Private ruling: Rental property expenses
Published: September 2011
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to a deduction for interest on a loan used to purchase your spouse's share of a rental property, when it becomes available for rent? | A1: Yes

Relevant facts and circumstances: You and your spouse purchased a property as joint tenants. The property was your main residence until your spouse has purchased a new property, and together you have made this your primary residence. You are considering retaining the previous residence as a long term rental. To do this you will take out a loan of to purchase your spouse's 50% interest in your previous residence and pay off your previous loan. You will rent the property through commercial third party arrangements at market rates. The property will be negatively geared.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1,

Reasons for decision: Detailed Reasoning - Interest deduction: Interest is deductible under section 8-1 of the Income Tax Assessment Act 1997 to the extent that it is incurred in gaining or producing assessable income or in carrying on a business for that purpose, except to the extent that the expense is of a capital, private or domestic nature or incurred in gaining or producing exempt income. Whether interest has been incurred in the course of producing assessable income generally depends on the use to which the borrowed funds have been put. The 'use' test, established in FC of T v Munro (1926) 38 CLR 153, is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion. The interest incurred will be deductible to the extent that the property is used to produce assessable income, that is, when it is rented or available for rent. Taxation Ruling TR 95/33 discusses the relevance of subjective purpose, motive or intention in determining the deductibility of losses or outgoings. A common practice in relation to the acquisition of income producing assets is known as 'negative gearing'. An inherent feature of negatively gearing an asset is that the interest payable on the funds borrowed to acquire the asset exceeds the income derived from the asset, at least in the initial years of ownership. In your case, you are going to take out a loan to purchase your spouse's share in a property which you are going rent out. Therefore you are entitled to a full deduction for the interest you will incur on the property, once it has become available for rent.

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