Private ruling: Loan interest deduction
Published: December 2011
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for the interest you incur on your loan? | A1: 



Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. Whether interest has been incurred in the course of gaining or producing assessable income generally depends on the purpose of the borrowing and the use to which the borrowed funds are put. Where a borrowing is used to acquire an assessable income producing asset, or relates to expenses of an assessable income producing activity, the interest on this borrowing is considered to be incurred in the course of gaining or producing assessable income. The character of a new loan which refinances a previous loan follows from that previous loan: Taxation Ruling TR 95/25 The choice of assets used as security for a loan is irrelevant in determining the deductibility of interest incurred on that loan. Where a non income producing asset is used as security for a loan to purchase an income producing asset, the interest is deductible because of the use to which the borrowed money is applied: that is, to acquire an income producing asset. Equally, where an income producing asset is used as security for a loan used to acquire a non income producing asset, the interest will not be deductible as the use of the loan funds is private in nature: Taxation Ruling TR 93/13. In your case, the purpose and use of the new loan will be to fully repay the existing loan which is referable to property B. As property B will become your private residence, which is private in nature and not related to an income producing purpose, the new loan will inherit this private character. Accordingly, as the character of your new loan is private and will not be used for income producing purposes, you are not entitled to a deduction under section 8-1 of the ITAA 1997 for the interest incurred on this loan.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: You have a property that is owner occupied (property A) and an investment property (property B) which is currently rented. | You have a loan referable to property B, secured by property A. | There is little owing on the current loan referable to property A. | You wish to make property B your principal place of residence and make property A the rental property. | You will obtain a new loan, secured by property B before you relocate. | You will use the new loan funds to fully repay out the current loan for property B.