Private ruling: Deduction - Investment Property - Interest
Date of advice: 27 October 2016
Published: February 2017
Ruling period: Year ending 30 Jun 20VV | Year ending 30 Jun 20WW | Year ending 30 Jun 20XX | Year ending 30 Jun 20YY | Year ending 30 Jun 20ZZ
Date scheme commenced: 01 July 20UU

Ruling: Q1: Are you entitled to claim a deduction for interest incurred on the balance of an outstanding loan on a rental property which has been disposed of? | A1: Yes

Relevant facts and circumstances: You purchased a property which was rented. You funded the purchase price with a bank loan. The property first earned rental income from xxxx . Due to financial hardship, you sold the property. It was settled on xxxx. You applied the sale proceeds against the loan but this was not enough to pay the loan in full. You do not have the funds or financial ability to pay out the loan in full. You continue to incur interest on the loan balance.

Relevant legislative provisions: Income Tax Assessment Act 1997 (ITAA 1997)

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 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 or a provision of the taxation legislation excluded it. Taxation Ruling TR 2004/4 provides the Commissioner's view on the deductibility of interest where the income-producing asset has been disposed of and the taxpayer is still liable for the balance of the loan. In general, the interest expense will continue to be deductible where: ● The taxpayer borrowed money to acquire an income-producing asset ● The income-producing asset has been disposed of ● The proceeds from the disposal have been applied against the loan and not used for personal or non-income producing purposes ● The taxpayer does not have the legal power to repay the loan ( FC of T v. Brown 99 ATC 4600; (1999) 43 ATR 1) or does not have the financial resources to repay the loan fully ( FC of T v. Jones 2002 ATC 4135; (2002) 49 ATR 188) ● Is unable to avoid incurring ongoing interest liabilities. In this situation, a nexus will continue to exist between the interest outgoings and the relevant income earning activities at least until the end of the period during which the interest cannot be avoided. However, where it can be inferred that a taxpayer has: ● kept the loan on foot for reasons unassociated with the former income earning activities, or ● made a conscious decision to extend the lean in such a way that there is an ongoing commercial advantage to be derived from the extension which is unrelated to the attempts to earn assessable income in connections with which the debt was originally incurred, The nexus between the outgoings and relevant income-earning activities will be broken. We have determined that you are entitled to claim deductions for the interest expenses related to your rental property loan. Your obligation to pay the interest expenses arose from your former rental property. The connection with the income earning activities has not been broken because of the sale of the rental property and the loan has been refinanced. You have not kept the loan on foot for reasons unassociated with your former income earning activities. Nor have you made a conscious decision to extend your loan to gain on ongoing commercial advantage. You have not had the financial means to pay out the loan. Therefore, you are entitled to claim a deduction for interest on this loan. | Detailed Reasoning - Limit to future years rulings: You have requested the Commissioner to provide you with a private ruling for future years. Due to the possibility of change to the law, the possibility of changes in your circumstances, and the risk that a subsequently issued public ruling might override a private ruling the Commissioner has issued, he Commissioner has provided a private ruling until the 20YY-20ZZ income year. You may request a further ruling after this time if this issue remains a concern to you.