Private ruling: Rental interest expense - Offset account
Date of advice: 19 November 2015
Published: January 2016
Ruling period: Year ending 30 June 2016.
Date scheme commenced: 1 July 2015.

Ruling: Q1: Are you entitled to a deduction for interest incurred on a loan used to purchase your main residence as a result of monies withdrawn from a linked offset account to purchase the rental property? | A1: No.

Relevant facts and circumstances: You have a loan for a private residence with an offset facility. The bank charges interest on the difference between the loan balance and the offset account. You withdrew an amount from the offset account for a deposit on a rental property. You obtained an additional loan to pay the balance of the rental property.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 allows you a deduction for any loss or outgoing that is incurred in gaining or producing your assessable income, to the extent that it is not of a private, capital or domestic nature. Interest incurred on money borrowed to purchase income producing investments such as shares is an allowable deduction. However, interest incurred on money borrowed for a private purpose is not deductible. In your case, you have a home loan that has an offset account attached. You can deposit and withdraw money from the offset account for day to day transactions. The interest incurred on the home loan is reduced based on the balance of the offset account. Withdrawing money from the offset account increases the interest on the home loan, and does not change the character of that money from savings to borrowings. Section 995-1 of the ITAA 1997 defines the term borrowing; borrowing means any borrowing, whether secured or unsecured, and includes the raising of funds by the use of a bond, debenture, discounted security or other document evidencing indebtedness. The money withdrawn from the offset account is not in the form of borrowings and will not incur any interest. The amount withdrawn is reflected as a reduction in your savings. Consequently, any use to which these funds are put (including an income producing purpose) is funded by your savings and not new borrowings (indebtedness). All the interest payable on the home loan account will still relate to the private purpose of purchasing your home. Therefore, the increased interest on your home loan, as a result of withdrawing funds from the offset account and using those funds for investment purposes, is not an allowable deduction under section 8-1 of the ITAA 1997.