Private ruling: Interest on loan
Published: July 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you eligible to claim your share of the interest on the loan for your principal place of residence where it is a bank requirement that the security for the loan is provided by a term deposit? | A1: No.

Relevant facts and circumstances: You were the joint owner of a home which provided security for the loan. You sold the home, and wished to keep the loan active. To do this the bank required you to establish a locked term deposit against the home loan. You receive income from the term deposit and pay interest on the home loan.

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

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. Taxation Ruling TR 95/25 considers the deductibility of interest. 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. Where borrowed funds are used to acquire an income producing asset (for example, a rental property), the interest on the borrowed moneys is considered to be incurred in gaining or producing assessable income. In your case you took out a loan to assist with the purchase of your home. You have established a locked term deposit as security against the loan, now that the home has been sold. The purpose of the loan is not for an income producing purpose, as it was originally used to purchase your home. The loan was not taken out to enable the establishment of the term deposit, and is a separate facility in its own right. The fact that the term deposit is a requirement of the bank is incidental to the interest incurred by the loan. The interest incurred by you is not in the course of producing your assessable income, and as such is not deductible against your income.