Private ruling: Interest deductions for investments
Date of advice: 3 November 2025
Published: 22 December 2025
Ruling period: Year ending 30 June 20YY | Year ending 30 June 20YY
Date scheme commenced: DD MM YYYY

Ruling: Q1: Is interest payable under your loan agreements deductible for the purchasing of shares under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Is interest payable under your loan agreements deductible for the repayment of your loan which was used to purchase shares under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes. | Q3: Is interest payable under your loan agreements deductible for the buy out of your ex-spouse's 50% share of the investment property under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A3: Yes. | Q4: Is interest payable under your loan agreements deductible for amounts attributable to your personal home mortgage repayments and living expenses under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A4: No.

Relevant facts and circumstances: Loan agreement 1 On DD MM YYYY, you signed a loan agreement between your Parent A to borrow an amount of $XXX. The loan agreement was prepared by legal firm. As part of the loan agreement, you were to make repayments on the DD MM YYYY. The purpose of the loan was to buy stock investments. You agreed to an interest rate of XX%, the then market prevailing interest rate for personal loan. The loan was paid in the multiply cash injections. On DD MM YYYY, the loan was fully repaid, together with outstanding interest. Loan agreement 2 On DD MM YYYY, you signed a loan agreement between your Parent B to borrow an amount of $XXX. The loan agreement was prepared by legal firm. The purpose of the loan was to repay the money you borrowed from Parent A. You agreed to an interest rate of XX%, the then market prevailing interest rate for personal loan. On DD MM YYYY, the loan was advanced. An agreement was made to provide for an interest free period up to DD MM YYYY, payable on DD MM YYYY. On DD MM YYYY, a further agreement was made to postpone the interest payment until DD MM YYYY, because you were having financial hardship. On DD MM YYYY, you borrowed a further amount of $XXX, from Parent B to fund a property ownership takeover from your ex-spouse following a financial agreement. This amount was used to acquire the full ownership of the investment property. On DD MM YYYY, the $XXX funds were advanced. On DD MM YYYY, the loan was fully repaid together with outstanding interest of $XXX. You made a capital gain of $XXX in the 20YY/YY financial year, but you did not claim the loan interest borrowed. You have supplied documentation to substantiate the agreements. Rental Property On DD MM YYYY you and your partner at the time purchased an investment property located at XX XX XX. The property settled on the DD MM YYYY. The ownership interest according to the title was 50% each person. The property was financed by borrowing $XXX from a financial institution. The remainder was split 50% each by person, the total cost of acquisition was $XXX. The property was first made available for rent on the DD MM YYYY. The property is privately managed by you. You have a landlord/tenants relationship and the property was advertises on real-estate websites. The property is leased at market rate. Between DD MM to DD MM YYYY, the property was vacant in preparation for sale for the purpose of financial separation. The campaign ended futile, and the property returned to being a rental. An alternative separation arrangement was entered and agreed upon by you and your ex-partner, where you brought your ex-partner's 50% share with money you borrow from Parent B. On DD MM YYYY, the property re-settlement took place where you are 100% ownership of the property. Parent A has declared the interest in their personal income tax return. Parent B will declare the interest in their income tax return in MM YYYY. Other information provided The documents you provided, shows numerous emails of you asking Parent B to borrow extra amounts for your mortgage repayments and living expenses.

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

Reasons for decision: Summary: Section 8-1 of the 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 non-assessable non-exempt income. Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith (TR 95/25) provides the Commissioner's view regarding the deductibility of interest expenses. As outlined in paragraph 3 of TR 95/25, there must be a sufficient connection between the interest expense and the activities which produce assessable income. Further, to determine whether the associated interest expenses are deductible, it is necessary to examine the purpose of the borrowing and the use to which the borrowed funds are put. The 'use' test, established in the High Court case Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, (1926) 32 ALR 339 is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion. Accordingly, it follows that if a loan is used for investment purposes from which income is to be derived, the interest incurred on the loan will be deductible. However, where a loan relates to private purposes, no deduction is allowed. Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith (TR 95/25). Paragraph 42 Borrowing used to repay an existing loan explains interest on a new loan will be deductible if the new loan is used to repay an existing loan which, at the time of the second borrowing, was being used in an assessable income producing activity or used in a business activity which is directed to the production of assessable income ( Roberts and Smith ATC at 4388; ATR at 504). Taxation Ruling IT 2606 Income tax: deduction for interest on borrowings to fund share acquisitions (IT 2606) provides the Commissioner's view on the issue of interest deductibility in the context of share acquisitions. At paragraph 9 of IT 2606, it is explained that that interest on moneys borrowed to acquire shares is generally deductible where it is reasonably expected that dividends or other assessable income will be derived from the investment. It also provides that it is expected the nature of the shares is inherently capable of generating dividends, whether in the short or long term. However, paragraph 10 of IT 2606 states that interest will not be deductible where shares were acquired solely for the purpose of capital profit on their resale since the proceeds of sale are not assessable income. Taxation Ruling TR 2000/2 Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities considers the deductibility of interest incurred by borrowers on money drawn down under line of credit facilities and loans offering redraw facilities. The ruling establishes drawing any excess or available funds from a loan account is treated as a new loan. As such the purpose or use of the drawing is relevant. That is, the deductible portion of interest when further borrowings are made depends on the use to which the redrawn funds are put. This is independent of the purpose of the original borrowing. The redraw facilities referred to in TR 2000/2 is where a borrower redraws previous repayments of the loan principal in a loan account. Paragraph 11 of TR 2000/2 provides a taxpayer may use the redrawn funds for different purposes, then the loan account becomes a mixed purpose account. In a mixed purpose loan, the interest must be apportioned between the income producing and non-income producing purposes. The part of the accrued interest attributable to the funds used for private purposes is not deductible. | Detailed Reasoning - Incurred: Taxation Ruling TR 97/7 Income Tax: section 8-1 - meaning of 'incurred' - timing of deductions (TR 97/7), sets out the Commissioner's view on the meaning of incurred in section 8-1 of ITAA 1997. Paragraph 6 of TR 97/7 states the following: 'The courts have been reluctant to attempt an exhaustive definition of a term such as 'incurred'. The following propositions do not purport to do this, they help to outline the scope of the definition. The following general rules, settled by case law, assist in most cases in defining whether and when a loss or outgoing has been incurred: (a) a taxpayer need not actually have paid any money to have incurred an outgoing provided the taxpayer is definitively committed in the year of income. Accordingly, a loss or outgoing may be incurred within section 8-1 even though it remains unpaid, provided the taxpayer is 'completely subjected' to the loss or outgoing. That is, subject to the principles set out below, it is not sufficient if the liability is merely contingent or no more than pending, threatened or expected, no matter how certain it is in the year of income that the loss or outgoing will be incurred in the future. It must be a presently existing liability to pay a pecuniary sum; (b) a taxpayer may have a presently existing liability, even though the liability may be defeasible by others; (c) a taxpayer may have a presently existing liability, even though the amount of the liability cannot be precisely ascertained, provided it is capable of reasonable estimation (based on probabilities); (d) whether there is a presently existing liability is a legal question in each case, having regard to the circumstances under which the liability is claimed to arise; (e) in the case of a payment made in the absence of a presently existing liability (where the money ceases to be the taxpayer's funds) the expense is incurred when the money is paid; (f) while the above principles may be applied to both losses and outgoings, the distinct nature of losses must be considered. A loss must be definitively encountered, run into, or fallen upon by the taxpayer. For a loss to be incurred it must be realised and more than impending, threatened or expected. A taxpayer will not have incurred a loss if some contingency means that they are not 'definitively committed' or 'completely subjected' to it. Furthermore, the outgoing must also be referable to the year of income in which the deduction is sought ( Coles Myer Finance Pty Ltd v. FC of T 93 ATC 4214 at 4222).' You have a presently existing liability to pay the interest expenses and as such you have incurred the interest expenses under section 8-1 of the ITAA 1997. However, the interest expenses must be 'properly referable' to the particular year in question. To determine the timing of the deductibility of interest in the case of interest on a loan, we consider the period of the loan is the relevant period (Taxation Ruling TR 94/26 Income tax: subsection 51(1) - meaning of incurred - implications of the High Court decision in Coles Myer Finance ). This means as soon as you become committed to the interest expense, with reference to the loan agreement, the interest is taken to have incurred. The interest will be deductible in the income year it is incurred. | Detailed Reasoning - Application to your circumstances: In your case, you borrowed $XXX from Parent A thought a formal loan agreement to invest in shares. The shares you brought generate assessable dividends as income. Interest expenses have been accrued on loan funds that were used for purchasing shares. Later you borrowed $XXX from Parent B through a formal loan agreement to repay Parent A's loan. You later borrowed an extra amount of $XXX from Parent B to buy out your ex-spouse 50% share in the investment property after your relationship break down. You have also stated Parent B will declare the interest in their Australian income tax return once they visit Australia in MM YYYY as part of their Australian assessable income. As you have used the loan funds to acquire income producing shares and to buy out your ex-spouse share of the investment property, the interest expense is an allowable deduction under section 8-1 of the ITAA 1997. The interest expense attributable to the shares and the investment property will be an allowable deduction for your income tax return. The income year the interest will be deductible will relate directly to the loan arrangements and when the interest became due and payable under the loan agreement. This will mean some of the interest deduction will be deductible in the 20YY income year when incurred and some will be deductible the 20YY income year when incurred and the final payment was made. | Detailed Reasoning - Question 4: Is interest payable under your loan agreements deductible for amounts attributable to your personal home mortgage repayments and living expenses under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | Summary: No. Interest payable under your loan for the purpose of paying your mortgage repayments and living expenses are not deductible under section 8-1 of the ITAA 1997 because they do not produce assessable income and are seen as private in nature. | Detailed Reasoning - Detailed reasoning: Section 8-1 of the 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 non-assessable non-exempt income. Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith (TR 95/25) provides the Commissioner's view regarding the deductibility of interest expenses. As outlined in paragraph 3 of TR 95/25, there must be a sufficient connection between the interest expense and the activities which produce assessable income. Further, to determine whether the associated interest expenses are deductible, it is necessary to examine the purpose of the borrowing and the use to which the borrowed funds are put. The 'use' test, established in the High Court case Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, (1926) 32 ALR 339 is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion. Accordingly, it follows that if a loan is used for investment purposes from which income is to be derived, the interest incurred on the loan will be deductible. However, where a loan relates to private purposes, no deduction is allowed. Taxation Ruling TR 2000/2 Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities considers the deductibility of interest incurred by borrowers on money drawn down under line of credit facilities and loans offering redraw facilities. The ruling establishes drawing any excess or available funds from a loan account is treated as a new loan. As such the purpose or use of the drawing is relevant. That is, the deductible portion of interest when further borrowings are made depends on the use to which the redrawn funds are put. This is independent of the purpose of the original borrowing. The redraw facilities referred to in TR 2000/2 is where a borrower redraws previous repayments of the loan principal in a loan account. Paragraph 11 of TR 2000/2 provides a taxpayer may use the redrawn funds for different purposes, then the loan account becomes a mixed purpose account. In a mixed purpose loan, the interest must be apportioned between the income producing and non-income producing purposes. The part of the accrued interest attributable to the funds used for private purposes is not deductible. | Detailed Reasoning - Application to your circumstances: In your case, you applied to Parent B under your loan agreement to borrow extra funds. Some of these funds were used for private purposes such as repayment of your personal mortgage and living expenses. These amounts are considered private in nature and are not deductible under section 8-1 of the ITAA 1997. | Detailed Reasoning - Apportionment: Having considered your circumstances, you are not entitled to a full deduction on interest expenses of your loan interest, and you are required to apportion the interest expenses under section 8-1 of the ITAA 1997. The method of calculations for the apportionment going forward are prescribed in TR 2000/2 at paragraph 20. You can also go to our website ato.gov.au and type in QC 23635 into the search for more information.