Private ruling: Rental deductions
Published: June 2013
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to deduct the interest expenses that you will incur on a loan for an investment property purchased from your spouse? | A1: Yes.

Relevant facts and circumstances: Your spouse owns a rental property. Due to financial reasons your spouse has proposed to sell the property. You would like to purchase the property from your spouse at market value and use it for investment purposes.

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) states that you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income except where the loss or outgoing is capital, private or domestic in nature or relates to the earning of 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 92 ATC 4380; (1992) 23 ATR 494, provide the Commissioner's view regarding the deductibility of interest. The use test is the basic test relied upon to establish the deductibility of interest and looks at the application of the borrowed funds as the main criterion. Accordingly, where borrowed funds are used for income producing purposes the interest on those funds is deductible. In your case, you will be incurring interest on a loan where the funds are used to acquire ownership in a property. The property is being purchased at market value in an arms length transaction. You will then use the property for rental. As the borrowed funds will be used for income producing purposes, the associated interest expenses are an allowable deduction. The fact that you are purchasing the property from your spouse does not change the deductibility of the expense in your specific circumstances. Therefore, you are entitled to a deduction for the interest expenses incurred under section 8-1 of the ITAA 1997.