Private ruling: Rental deductions - loan interest
Date of advice: 18 September 2020
Published: November 2020
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the interest incurred on your investment property loan that relates to the purchase cost of the investment property be deductible in whole? | A1: Yes. In your case, your bank agreed to lend you the required funds to fund the entire cost of the purchase of an investment property. You were instructed by your bank to fund the deposit for your investment property from your own funds, and you then reimbursed this amount to yourself from the loan surplus amount paid to you shortly after the settlement occurred. It is therefore accepted that the borrowing that related to the reimbursement for the deposit for your investment property was also used for an income producing purpose. However, regarding the loan surplus amount which was paid into your bank account shortly after the settlement occurred, a separate portion of that surplus was paid into the loan offset account for the investment property loan and was unrelated to the investment property purchase. Therefore, this amount not used for an income producing purpose and is considered as your own private funds. As such you are not entitled to a deduction for loan interest on the investment property loan that relates to that amount. Accordingly, it is only the interest expenses you incur which relate to the purchase cost of your rental property which are deductible. Further information about rental property expenses can be found by searching 'QC 23633' on ato.gov.au

Relevant facts and circumstances: You purchased an investment property located in Australia (the property). The property purchase settled in early 20XX. When the property was purchased it was already tenanted, and it has been continuously rented out ever since. It was both your and your bank's intention to borrow 100% of the loan required to purchase the property. However since it was impossible for you as an investor to provide a deposit to the vendor with bank funds prior to settlement, you were instructed by your bank to use your personal funds to pay the required initial deposit in order to exchange contracts and secure the purchase of the property. Following the banks advice you funded the initial deposit via your own funds in late 20XX. This amount was paid from your bank account via a cheque drawn, which is evidenced by the supplied bank statement for that period. The bank agreed to loan you an amount to fund the entire cost of the purchase of the property. Once the loan was dispursed following the property settlement taking place, you were paid a loan surplus amount. From this amount a portion was used to reimburse yourself for the initial deposit which you paid in late 20XX and the remaining portion was deposited into the investment property loan offset account, and was unrelated to the property purchase. In mid-20XX you deposited an amount of funds into the investment property loan offset account in error, where you intended to deposit this amount to your owner-occupied home loan. In late-20XX you withdrew the whole amount from the investment property loan offset account (including the amount deposited in error in mid-20XX and the original amount which was deposited from the loan surplus in early 20XX following settlement taking place).

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