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

Ruling: Q1: Are you entitled to claim a deduction for 100% of the interest expenses incurred on a loan used to pay out an existing loan used to purchase your portion of an investment property where the refinanced loan will be in the names of both you and your spouse, as co-owners of the property? | A1: Yes.

Relevant facts and circumstances: You and your spouse purchased an investment property as tenants in common in the ratio of X. Your spouse paid cash for their Y% interest and you borrowed to finance your Z% interest. The original loan is in your name only, with your spouse as guarantor, and you have always claimed 100% of the interest expenses incurred on this loan. You are now considering refinancing your loan with a lower cost provider but have been told that the new loan would need to be in the names of both you and your spouse, as tenants in common. You will continue to pay 100% of any interest incurred on the new loan and the new loan would be used to payout the existing loan. Your spouse will continue to hold a Y% interest in the property. You wish to claim 100% of the interest incurred on the new 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 or outgoings to the extent to which they are incurred in gaining or producing assessable income, except to the extent that the outgoings are of a capital, private or domestic nature. Taxation Ruling TR 95/25 provides the Commissioners view regarding the deductibility of interest. An outgoing of interest is incidental and relevant to the gaining of assessable income if the funds were borrowed for the purpose of gaining that income ( FC of T v. Munro (1926) 38 CLR 153; (1926) 32 ALR 339). 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 a loan is used for an income producing purpose the interest on the loan is deductible. In your case, you borrowed funds to finance the purchase of your Z% interest in an investment property. You are entitled to a claim a deduction for 100% of the interest incurred on this loan. You are now considering refinancing the loan with a lower cost provider but have been told that the new loan would need to be in the names of both you and your spouse, as tenants in common. TR 95/25 states that 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, paragraph 42. Essentially, the character of the refinancing takes on the same character as the original borrowing. In your case, the new loan will be used to repay the existing loan held in your name only and used to purchase your portion of the investment property. The character of the new loan will take on the same character as the existing loan, that being to purchase your Z% interest in the investment property. You will continue to pay 100% of any interest incurred on the new loan. Therefore, you will be entitled to claim 100% of the interest incurred on the new loan, under section 8-1 of the ITAA 1997.