Private ruling: Deduction- Rental interest
Date of advice: 30 November 2015
Published: February 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is interest incurred on a line of credit deductible after the investment property is sold? | A1: Yes.

Relevant facts and circumstances: You acquired a rental property in 20XX jointly with your spouse. The purchase was funded through two loans - an interest only loan through one financial institution, and a line of credit through a second financial institution. When the property was sold, the financial institution took the proceeds in order to settle the interest only loan. You supplemented the sale proceeds in order for the loan to be extinguished. The line of credit loan has increased in value since the purchase of the property. The line of credit loan was used solely to pay rental property expenses except for one minor personal expense. The property was sold for an amount less than the original purchase price.

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 2004/4 provides the Commissioner's view on the deductibility of interest where the income-producing asset has been disposed of and the taxpayer is still liable for the balance of the loan. In general, the interest expense will continue to be deductible where: • the taxpayer borrowed money to acquire an income-producing asset • the income-producing asset has been disposed of • the proceeds from the disposal have been applied against the loan and not used for personal or non-income producing purposes • the taxpayer does not have the legal power to repay the loan ( FC of T v. Brown 99 ATC 4600, (1999) 43 ATR 1) or does not have the financial resources to repay the loan fully ( FC of T v. Jones 2002 ATC 4135, (2002) 49 ATR 188), and • is unable to avoid incurring ongoing interest liabilities. In this situation, a nexus will continue to exist between the interest outgoings and the relevant income earning activities at least until the end of the period during which the interest cannot be avoided. However, where it can be inferred that a taxpayer has: • kept the loan on foot for reasons unassociated with the former income earning activities, or • made a conscious decision to extend the loan in such a way that there is an ongoing commercial advantage to be derived from the extension which is unrelated to the attempts to earn assessable income in connection with which the debt was originally incurred the nexus between the outgoings and relevant income-earning activities will be broken. In this case, you have disposed of your rental property. The sale proceeds were first applied to the bank loan and there were no further funds available to apply to the line of credit. We accept that a nexus continues to exist between the interest outgoings and the relevant income earning activities. Therefore, you are entitled to a deduction for interest incurred on the line of credit.