Private ruling: Deductibility of loan interest
Published: July 2013
Ruling period: Year ended 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2012

Ruling: Question and answer: | Is the interest you pay on your relative's loan a deductible expense for you? | Yes.

Relevant facts and circumstances: You have a 100% interest in a rental property. You took out a bank loan to purchase the property. You were unable to borrow sufficient funds to cover the total purchase costs and your relatives took out a separate loan to assist you with the purchase. Their loan was secured by a different property. You make the full repayments on your relative's loan as well as your own loan. The repayments for both loans are debited from your bank account.

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

Reasons for decision: Summary: Interest is deductible under section 8-1 of the Income Tax Assessment Act 1997 to the extent that it is incurred in gaining or producing assessable income or in carrying on a business for that purpose, except to the extent that the expense is of a capital, private or domestic nature or incurred in gaining or producing exempt income. Whether interest has been incurred in the course of producing assessable income generally depends on the use to which the borrowed funds have been put. The 'use' test, established in Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion. The interest will be deductible to the extent that the property is used to produce assessable income. In your case, you took out a loan to purchase a rental property from which you gain assessable income. Your relatives took out another loan to assist you purchase the property. Although the loan is not in your name you make the repayments on the loan. Therefore, you have paid the interest on your relative's loan and have incurred it as an expense in gaining or producing your assessable income. Therefore, the interest expenses incurred by you on your loan and your relative's loan are deductible by you while the property is rented or is available for rental purposes.