Private ruling: Assessable income - interest deductions.
Date of advice: 1 September 2025
Published: 3 November 2025
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to a 100% deduction for your 50% share of the interest incurred on your rental property loan? | A1: No.

Relevant facts and circumstances: On DDMMYY, you and Person B entered a contract to purchase an off the plan property. The property was to be used for investment purposes and was going to be leased out. You were not going to live at the property as your main residence at any time. The purchase price was $0. You were required to pay a 10% deposit of $0 with the balance to be paid in full by DDMMYY. You took out a variable home loan with the bank to pay for the deposit and any associated purchase fees. The total amount of the loan was $0. On DDMMYY, you paid the deposit in full. You provided a contract which details the following: Deposit Holder bank details (clauses 4.3 and 4.4) Intended use of lot (clause 21.2): To be notified by the Buyer to the Seller within 14 days after the Contact Date. Sunset date (clause 5.1): The date being 5½ years after the date this contract is entered into by the Buyer. Clause 4.4 Investment of Deposit a) The Deposit Holder is under no Obligation to invest the Deposit unless: 1) the Buyer provides its tax file number and any other information that the Deposit Holder requires for investment; and 2) the whole of the Deposit has been paid. b) The Deposit Holder may: 1) invest as much of the Deposit as has been paid with any Bank in an interest-bearing account; 2) provide the parties' tax file numbers and other information to the Bank; and 3) prior to Settlement, reinvest the Deposit with a different Bank. Clause 4.5 Entitlement to Deposit and interest a) The entitlement of the parties to receive the Deposit and any interest on the Deposit is to be determined as follows: 1) if this contract settles, the Seller is entitled to the Deposit and the Seller is entitled to the interest on the Deposit; 2) if this contract is terminated without default by the Buyer, the Buyer is entitled to the Deposit and any interest on the Deposit; and 3) if this contract is terminated owing to the Buyer's default, the Seller is entitled to the Deposit and any interest on the Deposit. b) The Seller and the Buyer agree that the Deposit Holder or the Bank with whom the Deposit has been invested may deduct Investment Costs from any interest payment referred to in subclause 4.5(a) and, where that payment is to be made to the Buyer, the Buyer authorises the Deposit Holder to make the payment to the Buyer or the Buyer's Solicitor on behalf of the Buyer. The interest payment (less Investment Costs) will be made on or as soon as practicable after Settlement or termination. The deposit holder chose to invest the Deposit with their bank in an interest-bearing account. The contract was terminated without default by you. As per the conditions stated in the contract, you were entitled to the deposit and any interest on the deposit. On DDMMYY, the full deposit and interest were received by you. The total interest component received was $0. The interest incurred relating to all costs associated with the transaction of the property deposit for each relevant income year were as follows: • 20XX $0 • 20XX $0 • 20XX $0 Total: $0. You will include your 50% share of $0 interest in your tax returns as assessable income.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 6-5

Reasons for decision: Summary: Under section 6-5 of the ITAA 1997, your assessable income includes income according to ordinary concepts, which is called ordinary income. If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Under section 8-1 under the ITAA 1997 you can deduct from your assessable income any loss or outgoing to the extent that: a) it is incurred in gaining or producing your assessable income; or b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, you cannot deduct a loss or outgoing under this section to the extent that: a) it is a loss or outgoing of capital, or of a capital nature; or b) it is a loss or outgoing of a private or domestic nature; or c) it is incurred in relation to gaining or producing your exempt income or your non - assessable non - exempt income; or d) a provision of this Act prevents you from deducting it. Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the ITAA 1997 following FC of T v. Roberts; FC of T v. Smith provides that the deductibility of interest on borrowed funds is determined by the use of the borrowed money. The use test, established in FC of T 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. Where a borrowing is used to acquire an income producing asset or relates to an income producing activity, the interest on this borrowing is considered to be incurred in the course of producing assessable income. In your case, you and Person B entered into a bank loan for a deposit on an off the plan property which you were going to lease out once construction was completed. The deposit that you paid was held in an interest-bearing account by the developer. Although we appreciate that you incurred interest totalling $0 on a loan which was going towards a property to be used for earning assessable income, the developer cancelled the development. As the construction did not go ahead by the developer, your deposit and the accumulated interest of $0 was returned to you. You will report your 50% share in the interest as assessable income in your tax returns. The amount of interest you incurred over the amount of $0 interest is not an allowable deduction as it was not incurred in relation to gaining or producing assessable income. As you received the amount of $0 in interest as assessable income, a deduction is allowable for this amount as you incurred an interest expense from the loan which relates to producing the interest income.