Private ruling: Rental property interest
Published: June 2014
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to a deduction for interest on a loan to refinance two existing loans into one loan of a lesser amount? | A1: Yes.


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 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 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 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. An outgoing of interest will not fail to be deductible merely because the original loan is refinanced. You originally borrowed funds under two loans to purchase an investment property. You wish to refinance the loans into one loan of a lesser amount and pay out the additional amount on the loan. Therefore, as the funds will be used to pay out two loans and the property continues to be used for income producing purposes you are entitled to claim a deduction for the interest incurred on the new loan.

Relevant facts: You have two loans over an investment property. | You wish to refinance the loans up to 80% of the property value. That is, you wish to refinance up to a lesser amount than the original loans and will pay the balance of the original loan off.