Private ruling: Deductibility of interest expenses
Date of advice: 13 October 2016
Published: January 2017
Ruling period: Year ended 30 June 20YY.
Date scheme commenced: 1 July 20YY

Ruling: Q1: Are you entitled to a deduction for a portion of the interest expense on a redrawn amount used to purchase an income producing asset? | A1: Yes.

Relevant facts and circumstances: On DDMMYY you and your spouse borrowed funds from a Bank (loan 1). You used some funds for private purposes and placed some funds in an offset account. On DDMMYY you settled an investment property. You funded the purchase with funds from the offset account and funds from another Bank loan (loan 2).

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 you 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. TR 95/25 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. Where you redraw available funds from an existing loan, this drawing is considered to be a new borrowing and the nature of this borrowing will be determined by its use (Taxation Ruling TR 2000/2). Paragraph 23 of TR 2000/2 states that where the original borrowing is for non-income producing purposes and you use the redrawn funds wholly or partly for income producing purposes, that part of the accrued interest attributable to the redrawn funds used for income producing purposes is deductible. Where you redraw funds for a different purpose to the original borrowing in circumstances described above, the loan account becomes a mixed purpose account. There is an ongoing need to apportion interest on a mixed purpose account and that apportionment needs to be made on a fair and reasonable basis. In your case you drew down an amount from loan 1 and placed funds in an offset account. The following day the funds were used for part of the purchase of an investment property. As the property will be used to earn assessable income, the interest attributable is deductible. At the date of drawn-down, a % of the loan 1 funds were used for income producing purposes and provided no other drawdowns/redraws or additional borrowings have occurred for this loan you can claim a % of the interest incurred from the redraw date. If there have been additional borrowings please refer to Taxation Ruling TR 2000/2 on how to calculate the interest deduction.