Private ruling: Deduction of Interest Expense
Date of advice: 10 February 2016
Published: April 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is the interest on a redraw amount from an investment loan deductible where the redraw amount is used for income producing purposes? | A1: Yes.

Relevant facts and circumstances: You currently own a rental property with a loan. You have made advance payments on the loan over a period of time. You are intending to use a redraw facility on the loan to withdraw funds to use towards renovations to be carried out on the rental property. You want to carry out the repairs and renovations to maintain the properties condition and improve the rental income.

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 95/25 provides the Commissioner's view regarding the deductibility of interest expenses. As outlined in TR 95/25, there must be a sufficient connection between the interest expense and the activities which produce assessable income. TR 95/25 specifies that to determine whether the associated interest expenses are deductible, it is necessary to examine the purpose of the borrowing and the use to which the borrowed funds are put. The 'use' test, established in the High Court case Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, (1926) 32 ALR 339 is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion. In your situation, the deposits that you made over time on your loan are considered permanent reductions or repayments to the loan. These reduced the balance owing and reduced the amount of interest incurred. Should the money be withdrawn from the account, it will be considered to be a redraw in relation to the loan. The Commissioner regards the redraw as a separate instance of borrowing to the original loan. His rationale is explained in paragraphs 39-43 of Taxation Ruling TR 2000/2. At paragraph 22 of Taxation Ruling TR 2000/2 the Commissioner states that the deductibility of interest on a further borrowing of money under a redraw facility depends on the use to which the redrawn funds are put. If this is for an income producing purpose then the interest on the redraw amount is deductible. You intend to use the redraw facility on your loan for income producing purposes. Accordingly, the interest you incur on the redrawn amount will be an allowable deduction.