Private ruling: Interest expenses
Published: November 2013
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for the interest expenses incurred? | A1: No.

Relevant facts and circumstances: You own a rental property. Due to the ill health of a family member, you became the primary carer and you relocated to care for your family member and resided in their home. You decided to re-organise your affairs and subsequently paid out the investment loan. Your role as primary carer of your family member ended and subsequently you needed a main residence. You purchased a residence and subsequently incur interest expenses.

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 considers the deductibility of interest. 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 criteria. Where borrowed funds are used to acquire an income producing asset, the interest on the borrowed moneys is considered to be incurred in gaining or producing assessable income. The property used as security for the loan is not relevant, only the purpose to which the funds are to be put is relevant in determining whether the interest is deductible. In your case, you have taken out a home loan to purchase your main residence. The purchase of your residence is considered a private expense as the home is not used for income producing purposes. As such, you are not entitled to a deduction under section 8-1 of the ITAA 1997 for any portion of the interest on your home loan.