Private ruling: Interest expenses
Published: December 2013
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1:  | A1: No.

Relevant facts and circumstances: You recently sold an investment property (property A) which had a loan (investment loan A). This loan was cross-collateralised and linked to a personal home loan and an investment property home loan (investment loan B). When investment property A was sold, given the way the loans were structured, the bank required you to fully discharge investment loan A and investment loan B. You didn't intend to direct the proceeds in this manner and you are looking to reinstate investment loan B to its previous balance via a refinance and apply the surplus funds to the personal home loan.

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 money 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 are considering refinancing an investment loan and using the surplus funds to your personal home loan. The application of the funds to the personal home loan is considered a private expense as the home is not used for income producing purposes. As such, you will not be entitled to a deduction under section 8-1 of the ITAA 1997 for the interest incurred on the refinanced loan.