Private ruling: Rental - expenses
Date of advice: 6 September 2016
Published: October 2016
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Are you entitled to claim deductions for a portion of your interest expenses, borrowing expenses and council rates in relation to leasing part of your property? | A1: Yes.

Relevant facts and circumstances: You purchased a property. The property came with an income-generating lease agreement for a portion of the property. As part of the property sale, the lease was transferred from the previous property owner's name into your name. You incur borrowing and interest expenses on the loan used to purchase the property and council rates.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 25-25

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, or relate to the earning of exempt income or a provision of the taxation legislation excludes it. Interest on loan Taxation Ruling TR 95/25 provides that the deductibility of interest is determined by the use to which the borrowed money is intended. The use test is the basic test for the deductibility of interest and looks at the application of borrowed funds as the main criteria. Where the borrowed funds are used for the purposes of producing assessable income, a deduction will be allowed for the interest on the loan. This includes interest on loans used to acquire a rental property. Where a loan is used to acquire an asset which is used for both income producing and non-income producing purposes, only the portion of the interest expense on the borrowed funds relating to the income producing purpose is deductible. In your case, you purchased a property of which part of the property was subject to a lease. Other than the land on which the relevant item stands, you will use the property for your private residence. You will be entitled to a deduction for the interest expense on that portion of the loan which can be attributed the leased item. Borrowing expenses Section 25-25 of the ITAA 1997 allows a deduction for borrowing expenses to the extent that the borrowed funds are used or are to be used during that year to earn assessable income. Borrowing expenses are those expenses directly incurred in taking out a loan for the property. They can include loan establishment fees, title search fees and costs for preparing and filing mortgage documents. Borrowing expenses also include other costs that the lender requires you to incur as a condition of them lending you the money for the property, such as the costs of obtaining a valuation or lender's mortgage insurance. Borrowing expenses greater than $100 is deductible over the period of the loan or five years, starting on the date on which the money was borrowed, whichever is the shorter. If only a part of the property was income producing, the deduction allowable will be apportioned in accordance with the following formula: = borrowing expenses / (number of days in loan period or five year period) * your ownership share * income producing portion percentage In your case, only that portion of the borrowing expenses attributable to the leased portion of the property can be claimed as a deduction. Council rates Under section 8-1 of the ITAA 1997 council rates are an allowable deduction where a property is being used for income producing purposes. As only part of your property is being used for income producing purposes, only a portion of the council rates may be claimed as a deduction.