Private ruling: Interest expenses
Published: October 2014
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction for your share of the interest expenses incurred on loan money used for your investment property after the property ceased to be rented? | A1: Yes.

Relevant facts and circumstances: You acquired an investment property. The property was available for rent since settlement. The loan defaulted and the bank repossessed the property. The proceeds of the sale were used to repay the loan. Your mortgage insurance paid the remainder of the loan balance and the loan is now paid out. Interest continued to be incurred on the loan from when the property stopped being rented until when the loan was paid out.

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. Interest expenses are generally deductible under section 8-1 of the ITAA 1997 to the extent that it is incurred in relation to funds used for an income producing purpose. Taxation Ruling TR 2004/4 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities states that a loss or outgoing can be deductible even if it is incurred after the cessation of income producing activities. However, in order to be deductible the occasion of the outgoing must be found in those income earning activities. Taxation Ruling TR 2004/4 states further that if the loan continues for reasons not associated with the former income earning activities, or where there has been a conscious decision to extend the loan for a purpose which is unrelated to the original reason as to why the debt was incurred, then the nexus between the outgoings of interest and the relevant income earning activities will be broken. In your case, your borrowed funds were used to purchase an income producing rental property. The property was subsequently repossessed and sold, however you continued to incur interest expenses until the mortgage insurance paid the remainder of the loan. As your borrowed funds were used to produce assessable income, it is considered that the funds were used for income producing purposes. It is not considered that the loan was being kept for other non-income earning activities. As the investment is regarded as being an income earning activity, the principles of TR 2004/4 apply. It is considered that your interest expenses on the loan were sufficiently connected to your prior income earning activity after the property ceased to be rented. Therefore you are entitled to a deduction for the associated interest expenses incurred under section 8-1 of the ITAA 1997.