Private ruling: Interest expenses
Published: June 2012
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction for interest expenses on a refinanced loan used for income producing purposes? | A1: Yes.


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 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. Accordingly, it follows that if a loan is used for investment purposes from which income is to be derived, the interest incurred on the loan will be deductible. Further, interest on a new loan used to repay an existing investment loan will generally also be deductible as the character of the new loan is derived from the original borrowing. That is, when a loan is refinanced, the new loan takes on the same character as the previous loan. Refinancing a loan does not in itself break the nexus between the outgoings of interest under a loan and the income earning activities. In your case, you have a loan with an Australian bank. You intend to refinance the borrowings from this loan with another bank. When you refinance your loan from one bank to another, the borrowed funds are still being used for income producing purposes. Both loans are arms length commercial arrangements. Accordingly, you will still be entitled to a deduction for interest incurred on funds used for investment purposes if you refinance the loan with another bank. The fact that the new loan is with an overseas bank and you are now living overseas does not change the above principle. Where the full amount of the existing loan is used in relation to your income producing investment property and this same or lesser amount is refinanced, the interest expenses incurred remain an allowable deduction. However, where the refinanced amount is for a greater amount than that relating to your current outstanding loan on your investment property, the allowable deductions need to be apportioned accordingly and only that amount which relates directly to your investment property is an allowable deduction.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: You are currently living overseas. | You are a foreign resident for taxation purposes. | You have an investment property in Australia which is used to derive rental income. | Income from your rental property is assessable in Australia. | You have a loan with an Australian bank in relation to this property. | You wish to refinance this loan with an overseas bank that has a better interest rate.