Private ruling: the deductibility of interest
Published: October 2011
Ruling period: Income year ending 30 June 2011 | Income year ending 30 June 2012 | Income year ending 30 June 2013 | Income year ending 30 June 2014
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to a deduction for all the interest expenses incurred on the loan? | A1: 

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You acquired a rental property approximately 10 years ago in your name solely. The purchase of the property was entirely funded by a borrowing, held in your name solely. In August 2011 you refinanced this borrowing into a new loan held in the names of both you and your spouse. You state the inclusion of your spouse on the loan was a requirement of your lender. You have not altered the title of the property.

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

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for any loss or outgoing that is incurred in gaining or producing assessable income, to the extent that it is not of a private, capital or domestic nature. 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. Where a borrowing is used to acquire an income producing asset, or relates to expenses of an income producing activity, the interest on this borrowing is considered to be incurred in the course of gaining or producing assessable income. Interest on a new loan used to repay an existing loan will generally also be deductible as the character of the new loan is derived from the original borrowing: Taxation Ruling TR 95/25. Where two taxpayers borrow jointly, both taxpayers will have presently existing pecuniary liability to discharge interest on that borrowing once it accrues and is due and payable. Therefore, each of the borrowers will only incur their share of the interest expense, notwithstanding circumstances where one borrower may meet all repayments in respect of the borrowing: paragraph 6 of Taxation Ruling TR 97/7. A loss or outgoing is not deductible where it is incurred to gain or produce benefits for other persons: Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153; [1926] HCA 58; (1926) 32 ALR 339. In your situation, it is accepted the character of the loan will follow from the original borrowing. However, each borrower incurs their share of the interest individually. Therefore your share of the interest incurred on the refinanced borrowing remains referable to your rental property. However your spouse's share of the interest is not associated with the production of their assessable income, rather it is attributed to the production of your assessable income. Accordingly you are only entitled to a deduction for your share of the interest you incur on the loan, notwithstanding circumstances where you meet the full amount of loan repayments.

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.