Private ruling: Deductions - rental properties - interest expenses
Date of advice: 28 January 2022
Published: April 2022
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Can you claim a deduction for interest expenses incurred in relation to the investment properties owned by your children? | A1: No.

Relevant facts and circumstances: In 20XX, you and your spouse separated. Shortly after, title for investment properties Property A and Property B, held in equal shares as joint tenants by you and your ex-spouse, was transferred to your ex-spouse under a court order. Your ex-spouse passed away a short time later. The investment properties were transferred to your children, each with an equal ownership interest. Your ex-spouse's Estate was finalised a short time later. The loans for Property A and Property B are in the names of you and your ex-spouse. You have been paying the loans since your ex-spouse's date of death until the present. The amount of interest you are seeking to claim a deduction for is $X,XXX for Property A and $X,XXX for Property B. The mortgages on the investment properties are paid for with a combination of rent received and you topping up the remainder from your personal funds.

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

Reasons for decision: Detailed Reasoning - Detailed reasoning: Interest expenses are deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to the extent they are incurred in gaining or producing assessable income or in carrying on a business for that purpose. Interest expenses are not deductible if they are of a capital, private or domestic nature or incurred in gaining or producing exempt income. There must also be a sufficient connection between the interest expense and the activities which produce assessable income to claim a deduction. Generally, rental income and expense amounts should be declared in the income tax return of the legal owner, that is, the person whose name is on the registered title for the property. If there are joint tenants, then each owner should claim their percentage of the rental property expenses in accordance with their ownership interest. | Detailed Reasoning - Application to your circumstances: Generally, rental income and expense amounts should be declared in the income tax return of the legal owner, that is, the person whose name is on the registered title for the property. If there are joint tenants, then each owner should claim their percentage of the rental property expenses in accordance with their ownership interest. In your situation, it is your children who are earning assessable income from the Properties and who are the legal owners of the Properties. You have advised that you are paying the difference between the rent received from the Properties and the mortgage repayments. However, as there is no legal requirement for you to do so, we would view such payments as a gift. As the Estate of your ex -spouse has been fully administered, neither are you making these payments in your capacity as Executor. Therefore, you are not able to claim a deduction for the interest expenses you have incurred as they do not meet the requirements of section 8-1 of the ITAA 1997.