Private ruling: Interest deductions
Published: March 2014
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a partial deduction for the interest incurred on your investment loan? | A1: Yes.

Relevant facts and circumstances: You want to take out an investment home loan and place a portion of the loan in an offset bank account. The offset account will be used solely for the investment properties. All of your rental income will be deposited into the offset account and all of your investment property expenses will come out of the offset account.

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 a losses or outgoings to the extent that they are incurred in gaining or producing assessable income, except where the losses or outgoings are of a capital, private or domestic nature. Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith considers the deductibility of interest. 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 borrowed funds are used to acquire an income producing asset (for example, a rental property), the interest on the borrowed moneys is considered to be incurred in gaining or producing assessable income. Taxation Ruling TR 93/6 Income tax and fringe benefits tax: loan account offset arrangements considers loan account offset arrangements which are used to reduce the interest payable on a customer's loan account. TR 93/6 provides that an acceptable loan account offset arrangement with dual accounts operates as follows: • There are two accounts; a loan account and a deposit account. • No interest is received on the deposit account • The interest on your loan can only be reduced to the extent of the amount of interest which would have been charged on the loan amount equal to the balance of your deposit account. For example, you have a loan of $250,000 and a credit balance in your deposit account of $50,000. You can only obtain a maximum reduction of interest as if the balance of your loan was $200,000 (reduced by the $50,000 balance of your deposit account). A taxpayer with an acceptable loan account offset arrangement with dual accounts is entitled to claim a deduction for the full amount of interest actually incurred on the loan account whilst the loan is used wholly for income producing purposes. In your case, you are considering borrowing money for an investment property and to place money into an offset account. As stated above, interest on borrowed funds used to purchase an investment property are an allowable deduction as it is considered to be incurred in gaining or producing assessable income. However, the interest incurred on the portion of the loan which is held in the offset account will not be deductible as that portion of the loan is not being used for income producing purposes. When money in the offset account is used to pay for a tax deductible expense (for example, rates and insurance), that amount will be used for income producing purposes and subsequently the portion of interest attributable to the amount will be deductible. Thus if the arrangement as described was to be undertaken the proportion of the interest which would be deductible would decrease because the amounts held in the offset account would not be deductible until each amount was actually incurred on deductible expenditure. The amounts held in the offset account would be considered to be non-deductible amounts for which any interest would not be deductible. The principles in Taxation Ruling TR 2000/2 Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities provides guidance about how interest is calculated where there are both deductible and non-deductible amounts. These principles would equally apply to where an offset account is used. This would occur notwithstanding that the interest charged is calculated on the amount of the loan less the amount held in the offset account.