Private ruling: Deductibility of interest expenses
Date of advice: 21 May 2026
Published: 3 August 2026
Ruling period: Income year ended 30 June 20YY | Income year ending 30 June 20YY | Income year ending 30 June 20YY | Income year ending 30 June 20YY | Income year ending 30 June 20YY
Date scheme commenced: 1 July 20YY

Ruling: Q1: Are you entitled to claim a deduction for interest expenses incurred by you in relation to the investment loan in relation to the income year ended 30 June 2025? | A1: Yes, from the date of settlement. | Q2: Are you entitled to claim a deduction for interest expenses incurred in relation to the investment loan in relation to each subsequent income year (or part thereof) during which your property is rented or available for rent? | A2: Yes.

Relevant facts and circumstances: You are married. During 20YY, you decided to acquire a residential investment property. You applied for and had approved an investment loan for the purpose of financing that acquisition. The loan is a X-year investment home loan from a bank. It is interest-only for the first X years, thereafter principal-and-interest. The loan is in the joint names. On DD MM 20YY, the loan was established, having an initial limit of $X. You have an offset account which is 100% linked to the investment loan. The intention was that the funds then sitting in the offset account would be applied in future towards the purchase of an investment property, once a suitable property was identified. At the time of applying for the investment loan, you had not identified an investment property that you wanted to purchase, that is, one that satisfied your criteria and was within your available budget. You were informed by your mortgage broker that unless the investment loan (which by this time had been approved, but not drawn down) was drawn down, then the loan approval would lapse. On DD MM 20YY, the investment loan was fully drawn down (up to its maximum limit of $X) and the proceeds were deposited into the offset account. Between DD MM 20YY and DD MM 20YY, no transactions occurred on the offset account. During that period, no interest was charged on the investment loan because its balance was fully offset by the balance of funds on deposit in the offset account. Due to your increased borrowing capacity at this time, you sought and had approved an increase to the loan limit in relation to the investment loan. On DD MM 20YY, a further drawdown was made on the investment loan (in the amount of $X), with the drawdown proceeds being deposited into the offset account. In early 20YY, you identified the property (the property) as a suitable investment property to purchase. In MM 20YY, you entered into a contact to buy the property. From DD MM 20YY onwards, you commenced applying the funds from the offset account to the purchase of the property. This included funding of the purchase deposit, building inspection costs and contribution towards funding of the price payable at settlement of the purchase. From this date, interest commenced being charged on the investment loan, calculated on the difference between the investment loan balance and the offset account balance. On DD MM 20YY, in anticipation of settlement of the purchase, you executed a leasing and management authority with a real estate agent in relation to the property. They would organise the renting of the property. By DD MM 20YY, the balance of funds in the offset account had reduced to $X, with all withdrawals from the offset account having been used exclusively in connection with the funding of the acquisition of the property. On or about DD MM 20YY, settlement occurred on the property. Following settlement of the property, you had accessed the funds in the offset account exclusively for the purpose of paying outgoings associated with your ownership of the property. As of DD MM 20YY, the balance of the offset account had reduced to $X, with all post-settlement withdrawals having been for the purpose of paying such outgoings. On DD MM 20YY, tenants moved into the property. Your relationship to the tenants is landlord/tenant with no prior connection to them. The estate agent advertised the property as being available for rent. The tenants applied and were successful. The property rented at a market rate on advice from the estate agent with a view to producing the highest rent able to be achieved in light of prevailing market conditions. The lease is a standard-form lease for residential premises with an initial term of X months. The property has not been vacant and not rented for more than a week. There has been no private use of the property. There are no periods when the property has been occupied but no rent has been charged. When purchased, the property was fully completed and habitable, unfurnished, ready for immediate leasing.

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

Reasons for decision: Summary: Deductibility of interest expenses | Detailed Reasoning - Questions: 1. Are you entitled to claim a deduction for interest expenses incurred by them in relation to the investment loan in relation to the income year ended 30 June 20YY? 2. Are you entitled to claim a deduction for interest expenses incurred in relation to the investment loan in relation to each subsequent income year (or part thereof) during which your property is rented or available for rent? | Summary: Are you entitled to claim a deduction for interest expenses incurred in relation to the investment loan used to purchase the property from the settlement date and for subsequent income years where the property is rented or available for rent. | Detailed Reasoning - Deductibility of interest expenses: 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, or relate to the earning of exempt income. Expenses incurred relating to a rental property are deductible under section 8-1 of the ITAA 1997 if the property is rented or available for rent in the income year in which you claim the deduction. Interest on loan used to purchase a property which is rented or available for rent is an allowable deduction under section 8-1 of the ITAA 1997. 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. However, where a loan relates to private purposes, no deduction is allowed. | Detailed Reasoning - Loan account offset arrangements: Taxation Ruling TR 93/6 Income tax and fringe benefits tax: loan account offset arrangements , (TR 93/6) outlines the Commissioner's view on loan account offset arrangements which are used to reduce the interest payable on a taxpayer'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. It is accepted that where the deposit account is a sub-account, it will be treated as a separate account. • No interest is received on the deposit account. • The reduction of the loan account interest should be achieved by offsetting the balances of the two accounts. As highlighted in paragraph 6 of TR 93/6, to be an acceptable offset arrangement for tax purposes, it is essential that there be no entitlement, either in law or in equity, to receive interest payment or payments in the nature of interest on the amounts credited to the deposit account. The only benefit arising in the deposit account should be the right to ensure that the interest payable on the loan account is reduced. A taxpayer with an acceptable loan account offset arrangement is entitled to claim a deduction for the full amount of interest incurred on the loan account, whilst the loan is used wholly for income producing purposes. | Detailed Reasoning - Application to your circumstances: You purchased a property together with settlement occurring on or about DD MM 20YY. The property was purchased with borrowed money using an offset account. The purpose was to produce assessable by renting the property. Tenants moved into the property DD MM 20YY. As the property has been rented or available for rent from settlement date, you are entitled to a deduction for the interest expenses you incur for the loan from that date. In your case, you have an investment loan with the bank used wholly for the purchase of an investment property. The investment loan is linked to an offset account. You will not earn interest on any credit balance you have in your offset account and funds kept in the offset account will reduce the amount of interest you pay on your investment loan balance. As the investment loan is wholly used for income producing purposes, and there is an acceptable loan offset account arrangement in place, the associated interest expense on the investment loan is an allowable deduction. As long as the property continues to be rented, or genuinely available for rent, in the income year for which you claim a deduction. | Detailed Reasoning - Apportionment: As co-owners, your claims for interest expenses will be apportioned in line with your respective ownership interests.