Private ruling: Interest incurred to acquire investment property
Published: October 2014
Ruling period: Year ended 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to claim a deduction for interest incurred on money redrawn on an offset account to fund the settlement of an investment property? | A1: Yes.

Relevant facts and circumstances: While you were looking to purchase an investment property, you took out a loan to assist with the eventual purchase of a property. As the loan was drawn before you had purchased a property, you had no other use for the funds, rather than unnecessarily incurring interest while the funds were held, the entire proceeds were put into an offset account that is completely linked to this loan. You deposited additional money from your own sources into the offset account. This money was never used for private purposes and no money was ever withdrawn for private use. You entered into a contract to purchase an investment property. At settlement, you withdrew funds from the offset account to fund the shortfall. You are incurring interest on this loan due to the funds being withdrawn to fund the settlement.

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

Reasons for decision: Summary: 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. 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. Taxation Ruling TR 2000/2 contains the Commissioner's view on the deductibility of interest with regards to line of credit and redraw facilities. We consider draw-down from a line of credit account or sub account, or a redraw from a loan account, is a separate borrowing. To the extent borrowings are used for income producing purposes, that part of the accrued interest attributable to those borrowings is deductible. Conversely, that part of the accrued interest attributable to borrowings for non-income producing purposes is not deductible. In your case, you have incurred interest expense on monies redrawn from an offset account to assist in funding the purchase of an investment property. No amounts have been withdrawn from the offset account for any non-income producing purposes. Interest is fully deductible where funds redrawn from an offset account are used exclusively for an income producing purpose. Accordingly, the interest you incur on redrawn monies from the offset account to fund the purchase of an investment property will be deductible under section 8-1 of the ITAA 1997.