Private ruling: Mixed purpose line of credit - repayments - notional allocation
Published: October 2011
Ruling period: Year ended 30 June 2011 | Year ending 30 June 2012
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you allowed to apply the extra repayments you have made to your line of credit facility to reduce the non-income producing portion of the total debt, rather than applying the repayments proportionately to both the non-income producing portion and the income producing portion? | A1: No. | Q2: If you refinance your existing mixed purpose line of credit with two new loans, where the borrowings under those two new loans are equivalent to the respective income producing and non-income producing portions of your existing line of credit, will the interest on the loan used to refinance the income producing portion of your existing line of credit be fully deductible? | A2: Yes.

Relevant facts and circumstances: You have a line of credit. You have used the line of credit for income producing purposes including paying for the construction of a rental property, purchasing shares and paying for other expenses relating to your rental properties. You have also used the line of credit for non-income producing purposes including paying your everyday living expenses. You have made repayments to the line of credit over and above the minimum required amounts with the intention of reducing the non-income producing portion of the line of credit.

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

Reasons for decision: Summary: The Commissioner does not have any discretion to allow you to apply the extra repayments you have made to your mixed purpose line of credit facility against the non-income producing portion of the line of credit only. The repayments to the line of credit need to be applied proportionately to reduce the balance of the outstanding principal attributable to income producing and non-income producing use respectively. However, if you refinance your existing mixed purpose line of credit with two new loans, where the amounts borrowed under those two new loans are equivalent to the respective income producing and non-income producing components of your existing line of credit, the interest on the loan used to refinance the income producing portion of the line of credit will be deductible. In addition, any repayments you make to the loan used to refinance the non-income producing portion of your existing line of credit will reduce your non-income producing borrowings only. | Detailed Reasoning - Detailed reasoning: You can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income except where the loss or outgoing is capital, private or domestic in nature or relates to the earning of exempt income (section 8-1 of the Income Tax Assessment Act 1997 ). Taxation Ruling TR 2000/2 considers the deductibility of interest incurred by borrowers on line of credit facilities, where the borrowed money has been applied for both income producing and non-income producing purposes. TR 2000/2 provides, at paragraph 21, that where a taxpayer makes repayments over and above the required minimum payment and the line of credit facility is used for both income producing and non-income producing purposes, the taxpayer cannot choose to notionally allocate the repayments to a particular portion of the total debt, for example, the non-income producing portion. This is because the balance outstanding on a mixed purpose line of credit facility is an undivided single debt owed by the borrower(s) to the lender. When repayments of principal are made, it is not considered possible to direct those repayments to only that part of the borrowed funds used for a particular purpose as if it were a separate debt. While it may be possible to trace the uses to which different parts of the borrowed funds are put, it is considered repayments of principal need to be applied proportionately to reduce the balance of the outstanding principal attributable to income producing use and non-income producing use respectively. That is, if 80% of an outstanding line of credit debt is used for income producing purposes, 80% of any repayment would be in respect of that part of the outstanding debt. There are two exceptions that can apply to repayments made to mixed purpose line of credit facilities. The first exception is where money borrowed and applied to a particular use is recouped and repaid. For example, where an asset that was purchased with the borrowed funds is sold, that part of the outstanding balance of the mixed purpose debt that related to the purchase of the asset, can no longer be regarded as being applied to that use. Where the borrowed funds recouped are paid into the mixed purpose line of credit facility, those funds have ceased to be outstanding funds used for any purpose. The effect of the repayment of the recouped funds to the mixed purpose line of credit is to reduce only that part of the outstanding line of credit debt applied to the previous use of those funds. Under the second exception, a taxpayer may choose to refinance a debt outstanding on a mixed purpose line of credit by borrowing an equivalent amount under two separate accounts or loans. Where a mixed purpose line of credit debt is replaced by two new debts and the advantage sought by these borrowings is the refinancing of the respective parts of the previous debt used at the time for income producing and non-income producing purposes, we consider that a strict tracing approach is not appropriate. Therefore, where an existing line of credit facility comprising of both income producing and non-income producing components is refinanced using two new loans which separate the income producing and non-income producing components, the interest on the new loan used to refinance the income producing portion of the previous mixed purpose line of credit facility will be fully tax deductible. In your case, you have made a number of repayments over and above the minimum amount required by the lender, to a mixed purpose line of credit. When repayments of principal are made, it is not considered possible to direct repayments to only part of the borrowed funds used for a particular purpose as if they were a separate debt. As such, you are not allowed to apply the extra repayments you have made to your mixed purpose line of credit to the non-income producing portion of the loan only. The repayments to the line of credit need to be applied proportionately to reduce the balance of the outstanding principal attributable to income producing and non-income producing use respectively.

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