Private ruling: Rental property interest
Published: June 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a deduction for interest on the additional funds used to refinance the deposit on the commercial property? | A1: Yes.


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 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 that the deductibility of interest on borrowed funds is determined by the use of the borrowed money. The use test, established in FC of T v. Munro (1926) 38 CLR 153, is the basic test for the deductibility of interest and looks at the application of the borrowed funds as the main criterion. Where a borrowing is used to acquire an income producing asset or relates to an income producing activity, the interest on this borrowing is considered to be incurred in the course of producing assessable income. An outgoing of interest will not fail to be deductible merely because the original loan is refinanced. You originally borrowed funds for a deposit on a commercial property from private loan over your residential home. You are now able to extend the commercial property loan and have repaid the deposit funds borrowed against your residential home. Therefore, as the additional funds will be used to repay the original loan for the deposit used to purchase a commercial property, you are entitled to claim a deduction for the interest incurred on the loan.

Relevant facts: You purchased a commercial investment property. | You could not initially borrow the full amount from the bank so you drew down on a loan over a private dwelling for the deposit. | Once the commercial property was rented, the property was revalued, allowing the bank to increase the loan over the property to incorporate the initial deposit amount. | You extended the investment loan and repaid the deposit amount to the private loan.