Private ruling: interest expenses
Published: October 2011
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for 100% of the interest you incur on your new joint loans? | A1: 

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You own a property jointly with your spouse which you use as your principal place of residence. You own a property in your name solely which you use as a rental property. Your spouse owns a property in their name solely which they use as a rental property. You have loans referable to the above properties. You will refinance the existing borrowings into new loans with you and your spouse as joint borrowers.

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

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. Section 8-1 of the ITAA 1997 allows you a deduction for any loss or outgoing that is incurred in gaining or producing your assessable income, to the extent that it is not of a private, capital or domestic nature. Whether interest has been incurred in the course of gaining or producing assessable income generally depends on the purpose of the borrowing and the use to which the borrowed funds are put. Where a borrowing is used to acquire an assessable income producing asset, or relates to expenses of an assessable income producing activity, the interest on this borrowing is considered to be incurred in the course of gaining or producing assessable income. The character of a new loan which refinances a previous loan follows from that previous loan: Taxation Ruling TR 95/25 Where two taxpayers borrow jointly, both taxpayers will have presently an existing pecuniary liability to discharge interest on that borrowing once it accrues and is due and payable: paragraph 6 of Taxation Ruling TR 97/7. Therefore, each of the borrowers will only incur their share of the interest expense, notwithstanding circumstances where one borrower may meet all repayments in respect of the borrowing: paragraph 6 of TR 97/7. In your situation, it is accepted a portion of the interest on your new loans will be referable to your rental property and is therefore incurred in the production of your assessable income. Accordingly, as a joint borrower, you are entitled to a deduction for your 50% share of the interest incurred on the new joint loan in respect of your rental property.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.