Private ruling: Rental property interest deductions
Published: January 2013
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for the full amount of interest paid on a loan used to acquire your share in a number of rental properties? | A1: Yes.

Relevant facts and circumstances: You co-own several rental properties as tenants in common. You and the co-owner each have separate loans for the rental properties and each pay different amounts of interest on these loans. The loan you have taken out was used exclusively to fund the purchase of your interest in the properties.

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 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing your assessable income. However, a deduction is not allowed where the loss or outgoing is of a capital, private or domestic nature or incurred in relation to gaining exempt income. Taxation Ruling TR 95/25 provides the Commissioner's view regarding the deductibility of interest. The use test is the basic test relied upon to establish the deductibility of interest and looks at the application of the borrowed funds as the main criterion. Accordingly, where borrowed funds are used for income producing purposes the interest on those funds is deductible. Co-owners who are not carrying on a rental property business must divide the income and expenses for the rental property in line with their legal interest in the property. However, according to the guide for rental property owners, Rental properties 2012 NAT 1279, interest on money borrowed by only one of the co-owners which is exclusively used to acquire that person's interest in the rental property does not need to be divided between all of the co-owners. In your case, you took out a loan to purchase an interest in a number of rental properties. The money borrowed was used exclusively to acquire your interest in these properties. The interest you incurred on the loan does not need to be divided between the co-owners of the property. Therefore, you are entitled to a deduction for the full amount of interest incurred on your loan.

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