Private ruling: Rental property expenses
Published: March 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for the interest incurred on the loans, which is referable to the acquisition of your share of the 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 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 Income and expenses from a rental property are shared in accordance with the legal title, except in the very rare instances that equitable interests differ: Taxation Ruling TR 93/32. In your situation, it is accepted the interest is referable to the rental property and you are entitled to a deduction for the interest incurred on the loans referable to the acquisition of your share of the property, notwithstanding the interest incurred by each owner may be more or less than the other owner given different borrowing arrangements and structure.

Relevant facts: Person A has a borrowing which is referable to the purchase of a share of a rental property which was previously held jointly with his/her sibling. | Person B subsequently purchased the sibling's half share of the rental property at the market rates current at the time of purchase. | Person A retained his/her existing half share. | This purchase was funded by a number of borrowings, which were part of an overall restructure of the borrowings referable to the property. | Given an increase in market value since the initial purchase by Person A and their sibling, the borrowing referable to Person B's share of the property is larger relative to the borrowing referable to Person A's half share of the property.