Private ruling: Deductibility of interest on a rental property
Date of advice: 28 February 2018
Published: June 2018
Ruling period: Year ending 30 June 2018
Date scheme commenced: In 20XX, you and another party purchased a property as joint tenants.

Ruling: Q1: Is the interest on an investment loan used to finance the purchase of a further share in the property deductible under section 8(1) of the Income Tax Assessment Act 1997 ? | A1: Yes

Relevant facts and circumstances: In 20XX, you and another party purchased a property as joint tenants. The property was your main residence from date of purchase until 20XX when you changed residences. The property was tenanted shortly after you moved out and has since then generated rental income for you and the joint owner. Income and deductions associated with it were properly returned by you and the joint owner. You later acquired the joint owner’s share of the property, which you funded by a new loan.

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

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that 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. Taxation Ruling TR 95/25: Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith, provide the Commissioners 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. As the interest is an expense incurred in deriving your assessable income it is deductible under section 8-1 of the Income Tax Assessment Act 1997

The scheme commences on: 1 July 2016