Private ruling: Investment property deductions
Date of advice: 9 November 2018
Published: January 2019
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are the accumulated special repayments tax deductible in relation to property one? | A1: No. | Q2: Are the accumulated special repayments tax deductible if transferred to the property two loan? | A2: No. | Q3: Is the interest on the investment property tax deductible? | A3: Yes.

Relevant facts and circumstances: Client A purchased a unit (property one) in 20XX. After marrying Client B and having dependants you decided to upgrade your residence. Jointly you purchased a house (property two) in 20XX. You then decided to rent property two for one year to place you in a more comfortable financial position, and thus not needing to sell property one. In mth/20XX you decided to leave property two tenanted and postponed your move there. In mth/20XX you locked the two investment loans to a fixed interest rate for X years. On mth/20XX you moved the ‘accumulated special repayments’ (ASR) from your investment loan (property two) to your home loan (property one) totalling $XX. You continue to make ASR to your property one loan. You consider these funds to be ‘savings’. You thought that you could transfer the funds back to the property two loan once you moved into the house as your main residence and the fixed terms for the loans has expired. You met with your accountant. You advised him of your intentions to move into property two. Your accountant reviewed your loan balances and provided guidance on the feasibility and the tax implications. The ASR in the property one loan has now reached $XX.

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 assessable income except where the outgoings are of a capital, private or domestic nature. 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 (TR 95/25) provides the Commissioner's view regarding the deductibility of interest expenses. As outlined in TR 95/25, there must be a sufficient connection between the interest expense and the activities which produce assessable income. TR 95/25 specifies that to determine whether the associated interest expenses are deductible, it is necessary to examine the purpose of the borrowing and the use to which the borrowed funds are put. The 'use' test, established in the High Court case Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, (1926) 32 ALR 339 is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion. Accordingly, it follows that if a loan is used for investment purposes from which income is to be derived, the interest incurred on the loan will be deductible. The money accumulated in the ASR is not related to the producing of assessable income. In your case the money accumulated in the ASR was considered by you to be ‘savings’, therefore it is not received in relation to the income production of the investment property. The funds accumulated in the ASR are considered to be deposits of a private nature and therefore the movement of these funds is also considered to be a private expense and not an allowable deduction.