Private ruling: Interest incurred after property sold
Published: July 2012
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to claim your share of a deduction for the interest incurred on the balance of a loan obtained to acquire an investment property after the property has been sold? | 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 (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, or relate to the earning of exempt income. The deductibility of interest expenses is determined through the examination of the purpose of the borrowing and the use to which the borrowed funds are put. 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. Where interest has been incurred over a period after the relevant borrowings (or assets representing those borrowings) have been lost to the taxpayer and the relevant income earning activities have ceased, it is necessary to determine whether a nexus between the outgoing and the income earning activities still exists. Generally, where the relevant income earning activities have ceased, the interest incurred will not be deductible if the taxpayer: · keeps the loan for reasons unassociated with the former income earning activities; or · makes a conscious decision to extend the loan in a way so as there is an ongoing commercial advantage to be derived which is unrelated to the income earning activity with which the debt was originally incurred. In these circumstances the nexus between the outgoings of interest and the relevant income earning activity is broken and the interest will not be deductible. A legal or economic inability to repay the loan would suggest that the loan is not being maintained for the purposes other than the former income earning activities. The decisions in the Federal Court Cases FCT v. Brown (1999) FCA 721; (1999) 43 ATR 1; 99 ATC 4600 (Browns Case) and Federal Commissioner of Taxation v. Jones [2002] FCA 204; 2002 ATC 4135; (2002) 49 ATR 188 (Jones Case) support this view and are considered the authority for the deductibility of interest expenses where the income-producing activity has ceased. The Courts held in these cases that the interest will be deductible provided: · the loan was entered into to acquire or maintain an income-producing asset · the funds borrowed were used in an income-producing activity · there is no act that severs the interest from its connection with the former income-producing activity which was the occasion for the loan; and · the interest as it occurs is still sufficiently proximate to the taxpayers previous income-producing activity. In your case, you obtained a loan to acquire an investment property. When you sell the property it will be at a loss, and when the proceeds of the sale are applied to it, they will not be sufficient to extinguish the loan. You will not be in a position to fully pay the remaining amount of the loan immediately. You intend to repay the outstanding amount when funds become available. You have indicated that your inability to repay the entire loan was due to the fact that you will not have sufficient funds available. Based on this the sale of the property does not sever connection between the interest expenses and your previous income earning activities. The interest accruing on the remaining loan is still sufficiently proximate to your former income earning activities to be deductible. Accordingly, the interest you incur on the loan is deductible under section 8-1 of the ITAA 1997.

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. | Relevant facts: You and your spouse purchased an investment property from developers over seven years ago, and it was made available for rent immediately. Your individual holding in the property on the title deed is 99%. | When you purchased the property it was with the unwritten understanding that it would be highly sought after as accommodation for students attending the nearby university when it closed its existing on site accommodation. | This did not eventuate, and over time the value of the property has declined, with the current valuation a little over half of what was paid for it. | You took out an interest only loan to purchase the property, and partly mortgaged your principal residence to facilitate this. The principal amount of the loan is still outstanding. | You are considering selling the property and will apply all of the proceeds against the outstanding loan, after converting it to principal and interest. There will still be an amount outstanding against the mortgage, which you intend to pay off as quickly as possible. | You have considered other means to assist in paying down the loan. You have no other property which may be sold, and insufficient liquid assets to substantially reduce the loan. | You have a small number of shares which if sold would not significantly reduce the loan. | You have insufficient superannuation to draw on to assist in loan reduction. | You do not intend to keep the loan on foot to gain any economic advantage, and wish to pay it out as soon as possible.