Private ruling: Deduction - rental - interest expense
Date of advice: 19 January 2017
Published: June 2017
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you entitled to a deduction for the interest incurred on the money borrowed to purchase your residential property whilst it is being used as a rental property? | A1: Yes

Relevant facts and circumstances: You purchased an residential property 201X. You withdrew $XXX,000 from your existing owner-occupied mortgage (loan) account to purchase the residential property and cover the associated costs (such as stamp duty etc) A family member lived in the residential property between X to X in 201X. You have recently commenced advertising the residential property for rent and expect to find a tenant in the near future.

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

Reasons for decision: Summary: Interest is deductible under section 8-1 of the Income Tax Assessment Act 1997 to the extent that it is incurred in gaining or producing assessable income or in carrying on a business for that purpose, except to the extent that the expense is of a capital, private or domestic nature or incurred in gaining or producing exempt income. Whether interest has been incurred in the course of producing assessable income generally depends on the use to which the borrowed funds have been put. The 'use' test, established in Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion. The interest will be deductible to the extent that the property is used to produce assessable income. Taxation Ruling TR 2000/2 provides guidance on the deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities. Where interest accrues periodically on the outstanding balance of a mixed purpose line of credit sub-account, the deductibility of accrued interest is determined by considering the application of the borrowed funds for income producing and non-income producing purposes. The interest needs to be apportioned between the income producing and non-income producing purposes. Apportionment must be made on a fair and reasonable basis. Where interest accrues daily under a mixed purpose sub-account, a taxpayer is entitled to a deduction in respect of that part of the interest that has accrued on the portion of the outstanding daily loan balance attributable to an income producing purpose. In calculating the portion of the outstanding daily loan balance attributable to an income producing purpose, any repayment of principal is applied proportionately against the outstanding balance of amounts applied to income producing and non-income producing purposes respectively, at the time the repayment is made. In your case, you are currently advertising your residential property for rent and you intend to tenant the residential property in the near future, gaining assessable income from the rent. You will be entitled to a deduction for the apportioned interest expense relating to the money borrowed to purchase the residential property, only to the extent that it is used to produce assessable income, that is, only for the time the residential property is available for rent.