Private ruling: interest deduction
Published: January 2014
Ruling period: Year ending 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: In the interest incurred on funds used to acquire your spouse's share of an investment property deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: You and your spouse own a property together which is currently being used as your main residence. You propose to purchase your spouse's 50% share of the property using a bank loan at market rates of interest. The property will be used as rental property.

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

Reasons for decision: Summary: As stated in ATO Interpretive Decision ATOID 2001/79: 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 FC of T 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 incurred will be deductible to the extent that the property is used to produce assessable income.