Private ruling: Deductibility of interest after sale of rental property
Date of advice: 28 April 2021
Published: July 2021
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 27 June 20XX

Ruling: Q1: Are you entitled to a deduction for the interest expense incurred on Loan xxxxxx following the sale of your investment property? | A1: Yes . You are entitled to a deduction for your interest expenses incurred on the funds borrowed and used for your investment properties. 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 outgoingsare of a capital, private or domestic nature, or relate to the earning of exempt income. Taxation Ruling TR 2004/4 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities , examines the deductibility of interest after the cessation of the income earning activities. You may still be entitled to a deduction for recurrent interest expenses incurred after the cessation of your previous income earning activity. Paragraph 10 of TR 2004/4 states that the outgoing will still have been incurred in gaining or producing the assessable income if the occasion of the outgoing is to be found in whatever was productive of assessable income of an earlier period

Relevant facts and circumstances: You purchased an investment property. The property was available for rent for the entire period you owned it. The purchase of the property was financed via a mortgage. The security for this property was a registered mortgage over this property and a second registered mortgage over another investment property. You sold your investment property at a capital loss. Prior to sale your investment property was used as security for x other loans with the Bank over registered mortgages for X other properties including your main residence. On the sale of the investment property the Bank would not allow the proceeds from the sale to pay out the loan. The Bank have insisted the proceeds from the sale of the property be held in an account which is used as the new security for your existing loans. Your original investment loan remains an interest only loan and you continue to make loan payments. You do not have the capacity to repay the loans in a lump sum. You did not make a conscious decision to extend the loan in order to derive an ongoing commercial advantage unrelated to the prior income earning activities which resulted in the debt.

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