Private ruling: Rental property expenses
Published: September 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for 100% of the interest expense on refinanced loans used to purchase your share of jointly owned investment properties? | A1: Yes

Relevant facts and circumstances: You own two properties as joint tenants with your spouse. There is one loan for each property. The loans relate 100% to the purchase of the properties. The loans are in joint names. You intend to refinance the loans in such a way that you and your spouse each obtain one loan for each property solely in your own names. This will enable you and your spouse to arrange your finances to better suit your individual financial positions. The restructure will mean that you are able to prepay your interest for 12 months and your spouse is able to choose not to.

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. Interest paid on a mortgage over a rental property is considered an allowable deduction for the purposes of section 8-1 of the ITAA 1997. The refinancing of a loan does not of itself break the nexus between outgoings of interest under the loan and the prior income earning activities. However the decision to refinance may, in all the circumstances, lead to the inference being drawn that the taxpayer has made a conscious decision to extend the loan, and has done this in order to derive an ongoing commercial advantage. In your case, you and your spouse wish to separate your joint investment property loans into separate loans held solely in your individual names in order to align your repayment options with your financial situations. As the refinance will not be carried out to extend the loan or achieve an ongoing commercial advantage the nexus between the incurring of the interest expense and the earning of assessable income from the investment properties will not be broken. As such you are entitled to a 100% deduction on the interest accruing on your refinanced investment property loans.

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