Private ruling: Rental deductions
Published: September 2014
Ruling period: Income year ended 30 June 2014
Date scheme commenced: On or after 1 June 2014

Ruling: Q1: Will the interest incurred on a loan, or an amount redrawn from an existing loan, taken to meet expenses in relation to a granny flat which is rented or available to rent be deductible? | A1: Yes

Relevant facts and circumstances: You purchased a property with your spouse. The property includes a granny flat which you rent out. You got separate loans for the house and granny flat portion of the property. Your tenant will be moving out in the near future, you will be advertising for a new tenant before they move out but consider it likely that there may be a period of time where the granny flat is unoccupied. You are concerned about meeting expenses (interest, land tax, rates etc) in relation to the granny flat if you cannot immediately find a new tenant. You are considering taking out a new loan or redrawing from the previous loan to meet these expenses.

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. Taxation Ruling TR 95/25 provides the Commissioner's view regarding the deductibility of interest expenses. As outlined in TR 95/25, there must be a sufficient connection between the interest expense and the activities which produce assessable income. TR 95/25 specifies that to determine whether the associated interest expenses are deductible, it is necessary to examine the purpose of the borrowing and the use to which the borrowed funds are put. The 'use' test, established in the High Court case Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, (1926) 32 ALR 339 is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion. Accordingly, it follows that if a loan is used for the payment of expenses you incurred in relation to a property that is rented or available for rent, the interest incurred on the loan will be deductible.