Private ruling: rental property expenses
Published: February 2012
Ruling period: Income year ended 30 June 2012 | Income year ended 30 June 2013 | Income year ended 30 June 2014 | Income year ended 30 June 2015 | Income year ended 30 June 2016
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for the interest you incur on your line of credit? | A1: 

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You own an income producing rental property, the purchase which was funded by an investment property loan. You will allow the interest on this rental loan to charge to a separate line of credit facility. You will not make any repayments to the line of credit and will allow interest accrued on this facility to charge to itself without repayment (capitalise).

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 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. Whether interest has been incurred in the course of producing assessable income generally depends on the purpose or use to which the borrowed funds have been put. Where a borrowing is used to acquire an assessable income producing asset, or relates to expenses of an assessable income producing activity, the interest on this borrowing is considered to be incurred in the course of gaining or producing assessable income. The character of a new loan which refinances a previous loan follows from that previous loan: Taxation Ruling TR 95/25 Compound interest, as with ordinary interest, derives its character from the use of the original borrowings: Taxation Determination TD 2008/27. Where you allow interest incurred on your rental loan to simply charge to the line of credit without repayment, the interest is compounding. Accordingly you are entitled to a deduction for the interest you incur on this borrowing as its character follows that of the original borrowing, which is in respect of earning assessable income. Please note, however, that Part IVA of the Income Tax Assessment Act 1936 has not been considered in this matter. These provisions are a general anti-avoidance rule that can apply in certain circumstances where a taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. Tax Determination TD 2011/D8 considers how the general anti-avoidance provisions would apply to certain investment loan arrangements. You may wish to review this document (available from our website) and consider its relevance to your situation.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.