Private ruling: Rental property interest
Published: November 2014
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to a deduction for interest on a loan from your parents to construct a granny flat? | A1: Yes.


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. Taxation Ruling TR 95/25 provides that the deductibility of interest on borrowed funds is determined by the use of the borrowed money. 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. Where a borrowing is used to acquire an income producing asset or relates to an income producing activity, the interest on this borrowing is considered to be incurred in the course of producing assessable income. You intend borrowing funds from your parents to build a granny flat onto an existing investment property. The granny flat will be used for income producing purposes when constructed. You will pay your parents the amount of interest they are charged by the bank. Therefore, as the funds will be used to for income producing purposes, you are entitled to claim a deduction for the interest incurred on the loan.

Relevant facts: You own an investment property which is rented at market rates. | You intend building a granny flat on the block and renting it out at market rates. | You intend borrowing the funds from your parents who will take out a loan in their name. | You will repay the interest on the loan at the rate charged to them by the bank. The funds will be transferred from your own account to your parent's loan.