Private ruling: Capital gains tax - real property - interest deductions - cost base
Published: May 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Questions and Answers: | Is the additional amount paid an allowable deduction? | No. | Does the additional amount form part of the cost base of the property? | No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 25-25 | Income Tax Assessment Act 1997 Section 25-35 | Income Tax Assessment Act 1997 Section 110-25

Reasons for decision: Summary: Deductibility of interest You can claim deductions 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, or relate to the earning of exempt income. Interest is deductible where the expense has a sufficient connection with the gaining or producing of assessable income and the interest has not been incurred too soon before the production of assessable income. To establish that there is a sufficient connection between incurring an interest expense and the gaining or producing of assessable income, regard must be given to all the circumstances including the use to which the borrowed funds are put. The 'use' test, is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion. The interest incurred will be deductible to the extent that the property is used to produce assessable income. It is therefore generally accepted that ordinary interest incurred on funds borrowed to acquire an income producing asset is an allowable deduction. In your case, you purchased a dwelling, in order to secure a loan from a financial institution and to enable you to avoid paying mortgage insurance you were advanced an amount by your parent's. You agreed to repay the amount and an additional component which would reflect the appreciation of the property upon disposal. The sale of the property was completed and an amount has been returned to your parents. The family arrangement has been documented in a signed deed between you and your parents, a term of the deed was that so long as the loan or any part thereof remains outstanding after 120 days from written notice by the lenders pursuant to clause 3, the borrower shall pay interest thereon at the rate of 12% per annum until repaid. Until such time as the lenders give a written notice to the borrower pursuant to clause X, the loan shall be interest free. Your parents did not enforce this clause and as such the payment can not be classified as an interest payment. The fact that the deed only required repayment of the originally advanced amount and that there was provision in your parents' wills to cover any repayment indicates that the entire arrangement is a private family arrangement. The additional amount paid to your parents was part of a family arrangement and as such is not an allowable deduction under the provisions of the Income Tax Assessment Act 1997. Similarly it cannot be said to be a cost of ownership of the property, the cost of an improvement, or to preserve the value of the property or to protect your title to the property. Hence it does not form part of the cost base of your property.

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. | Relevant facts: You purchased an investment property. | You own the property solely. | You have declared all the income and claimed all related expenses of the property. | You borrowed an amount from your parents, to assist you secure a loan and to avoid paying mortgage insurance. | The loan was also to be treated as an investment by your parent's in the purchase of the investment property and upon sale a proportion would be returned to them from the sale proceeds. | You entered into an informal agreement with your parents upon these terms. | You formalised the arrangement by executing a loan deed with different terms and conditions. | Your parents have terms in their wills to leave you an amount to cover any repayment required in the event of their death. | You have provided the following documents, which form part of and should be read in conjunction with this private ruling | · Letter of understanding | You sold the property and have paid your parent's an amount which comprised a repayment of the advanced amount and an additional amount. | You made a capital gain on the sale of the investment property.