Private ruling: Deductibility of interest expenses on redrawn funds
Published: October 2012
Ruling period: Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction for interest expenses on money withdrawn from a mortgage held against your private residence where the redrawn funds were used to purchase a rental property? | A1: Yes.

Relevant facts and circumstances: You intend to purchase a property during the 2012-13 financial year. The property will be used to earn rental income. You will redraw funds from the existing mortgage against your private residence to fund the purchase of the rental property. As a result of the redraw you will incur additional interest expenses.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision: Detailed Reasoning - Deductibility of interest expense: 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, or relate to the earning of exempt income or a provision of the taxation legislation excludes it. 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. The security used for the loan does not affect the deductibility of the interest expense incurred (Taxation Determination TD 93/13). If the borrowed money has been used to buy, or is in relation to, an income producing asset then the interest expense is an allowable deduction. However, if the borrowed money is used only partly to produce assessable income, only that part of the interest which relates to the production of assessable income is an allowable deduction. You intend to redraw funds to purchase a property which will be used to earn rental income. The loan the funds will be redrawn from is secured against your current private residence. As you are using the redrawn funds to purchase an income producing asset, you will be entitled to a deduction for the interest expense on that portion of the loan which was used to acquire the new property.

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