Private ruling: Rental deductions for interest and the use of an offset facility attached to a loan account
Date of advice: 16 October 2020
Published: November 2020
Ruling period: Year ending 30 June 2021 | Year ending 30 June 2022
Date scheme commenced: 1 July 2020

Ruling: Q1: Are you entitled to a deduction for the full amount of interest charged on your investment loan where you withdraw funds from your linked mortgage offset account for private use? | A1: Yes. While withdrawing funds from the mortgage offset account for private purposes will increase the interest payable on the investment loan, it will not increase the balance. As such, withdrawing these funds for private purposes are not considered to be new borrowings. As the loan account will only have been used for income producing purposes the whole of the interest charged on the investment loan is deductible. | Q2: Will the interest charged on the investment loan be fully deductible after you move out of the rental property and make it available for rent? | A2: Yes. As you will only withdraw funds from the mortgage offset account and not from the investment loan the loan will only have been used only for income producing purposes. The interest charged on the investment loan will be fully deductible when you have vacated the property and made it available for rent.

Relevant facts and circumstances: You purchased a rental property. You used funds from an investment loan to purchase the rental property. The names against the loan have not changed since you purchased the rental property. The investment loan is principal and interest with a variable interest rate. There is a mortgage offset account linked to the investment loan. No interest is received on the mortgage offset account. The loan has not been refinanced. The loan funds have not been used for any purpose other than for the purchase of the rental property. The tenant pays rent at market rate. The rental property is managed by an agent. You have never occupied the rental property previously. You will sell your main residence and deposit the sale proceeds into the mortgage offset account linked to your investment loan. The balance of the mortgage offset account will not exceed the balance of the investment loan account. Upon the sale of your main residence you will move into the rental property for approximately 2-3 years. You will then withdraw funds from the mortgage offset account to purchase a new main residence and will vacate the rental property and use it again for income producing purposes. No interest deductions will be claimed on the rental property loan while you are living there.

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