Private ruling: rental property expenses
Published: July 2011
Ruling period: Year ended 30 June 2009 | Year ended 30 June 2010 | Year ending 30 June 2011 | Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2008

Ruling: Q1: Are you entitled to claim a deduction for interest? | A1: No.


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 (ITAA 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 use to which the borrowed funds have been put. 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. Further, interest on a new loan used to repay an existing loan that is used for income producing purposes will generally also be deductible as the character of the new loan is derived from the original borrowing: Taxation Ruling TR 95/25. In examining the use of borrowings, there may be instances where the loan has a mixed purpose. The loan may consist of a certain amount which was used to acquire the property, and another amount which was used for another purpose. Taxation Ruling TR 2000/2 examines the treatment and consequences of payments to loans in excess of the required amount and the subsequent redrawing or withdrawal of these funds. It is considered that a repayment to a loan in excess of the required amount is a permanent reduction to this debt and is applied proportionately to each purpose of the loan. You cannot choose to notionally allocate the repayments to a particular portion of the total debt, for example the non-income producing portion. Repayments of an amount to a loan do not create a debt due to the borrower, but simply allows the borrower to then draw funds from the loan to an agreed limit. These redrawn funds therefore constitute new lending and as such, the purpose or use of these drawings is relevant. In Domjan v Commissioner of Taxation 2004 ATC 2204; 56 ATR 1235 (Domjan), the AAT confirmed the view taken by the Commissioner in TR 2000/2. In this case, the taxpayer repaid money into their investment loan account and then used the funds available in the redraw facility to pay for various personal and investment expenses. The question to be answered by the tribunal was whether the whole of the interest incurred on the loan was a deductible expense. The taxpayer argued that the loan was a chose in action with a right to access funds in the redraw facility as if it was a separate sub-account in the loan facility. Therefore because the taxpayer was re-accessing private funds it followed that the increased interest expense on the loan facility resulting from the redraw was attributable to their investment activities and therefore deductible. However, the Tribunal rejected this argument. The Tribunal further agreed that amounts redrawn from this type of loan facility constituted the new borrowing of funds and that therefore the interest payable on the amounts redrawn for private use was not deductible. The principle in Domjan is not altered by the fact that any repayments or redraws to a loan facility are only made while a property is non-income producing. When a property is used for private purposes and then later used for income producing purposes, if there is still a loan over the property at the time, the portion of the loan interest that can be attributed to the original purchase of the property and subsequent renovation or repairs is deductible. The date from which the interest is deducible is from the date the property became available for rent. In your situation, you borrowed funds to purchase a house. The depositing of your salary and wages directly to the loan account is considered to be a permanent reduction to the loan. You have made multiple withdrawals for living expenses from the loan account and each of these is considered a 'new borrowing' of a private nature. Based on the information provided, you have made repayments in excess of the amount borrowed. Loan amounts relating to the property including your original loan and subsequent borrowings for renovations plus interest total less than the amounts of salary and wages you deposited against the loan. As such the loan that directly related to the property has been completely paid off and you are not entitled to a deduction for any interest incurred under section 8-1 of the ITAA 1997.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Relevant facts: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: | · application for private ruling | · documents attached to the private ruling application | · email containing Microsoft excel spreadsheets | · email containing loan statements. | In 2001 you purchased a house. | You borrowed funds from a financial institution to compete the purchase. | One of the features of the loan is a redraw facility which allowed you to access funds which you had made over the normal scheduled payments. | You had your employer deposit your wages directly into the loan account. | You redrew funds from the loan for private use and renovations to the property. | In early 2003 you increased the loan balance and used the majority of the increase for renovations to the property. | You refinanced the original loan in early 2005 with a new loan, the new loan was used to pay out the original loan, and the remaining funds used for private use and renovations to the property. | You applied for a top up to the new loan in 2006; you used the increase of funds for further renovations to the property. | The property was used as your principal place of residence from early 2001 until late 2008. | The last deposit of wages into the loan account was late 2008. | The property became available for rent in early 2009, and was rented out at market rate. | You have not provided the full financial details of your original loan, as you are unable to locate all of your loan account statements.