Private ruling: Interest
Published: May 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a deduction for interest on a refinanced loan? | 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. An outgoing of interest will not fail to be deductible merely because the original loan is refinanced. You originally borrowed funds under a commercial loan purchase a commercial property. As the interest rate is much higher on a commercial loan, you wish to take out a personal loan using your family home as security and use the funds to pay out the commercial loan. Therefore, as the funds will be used to pay out a commercial loan and the property continues to be used for income producing purposes you are entitled to claim a deduction for the interest incurred on the new loan.

Relevant facts: You own a commercial property that is mortgaged with a commercial loan. | You wish to take out a personal loan with your family home as security and use the funds to pay out the commercial loan. | The loan you will take out will be for the amount of the existing loan plus an additional amount for any fees to change the loans. | The new loan will be in your name only. | You want to change the loan to a residential loan because the interest rate is much lower.