Private ruling: Compound interest
Ruling period: Income year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to a deduction for the interest you incur on your rental loan where you allow the interest to charge to the loan without payment? | A1: 

Relevant facts and circumstances: You own an income producing rental property, the purchase which was funded by an investment property loan. You will allow the interest on the rental loan to charge to itself without repayment (capitalise). You will incur interest charges on this capitalised amount of the loan.

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. Whether interest has been incurred in the course of producing assessable income generally depends on the purpose or 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. Compound interest, as with ordinary interest, derives its character from the use of the original borrowings: Taxation Determination TD 2008/27. Where you allow interest incurred on your rental loan to simply charge to the loan without repayment, the interest is compounding. Accordingly you are entitled to a deduction for the interest you incur on this portion of the borrowing as its character following that of the original borrowing, which is in respect of earning assessable income.

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.