Private ruling: Rental property interest
Published: January 2012
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for interest on a loan to repay your parents? | 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 from your parents to purchase a rental property. As your parents now require the funds to be repaid, you intend taking out a new loan for this purpose. Therefore, as the funds will be used to refinance a loan used to purchase an investment property, you are entitled to claim a deduction for the interest incurred on the loan.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: You purchased a property in the 2006-07 using funds interest free from your parents and also a loan from the bank. | Your parent now requires you to repay the loan. | You intend taking out a loan to repay your parents.