Private ruling: Interest
Published: December 2014
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to a deduction for 100% of the interest incurred on loans for your investment property? | A1: Yes. | Q2: Are you entitled to a deduction for 100% of the interest incurred on loans for your investment property if your spouse contributes to loan repayments? | A2: Yes.

Relevant facts and circumstances: You intend to purchase a rental property and the title will be solely in your name. You will be receiving all of the income in relation to the property. You will be obtaining two loans to fund the purchase of this property. Loan 1 will use the rental property as collateral and will be solely in your name. 100% of the funds from this loan will be used towards the purchase of the property. Loan 2 will use your principal place of residence as collateral. Your principal place of residence is jointly owned by you and your spouse. Loan 2 will be in join names. This is required by the bank in order to satisfy their serviceability requirements. 100% of the funds from Loan 2 will be used towards the purchase of the property. Loan 1 will require more equity than you have in cash making Loan 2 necessary. Loan 2 also provides a more favourable interest rate compared to Loan 1. If you are unable to sufficiently service the loan, your spouse will make up the difference. Your spouse may also contribute to the loan in order to reduce the principal and interest payable.

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 you a deduction for any loss or outgoing that is incurred in gaining or producing your assessable income, to the extent that it is not of a private, capital or domestic nature. Whether interest has been incurred in the course of gaining or producing assessable income generally depends on the purpose of the borrowing and the use to which the borrowed funds are put. Where a borrowing is used to acquire an assessable income producing asset, or relates to expenses of an assessable income producing activity, the interest on this borrowing is considered to be incurred in the course of gaining or producing assessable income. The character of a new loan which refinances a previous loan follows from that previous loan: Taxation Ruling TR 95/25. Taxation Ruling TR 93/32 provides that you must share the net profits or losses from your rental property in accordance with the legal title unless, in rare instances, the beneficial interest differs from the legal title. In situations relating to spouses, we consider the legal title to correctly reflect the beneficial ownership. In your situation, there is no evidence to suggest there was any intention your spouse would acquire any ownership interest in the property. It is accepted the interest incurred on your loans referable to the purchase of your rental property meets these requirements and you are entitled to a deduction for the entire amount of interest.