Private ruling: Interest expenses
Published: September 2012
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for the interest expenses on a loan used to purchase a rental property? | A1: Yes

Relevant facts and circumstances: You are the sole owner of a rental property. You obtained a borrowing to fund the purchase of the rental property. You do not have a written loan agreement. Under the informal arrangement you meet the repayments of the loan which includes both interest and capital components. The lender does not make any contribution to the rental property expenses.

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, or relate to the earning of exempt income or a provision of the taxation legislation excludes it. Taxation Ruling TR 95/25 states that the deductibility of interest is dependent upon how the borrowed funds are used. If the borrowed funds are used to purchase an income producing asset the associated interest expenses will be deductible. You have borrowed funds to purchase a property which has been rented. Whilst you have no formal loan agreement, you make repayments to the loan which contain both capital and interest components. As the interest expenses relate to earning your assessable rental income you are entitled to a deduction for the interest expenses incurred on the loan.

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