Private ruling: Interest
Published: October 2011
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for interest on a loan where the funds are used to purchase a principal place of residence? | A1: No.


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. You originally took out a loan to purchase a rental property. The loan was completely paid out during a period when you lived in it. You now wish to purchase a new primary residence by re-raising the original loan. While it is accepted that the original funds were used to fund the purchase of a rental property, the new funds will be used for the purchase of a primary residence. As such, the use of the funds is considered to be of a private nature. Therefore, you are not entitled to a deduction for interest.

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 2007-08 financial year which was immediately made available for rent. | In the 2008-09 financial year, the property became your primary residence. | When the property ceased to be income producing, the loan was paid out in full. However, the mortgage was never discharged. | You wish to move out of the property and re-rent it and redraw the original funds to purchase a new primary residence.