Private ruling: Allowable interest deductions under section 8-1 of the Income Tax Assessment Act 1997
Date of advice: 24 January 2018
Published: May 2018
Ruling period: 1 July 2017 to 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Question and answer | Will the interest expenses you incur on your new investment loan used to finance the purchase of a property from your spouse be allowable as deductions under section 8-1 of the Income Tax Assessment Act 1997 ? | Yes

Relevant facts and circumstances: You intend to buy your spouse’s house (the property). For the purchase you intend to borrow additional funds on an existing revolving line of credit facility you have for your investment portfolio a major lender, the facility is in your name alone. Standard commercial interest rates apply to the credit facility and the property will be used as security for the loan. You intend to put the property in your investment portfolio as a rental property at arm’s length through an agent. You will get an independent market valuation to determine the price you will pay. The property is currently owned by your spouse and the title is in their name alone. Your spouse owned the property when you met. You and your family intend to move to a different area to live where you will purchase a new family home. The property has been primary residence for you and your family for a number of years. If you do not buy the property your spouse will sell the property anyway. Assumptions Nil

Relevant legislative provisions: Section 8-1 of the Income Tax Assessment Act 1997 | Summary | You are buying your spouse’s property it has been your families primary residence for some years, your spouse is the sole owner of the property since before you were married. You intend to pay the amount represented by an independent valuation. You intend to borrow an amount of money to buy the property. After the acquisition of the property you intend to rent it to tenants. You will incur an interest expense on the money you borrow and intend to claim it as a deduction. As the interest is an expense incurred in deriving your assessable income it is deductable under section 8-1 of the Income Tax Assessment Act 1997. Detailed reasoning | Interest is deductible under section 8-1 of the Income Tax Assessment Act 1997 to the extent that it is incurred in gaining or producing assessable income or in carrying on a business for that purpose, except to the extent that the expense is of a capital, private or domestic nature or incurred in gaining or producing exempt income. Whether interest has been incurred in the course of producing assessable income generally depends on the use to which the borrowed funds have been put. 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. The interest incurred will be deductible to the extent that the property is used to produce assessable income. | Your circumstances satisfy these criteria.