Private ruling: Rental property expenses
Date of advice: 13 January 2017
Published: June 2017
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020
Date scheme commenced: 1 July 2016

Ruling: Question and answer | Are you entitled to a deduction for interest on a loan after the rental property was sold? | Yes.

Relevant facts and circumstances: You purchased a rental property a number of years ago. The property had a loan over it. Your loan was exclusively obtained for the purpose of the investment and never extended. You sold the property due to the downturn in the market and the difficulty in finding tenants. Funds from the sale of the property were directed to the loan. There were insufficient funds from the sale to completely pay out the loan leaving an outstanding debt. You do not have the capacity to repay the loan out at this stage. You will continue to repay the loan. You believe you can have the loan paid off in XX months by paying $XXXX per month.

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 2004/4 examines the deductibility of interest after the cessation of the income earning activities. Paragraph 10 of TR 2004/4 states that the outgoing will still have been incurred in gaining or producing the assessable income if the occasion of the outgoing is to be found in whatever was productive of assessable income of an earlier period. However, the nexus between the interest expense and the relevant income earning activities will be broken where: ● you have the ability to repay the loan but choose not to ● you make a conscious decision to extend the loan in order to derive an ongoing commercial advantage unrelated to the prior income earning activities which resulted in the debt. In your situation, it is accepted that the interest incurred has resulted from a loan left after the funds from the sale of the investment property were expended. You do not have the ability to repay the loan in a lump sum and it is not a conscious decision to extend the loan. Accordingly, you are entitled to a deduction for the interest on the residual borrowings relating to the loan for the sold investment property.