Private ruling: Investment property loan interest
Published: July 2013
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 1 July 2012

Ruling: Q1: 1. Are you entitled to claim a deduction for 100% of the interest expenses incurred on a loan used to purchase your portion of an investment property where the loan is taken out in the name of you and your spouse, as co-owner of the property? | A2: 

Relevant facts and circumstances: You have a share in an investment property, for which you intend to refinance the loan The co-owner has repaid an amount equal to their shareholding and the current loan is in your name alone. The new finance provider that you wish to use requires both names of the property owners to be on the loan documents. You wish to claim all of the interest paid on the loan in your name.

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 or outgoings to the extent to which they are incurred in gaining or producing assessable income, except to the extent that the outgoings are of a capital, private or domestic nature. Taxation Ruling TR 95/25 provides the Commissioners view regarding the deductibility of interest. An outgoing of interest is incidental and relevant to the gaining of assessable income if the funds were borrowed for the purpose of gaining that income (FC of T v. Munro (1926) 38 CLR 153; (1926) 32 ALR 339). The use test is the basic test relied upon to establish the deductibility of interest and looks at the application of the borrowed funds as the main criterion. Accordingly, where a loan is used for an income producing purpose the interest on the loan is deductible. Investment in two names Taxation Ruling TR 93/32 explains that the loss or income from a rental property must be shared according to the legal interest of the owners, except in those very limited circumstances where there is sufficient evidence to establish that the equitable interest is different from the legal title (paragraph 6). Where the title deed indicates joint ownership of a property, the legal owners are entitled to claim the interest paid on a mortgage loan in the proportion of their ownership. In your case, you and the co-owner hold the property as tenants in common according to the title deed, and each of you is required to claim the interest paid on the loan according to their percentage of ownership, under section 8-1 of the ITAA 1997.

2. Do the loan interest deductions have to be shared between the titleholders of an investment property in accordance with the percentage of their ownership according to the title deed?