Private ruling: Interest expenses
Published: November 2012
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to interest expense on a loan where the funds were borrowed from your relative and used to refinance your existing investment property loans? | A1: Yes.

Relevant facts and circumstances: You own investment properties which were purchased with interest only loans from a bank. You receive rent from the investment properties. A relative will lend you money which will be applied against your investment property loans. The loan from your relative will be interest only and at a lower rate than the bank.

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, or relate to the earning of exempt income or a provision of the taxation legislation excludes it. Taxation Ruling TR 95/25 provides that the deductibility of interest is determined by the use to which the borrowed money is intended. The use test is the basic test for the deductibility of interest and looks at the application of the borrowed funds as the main criteria. Where the borrowed funds are used for the purposes of producing assessable income a deduction will be allowed for the interest on the loan. This includes interest on loans used to acquire a rental property. TR 95/25 goes on to state that interest on a new loan will be deductible if the new loan is used to repay an existing loan which, at the time of the second borrowing, was being used in an assessable income producing activity. You borrowed funds from a bank to purchase an investment property. You will refinance the loans using funds borrowed from your relative at a lower interest rate. The interest expense on the new loan is an allowable deduction as it will relate to the earning of assessable income.