Private ruling: Deductions - rental
Date of advice: 3 December 2025
Published: 27 January 2026
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Can you claim interest deductions under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the loan balance owing prior to the deposit of funds into the loan account in error? | A1: No. | Q2: Can you claim interest deductions under section 8-1 of the ITAA 1997 in relation to funds redrawn from the loan account that were paid into the offset account? | A2: No.

Relevant facts and circumstances: You solely purchased a tenanted property (the Property). The tenant's rental agreement continued after the purchase of the Property, and you have continued to use the Property for rental purposes since it was purchased until the present time. You obtained an interest only loan (the Loan) to partially fund purchase the Property. Your mortgage broker sent you correspondence in relation to the Loan settlement which outlined that there were two linked accounts in relation to the Loan, being a loan account (the Loan Account) and an offset account (the Offset Account). You funds in a savings account when you purchased the Property that you intended to hold in the Offset Account linked to the Loan. Your goal was to preserve those funds as a future deposit for an owner-occupied property. You transferred an amount into the Loan Account, reducing the loan amount owing. You and your partner decided to purchase a property jointly for you both to live in. You and your partner had a meeting with your mortgage broker to discuss the options for you and your partner purchasing a primary residence. Your mortgage broker contacted you after reviewing your loan documents to advise you that the account in which you had held your savings for your future house deposit was in the Loan Account and not in the Offset Account as you had thought. Your mortgage broker advised you that even if you withdrew the funds from the Loan Account to use as a deposit for your future home, which would increase the outstanding Loan balance and the interest charged, you would only be able to claim the interest amount you were currently being charged per month, and not the interest being charged on the increased loan balance. You redrew some funds from the Loan Account (the Redraw Amount) and deposited it into the Offset Account. As a result of the redraw the balance of the Loan Account increased. You have updated transfer details for all other accounts to ensure that you are no longer paying down the Loan balance.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1

Reasons for decision: Summary: Question 1: Can you claim interest deductions under section 8-1 of the ITAA 1997 on the loan balance owing prior to the deposit of funds into the loan account in error? Question 2: Can you claim interest deductions under section 8-1 of the ITAA 1997 in relation to funds redrawn from the loan account that were paid into the offset account? | Detailed Reasoning - Deductions for rental interest: Section 8-1 of the ITAA 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. Expenses incurred in relation to a rental property are deductible under section 8-1 of the ITAA 1997 if the property is rented or available for rent in the financial year in which you claim the deduction. Interest on a loan used to purchase a property which is rented or available for rent is an allowable deduction under section 8-1 of the ITAA 1997. However, to be deductible there must be a presently existing liability, the loss or outgoing must be of a revenue nature and must be properly referable to the particular financial year. Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions sets out the Commissioner's views on the meaning of incurred. Paragraph 3 of TR 97/7 outlines that to qualify for deduction under section 8-1 of the ITAA 1997, a loss or outgoing must have been incurred. Paragraph 5 of TR 97/7 outlines that as a broad guide, you incur an outgoing at the time you owe a present money debt that you cannot escape. Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith provides the Commissioner's view regarding the deductibility of interest expenses. TR 95/25 outlines that there must be a sufficient connection between the interest expense and the activities which produce assessable income. To determine whether the associated interest expenses are deductible, it is necessary to examine the purpose of the borrowing and the use to which the borrowed funds are put. The 'use' test established in the High Court case Federal Commissioner of Taxation v Munro (1926) 38 CLR 153, (1926) 32 ALR 339 is the basic test for the deductibility of interest and looks at the application of the borrowed funds as the main criterion. Accordingly, it follows that if a loan is used for investment purposes from which income is to be derived, the interest incurred on the loan will be deductible. However, where a loan relates to private purposes, no deduction is allowed. Taxation Ruling TR 2000/ 2 Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities considers the operation of section 8-1 of the ITAA 1997 where the borrowed money has been applied for both income producing and non-income producing purposes. Paragraph 43 of TR 2000/2 states that the Commissioner considers a redraw from a loan account, to be a separate borrowing. Therefore, the deductibility of the interest on that separate borrowing depends on whether the interest is incurred in gaining or producing assessable income regardless of the original purpose of the funds. If the redrawn amount is used for a non-income producing purpose, then the interest on the redraw amount is not deductible. TR 2000/2 outlines that where a person uses the redrawn funds for different purposes then the loan account becomes a mixed purpose account. In a mixed purpose loan, the interest must be apportioned between the income producing and non-income producing purposes. The part of the accrued interest attributable to the funds used for non-income producing purposes is not deductible. Based on the principles contained in TR 2000/2: • A taxpayer is entitled to a deduction in respect of that part of the interest that has accrued on the portion of the outstanding daily loan balance attributable to an income producing purpose. • When an amount of the loan balance has been paid resulting in the reduction of the outstanding balance of the loan, the effect of reducing the outstanding loan balance is that any interest liability would be based on the reduced outstanding balance of the loan and not the loan amount prior to the payment/s that reduced the balance being made. Subject to interest rates, the paying down of the outstanding balance would generally reduce the amount of interest liability payable by the borrower given the smaller outstanding loan amount. The borrower can only claim a deduction for interest based on the reduced loan balance and not what the loan balance would have been if the reduction had not occurred. Taxation Ruling TR 93/6 Income tax and fringe benefits tax: loan account offset arrangements outlines the Commissioner's view on loan account offset arrangements which are used to reduce the interest payable on a taxpayer's loan account. TR 93/6 provides that an acceptable loan account offset arrangement with dual accounts operates as follows: • There are two accounts - a loan account and a deposit account. It is accepted that where the deposit account is a sub-account, it will be treated as a separate account. • No interest is received on the deposit account. • The reduction of the loan account interest should be achieved by offsetting the balances of the two accounts. A taxpayer with an acceptable loan account offset arrangement is entitled to claim a deduction for the full amount of interest incurred on the loan account, whilst the loan is used wholly for income producing purposes. | Detailed Reasoning - Application to your situation: You obtained the Loan to help fund the purchase of the Property, which had the Loan Account and the Offset Account. You transferred funds from your savings account into the Loan Account which reduced the balance owing in relation to the Loan. However, you thought that you had deposited the amount into the Offset Account. You continued to pay amounts into the Loan Account with the interest charged being calculated on the outstanding balance of the Loan. After becoming aware that you had deposited the funds into the Loan Account and not the Offset Account as you had intended, you redrew the Redraw Amount from the Loan Account and deposited it into the Offset Account. This resulted in the balance of the Loan Account increasing because of the redraw. We have taken the following into consideration: • Interest in relation to amounts paid into the Loan Account in error which reduced the Loan balance As outlined in TR 97/7, deductions can only be claimed in relation to expenses that have been incurred. The paying of amounts into the Loan Account had reduced the outstanding balance owing which subsequently reduced the interest expenses liability you had incurred in relation to the Loan. While we appreciate that you had paid amounts into the Loan Account instead of the Offset Account as you had intended, there is no Commissioner's discretion, exemption, concession and/or legislation that would allow you to be able to claim interest deductions for any interest liability that you had not incurred. Any interest liability you incurred in relation to the Loan was calculated on the reduced Loan balances as a result of making the payments into the Loan Account, and not on what the balance/s of the Loan would have been if you had not made the payments into the Loan Account. Therefore, you cannot claim any interest deductions under section 8-1 calculated on any loan balances that would have been in effect had you not made the payments into Loan Account which reduced the Loan balance as you had not incurred them. However, you can claim interest deductions in relation to the outstanding Loan balance/s to the extent that they relate to the gaining or producing of your assessable income. • Interest deductions in relation to redrawn amount paid into Offset Account You were advised by your mortgage broker that withdrawing the funds from the Loan Account to use as a deposit for your future home, which would increase the outstanding loan balance, and the interest charged. However, if you did that you would only be able to claim interest on the amount that was being charged per month, and not the increased interest charged in relation to the loan balance after you had redrawn funds from the Loan Account. The Redraw Amount was redrawn from the Loan Account and then deposited into the Offset Account. As outlined above, under TR 2000/2 the redraw from the Loan Account is considered a separate borrowing. The deductibility of the interest expense relating to the Redraw Amount will be determined by the use of the redrawn funds, regardless of the original purpose of the loan funds. The Redraw Amount is viewed as being an increase of your savings in the Offset Account, which is private in nature, that resulted in decreased interest payable in relation to the Loan account. The interest incurred in relation to the Redrawn Amount does not have sufficient connection to gaining or producing assessable income despite the fact that the original purpose of the Loan was for income producing purposes. Therefore, interest deductions cannot be claimed under section 8-1 to the extent that the interest amounts for the Loan Account relate to the Redrawn Amount which has been used for private purposes. | Detailed Reasoning - Conclusion: As outlined above, we have made the following decisions in relation to your eligibility to claim interest deductions: • You can only claim interest deductions for the interest liability incurred in relation to the actual balance of the Loan, and not what the balance would have been if you had not paid your savings into the Loan Account, which had reduced the Loan balance. Interest deductions can be claimed in relation to interest charged on the outstanding balances of the Loan Account to the extent that the borrowed funds are used in relation to gaining or producing assessable income and is not excluded from being deductible because it is an outgoing of a private or domestic nature. • The redrawing of funds from the Loan Account and then depositing them into the Offset Account is viewed as a separate borrowing, with those funds being used for a different purpose to the Loan. While the Loan you obtained to purchase the Property to produce rental income may have been reduced in error, having regard to all of your circumstances, and based on the principles contained in TR 2000/2, it is not considered that the Redrawn Amount was used for the purpose of gaining or producing assessable income. The Redrawn Amount had increased your savings amount in the Offset Account, which is private in nature. The withdrawal of funds from the Offset Account increased the interest payable on the Loan Account but did not increase the balance of the Loan. Funds withdrawn from the Offset Account will be reflected in a reduction of your savings. Any use of the funds from your Offset Account are put to, including any income producing purposes, will be funded by your savings and not the Loan. Therefore, you cannot claim a deduction for any interest charged for the Loan Account that relates to the redrawn funds. • As you are not using the amount redrawn from the Loan Account in relation to income producing purposes, the Loan Account has become a mixed purpose account. The interest charged in relation to the Loan Account must be apportioned to account for the income producing purpose in relation to the purchase of the Property, and any private purpose, such as the increase of your savings in the Offset Account which is private in nature for which you cannot claim a deduction. Note: The apportionment of the interest will also need to be done to account for any other redrawn amount/s out of the Loan Account not used for gaining or producing assessable income. TR 2000/2 outlines how to apportion interest to account for any part of the interest that is attributable to redrawn funds used for non-income producing purposes.