Private ruling: Interest deduction
Date of advice: 26 August 2016
Published: October 2016
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020 | Year ending 30 June 2021
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you entitled to a deduction for interest incurred on the loan? | A1: Yes.

Relevant facts and circumstances: You will use your residential property which is held solely in your name, as security for a loan. The loan will be over a 30 year term with principal and interest repayments. You will on-lend the total of the loan funds. A contract will be in place, outlining the terms and conditions of the on-lent funds. All terms will be on a commercial basis including the interest rate. You will receive interest income from the on-lending of the funds and you will declare the income in your income tax return.

Relevant legislative provisions: Section 8-1 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: 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, provided those expenses are not capital, private or domestic in nature, or relate to the earning of 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 Federal Commissioner of Taxation 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. Where a borrowing is used to acquire an assessable income producing asset, or relates to expenses of an assessable income producing activity, the interest on this borrowing is considered to be incurred in the course of gaining or producing assessable income. In your situation, it is accepted the interest is referable, to the on-lending of the loan funds and is therefore incurred in the production of your assessable income. Accordingly you are entitled to a deduction for the interest incurred on the loan.