Private ruling: Interest deduction
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to a deduction for interest incurred on a loan from a family member to purchase your former spouse's share of an investment property? | A1: Yes.


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 95/25 provides that the deductibility of interest on borrowed funds is determined by the use of the borrowed money. The use test, established in FC of T 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 income producing asset or relates to an income producing activity, the interest on this borrowing is considered to be incurred in the course of producing assessable income. You borrowed funds to purchase your former spouse's share of a rental property. The property continued to be rented since it was purchased and you have received rental income from the property. As such, the interest on the borrowing is considered to be incurred in the course of producing assessable income and is an allowable deduction.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Relevant facts: You and your spouse separated and as part of the property settlement, property was sold and the proceeds divided equally. | In relation to a one jointly owned property, this was being rented out and it was initially agreed your share would be bought by your spouse for half the market value of the property. However, your spouse was unable to obtain finance to allow this to occur. | You then unsuccessfully attempted to sell the property on the open market. Subsequently, you agreed to buy out your spouse's share in the property for slightly less than the price suggested by the original valuation. | At the time of offering to buy out your spouse's share in the property, you did not have sufficient funds to pay the full agreed price. This necessitated you borrowing part of the needed funds. | The property continues to be rented, providing you with assessable income.