Private ruling: the deductibility of interest expenses
Published: October 2011
Ruling period: Income year ending 30 June 2012 | Income year ending 30 June 2013 | Income year ending 30 June 2014 | Income year ending 30 June 2015
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for all the interest expenses incurred on the loan? | A2: 

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You have a rental property held jointly between you and your spouse. The purchase of the property was entirely funded by a borrowing, held in joint names with your spouse. Your spouse will gift you their share of the property, resulting in you holding the entire property in your name solely. Upon this transfer you will commence meeting all repayments due on the borrowing.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 Section 177F

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. | Detailed Reasoning - Interest deduction: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for any loss or outgoing that is incurred in gaining or producing assessable income, to the extent that it is not of a private, capital or domestic nature. 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. Where a borrowing is used to acquire an income producing asset, or relates to expenses of an income producing activity, the interest on this borrowing is considered to be incurred in the course of gaining or producing assessable income. Where two taxpayers borrow jointly, both taxpayers will have presently existing pecuniary liability to discharge interest on that borrowing once it accrues and is due and payable. Therefore, each of the borrowers will only incur their share of the interest expense, notwithstanding circumstances where one borrower may meet all repayments in respect of the borrowing: paragraph 6 of Taxation Ruling TR 97/7. Accordingly you are only entitled to a deduction for your share of the interest you incur on the loan, notwithstanding circumstances where you meet the full amount of loan repayments. | Detailed Reasoning - Part IVA: The Commissioner may decline to make the ruling in certain situations, including circumstances where the making of the ruling would prejudice or unduly restrict the administration of a taxation law: subsection 359-35(2) of Schedule 1 to the TAA. This includes situations where the making of a ruling would have no effect: paragraph 39 of TR 2006/11. Part IVA of the Income Tax Assessment Act 1936 (Part IVA) is a general anti-avoidance rule. Part IVA gives the Commissioner the discretion to cancel a 'tax benefit' (or part of a 'tax benefit') that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. In this instance, a tax benefit has not been obtained as the deduction sought is not allowed under section 8-1 of the ITAA 1997. Accordingly the Commissioner will not make a ruling on the application of Part IVA.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Answer: No Have you obtained a tax benefit in connection with a scheme to which Part IVA of the ITAA 1936 (Part IVA) applies? | Answer: The Commissioner declines to make a ruling on this issue.