Private ruling: Rental - deductions - interest
Date of advice: 1 November 2016
Published: February 2017
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will you be entitled to interest deductions if you purchase your spouse's 50% share in your main residence that will then be an investment property? | A1: Yes.

Relevant facts and circumstances: You and your spouse own your main residence. Together you have purchased another family home that will become your main residence. You want to keep your first residence as an investment property. You want to obtain financing to purchase your spouse's 50% share in the property, at the current market value. You are going to rent out the property through a real estate agent and claim interest on the loan and other expenses again the rental income.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 and | Income Tax Assessment Act 1997 section 112-20.

Reasons for decision: Summary: Cost base Under the general cost base and reduced cost base rules, the first element of the cost base and reduced cost base of a CGT asset is the sum of the amount paid (or required to be paid) and the market value of property given (or required to be given) in respect of acquiring it. The general rules may be modified if the market value substitution rule in section 112-20 of the Income Tax Assessment Act 1997 (ITAA 1997) applies. The market value substitution rule generally applies where a taxpayer: ● did not incur any expenditure to acquire that asset ● incurred expenditure which cannot be valued in whole or in part, or ● did not deal at arm's length with the other entity in connection with the acquisition. An individual is said to be dealing at arm's length with someone if each party acts independently and neither party exercises influence or control over the other in connection with the transaction. The law looks at not only the relationship between the parties but also the quality of the bargaining between them. In your case, you are going to obtain a market valuation of the property and your spouse will be selling you their 50% share in the property at market value. This indicates that the transaction will be dealt with at arms length. Rental deductions 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 in nature, or relate to the earning of exempt income. Accordingly, to be able to claim expenses that relate to the property you must have held the property for the purpose of gaining or producing assessable income, and those expenses must not be of a private or domestic nature. The interest on the loan to acquire your spouse's 50% share of the property will be deductible under section 8-1 of the ITA 1997 for as long as the property is an income producing asset and is not used for private use.