Private ruling: Interest deduction on line of credit to pay investment loan.
Published: November 2012
Ruling period: Year ending 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2012

Ruling: Q1: Is the interest deductible on funds from a line of credit used to pay an interest only investment loan? | 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. Whether interest has been incurred in the course of producing assessable income generally depends on the purpose or use to which the borrowed funds have been put. 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. The character of a new loan which refinances a previous loan follows from that previous loan: Taxation Ruling TR 95/25 Compound interest, as with ordinary interest, derives its character from the use of the original borrowings: Taxation Determination TD 2008/27. In your situation, you have funded the interest incurred on your rental loan and the expenses in respect of your rental property from your line of credit and incur interest on that line of credit borrowing. Given the above principles, this interest is accepted as being incurred in producing your assessable income and accordingly you are entitled to a deduction for that interest.

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. | Relevant facts: You propose to build an investment property. | Interest only loans and a line of credit will be used to finance the property | Loan A will use the investment property as security and will be interest only. | Loan B will use your own property as security and be used to provide funds for the remainder of the purchase price and initial costs such as purchase costs, legal expenses and inspections etc. Interest only will be paid on the loan and will be paid every billing period. | A Line of Credit (loan C) will use your own property as security and will not be drawn upon until the investment property is handed over. Interest only will be paid in full every billing period. This will be used as an operating account into which all rent will be received and all expenses associated with the investment will be paid such as rates, insurance and repairs. These costs will be capitalised. It will also pay the interest on Loan A.