Private ruling: The deductibility of interest expense
Published: August 2014
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to claim a deduction for interest expense incurred on a line of credit taken out to pay investment property expenses? | A1: Yes.

Relevant facts and circumstances: You have two investment properties. At the moment, all investment property expenses are paid from an offset account linked to your personal home loan. You also pay interest expense incurred on your investment properties from the offset account. Any rental income received from the properties is credited to the offset account as well. You wish to create a separate line of credit facility for each of your investment properties to pay for all property expenses. You will also use the line of credit facilities to fund other investment properties. Interest expense and rental income will continue to be applied to your home loan offset account.

Relevant legislative provisions: Income Tax Assessment Act 1997 (ITAA 1997) section 8-1

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (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 nature. Taxation Ruling TR 95/25 provides the Commissioner's view regarding the deductibility of interest expenses. As outlined in TR 95/25, there must be a sufficient connection between the interest expense and the activities which produce assessable income. TR 95/25 specifies that to determine whether the associated interest expenses are deductible, it is necessary to examine the purpose of the borrowing and the use to which the borrowed funds are put. The 'use' test, established in the High Court case Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, (1926) 32 ALR 339 is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion. Accordingly, it follows that if a loan is used for investment purposes from which income is to be derived, the interest incurred on the loan will be deductible. Further, interest on a new loan used to repay an existing investment loan will generally also be deductible as the character of the new loan is derived from the original borrowing. Taxation Ruling TR 2000/2 contains the Commissioner's view on the deductibility of interest with regards to line of credit and redraw facilities. We consider draw-down from a line of credit account or sub account, or a redraw from a loan account, is a separate borrowing. To the extent borrowings are used for income producing purposes, that part of the accrued interest attributable to those borrowings is deductible. Conversely, that part of the accrued interest attributable to borrowings for non-income producing purposes is not deductible. In your case, you intend to take out line of credit facilities for each of your investment properties, for ease of managing their expenses. These facilities will be used solely for income producing activities, relating to your current investment properties and any future investment properties, which will be funded through the line of credit. You will pay expenses incurred in relation to your investment properties using its corresponding line of credit. Interest is fully deductible where funds drawn down on an investment account continue to be used exclusively for an income producing purpose. Accordingly, the interest you incur on these lines of credit will be deductible under section 8-1 of the ITAA 1997.