Private ruling: Rental property expenses - deductibility of loan interest
Date of advice: 31 October 2023
Published: 18 December 2023
Date scheme commenced: DD MM 20YY

Ruling: Q1: Is the interest on the loan of $X deductible in full against the rental income? | A1: Yes. This private ruling applies for the following period: Income year ended DD MM 20YY The scheme commenced on: DD MM 20YY

Relevant facts and circumstances: You own an investment property (the Property). You own the Property in equal shares (50/50) with another person. You purchased the Property on DD MM 20YY. Settlement occurred on DD MM 20YY. You signed a tenancy agreement on DD MM 20YY, with a move in date of DD MM 20YY (lease start date). Your intention was to finance the purchase of the Property with borrowed funds including other associated costs of the purchase, such as stamp duty. In your correspondence with your mortgage broker you told them to finance the purchase in full from borrowed funds. These funds were to be raised via mortgage loan number XXXX. The mortgage broker was not initially able to borrow all the funds required for settlement leaving a shortfall of $X. You contacted your mortgage broker on DD MM 20YY requesting an update on the outstanding loan funds of $X required for the settlement amount. On DD MM 20YY you were advised to use your own funds and these would be reimbursed when the additional loan funds come through. As a temporary measure, you drew $X from a separate loan facility you have, your existing home mortgage account. You have incurred interest expenses on this loan. On the DD MM 20YY the mortgage broker made additional loan funds of $X available by via a new mortgage loan account number XXXX. This was after settlement, which had occurred on DD MM 20YY. These funds were then used to repay your home mortgage account.

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

Reasons for decision: Summary: You are entitled to claim a deduction for the interest expense on the $X loan because the expense was incurred in producing assessable income from your rental property. | Detailed Reasoning - Detailed reasoning: 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, or relate to the earning of exempt income. Expenses incurred relating to a rental property are deductible under section 8-1 of the ITAA 1997 if the property is rented or available for rent in the income year in which you claim the deduction. Interest on loan used to purchase a property which is rented or available for rent is an allowable deduction under section 8-1 of the ITAA 1997. | Detailed Reasoning - Application to your circumstances: You purchased the Property with borrowed money with the purpose of producing assessable by renting it. Settlement occurred on DD MM 20YY. You signed a tenancy agreement on DD MM 20YY with a move in date of DD MM 20YY. You incurred interest expense on a short-term loan, drawn down loan from your home mortgage account which were used to fund the settlement of the Property. This was repaid with additional mortgage funds of $X received from the mortgage broker on DD MM 20YY and which are secured against the Property. As the Property has been rented or available for rent since settlement and the $X was used to fund settlement, you are entitled to a deduction for the interest expense you incur for this loan. | Detailed Reasoning - Apportionment: As your ownership interest in the Property is 50%, you are entitled to a deduction of 50% of the interest expense you incurred on the $X loan.