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Edited version of private ruling

Authorisation Number: 1011642413880

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Ruling

Subject: Deduction - mortgage repayment insurance

1. Are you entitled to a deduction for the mortgage repayment insurance premium?

Yes.

2. Is the mortgage repayment insurance premium subject to the prepayment rules?

Yes.

3. Are you entitled to a deduction for the portion of the interest expenses on your home loan that relate to that part of the loan proceeds used to pay the mortgage repayment insurance premium?

Yes.

Relevant facts

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

You have taken out a loan with a finance entity to purchase a home.

You purchased a mortgage repayment insurance policy from an insurer with respect to this loan which provides that:

You did not take out death cover in relation to mortgage repayment insurance policy.

You purchased the mortgage protection insurance for a period of several years.

You paid a premium for the mortgage insurance cover.

Approval of the loan was not associated with or conditional upon the purchase of the mortgage protection insurance policy.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Income Tax Assessment Act 1936 Section 82KZM.

Reasons for decision

Summary

You can claim to a deduction for the mortgage protection insurance premium subject to the prepayment rules.

You can also claim a deduction for the portion of the interest expenses for the loan that relates to the mortgage protection insurance premium.

The deductions are claimed under item D16 'Other deductions' on your tax return.

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses or 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.

In Ronpibon Tin N.L.Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236, the Court established that, for a loss or outgoing to be an allowable deduction, there must be a nexus between the outgoing and the assessable income so that the expenditure is incidental and relevant to the taxpayer's income-producing or business operations.

The Full High Court in Federal Commissioner of Taxation v. Smith (1981) 147 CLR 578; (1981) 81 ATC 4114; (1981) 11 ATR 538, allowed a deduction for premiums paid to secure a monthly indemnity against the income loss arising from the inability to earn. It was held that there was sufficient connection between the purchase of the insurance cover against the loss of the ability to earn and the consequent earning of assessable income, and the outgoing was not of a capital, private or domestic nature.

The deduction was allowed under subsection 51(1) of the Income Tax Assessment Act 1936 (ITAA 1936) (the equivalent of section 8-1 of the ITAA 1997).

Disability and unemployment benefits payable under a mortgage protection insurance policy due to either inability to perform your usual occupation or unemployment are assessable as ordinary income under section 6-5 of the ITAA 1997.

Therefore, the premium paid for the disability and unemployment cover has the necessary connection with the earning of your assessable income and is an allowable deduction under section 8-1 of the ITAA 1997.

Prepayment

Generally, the prepayment rules mean that you must apportion deductions for certain prepaid expenses of $1,000 or more over the income years that the goods or services are provided. Section 82KZM of the ITAA 1936 provides the method for calculating a deduction for prepayment of expenses exceeding 12 months or more.

You purchased mortgage protection insurance for a period of several years. Consequently, you will only be entitled to claim a proportionate deduction for the disability and unemployment cover over the period of the mortgage repayment insurance policy.

Interest

Taxation Rulings TR 95/25 and TR 95/33 set out the general principles relevant to the deductibility of interest expenses under section 8-1 of the ITAA 1997.

The character of interest on a loan is generally ascertained by reference to the purpose of the loan (Fletcher & Ors v. Federal Commissioner of Taxation (1991) 173 CLR 1; 91 ATC 4950; (1991) 22 ATR 613 (Fletcher's Case)) and the use to which the loan is put (Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153).

Therefore, if a loan is used to purchase property from which income is to be derived, the interest paid on the loan is generally deductible.

In your case, you used a loan to purchase your home and a mortgage protection insurance policy for the loss of income through disability and unemployment. As the purchase of the mortgage protection insurance policy covers against the loss of the ability to earn assessable income it is considered the related interest expense is deductible under section 8-1 of the ITAA 1997.

Note: To determine your allowable deduction, you will need to apportion your interest expense between the income producing and non-income producing purposes of the home loan. Apportionment must be made on a fair and reasonable basis. The prepayment rules under Subdivision H of Division 3 of Part III of the ITAA 1936 do not apply to the interest as the interest expense is incurred on a daily basis.

Tax return

The deductions for the premium and related interest are claimed under item D16 'Other deductions' on your tax return.

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