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Edited version of private advice
Authorisation Number: 1051791717017
Date of advice: 18 December 2020
Ruling
Subject: Deductions for interest and the use of an offset facility attached to a loan account
Question:
Are you entitled to a deduction for the amount of interestcharged on your home loan where you withdraw funds from your linked mortgage offset account for a deposit on an investment property?
Answer:
No
This ruling applies for the following period:
Year ending 30 June 2020
The scheme commences on:
1 July 2019
Relevant facts and circumstances
You and your partner own a property as joint tenants (Property A). You currently reside in Property A.
You purchased Property A in 20XX using borrowed funds.Property A is mortgaged as security for this loan and there is an offset account linked to it.
A short time ago, you withdrew a sum from the offset account linked to the mortgage for Property A.
You withdrew the amount to use as a deposit to purchase an investment property (Property B).
By withdrawing the deposit for the investment property (Property B), you have incurred interest expenses on your mortgage.
You wish to claim these interest expenses as a deduction in your income tax return.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Reasons for decision
Summary
The interest you incurred when you withdrew money from your offset account to purchase Property B is a private expense. You are therefore unable to include this amount as a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).
Detailed reasoning
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 nature.
When you borrow funds to acquire an income producing asset, the interest on the borrowing is incurred in the course of producing assessable income. Where funds are borrowed to purchase property, the interest will be deductible to the extent that the property is used to produce assessable income.
Application to your circumstances
In your circumstances, you have not incurred interest as a result of borrowing money to acquire an income producing asset. The interest was incurred on a mortgage associated with Property A which is not used to produce assessable income. The interest on this mortgage is therefore a private expense.
The purpose of an offset account linked to a mortgage account is to reduce the interest payable on the mortgage. This is an arrangement between you and the bank on how the amount of interest is calculated. It does not change the character of the interest. As the interest incurred is a private expense, it is non-deductible.
Withdrawal of funds from the offset account does not constitute a borrowing as you are using your own money. You are therefore unable to deduct the amount of interest you incurred when you withdrew the deposit from the offset account for Property B.
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