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Edited version of your written advice
Authorisation Number: 1013097177868
Date of advice: 28 September 2016
Ruling
Subject: Mortgage interest
Question 1
Are you able to refinance your loan and place the mortgage onto your investment property?
Answer
Not a valid tax law question
Question 2
Are you able to deduct any additional interest on the loan once it has been refinanced?
Answer
No
This ruling applies for the following periods:
Year ended 30 June 2015
Year ended 30 June 2016
Year ending 30 June 2017
The scheme commences on:
1 July 2014
Relevant facts and circumstances
You lived in a property, Property A.
You used the Property A as your primary residence for years.
You decided to move to a new house after you separated from your spouse.
You attempted to sell the Property A.
However, the property A was not sold.
You rented out the Property A.
You had a mortgage balance of $X outstanding on the Property A.
You purchased a new property, Property B.
You now live in the Property B.
You took out a mortgage of $Y to purchase the Property B by using the Property A as security.
You intend to refinance your properties to transfer part of your mortgage from the Property B to the Property A.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Tax Administration Act 1953 Section 359-35
Reasons for decision
Section 359-5 of the Taxation Administration Act 1953 (TAA) provides that the Commissioner may make a ruling on the way the Commissioner considers a relevant provision applies or would apply to your in relation to a scheme.
The relevant provisions are specified in Section 357-55 (TAA) none of those provision deal with allowing a person to finance or refinance an investment. Therefore the first question is not a valid ruling request and will not be addressed by the Commissioner.
However, the deductibility of interest expense is covered by a relevant provision and will be addressed.
Section 8-1 of the Income Tax Assessment Act 1997(ITAA 1997) allows a deduction for any loss or outgoing that is incurred in gaining or producing your assessable income, to the extent that it is not of a private, capital or domestic nature.
Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith 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 expenses 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 purposes 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.
Interest on a loan taken out to refinance a loan used to acquire an investment property is deductible to the extent it refinances the balance outstanding that directly relates to the original acquisition of the rental property or it is used to finance other income producing activities.
In your case, you had a mortgage balance of $XX on your rental property. Therefore, only the interest on the outstanding loan will be deductible unless the additional loan is used for income producing purposes.
Here is an example regarding apportionment of interest:
Kelly and Dean decide to refinance their rental property's mortgage. After refinancing, their mortgage on investment property increased from $170,000 to $200,000. They used the additional $30,000 to repay the mortgage for their main residence and their car loan. They will need to work out how much of their interest payments is tax deductible at the end of the year. The following whole-year example illustrates an appropriate method that could be used to calculate the proportion of interest that is deductible. The example assumes an interest rate of 6.75% per annum on the loan and the refinancing happened on 1 July:
Interest for the year=$200,000×6.75%=$13,500
Apportionment of interest payment related to rental property:
Total interest expenses |
x |
Rental property loan |
= |
Deductible interest |
$13,500 |
x |
$170,000 |
= |
$11,475 |
Refinancing the loan does not change the purpose of the loan. As the original amount of the borrowing relating to the rental property was at most $X the amount relating to the rental property cannot exceed that amount unless funds were used to pay for an expense relating to rental property.