Hi Alan
Yes, the tax law ensures that Scotland's finest products are never short of supply!!!
I am afraid that your accountant (the original advice) is right and to help you in this regard, I have attached below an ATO ID which also makes reference of current rulings.
The easiest thing to do would be to ask the bank to split the LOC into two accounts and then repay the non income related account.
Dale
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ATO ID 2002/817
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FOI status: may be released
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Status of this decision: Decision Current
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ATO Interpretative Decision
CAUTION: This record of an ATO decision may not include a complete statement of all facts in summarising the application of the relevant provision of the law to complex circumstances. If you rely on this decision and your circumstances are materially the same as those described, and the decision is subsequently found to be incorrect, penalties will not be attracted on the missing tax. However, interest could be payable in any event depending on the circumstances of the case. If the relevant provisions, being those in force at the date of decision, have been amended or rewritten, it will be necessary to have regard to the amended or rewritten law. You may wish to obtain further advice from the ATO or from a professional adviser.
Income tax
Deductibility of» interest under a «line» «of» «credit» facility - mixed purpose loans
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Issue
Is the taxpayer entitled to a deduction under section 8-1 «of» the Income Tax Assessment Act 1997 (ITAA 1997) for loan interest expenses where the original purpose «of» the loan was private, but now has mixed income and non-income producing purposes?
Decision
Yes. A deduction is allowable under section 8-1 «of» the ITAA 1997 to the extent that the loan interest expenses were incurred in earning assessable income.
Facts
The taxpayer took out a conventional loan to finance the purchase «of» their main residence.
The taxpayer later refinanced the loan with a «line» «of» «credit».
The taxpayer's salary was deposited into the account and they drew money out «of» the account for living expenses.
The taxpayer ceased using the property as their main residence and made it available for rent.
The taxpayer received rental income from this property.
Consequently, the loan has mixed income producing and non-income producing purposes.
The taxpayer incurred interest expenses on the «line» «of» «credit».
Reasons for Decision
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, or relate to the earning «of» exempt income.
The loan was originally set up to re-finance the loan used to purchase their primary place «of» residence. As such, the interest expenses incurred would not have been deductible under section 8-1 «of» the ITAA 1997. However, from the time the property was tenanted, some portion «of» the interest incurred on the amount outstanding on the property would be an allowable deduction against the income generated.
Taxation Ruling TR 2000/2 stipulates that interest accrued on a «line» «of» «credit» used for mixed purposes needs to be apportioned.
In order to do this, the taxpayer must establish what portion «of» the loan is attributable to the property at the time it becomes income producing. This is achieved by making a notional calculation «of» the «line» «of» «credit» as if it was used for the mixed purpose from its inception.
As such, all repayments made from the date that the «line» «of» «credit» was established until the date the property became income producing must be notionally apportioned in accordance with paragraphs 44-46 «of» TR 2000/2. This will establish the loan balance applicable to the property as at the date it becomes income producing.
The interest deduction can then be calculated for the rental property in accordance with TR 2000/2 and a deduction will be allowable under section 8-1 «of the ITAA 1997.
Date of decision: 1 May 2002
Year of income: Year ended 30 June 2001
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Legislative References:
Income Tax Assessment Act 1997
section 8-1
Related Public Rulings (including Determinations)
Taxation Ruling TR 2000/2
Keywords
Interest expenses
Rental property loan interest expenses
Date of publication: 22 August 2002
ISSN: 1445-5872