TAXA 5001: Taxation Law - Analysis of Rental Property Deductions

This essay addresses the deductibility of interest and borrowing expenses related to a rental property, focusing on a scenario involving Eddie's divorce and subsequent mortgage. It analyzes relevant sections of the ITAA 1997, case law such as Ure v Federal Commissioner of Taxation and Mc Donald v FCT, and taxation rulings like TR 93/32 to determine whether Eddie can claim deductions for interest and borrowing expenses against his rental income. The essay provides a letter of advice to Eddie, explaining the conditions under which he can claim these deductions, emphasizing the importance of the nexus between the expenses and the generation of assessable income. It concludes that Eddie can claim immediate deductions for interest on the loan and spread the borrowing expenditure over five years, provided the property is rented out or available for rent.

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Authors Note
Course ID

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Table of Contents
Answer to Part A:.......................................................................................................................2
Answer to Part 2:........................................................................................................................5
Reference List:...........................................................................................................................7

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Answer to Part A:
According to “section 8-1 of the ITAA 1997” an individual under the positive limbs
is allowed to claim an allowable deductions relating the expenditure that is occurred in
gaining the taxable income1. According to the Australian taxation office an individual is
allowed to claim deductions relating to the certain expenditure that is incurred on rental
properties when the property is rented out. However, an individual is not allowed to claim
deductions relating to the expenditure that is in the nature of private or capital in nature.
As evident in the case of Gertie and Eddie they jointly own the rental property that
has the current worth of $600,000. It was later decided by Eddie that he would obtain
mortgage for a sum of $300,000 and pay out Gertie. According to the Australian taxation
office an individual is allowed to claim borrowing expenditure related with the purchase of
property namely the loan establishment, title search fees and cost of filing the mortgage
documents2.
There are certain expenditure that are deductible over the period of several years. If an
individual total borrowing goes pas the $100 the amount for deductions would be spread over
the period of five year or over the term of loans whichevers is lower. However if the total
amount of borrowing is lower than $100 then the taxpayer can claim full deductions relating
to such expenditure in the income year in which the expenditure is occurred3. As held in the
1 Barkoczy, Stephen, Foundations Of Taxation Law 2014
2 Coleman, Cynthia and Kerrie Sadiq, Principles Of Taxation Law 2013
3 Grange, Janet, Geralyn A Jover-Ledesma and Gary L Maydew, 2014 Principles Of Business
Taxation

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case of “Ure v Federal Commissioner of Taxation (1981)” the taxpayer borrowed a sum for
the interest rate of 12.5%4. The court of law held that the taxpayer’s interest on loan would be
considered as allowable deductions up to the extent that interest expenditure incurred by the
taxpayer does not goes beyond the interest income received by the taxpayer.
Similarly there are certain expenditure relating that rental property that are allowed
for deductions for several years. These expenditure include the borrowing expenditure5. The
taxpayer in the current case has taken a mortgage for $300,000 therefore the amount of
borrowings shall be considered for allowable deductions over the period of number of years
until the property has been rented out. The total borrowing the current case of Eddie has
surpassed the value of $100 therefore the taxpayer in this case would be allowed to claim an
allowable deduction for the borrowing expenditure over the period of several income years.
The “taxation ruling of TR 93/32” provides that co-ownership of the rental property
constitutes partnership for income tax purpose unless the ownership amounts to carrying on
the business. As the co-owners of the property are usually not considered under the general
law the co-ownership agreement provides that income and expenditure must be shared
according to the legal interest of the owners. Referring to “Mc Donald v FCT (1987)” under
“section 25-25 of the ITAA 1997” the borrowing expenditure should be shared in the legal
interest of the property by the taxpayers.
Additionally, if an individual takes out the loan to purchase the property can claim the
deductions relating such interest expenditure. An important consideration in this regard is that
4 Kenny, Paul, Australian Tax 2013 (LexisNexis Butterworths, 2013)
5 Morgan, Annette, Colleen Mortimer and Dale Pinto, A Practical Introduction To Australian
Taxation Law (CCH Australia, 2013)

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the property must be rented out by the taxpayer or should be available for rent for which they
can claim the deductions6. If an individual starts making a private use of the property then a
deduction shall not be allowed to the taxpayer. A person is barred from claiming deductions
relating to the expenditure that is incurred when the taxpayer starts making the private use of
the property. According to the Australian taxation office if an individual takes out the loan to
purchase the land on which the rental property would be build the interest expenditure
relating to loan can be considered as the allowable deductions from the time when the
property was available for rent or rented out7.
As evident in the current case of Eddie, he incurred interest expenditure in borrowing
the property. Therefore in respect to “section 8-1 of the ITAA 1997” Eddie would be allowed
to claim an immediate deductions relating to the interest on loan for the rental property. The
interest expenditure is associated to rental property falls under the positive limbs of “section
8-1 of the ITAA 1997”8. Therefore, the interest on loan has sufficient amount of connection
between the taxpayer outgoings and production of assessable income. Similarly the
borrowing expenditure of rental property is beyond the ATO prescribed sum of $100. Since
the sum has goes past the prescribed limit the borrowing expenditure of Eddie would be
spread over the period of five years or the terms of loan whichever is lower for Eddie.
6 Sadiq, Kerrie et al, Principles Of Taxation Law 2014
7 Woellner, R. H, Australian Taxation Law Select 2013 (CCH Australia, 2013)
8 Woellner, R. H et al, Australian Taxation Law 2014

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Answer to Part 2:
Letter of Advice
To
Mr Eddie
I would like to draw your kind attention towards the letter of advice that is related to
the expenditure of rental property. Evidences obtained from the transactions reported by you
states that you have incurred expenditure relating the borrowings of your rental property that
was jointly held by your former partner. Additionally, instances obtained also suggest that
you incurred an interest expenditure relating to the loan undertaken for the rental property.
An important consideration should be paid towards the two positive limbs of section
8-1 of the ITAA 1997. The two positive limbs describes that an individual shall be allowed to
claim an allowable expenditure from their assessable income any sum of loss or outgoings
that are up to the extent incurred in deriving or generating your taxable income. The second
limb also states that the expenditure should be necessarily incurred in carrying on of the
business for the taxation purpose in deriving or producing the taxable income.
As evident the borrowing expenditure that is reported by you has surpassed the
prescribed amount of $100 and accordingly your borrowing sum of $300,000 shall be spread
for deductions for a term of five years or for in respect of term of loans whichever is lower.
On the other hand the interest expenditure incurred by you is in the course of deriving the
assessable income from your rental property business. Both the expenditure occurred by
meets the two positive limbs of section 8-1 of the ITAA 1997. Therefore you will be able to
claim allowable deductions relating to borrowing expenditure of rental property and interest

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on loan expenditure relating to your rental property. The expenditure meets the nexus test and
has sufficient connection with outgoings and assessable income.
I hope that the letter has served your purpose and hope that advice provided meets
your expectations.
Thanking You

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Reference List:
Barkoczy, Stephen, Foundations Of Taxation Law 2014
Coleman, Cynthia and Kerrie Sadiq, Principles Of Taxation Law 2013
Grange, Janet, Geralyn A Jover-Ledesma and Gary L Maydew, 2014 Principles Of Business
Taxation
Kenny, Paul, Australian Tax 2013 (LexisNexis Butterworths, 2013)
Morgan, Annette, Colleen Mortimer and Dale Pinto, A Practical Introduction To Australian
Taxation Law (CCH Australia, 2013)
Sadiq, Kerrie et al, Principles Of Taxation Law 2014
Woellner, R. H, Australian Taxation Law Select 2013 (CCH Australia, 2013)
Woellner, R. H et al, Australian Taxation Law 2014