Deductions and expenses: Interest on Loan to Refinance an investment property.

Whether interest on a loan taken out to refinance an investment property is deductible under Income Tax Assessment Act 1936 subsection 51(1).

The interest on the new loan is deductible under Income Tax Assessment Act 1936 subsection 51(1) as it is an outgoing incurred in gaining or producing assessable income.

The taxpayer purchased a rental property. The taxpayer purchased the property using funds received on redundancy, funds from relatives and funds from the bank. In relation to the funds obtained from relatives, the taxpayer did not claim any interest amounts.

The last tenants caused substantial damage to the property. Before carrying out necessary repair work (which is not capital in nature), the taxpayer borrowed further funds.

In order to repay the monies borrowed from relatives and credit institutions, the taxpayer took out a new loan to refinance the entire package.

Expenditure will be deductible under subsection 51(1) of the Income Tax Assessment Act 1936 if its essential character is that of expenditure that has a sufficient connection with the operations or activities which more directly gain or produce the taxpayer's assessable income, provided that the expenditure is not of a capital, private or domestic nature. ( Lunney & Anor v FC of T (1958) 100 CLR 478.)

In taking out the loan, the taxpayer was merely consolidating all the expenses relating to the rental property. The interest that is incurred on the loan to repay the amounts borrowed for the rental property satisfy subsection 51(1) of the Income Tax Assessment Act 1936 , as they are outgoings incurred in gaining or producing assessable income.