Income tax: is interest paid on a loan used to acquire income producing property an allowable deduction where non income producing property (e.g. the family home) is used as security for the loan?

Yes. The deductibility is determined by the use of the borrowed money. If the money is used to buy income producing property, the interest expense is an allowable deduction.

If the money borrowed is used only partly to produce assessable income, only that part of the interest which relates to the production of assessable income is an allowable deduction.