April 2008
Private Ruling Authorisation Number 81797
http://www.ato.gov.au/rba/content.asp?doc=/rba/content/81797.htm

Facts: The taxpayer sought to claim as a deduction the capitalised interest on additional borrowings used to meet the shortfall between the rental income on his investment property and the interest, rates and maintenance costs he paid in relation to the property. The taxpayer advised the ATO that he did not want to use his personal income to repay his private home loan debt or reinvest in other income-producing assests.

In this scenario the ATO confirmed that the taxpayer could claim the capitalised interest as a deduction under s.8-1 and that Part IVA would not apply to deny the deduction.
In relation to Part IVA the states in the Private Ruling that "a reasonable person would conclude that the taxpayer did not enter the scheme for the dominant purpose of a tax benefit"; he was simply seeking to quarantine "all expenses of the rental property" rather than use his "private income to service the expenses of the rental property".
While a Private Ruling does not have the standing of a Public Ruling it nevertheless gives taxpayers some guidance at the current ATO approach on deductibility of capitalised interest.
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