ATO Interpretative Decision
ATO ID 2001/37
Income Tax
Deductions and expenses: Interest Repayment on an Investment LoanFOI status: may be released
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This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Whether interest repayments on an investment loan where an amount is redrawn and used for non-income producing purposes is an allowable deduction under subsection 51(1) of the Income Tax Assessment Act 1936.
Decision
Interest repayments on an investment loan where an amount is redrawn and used for non-income producing purposes are not an allowable deduction under subsection 51(1) of the Income Tax Assessment Act 1936.
Facts
The taxpayer borrowed funds for the purchase of an income producing property. After a period of time the taxpayer made an additional repayment on the loan in order to reduce the interest charges. Accordingly, the principal outstanding is reduced by this repayment. The taxpayer then redrew an amount under a redraw facility of the loan . The amount redrawn was used for non-income producing purposes and was equal to the additional repayment previously made on the loan. The redrawn amount increased the loan principal to its original level. The interest charges were subsequently increased.
Reasons For Decision
As the redrawn amount is used for non-income producing purposes, the increase in the interest expense cannot be claimed as a deduction as it is not incurred in deriving assessable income, in accordance with subsection 51(1) of the Income Tax Assessment Act 1936.
In FC of T v South Australia Battery Makers Pty Ltd (1978) 140 CLR 645 the court stated that it is the advantage which the expenditure was intended to gain, directly or indirectly, for the taxpayer that is relevant in determining the character of the expenditure. In these circumstances there is no obvious commercial explanation for incurring the further interest amount. Rather the object of the facility is to enable the taxpayer to reduce the principal amount outstanding.
Therefore a single liability incurred in respect of interest on the investment in any particular period serves more than one end, activity or object. Taxation Ruling TR 98/22 Income tax: the taxation consequences for taxpayers entering into certain linked or split loan facilities, considers that the further amount of interest is incurred for the purpose of enabling a corresponding reduction in the private account and as a result an apportionment of the interest incurred on the investment account is warranted.
Date of decision: 4 September 1997
Legislative References:
Income Tax Assessment Act 1936
subsection 51(1)
Case References:
FC of T v South Australia Battery Makers Pty Ltd
(1978) 140 CLR 645
(1978) 78 ATC 4412
(1978) 8 ATR 879
Related Public Rulings (including Determinations)
TR 98/22
Keywords
Deductions and expense
Interest expenses
Negative gearing
Rental property loan interest expenses
ISSN: 1445-2782
| Date: | Version: | |
| You are here | 4 September 1997 | Original statement |
| 3 November 2006 | Archived |