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Edited version of private ruling
Authorisation Number: 1011443077019
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Ruling
Subject : Interest and investment loan
Does your joint investment loan retain the original purpose of the loan when your building society makes an error in the disbursement of funds and reverses the entries the following business day?
Yes.
This ruling applies for the following period
Year ended 30 June 2009
The scheme commenced on
1 July 2008
Relevant facts
You and your spouse applied for an investment loan through a financial institution for the purpose of purchasing shares that provide dividend income.
You instructed the financial institution to draw down the loan and deposit the funds into your joint savings account, which was opened to manage your share trades.
The financial institution made an error at the time of drawdown, and deposited a portion of the funds into your joint home loan account.
The financial institution corrected the error by passing reversing entries the following business day and deposited the funds to the correct account as instructed.
There is no personal use component in the joint investment loan and the drawn funds are entirely attributed to the purchase of shares owned by you and your spouse.
Reasons for decision
Interest is deductible under section 8-1 of the Income Tax Assessment Act 1997 to the extent that it is incurred in gaining or producing assessable income or in carrying on a business, provided those expenses are not capital, private or domestic in nature.
Whether interest has been incurred in the course of producing assessable income generally depends on the use to which the borrowed funds have been put. The 'use' test, established in Federal Commissioner of Taxation v Munro (1926) 38 CLR 153, is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion.
In your case, an error was made by the financial institution at the time of the loan drawdown. However, this error was corrected by reversing entries the following business day and the funds deposited into the trading account as instructed. These funds have now been withdrawn in full to purchase shares that receive dividends in joint names. Therefore, the original purpose of borrowing funds to purchase shares with the expectation of receiving dividend income has not changed.
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