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Edited version of private ruling
Authorisation Number: 1011569684830
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Ruling
Subject: interest expenses
Are you entitled to a deduction for interest expense on money borrowed to purchase a share in an asset used in your partnership where you purchase it from another partner?
Yes.
This ruling applies for the following period:
1 July 2010 to 30 June 2011
The scheme commences on:
1 July 2010
Relevant facts and circumstances
You are a member of a partnership.
The partnership conducts a farming business on various landholdings.
The landholdings are owned by your partners.
The landholdings are not recorded or considered to be partnership assets nor is any rent paid to your partners for the use of the land.
You intend to acquire a one-third share of the properties. You will pay your partners an immediate payment with the remaining balance to be 'at call'.
You will finance the initial payment with an interest-bearing bank facility which will be increased when your partners call up any of the remaining balance. You will incur interest expense on the bank facility.
After the restructuring the properties will be owned as joint tenants by you and your partners and your share of the partnership profits will increase.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Reasons for decision
Summary
You are entitled to a deduction for the interest expense on funds borrowed to purchase a share in landholdings used in your partnership to generate assessable income. This is not altered by the fact that the landholdings are currently owned by your partners.
Detailed reasoning
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income or a provision of the taxation legislation excludes it.
Taxation Ruling TR 95/25 states that the deductibility of interest is dependent upon how the borrowed funds are used. If the borrowed funds are used to purchase an income producing asset the associated interest expenses will be deductible.
You will borrow funds to purchase a share in four landholdings which will be used by your partnership to generate assessable income. Whilst the landholdings are already used by your partnership they are not recorded as or considered to be partnership assets.
As the landholdings will produce assessable income for you in the form of a partnership distribution, you are entitled to claim a deduction for the interest expense incurred on the money borrowed to purchase a share in the landholdings.
The fact that the landholdings are currently owned by the other members of your partnership does not alter the deductibility of the interest expense.
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