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Edited version of private ruling
Authorisation Number: 1011647216789
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Ruling
Subject: Interest deductions
1. For the year ended 30 June 2008, is 100% of your interest incurred on your loan (when used to earn assessable income) deductible?
Yes.
2. Is the portion of your interest incurred on your section 109E shareholder loan deductible (when the portion was used for repairs to your rental property)?
Yes.
This ruling applies for the following periods:
Year ended 30 June 2008
The scheme commences on:
1 July 2007
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
You are the two shareholders of a company and rent a commercial property to the company. You borrowed an amount to purchase the property.
On 1 July 2007, the company paid a portion of the borrowed amount into the loan account. Before 30 June 2008, the amount was repaid to the company.
Also, in the year ended 30 June 2008, the company provided you with a shareholder loan in accordance to section 109E of the ITAA 1936, of which you spent a portion on repairs to your commercial property.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.
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.
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. The interest incurred will be deductible to the extent that the property is used to produce assessable income.
Also, as a general principle, refinancing does not of itself break the nexus between interest outgoings and the income producing activity. When an original borrowing is refinanced, the new borrowing takes on the same character as the original borrowing.
In your case, your borrowing from the company to reduce your loan and your redrawing of your loan to repay the company were both the refinancing of your rental property. The funds from both of these borrowings were put to the same use. As the nexus between your interest outgoings and your income producing activity was not broken, your interest expense incurred on your loan is deductible under section 8-1 of the ITAA 1997.
The interest incurred on the portion of your section 109E shareholder loan used for repairs to your rental property is also deductible under section 8-1 of the ITAA 1997. This is because the interest expense was incurred in gaining or producing assessable income.
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