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Edited version of private ruling
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Ruling
Subject: deductibility of loan interest
Question
Can you claim a deduction for the interest costs incurred on funds borrowed to pay out your Superannuation Surcharge debt and accumulated interest?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 2010
The scheme commences on:
1 July 2009
Relevant facts and circumstances
You have a defined benefit superannuation fund, which does not allow you access to the fund until retirement.
Your superannuation fund has been charged the superannuation surcharge.
As your fund is unable to pay the surcharge, interest is accumulating on a yearly basis.
You wish to borrow funds to pay out the surcharge debt and the accumulated interest.
You will incur interest on this loan.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1(2)(d),
Income Tax Assessment Act 1997 ,
Superannuation Contributions Tax (Assessment and Collection) Act 1997, and
Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Act 1997.
Reasons for decision
Interest is deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to the extent that it is incurred in gaining or producing assessable income or in carrying on a business for that purpose, except to the extent that the expense is of a capital, private or domestic nature or incurred in gaining or producing exempt income.
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.
Where borrowed funds are used to pay for a non-deductible expense, the interest on the borrowed funds is also not considered deductible.
Section 26-60 of the ITAA 1997 states that you cannot deduct a superannuation contributions surcharge within the meaning of the Superannuation Contributions Tax (Assessment and Collection) Act 1997; or a superannuation contributions surcharge within the meaning of the Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Act 1997.
Further, interest charged on a superannuation account where there was a debit on the account at the end of a financial year, is also considered a non-deductible expense.
In your case, you intend on borrowing funds to pay out the surcharge debt and the accumulated interest accrued in your superannuation fund. These are both non-deductible expenses. Therefore, the interest you would incur on borrowed funds to pay for these expenses is also non-deductible.
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