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Edited version of private ruling
Authorisation Number: 1011728923030
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Ruling
Subject: Borrowing expenses
Question
Is interest paid on a loan to acquire shares deductible?
Answer
Yes.
This ruling applies for the following period:
Year ended 30 June 2010.
The scheme commences on:
1 July 2009
1 July 2009.
Relevant facts and circumstances
You borrowed money solely to acquire shares in an unlisted public company.
During the income year you paid interest on this loan.
During the income year you weren't paid dividends on the shares acquired.
You anticipate that the company will pay a dividend in the current financial year.
You acquired the shares for the purpose of deriving dividend income.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Summary
The interest you paid on a loan to acquire shares is deductible as it was incurred in gaining or producing your assessable income.
Detailed reasoning
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for any loss or outgoing to the extent that it is 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.
Taxation ruling IT 2606 states that as a general rule, interest on money borrowed to acquire shares will be deductible where it is expected that dividends or other assessable income will be derived from the investment. Such an expectation will usually exist as shares by their very nature are inherently capable of generating dividends, whether in the short or long term. However, such an expectation must be reasonable and not a mere theoretical possibility; there must be a prospect of dividends or other assessable income being received.
In your case, you have borrowed money in order to purchase shares for the purpose of deriving dividend income. Money earned from dividends is typically classified as income from ordinary concepts. As you expected to derive assessable income from the investment, the interest on money borrowed to acquire the shares is deductible.
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