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Edited version of your private ruling
Authorisation Number: 1012352474752
Ruling
Subject: Interest deduction
Question:
Are you entitled to claim a deduction for interest incurred on a loan taken out to purchase an investment product structured as a call option?
Answer:
No.
This ruling applies for the following period
Year ended 30 June 2012
The scheme commenced on
1 July 2011
Relevant facts
You took out a personal loan to purchase an investment product on the Australian Securities Exchange (ASX).
You purchased the investment product in the relevant financial year.
According to the product disclosure statement, the investment is structured as a call option and maybe exercised at any time.
There are two exercise options; either the asset or cash.
If you were to sell the product, you would make a capital gain. There are no income entitlements attached to this investment.
You incurred interest expenses on the personal loan in the relevant financial year.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Section 8-1
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for a losses or outgoings to the extent that they are incurred in gaining or producing assessable income, except where the losses or outgoings are of a capital, private or domestic nature.
Taxation Ruling TR 95/25 considers the deductibility of interest. 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. Where borrowed funds are used to acquire an income producing asset, the interest on the borrowed moneys is considered to be incurred in gaining or producing assessable income.
Taxation Ruling IT 2606 provides that, as a general rule, interest on money borrowed to acquire shares will be incurred in gaining or producing assessable income 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, a deduction for interest will not be allowable where shares were acquired solely for the purpose of capital profit on their resale (paragraphs 9 and 10).
While IT 2606 considers the deductibility of interest on borrowings to fund share acquisitions, the same principles can be applied to your case. You have incurred interest on borrowings used to purchase an investment product for the sole purpose of generating a capital gain. There are no income entitlements attached to your investment. Therefore, the interest expenses have not been incurred in gaining or producing your assessable income and are not deductible under section 8-1 of the ITAA 1997.
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