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Edited version of your private ruling
Authorisation Number: 1012477112237
Ruling
Subject: Deductibility of interest expense
Question
Are you entitled to a deduction for your share of the interest incurred in respect of your joint loan account?
Answer
Yes.
This ruling applies for the following periods
Year ended 30 June 2013
Year ended 30 June 2014
Year ended 30 June 2015
Year ended 30 June 2016
The scheme commenced on
1 July 2012
Relevant facts
You had a joint loan account which was 100% for investments.
The joint loan account was then paid out by another joint loan.
Your investments were withdrawn completely.
Principal and interest is repaid on the loan each year.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Section 8-1
Reasons for decision
Taxation Ruling TR 95/25 provides the Commissioner's view regarding the deductibility of interest expenses. TR 95/25 states that the deductibility of interest depends upon satisfying, or being able to show, that the expense has sufficient connection with the operations of activities which directly gain or produce a taxpayer's assessable income. In other words, the interest must be incurred in relation to property which is held for income producing purposes.
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.
Your funds were borrowed for the investments, for the purpose of deriving assessable income, but those investments have now been withdrawn completely. You have paid out the original loan by taking out another loan for the amount outstanding.
In Browns case, the Full Federal Court stated that the occasion for the recurring payments of interest was to be found in the original loan agreement (carrying with it the obligation to pay interest over the term of the loan) entered into by the taxpayer. The Full Federal Court found that the ceasing of the income producing activity did not operate to break this nexus. In Federal Commissioner of Taxation v. Jones 2002 ATC 4135; (2002) 117 FCR 95 the Full Federal Court found that the refinancing of a business loan after cessation of the business activities to obtain a better interest rate did not break the nexus between the interest expense and the business. The court considered that the new financing takes on the same character as the original borrowing.
However, the nexus between the interest expense and the relevant income earning activities will be broken where:
· the taxpayer has the ability to repay the loan but chooses not to do so, or
· the taxpayer makes a conscious decision to extend the loan in order to derive an ongoing commercial advantage unrelated to the prior income earning activities which resulted in the debt.
In your situation, you repaid the original joint loan account with funds raised from the new joint loan account. Further advances have not been made from this loan. A nexus existed between the interest expense incurred and the assessable income earned. This nexus remains unbroken when you refinanced, and therefore your share of the interest expense will be deductible under section 8-1 of the ITAA 1997.
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