Edited version of your private ruling

Authorisation Number: 1012568588185

Ruling

Subject: losses

Question 1

Are you considered to be party to a joint venture as described in the Joint Venture Agreement (JVA)?

Answer: No

Question 2

Are you considered to be a partner in a partnership for tax purposes as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) under the JVA?

Answer: No

Question 3

Are you entitled to claim a deduction of $xx as a partnership loss for the purposes of subsection 92(2) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer: Not applicable

Question 4

Are you entitled to claim a deduction, under section 8-1 of the ITAA 1997, for the loss you incurred (being your initial outlay) as part of your investment in a property development?

Answer: No

Question 5

Are you entitled to claim a deduction, under section 8-1 of the ITAA 1997, for the loss you incurred (being additional loans) as part of your investment in a property development?

Answer: No

Question 6

Are you entitled to claim a deduction, under section 8-1 of the ITAA 1997, for the loss you incurred which represented the (unreturned) deposit paid to A on the contracts for sale of the completed properties?

Answer: No

Question 7

Will the non-repayment (by A) of your original investment in the property development constitute the happening of capital gains tax (CGT) event C2, thereby giving rise to a capital loss at the time of receipt of the liquidator's final distribution or, if no distribution, when the company is completely wound up?

Answer: Yes

Question 8

Will the non-repayment (by A) of your additional investments in the property development constitute the happening of capital gain tax (CGT) event C2, thereby giving rise to a capital loss at the time of receipt of the liquidator's final distribution or, if no distribution, when the company is completely wound up?

Answer: Yes

Question 9

Will the non-repayment (by A) of your deposits paid on the contracts of sale of the completed properties constitute the happening of capital gain tax (CGT) event C1, thereby giving rise to a capital loss at the time of the rescission of the contracts of sale?

Answer: Yes

Question 10

Are you entitled to claim a deduction, under section 8-1 of the ITAA 1997, for the interest expenses incurred in each financial year on borrowings to fund your investments in the property development?

Answer: Yes

Question 11

Are you entitled to claim a deduction, under section 25-25 of the ITAA 1997, for a portion of the borrowing costs associated with your borrowings to fund your investments in the property development?

Answer: Yes

This ruling applies for the following periods

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on

1 July 2009

Relevant facts and circumstances

You entered into a joint venture agreement (JVA) with another unrelated party, A, for the purchase, development and sale of the property (the development) for a profit.

Joint Venture Agreement

· A entered into a contract to purchase property

· A purchased the property on behalf of A and yourself. A held the property in trust for both parties as tenants in common and in equal shares

· Both parties agreed to acquire the property to develop jointly. The arrangement is for the purchase, development and eventual sale of the property.

· A acknowledges having entered into the contract to purchase the property

· Your initial contribution is to be paid to the bank account of A

· You are required to participate in joint decisions from time to time, attend to other matters as agreed to by the parties and, consult with A on a regular basis to achieve the best outcome for the project

· On completion of the development, the property shall be subdivided and the properties placed on the market for sale

· The net proceeds from the sale, after payment of all agents commission, legal costs, principal and interest payable under any mortgage or loan obtained on the security of the property, all development costs and after payment to you of your initial contribution, the net profits shall be distributed equally between you and A

Guarantee and indemnity documents from both yourself and A, guaranteeing the loans and contributions of each party in the JVA, have been provided.

You have also provided loans to A (loan acknowledgments from A have been provided). Since providing the loans some amounts have been repaid.

On completion, the properties were marketed for sale. At this stage of the development you state that your options were limited and, in effect, you took over the venture.

As a consequence, you organised finance to acquire the properties sell them at a later time. You state that your original contribution was to be offset against the purchase price. You paid a deposit to A for the properties.

You entered into contracts of sale for the properties with A in the 2012-13 financial year.

Subsequent to entering into the contracts, you were advised that A was unable to secure release of the titles as A had fully leveraged the properties to fund other business activities.

You state that as A had no money for you to be able to recoup your initial contribution, the contracts were rescinded and the deposits paid on each contract was not repaid or capable of being repaid and effectively forfeited.

Later, A advised that they had sold the properties under the direction of their bank. The sale price less costs relating to the development resulted in a loss from the development.

Subsequent to the sale of the properties, an undated deed prepared by solicitors was entered into between yourself and A. The deed refers to the JVA to which you and A are parties.

You state that despite the deed, the total funds paid by you to undertake and complete the development are not recoverable.

You state that despite the areas of responsibilities agreed to under the JVA, it was in fact you who managed the development. You state that you devoted all your time to the development as you were not working in any other position at the time.

You state that you entered into the JVA with the intention of the development becoming your primary source of income. If the development was successful you intended to continue with this line of endeavours.

You state that managing the project full-time encapsulated;

· full project and on-site management from the inception of the development until some time in the 2011-12 financial year, involving; selection of architect, vendor and contractor identification, selection and management

· project quality control

You advise that you were not paid for your project management role.

You state that you incurred interest on borrowings in respect of the 2011 to 2013 income years. You have also incurred borrowing costs in each of these years.

As a consequence of being a party to the JVA, you suffered losses in respect of your contribution to, and borrowings made for, the development.

You state that A is in liquidation (no liquidator's statement has been provided).

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 116-30

Income Tax Assessment Act 1997 Section 102-25

Income Tax Assessment Act 1997 Section 116-25

Income Tax Assessment Act 1997 Section 25-25

Income Tax Assessment Act 1936 Section 170

Reasons for decision

Is the arrangement a partnership or joint venture?

The term partnership is defined in subsection 995-1(1) of the ITAA 1997 as an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly.

The distinction between a joint venture and a partnership is that a joint venture is, broadly, the relationship that exists between parties carrying on an undertaking in common for their individual gain. It is usually a relationship between two or more parties formed for a particular commercial transaction or transactions, the product of which will be taken by the joint venturers in such shares as is mutually agreed between them and disposed of by them individually at such times as the venturers may individually determine.

Joint venturers are usually individually liable for the costs of operating the joint venture and further, joint venturers are not jointly and severally liable for each party to any unincorporated joint venture.

Notwithstanding the expanded statutory definition of partnership, a joint venture is not a partnership for income tax purposes. The distinguishing factor between a joint venture and a partnership for income tax purposes is that, for a tax partnership there must be a joint receipt of income but, in the case of a joint venture, each venturer derives separate income and there is no joint derivation of income.

In your case, you entered into an arrangement with A whereby you invested some money with A in order for A to purchase property to develop and later dispose of at a profit. Based on the information provided, it appears that on completion of the development A would receive the initial monies from any disposal of the developed properties and distribute any monies received in the following manner and priority;

· pay all development costs

· payout any principal and interest payable under any mortgage or loan obtained on the security of the property

· repay your initial contribution, and

· pay you 50% of the remaining profits

Therefore, the arrangement will not be a joint venture as the product of the arrangement (the properties), were not to be split between the parties in order for each party to dispose of a property individually, nor were you individually liable for the costs of operating the venture as the arrangement allowed for you to receive a repayment of your initial investment and a return on that investment. Instead, the arrangement provided for A to solely dispose of the properties, meet expenses and receive any consideration.

Further, the arrangement will not amount to a partnership as you and A are not carrying on a business together, nor are you in receipt of income jointly. Instead, it is A who will receive the income from the disposal of the properties and meet all associated expenses. Any remaining monies will be used by A to repay your initial contribution and a return on your initial investment amounting to 50% of the remaining profit.

Accordingly, despite the agreements in place, we do not consider that the arrangement amounts to a joint venture or a partnership for tax law purposes. Instead, we consider that you have merely invested monies in a project (by way of a series of loans) to be undertaken by A.

Are you carrying on a business of property development or did you conduct an isolated commercial transaction with a view to a profit?

You have made a loss from an investment related to a land/property development. We will need to determine whether the loss:

· is deductible under section 8-1 of the ITAA 1997 against your other assessable income as you were carrying on a business of land/property development

· is deductible under section 8-1 of the ITAA 1997 against your other assessable income as you conducted an isolated commercial transaction with a view to profit, or

· is considered to be a capital loss.

Carrying on a business of property development

Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'. The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts.

Taxation Ruling TR 97/11 incorporates the general factors that the Commissioner would consider important in determining whether a business is being carried on, these are as follows

· whether the activity has a significant commercial purpose or character

· whether the taxpayer has more than just an intention to engage in business

· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

· whether there is regularity and repetition of the activity

· whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

· whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

· the size, scale and permanency of the activity, and

· whether the activity is better described as a hobby, a form of recreation or sporting activity.

No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression.

When applying the above factors to your circumstances and the fact that you have stated that you are not, nor have you ever been, in the business of property development, it is considered that you are not carrying on a business of property development.

Isolated commercial transaction with a view to profit

Taxation Ruling TR 92/4 discusses whether losses on isolated transactions are deductible. TR 92/4 should be read in conjunction with Taxation Ruling TR 92/3 which deals with whether profits from isolated transactions are income and therefore assessable under section 6-5 of the ITAA 1997.

An isolated transaction refers to those transactions outside the ordinary course of business of a taxpayer carrying on a business and those transactions entered into by non-business taxpayers. A loss from an isolated transaction is generally deductible under section 8-1 of the ITAA 1997 if:

(a) in entering into the transaction the taxpayer intended or expected to derive a profit which would have been assessable income

(b) the transaction was entered into, and the loss was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient if the transaction is business or commercial in character (Federal Commissioner of Taxation v. Whitfords Beach Pty Ltd (1982) 150 CLR 355, 82 ATC 4031, 12 ATR 692). Whether a particular transaction has a business or commercial character depends on the circumstances of the transaction.

Paragraph 49 of TR 92/3 provides that generally, a transaction has a business or commercial character if the transaction would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions.

Where a taxpayer's activities have become a separate business operation or commercial transaction, the profits on the sale of land or a property can be assessed as ordinary income within section 6-5 of the ITAA 1997. TR 92/3 lists the following factors to be considered:

a) the nature of the entity undertaking the operation or transaction 

b) the nature and scale of other activities undertaken by the taxpayer

c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained

d) the nature, scale and complexity of the operation or transaction

e) the manner in which the operation or transaction was entered into or carried out

f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction

g) if the transaction involves the acquisition and disposal of property, the nature of that property, and

h) the timing of the transaction or the various steps in the transaction.

In your case, you state that your intention in entering into the transaction was to make a profit from the sale of the properties. As part of the agreement entered into with A you were to receive a repayment of your original investment and a 50% share of any profits left after all development costs and related payments were made.

However, we consider that while there may have been an intention to make a profit, the arrangement was not a commercial transaction but instead had the character of a passive investment, as:

· you conducted the transaction as an individual

· you are not in the business of land/property developments and, you have not been involved in land/property development projects in the past

· you entered into an agreement with A whereby you invested funds with them to purchase and develop the land but were to have minimal involvement with the project

· the land and property purchased by A, was held in title by A however, the agreement entered into with A states that property was purchased for A and yourself to be held in trust for you in equal shares as tenants in common

· you lent further funds to A (for business and investment purposes)

· the amount of money involved was relatively minor and would not have been sufficient to cover the full development costs of the project

· while you were involved in some project management for the development for a period of approximately 12 months, it is noted that you were concerned with how the development was progressing and that you were not currently employed at the time you undertook these project management activities.

Instead, it appears that A, not you, was carrying on a business or carrying out a business operation or commercial transaction. We consider that by entering into the JVA with A you have merely made an ad-hoc investment into the project. As such, we consider that the arrangement, on your part, was merely a passive investment and not a commercial transaction.

Therefore, if the sale of the property had resulted in a profit, the profit would not have been assessable as ordinary income, but instead, as a capital gain. Accordingly, as a loss was made on the realisation of the investment, the loss would be considered a capital loss and therefore is not deductible under section 8-1 of the ITAA 1997.

Capital or revenue loss from loans made to JSK

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which;

a) they are incurred in gaining or producing assessable income; or

b) they are necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income

The question of whether or not a loss is of a revenue or capital nature depends upon a consideration of the facts and circumstances in each case. It is necessary to ascertain the circumstances which occasioned the loss and the relation that these circumstances bear to the taxpayer's income earning activities. If the loss is an ordinary incident of the taxpayer's income earning activities then the loss will be on revenue account.

Ordinarily, a taxpayer who is carrying on a business as a banker, or moneylender or in the limited categories of other cases where loans represent the trading stock of the lender, could account for losses on loans on revenue account. Those taxpayers who do not fall within the above categories would ordinarily account for the corpus of a loan as capital and any loss in relation to that capital asset is a loss on capital account.

The issue of whether a loss is on capital or revenue account has been considered by the courts in various cases, most notably in Sun Newspapers Ltd. and Associated Newspapers Ltd. v. F.C. of T. (1938) 61 CLR 337 at p. 363, where Dixon J made the following statement:

"There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment."

Character of the advantage sought and manner in which it is to be enjoyed

These matters are concerned with whether the expenditure may result in an enduring benefit for the taxpayer. When the words "permanent" or "enduring" are used in this connection it is not meant that the advantage which will be obtained will last forever. The distinction which is drawn is that between more or less recurrent expenses involved in running a business or in order to earn assessable income and, an expenditure for the benefit of the taxpayer or business as a whole.

In your case, the initial outlay made to A resulted in you obtaining a new capital asset, that being a debt owed to you (section 108-5 of the ITAA 1997). You also loaned further funds to A. While you entered into the arrangement to earn assessable income, being interest income and a share of the profit on the venture being undertaken by A, this does not necessarily mean that the expenditure (being the payments made to A) will be on revenue account.

Indeed, as the transactions in question amount to the loaning of funds to A and you are not considered to be in the business of lending money, we do not consider that the loans represent your trading stock and therefore the loans cannot represent money that was lent in the ordinary course of earning your assessable income. Instead, we consider that the amount you loaned constitutes a capital sum which you have employed to earn assessable income.

On this basis, the advantage sought was the generation of income from the utilisation of a capital asset for your benefit, further, the manner in which the advantage is to be enjoyed was as increased personal wealth.

This situation is similar to that in Case U26 87 ATC 204, where Member Roach concluded that a loss on monies loaned to fund a real estate venture by an investor was a capital loss for the purposes of 51(1) (now section 8-1 of the ITAA 1997). The principal sum was the "profit yielding subject" which was to generate interest income in the short term and profit from sale of the developed land in the long term and as such was capital in nature. In that case, it was found that the taxpayer was not carrying on a money lending business, nor was the money lent in the ordinary course of earning their assessable income, it was merely an ad-hoc investment on the part of the taxpayer.

Further, a similarity can also be drawn with that of a taxpayer, who is not in the business of share trading, but acquires capital assets such as shares. In this situation, the taxpayer has utilised the capital asset to earn assessable income through dividends. If the shares become worthless in the future and are disposed of at a loss, the taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 as the loss is of a capital nature, and not a loss of a revenue nature, despite the fact the assets were used to earn assessable income.

Means adopted to obtain it

You have entered into an agreement with A where you initially lent them a sum of money and provided further funds.

We do not consider that these payments show that regular outlays were incurred in order to obtain regular returns in the form of assessable income. The payments appear to be of a nature entirely different from the continual flow of working expenses that is, expenditure on revenue account. Instead, the process in which you provided funds to A was simply a matter of agreement between yourself and A and merely shows that you are increasing your investment in A, in other words, you are enlarging the 'profit-yielding subject' (that being the debt owed to you by A) which is a capital outlay.

As you are not in the business of lending money, the loss cannot be incurred in carrying on a business for the purpose of gaining or producing assessable income. Further, as we do not consider that the loans to A represent your 'trading stock' it cannot represent money that was lent in the ordinary course of earning your assessable income.

Therefore, the losses incurred (being debts owed to you by A) are losses concerning your 'profit yielding subject', a capital asset. While there clearly is a loss (being the total amount of debt owed to you by A) the fact remains that the loss is of a capital nature.

Accordingly, the payments you made to A are a capital outlay and the losses incurred are considered capital losses. As such, no deduction for the losses will be allowable under section 8-1 of the ITAA 1997.

Capital losses and CGT event C2

Section 108-5 of the ITAA97 states that a CGT asset is:

a) any kind of property; or

b) a legal or equitable right that is not property.

One of the examples of a CGT asset given in the notes to section 108-5 of the ITAA97 is 'debts owed to you'.

Section 104-25 of the ITAA 1997 provides that that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset:

a) being redeemed or cancelled; or

b) being released, discharged or satisfied; or

c) expiring; or

d) being abandoned, surrendered or forfeited; or

e) if the asset is an option - being excised; or

f) if the asset is a convertible interest - being converted

The time of the event is:

a) when you enter into the contract that results in the asset ending; or

b) if there is no contract - when the asset ends.

Section 116-30 of the ITAA 1997 provides that if you received no capital proceeds from a CGT event, you are taken to have received the market value of the CGT asset that is the subject of the event. (The market value is worked out as at the time of the event.)

In Taxation Ruling TR 96/23 which discusses the capital gains implications of a guarantee to pay a debt, the Commissioner is of the opinion that when a debtor is insolvent, the market value of the debt is nil. Paragraph 26 of TR 96/23 states:

In this situation, where there is a disposal of the debt by release or discharge, a capital loss is incurred. The deemed market value rules apply to the disposal: (subsection 116-30(1) and subsection 116-30(3A) of the ITAA97). If the debtor is insolvent, the market value of the debt is nil.

In your case, you loaned money to A. Since the amounts were loaned to A, some amounts have been repaid and applied against the further payments made to A. Most of the amounts lent remain outstanding.

As the amounts are considered 'debts owed to you', CGT event C2 will happen when your ownership of the asset ends, that is, in the case of insolvency of a company, at the time of receipt of the liquidator's final distribution or, if no distribution, when the company is completely wound up.

You make a capital gain from CGT event C2 if the capital proceeds from the asset ending are more than its cost base. If the capital proceeds are less than the reduced cost base of the asset, a capital loss is made.

The cost base of your asset/s is the loan amount/s remaining, your capital loss will therefore be the amount of the loan/s.

Forfeited deposits on contracts of sale

If the purchaser defaults, the vendor terminates the contract and the purchaser forfeits the deposit, there may be a surrender, forfeiture or abandonment of the rights such that there is an ending of the purchaser's ownership of the rights. If so, CGT event C2 happens (subsection 104-25(1)).

CGT event C1 in section 104-20 (about a loss or destruction of a CGT asset) might also happen if a purchaser defaults, the vendor terminates the contract and the purchaser forfeits the deposit. A purchaser's contractual rights might be said to be lost or destroyed in these circumstances.

As both CGT event C1 and CGT event C2 may apply if a purchaser forfeits a deposit, subsection 102-25(1) provides that the CGT event that is the most specific to the situation is the one to use. The circumstances surrounding the purchaser's default determines which is the more specific CGT event.

Paragraph 123 of Taxation Ruling TR 1999/19 states:

If the circumstances are of a genuinely involuntary nature, there is a loss or destruction of the contractual rights and CGT event C1 is the more specific CGT event. For example, if a purchaser defaults because their finance fails, or because of extenuating personal circumstances, e.g., death of spouse, severe illness, natural disaster, CGT event C1 is the more specific CGT event.

In your case, you entered into contracts of sale to acquire the properties. You paid a deposit on each property. Subsequent to entering into the contracts, you were advised that A was unable to secure release of the titles of the property as they had fully leveraged the properties to fund their other business activities. As a result, the contracts were rescinded. You have stated that A has no money to repay the deposits and therefore the deposits were effectively forfeited. As the circumstances are of a genuinely involuntary nature, there is a loss or destruction of the contractual rights and therefore CGT event C1 will happen.

The capital gain or capital loss arising from this event is calculated by comparing the capital proceeds received as a result of the event with the cost base of the asset. If the capital proceeds are greater than the cost base, then a capital gain has been made. Alternatively, if the capital proceeds are less than the reduced cost base, the result is a capital loss (subsection 104-25(3) of the ITAA 1997)

Usually, no capital proceeds are received by a defaulting purchaser on the ending of their contractual rights. If an entity receives no capital proceeds from a CGT event, generally the entity is taken to have received the market value of the CGT asset that is the subject of the event (subsection 116-30(1)). However, the general rule for substituting market value if no capital proceeds have been received, does not apply to CGT event C1 (section 116-25 of the ITAA 1997).

The cost base of a CGT asset is generally the cost of the asset plus certain other costs associated with acquiring, holding and disposing of the asset (section 110-25 of the ITAA 1997).

Accordingly, as CGT event C1 happens, the market value substitution rule does not apply and you are entitled to a capital loss of the amount of the deposit forfeited plus incidental costs. The time of the event is when the asset ended, that is on the date of the rescission of the contracts.

Interest expenses

Section 8-1 of the 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.

A number of significant court decisions have determined that for an expense to be an allowable deduction:

· it must have the essential character of an outgoing incurred in gaining

assessable income or, in other words, of an income-producing expense

(Lunney v. FC of T; (1958) 100 CLR 478),

· there must be a nexus between the outgoing and the assessable income so

that the outgoing is incidental and relevant to the gaining of assessable

income (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47), and

· it is necessary to determine the connection between the particular outgoing

and the operations or activities by which the taxpayer most directly gains or

produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v.

FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).

Taxation Ruling TR 95/25 provides the Commissioner's view regarding the deductibility of interest expenses. As outlined in TR 95/25, there must be a sufficient connection between the interest expense and the activities which produce assessable income. TR 95/25 specifies that to determine whether the associated interest expenses are deductible, it is necessary to examine the purpose of the borrowing and the use to which the borrowed funds are put.

The 'use' test, established in the High Court case Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, (1926) 32 ALR 339 is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion.

Accordingly, it follows that if a loan is used for investment purposes from which assessable income is to be derived, the interest incurred on the loan will generally be deductible. 

In your case, you have borrowed funds to invest with an entity to undertake a development project. In doing so, you have incurred the interest expenses;

As the loan/s were used for investment purposes, that is to earn assessable income via interest income and a share of the profits of the completed development project, the interest expenses will be allowable deductions under section 8-1 of the ITAA 1997 in the financial years in which the expenses were incurred.

Borrowing costs

Subsection 25-25(1) of the ITAA 1997 states:

You can deduct expenditure you incur for borrowing money, to the extent that you use the money for the purpose of producing assessable income. In most cases the deduction is spread over the period of the loan

The term 'borrowing' is defined in subsection 995-1(1) of the ITAA 1997 to mean any form of borrowing, whether secured or unsecured, including the raising of funds by the issue of a bond, debenture, discounted security or other document evidencing indebtedness.

Expenditure incurred for borrowing money is deductible only to the extent that the money is used by the taxpayer for the purpose of producing assessable income. The expression 'purpose of producing assessable income' is defined in subsection 995-1(1) to include the purpose of gaining or producing assessable income, and carrying on a business for the purpose of gaining or producing assessable income.  

To the extent relevant, the deduction is spread over the period of the loan. Under subsection 25-25(5) the period of the loan is the shortest of:  

· the period of the loan as specified in the original loan contract;

· the period starting on the first day on which the money was borrowed and ending on the day the loan is repaid - if the money is borrowed in instalments, the first day on which the money is borrowed would be the first day on which the first instalment is borrowed and, if the loan is repaid in instalments, the loan would be repaid on the day on which the last repayment is made; or

· five years starting on the first day on which the money is borrowed.

Therefore, the maximum period of the loan for the purposes of section 25-25 is five years.

Subsection 25-25(6) of the ITAA 1997 explains that if the total amount of the borrowing costs incurred for each year is under $100, there is no need to spread the deduction over the period of the loan, instead you may deduct the full amount in the year it was incurred.

In your case, you have incurred the borrowing costs;

Accordingly, you may claim a deduction for a portion of the borrowing costs incurred in each financial year.

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