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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of private advice

Authorisation Number: 1051550577493

Date of advice: 18 July 2019

Ruling

Subject: Interest deductions

Question:

Will you be entitled to claim a deduction on the interest on the loan from the Trustee for the Trust under section 8-1 of the Income Tax Assessment Act 1997?

Answer

Yes

The Commissioner accepts that the interest you will incur in relation to the proposed new loan you obtain from the Trustee will be used to pay out your original loan, which has been used to earn your assessable income. Therefore, you will be eligible to claim deductions for the interest incurred in relation to the proposed borrowed funds from the Trustee.

Further information about the interest deductions can be viewed at the following link, or by searching 'QC 55664 on www.ato.gov.au and looking under the 'interest on loans' link under the Rental expenses drop down function to view the Taxation Ruling.

Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith

Paragraph 42 of the above Taxation Ruling addresses borrowing used to repay and existing loan.

Relevant facts and circumstances

You, being Persons A and B, were each issued XX units in the Trust when it was created by deed.

The Trust is a fixed trust. Its trustee is Company A (the Trustee) of which Person A is the director.

The Trustee purchased a property (the Property) in the year after the Trust was created for $XXX,XXX, with settlement occurring after a number of months..

Just prior to settlement on the purchase of the Property occurring, you obtained a loan from a banking institution for $XXX,XXX to fund the purchase of a further XXX,XXX units each, being the value of the purchase price of the Property and stamp duty. You were guarantor for the loan.

The following day a registered mortgage was secured over the Property, with a banking institution as the mortgagee and the Trustee as the mortgagor.

The Trustee used the funds from the sale of the units to pay for the purchase of the Property.

The Property has been used by the Trustee to derive rental income.

You received distributions from the Trust.

You claim deductions for the interest incurred in relation to your bank loan.

You consider that you are being charged a relatively high interest rate in comparison to interest rates offered by other lenders and that due to the change in the lending environment you are of the view that it would be difficult for you to refinance your current loan due to the Property being owned by the Trustee and not you.

To enable you to save interest on your loan, and to allow a different lender to be used, it is proposed that:

·         the Trustee will obtain a loan from a major bank or financial institution;

·         you will provide personal guarantees for the new loan;

·         the security for this loan will be a first registered mortgage over the Property;

·         the funds borrowed by the Trustee will be lent by the Trustee to you, being the new loan, in accordance with a loan agreement (the Loan Agreement) to enable you to pay your original loan.

A Draft Loan Agreement (the Agreement) has been prepared between you and the Trustee as trustee of the Trust which includes the following information:

Lender

Trustee of the Trust

Borrowers

You

Recitals

The Lender has agreed to lend the Borrowers, and you have agreed to borrow from the Lender, the single amount of $XXX,XXX (the Principal Sum) on the terms outlined in the Agreement.

The Agreement is intended to be legally binding on the parties.

Default rate

Means a rate of interest of X.00% per annum

Loan

The Lender agrees to advance to the Borrowers, and the Borrowers agree to borrow the Principal Sum on a specified date, provided that the Lender will not be required to advance the Principal Sum to the Borrowers on that date unless either:

·         the event of default has occurred; or

·         if any event of default has occurred, it has been remedied to the satisfaction of the Lender; and

·         no potential event of default exists.

The Parties acknowledge and agree that the advance of the Principal Sum pursuant to the above constitutes a loan from the Lender to you on the terms of this agreement.

Interest

Interest will accrue on the Outstanding Principal, being the amount of the Principal Sum that is outstanding at that time, during the period commencing on the date the Agreement is entered into until the Repayment Date, being the date nine years after the date of the Agreement or another date as agreed by the parties.

The interest rate will be the equivalent to the Standard Variable Rate as advertised for residential investment loans with an unspecified bank.

The interest will:

·         accrue daily and be calculated on the basis of a 365 day year; and

·         be compounded on a monthly basis on the 15th day of each month.

Debt is unsecured

The Lender acknowledges and agrees that the obligations of the Borrowers under this agreement are unsecured.

Use of funds

The Borrowers may use the amounts advanced to them by the Lender under this agreement only for a Permitted Purpose.

 

You intend holding the units in the Trust for long term, with the income from the units being used to help fund your retirement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

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