Edited version of private advice

Authorisation Number: 1051572643963

Date of advice: 27 August 2019

Ruling

Subject: Interest income and expenses

Question 1

Is the interest you receive from your loan to a company assessable?

Answer

Yes

Question 2

Is the interest that you receive from money you loaned to an entity assessable income?

Answer

Yes

Question 3

Are you eligible to claim all of the interest on money you loaned from a bank, which was used to on lend to an entity?

Answer

No, the total amount of interest deductions will be limited to the amount of interest income received.

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

You borrowed funds from a bank and pay a rate of X% interest for the loan.

You on loaned these borrowed funds to a non-related entity and the rate of interest paid by the entity to you is currently X%. The interest is paid to you on an annual basis.

This rate will vary from year to year.

Both loans are interest only.

You have mortgaged your own home in order to take out the loan.

The period of the loan is planned to be X years.

This arrangement has been in place for X years, and depending on market conditions it may be extended. The principal of the loan will be repaid once the property that the company has brought is sold.

You are not in the business of lending money.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 6-5

Reasons for Decision

Interest income

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes all ordinary income derived directly or indirectly from all sources.

Interest income is considered ordinary income for the purposes of section 6-5 of the ITAA 1997 and is therefore assessable.

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, or relate to the earning of exempt income.

Generally, loan interest expenses incurred for income producing purposes are deductible under section 8-1 of the ITAA 1997, to the extent that it is not capital, private or domestic in nature.

If the money is borrowed for the purpose of, or applied in, producing both assessable and non-assessable income, rather than producing only assessable income, the interest expense may need to be apportioned (see Ronpibon Tin NL v. FC of T (1949) 78 CLR 47 at 59; 8 ATD 431 at 437 (Ronpibon Tin); Kidston Goldmines Ltd v. FC of T 91 ATC 4538 at 4544-46; (1991) 22 ATR 168 at 175-177). This is a question of fact.

Regarding apportionment it has been stated (Brennan J in Ure v. FC of T 81 ATC 4100; 11 ATR 484)

If the borrowed moneys had been laid out solely for the purpose of gaining assessable income, the interest would be wholly deductible; but as they were laid out in part for that purpose, and in part for other purposes, the interest charges must be apportioned.

While the cases above discuss interest, the principle can be applied equally to other expenses.

Taxation Ruling TR 95/33 considers the deductibility and apportionment of losses and outgoings where expenses are incurred for dual purposes. TR 95/33 states that if an outgoing produces an amount of assessable income greater than the amount of the outgoing, there would normally be no need to examine the taxpayer's motives and intentions when determining the deductibility of the expenditure.

However, if the outgoing produces no assessable income, or the amount of assessable income is less than the amount of the outgoing, it may be necessary to examine all the circumstances surrounding the expenditure to determine whether the outgoing is wholly deductible. This may, depending on the circumstances of the particular case, include an examination of the taxpayer's subjective purpose, motive or intention in making the outgoing.

If it is concluded that the disproportion between the outgoing and the relevant assessable income is essentially to be explained by reference to the independent pursuit of some other objective, then the outgoing must be apportioned between the pursuit of assessable income and the other objective: see Fletcher & Ors v. FC of T 91 ATC 4950; (1991) 22 ATR 613 (Fletcher's Case).

As explained in Ure's case and Fletcher's case, in determining the deductibility of expenses it is necessary to consider the motive/purpose in incurring the loss/outgoing.

You have loaned borrowed funds and you receive interest on the loan at a lesser rate than that which you are paying for your loan of the funds.

Consequently, if the immediate or direct object intended to be achieved from the outgoings is not the production of assessable income which is commensurate with the outgoing, it will be necessary to determine if the expenses associated with the loan can genuinely be characterised as outgoings incurred in gaining or producing assessable interest income.

Therefore, any deduction for the interest expenses you incur will need to be apportioned to reflect your ultimate purpose.

When it is necessary to apportion a loss or outgoing, the appropriate method of apportionment will depend on the facts of each case. However, the method adopted in any particular case must be both 'fair and reasonable' in all the circumstances (Ronpibon Tin). In Fletchers Case, it was 'fair and reasonable' to limit the amount of the deduction to the amount of the assessable income actually received in that year.

Having regard to all the circumstances, it is considered fair and reasonable to adopt the same approach in your case. Therefore, a deduction for interest paid on your loan will only be allowed up to the amount of the interest received from the company.

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