Edited version of private advice

Authorisation Number: 1052180127531

Date of advice: 12 October 2023

Ruling

Subject: Deductions - investment related expenses

Question

Are you entitled to claim a deduction for the interest expenses incurred on part of the loan used to purchase shares that are income producing under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

DD MM 20XX

Relevant facts and circumstances

You and Person A have a loan which is secured by a property.

The loan was obtained for the purpose of purchasing a property and shares.

The loan consists of a loan account and a loan transaction account (Offset Account).

The loan has been in place for approximately X years and you started to purchase shares in your individual name through the Offset Account from DD MM 20XX.

You invested funds from the loan to purchase shares in your name since DD MM 20XX.

You advised the purpose of buying shares is to generate income through dividends.

You did not claim interest deductions in your previous' income tax return as interest rates were not substantial prior to 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

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 or non-assessable non-exempt income.

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 (TR 95/25) provides the Commissioner's view regarding the deductibility of interest expenses. As outlined in paragraph 3 of TR 95/25, there must be a sufficient connection between the interest expense and the activities which produce assessable income. Further, 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 income is to be derived, the interest incurred on the loan will be deductible. However, where a loan relates to private purposes, no deduction is allowed.

Taxation Ruling IT 2606 Income tax: deduction for interest on borrowings to fund share acquisitions (IT 2606) provides the Commissioner's view on the issue of interest deductibility in the context of share acquisitions. At paragraph 9 of IT 2606, it is explained that that interest on moneys borrowed to acquire shares is generally deductible where it is reasonably expected that dividends or other assessable income will be derived from the investment. It also provides that it is expected the nature of the shares is inherently capable of generating dividends, whether in the short or long term. However, paragraph 10 of IT 2606 states that interest will not be deductible where shares were acquired solely for the purpose of capital profit on their resale since the proceeds of sale are not assessable income.

Taxation Ruling TR 2000/2 Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities considers the deductibility of interest incurred by borrowers on money drawn down under line of credit facilities and loans offering redraw facilities.

The ruling establishes drawing any excess or available funds from a loan account is treated as a new loan. As such the purpose or use of the drawing is relevant. That is, the deductible portion of interest when further borrowings are made depends on the use to which the redrawn funds are put. This is independent of the purpose of the original borrowing. The redraw facilities referred to in TR 2000/2 is where a borrower redraws previous repayments of the loan principal in a loan account.

Paragraph 11 of TR 2000/2 provides a taxpayer may use the redrawn funds for different purposes, then the loan account becomes a mixed purpose account. In a mixed purpose loan, the interest must be apportioned between the income producing and non-income producing purposes. The part of the accrued interest attributable to the funds used for private purposes is not deductible.

Application to your circumstances

In your case, you and Person A have a loan which is secured by a property and has been in place for X years.

The purpose of the loan is intended to buy property and shares. The loan consists of a loan account and an Offset Account.

You invested funds from the loan to purchase shares in your name through Offset Account for generating assessable dividends as income. Interest expenses have been accrued on loan funds that were used for purchasing shares.

As you have used the loan funds to acquire income producing shares the interest expense is an allowable deduction. In this case the loan is under both you and Person A's name, however as the shares are in your name the interest expense will be a deduction for you in your tax return.

You are entitled to claim a deduction for the interest expenses attributable to the loan funds that used to purchase shares that are income producing in your tax return under section 8-1 of ITAA 1997.

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