Edited version of private advice

Authorisation number: 1052242120463

Date of advice: 17 April 2024

Ruling

Subject: Deductibility of loan interest

Question

Are you entitled to a deduction for the loan interest incurred on the new investment loan as per section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You purchased income producing shares using a XX loan with borrowed funds from XX bank.

You are the sole account holder of the XX loan.

The portfolio loan was secured against your home which is jointly owned with your spouse.

You applied to refinance the XX loan with a XX bank loan, however, simultaneously settled the sale of your home, as well as the purchase of a new home.

The new home is also jointly owned with your spouse.

On XX/XX/20XX, part of the settlement was used to pay off the portfolio loan with a balance of $XX.

On XX/XX/20XX, XX bank drew down loan funds of $XX with effect from XX/XX/20XX.

The XXX bank loan of $XXX was split as follows:

a)            $XX (New home loan)

b)            $XX (Investment loan)

c)            $XX (Payout of St George bank loan)

XXX bank has confirmed that their $XX loan was provided on the basis that it was an investment loan refinancing the XX bank loan and not for housing purpose.

You provided the bank statements, purchase, sale, loan documents and settlement statements for the transactions above.

Both the properties settled at the same time on the same day of XX/XX/20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (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.

Taxation ruling TR 2004/4 Income tax: deductions for interest incurred prior to commencement of, or following the cessation of, relevant income earning activities further focuses on tracing the application of the borrowed monies, i.e., "the use to which the borrowed funds were put".

Paragraph 6 states: the deductibility of interest is typically determined through the examination of the purpose of the borrowing and the use to which the borrowed funds are put (Fletcher & Ors v. FC of T 91 ATC 4950; (1991) 22 ATR 613, FC of T v. Energy Resources of Australia Limited 96 ATC 4536; (1996) 33 ATR 52, and Steele v. FC of T 99 ATC 4242; (1999) 41 ATR 139 (Steele)).

Paragraph 7 states that: Ordinarily '...the purpose of the borrowing will be ascertained from the use to which the borrowed funds were put...' (Hill J in Kidston Goldmines Limited v. FC of T 91 ATC 4538 at 4545; (1991) 22 ATR 168 at 176). However, as his Honour later observed in FC of T v. JD Roberts; FC of T v. Smith 92 ATC 4380 at 4388; (1992) 23 ATR 494 at 504, '...a rigid tracing of funds will not always be necessary or appropriate...'.

In your case, after the settlement on XX/XX/20XX, an amount of $XX portfolio loan was extinguished, and a $XX loan was created. Functionally, there was a 'purpose' of the taxpayer to refinance their portfolio loan by replacing the creditor with a new lender. The amounts of $XXX were equivalent for the two loans. Had it not been for the requirements of the payment process under XX simultaneous settlement steps the borrowing would have been directly refinanced. It is reasonable to conclude that this is a situation where "a rigid tracing of funds will not always be necessary or appropriate..." and that an examination of the 'purpose' of the borrowing is 'appropriate'.

Therefore, you are entitled to a deduction on interest expense incurred on the loan under section 8-1 of the ITAA 1997.

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