| Disclaimer This edited version will be removed from the Database after 30 September 2025. If you believe the issues detailed in this edited version warrant retention in an alternative form, email publicguidance@ato.gov.au This edited version has been archived due to the length of time since original publication.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. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of private ruling
Authorisation Number: 1011474615921
This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.
Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.
Ruling
Subject: Interest deductions
Question
Is the Trust entitled to claim a deduction for interest incurred on funds borrowed for the purpose of investing in income producing assets?
Answer
Yes.
This ruling applies for the following periods:
30 June 2010
30 June 2011
30 June 2012
30 June 2013
30 June 2014
Relevant facts
The trustee has loaned the Trust funds for the purposes of acquiring income producing assets.
The assets include commercial property, shares and investments in independent businesses.
The funds will be loaned at residential rates and have been borrowed from the trustee. The trustee has borrowed money from a financial institution and has on-lent the funds to the Trust. The Trust pays the trustee, on a monthly basis, a principle and interest component.
All funds loaned to the Trust are recorded in the trust accounts as liabilities. The loans are recorded in the Trust's minutes. The minutes also state that the loan must be repaid.
The trustee has already loaned funds interest free to the Trust. The trustee requires some of these funds to be returned.
In order for the Trust to return these funds, it must obtain a loan to replace the funds, which are currently invested in commercial property and shares.
The Trust has decided to borrow from the trustee as the loan establishment and maintenance costs, and interest rate were lower than if the Trust were to borrow the funds.
The Trust now wishes to claim interest deductions for interest it pays to the trustee.
The Trust is paying the same interest rate as trustee is paying to the financial institution.
Relevant legislative provisions
Section 8-1 of the Income Tax Assessment Act 1997
Section 25-25 of the Income Tax Assessment Act 1997
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, or relate to the earning of exempt income or a provision of the taxation legislation excludes it.
The deductibility of interest on borrowed funds is determined by the use of the borrowed money. If the money is used to buy income producing assets, then the interest expense is an allowable deduction.
In the present situation, the Trust will be using the borrowed funds to invest in income producing assets. There is a nexus between the interest expenses and the possible returns from these investments.
However the borrowed funds were not sourced from a conventional lender, such as a bank, but from a private loan from the Trustee. It must be examined whether the funds have actually incurred this interest, or are simply the result of a private arrangement.
The federal court examined this issue in Ure v. Federal Commissioner of Taxation (1981) 34 ALR 237. In this case a taxpayer obtained a loan from a bank at commercial rates up to 12.5% and on-lent the funds to their spouse at a discounted rate of 1%.
The taxpayer returned the discounted interest they received as income and claimed the higher amount of interest they incurred as a deduction, resulting in a large loss situation.
The court found two reasons why the taxpayer on-lent the funds to their spouse. Firstly the taxpayer's object was predominantly private in nature as they wished to provide financial benefits to their spouse. Secondly, there was an objection to produce of income. The court apportioned the expenses between these purposes and allowed a deduction for up to only the amount of interest received as income.
In the present situation, the trustee has provided the Trust with funds the trustee obtained by borrowing from a financial institution. The Trust is paying interest to the trustee at the same rates the trustee is paying interest to the financial institution. The Trust must also repay the principal of the amount on-lent.
It is accepted that the arrangement has been made on commercial terms and is not a private arrangement. Consequently, the Trust is entitled to a deduction for interest incurred on the funds borrowed from the trustee.
On an additional note, the Trust may also be entitled to a deduction for borrowing costs under section 25-25 of the ITAA 1997. If so, these deductions may have to be apportioned over a 5 year period.