| Disclaimer This edited version has been archived due to the length of time since original publication.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: 1011618177504
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 fac 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: Private Ruling - Loan interest deductibility
Question 1
Is the interest on the portion of the Consolidated Loan that was used to repay the Investment A component of your Investment Loan deductible in full under section 8-1 of the ITAA 1997 in the income years ruled upon?
Answer
Yes.
Question 2
Is the interest on the portion of the Consolidated Loan that was used to repay the Investment B component of your Investment Loan deductible in full under section 8-1 of the ITAA 1997 in the income years ruled upon?
Answer
No. The interest deduction needs to be apportioned.
Question 3
Is the interest on the portion of the Consolidated Loan that was used to repay the accrued interest and fees on your Investment Loan deductible in full under section 8-1 of the ITAA 1997 in the income years ruled upon?
Answer
No. The interest deduction needs to be apportioned.
This ruling applies for the following periods:
Income year ending 30 June 2010
Income year ending 30 June 2011
Income year ending 30 June 2012
The scheme commences on:
1 July 2008
Relevant facts and circumstances
On the particular date 2009 you took out a secured loan (the Consolidated Loan). The purpose of this loan was to consolidate various loans you had, including the Investment Loan
The Investment Loan was a loan you regularly drew upon for investment purposes. You drew from this loan to make repayments to another loan - a margin loan you used to invest in Investment B. You drew $X in total for this purpose. In the particular month 2008, Investment B was sold and the margin loan settled, and excess proceeds of $Y were forwarded to one of your everyday accounts. This amount did not go to repaying the Investment Loan.
You also drew a total of $Z from the Investment Loan to buy a business interest (Investment A). This investment remains ongoing.
You settled your Investment Loan using funds $E from the Consolidated Loan on the particular date 2009, which at the time comprised of:
$Z |
Money drawn to repay the margin loan holding Investment A |
$X |
Money drawn to invest in Investment B |
$D |
Unpaid interest and fees on the loan |
$E |
Total |
The Consolidated Loan has a contracted term of 30 years, however you endeavour to repay more than the minimum with a view to settle in about half that time. You also endeavour not to increase the loan in the near future.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1.
Does Part IVA apply to this ruling?
Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.
We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.
If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.
For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.
Reasons for decision
While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.
Question 1
Is the interest on the portion of the Consolidated Loan that was used to repay the Investment A component of your Investment Loan deductible in full under section 8-1 of the ITAA 1997 in the income years ruled upon?
Answer
Yes.
Detailed reasoning
Section 8-1 of the ITAA 1997 allows you to deduct an expense to the extent that it is incurred in producing assessable income, as long as it is not capital, private or domestic in nature. When dealing with loan interest paragraph 27 of Taxation Ruling TR 95/25 asks you to trace the 'use' to which the borrowed funds have been put and if the loan has multiple uses, apportion the loan to those respective uses. Paragraph 42 of TR 95/25 explains that if a new loan is taken out to repay an existing loan, interest on the new loan will be deductible if interest on the existing loan is deductible at the time of taking.
$Z of the Investment Loan had been used to acquire a business interest in Investment A. Loans for business activities have a deductible purpose under section 8-1 of the ITAA 1997, therefore the Consolidated Loan, to the extent it was used to repay $Z of the Investment Loan, will have a deductible purpose per paragraph 42 of TR 95/25.
Question 2
Is the interest on the portion of the Consolidated Loan that was used to repay the Investment B component of your Investment Loan deductible in full under section 8-1 of the ITAA 1997 in the income years ruled upon?
Answer
No. The interest deduction needs to be apportioned.
Detailed reasoning
$X of the Investment Loan had been used to make repayments to the margin loan which held your Investment B, which by the particular date 2009 had been sold. Paragraph 10 of Taxation Ruling TR 2004/4 shows that a loan to fund an income-producing use can still have a deductible purpose even after that use has ceased, provided that the loan remains on foot solely as a legacy of that old use. For this, the Commissioner considers it vital that you repay as much of the loan as possible using the proceeds from cessation (i.e. sale of your investment) pursuant to paragraph 50 of TR 2004/4.
In your case you had two loans financing the investment rather than one, but the principle applies in much the same way. The crucial aspect is that the sales proceeds are used as much as possible to repay any debt that financed the investment.
When your investment was redeemed in the particular month 2008 you applied the proceeds to settle the margin loan, but there were additional proceeds of $Y, that were not applied to the Investment Loan. This amount was not used for any deductible purpose, but rather deposited into one of your everyday bank accounts for private use.
In effect $Y of that $X loan had been diverted for other advantages, and it was no longer the case that this portion of liability was a legacy of that old use. Nor was it the case that it went toward a new use that could be considered deductible (paragraph 50 of TR 2004/4).
The Consolidated Loan, to the extent it was used to repay a particular amount of the Investment Loan, will have a deductible purpose per paragraph 42 of TR 92/25.
For loan interest in respect of an old use to remain deductible, the loan must maintain its connection to that old use. That connection could be severed where the loan begins to yield commercial advantages that are unrelated to that old use (paragraph 13 of TR 2004/4). Having regard to your bona-fide efforts to repay the Consolidated Loan quickly, the Commissioner considers that integrating non-deductible elements as you have done will not give you such a material advantage
Question 3
Is the interest on the portion of the Consolidated Loan that was used to repay the accrued interest and fees on your Investment Loan deductible in full under section 8-1 of the ITAA 1997 in the income years ruled upon?
Answer
No. The interest deduction needs to be apportioned.
Detailed reasoning
$D represents accrued interest and fees on the Investment Loan as at the time you closed it. Because a small portion of the Investment Loan lacked a deductible purpose, some of this amount will represent interest and fees that are not deductible. You will need to determine, on a reasonable basis, what part of this amount relates to a deductible purpose. The Consolidated Loan, to the extent it was used to pay the deductible accrued fees and interest of the Investment Loan, will have a deductible purpose per paragraph 42 of TR 92/25.