Edited version of private ruling

Authorisation Number: 1011696727384

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Ruling

Subject: Deductibility of interest expense

Question:

Are you entitled to a deduction for the interest expenses you incur on your Line of Credit (LOC), which is secured by your primary residence, to the extent that the funds are used in the course of generating assessable income?

Answer: Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You and your spouse both work in individual medical practices as sole traders.

You have a home loan which you used to purchase your primary residence. Also since September 2010 you put into place a LOC under both your names with the same financial institution. This is secured by a mortgage over your primary residence.

Both loans have separate terms and conditions and are not linked in any way, other than sharing the same security.

You and your spouse have entered into an agreement with an administration support company, to provide administrative and support services for each of your medical practices. This also includes clerical services and provision of facilities, supplies and equipment.

Each doctor in the practice is invoiced a monthly sessional fee. The funds from the LOC are only used to pay the sessional fees for you and your spouse.

The line of credit has the following features:

· the loan is a line of credit with a particular limit

· the interest rate is standard rate for this facility

· the loan is an on call facility, and

· the minimum monthly repayment is interest only.

There will be no private use of the line of credit.

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 any loss or outgoing that is incurred in gaining or producing assessable income to the extent that it is not of a private, capital or domestic nature.

The deductibility of an outgoing is determined by its essential character (Lunney & Hayley v. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 AITR 166).

The character of interest is determined by the purpose of the borrowing. Generally, the purpose of a borrowing can be determined from the use of borrowed funds and outgoings of interest ordinarily draw their character from that use (Fletcher & Ors v. Federal Commissioner of Taxation (1991) 173 CLR 1; 91 ATC 4950; (1991) 22 ATR 613, Kidston Goldmines Limited v. Federal Commissioner of Taxation (1991) 30 FCR 77; 91 ATC 4538; (1991) 22 ATR 168).

It is therefore generally accepted that ordinary interest incurred on funds borrowed in the course of generating assessable income is deductible.

In your case, you have used borrowed funds to pay for services associated with your income earning activities. As such, the interest on your LOC is considered an allowable deduction under section 8-1 of the ITAA 1997.