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Edited version of private ruling
Authorisation Number: 1011737083589
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Ruling
Subject: Interest expense
Question
Are you entitled to a deduction for interest on a loan to purchase an investment property for a company?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2011
Year ended 30 June 2012
The scheme commenced on
1 July 2010
Relevant facts
You are directors and shareholders of a company.
You intend to purchase an investment property and register it in the name of the company.
To finance the purchase, you as individuals, will draw down on your personal line of credit and also take out a new loan for the balance.
The company is not required to make any repayments to you of principal or interest in respect to these loans.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 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, relate to the earning of exempt income, or are prevented from being deductible by a provision of the income tax legislation.
An outgoing is considered to be incurred in gaining or producing assessable income if there is a sufficient connection between the outgoing and the activities which produce or are expected to produce assessable income (Ronpibon Tin NL v. FC of T (1949) 78 CLR 47). The essential character of an outgoing is generally determined objectively. As a general rule, an outgoing will not be deductible unless it is incurred in gaining or producing the assessable income of the taxpayer who incurs it.
In your case, you will incur interest expenses on a property owned by the company. It is considered you will incur the expenses in order to produce the assessable income of the company rather than your own salary and wages. Even though you may derive dividend income from the company, there is not sufficient or direct connection between the expense and your assessable income. Accordingly, you are not entitled to a deduction for these expenses.