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Edited version of private ruling
Authorisation Number: 1011863160477
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Ruling
Subject: loan interest deduction
Question
Are you entitled to claim the interest under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) on the monies you borrowed?
Answer
No.
This ruling applies for the following periods
Year ended 30 June 2005
Year ended 30 June 2006
Year ended 30 June 2007
Year ended 30 June 2008
Year ended 30 June 2009
Year ended 30 June 2010
The scheme commenced on
1 July 2004
Relevant facts
You borrowed an amount of money and provided the money to a person who said they would invest it for you.
You were advised that the company where your money was to be invested was not registered with the Australian Securities and Investments Commission (ASIC).
You were charged amounts to set up the loan and to set up a company.
You did not receive any income from the activity. You did have a portion of your funds returned to you. You did get advised about where some of your money was placed.
The money and the person you gave the money to have disappeared. You have attempted to contact all involved, to have your money returned, by employing a private investigator but have had no success in locating any of them. You have reported the matter to ASIC who advised they would investigate.
Reasons for decision
Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income except to the extent they are losses or outgoings of capital or of a capital, private or domestic nature.
For a loss or outgoing to be deductible there must be a nexus between the loss or outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T (1949) 78 CLR 47; 8 ATD 431).
You took out a loan and gave the money to a person to place it with a company. You have not received any income from this activity with the money and the person disappearing.
The interest expenses in respect of the funds borrowed were not incurred in conducting a business and nor did you derive any income from this activity.
From the information you have provided, whilst you were provided with names of where your money was invested, it appears unlikely that any actual investment activities took place when you handed over your money and as such you would not have obtained any income producing assets when you provided the money. Therefore there could be no assessable income from the activity.
Consequently as there is no nexus between the interest expense and any assessable income the interest is not deductible.