Edited version of your private ruling

Authorisation Number: 1011946174599

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. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Capital loss on shares and interest expenses

Question 1

Are you entitled to a deduction for the interest incurred on your home loan, where you withdraw funds from your offsetting account to purchase shares?

Answer

No.

Question 2

Are you entitled to claim a capital loss on your shares where the company is currently under administration?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You purchased shares in a company.

To purchase the shares you withdrew an amount from your cheque account.

You have an offset arrangement in place whereby your cheque account offsets the interest incurred on your home loan account.

The company is now under administration but has not yet been would up.

You have not provided any evidence of the administrators making a declaration in respect of the likelihood of them making a final distribution.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Subsection 104-145(1)

Income Tax Assessment Act 1997 Subsection 104-145(2)

Income Tax Assessment Act 1997 Subsection 104-145(3)

Reasons for decision

Question 1

Summary

You are not entitled to a deduction for the interest incurred on your home loan, where you withdraw funds from your cheque account to purchase shares. This is because the purpose of the loan is private in nature.

Although you will increase the amount of interest payable on your loan by withdrawing from your cheque account, this does not change the nature of the interest. The interest expenses are not connected to an income-producing purpose.

Detailed reasoning

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 except where the outgoings are of a capital, private or domestic nature.

Whether interest on a borrowing has been incurred in the course of producing assessable income generally depends on the use to which the borrowed funds have been put. Where a borrowing is used to acquire an income producing asset, the interest on this borrowing is considered to be incurred in the course of producing assessable income: Taxation Ruling TR 95/25.

Taxation Ruling TR 93/6 examines 'interest offset arrangements' which are used to reduce the interest payable on a taxpayer's loan account. TR 93/6 provides that an acceptable loan account offset arrangement with dual accounts operates as follows:  

There are two accounts - a loan account and a deposit account. It is accepted that where the deposit account is a sub-account, it will be treated as a separate account

No interest is received on the deposit account

The interest on your loan can only be reduced to the extent of the amount of interest which would have been charged on the loan amount equal to the balance of your deposit account. For example, you have a loan of $250,000 and a credit balance in your deposit account of $50,000. You can only obtain a maximum reduction of interest as if the balance of your loan was $200,000 (reduced by the $50,000 balance of your deposit account).

A taxpayer with an acceptable loan account offset arrangement with dual accounts is entitled to claim a deduction for the full amount of interest incurred on the loan account whilst the loan is used wholly for income producing purposes.

This will remain the case even if funds are withdrawn from the deposit account and used for non-income producing purposes. Depositing funds into the deposit account will decrease the interest payable on the loan account but will not decrease the balance of the loan account. Withdrawing funds from the deposit account will increase the interest payable on the loan account but will not increase the balance of the loan account.

In your case

You currently have an offset arrangement in place. You have a home loan and a cheque account (the 'deposit account'), which reduces the amount of interest that you would otherwise be charged on your loan.

You have withdrawn funds from your cheque account to purchase shares. By doing so, the interest payable on the loan will increase as your deposit account has decreased.

Although the shares are for investment purposes, the interest incurred on your home loan is for private purposes. You are only entitled to a deduction for the interest expenses if the loan is used for income-producing purposes.

Therefore, even though you used funds from your cheque account to purchase shares, this has no connection to the interest that is incurred on your home loan. While you have used the funds to purchase shares, this does not change the inherently private nature of the interest incurred on your home loan.

For this reason, you are not entitled to a deduction for the interest expenses under section 8-1 of the ITAA 1997.

Question 2

Summary

You are entitled to claim the capital loss on your shares in the income year when either:

· the administrator makes a declaration that there is no likelihood that you will receive any further distribution AND you choose to realise the capital loss at that time, OR

· when a court orders that the company be dissolved (wound up).

Detailed reasoning

Section 102-20 of the ITAA 1997 provides that you make a capital gain or loss if, and only if, a capital gains tax (CGT) event happens. The gain or loss is made at the time of the CGT event.

In the event of the dissolution (winding up) of a company, a CGT event occurs when the company is wound up. While a company remains in administration or liquidation, the CGT event has not yet occurred and you are not able to make a capital loss or gain at that time.

However, in certain circumstances you can choose to realise a capital loss on worthless shares or financial instruments before the dissolution of a company. CGT event G3 occurs if a liquidator or administrator of a company declares in writing that they have reasonable grounds to believe that there is no likelihood that owners of loans to the company will receive any further distribution from the company in the course of its winding up (subsection 104-145(1) of the ITAA 1997).

If this declaration is made, the owners of these loans can choose to make a capital loss on their loans at the time of the declaration (subsections 104-145(2) and 104-145(3) of the ITAA 1997).

In your case

You purchased shares in a company that is now under administration.

However, the company has not yet been wound up and there is no evidence of the administrator declaring there is no likelihood that you will receive any further distribution. Accordingly you are not entitled to a capital loss in respect of your shares.