Edited version of your private ruling

Authorisation Number: 1012036112100

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Ruling

Subject: Interest expenses

Questions

Are you entitled to a deduction for all the interest expenses incurred on the loan?

Answer: No

Have you obtained a tax benefit in connection with a scheme to which Part IVA of the ITAA 1936 (Part IVA) applies?

Answer: The Commissioner declines to make a ruling on this issue.

This ruling applies for the following period

Income year ending 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You obtained a borrowing held jointly with your spouse which you will use to fund the acquisition of an investment portfolio of managed investments.

The managed investments will be held in your name solely.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 Section 177F

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.

Interest deduction

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.

Whether interest 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, or relates to expenses of an income producing activity, the interest on this borrowing is considered to be incurred in the course of gaining or producing assessable income.

Compound (or capitalised) interest, as with ordinary interest, derives its character from the use of the original borrowings: Taxation Determination TD 2008/27.

Where two taxpayers borrow jointly, both taxpayers will have presently existing pecuniary liability to discharge interest on that borrowing once it accrues and is due and payable. Therefore, each of the borrowers will only incur their share of the interest expense, notwithstanding circumstances where one borrower may meet all repayments in respect of the borrowing: paragraph 6 of Taxation Ruling TR 97/7.

An informal agreement you may have with your spouse with respect to the making of repayments has no tax effect as it is considered an unenforceable domestic arrangement with no intention to create a legal relationship: Cohen v. Cohen (1929) 42 CLR 91.

Accordingly you are only entitled to a deduction for your share of the interest (including compound interest) you incur on the loan, notwithstanding circumstances where you meet the full amount of loan repayments.

Part IVA

The Commissioner may decline to make the ruling in certain situations, including circumstances where the making of the ruling would prejudice or unduly restrict the administration of a taxation law: subsection 359-35(2) of Schedule 1 to the TAA. This includes situations where the making of a ruling would have no effect: paragraph 39 of TR 2006/11.

Part IVA of the Income Tax Assessment Act 1936 (Part IVA) is a general anti-avoidance rule. Part IVA gives the Commissioner the discretion to cancel a 'tax benefit' (or part of a 'tax benefit') that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies.

In this instance, a tax benefit has not been obtained as the deduction sought is not allowed under section 8-1 of the ITAA 1997. Accordingly the Commissioner will not make a ruling on the application of Part IVA.

Income years

You have requested a ruling for the 2012 and future years of income. The Commissioner does not rule for extended periods due to the possibility of changes to tax law, changes to facts in relation to the arrangement and the risk that a subsequently public ruling may override a private ruling the Commissioner has issued. Therefore a ruling for the 2012 income year has been issued. You can request a further ruling after this time if you are still unsure about this issue.