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Ruling
Subject: Borrowed funds
Question
Is the loan amount a deduction in the hands of the lender or assessable income in the hands of the borrower in the arrangement described?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2013
The scheme commenced on
1 July 2012
Relevant facts
A family member will loan funds sitting in their bank account to another family member and their spouse.
No interest will be paid on the funds.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Reasons for decision
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia.
Ordinary income is income according to ordinary concepts. Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business. The legislation does not provide a definition of 'ordinary income' therefore it is necessary to turn to case law.
Statutory income consists of those amounts that are specifically included in your assessable income by a provision of the taxation legislation.
In this case, the funds loaned to family members are not ordinary income and is not statutory income rather it is a principal amount of a loan. Therefore, the amount is not assessable income to the family members who receives the funds.
Section 8-1 of the 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.
In respect of the person loaning the funds to their family members, the loan funds are not expenses as the funds are considered to be capital and are therefore not deductible.
In this case, the arrangement is a private arrangement and there are no tax consequences for either the person loaning the funds or the person/s borrowing the funds.