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Edited version of private advice
Authorisation Number: 1012630073233
Ruling
Subject: Interest expense
Question
Is entity A entitled to a deduction for the reimbursed interest expenses paid to a related entity?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2013
The scheme commenced on
1 July 2012
Relevant facts
A related entity purchased supplies on behalf of entity A.
The supplies are used by entity A for income producing purposes.
The related entity used their personal credit card to purchase the supplies.
Interest was charged on the credit card.
Entity A will reimburse the related entity for the cost of the original supplies as well as the portion of the credit card interest that related to the purchases.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Section 8-1.
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (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.
Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith provides the Commissioner's view regarding the deductibility of interest expenses. As outlined in TR 95/25, there must be a sufficient connection between the interest expense and the activities which produce assessable income. TR 95/25 specifies that to determine whether the associated interest expenses are deductible, it is necessary to examine the purpose of the borrowing and the use to which the borrowed funds are put.
Where entity A is dealing with a related entity, the essential question is whether the arrangements are consistent with normal commercial practices.
In this case the related entity purchased supplies on behalf of entity A. Entity A subsequently reimbursed the related entity for the amount of the supplies and the associated interest incurred. Interest expenses incurred in relation to purchasing supplies used for income producing purposes is generally an allowable deduction. It is considered that entity A is dealing at arm's length and the arrangement is commercially realistic.
Therefore, as the interest relates to entity A's supplies which are used for income producing purposes, the associated interest expense is an allowable deduction. The fact that entity A is reimbursing a related entity in relation to the cost of the supplies and the associated interest expense does not change the deductibility of the expense in these specific circumstances. The interest expense paid is incurred and is an allowable deduction under section 8-1 of the ITAA 1997.