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Edited version of private advice
Authorisation Number: 1012630761434
Ruling
Subject: Expenses - investment
Question
Are you entitled to a deduction for interest incurred in connection with the additional units you purchased in a unit trust?
Answer
No.
This ruling applies for the following periods:
1 July 2013 to 30 June 2014
1 July 2014 to 30 June 2015
1 July 2015 to 30 June 2016
The scheme commences on:
1 July 2013.
Relevant facts and circumstances
You took out an interest only bank loan in conjunction with some relatives. The proceeds of this loan were used to acquire additional units in a unit trust. The only other person who holds units in this unit trust is a relative. The trust was originally established in a few years ago. The trustee of the unit trust was a company. You are a director of this company (along with some relatives). Any profits and capital gains of the trust are distributed according to each individual's unit holdings.
The unit trust purchased a property with the proceeds of the sale. The unit trust has no other property or investments. There are no short terms plans to acquire any other property or investments.
This property is rented to you at a market rate, and you have lived in the property from the settlement date. It is expected that you will live in this property for a few years.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Reasons for decision
Under section 8-1 of Income Tax Assessment Act 1997 (ITAA 1997), interest on a loan is generally deductible if there is a sufficient connection between the expense and the gaining or producing of assessable income. This is the case provided that the expenditure is not of a capital, private or domestic nature. The essential character of interest is a question of fact to be determined by reference to all the circumstances.
In your case, the interest incurred in connection with the additional units you purchased in the unit trust has a sufficient connection with earning of assessable income (that is, distributions from the unit trust).
However, as the property that the unit trust derives its income from is rented to you as your private residence, it is considered that this makes the nature of the interest expenditure private and domestic in nature.
Accordingly, your interest expense on the loan taken out to purchase additional units in the unit trust is not allowable as a deduction under section 8-1 of the ITAA 1997.