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Edited version of private advice
Authorisation Number: 1012651795854
Ruling
Subject: The deductibility of interest incurred on joint loans
Question 1
Are you entitled to a deduction for 100% of the interest incurred on money borrowed jointly with your spouse, where the borrowed money is used to purchase premises to be used in your business?
Answer
Yes.
Question 2
Are you entitled to a deduction for 100% of the interest incurred on money borrowed jointly with your spouse, where the borrowed money is used to purchase assets for your business?
Answer
Yes.
Question 3
Are you entitled to a deduction for 100% of the interest incurred on money borrowed jointly with your spouse to fund working capital in your business?
Answer
Yes.
This ruling applies for the following periods
Year ended 30 June 2015
Year ended 30 June 2016
Year ended 30 June 2017
Year ended 30 June 2018
The scheme commences on
1 July 2013
Relevant facts and circumstances
You operate a business as a sole trader.
You currently lease your business premises from a related party on an arm's length basis.
You intend on purchasing the business premises on an arm's length basis.
To finance the purchase of the business premises you intend on borrowing from a financial institution.
The loan will be on standard commercial terms.
The loan will be in joint names with your spouse, and you will use your jointly owned family home as security for the loan.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Reasons for decision
You are entitled to a deduction for all losses and outgoings to the extent that they are incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature (section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)).
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 an income producing activity, the interest on the borrowing is considered to be incurred in the course of producing assessable income.
The security given for the borrowed money is not relevant in determining the deductibility of the interest (Taxation Determination TD 93/13).
Also, where money is borrowed jointly by a taxpayer and their spouse, and the borrowed money is used to purchase an income-producing property in the name of only one of those parties, it is the party who is the legal owner of the property that is entitled to claim a deduction for the interest incurred on the borrowed money (Taxation Ruling TR 93/32).
In your case you will incur interest on borrowings made jointly with your spouse that will be used to purchase premises to be used in your business. The premises will be purchased solely in your name. You will also incur interest on joint borrowings that will be used to purchase other assets used solely in the business, and to fund working capital.
The interest on these borrowings will be considered to be incurred for the purpose of gaining or producing your assessable income, and as such you will be entitled to a deduction for the interest incurred under section 8-1 of the ITAA 1997. The use of the family home as security for the borrowings, and the fact that the borrowings have been made jointly with your spouse, do not alter this conclusion.