Edited version of your written advice

Authorisation Number: 1012676528908

Ruling

Subject: Deduction - interest

Question

Are you eligible to treat your existing loan as an income producing loan and deduct the interest accrued, where the loan was repaid and redrawn for non-income producing purposes?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

The scheme commences on:

The scheme has commenced

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 borrowed loan funds to a self-managed super fund.

You repaid the loan, using private funds in order to reduce your interest expense.

You withdrew this amount for private purposes, under the impression you were withdrawing your personal funds that had been previously contributed to the loan.

Relevant legislative provisions

Income Tax Assessment Act 1997 (ITAA 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.

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 this borrowing is considered to be incurred in the course of producing assessable income.

Taxation Ruling TR 2000/2 examines the treatment and consequences of payments to loans in excess of the required amount and the subsequent redrawing of these funds.

It is considered that a repayment to a loan account in excess of the required amount is a permanent reduction to this debt. Repayments of an amount to a loan do not create a debt due to the borrower, but simply allows the borrower to then draw funds from the loan to an agreed limit.

These redrawn funds therefore constitute new lending and as such, the purpose or use of these drawings is relevant.

In accordance with TR 2000/2, interest is fully deductible where funds drawn down on an investment continue to be used exclusively for an income producing purpose. Paragraph 28 of TR 2000/2 discusses the deductibility of interest on a further borrowing of money under a redraw facility, which depends upon the use to which the redrawn funds are put. Where the original borrowing is for income producing purposes and the redrawn funds are wholly or partly used for non-income producing purposes, that part of the accrued interest attributable to the redrawn funds used for non-income producing purposes is not deductible.

In your situation, depositing personal funds in to your loan is considered a permanent reduction of the loan. The nature of the subsequent redraws you made are characterised by the use to which they are put. Since you withdrew these amounts for private, non-income producing purposes you are not entitled to a deduction for the portion of interest applicable to the redrawn amount.

Given the redraw was equivalent to the repayment and principle amount of the loan; interest accrued is now attributable to the redrawn funds used for non-income producing purposes and is no longer deductible under section 8-1 of the ITAA 1997.