Edited version of your written advice

Authorisation Number: 1012688781000

Ruling

Subject: Interest Expenses

Question 1

Will the interest expenses on a loan taken out to start and support your business be deductible?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 2003

The scheme commences on:

1 July 2002

Relevant facts and circumstances

You operated a business which had an overdraft facility, but this was insufficient to requirements when you had a high caseload. As the business grew you transferred funds from your portfolio loan account originally set up to fund the business on an as needed basis to support cash flow needs.

In effect you were providing a line of credit for your business. Deposits from this account showed up as shareholders loan in the business records. However the interest paid on the Portfolio Loan account was paid by you directly and was not shown on the business tax returns.

You were a sole trader when you originally obtained the portfolio loan to start the business. Once the business was operated by a company you used the loan account as a line of credit to support the company. You were the sole shareholder and director of the company.

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 or relate to the earning of exempt income.

Taxation Ruling TR 95/25 discusses deductions for interest under section 8-1 of the ITAA 1997. Whether a loss or outgoing satisfies the requirements of section 8-1 of the ITAA 1997 depends on all the facts and matters relating to the loss or outgoing.

Paragraph 3 of TR 95/25 includes the following general principles relevant to the deductibility of interest expenses:

• The interest expense must have a sufficient connection with the operations or activities which more directly gain or produce the taxpayer's assessable income and not be capital, private or domestic in nature, and

• The character of interest on money borrowed is generally ascertained by reference to the objective circumstances of the use to which the borrowed funds are put.

In AAT Case [2001] AATA 1249, Re Economedes and FCT 58 ART 1046, the AAT held that a taxpayer who borrowed money from a bank and on-lent it to a family company to purchase a takeaway food business was entitled to a deduction for the interest on the bank loan. This decision followed that in FCT v Total Holdings (Aust) Pty Ltd (1979) 9 ATR 885, where the funds were on-lent with the reasonable expectation of deriving income from the company in the form of dividends and interest. The claim arose in respect of interest payable to the bank after the business had failed and been wound up. In these cases, it was found that there was a sufficient nexus between the on-lending and the expectation of profit.

It is considered that your circumstances are on point with the above cases and there is sufficient nexus between the purpose of borrowing which in this instance was supporting your business and the earning of assessable income in the form of dividends. Consequently the interest expenses will be deductible under section 8-1 of the Income Tax Assessment Act 1997.