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Edited version of private advice
Authorisation Number: 1051550131226
Date of advice: 18 July 2019
Ruling
Subject: Deductions - interest
Question:
Will you be entitled to claim a deduction on the interest on the Proposed Loan under section 8-1 of the Income Tax Assessment Act 1997?
Answer
Yes
The Commissioner accepts that the interest expense will be incurred in the course of earning the interest income you will receive from Persons A and B in relation to the Proposed Loan in accordance with the application of the principles as outlined in Taxation Ruling TR 95/33 Income tax: subsection 51(1) - relevance of subjective purpose, motive or intention in determining the deductibility of losses and outgoings.
This ruling applies for the following periods:
Income year ending 30 June 20XX
Income year ending 30 June 20XX
Income year ending 30 June 20XX
Income year ending 30 June 20XX
Income year ending 30 June 20XX
Income year ending 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
The Trust is a fixed trust which was created by deed (the Deed) a number of years ago with a settlement sum of $XX. The Trust will continue to operate for a specified number of years, or any other date agreed by its unit holders. The unit holders are entitled to both income and capital subject to the Trust's expenses being paid.
The Deed outlines that the following units were issued:
· XX units - Person A; and
· XX units - Person B.
You were incorporated prior to the Trust being created and are the Trustee of the Trust. Person A is your director.
You entered into a contract to purchase the Property a number of years after you were incorporated, with settlement occurring after a number of months.
Just prior to settlement on the purchase of the Property occurring, Persons A and B obtained a loan from a banking institution for $XXX,XXX to fund the purchase of a further XXX,XXX units each, being the value of the purchase price of the Property and stamp duty. You were guarantor for the loan.
The following day a registered mortgage was secured over the Property, with a banking institution as the mortgagee and the Trustee as the mortgagor.
You used the funds from the sale of the units to fund the purchase of the Property.
You have used the Property to derive rental income and intend holding it long-term.
You make distributions to Persons A and B.
Persons A and B are of the view that the interest they are paying on their loan is relatively a high interest rate in comparison to interest rates offered by other lenders and that due to the change in the lending environment they consider that it would be difficult for them to refinance their current loan due to the Property being owned by you and not them.
To enable Persons A and B to save interest on their loan, and to allow a different lender to be used, it is proposed that:
· you will obtain a loan from a major bank or financial institution (the Proposed Loan);
· Persons A and B will provide personal guarantees for the loan;
· the security for the loan will be a first registered mortgage over the Property; and
· the funds borrowed by you will be lent to Persons A and B in accordance with a loan agreement (the Loan Agreement). The Loan Agreement will be unsecured with an interest rate equivalent to the rate that the Trustee pays to the bank or financial institution.
A Draft Loan Agreement (the Agreement) has been prepared between you as trustee of the Trust and Persons A and B which includes the following information:
|
Lender |
You |
|
Borrowers |
Tony and Patricia |
|
Recitals |
The Lender has agreed to lend the Borrowers, and you have agreed to borrow from the Lender, the single amount of $XXX (the Principal Sum) on the terms outlined in the Agreement.
The Agreement is intended to be legally binding on the parties. |
|
Default rate |
Means a rate of interest of X% per annum |
|
Loan |
The Lender agrees to advance to the Borrowers, and the Borrowers agree to borrow, the Principal Sum on 1 August 20XX, provided that the Lender will not be required to advance the Principal Sum to the Borrowers on that date unless either: · in the event of default has occurred; or · if any event of default has occurred, it has been remedied to the satisfaction of the Lender; and · no potential event of default exists. The Parties acknowledge and agree that the advance of the Principal Sum pursuant to the above constitutes a loan from the Lender to you on the terms of this agreement. |
|
Interest |
Interest will accrue on the outstanding principal, being the amount of the principal sum that is outstanding at that time, during the period commencing on the date the Agreement is entered into until the repayment date, being the date nine years after the date of the Agreement or another date as agreed by the parties. The interest rate will be the equivalent to the Standard Variable Rate as advertised for residential investment loans with an unspecified bank. The interest will: · accrue daily and be calculated on the basis of a 365 day year; and · be compounded on a monthly basis on the 15th day of each month. |
|
Debt is unsecured |
The Lender acknowledges and agrees that the obligations of the Borrowers under this agreement are unsecured. |
|
Use of funds |
The Borrowers may use the amounts advanced to them by the Lender under this agreement only for a permitted purpose. |
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1