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Edited version of private advice
Authorisation Number: 1051554251430
Date of advice: 1 August 2019
Ruling
Subject: Income tax - interest deductions
Question 1
Will the interest on the loan from Individual A and Individual B to the Trustee of the Trust be deductible in full for the trust under section 8-1 Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes. Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the ITAA 1997 following FC of T v Roberts; FC of T v Smith provides the Commissioner's view regarding the deductibility of interest expenses. As outlined in TR 95/25, there must be a sufficient connection between the interest expense and the activities which produce assessable income.
It is considered in this case there is a sufficient connection between the loan obtained from Individual A and Individual B and the income earning activity, being the rental property. It is considered that the trust has merely refinanced the loan on the rental property and accordingly the Trust can claim a deduction under section 8-1 of the ITAA 1997 for the interest expenses it incurs under the Second Agreement.
Question 2
Will the interest Individual A and Individual B incur on the bank loan be deductible under section 8-1 of the ITAA 1997?
Answer
Yes. Where a person lends money to a related entity or takes responsibility for their loan, a deduction for any interest or associated expense incurred will only be allowed where the arrangement is on a genuinely commercial basis. There must be a reasonable expectation that the person will receive a return.
In this case Individual A and Individual B will be receiving assessable income from the loan to the Trust, in the form of interest income. Therefore Individual A and Individual B are entitled to a deduction for the interest they incur on the bank loan.
This ruling applies for the following periods:
Financial year ending 30 June 2020
Financial year ending 30 June 2021
Financial year ending 30 June 2022
Financial year ending 30 June 2023
The scheme commences on:
4 July 2019
Relevant facts and circumstances
Taxpayers:
· Individual A
· Individual B
· The Trust
· The Company
Individual A and Individual B are directors of the company and are also major beneficiaries of the Trust.
The Company is the Trustee of the Trust and the Trust is a discretionary trust.
Individual A and Individual B have borrowed money from a bank using their private home as security for the loan (Bank Loan)
Individual A and Individual B used the funds of the Bank Loan and lent this amount to the company as trustee of the trust (Trust Loan).
On XX November 20XX Individual A and Individual B lent $XXX to the Trust under a loan agreement (First Agreement).
The First Agreement was varied on X of July 20XX and replaced by a subsequent lending agreement (Second Agreement).
The Trust used the funds obtained from Individual A and Individual B to repay an existing loan it held on a rental property. The existing loan had a higher interest rate then what is currently being paid by the Trust.
The purpose of the loan restructure was to obtain a lower interest rate.
The property the Trust owns is currently available for rent.
The second loan agreement dated X July 20XX has been considered as part of this ruling.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1