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Edited version of private advice
Authorisation Number: 1051839319124
Date of advice: 7 June 2021
Ruling
Subject: Deductibility of interest on a loan on-lent to a family trust
Question 1
Is written documentation, such as a loan agreement, required to substantiate interest deductions?
Answer
Yes. For more information on interest deductions, please visit our website ato.gov.au and enter quick code "QC 19052" in the search area at the top of the page.
Question 2
Will the interest expense on the loan from individuals to the Trustee for the Trust be deductible for the Trust under section 8-1 of the Income Tax Assessment Act (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.
This ruling applies for the following periods:
Year ending 1 July 20XX
Year ending 1 July 20XX
Year ending 1 July 20XX
Year ending 1 July 20XX
Year ending 1 July 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
Person A is the Trustee of The Trust
Person A is a beneficiary of The Trust.
Person B is a beneficiary of The Trust.
Person A and Person B have borrowed an amount of money from a financial services company using their private home as security for the loan (Bank Loan 1)
Person A and Person B intend to loan the funds from Bank Loan 1 to The Trust under a proposed loan agreement.
Person A also has a loan on an investment property where a portion of it is unused (Bank Loan 2). Person A intends to loan the funds from Bank Loan 2 to The Trust under a proposed loan agreement.
Person A, as Trustee of The Trustee, will use the on-lent funds (being Bank Loan 1 and Bank Loan 2) to acquire shares which pay dividends.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1