Edited version of private advice

Authorisation Number: 1051957703457

Date of advice: 4 March 2022

Ruling

Subject: General deduction - mortgagee in possession

Question 1

Can you claim a tax deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for $X that was lent to the borrower to refinance and pay for the property development costs for the specified?

Answer

No.

Question 2

Can you claim a tax deduction under section 8-1 of the ITAA 1997 for $X that was used by the borrower for the property development related costs for the specified period?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

XX July 20XX

Relevant facts and circumstances

You are an Australian non-resident for tax purposes.

You registered for an ABN on a specified date. The ABN was backdated to a specified date at the time of application.

You registered for GST on a specified date effective from a specified date.

You have lodged Business Activity Statements commencing the quarter ending 31 December 20XX.

You ('lender') initially agreed to lend the borrower a specified amount for the purpose of a specified project only, unless another purpose is approved by the lender. The loan was documented through a loan agreement at a specified date.

The borrower entered into a contract with a supplier to complete the project.

A request for a loan for additional funds was requested by the borrower with the loan agreement being entered into on a specified date. The borrowed amount was a draw down loan with a portion of the loan being drawn from the total amount financed.

When second loan was agreed to a tripartite deed was entered into with the lender, borrower and the supplier. The deed gave the lender step-in rights to the project.

The borrower failed to repay the lender's loan amount by the due date.

The lender paid the builder and all project associated costs of a specified amount for the specified period. The invoices for this period were issued to the borrower.

The borrower failed to comply with the notice and on or around a specified date the lender exercised its powers as mortgagee of the property and look possession of the land.

On a specified date ASIC deregistered the borrower under section 601 of the Corporations Act 2001 and the lender was unable to appoint a receiver prior to this occurring.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Section 8-1 of the ITAA 1997 relates to general deductions and provides:

You can deduct from your assessable income any loss or outgoing to the extent that:

(a)  it is incurred in gaining or producing your assessable income; or

(b)  it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.

The courts have held that for there to be a deduction under section 8-1 there must be sufficient connection between the loss or outgoing and the production of assessable income. The loss or outgoing must be incidental and relevant to the earning of assessable income (Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236).

In your case the lending of funds does not equate to you incurring development expenditure. Furthermore, there is no nexus between the development costs and the assessable income you derived from your lending activities.

Conclusion

In your case, you did not incur the expenditure at a time you were carrying on a property development business and therefore the expenditure is not deductible by you under section 8-1 of the ITAA 1997.

The requirements of section 8-1 ensure that expenses are not claimed by multiple entities.