Edited version of private advice

Authorisation Number: 1052161346581

Date of advice: 30 August 2023

Ruling

Subject: Business deductions - interest - related party

Question

Can you deduct interest paid to your related party on the loan borrowed for the purchase of the premises under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. The essential character of the interest payments made to the related party has a sufficient connection with your business of providing short term accommodation in which you gain or produce your assessable income. The interest expense is not of capital, private or domestic nature. Therefore, the interest payments made to your related party for the loan on the premises are deductible.

This ruling applies for the following periods:

Period ended 30 June 2023

Period ending 30 June 2024

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

You entered into a contract to purchase the premises and borrowed funds from the bank (bank loan), and an additional amount from your related party to finance the purchase of the premises.

The related party loan agreement included repayment terms including loan term and interest rate.

The related party loan is broken up as follows:

•         Part of the funds used as a contribution towards the purchase of the premises

•         Part of the funds used towards the initial purchase of some furniture for the premises

•         Balance of funds to be used as working capital in an offset account to purchase subsequent furniture, equipment, maintenance, running of the premises, website systems, food purchase, cooking services, cleaning services, Netflix subscriptions, internet, utilities, handyman services, and related home and content insurances.

The unused working capital that is stored in an offset account reduces any interest charged on the bank loan for the premises without having to paydown the bank loan and redraw funds.

You have paid interest to the related party for the loan to date.

You were previously issued with an Australian Taxation Office private binding ruling with the view that you are carrying on a business of providing short term accommodation.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidancerule for income tax'.