Edited version of private advice

Authorisation Number: 1052236393829

Date of advice: 28 March 2024

Ruling

Subject: Interest deductions on loan used in business

Question

Is the interest paid on a loan used in carrying on the business of share trading deductible in accordance with section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

The interest is deductible for your share trading business to the extent that the loss or outgoing was necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

Paragraph 23 of Taxation Ruling TR 2000/2 Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities advises where the original borrowing is for non-income producing purposes and the taxpayer uses the redrawn funds wholly or partly for income producing purposes, that part of the accrued interest attributable to the redrawn funds used for income producing purposes is deductible.

A deduction is not allowed where interest accrues on a loan and the funds have not been used for an income producing purpose. Once the loaned funds are shifted to an income producing activity, a deduction on the interest is allowed.

This ruling applies for the following periods:

Year ended 30 June 20YY

Year ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

You live at a property and have a loan for the land purchase and the construction of the dwelling.

As a result of increased value in the equity in your residential property in the 20XX-XX financial year you took the opportunity to secure a loan drawdown against the increase in equity in your property, before property values cooled down again.

You advised this method of obtaining a loan is generally the cheapest form of financing. This drawdown was promptly secured by you in readiness to invest in trading activities.

The refinancing created a third loan for you - the drawdown of equity in the property.

The loan is secured by your residential property.

You advised the purpose of the loan drawdown was intended to invest in a trading activity that generates assessable income.

The loan facility consists of a loan account and an offset account, whereby the entirety of the loan was drawdown into the offset account.

Upon drawdown, the funds were simultaneously parked into a 100% offset account, until ready to be deployed in a trading activity.

Given the loan was an interest-only term, no principal or interest was paid on the loan as it was 100% offset with the drawdown funds being parked in the offset account.

In the 20YY-YY financial year, the trading activity was sufficiently progressed and a majority of the funds were deployed into the trading activity at one go.

A significant portion from the loan was used to finance the trading activity through the offset account for generating assessable income. This was transferred to your portfolio through your linked Investment Account. You purchased shares on the same day.

Interest expenses have been accrued on loan funds that were used for funding the trading activity.

The first time the loan funds ever compounded interest was upon the funds being moved from the 100% offset account into the trading activity.

Given the funds exiting the offset account would trigger interest repayments, a small portion was left in the offset account to cover the interest repayments and are set up to be debited by the bank directly from this account.

To avoid any failed loan repayments the account has to have sufficient funds for direct debit.

Hence of the loan, $X was directly invested in the trading activity, and $X kept for the loan's own repayments that are triggered.

You advised the funds were never intended to be used, nor were used, for any activity other than the trading activity.

Supporting documents relating to the loan, the interest and the trading activity were provided.

From your Home Loan Account statement, you showed the $X being lent to you on a particular date.

You provided a transaction listing from your Offset Account statement showing the transfer in of $X on a particular date.

You provided a statement showing transactions and the loan amount still in your Home Loan Account.

As per your Offset Account you transferred $X on a particular date to another account within your financial institution and as per your Home Loan Account statement, started being charged interest from a particular date.

You subsequently received a private ruling stating that you were considered to be carrying on a share trading business. This was applicable for multiple years.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1