ATO Interpretative Decision
ATO ID 2009/71 (Withdrawn)
Income Tax
Deductions: interest expense on a loan to acquire optionsFOI status: may be released
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This ATO ID is withdrawn. Guidance relating to the issue addressed in the ATO ID can be found in TR 2004/4 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities.This document has changed over time. View its history.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is interest incurred by a taxpayer on a loan used to purchase options to acquire shares, deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. Interest incurred on a loan used to purchase options is not deductible under section 8-1 of the ITAA 1997.
Facts
The taxpayer enters into a loan arrangement to purchase options to acquire shares in their employer.
The options acquired under the arrangement are acquired at market value (as calculated under Subdivision F of Division 13A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936)).
The taxpayer is not carrying on an enterprise of share trading and holds the options on capital account.
The taxpayer has no entitlement to actual dividends or a dividend equivalent, arising from holding the options.
Reasons for Decision
Interest is deductible under section 8-1 of the ITAA 1997 to the extent that it is incurred in gaining or producing assessable income or in carrying on a business for that purpose, except to the extent that the expense is of a capital, private or domestic nature, or incurred in gaining or producing exempt income or non-assessable non-exempt income.
Whether an interest expense has been incurred in the course of producing assessable income generally depends on the use to which the borrowed funds have been put. The 'use' test, established in Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion.
In that regard, Taxation Ruling IT 2606 in paragraph 9, states that:
...interest on money borrowed to acquire shares will be deductible under the first limb of subsection 51(1) where it is expected that dividends or other assessable income will be derived from the investment.
Unlike shares, the options acquired by the taxpayer have no entitlement to dividends and whilst the taxpayer may in the future, exercise the options and acquire shares from which they may expect to receive dividends, the taxpayer will not otherwise derive assessable income from holding the options.
In relation to the disposal of options by the taxpayer, assessable income may also include a net capital gain under section 102-5 of the ITAA 1997. Where interest is incurred on a loan to acquire such options, section 51AAA of the ITAA 1936 ensures that the interest is not deductible under section 8-1 of the ITAA 1997 (formerly subsection 51(1) of the ITAA 1936) by reason of the inclusion in assessable income of the capital gain on disposal of the options.
The Commissioner does not consider that the principles established in the decisions in FC of T v. Total Holdings (Australia) Pty. Limited 79 ATC 4279; (1979) 9 ATR 885; and Steele v. Federal Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139 apply to these circumstances because the interest expenditure is considered to be both preliminary to and remote from any possible derivation of assessable income once an option has been converted to a share. The interest expense also lacks the necessary connection to an income producing purpose.
Therefore, as the requirements of section 8-1 of the ITAA 1997 are not satisfied, the taxpayer is not entitled to a deduction for an interest expense incurred in relation to a loan to acquire options to acquire shares.
Date of decision: 16 July 2009Year of income: Year ended 30 June 2002
Legislative References:
Income Tax Assessment Act 1936
section 51AAA
Subdivision F of Division 13A of Part III
section 8-1
section 102-5
Case References:
Federal Commissioner of Taxation v Munro
(1926) 38 CLR 153
79 ATC 4279
(1979) 9 ATR 885 Steele v Federal Commissioner of Taxation
(1999) 197 CLR 459
99 ATC 4242
(1999) 41 ATR 139
Related Public Rulings (including Determinations)
Taxation Ruling IT 2606
Keywords
Deductions & expenses
Interest expenses
Securities ownership & interests
ISSN: 1445-2782
| Date: | Version: | |
| 16 July 2009 | Original statement | |
| You are here | 31 March 2017 | Archived |