Private ruling: Deductibility of interest expenses
Published: October 2012
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2011 | Year ended 30 June 2010
Date scheme commenced: 1 July 2009

Ruling: Question and answer | Can you claim a deduction for interest expenses relating to a loan made to a third party? | Yes.

Relevant facts and circumstances: You withdrew a sum of money from a redraw facility attached to your home loan to lend to a third party. You have incurred interest expenses in relation to this drawn down amount. A loan agreement between you and the third party was put in place whereby the third party agreed to pay interest per annum. To date, none of the principal sum has been repaid, and no interest payments have been made to you.

Relevant legislative provisions: Income tax Assessment Act 1997 Section 8-1.

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. The deductibility of interest on a further borrowing of money under a redraw facility depends upon the use to which the redrawn funds are put. 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. Similarly, where the original borrowing is for income producing purposes and the taxpayer uses the redrawn funds wholly or partly for non-income producing purposes that part of the accrued interest attributable to the redrawn funds used for non-income producing purposes is not deductible. In your case you took out a home loan which is non-income producing purposes, and later withdrew a sum of money which was for income producing purposes. The interest expenses you incurred on this withdrawn amount are therefore deductible because the sum of money was used for income-producing purposes, that is, to earn interest on the loan made to the third party. You must apportion the interest incurred on a reasonable basis between the non-deductible home loan amount, and the deductible income-producing amount, that is, the sum withdrawn.

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