Private ruling: Interest expense
Published: April 2013
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for interest expenses incurred on loan money used to release your property from the bank's encumbrance? | A1: No.

Relevant facts and circumstances: You applied for, and received a ruling stating that interest deductions were not available on money used to repay a company loan. The bank held security over your private residence with the only mortgage attached to it being the security mortgage for the business funds. Your business went into bankruptcy and was liquidated. The assets of the business were used to pay down the business overdraft which left a business loan. The bank created a low document loan in your name called a residential investment loan. This is the only loan remaining as it released the property from the bank encumbrance and paid down the business loan.

Relevant legislative provisions: Income Tax Assessment Act section 8-1.

Reasons for decision: Summary: Section 8-1 of the 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 essential character of the expense is a question of fact to be determined by reference to all the circumstances. Taxation Ruling TR 95/25 specifies that to determine whether the associated interest expenses are deductible, regard must be given to all the circumstances including the purpose of the borrowing and the use to which the borrowed funds are put. In your case the residential investment loan firstly paid down the company's loan which in turn disencumbered your property from the bank. The funds you borrowed were not used by you to produce assessable income. Therefore a deduction is not allowable.