Private ruling: The deductibility of interest
Date of advice: 21 July 2016
Published: August 2016
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a deduction for the interest expenses incurred for a loan to purchase shares in a business? | A1: Yes


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

Reasons for decision: Summary: Interest is deductible under section 8-1 of the Income Tax Assessment Act 1997 (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. Taxation Ruling TR 95/25 considers the deductibility of interest. Whether interest 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. The interest will be deductible to the extent that the funds are used to produce assessable income. In your case, the loan of money was used to purchase a percentage of shares pursuant to a shareholders agreement with the shares being issued. Group Pty Ltd.'s accountant valued the company at $X. The money paid to Group Pty Ltd for the purchase of the percentage of shares consisted of the following investment: (a) a percentage of the ordinary shares being 100 shares (b) $xx xxx being an interest free loan The interest free loan to the Group Pty Ltd is being repaid at an amount each month. Group Pty Ltd.'s directors have agreed not to pay dividends until at least 1 July 2016 or the loan is repaid in full. As the money which you borrowed was used for income producing purposes, interest incurred on these funds is fully deductible.

Relevant facts: You are employed as a manager in a retail shop. This retail shop amalgamated with a number of other businesses to form Group Pty Ltd. | You were invited to purchase a percentage of shares of Group Pty Ltd for the amount of $xx xxx and your shares were issued. | You borrowed money on your home loan to purchase the shares.