Private ruling: : Income tax - d eductibility of interest
Date of advice: 29 April 2026
Published: 3 August 2026
Ruling period: Income year ended 30 June 2025

Ruling: Q1: Is the Partnership entitled to claim a deduction for interest incurred on funds on-lent to related entities under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Is the payment of $X made by the Partnership under the Swap Transaction with a bank wholly deductible under section 8-1 of the ITAA 1997 at the time it was incurred (in the 2025 income year)? | A2: Yes

Relevant facts and circumstances: (1) The Partnership owns rental properties. The rental properties are leased to third parties from which the Partnership derives rental income at market rates. (2) The Partnership has interest-only loan facilities over those properties. Some of the funds drawn down under those loan facilities have been on-lent by the Partnership to related entities and applied by those entities to fund the acquisition of income-producing commercial properties. (3) The primary reason for consolidating debt within the Partnership (rather than taking on debt at the entity level) is that the Partnership's significant assets are more readily available to the bank as security, thus lowering the bank's risk and the amount of interest payable by the group as a whole. (4) None of the funds drawn down by the Partnership from these loan facilities have been applied by the Partnership or its related entities for private purposes. (5) The rate of interest the Partnership has paid the relevant bank on the funds drawn down from its loan facilities to on-lend to its related entities has varied. On each occasion that the Partnership has on-lent funds to its related entities the interest it has been charged by the banks has been on-charged to those entities at the same rate. (6) All interest received by the Partnership from its related entities during the 2025 income year in respect of the on-lent funds will be returned as assessable income of the Partnership for the year. (7) As at June 2025, the balance of the Partnership's loan facility with the Z Bank was $X and interest was accruing on that loan at a rate of 5.407%. (8) On X June 2025, that loan facility was rolled into a Swap Transaction between the Partnership and Z Bank. The Confirmation issued by Z Bank to the Partnership: • provided that the definition and provisions contained in the 2002 ISDA Definitions (as published by the International Swaps and Derivatives Association, Inc.) are incorporated into the Confirmation; • provided that the Confirmation supplements, forms part of, and is subject to, the ISDA Master Agreement dated X April 2018 between the parties; and • set out the terms of the Swap Transaction to which the Confirmation relates, including as follows: Notional Amount: AUD X Trade Date: X June 2025 Effective Date: X June 2025 Termination Date: X June 2026 Fixed Amounts Fixed Rate Payer: Partnership Fixed Rate Payer Payment Date: X June 2025 Fixed Payment Amount: AUD X (1) In essence, pursuant to the terms of the Swap Transaction the Partnership agreed to pay Z Bank an upfront lump sum of $X on X June 2025 in order to secure a reduced rate of interest on offer. (2) The Partnership made the payment of $X to Z Bank on X June 2025 as required. (3) The Partnership is using the Swap Transaction as a hedge to limit its exposure to interest rate fluctuations on its underlying loan with Z Bank, and the Swap Transaction constitutes a "bona fide swap" for the purposes of Taxation Ruling IT 2682 [1] .

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1936 section 82KZM Further issues for you to consider | This private ruling is confined to the questions addressed in the ruling and does not provide any certainty regarding the assessability of any swap receipts derived by the Partnership under the Swap Transaction. | IT 2682 provides relevant guidance regarding the allocation of income derived under interest rate swaps. | You may apply for another private ruling on this or any other matter.

Reasons for decision: Summary: The Partnership is entitled to claim a deduction for interest incurred on funds on-lent to related entities under section 8-1. | Detailed Reasoning - Detailed reasoning: Section 8-1 allows a deduction for 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. A number of significant court decisions have determined that for an expense to be an allowable deduction: • it must have the essential character of an outgoing incurred in gaining assessable income ( Lunney v. FC of T (1958) 100 CLR 478); • there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income ( Ronpibon Tin NL v. FC of T (1949) 78 CLR 47); and • it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income ( Charles Moore Co (WA) Pty Ltd v. FC of T (1956) 95 CLR 344; FC of T v. Hatchett , 71 ATC 4184). Similarly, to be deductible under section 8-1 an interest expense must have a sufficient connection with the operations or activities which more directly gain or produce the taxpayer's assessable income. The character of interest on money borrowed is generally ascertained by reference to the objective circumstances of the use to which the borrowed funds are put by the borrower ( Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, (1926) 32 ALR 339). However, regard must be had to all the circumstances, including the character of the taxpayer's undertaking or business, the objective purpose of the borrowing, and the nature of the transaction or series of transactions of which the borrowing of funds is an element. In some cases (i.e. where the interest expense produces no assessable income or the amount of assessable income is less than the amount of the expense), the taxpayer's subjective purpose, motive or intention in making the expense may be relevant in deciding the deductibility of interest. Given: • interest was charged by the Partnership on the funds on-lent by it to its related entities; • the interest rate charged by the Partnership on such funds and the amount of interest paid to the Partnership on such funds was at least equal to the interest rate charged on the funds lent to the Partnership and the amount of interest paid by the Partnership on those funds; and • all of the interest received by the Partnership during the 2025 income year on those on-lent funds will be recognised as ordinary income and assessable to the Partnership for the year, the interest incurred by the Partnership on the funds it on-lent to its related entities is sufficiently connected to activities which directly gain or produce the partnership's assessable income for the year. The interest incurred by the Partnership on the funds it on-lent to its related entities is also not private, domestic or capital in nature. So much of the total interest the Partnership incurred during the 2025 income year as equalled the amount of interest it was entitled to receive on the re-lending of the money is therefore deductible under section 8-1. | Summary: The payment of $X made by the Partnership on X June 2025 under the Swap Transaction with Z Bank is wholly deductible under section 8-1 in the 2025 income year. | Detailed Reasoning - Detailed reasoning: Broadly, an interest rate swap is an agreement between 2 parties to exchange 2 different cash flows over time in respect of a notional principal amount. The practical effect of entering into an interest rate swap transaction is to substitute liability for an interest rate regime with a regime of swap payments. The rights and obligations of parties to swaps do not depend upon the existence of an underlying loan. Therefore, while swap payments are calculated with reference to interest obligations, the swap payments themselves are not interest payments nor are they in the nature of interest. Paragraph 6 of IT 2682 confirms that where an accelerated payment (i.e. a payment in advance) is made under both the ISDA Agreement and a bona fide swap, the entire payment is incurred and deductible at the time of payment. In addition, the prepayment rules under section 82KZM of the Income Tax Assessment Act 1936 which spread deductions over the period of the contract do not apply to swap payments in advance. It follows that the Partnership's accelerated payment of $X to Z Bank under the Swap Transaction is deemed to be incurred and deductible under section 8-1 at the time of payment, on X June 2025. [1] Income tax: payments made under interest rate swap contracts: timing of income and deductions .