Private ruling: Deductibility of interest expenses and timing of deduction
Published: March 2014
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 1 July 200X

Ruling: Q1: Will the Commissioner allow you to claim a deduction for the total amount of interest for the relevant income years, which you are going to pay in the 20XX income year, in your 20xx income year tax return? | A1: No | Q2: Is the amount of interest incurred in relation to the loans taken out to enter into the managed investments, deductible each year for the relevant income years, under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 subsection 8-1(b) | Income Tax Assessment Act 1997 paragraph 35-10(1)(b)

Reasons for decision: Summary: The deductions for the interest expenses are allowable in the year they are incurred. The application of the non-commercial losses provisions should be considered in each of the years and for each of the projects. | Detailed Reasoning - Deductibility of interest: The Product Ruling indicates that the interest expense is deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) where the taxpayer has funded their participation in the Project through a loan on the terms described in the product ruling. Interest will also be deductible on loans that have been taken over by other financiers. Your loan was taken out on these terms through the promoter and has been refinanced through a Bank. It is a full recourse loan. Expenses can be claimed under section 8-1 of the ITAA 1997 in the year that they are incurred. For a liability to have been incurred, it is not necessary that a disbursement has actually been made. If, in the relevant year, the taxpayer is definitely committed, or has completely subjected itself, to the expenditure, it will be deductible. The amount of interest owing each year has been added to your loan account. You have a definite liability to pay a defined amount and the amount has been paid by adding it to your loan outstanding in that year. Similarly, for the other investment the Product Ruling indicates that interest on loans with the financier is deductible as incurred. You meet the requirements as set out in the product ruling. Therefore the interest amounts will be deductible in the years in which they are incurred. Note: For income years starting before 1 July 2005 all entities that elected to use the Simplified Tax System (STS) were required to use a unique cash accounting (the "STS accounting method") where expenses were accounted for on a cash/paid basis. This is not applicable to this case where the business commenced on 1 July 2008. | Detailed Reasoning - Non-commercial losses: For one investment the product ruling provides for the Commissioner's lead time discretion to be exercised for the years ending 30 June 20XX to 30 June 20XX, where the grower incurs taxation losses for the income year and is carrying on a business within the terms of the product ruling. Losses incurred from this activity could be offset against other income in the years ending 30 June 20XX to 30 June 20XX. In the other investment, the product ruling provides for the Commissioner's lead time discretion to be exercised for the years ending 30 June 20XX to 30 June 20XX, subject to the Project being carried on in the manner described in the product ruling. Losses incurred from this activity could be offset against other income in the year ended 30 June 20XX. Losses incurred in later years should be deferred and can be offset against income from this activity or if the relevant non-commercial losses tests are passed in later years the losses could be offset against other income. This has to be considered on a yearly basis.

Relevant facts: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: | • The private ruling application form | • The attachment to the application form | • Income tax returns for the 20XX-XX to 20XX-XX years | You entered into two tax effective investment schemes. The investments were being financed by bank loans. The original loans were through the promoter and then the loans were taken over by a Bank. | The investments were covered by Product Rulings. | Interest for both of the loans was claimed in the 20XX-XX income year in your tax return, as both amounts had been paid. Thereafter, from the 20XX-XX tax year you stopped any payments off the bank loans. You did not claim interest deductions in the 20XX-XX income years onwards. | In the current income year (20XX-XX) you have decided to pay the loans in full including all the interest accrued to date. You have always claimed the interest using the cash basis, which was the case for the 20XX-XX and previous tax years. | The projects are continuing and have not been wound up.