Private ruling: Deductibility of interest
Published: September 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is interest incurred on a loan to purchase shares tax deductible? | A1: Yes. | Q2: Is interest incurred on a loan to purchase land, which was not used for income producing purposes, tax deductible? | A2: No. | Q3: Can you include the loan interest relating to the purchase of the land, in the calculation of your Capital Gains Tax (CGT) loss? Advice/Answers No.

Relevant facts and circumstances: You borrowed funds from a financial institution and purchased a vacant block of land. You sold the block of land some time later at a capital loss. You applied your share of the funds from the sale of the land to your investment loan. You borrowed more funds from the same loan facility to invest in shares. The loan facility has not been used for private purposes.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Subsection 104-55(3) | Income Tax Assessment Act 1997 Subsection 110-55(5).

Reasons for decision: Summary: All legislative references that follow are to the Income Taxation Assessment Act 1997 , unless indicated otherwise. | Detailed Reasoning - Interest deduction: Section 8-1 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. 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 (Taxation Ruling TR 95/25). Where a borrowing is used to acquire an income producing asset, the interest on this borrowing is considered to be incurred in the course of producing assessable income. However, where interest has been incurred in the course of purchasing a CGT asset with the intention of selling in the future at a capital gain, the interest is considered capital and is not deductible. In your case you have incurred interest relating to the purchase of the land and the purchase of shares. As the land was purchased with the intention of selling in the future at a capital gain, and was not used for income producing purposes (for example, as a rental property), the portion of the interest relating to the land purchase is considered capital and is not deductible under section 8-1. However, the portion of the interest which relates to the purchasing of shares is considered to be incurred in gaining or producing assessable income and is deductible under section 8-1. Although the interest relating to the land purchase is not deductible, below we will consider whether the interest can be included in your capital loss calculations. | Detailed Reasoning - CGT consequences: You make a capital gain or a capital loss if a CGT event happens to a CGT asset (section 102-20). CGT event A1 happens if a CGT asset is disposed of, that is, when there is a change of ownership from one entity to another entity. In your case, a CGT event happened when you sold the block of land. Under CGT event A1 you make a capital loss if the capital proceeds of the sale are less than the asset's reduced cost base (subsection 104-55(3)). As you have made a capital loss on the sale on the sale of the land, we must look at the calculation of your reduced cost base . | Detailed Reasoning - Reduced cost base: Subsections 110-55(4) to 110-55(9E) specify certain amounts that do not form part of the reduced cost base . The exclusion that applies to your situation is specified at subsection 110-55(5). It states that an amount is not included in the reduced cost base of a CGT asset if it could have been deducted had the asset been used wholly for the purpose of producing assessable income. In your case, the land was not used for income producing purposes, and your intention was to sell the land at a capital gain in the future. This means that loan interest is not included for the purposes of calculating the reduced cost base of the land.