Private ruling: Interest deductions
Published: October 2014
Ruling period: Income year ended 30 June 2012 | Income year ended 30 June 2013 | Income year ended 30 June 2014 | Income year ended 30 June 2015 | Income year ended 30 June 2016
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for all the interest expenses incurred on the loan? | A1: Yes

Relevant facts and circumstances: On recommendation of your financial planner you entered into an investment scheme. You entered into a margin loan with a financial institution. The sole purpose of this loan was to buy and sell shares. On a date unknown to you the shares were sold by the financial institution without notification or authority from yourself or your financial planner. You continue to be charged interest on the loan.

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

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 allows you a deduction for any loss or outgoing that is incurred in gaining or producing your assessable income, to the extent that it is not of a private, capital or domestic nature. Whether interest has been incurred in the course of gaining or producing assessable income generally depends on the purpose of the borrowing and the use to which the borrowed funds are put. Where a borrowing is used to acquire an assessable income producing asset, or relates to expenses of an assessable income producing activity, the interest on this borrowing is considered to be incurred in the course of gaining or producing assessable income. Taxation Ruling TR 2004/4 provides the commissioners view on the deductibility of interest expenses incurred following the cessation of relevant income earning activities. The ruling provides that interest will still be deductible where there is sufficient nexus between the interest outgoing and the earlier income producing activity. In your situation, it is accepted the interest is referable to the share investments and is therefore incurred in the production of your assessable income, and further that the fact that the lender has disposed of the relevant shares in an earlier financial year has not broken the nexus between the interest expense and the original income producing purpose of borrowing funds. Accordingly the interest will remain deductible under section 8-1 of the ITAA 1997.