Private ruling: Interest Expenses
Published: August 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction for 100% of the interest expenses on your Bank Account? | A1: No. | Q2: Are you entitled to a deduction for the income producing portion of the interest expenses on your Bank Account? | A2: Yes.


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 (ITAA 1997) 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. Taxation Ruling TR 95/25 provides the Commissioner's view regarding the deductibility of interest expenses. As outlined in TR 95/25, there must be a sufficient connection between the interest expense and the activities which produce assessable income. TR 95/25 specifies that to determine whether the associated interest expenses are deductible, it is necessary to examine the purpose of the borrowing and the use to which the borrowed funds are put. The 'use' test, established in the High Court case Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, (1926) 32 ALR 339 is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion. Accordingly, it follows that if a loan is used for investment purposes from which income is to be derived, the interest incurred on the loan will be deductible. In your case, although the initial intention was to use the loan account solely for income producing purposes, you have also used the account for private purposes. Therefore the account is considered to be a mixed purpose loan account. Taxation Ruling TR 2000/2 considers the deductibility of interest incurred by borrowers on mixed purpose loans. Where interest accrues periodically on the outstanding balance of a mixed purpose account, the deductibility of accrued interest is determined by considering the application of the borrowed funds for income producing and non-income producing purposes. The original application of the borrowed funds will not determine deductibility where funds borrowed have been recouped or withdrawn from the original use and are reapplied to a new use. In your case, as you have used the account to purchase shares as well as for private purposes it is only the portion related to the shares that you are able to claim as a deduction. For example, if a loan is used 70% for income producing purposes and 30% private purposes, 70% of the interest incurred will be deductible.

Relevant facts: You took out an investment loan to purchase shares | You use the account as a sole bank account | Your wages are deposited directly into the loan account | You draw down on the loan account for living expenses