Private ruling: Deductions - interest expenses
Date of advice: 13 February 2026
Published: 28 April 2026
Ruling period: Year ended 30 June 20XV | Year ended 30 June 20XW | Year ended 30 June 20XX | Year ended 30 June 20XY | Year ended 30 June 20XZ
Date scheme commenced: DDMM20XU

Ruling: Q1: Is Company X entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 for all of the interest expense incurred on the bank funding facility? | A1: Yes.

Relevant facts and circumstances: A is the sole director of all corporate entities within their family group and the sole shareholder of Company Y. A is the director of a business in which they have an ownership interest. The annual business profits have been distributed to Company X. X Trust is the sole shareholder of Company X. Company Y owned a portfolio of income-producing investments. Investments held by Company Y were transferred to Company X creating a loan between the 2 entities. A capital gains tax event was taxable to Company Y as a result of the investment transfer. The primary role of Company X is to hold investments which derive assessable income. The Company X investments are primarily funded by earnings from the business and by way of the loan from Company Y and a loan from A. The investments are held primarily for long-term wealth generation for the benefit of A and their immediate family. In DDMM 20XU, Company X obtained a bank funding facility, the proceeds of which were used to: 1. fully repay the loan owing to A 2. repay approximately $# of the inter-company balance owed to Company Y (which will be declared as a dividend by Company Y to A), and 3. fund ongoing investment activity and provide liquidity to Company Y.

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

Reasons for decision: Summary: All references made in these reasons for decision are to the Income Tax Assessment Act 1997 unless otherwise stated. Company X is entitled to a deduction under section 8-1 for all of the interest expense incurred on the bank funding facility. | Detailed Reasoning - Detailed reasoning: Section 8-1 allows a deduction for a loss or an outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature, or relates to the earning of exempt income. Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith (TR 95/25) provides the Commissioner's view regarding the deductibility of interest expenses. As outlined in paragraph 3 of TR 95/25, there must be a sufficient connection between the interest expense and the activities which produce assessable income. Further, 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. Company X used the bank funding facility to: • repay all of the loan from A • repay part of the loan from Company Y, and • fund ongoing investment activity and provide liquidity to Company X. Where money has been borrowed to repay an existing loan paragraph 42 of TR 95/25 explains: Interest on a new loan will be deductible if the new loan is used to repay an existing loan which, at the time of the second borrowing, was being used in an assessable income producing activity or used in a business activity which is directed to the production of assessable income (Roberts and Smith ATC at 4388; ATR at 504). Company X used the existing loans from Company A and Company Y to support the acquisition of its investments. At the time Company X obtained the bank funding facility, the existing loans from A and Company Y were being used to derive assessable income for Company X. A portion of the bank funding facility was used to repay those loans. Paragraphs 9 and 10 of Taxation Ruling IT 2606 Income tax: deduction for interest on borrowings to fund share acquisitions (IT 2606) explain that interest on moneys borrowed to acquire shares is generally deductible where it is reasonably expected that dividends or other assessable income will be derived from the investment. However, interest will not be deductible where shares were acquired solely for the purpose of capital profit on their resale since the proceeds of sale are not assessable income. Paragraph 11 of IT 2606 explains that: In order to obtain a deduction for interest a company must show that the expense was incurred for the purpose of furthering its present or future assessable income producing activities, whether or not those activities constitute the carrying on of a business. The primary role of Company X is to hold investments that derive assessable income from those investments. A portion of the $# remaining after the repayment of the loans will be used by Company X in carrying out that investment activity. Considering the use of the funds obtained from the bank funding facility, the interest expense incurred on the Company X's bank funding facility will be deductible under section 8-1.

Does IVA apply to this private ruling?: Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement. | If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website ato.gov.au/gaar. | This is to explain how we reached our decision. This is not part of the private ruling.