Private ruling: Interest deductions and borrowing costs
Published: June 2013
Ruling period: Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020 | Year ending 30 June 2021 | Year ending 30 June 2022 | Year ending 30 June 2023 | Year ending 30 June 2024
Date scheme commenced: 1 July 2012

Ruling: Q1: 1. Will interest incurred on the loan used to refinance your investment be deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A3: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 8-1 | Income Tax Assessment Act 1997 - Section 25-25 | Income Tax Assessment Act 1997 - Division 35

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 considers the deductibility of interest expenses under section 8-1 of the ITAA 1997. Generally, interest expenses are deductible to the extent they are incurred in relation to funds used for an income producing purpose ( Federal Commissioner of T v. Munro (1926) 38 CLR 153). Where a borrowing is used to repay an existing loan, interest on the 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. (paragraph 42) In your case, you originally financed your investment via a loan from a finance entity. You now wish to refinance that loan with a commercial bank due to the lower interest rate available. The new loan has no features that would prevent the interest from being a deductible expense in relation to your investment. Therefore, the interest incurred on your refinanced loan will be an allowable deduction. Borrowing expenses are deductible under section 25-25 of the ITAA 1997 to the extent that you use the money for the purpose of producing assessable income. The deduction is spread over the period of the loan or over five years, whichever is shorter. Where the borrowing cost is $100 or less, the whole of the borrowing expense is deductible in the year in which it is incurred. In your case, as the refinanced loan is being used for an income producing purpose, the borrowing costs incurred are an allowable deduction. As the business activity that you will continue under the new loan is not materially different to that described in the PR, all other aspects of the ruling continue to apply to your investment, including the exercise of the Commissioner's discretion and the application of the anti avoidance provisions.

2. Will borrowing costs associated with the refinanced loan be deductible under section 25-25 of the 1997 Act? | 3. Are you still able to rely on the investment Product Ruling, including the Commissioner's discretion for the purposes of Division 35 of the ITAA 1997? | Relevant facts: You acquired your investment product on identical terms to those referred to in the Product Ruling (PR). | You originally financed your investment via a loan as described in the PR. | You now want to refinance the loan to one provided by a commercial bank. | In all other respects, after refinancing, the investment will be identical to that outlined in the PR. | The new loan will not be materially different to the original loan, as referred to the PR. | There will be no prepayment of interest and the repayments will include both principle and interest components. | Stamp duty and an application fee may be payable on the new loan. | The commercial bank is an external, unrelated, arms-length party and is not related in any way to the investment or any of its associated entities. | You acquired your investment as part of long term diversification of your income stream to assist in your overall wealth creation. | You would like to utilise the commercial bank loan package, rather than the current financing simply because the commercial bank has finance available at a significantly lower interest rate as compared to the original loan, whilst still being consistent with the financing principles outlined in the PR.