Private ruling: Expenses - treatment of interest expenses
Date of advice: 16 June 2016
Published: August 2016
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the interest attributable to the investment portion of a loan remain deductible where redrawn funds are used for private purposes? | A1: Yes.

Relevant facts and circumstances: You will borrow an amount for investment purposes. At the end of the first year, you will repay part of principal. The following year you will redraw additional funds and use them for personal expenses.

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 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, or relate to the earning of exempt income or a provision of the taxation legislation excludes it. The deductibility of interest on borrowed funds is determined by the use of the borrowed money. The use test, established in FC of T v. Munro (1926) 38 CLR 153, is the basic test for the deductibility of interest and looks at the application of the borrowed funds as the main criterion. If the borrowed money has been used to buy, or is in relation to, an income producing asset then the interest expense is an allowable deduction. However, if the borrowed money is used only partly to produce assessable income, only that part of the interest which relates to the production of assessable income is an allowable deduction. In your situation, you will have a loan that initially used for investment purposes and the production of assessable income. You will redraw funds and use them for private purposes. The redraw of funds constitutes an additional borrowing. As the additional borrowing is for private purposes, the interest attributable to this redraw is not deductible. However, the interest attributable to the remaining loan funds will remain deductible as they were used for investment purposes.