Private ruling: Deductions
Date of advice: 29 November 2016
Published: April 2017
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Question and answer | Are you entitled to a deduction for interest charges incurred on a loan to purchase shares in a company? | Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You purchased shares in a company. You used two lines of credit to fund the purchase of the shares. You were paid dividends on the shares. You still hold the shares. The business the company was running has ceased.

Relevant legislative provisions: Income tax Assessment Act 1997 Section 8-1.

Reasons for decision: Summary: Section 8-1 of the ITAA 1997 allows a deduction for all losses or outgoings to the extent to which they are incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for that purpose. However, where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income they will not be deductible (subsection 8-1(2) of the ITAA 1997). Paragraph 10 of Taxation ruling 2004/4 states: Where interest has been incurred over a period after the relevant borrowings (or assets representing those borrowings) have been lost to the taxpayer and relevant income earning activities (whether business or non-business) have ceased, it is apparent that the interest is not incurred in gaining or producing the assessable income of that period or any future period. However, the outgoing will still have been incurred in gaining or producing 'the assessable income' if the occasion of the outgoing is to be found in whatever was productive of assessable income of an earlier period. Whether or not the occasion of the outgoing of interest is to be found in what was productive of assessable income of an earlier period requires a judgment about the nexus between the outgoing and the income earning activities. An outgoing of interest in such circumstances will not fail to be deductible merely because: ● the loan is not for a fixed term; ● the taxpayer has a legal entitlement to repay the principal before maturity, with or without penalty; or ● the original loan is refinanced, whether once or more than once. However, if the taxpayer: ● keeps the loan on foot for reasons un-associated with the former income earning activities; or ● makes a conscious decision to extend the loan in such a way that there is an ongoing commercial advantage to be derived from the extension which is unrelated ● to the attempts to earn assessable income in connection with which the debt was originally incurred, ● the nexus between the outgoings of interest and the relevant income earning activities will be broken. In your case you purchased shares in a company. You used two lines of credit to make the purchase of the shares. You have not disposed of the shares, you still hold the shares. The interest you incur on the loan for the purchase of the shares is an eligible deduction under section 8-1 of the ITAA 1997.