Private ruling: Interest expenses
Published: May 2012
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for the interest on a loan to buy out your former spouse's share of the land, animals and equipment? | A1: 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. As the result of a marriage breakdown, you and your spouse have a Family Court order which states among other things, that you pay your spouse a sum and contemporaneously with the payment of the sum, your spouse transfers to you, their right, title and interest in properties, the breeding herd and plant and equipment. You have taken out a loan to buy your spouse's share of the property, animals and equipment.

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. Taxation Ruling TR 95/25 provides that 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. Where a borrowing is used to acquire an income producing asset or relates to an income producing activity, the interest on this borrowing is considered to be incurred in the course of producing assessable income. You borrowed funds to purchase your former spouse's share of the property, animals and equipment. As these are income producing assets, the interest on the borrowing is considered to be incurred in the course of producing assessable income and is an allowable deduction.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.