Private ruling: Borrowed funds
Published: August 2012
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is the loan amount a deduction in the hands of the lender or assessable income in the hands of the borrower in the arrangement described? | A1: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia. Ordinary income is income according to ordinary concepts. Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business. The legislation does not provide a definition of 'ordinary income' therefore it is necessary to turn to case law. Statutory income consists of those amounts that are specifically included in your assessable income by a provision of the taxation legislation. In this case, the funds loaned to family members are not ordinary income and is not statutory income rather it is a principal amount of a loan. Therefore, the amount is not assessable income to the family members who receives the funds. Section 8-1 of the ITAA 1997 allows a deduction for any loss or outgoing that is incurred in gaining or producing assessable income to the extent that it is not of a private, capital or domestic nature. In respect of the person loaning the funds to their family members, the loan funds are not expenses as the funds are considered to be capital and are therefore not deductible. In this case, the arrangement is a private arrangement and there are no tax consequences for either the person loaning the funds or the person/s borrowing the funds.

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. | Relevant facts: A family member will loan funds sitting in their bank account to another family member and their spouse. | No interest will be paid on the funds.