Private ruling: Deductibility of interest
Date of advice: 15 June 2016
Published: August 2016
Ruling period: Year ending 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Are you entitled to a deduction for the interest on money used to purchase investment bonds? | A1: 


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

Reasons for decision: Summary: Interest is deductible under section 8-1 of the Income Tax Assessment Act 1997 to the extent that it is incurred in gaining or producing assessable income or in carrying on a business for that purpose, except to the extent that the expense is of a capital, private or domestic nature or incurred in gaining or producing exempt income. Taxation Ruling TR 95/25 considers the deductibility of interest. Whether interest has been incurred in the course of producing assessable income generally depends on the use to which the borrowed funds have been put. The 'use' test, established in Federal Commissioner of Taxation 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. The interest will be deductible to the extent that the funds are used to produce assessable income. A tracing of the borrowed money which establishes that it has been applied to an income producing use may demonstrate the relevant connection between the interest and the income producing activity. In your case, the original draw down of $50 000 and the subsequent drawdown of the $30 000 from your Investment line of credit is used for investing in investment bonds which are used in gaining or producing assessable income. Therefore the interest associated with both of these amounts would be considered a tax deduction against your taxable income.

Relevant facts: You have an existing line of credit facility with two separate loan accounts. | Portion A is a mortgage or non-tax deductible portion with a limit of $120 000 and an interest rate of 5% pa. | Portion B is an investment with a limit of $100 000 and applicable interest of 5%pa. | On 1 July 2016 you are intending to draw an amount of $50 000 from your investment line of credit and invest into an investment bond with a licensed financial adviser such as IOOF Wealthbuilder. | One month later on 1 August 2016 you borrow $30 000 from IOOF accessing the loan facility that allows you to borrow money using your investment bond as security. You do not use these funds for further investment but pay the money into your mortgage. | After settlement of the above transactions a further $30 000 is withdrawn from your investment line of credit and invested into the investment bond with a licenced provider.