Private ruling: The deductibility of interest on loans from shareholders
Published: May 2015
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the entity entitled to claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for interest, on shareholder loans, it paid to shareholders for the same amount of interest the shareholders paid on borrowed funds to their lenders? | A1: Yes


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 (ITAA 1997) allows a deduction for all losses or outgoings to the extent that they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, no deduction is allowed to the extent that the losses or outgoings are of a capital, private or domestic nature or are incurred in gaining or producing exempt income. In this case the entity received loans from its shareholders and used the funds to produce assessable income. The entity has since paid back the principle amount of each loan and in addition paid back the same amount of interest each shareholder paid to the financial institution they loaned the funds from. The entity is entitled to claim a deduction under section 8-1 of the ITAA 1997 for the interest it paid to the shareholders.

Relevant facts: The entity operates a business. | The entity borrowed funds from shareholders to use in the production of assessable income. | As soon as the entity was able to it paid back the principle of the loans and the same interest amount the shareholders were charged by their financial institutions to the shareholders.