Private ruling: interest expense under a salary sacrifice arrangement
Published: October 2011
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for interest expenses for your investment property loan where the interest payment is made by your employer under a salary sacrifice arrangement? | A1: No.


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 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, or incurred in gaining or producing exempt income. A number of significant court decisions have determined that for an expense to be an allowable deduction: · it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense ( Lunney v. FC of T ; (1958) 100 CLR 478, · there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income ( Ronpibon Tin NL v. FC of T , (1949) 78 CLR 47), and · it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income ( Charles Moore Co (WA) Pty Ltd v. FC of T , (1956) 95 CLR 344; FC of T v. Hatchett , 71 ATC 4184). Taxation Ruling TR 95/25 considers the deductibility of interest. An interest expense must have a sufficient connection with the operations or activities which more directly gain or produce a taxpayer's assessable income. The character of interest on money borrowed is generally ascertained by reference to the objective circumstances of the use to which the borrowed funds are put. However, regard must be had to all the circumstances, including the nature of the transaction or series of transactions of which the borrowing of funds is an element. Where borrowed funds are used to acquire an income producing asset such as a rental property, the interest on the borrowed moneys is generally considered to be incurred in gaining or producing the assessable rental income. In your case the borrowed funds have been used for your rental property. You now wish to enter into a salary sacrifice arrangement where your employer will be responsible for the loan repayments. It therefore must be determined if you will still incur the interest expense that is paid under a salary sacrifice arrangement. Taxation Ruling TR 97/7 sets out the Commissioner's views on the meaning of incurred. Generally, a taxpayer incurs an expense at the time they owe a present money debt that they cannot escape. The guidelines developed by the courts that help to determine if an expense has been incurred include: · there must be a presently existing liability to pay a pecuniary sum, · presently existing liability is determined on the circumstances of the case, · an expense is incurred when actually paid if there was no presently existing liability. Taxation Ruling TR 94/26 also discusses the meaning of incurred and states at paragraph 6 that: Whether there is a presently existing pecuniary liability is a question which must be determined in light of the particular facts of each case, and especially by reference to the terms of the contract or arrangement under which the liability is said to arise. Taxation Ruling TR 2001/10 discusses salary sacrifice arrangements and defines a salary sacrifice arrangement as being an arrangement whereby an employee contractually agrees with their employer to forego part of their remuneration that they would otherwise receive as salary and wages in return for benefits of a similar value. Generally, an arrangement for an employer to make a payment directly to an employee's loan account is considered to be an expense payment benefit provided by the employer to the employee. That is, the employer is making a payment in relation to an obligation of the employee and that the payment is in respect of expenditure incurred by the employee. Therefore where you have an effective salary sacrifice arrangement with your employer in respect of your loan, the employer is considered to meet the repayment obligations of the loan. That is, under such an arrangement the obligation to make the loan repayments has been transferred to the employer. The provision of such a benefit becomes a contractual liability of the employer. It is therefore considered that you no longer have a presently existing liability to pay the pecuniary sum in relation to the interest expense paid under the salary sacrifice arrangement. As the interest expense is to be paid by your employer and not by you, it is considered that the relevant interest expense has not been incurred by you. Therefore, as you will not incur the interest expense that is paid by your employer under an effective salary sacrifice arrangement, you are not entitled to a deduction for the interest expense.

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: You have a principal and interest investment loan for your rental property. | You derive rental income from your investment property. | You wish to enter into an effective salary sacrifice arrangement where your employer will be responsible for the loan repayments.