Private ruling: Deductibility of interest - acquiring an income producing property under a Deed of Family Arrangement
Published: March 2013
Ruling period: 2012-13 financial year | 2013-14 financial year | 2014-15 financial year | 2015-16 financial year
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction for the interest you will incur on a loan used to acquire an income producing property? | A1: Yes.

Relevant facts and circumstances: You are a beneficiary in a deceased estate. The deceased died after 20 September 1985. You and another person are the legal personal representatives (LPRs) of the estate. The deceased estate includes a CGT asset which under the deceased's will has been left to another beneficiary. The CGT asset is currently used in your partnership business. It is proposed the CGT asset will continue to be used by the partnership for this same purpose. A dispute has arisen between the beneficiaries of the deceased estate. In order to avoid further costs, expense and inconvenience and to settle all claims arising out of the death of the deceased and the Administration of the estate you intend on entering into a Deed of Arrangement. The terms and conditions of the Deed of Arrangement include 'The LPRs shall transfer to you by way of devise the CGT asset subject to you paying the other beneficiary money' (from outside the estate). You will incur interest on a loan taken out to finance the payment to the other beneficiary.

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

Reasons for decision: Summary: You can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income except where the loss or outgoing is capital, private or domestic in nature or relates to the earning of exempt income (section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)). Taxation Ruling TR 95/25 provides the Commissioner's view regarding the deductibility of interest. An outgoing of interest is incidental and relevant to the gaining of assessable income if the funds were borrowed for the purpose of gaining that income ( FC of T v. Munro (1926) 38 CLR 153; (1926) 32 ALR 339). The use test is the basic test relied upon to establish the deductibility of interest and looks at the application of the borrowed funds as the main criterion. Accordingly, where a loan is used for an income producing purpose the interest on the loan is deductible. As you intend on taking out a loan to acquire an income producing asset the interest on this loan will be deductible under section 8-1 of the ITAA 1997.