Private ruling: Deduction-interest
Published: August 2012
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2008

Ruling: Q1: Are you entitled to a deduction for the interest expense when the interest is paid? | A1: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1. Income Tax Assessment Act 1997 section 26-25.

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. Interest expenses that relate to a rental property will be deductible to the extent that the property is used to produce assessable income. Taxation Ruling TR 97/7 examines whether the word 'incurred', has the same meaning for those taxpayers who return their income on a receipts basis as it does for those taxpayers who generally return their income on an earnings basis. The receipts method is sometimes called the 'cash' basis. Under the receipts method, expenditure is incurred when it is actually paid. The earnings method is often referred to as the accruals method. Under the earnings method, expenditure is incurred when a presently existing liability is created. A taxpayer who uses a cash based accounting system need not necessarily have paid or borne a loss or outgoing in order for that loss or outgoing to have been 'incurred' for the purposes of section 8-1 of the ITAA 1997. However, it has long been established practice, where the receipts basis is the appropriate method to account for income, to accept the returns lodged by taxpayers, notwithstanding that both income and expenses have been accounted for on a receipts basis. In the interests of practical administration, there is no intention to disturb this practice. Therefore it is necessary to examine what type of accounting method for income is appropriate in your case. Taxation Ruling TR 98/1 examines this question and provides that normally, individuals who are not in business would use the cash (receipts) method. In your case, as you are an individual who is not in the business of share trading, it is appropriate to use the receipts method of accounting for receipts. Consequently this method is also applicable for the purposes of accounting for expenditure. Therefore you will have incurred the interest expense according to the receipts method of accounting, when it is actually paid. Accordingly, you are entitled to a deduction for the interest expense under section 8-1 of the ITAA 1997 in the income year when the interest expense is actually paid.

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 borrowed funds from relatives in an overseas country. | You have a written loan agreement with your relatives. | Under the loan agreement the interest rate charged on the borrowed fund is a commercial rate. | The principal and interest should be paid on maturity of the loan. | You have not repaid any principal or interest on the loan. | You are a share investor. | You used the funds to buy shares which you hold for long term gains. | You received dividend income for the shares held. | You have returned the dividends as assessable income in your tax returns.