Private ruling: Deduction - loan interest
Date of advice: 13 April 2017
Published: September 2017
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction for interest incurred on your loan? | A1: Yes.

Relevant facts and circumstances: You registered a subscription in a project. You financed your investment through a loan and you have complied with the terms of the loan. The group was placed into administration and subsequently liquidation. You sought legal advice and joined a class action. You were advised to stop repayments on your loan and not to claim any further interest deductions in your tax returns, while the legal proceedings were ongoing. Interest has been accruing on your loan at the higher interest rate, in accordance with the terms of the loan agreement. Your loan balance is now substantially greater than at the time of the scheme's collapse due to the compounded interest.

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

Reasons for decision: Summary: Product Ruling PR xxxx/xx , explains how participation in the project constituted the carrying on of a business and outlined the deductions under section 8-1 of the ITAA 1997 they were entitled to claim. Even though this product ruling has now been withdrawn and ceased to have affect after 30 June xxxx, the Ruling continues to apply, in respect to the relevant provision(s) ruled upon for those entitles who entered into the specified scheme prior to withdrawal. The ruling confirms that interest incurred on loans taken out to fund participation in the Project, is an allowable expense when it is incurred. The group was placed into administration and subsequently liquidation, the income producing activity has now ceased. However, the interest continues to be deductible in your circumstances as we accept you meet the relevant requirements detailed in Taxation ruling TR 2004/4 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities. In regards to the accrued unpaid interest on the loan, Taxation Determination TD 2008/27 Income tax: is the deductibility of compound interest determined according to the same principles as the deductibility of other interest? states that compound (or capitalised) interest, as with ordinary interest, derives its character from the use of the original borrowings. Accordingly you are entitled to a deduction for the interest you incur as its character follows that of the original borrowing, which is in respect of earning assessable income. Therefore, you are entitled to claim a deduction for the interest accruing on your loan in the years it has been incurred.