Private ruling: Interest Expenses
Date of advice: 9 October 2017
Published: March 2018
Ruling period: Year Ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you entitled to a deduction for the interest expense incurred on a loan taken out to pay your ex-spouses entitlement? | A1: No

Relevant facts and circumstances: You separated from your spouse. All legal titles of the property and assets are in your name only. You were required to carry out valuations on the properties, business assets and livestock. A valued amount was determined to be your ex-spouse’s entitlement to the share of the combined assets. You obtained a loan to pay this amount to your ex-spouse.

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 allows you a deduction for any loss or outgoing that is incurred in gaining or producing your assessable income, to the extent that it is not of a private, capital or domestic nature. Taxation Ruling TR 95/25 deals with the general principles governing deductibility of interest under section 8-1 of the ITAA 1997. To establish that there is a sufficient connection between incurring an interest expense and the gaining or producing of assessable income, regard must be given to all the circumstances including the use to which the borrowed funds are put. The 'use' test, established in FC of T v Munro (1926) 38 CLR 153, is the basic test for the deductibility of interest, and looks to the application of the borrowed funds as the main criteria. Where borrowed funds are used for private purposes the interest will not be deductible even if there is a secondary result that other assets are able to be retained for the purpose of producing assessable income. Essentially, it is the use to which the borrowed funds are put rather than the security offered for the loan that will determine the deductibility of the interest. If the borrowed funds are used to produce assessable income, then the interest will be deductible. If the funds are used for non-income producing purposes, then the interest will not be deductible. In your case, you borrowed funds to comply with a marriage settlement. As part of the settlement, your ex-spouse received a valued amount of money and you retained all properties and businesses. A taxpayer's marital arrangements are regarded as being private in nature. The interest you incur on this loan is not an expense incurred in gaining or producing your assessable income from the investment property and businesses as it is an expense relating to your marriage settlement. Accordingly the interest is regarded as being of a private or domestic nature and you are not entitled to a deduction.