Private ruling: Storm financial collapse - Commonwealth Bank - deductibility of interest
Published: April 2012
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012
Date scheme commenced: 16 December 2004

Ruling: Q1: Are you entitled to claim future deductions for interest on the investment loans following the collapse of Storm Financial Services? | A1: Yes.



Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 generally allows a deduction for interest on a loan used to derive assessable income. 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 (TR 2004/4) considers the deductibility of interest expenditure after the cessation of the relevant income earning activities, specifically at paragraphs 40 to 50. At paragraph 44 of TR 2004/4, reference is made to Court cases that were decided by the Full Federal Court being FC of T v. Brown 99 ATC 4600; (1999) 43 ATR 1 (Brown) & FC of T v. Jones 2002 ATC 4135; (2002) 49 ATR 188 (Jones) In both Brown and Jones , the interest in question was incurred at a time after the relevant income earning activities had ceased and borrowed funds (or assets representing those funds, including goodwill) had been lost to the taxpayer. Even so, the Court had no difficulty in holding, in both instances, that interest incurred on the loans continued to be deductible despite the cessation of the relevant income earning activities.

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 engaged Storm Financial Services (herein referred to as Storm) to grow your wealth and income through investment in the stock market with listed securities. | Storm's strategy was to encourage you to borrow as much ongoing money as possible during the investment period by using existing assets as security and to then use the acquired investments and other personal shares as equity to support an additional margin loan. | The effect of this gearing strategy was to gear you 100% into the stock market and further encourage the injection of surplus cash flow from employment or other sources to increase the gearing into the market. | The global financial crisis hit in early 2008 and the stock market began to fall. During this time your Storm adviser recommended you stay in the market. | The market continued to fall and you received a margin call to reduce the Macquarie Margin Loan or inject additional capital, otherwise some you're your investments would be sold to achieve this result. | You were not in a position to reduce the Macquarie Margin Loan or inject additional capital. | Between October 2008 and November 2008 your Storm administered portfolio was sold/redeemed by Macquarie under the conditions within the margin loan following the margin call without any input from you. | This occurred later than it should have at a much higher LVR, resulting in a greater loss to you than should have been the case. | The resulting sale of the portfolio generated adequate funds to repay the Macquarie Margin Loan in full and left you with a small amount of cash and a significant amount in CBA investment loans outstanding. | The total capital loss suffered by you on the collapse of Storm through the margin loan operation and the gearing strategy was significant, and at the end of the 2009 financial year your carried forward losses totalled an amount after offsetting 2009 trust distributed gains. | Before the collapse you managed to prepay the Macquarie Margin Loan and CBA investment loan interest amounts in June 2008 for the 2009 financial year, which meant the requirement to make repayments on those CBA Investment Home Loans for the 2009 year had been covered. | In the months following the Storm collapse the CBA set up a review panel to look at individual taxpayers/investors positions to determine if compensation should be paid for their losses due to the gear strategy and loss suffered. The settlement process involved a law firm and a party acting for the CBA and was known as the CBA Storm Resolution Scheme. | You elected to have your position reviewed under the scheme and in April 2010 you were offered a resolution package which you accepted. | While the CBA Storm Resolution Scheme was in progress, interest on all your CBA investment loans was suspended by CBA in July 2009 for the 2010 financial year. This meant that in 2010 no interest needed to be paid on the two outstanding CBA investment loans that were used in the Storm portfolio. | However you had already prepaid the 2010 interest in June 2009 on the smaller of the two CBA investment loans prior to the CBA interest suspension announcement. | The CBA Storm Resolution Scheme offer that you accepted did not change the investment loan balances but they would be interest only loans at a flat 5% rate for a period of 5 years from 1 July 2010 after which they revert to a standard variable rate principal and interest loan. | The settlement between you and the CBA allowed you the ability to remain in your home which would otherwise have needed to be sold to pay out the CBA investment loans used in the Storm portfolio. | Given the terms of the resolution settlement with CBA the interest incurred on the two CBA investment loans used to fund the Storm portfolio recommence in the 2011 year and to the end of the 2011 financial year you have paid an amount in interest. | The two CBA investment loans used in the Storm gearing strategy have never changed in name since being taken out but their account numbers have been changed as a result of the CBA Storm Resolution Scheme. | You have supplied the following documents, which form part of, and should be read in conjunction with this private ruling: | Storm resolution scheme - Deed of Settlement