Private ruling: Expenses – loan repayments and interest
Date of advice: 26 June 2018
Published: September 2018
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Are you entitled to a deduction for loan repayments or interest incurred on a loan for a nursing home bond? | A1: No.

Relevant facts and circumstances: Your parent was admitted to a nursing home. You have taken out a loan to cover the nursing home bond. Your parent’s residence is being sold, and the proceeds will be put toward the loan. A large balance will remain.

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 (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. A number of significant court decisions have determined that for an expense to be an allowable deduction: ● it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense ( Lunney v. FC of T ; (1958) 100 CLR 478 ( Lunney’s case )), ● there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income ( Ronpibon Tin NL v. FC of T , (1949) 78 CLR 47), and ● it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income ( Charles Moore Co (WA) Pty Ltd v. FC of T , (1956) 95 CLR 344; FC of T v. Hatchett , 71 ATC 4184). In your case, you have taken out a loan to cover a nursing home bond. This expense is not incurred in earning your assessable income. It is considered private or domestic in nature and has no connection to your income earning activity. Therefore, you are not entitled to a deduction for the loan repayments or the interest incurred on the loan.