Private ruling: Interest expense
Published: November 2011
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for the interest on 50% of the original loan and 100% of the additional loan? | A1: Yes


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

Reasons for decision: Summary: Interest is deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to the extent that it is incurred in gaining or producing assessable income or in carrying on a business for that purpose, except to the extent that the expense is of a capital, private or domestic nature or incurred in gaining or producing exempt income. Taxation Ruling TR 95/25 considers the deductibility of interest. Whether interest has been incurred in the course of producing assessable income generally depends on the use to which the borrowed funds have been put. The 'use' test, established in Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion. The interest will be deductible to the extent that the funds are used to produce assessable income. In your case, the original loan amount does not change its character because you are refinancing. That is, 50% of interest on the original amount remains deductible. As the further amount you add to your loan is also used for income producing purposes, interest incurred on these funds is fully deductible.

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 have an overdraft of which 50% is used for income producing purposes. | You wish to refinance the overdraft and include a further amount. | The new facility will be in your name only. | The additional funds will be used solely for share trading and in particular, to reduce a margin lending facility that you now have.