Private ruling: Interest expenses
Published: February 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a deduction for interest incurred on money borrowed to acquire an ownership interest in a Limited Liability Company (LLC)? | A1: Yes

Relevant facts and circumstances: You are an Australian resident for tax purposes. You borrowed money to acquire an ownership interest in a LLC. The borrowings are secured against a residential property. The LLC owns a residential rental property in a foreign country. All distributions of income and expenses from the LLC will be made according to your ownership interest. You have contributed money to the LLC with the expectation that you will receive assessable distributions from the company.

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

Reasons for decision: Summary: You can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income except where the loss or outgoing is capital, private or domestic in nature or relates to the earning of exempt income (section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)). Taxation Ruling TR 95/25 provides the Commissioners view regarding the deductibility of interest. An outgoing of interest is incidental and relevant to the gaining of assessable income if the funds were borrowed for the purpose of gaining that income ( FC of T v. Munro (1926) 38 CLR 153; (1926) 32 ALR 339). The use test is the basic test relied upon to establish the deductibility of interest and looks at the application of the borrowed funds as the main criterion. Accordingly, where a loan is used for an income producing purpose the interest on the loan is deductible. Taxation Determination TD 93/13 considers the deductibility of interest on a loan used to acquire an income producing property where a non-income producing property (for example, the family home) is used as security for the loan. This determination provides that the deductibility of interest is determined by the use of the borrowed money and not by the security given for the borrowed money. In your case, you borrowed money to acquire a membership interest in a LLC for the purpose of gaining assessable income. The deductibility of the interest is not affected by the security used for the loan. As such you are entitled to a deduction for the interest incurred on the money borrowed to acquire your ownership interest in the LLC under section 8-1 of the ITAA 1997.