Private ruling: interest on loan repayments
Published: February 2014
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the trustee able to claim a tax deduction for the interest charged on the home loan when the funds are being used by the business? | A1: No.

Relevant facts and circumstances: The trust conducts a business. Mr X is a director of the trustee company. In July 2012, Mr and Mrs X sold their home and purchased another home. This resulted in them taking out a home loan. This loan freed up their personal savings to use in the business. A copy of the home loan agreement has been provided. The trustee cheque account makes the loan repayments of the home loan. There are no loan agreements in place between Mr and Mrs X and the trustee.

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

Reasons for decision: Summary: A deduction is available under section 8-1 of the Income Tax Assessment Act 1997 if a loss or outgoing was incurred in gaining or producing assessable income, or if it was necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, providing the expense is not of a capital, private or domestic nature. A loss or outgoing need not actually produce assessable income to give rise to a deduction, as long as it would be expected to produce assessable income. However, it is the assessable income of the person who incurred the loss or outgoing that is relevant. For example, if a company takes out a loan, the fact that an associated company will derive assessable income as a result is not of itself sufficient to allow a deduction for the interest on the borrowed funds ( Hooker Rex Pty Ltd v FC of T 88 ATC 4392). It is noted that there is no statutory definition of the term 'incurred'. As a broad principle, you incur an outgoing at the time you owe a present money debt that you cannot escape In your situation, Mr and Mrs X entered into a home loan agreement with a financial institution. This loan was in both their names, for the purchase of their private home. The interest on this loan is incurred personally by Mr and Mrs X as per the loan contract, regardless of the fact that repayments are made by the business as part of a private arrangement. It is Mr and Mrs X who owe the debt and have the legal obligation to repay it. The amount of the home loan was used to purchase the private property of Mr and Mrs X and therefore it can be seen that this does not relate to the production of any assessable income of the business. You have argued that the purpose of the loan should be the determining factor. It is noted that, legally, the purpose of the loan in this case was to purchase the private residence of Mr and Mrs X. Although this may have freed up Mr and Mrs X's personal savings for use in the business under an informal and private arrangement, the legal purpose of the loan, and the use of the loan monies to purchase a private residence, cannot be disregarded.