Private ruling: Interest expenses
Published: June 2013
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to a deduction for the interest expenses incurred? | A1: No.

Relevant facts and circumstances: You divorced from your partner. The matrimonial assets consisted of a family home and shares in a private company. The private company owns a commercial property. The matrimonial assets were divided as such that you received the shares in the private company and your former partner received the family home and an amount in cash. The cash was provided as the commercial property was worth more than the family home. In order to fund the payout to your former partner you borrowed the cash from the bank.

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, or relate to the earning of exempt income. Taxation Ruling TR 95/25 deals with the general principles governing deductibility of interest under section 8-1 of the ITAA 1997. To establish that there is a sufficient connection between incurring an interest expense and the gaining or producing of assessable income, regard must be given to all the circumstances including the use to which the borrowed funds are put. The 'use' test, established in FC of T v Munro (1926) 38 CLR 153, is the basic test for the deductibility of interest, and looks to the application of the borrowed funds as the main criteria. Where borrowed funds are used for private purposes the interest will not be deductible even if there is a secondary result that other assets are able to be retained for the purpose of producing assessable income. In your case, you borrowed funds to comply with a marriage settlement. As part of the settlement, your former partner received the family home and an amount in cash and you received the shares in a private company. A taxpayer's marital arrangements are normally regarded as being private in nature. The interest you incur on this loan is not an expense incurred in gaining or producing your assessable income from the shares in the private company as it is considered an expense relating to your marriage settlement. Accordingly, the interest is regarded as being of a private or domestic nature and you are not entitled to a deduction for this expense.