Private ruling: Deductions - Interest Expense
Date of advice: 6 May 2016
Published: June 2016
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020
Date scheme commenced: 1 July 2016

Ruling: Q1: Where part of your line of credit investment loan is refinanced are you entitled to a deduction for the full amount of interest incurred on both your line of credit loan and the refinanced portion? | A1: Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You have a line of credit loan account. You use this loan money for investment purposes. The money from this loan is not used for personal expenditure. You drew down funds for this loan in an earlier financial year. You entered into a formal written agreement with an entity and refinanced part of your existing loan. The interest on the loan with the entity was charged at a variable bank interest rate over the period of the loan arrangement. You have not repaid the loan to the entity. You have made repayments to reduce the balance of the loan. The entity is intending to extend the loan arrangement and intends to continue to charge the same variable interest rate as a financial institution, so that if the bank interest rate changes, the interest rate on the entity loan will change accordingly. The entity requires the loan to be paid out in part or in full by a certain date or when the assets purchased with the loan are sold.

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

Reasons for decision: Summary: You are entitled to a deduction for the interest expense on your line of credit facility and the interest expense in relation to the loan held with the Family Trust. | Detailed Reasoning - Detailed reasoning: 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 discusses deductions for interest under section 8-1 of the ITAA 1997. Whether a loss or outgoing satisfies the requirements of section 8-1 of the ITAA 1997 depends on all the facts and matters relating to the loss or outgoing. The interest expense must have a sufficient connection with the operations or activities which more directly gain or produce the taxpayer's assessable income and not be capital, private or domestic in nature. 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. When a loan is refinanced, the new loan takes on the same character as the previous loan. That is refinancing a loan does not in itself break the nexus between the outgoings of interest under a loan and the income earning activities. In your case, the loan with the entity is an arms-length commercial arrangement. The funds borrowed have been used for income producing purposes. Accordingly, you are entitled to a deduction under section 8-1 of the ITAA 1997 for the interest expenses on the money drawn from your line of credit account and the interest expense on the loan with the entity as the interest expense has the sufficient connection with the earning of your assessable income.