Private ruling: Interest expense
Published: February 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for interest incurred on a loan used to pay service trust fees? | A1: Yes.


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 you a deduction for any loss or outgoing that is incurred in gaining or producing your assessable income, to the extent that it is not of a private, capital or domestic nature. Whether interest has been incurred in the course of gaining or producing assessable income generally depends on the purpose of the borrowing and the use to which the borrowed funds are put. Where a borrowing is used to acquire an assessable income producing asset, or relates to expenses of an assessable income producing activity, the interest on this borrowing is considered to be incurred in the course of gaining or producing assessable income: Taxation Ruling TR 95/25. Compound (or capitalised) interest, as with ordinary interest, derives its character from the use of the original borrowings: Taxation Determination TD 2008/27. Application to your circumstances In this case the borrowed funds have been used to pay service trust fees, which are a deductible expense incurred in the course of earning assessable income. Therefore, you are entitled to a deduction for the interest you incur on this borrowing. Where you allow interest incurred on your loan to simply charge to the loan without repayment, the interest is compounding. Accordingly you are entitled to a deduction for the interest you incur on this borrowing as its character follows that of the original borrowing, which is in respect of earning assessable income.

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 and circumstances | You operate a business with a substantial turnover and all expenses are run through a service trust. | In total the expenses amount to X of the income earned. | You have a main residence with a home loan. X of the revenue earned from the business in directed to this loan. | At the end of each month, the service trust fees are paid out of a line of credit. No repayments of principal or interest are made to the line of credit. | The service trust fees are a deductible expense.