Private ruling: Deductibility of interest
Date of advice: 27 July 2018
Published: September 2018
Ruling period: Financial year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Is the family trust entitled to claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for interest on a loan from the deceased estate? | A1: No

Relevant facts and circumstances: A previous director of the corporate trustee of the Trust, the deceased, passed away. A loan from the deceased to the family trust was discovered as outstanding and an amended probate adding the loan as an asset of the estate was granted in 2017. There is no formal loan agreement and no history of interest being charged by the lender on the loan amount. However, the beneficiaries of the family trust, who are also the beneficiaries of the estate, have decided to pay interest amounts to the estate on the loan amount. A meeting was held by the directors of the family trust (including the deceased) more than 10 years ago which resolved that: all loan monies received by the family, specifically from the deceased, is at call, and subject to interest at a rate to be determined by the lender or their legal representative at the end of the financial year. The executor of the deceased’s estate, as the legal personal representative of the deceased, made no determination regarding interest payable on any loan amounts in the 2017 financial year. The executor has never made any demands or requests for interest to be paid on the loan.

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

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for a loss or outgoing to the extent that it is incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of 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. There is no formal loan agreement and no history of interest being charged by the lender on the loan to the family trust. The only stipulation in relation to interest is contained in a resolution from the meeting of the directors of the family trust (including the deceased). That resolution establishes that liability to pay interest on the loan amount was to be determined by the deceased or their legal personal representative at the end of each financial year. As the legal personal representative of the deceased made no determination about the interest rate payable on the loan amount owed to the estate by the end of the 2017 financial year, no liability for any interest exists in that year. Also, the executor has never made any demands or requests for interest to be paid on the loan. As the family trust had no liability to pay interest for the 2017 financial year, there appears to be no commercial reason why it would choose to pay an amount for interest. Therefore, if it did choose to pay an amount for interest than it is considered that it did so for a purpose other than to earn assessable income and consequently no deduction is allowable under section 8-1 of the ITAA 1997 for that amount.