Private ruling: Interest expense deduction
Published: June 2012
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction for the interest expenses you incur on a loan used to buy a vehicle that will be partly used for work related purposes? | A1: Yes

Relevant facts and circumstances: You are a sales representative and you use your vehicle for both private and work use. Your travel in excess of 5,000 kilometres per year for work and your work use starts after you arrive at your workplace. In 2012 you will purchase a new vehicle and to finance the purchase you intend to use funds available on your home mortgage through a redraw facility. You will incur an additional interest expense on your mortgage. Your mortgage was used to buy your residence and you have previously used the redraw facility for private purchases and to pay off your credit card. You intend to use the log book method to calculate the amount of work use.

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. Taxation Ruling TR 95/25 provides the Commissioner's view regarding the deductibility of interest expenses. There must be a sufficient connection between the interest expense and the activities which produce assessable income and, it is necessary to examine the purpose of the borrowing and the use to which the borrowed funds are put. The 'use' test, established in the High Court case Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, (1926) 32 ALR 339 is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion. Taxation Ruling TR 2000/2 states that the deductibility of interest on a further borrowing of money under a redraw facility depends upon the use to which the redrawn funds are put. Where the original borrowing is for non-income producing purposes and the taxpayer uses the redrawn funds wholly or partly for income producing purposes, that part of the accrued interest attributable to the redrawn funds used for income producing purposes is deductible. In your case, you will be incurring interest on borrowed money used to buy a vehicle. As the borrowed funds are being used partially for income producing purposes, the associated interest expenses are an allowable deduction. The interest expenses apportioned for work use are an allowable deduction under section 8-1 of the ITAA 1997.

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