Private ruling: Interest expense
Published: July 2012
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2007

Ruling: Q1: Is the interest you and your spouse incur on a loan a deductible expense where the funds were on-lent? | A1: Yes

Relevant facts and circumstances: In 2009 a private binding ruling covering several years was issued to you allowing you a deductible expense for the interest and borrowing expenses incurred on a loan that you had taken out and on-lent to a company. This company used the funds to purchase a franchise. You expect to receive interest income when the company makes a profit however the franchisor advised that a refurbishment of the franchisee's store was necessary. The cost of this refurbishment will delay the franchisee from producing a profit by one year.

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 expenditure incurred in the gaining or producing of assessable income, or in the carrying on of a business to gain or produce assessable income. No deduction is allowable to the extent that the expense is private, domestic or capital in nature. | Detailed Reasoning - Interest expense: In general, the use of the funds on which the interest is paid or payable will determine deductibility. In Economedes v. Federal Commissioner of Taxation [2004] AATA 1249; 2004 ATC 2353; (2004) 58 ATR 1046, the AAT held that a taxpayer who borrowed money from a bank and on-lent it to a family company to purchase a takeaway food business was entitled to a deduction for the interest on the bank loan. This decision followed that in FC of T v. Total Holdings (Australia) Pty Ltd 79 ATC 4279; (1979) 9 ATR 885 where the funds were on-lent with the reasonable expectation of deriving income from the company in the form of dividends and interest. The claim arose in respect of interest payable to the bank after the business had failed and been wound up. Similarly you and your spouse borrowed funds from a bank which you on-lent to a company. The funds were used by the company to purchase a franchise. When on-lending the funds you anticipated receiving interest income in future financial years. However when franchisor advised that a refurbishment of the franchisee's store was necessary your expectation of earning interest income was delayed by 12 months. Although no income was derived for several years and the expected income has been delayed 12 months it is considered that your intentions upon obtaining the loan and then extending it were to derive interest income through on-lending the funds to the company. Therefore, a deduction for interest on the investment loan is allowable under section 8-1 of the ITAA 1997.

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.