Private ruling: Interest - deductibility
Published: September 2014
Ruling period: 1 July 2014 to 30 June 2015 | 1 July 2015 to 30 June 2016 | 1 July 2016 to 30 June 2017 | 1 July 2017 to 30 June 2018 | 1 July 2018 to 30 June 2019 | 1 July 2019 to 30 June 2020 | 1 July 2020 to 30 June 2021

Ruling: Questions and answers | Are you entitled to a deduction, under section 8-1 of the Income Tax Assessment Act 1997, for interest paid on a loan? | No.

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. The trust owns shares in company 1. During the year company 1 declared a dividend in favour of the trust. Company 1 satisfied its obligation to pay the dividend by issuing further shares in itself in favour of the trust. The trust brought to account the dividend/shares as income. The trustee of the trust resolved to distribute the income of the trust to its beneficiary, company 2. According to the provisions of the deed of trust for the trust the distribution of income was satisfied by converting it to an 'at call loan' and as a result there was a balance owing by the trust to company 2 at the end of the financial year. A complying loan agreement, pursuant to section 109N of the Income Tax Assessment Act 1936, was entered into. As per the terms of the loan agreement interest is payable on the loan. You believe the funds otherwise available to enable the trust to pay to company 2 its distribution amount has been used to acquire the additional shares in company 1 rather than be available as cash for the purpose of paying the distribution.

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 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. 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. | Detailed Reasoning - Application to your circumstances: The shares acquired by the trust were a substitution for a cash dividend and which satisfied company 1s obligations to the trust. The distribution of income by the trust to its beneficiary, company 2 was satisfied by converting the distribution to an 'at call loan'. These transactions are isolated events and did not result in the distribution amount being used to acquire additional shares in company 1 Consequently, the interest payable on the loan is not deductible.