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ATO Interpretative Decision

ATO ID 2006/297 (Withdrawn)

Income Tax
Deductibility of compound interest on a split loan facility

Attention This ATO ID is withdrawn as guidance is contained in Taxation Ruling TR 98/22 Income tax: the taxation consequences for taxpayers entering into certain linked or split loan facilities and in the Rental properties Guide 2016 (QC 48221).
Attention This document has changed over time. View its history.
FOI status: may be released
Status of this decision: Decision withdrawn 31 March 2017.

CautionCAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.


Issue

Is the taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for compound interest incurred on funds borrowed, under a split loan facility, to acquire an income producing asset?

Decision

Yes. The taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for compound interest incurred on funds borrowed, under a split loan facility, to acquire an income producing asset. The Commissioner, however, will exercise his discretion under Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) to disallow the deduction otherwise allowable.

Facts

The taxpayer took out a loan to purchase a residential property which they used as their main residence (property A).

The taxpayer then purchased another property which was used for income producing purposes (property B).

They took out a split loan facility with a financial institution with one account being used to refinance the loan for property A and the other account being used to purchase property B.

The split loan facility required a minimum principal and interest repayment.

The taxpayer allocated all of their repayments to the account that related to property A.

As interest was capitalised on the account that related to property B, compound interest, being interest on the capitalised interest, accrued on that account.

Reasons for Decision

Section 8-1 of the ITAA 1997 allows a deduction for any loss or outgoing that is incurred in gaining or producing assessable income to the extent that it is not of a private, capital or domestic nature.

The deductibility of an outgoing is determined by its essential character ( Lunney & Hayley v. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 AITR 166).

The character of interest is determined by the purpose of the borrowing. Generally, the purpose of a borrowing can be determined from the use of borrowed funds and outgoings of interest ordinarily draw their character from that use ( Fletcher & Ors v. Federal Commissioner of Taxation (1991) 173 CLR 1; 91 ATC 4950; (1991) 22 ATR 613, Kidston Goldmines Limited v. Federal Commissioner of Taxation (1991) 30 FCR 77; 91 ATC 4538; (1991) 22 ATR 168).

It is, therefore, generally accepted that ordinary interest incurred on funds borrowed to acquire an income producing asset is an allowable deduction.

In Hart v. Federal Commissioner of Taxation (2002) 121 FCR 206; 2002 ATC 4608; (2002) 50 ATR 369 it was held that compound interest, as with ordinary interest, derives its character from the use of the original borrowings.

In this case the compound interest was incurred on funds borrowed, under the split loan facility, to acquire property B which was used solely for income producing purposes. As such, the compound interest was incurred in earning assessable income and is an allowable deduction under section 8-1 of the ITAA 1997.

Notwithstanding the above conclusion, the Commissioner will apply his discretion under Part IVA of the ITAA 1936 to disallow the deduction. A full and detailed explanation of the reasons for the application of Part IVA is set out in Taxation Ruling TR 98/22.

Date of decision: 5 October 2006

Year of income:Year ended 30 June 2006

Legislative references:
Income Tax Assessment Act 1936
   Part IVA

Income Tax Assessment Act 1997
   section 8-1

Case references:
Fletcher & Ors v. Federal Commissioner of Taxation
   (1991) 173 CLR 1
   91 ATC 4950
   22 ATR 613

Hart v. Federal Commissioner of Taxation
   (2002) 121 FCR 206
   2002 ATC 4608
   50 ATR 369

Kidston Goldmines Limited v. Federal Commissioner of Taxation
   (1991) 30 FCR 77
   91 ATC 4538
   22 ATR 168

Lunney & Hayley v. Federal Commissioner of Taxation
   100 CLR 478
   (1958) 11 ATD 404
   (1958) 7 AITR 166

Related Public Rulings (including Determinations)
Taxation Ruling TR 98/22
Taxation Ruling TR 2000/2
Taxation Determination TD 1999/42

Keywords
Borrowings & loans
Deductions & expenses
Interest expenses
Part IVA

Siebel/TDMS reference number: 5485189; 1-AWUAVNF

Business line: Small Business/Individual Taxpayers

Date of publication: 27 October 2006

ISSN: 1445-2782

ATO ID 2006/297 (Withdrawn) history   Top  
   Date   Version 
    5 October 2006   Original statement   
 You are here ®  31 March 2017   Withdrawn   


 


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