Issue
Whether interest repayments on an investment loan where an amount is redrawn and used for non-income producing purposes is an allowable deduction under subsection 51(1) of the Income Tax Assessment Act 1936.
Decision
Interest repayments on an investment loan where an amount is redrawn and used for non-income producing purposes are not an allowable deduction under subsection 51(1) of the Income Tax Assessment Act 1936.
Facts
The taxpayer borrowed funds for the purchase of an income producing property. After a period of time the taxpayer made an additional repayment on the loan in order to reduce the interest charges. Accordingly, the principal outstanding is reduced by this repayment. The taxpayer then redrew an amount under a redraw facility of the loan . The amount redrawn was used for non-income producing purposes and was equal to the additional repayment previously made on the loan. The redrawn amount increased the loan principal to its original level. The interest charges were subsequently increased.
Reasons For Decision
As the redrawn amount is used for non-income producing purposes, the increase in the interest expense cannot be claimed as a deduction as it is not incurred in deriving assessable income, in accordance with subsection 51(1) of the Income Tax Assessment Act 1936 .
In FC of T v South Australia Battery Makers Pty Ltd (1978) 140 CLR 645 the court stated that it is the advantage which the expenditure was intended to gain, directly or indirectly, for the taxpayer that is relevant in determining the character of the expenditure. In these circumstances there is no obvious commercial explanation for incurring the further interest amount. Rather the object of the facility is to enable the taxpayer to reduce the principal amount outstanding.
Therefore a single liability incurred in respect of interest on the investment in any particular period serves more than one end, activity or object. Taxation Ruling TR 98/22 Income tax: the taxation consequences for taxpayers entering into certain linked or split loan facilities, considers that the further amount of interest is incurred for the purpose of enabling a corresponding reduction in the private account and as a result an apportionment of the interest incurred on the investment account is warranted.