Income tax: is an investor who borrows to fund the purchase price of an infrastructure bond, entitled to a deduction under subsection 51(1) of the Income Tax Assessment Act 1936 for any interest incurred by him or her for that purpose?

Interest derived from an infrastructure bond is tax-exempt and interest incurred on funds borrowed for the purpose of investing in those borrowings will generally be an allowable deduction by virtue of section 159GZZZZF.

The extent to which interest paid by an investor on a loan used for the full purchase price of an infrastructure bond will be tax deductible depends on an investor's particular circumstances. In order for the interest to be deductible the investor must have entered into the loan solely for the purpose of funding the investment in or acquisition of the infrastructure borrowings. One indicator that the investor had a purpose other than, or in addition to, funding the infrastructure borrowing would be where the interest deduction return on the infrastructure borrowing is greater than the net exempt return of the infrastructure borrowing grossed up by the investor's marginal tax rate.