Can you claim interest expenses from your home loan account as a deduction if you use the monies from the home loan offset account / redraw for the purposes of share investing under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
No This ruling applies for the following periods: Year ended 30 June 20XX Year ending 30 June 20XX The scheme commenced on: 1 March 20XX
You have a 100% Offset Home Loan with Company A for $XXX to purchase your main residential home. You provided bank statements for XXX to XX 20XX and XXX to XXX 20XX which confirmed that the loan is a 100% Offset Home Loan. The statements you provided confirmed that deposits were made into the offset account totalling $XXX,XXX during XXX 20XX. The statements provided indicate by the description that the amount of $XXX,XXX has been withdrawn to purchase shares during the 20XX income year. The statements provided indicate by the description that the amount of $XXX,XXX has been withdrawn to purchase shares in the 20XX income year. The statement provided indicate by the description that the amount of $XX,XXX has been withdrawn for private use. You referred to the ATO website 'If you borrow money to buy shares or other investments from which you earn dividends or other assessable income, you can claim a deduction for the interest you pay. Only interest expenses you incur for an income-producing purpose are deductible'.
Income Tax Assessment Act 1997 section 8-1
Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith referring to paragraph 2: The deductibility of a loss or outgoing comprising interest under section 8-1 of the Income Tax Assessment Act (ITAA 1997) (formerly subsection 51(1) of the Income Tax Assessment Act 1936 ) depends upon satisfying the words of the section, that is, being able to show that the loss or outgoing (or part of the loss or outgoing in an appropriate case of apportionment) is: (a) Incurred by the taxpayer in gaining or producing assessable income of the taxpayer and the loss or outgoing is not capital, or of a capital, private or domestic nature ('first limb'); or (b) Necessarily incurred by the taxpayer in carrying on a business for the purpose of gaining or producing assessable income of the taxpayer and the loss or outgoing is not capital, or of a capital, private or domestic nature ('second limb') Taxation Ruling TR 93/6 (TR 93/6) Income tax and fringe benefits tax: loan account offset arrangements,
outlines the Commissioner's view on loan account offset arrangements which are used to reduce the interest payable on a taxpayer's loan account. TR 93/6 provides that an acceptable loan account offset arrangement with dual accounts operates as follows: • There are two accounts - a loan account and a deposit account. It is accepted that where the deposit account is a sub-account, it will be treated as a separate account. • No interest is received on the deposit account. • The reduction of the loan account interest should be achieved by offsetting the balances of the two accounts. An offset account is a separate account, and deposits to and withdrawals from the account will not change the character of the interest expense on the associated loan, in this case, the home Loan. The deposit to the offset account will not decrease the balance of the home loan. Depositing funds into the offset account reflects an increase in savings.
Conversely, withdrawing funds from the offset account will increase the interest payable on the home loan, but will not increase the balance of the home loan. The money withdrawn from the offset account is not in the form of borrowings and will not incur any interest. The amount withdrawn is reflected as a reduction in savings. Consequently, any use to which these funds are put (including an income producing purpose such as purchasing shares) is funded by savings and not a new loan. As the offset account is linked to the home loan and the home loan is not used for income producing purposes, you are not entitled to claim a deduction for interest incurred on the home loan under section 8-1 of the ITAA 1997 as the expense was not incurred in gaining or producing assessable income and is considered private in nature.
As highlighted in paragraph 6 of TR 93/6, to be an acceptable offset arrangement for tax purposes, it is essential that there be no entitlement, either in law or in equity, to receive interest payment or payments in the nature of interest on the amounts credited to the deposit account. The only benefit arising in the deposit account should be the right to ensure that the interest payable on the loan account is reduced. Application to your situation Your home loan was taken out for the purchase of your residential property and therefore any interest incurred is of a private nature. Deposits made into the offset account do not reduce the balance of the home loan they offset the interest calculated each month which is then applied to the loan. While the withdrawal of funds from the offset account are being used for the purchase of shares, the origin of these funds are private in nature and are the withdrawal from your offset account, which represents a reduction of your savings, not borrowings and do not incur interest.