Deductibilty of investment loan interest if no investment exists anymore

[Lawry]

Using this example: A person has a PPOR with a non deductible of say, $300k P&I loan.

They borrow an additional $100k from their PPOR equity as a new, separate IO investment loan, invest it in shares/ managed funds, declare the dividends etc as income and claim the new loan interest against their income tax each year.

In time the value of shares rises to, say $150k.

All good so far..

If the person then sells the shares, and (allowing say -$10k CGT for simplicity) then uses the $140k to pay down their non deductible P&I PPOR loan, leaving the $100k investment loan in place.

The purpose of the $100k loan was and is for investment, but the investment no longer 'exists' and there is no income from it

Q: Can the existing $100k investment loan interest still be claimed against tax in future years? or must the person first use $100k to pay off the $100k investment loan and then use only the remaining $40k to pay down the PPOR loan (or do whatever else they like with it)?

thanks

 

[alexlee]

They don't necesarily have to pay off the additional loan first, but regardless, the interest cannot be deducted, as there is no income. The 100k becomes non-deductible debt.

 

[Lawry]

thanks. what about a scenario when the investment (e.g. shares) goes down in value and is sold, and the investment loan can only be partially repaid - Is the interest on the remainder of the investment loan still deductible?

 

[marg4000]

Once the asset is sold you are not entitled to any deductions related to that asset.
Marg

 

[alexlee]

thanks. what about a scenario when the investment (e.g. shares) goes down in value and is sold, and the investment loan can only be partially repaid - Is the interest on the remainder of the investment loan still deductible?

No, because there is no income.

 

[speary]

I was under the impression than so long as you use all the sale proceeds to pay down the related investment debt, then the interest on any amount outstanding will still be deductible.

I recall reading a case where this situation came up, may have been an older couple where the husband died and left a business debt, Terry may have a better memory than me.

I believe you need to make every effort to continue to pay down the outstanding amount and not your non deductible debt otherwise the ATO will apply the anti avoidance provisions.

 

[jrc77]

Don't believe everything you read on the internet.

Have a read of "http://www.bantacs.com.au/booklets/Keeping_Your_Interest_Tax_Deductible.pdf" - especially the section "Continuing to Claim Interest on a Loan After Business or Investment Sold" and then talk to a qualified professional.

Regards,

Jason

 

[speary]

This is taken from TR 2004/4 - Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities

43. The facts in Brown and Jones presented a mirror image of those in Steele, to the extent that interest was incurred in a year subsequent to (cf 'prior to' in Steele) the year of derivation of the relevant assessable income:

?
in Brown, the taxpayer partners borrowed to acquire a delicatessen. After a number of years of trading the business was sold at a loss. The proceeds of the disposal were made over to the bank but were insufficient to satisfy the liability fully; and
?
in Jones, the taxpayer, together with her husband, borrowed money to fund a trucking and equipment hire business. After her husband's death, Mrs Jones sold the assets of the business but, as with the Browns, the proceeds (plus other amounts on hand) were insufficient and she was unable to fully repay the loan. Subsequently Mrs Jones refinanced the loan because she was able to obtain a lower rate of interest through an alternative lender.

44. In both Brown and Jones, the interest in question was incurred at a time after the relevant income earning activities had ceased and borrowed funds (or assets representing those funds, including goodwill) had been lost to the taxpayer. (Had it been otherwise, deductibility would typically be determined through an examination of the use of the borrowed funds over the period during which the interest was incurred - see paragraphs 6 & 7.) Even so, the Court had no difficulty in holding, in both instances, that interest incurred on the loans continued to be deductible despite the cessation of the relevant income earning activities.

45. Brown and Jones accordingly demonstrate that the occasion of interest expenditure can be found in the relevant income earning activities even where those activities are now defunct and all the borrowed funds (or assets representing those funds) are lost. Although these cases involved taxpayers who carried on a business, we accept that there is no reason why the same principle should not apply to income earning activities that do not constitute a business, such as passive investments.


The case I was referring to was Jones' case. Would be interested to hear from Terry and Paul on this one.

 

[Terry_w]

From my notes:


the deductibility of certain interest incurred after the cessation of business
FC of T v. Brown 99 ATC 4600; (1999) 43 ATR 1


the deductibility of certain interest incurred after the cessation of business
FC of T v. Jones 2002 ATC 4135; (2002) 49 ATR 188



Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities
TR 2003/D8
http://law.ato.gov.au/atolaw/view.htm?docid=DTR/TR2003D8/NAT/ATO/00001