This session explores the deductibility of interest and borrowing expenses in a family and trust context. We will review Ure v FCT alongside section 8-1 and the borrowing expense rules (formerly s 51(1) and s 67 ITAA 1936).
Discussion Focus:
- How the Federal Court applied Ronpibon-style apportionment to interest on borrowings used in a family/trust structure, where the taxpayer borrowed at commercial rates (up to 12.5% p.a.) but on-lent at 1% p.a. to his wife and a family company.
- The objective assessment of purpose and “incidental and relevant” connection: when interest outgoings are properly characterised as incurred in gaining assessable income, and when they are instead private or domestic (e.g. funding the family home and benefiting a discretionary trust).
- The principle that, in a low-interest related-party loan, interest is only deductible to the extent it relates to the small amount of interest actually derived, with the balance denied as private/domestic expenditure.
- Practical application of apportionment under s 8-1 where one borrowing serves multiple ends (income production, asset protection, family benefit, tax planning), and how “fair and reasonable” apportionment is approached in practice.
- The treatment of borrowing expenses and guarantee fees under s 67 ITAA 1936 (now s 25-25 ITAA 1997):
- what counts as “expenditure incurred in borrowing money”,
- how those costs are spread over the life of the loan, and
- the contrast between interest (price of money) and borrowing costs (cost of the borrowing itself).
- Contemporary implications for related-party loans and common structuring (family trusts, private companies, intra-group on-lending, interest-only loans) and the risk that overly concessional arrangements will see deductions limited to the income actually returned.
Please see below link to case materials which is assumed reading in order to participate in the discussion:
Re Richard Michael Ure v the Commissioner of Taxation of the Commonwealth of Australia [1981] FCA 9
Discussion led by Llewellyn Wood