Did you know, eligible candidates can claim deductions on interest expenses? If not, then continue reading this blog to get answers to your questions. In today’s blog, we’ll explore ATO’s guidance and considerations for claiming deductions on interest expenses in such scenarios. Let’s dive in.
Interest Income Expenses
You are allowed to claim a deduction for account-keeping fees you incur on holding an account for an investment purpose. You can get these fees mentioned on your statements. If you have a joint account, you can only deduct what you paid in fees, charges, and taxes. For instance, you can only deduct half of the permissible account-keeping fees if you and your spouse each own an equal portion of the account. The interest you pay on a personal tax debt is not deductible. For instance, you are not permitted to deduct the interest paid on a loan taken to settle a personal tax debt.
ATO Guidance on Interest Expenses
The ATO provides valuable guidance on the treatment of interest expenses for money borrowed to get units in a property unit trust. Primarily, focusing on fixed trusts without discretionary elements.
According to the ATO’s perspective, if the unit holder has a reasonable estimation of deriving accessible distributions from the trust, this generally allows them to claim a deduction under sections 8 to 1 for at least some of the interest expenses. Even if the expenses exceed the income derived from the trust in a particular year, then the interest can still be deductible.
Full Deduction Vs. Apportionment
However, whether the unit holder can claim a full deduction for the interest expenses depends on the situation. If the unit holder expects to get accessible distributions in relation to the rental income generated by the trust and they also anticipate sharing in capital growth, then a portion of the interest expenses may be necessary when they are looking to claim a deduction.
On the other hand, if the unit holder reasonably expects the accessible distribution, they will receive from the trust to exceed their interest expenses, then no apportionment might be necessary and a full deduction can be claimed even if no distribution was received in the current year. However, when the accessible component excluding capital gains is negligible or likely to be less than the expenses incurred, a portion would generally be expected.
Arm’s Length Terms and Tax Concerns
Now, here’s an important consideration for the client’s tax position based on the ATO’s comments. The ATO might seek to deny some or all of the interest deductions if the loan to the trust is not on arm’s length terms. The ATO could argue that the client has multiple purposes or reasons for making the loan to the trust, not just the derivation of their own as accessible income. Basically, a contract is at arms’ length and is made by 2 parties working independently and freely, and without providing any favour because of some special relationships. The contract’s terms need to be commercially reasonable, and the price of the contract must not be deflated or inflated as compared to the fair market price.
Dividend and Share Income Expenses: What You Can Claim?
You are allowed to claim a deduction for expenses you incur to invest in shares, such as:
- ongoing fees of management
- fees for suggestions for making changes in your investment mix
- the part of your expenses that are for investment management, such as:
- some travel expenses
- the expense of specialist investment journals and subscriptions
- borrowing expenses and interest
- computer’s declined value
- if you were a resident of Australia when a LIC paid you a dividend, and the dividend included a LIC capital gain amount – 50% of the listed investment company (LIC) capital gain amount.
In conclusion, understanding the ATO guidance on interest expenses for property unit trusts is essential for claiming deductions effectively. Always consult a qualified tax professional to ensure you make informed decisions aligned with the ATO’s guidelines. For this, you can also contact Reliable Melbourne Accountants where we can help you stay updated with new tax rules.
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