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Forward Thinking Magazine : April 2011
21 ExamPlE 3: Total net income intentions The ATO accepts that an inherent feature of ‘negative gearing’ is that interest paid in an income year exceeds income derived, resulting in a net tax loss for that year (see Taxation Ruling TR 95/33). Generally negative gearing arrangements produce this result in the initial few years. However, the overall net income intentions of the borrower for the entire intended holding period of the asset are important. If, over the intended holding period, the expected amount of total assessable income is less than the amount of expenses, the taxpayer’s subjective purpose, motive or intention in paying the expenses may come into question. If a conclusion can be drawn that the dominant purpose in entering into an arrangement is to incur the expenses in order to minimise current tax liabilities, rather than long term net income generation, then immediate tax deductions may be denied. AdvISeR TIP The intention of the taxpayer is often a key issue in the determination of tax deductibility of interest payments. Helping clients focus their intentions on long term income producing purposes for borrowings may aid in establishing interest deductibility. Elle borrowed funds to purchase a rental property in year 1. In year 3 the property ceased to be let and the existing dwelling was demolished. It was Elle’s intention to subdivide the property, build new dwellings on each block and offer them for sale. Elle had no intention after the demolition of the original dwelling to use any of the land for income producing purposes - her purpose was to sell the land for capital gain. Interest incurred on the borrowings was deductible only to the point the original dwelling was no longer available for leasing in year 3. See Private Ruling 38895. inTErEST noT dEducTiBlE whilST aSSET non-incomE Producing: MAStech