Interest Deductibility

Interest is a common deduction claimed by taxpayers. Generally, interest is seen as being inherently deductible where it is incurred in gaining or producing assessable income. This will involve an analysis of s 8-1 and whether the various elements of the section are satisfied.

Interest is not defined (apart than for withholding tax purposes) in the ITAA 1997 or ITAA 1936. However, several cases have suggested a legal definition of interest. Broadly all of these cases note that interest is compensation for utilising another’s principal sum.

These notes explore some of the key issues in interest deductibility including:

• A quick refresher on the elements to be proven for deductibility of interest
• A discussion of the nexus test and some key takeaways
• Exploration of timing issues including interest incurred before income is derived and after a business has ceased
• The impact of refinancing, redraws, repayments and on-lending
• A consideration of whether interest can be capital
• A brief consideration of other statutory impacts

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