Q: A sole trader taxpayer has a line of credit from an Australian bank. It is used for business purposes only. It is secured by a property held in the joint names of the taxpayer and his spouse. For asset protection purposes, the taxpayer wishes to transfer his interest in the property to his spouse. The bank wants security to be owned by a borrower and has requested that the spouse’s name be added as a borrower on the line of credit. Would having the spouse named on the account jeopardise full deductibility to the sole trader of interest paid on the line of credit if the fund is applied solely for business purposes?
A: Interest expense is deductible under s 8-1 if and to the extent to which it is incurred in gaining or producing the assessable income or in carrying on a business for that purpose, except to the extent to which it is of a capital, private or domestic nature or incurred in gaining or producing exempt income. The issue here is that if the wife is added to the loan as a borrower, it will no longer be the case that the husband will have incurred all the expenditure. Instead, both the husband and wife will have an obligation under the loan and will share the deduction equally. The entire amount of loan interest will still be deductible – it is still being used for business purposes after all – but that deduction will now be split between the husband and wife. The husband will no longer be able to claim a deduction for the entire amount.