When you have a loan and don't pay the accrued interest, this interest can be added to your loan balance. This added interest, known as 'compound interest', builds up over time. According to Taxation Determination TD 2008/27, the rules for deducting this type of interest from your taxes are the same as for regular interest. It all depends on why you borrowed the money and how you use it, as explained in the case Hart v FCT [2002] FCAFC 222.
However, be cautious of the general anti-avoidance rules under Part IVA, especially when dealing with 'linked' or 'split' loan facilities. In a linked loan scenario, repayments might be directed towards a non-income producing loan, allowing the interest on the income-producing loan to capitalize, which means it's added to the loan balance and accrues more interest. Similarly, a split loan facility involves one loan divided into sub-accounts for different purposes—one for generating income and another for personal use.
Be mindful of how you manage these loans to avoid potential tax issues. If you need further clarification or assistance, please reach out to Tax Ideas Accountants & Advisers at +61 2 83181545 or book an appointment through our live calendar.
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