Tax Tip 66: The Refinancing Principal and Partnerships

The so called ‘refinancing principal’ originated with the case of Roberts. It involved the partners claiming interest on money borrowed to pay them back the money they initially injected into the partnership.

The court judgment said:

(at 505).

s51 was the predecessor of s8-1 ITAA97.

Example

Bill and Ben are 2 lawyers and enter a partnership to run a law firm (they should know better!). Each contributed $50,000 to kick the business off. After a while the business is going well and the two are able to borrow $100,000. They use these funds to pay themselves back what they contributed initially. What they then use the funds for has no bearing on the deductibility of the interest.

They may use the funds to pay off their respective main residence home loans. The partnership can claim the interest on this loan as the refinancing principal applies. The purpose of the loan for partnership use and the use was to repay the partners their original contribution.


Authority
FC of T v Roberts & Smith [1992] FCA 363; (1992) 23 ATR 494; 92 ATC 4380
http://www.austlii.edu.au/au/cases/cth/FCA/1992/363.html


ATO
TR 95/25 Income tax: deductions for interest under subsection 51(1) of the Income Tax Assessment Act 1936 following FC of T v. Roberts; FC of T v. Smith https://www.ato.gov.au/law/view/document?docid=TXR/TR9525/nat/ato/00001

The refinancing principal can also apply to trusts and I will cover this in a future tax tip.