With the cash rate at 4.60 per cent, interest is a bigger line in many small business budgets. The good news is that interest on money borrowed for your business is generally deductible. The catch is how you use the money.
The test is what you spent the money on
The ATO lists interest on money borrowed to produce assessable income, or to buy income producing assets, as a deductible operating expense. Its long standing ruling on this, TR 95/25, says the character of the interest generally depends on what the borrowed funds are used for, not on what the loan is secured against. A loan secured by your home can still produce deductible interest if the money went into your business.
Mixed purpose loans
If you borrow once and spend part on the business and part on private things, only the business share of the interest is deductible. Repayments cannot be directed at only the private or only the business part, so the split can get messy over time. The simplest fix is separate loans or separate loan accounts for each purpose.
What to do
- Keep the paper trail. Keep the loan contract, statements and invoices showing where the money went.
- Do not mix. Draw the business amount into the business bank account first, then pay suppliers from there.
- Claim related costs. The ATO also lists bank fees and legal costs of borrowing among deductible operating expenses, though some borrowing costs may need to be claimed over time.
- Tell your tax agent. Share the loan details at tax time so the split is worked out correctly.
This is general information only. The rules for borrowing costs and mixed loans can be technical, so check with a registered tax agent before you claim.