Will adding a spouse as a borrower affect my full deductibility
Scenario:
I (sole trader, Australian taxpayer) have 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 my spouse and I. For asset protection purposes, I wish to transfer my interest in the property to my spouse. The bank wants security to be owned by a borrower and has requested that my 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 me of interest paid on the line of credit, if the fund is applied solely for business purposes?
Explanation:
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 your wife is added to the loan as a borrower, it will no longer be the case that you will have incurred all the expenditure. Instead, both you and your 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 you and your wife. You will no longer be able to claim a deduction for the entire amount.