Claiming deductions for interest paid
Scenario:
If I buy a car worth $300,000, I can only depreciate up to the cost limit. What if I finance a car for $300,000? Is there a limit on the interest which I can claim?
Explanation:
Interest is deductible under s 8-1 of ITAA 1997, if the expense can be characterised as being an outgoing incurred in gaining or producing assessable income or is incurred in carrying on a business for the purpose of gaining or producing assessable income. Further, an interest expense is determined by the use to which the borrowed funds have been put (Flectcher & Ors v FC of T 91 ATC 4950). While s40-230 limits the amount of depreciation that can be claimed under s 40-25 for a luxury car, the section does not affect the amount of interest otherwise deductible under s 8-1. In particular, s40-25 does not prevent a deduction for interest (ITAA 1997 S 8-1 (2)(d)) because it is limited to deductions available under Div 40. Therefore, if you use the car 100% for business or employment purposes, then you could claim all the interest in your financing lease for the car.