When are interest expenses tax deductible?
The determinant of whether interest on loans are tax deductible or not relates to the underlying purpose of using the borrowings.
For example:
- Interest paid on a mortgage of a rental property – deductible as it directly relates to the derivation of income
- Interest paid on a car that is used within the business – deductible for % of business usage
- Interest paid on a business loan – deductible as there is used as working capital/fund assets of the business
A common situation is when people do a cash out refinance of their home and use the cash for private purposes i.e. spending it on a holiday. As a portion of the loan now relates to private usage, that proportion would be non-deductible interest as it no longer relates to income derivation.