Income Tax Act 2007 section 384A

Restriction on relief where arrangements minimise risk to borrower

Section 384A denies income tax relief for interest paid on a loan where the loan forms part of arrangements that are virtually certain to produce a post-tax profit for the borrower and those arrangements appear designed to reduce the borrower's income tax or capital gains tax liability.

• Interest relief is denied where a loan is part of arrangements that appear very likely to produce a post-tax advantage and those arrangements seem designed to reduce the borrower's income tax or capital gains tax liability
• A post-tax advantage arises where, after appropriate tax adjustments, the amounts flowing back to the borrower (or connected persons) equal or exceed the borrower's total outgoings on the loan and any of their own capital invested
• Anti-avoidance provisions ensure the rule still applies where the arrangements include fallback mechanisms guaranteeing the borrower receives an amount not significantly less than a full post-tax advantage, even if there is a meaningful risk of not achieving the full advantage
• The definition of arrangements is deliberately broad, covering any combination of agreements, understandings, schemes or transactions (whether legally enforceable or not), together with any related transactions that would not have been entered into independently