What conditions must be met under section 393 of the Income Tax Act 2007 for interest relief on a loan to acquire shares in a close company?

Under section 393, the company must not be a close investment-holding company when the interest is paid. The individual must not have recovered capital from the company during the relevant period. Additionally, either the full-time working conditions or the material interest conditions must be satisfied for relief to be available.

What is the capital recovery condition under section 393 ITA 2007?

The capital recovery condition requires that the individual has not recovered any capital from the company between the date the loan was used and the date the interest is paid. The only exception is where recovered capital has already been treated as a loan repayment under section 406(2), which does not disqualify the individual from relief.

What are the full-time working conditions under section 393 of the Income Tax Act 2007?

The full-time working conditions require that the individual holds ordinary share capital of the company when the interest is paid. Additionally, for the greater part of the period from when the loan was used to when interest is paid, the individual must have been actively managing or conducting the business of the company or an associated company.

How do the material interest conditions apply where the company mainly holds investments or property?

If the individual has a material interest in a company that exists mainly to hold investments or property, an additional requirement applies. Either the individual must meet the full-time working condition by actively managing the company, or no property held by the company may be used as a residence by the individual. This prevents relief where the individual lives in company-owned property without working full-time.

Income Tax Act 2007 section 393

Eligibility requirements for interest on loans within section 392

Section 393 sets out the conditions that must be met for an individual to claim income tax relief on interest paid on a loan used to acquire an interest in a close company under section 392.

The company must not be a close investment-holding company at the time the interest is paid, though it does not need to be a close company at that point.
The individual must not have recovered any capital from the company during the period from the loan being used to the interest being paid, except for amounts already treated as a loan repayment under section 406(2).
Either the full-time working conditions or the material interest conditions must be satisfied, in addition to the capital recovery condition.
Where the company mainly holds investments or property and the individual has a material interest, the individual must either work full-time for the company or not use any company property as a residence.

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