Income Tax Act 2007 section 809BZE

Deemed interest if borrower is a partnership

Section 809BZE allows a member of a partnership that is the borrower under a type 1 finance arrangement to treat a finance charge recorded in the accounts as interest payable on a loan, thereby obtaining income tax relief.

• Where a partnership is the borrower under a type 1 finance arrangement, and the arrangement is either blocked from having its intended tax effect for a partnership member or the partnership is subject to the income-charging rules, a finance charge recorded under GAAP may be treated as loan interest for income tax purposes.
• The person entitled to treat the finance charge as interest is the individual partner within the charge to income tax — either the partner in respect of whom the arrangement is blocked, or, where the income-charging rules apply to the partnership, the partner who is chargeable to income tax.
• The finance charge must be recorded in either the person's own accounts or the partnership's accounts in accordance with generally accepted accounting practice; it is the amount so recorded that may be treated as interest payable by the partnership on a loan.
• To determine when the deemed interest is treated as paid, the periodic payments under the arrangement are split into capital repayment elements and interest elements, and the deemed interest is treated as paid at the same times as those interest elements are paid.