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Is the effective interest that accumulates on a trade support loan tax deductible?

Newbie

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Replies 8

Is the effective interest that accumulates on a trade support loan taken out by an apprentice electrician tax deductible?

1 ACCEPTED SOLUTION

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Most helpful response

ATO Community Support

Replies 7

Hi @Boydee,

 

Thanks for your question.

 

Study and training loan accounts are indexed, so there is no interest. The loan amount and indexation are not tax deductible.

 

Hope this helps.

RochL

 

8 REPLIES 8

Most helpful response

ATO Community Support

Replies 7

Hi @Boydee,

 

Thanks for your question.

 

Study and training loan accounts are indexed, so there is no interest. The loan amount and indexation are not tax deductible.

 

Hope this helps.

RochL

 

Newbie

Replies 6

Thanks for the reply RochL.  However, isn't the indexation of the loan the equivalent of imposing interest? 

Newbie

Replies 5

As the Trade Support Loan is indexed annually in line with the consumer price index (CPI) isnt the effective interest rate the CPI?

ATO Community Support

Replies 2

Hi @Boydee,

 

Thank you for your reply. As @RochL advised it is not deemed as interest and only increased to keep inline with CPI. As such indexation is not deductible. The website also advises -

Specific expenses you can't claim. You can't claim a tax deduction for the following expenses:

  • tuition fees paid to an education provider by you or the Australian Government under HECS-HELP
  • the cost of accommodation and meals associated with day-to-day living expenses
  • repayments you make (whether compulsory or voluntary) on debts you may have under the following loan schemes      
    • HECS-HELP
    • FEE-HELP
    • OS-HELP
    • VET Student Loan (formerly known as VET FEE-HELP)
    • SA-HELP
    • SFSS
    • Trade Support Loans program (TSL)
    • Student Start-up Loan (SSL)
    • ABSTUDY Student Start-up Loan (ABSTUDY SSL).

 

Hope this helps.

 

Regards,

Jodie2.

Newbie

Replies 1

Thanks Jodie2

 

In the link to the ATO's website it provides the folloiwng example:

 

Example: interest on borrowings

Tim is a solicitor undertaking a Master of Law degree part-time. He borrowed $10,000, repayable over three years, to pay for his tuition fees and incurs $1,000 interest each year. Tim is entitled to claim a deduction for interest in each of the three years.

 

What's the difference between the two?  Indexation in line with CPI is interest, pegged at the prevailing rate of CPI.

 

 

 

ATO Community Support

Replies 0

Hi @Boydee,

 

Thank you for your reply. It is deemed Consumer price index (indexation) not interest otherwise it would be referred to as such. Interest rates are set by the reserve bank and individual banks set their rates accordingly. Consumer Price Index is set in line with the cost of living and published by the Australian Bureau of Statistics. Indexation is applied to HELP/TSL debts once a year on June 1. It is a once a year adjustment to sit in line with the cost of living. If the debt is zero on June 1 or has been on our systems less then 11mnths, no indexation is applied.

 

Interest like GIC is different because generally it accrues daily, this interest is applied to other debts individuals hold with us, e.g. income tax debt. Indexation is not the same as interest, nor is it deductible.

 

Hope this helps.

 

Regards,

Jodie2. 

Newbie

Replies 1

Thanks Jodie
 
Another approach (which I contend is the better approach) is to ignore the label assigned to it (i.e. the legal form) and think about the economic substance of the transaction.  The holder of a Trade Support Loan holds a debt interest.  They are obliged to pay back not only the principal (i.e. the original amount of the loan) but also an additional amount.  This additional amount is not the principal but is the equivalent of interest on the principal calculated by reference to the interest rate conferred by the CPI.  A computation that compensates for the time value/use of money (irrespective of how it might be described) is the equivalent of interest.
 
Boydee

ATO Community Support

Replies 0

Hi @Boydee,

 

Thank you for your reply. Unfortunately we cannot change this as we only administer the legislation, it is deemed indexation, not interest. If you wanted to take it up with your local MP or write in to our early engagement team or for a Private ruling you can.

 

Regards,

Jodie2.