Advance to Partnership not a Loan

The AAT has affirmed that an advance to a partnership was a capital contribution to the partnership and not a loan as submitted by the taxpayers. Therefore, the Tribunal held that deductions claimed by the taxpayers for interest and loan service costs were not deductible.

In reaching its decision, the Tribunal noted that there was no formal agreement relating to the loan. It also noted the taxpayers’ accountant recorded the advance in the books of the partnership as being of a capital nature.

*  A written agreement should be entered into to formalise a loan. In addition, the terms of the loan must be at arm's length.