CFM17010 - Artificial payments of interest: sole or main benefit test

ICTA88/S787 prohibits relief (defined in CFM17015) in respect of any payment of interest:

• if a scheme has been effected, or
• arrangements have been made,

(whether before or after the time when the payment is made) such that the sole or main benefit that might be expected to accrue to that person from the transaction under which the interest is paid was the obtaining of a reduction in tax liability by means of any such relief.

The sole or main benefit test is an objective, rather than a subjective test: the subsection focuses on the result to be expected from the transaction rather than its purpose. (See The Crown Bedding Co Ltd v CIR 34TC107 at pp 115, 118-120, followed in Ackland & Pratten Ltd v CIR 39TC649 at p662, and approved in CIR v Brebner 43TC705 at p718).

Ordinary borrowings involving funds, which are genuinely invested or re-lent, are not affected because the tax relief on the interest paid is incidental to the transaction.