The Inland Revenue Department has confirmed premiums paid on an endowment policy taken out to repay a business loan are not tax deductible expenses.
IRD makes its position clear in the latest Tax Information Bulletin.
It says a woman anxious to obtain a $500,000 loan for her business asked IRD if the annual premiums of $20,000 are deductible expenses.
She told the department that a representative of a financial institution has advised her to take out an endowment policy that will mature in 15 years time, yielding the amount of the loan.
During the period of the loan she will make interest payments only, and when the loan is due for repayment the endowment policy will provide sufficient funds to pay off the capital.
IRD says deductions for expenses incurred in borrowing money are deductible, but not the repayment of the money itself.
It says items such as loan application fees, brokerage, legal and accounting fees, which are generally incurred before taking out the loan, are deductible. Repayment of the money itself is not.
Mortgage repayment insurance was also deductible as it is taken out as protection against certain misfortunes.
In regard to the woman's question IRD says; "It is the commissioner's view that the annual premiums are not expenses incurred in borrowing money. Rather such an arrangement is intended to provide funds for the repayment of the money that has been borrowed."
Therefore it has advised the woman that a deduction for the annual premiums is not permitted.
The Inland Revenue Department has confirmed premiums paid on an endowment policy taken out to repay a business loan are not tax deductible expenses.