Kate borrowed $100,000 from the local bank on 30 June 2018 for a period of five years, at an interest rate of 5% pa.

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Kate borrowed $100,000 from the local bank on 30 June 2018 for a period of five years, at an interest rate of 5% pa. Interest is to be paid annually in arrears on 30 June (first payment being due on 30 June 2019). The purpose of the loan is to invest $50,000 in shares yielding very good dividends and to on-lend $50,000 to her brother Nicholas, at an interest rate of 3% pa.

What amount can Kate claim as her interest expense in the current year, assuming that she paid $5,000 to the local bank on 30 June 2019? Explain your answer and where relevant provide legislative and/ or case authority.

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