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Edited version of private ruling
Authorisation Number: 1011489472976
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Ruling
Subject: Interest expense
Question
Are you entitled to a deduction for interest expenses incurred on a loan used to pay the debts of a company you were a director of?
Answer
No.
This ruling applies for the following periods:
1 July 2009 to 30 June 2010
1 July 2010 to 30 June 2011
1 July 2011 to 30 June 2012
1 July 2012 to 30 June 2013
The scheme commences on:
1 July 2009
Relevant facts and circumstances
You were a director of a company and held 50% of its shares.
The company went into voluntary administration.
After this, you borrowed money, in your individual name, which was used to pay the company's liabilities.
You have incurred interest expense on the loans.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Reasons for decision
Summary
You are not entitled to a deduction for interest incurred on money borrowed to pay the company's debts as the expense does not relate to the earning of your assessable income.
Detailed reasoning
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.
To be deductible to a taxpayer, any expenditure incurred must be incidental or relevant to the gaining or producing of their assessable income or the carrying on of a business for the purpose of gaining or producing their assessable income.
As a general rule, a loss or outgoing will not be deductible if it is incurred in gaining or producing the assessable income of another entity other than the one who incurs it. A company is a separate legal entity from its shareholders and directors.
You were a director of a company that went into voluntary administration. You borrowed funds, in your individual name, which were used to pay the company's liabilities. You have incurred interest expense on the borrowed funds.
In your application, you have referred to Taxation Rulings IT 2606 and TR 2004/4 which are discussed below.
TR 2004/4 provides the Commissioner's view on the deductibility of interest expenses incurred after the cessation of relevant income earning activities. The situation described in this ruling is where a taxpayer has borrowed money and used it for an income producing activity, such as the operation of a business, and the income producing activity ceased after the borrowing of the money. In these cases, the taxpayer may continue to claim a deduction for the interest incurred after the income producing activity has ceased.
This can be contrasted to your situation as you did not borrow the funds until after your company entered voluntary administration. Thus the principles established in TR 2004/4 cannot be applied to your situation.
IT 2606 states that a deduction will be allowed for interest on borrowings used to fund share acquisitions. Again, this ruling does not apply to your situation as your borrowings were used to pay the company's debts and not to acquire shares in the company.
As discussed above, the interest expense has been incurred in earning the company's assessable income rather than your own. Therefore you are not entitled to claim a deduction for this expense. This is not changed by the fact that you paid the liabilities in your capacity as a director of the company.
No deduction is allowable for interest expense incurred as it does not relate to the earning of your assessable income.
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