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Edited version of your written advice
Authorisation Number: 1013132783539
Date of advice: 28 November 2016
Ruling
Subject: Deduction - interest expenses
Question 1
Are you entitled to a deduction for interest expenses incurred on a loan used to pay the debts of a company you were a shareholder of?
Answer
No.
This ruling applies for the following period:
Year ending 30 June 20YY
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
The company borrowed funds to purchase a restaurant business and to renovate the restaurant premises.
You and your spouse were the only shareholders.
Due to a downturn in the economy the business was running at a loss and was no longer viable to continue running.
A liquidator was appointed.
At the time the liquidator was appointed you and the other shareholder of the company borrowed money, in your individual names, which was used to pay the company's liabilities.
The funds were only used for business purposes and no additional funds were being sought. This loan was originally established and maintained for the purposes of producing assessable income.
The individual shareholders will be repaying the borrowed funds rather than the company. No additional funds will be drawn.
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 your company's debts as the expense does not relate to the earning of your assessable income.
Detailed reasoning
Section 8-1 of the 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 shareholder of a company that went into voluntary administration. You borrowed funds, in your individual names, which were used to pay the company's liabilities. You will incur interest expenses on the borrowed funds.
In your application, you have referred to Taxation Rulings TR 2004/4 which is 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 cannot 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.
No deduction is allowable for interest expense incurred as does not relate to the earning of assessable income.
Limit to future years rulings
You have requested the Commissioner to provide you with a private ruling for future years. Due to the possibility of change to the law, the possibility of changes in your circumstances, and the risk that a subsequently issued public ruling might override a private ruling the Commissioner has issued, the Commissioner has provided a private ruling until the 20XX-YY income year. You may request a further ruling after this time if this issue remains a concern to you.
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