Edited version of private advice

Authorisation Number: 1052396922664

Date of advice: 20 May 2025

Ruling

Subject:Interest expenses incurred to pay tax liabilities

Question

Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for interest incurred on monies borrowed to pay your income tax and PAYG Instalments to the extent that it relates to your private consultation practice business income?

Answer

Yes.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are a XXXX.

You operate independently as a sole trader.

You perform procedures at a XXXX.

You employ a receptionist to handle XXXX appointments.

You independently bill your XXXX.

You have a floating line of credit which you use to pay for income-earning expenses, plus PAYG Instalments and income tax liabilities. The line of credit incurs interest costs.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

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 or necessarily incurred in carrying on a business to gain or produce assessable income except where the outgoings are of a capital, private or domestic nature.

Taxation Ruling IT 2582 Income tax: deductibility of interest incurred on moneys borrowed to pay income tax considers the deductibility of interest incurred on money borrowed by companies to pay income tax. IT 2582 explains that where a taxpayer carries on a business for the purpose of gaining or producing assessable income and, in connection with the carrying on of that business, borrows money to pay income tax then it is considered that the interest incurred on those borrowings is a normal incident of conducting that business.

The same approach is applicable to an individual carrying on a business as a sole trader; however it does not apply to interest on borrowings that are not connected with the carrying on of a business for the purpose of producing assessable income.

Based on the above, you will be entitled to a deduction under section 8-1 of the ITAA 1997 for interest incurred on money borrowed to meet the income tax and PAYG instalment tax obligations that arise from your private consultation practice business.

However, any interest incurred on money borrowed to pay your income tax liabilities that arise from non-business income, such as employment or investment income, will not be deductible under section 8-1 of the ITAA 1997. As such, any interest on money borrowed to pay your income liabilities that arise from both business and non-business income will need to be apportioned on a reasonable basis.

Other issues for you to consider

You will still need to satisfy the general substantiation requirements in relation to the borrowings to show that the monies were used to pay your income tax and PAYG Instalment tax obligations related to your private consultation practice business.

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