Edited version of private ruling

Authorisation Number: 1011508702011

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Ruling

Subject: Deductibility of interest expense on monies borrowed for the purposes of paying income tax

Are you an independent contractor?

Yes.

Are you able to deduct the interest expense incurred from borrowing money to pay your PAYG instalment tax obligations?

Yes.

Year(s) of income or period(s) to which this ruling applies:

For the year ended 30 June 2011
For the year ended 30 June 2012
For the year ended 30 June 2013
For the year ended 30 June 2014

Commencement date of scheme:

1 July 2009

The scheme that is the subject of the ruling:

You have previously been provided with a favourable ruling for the years.

Your circumstances have not changed. The following facts were provided with the previous ruling request:

You are a medical practitioner with your own ABN and registered for GST.

You have a contract with a medical practice to work on a non exclusive basis as a medical practitioner as part of their private general practice.

The contract states you are employed as a contractor and not as an employee.

Periodically, you issue the practice with an invoice of your fees including an additional amount for GST.

The fees you receive are inclusive of all entitlements payable to you and you have no claim against the practice for any further entitlements such as sick leave, annual leave or long service leave.

Staff of the medical practice make your patients' appointments. The consultations occur on the practice's premises and you use the practice's equipment.

You are required to supply your own adequately stocked and equipped portable doctor's bag.

You are paid based on the number of patients you treat.

If you were unable to work, you are able to nominate someone else to work in your place. However, the replacement medical practitioner must be approved by the practice first.

You are required to take out your own medical indemnity policy. You are also required to indemnify the practice and its directors against liability for all loss, damages or injury to persons or property arising out of or in connection with the services you perform.

The contract can be terminated by you or the practice by giving the other party one month's notice in writing.

You are considering borrowing money to use to meet your quarterly PAYG instalment tax obligations.

Relevant provisions:

Income Tax Assessment Act 1997 Section 8-1.

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

Explanation: (This does not form part of the notice of private ruling)

Summary

You are considered to be an independent contractor and not an employee.

The interest expense incurred from borrowing money to pay your PAYG instalment tax is deductible. It is considered that the interest expense is allowable under section 8-1 of the ITAA 1997 as it is necessarily incurred in the carrying on of a business.

Detailed reasoning

Employee or independent contractor

The taxation legislation does not define the term 'employee'. Whether a person is an employee of another is a question of fact to be determined by examining the terms and circumstances of the contract between them having regard to the key indicators expressed in relevant case law.

Taxation Ruling TR 2005/16 contains the indicators used to determine whether a person is an employee or an independent contractor.

No one of the following tests is individually decisive. The results of all the indicators must be considered to determine whether on balance you are working as an employee or as a contractor. The indicators are as follows:

The wording used in the contract

The degree and level of control - the mere fact that a contract may specify in detail how the contracted services are to be performed does not necessarily imply an employment relationship. The payer has a right to specify how the contracted services are performed, however, such control must be specified in the terms of the contract; otherwise the contactor is free to exercise their discretion.

Integration into the business of the taxpayer

Basis of payment

Who bears the legal risks in relation to the work performed

Ability to delegate

Who provides the tools and equipment used.

By examining the information provided in the application and the contract between you and the company, your facts can be applied to each indicator.

Your contract states you agree to provide your services in the capacity of an independent contractor. This is indicative of a principal contractor relationship.

Your contract stipulates where you will perform your services. However, as a member of the medical profession, the company cannot prescribe in detail how you will perform your services. You are also retained on a non exclusive basis. You are considered to have a moderate degree of control over the work you perform for the company. This factor is inconclusive.

You work as a medical practitioner in the company's private medical practice. You are considered to be integrated into the payer's business. This is indicative of an employer employee relationship.

You are paid for the number of patients you treat, not the amount of time you have worked. This is indicative of a principal contractor relationship.

You are required to maintain your own medical indemnity policy and to indemnify your employer and its directors against liability for all loss, damage or injury to persons or property arising out of or in connection with the services you provide. This is indicative or a principal contractor relationship.

You have the ability to delegate and arrange for another medical practitioner to work in your place subject to the approval of the payer. This is indicative of a principal contractor relationship.

The company provides the location and equipment you use in your duties, with the exception of your doctor's bag. In the medical profession it is common practice that the principal provides facilities and equipment for an independent contractor to use. For example, a specialist who contracts some of their services to a hospital would use the facilities at the hospital. This factor is inconclusive.

On the balance of the indicators, you are considered to be engaged as an independent contractor. As you are considered to be an independent contractor, you are considered to be working on your own account and hence income so derived in this way will be income of a business nature.

Interest on money borrowed to pay your PAYG instalment tax obligations

Section 8-1 of the Income Tax Assessment Act (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 states that the interest incurred on moneys borrowed to pay income tax will be deductible provided that the taxpayer is carrying on a business for the purpose of gaining or producing assessable income and, in connection with the carrying on of that business, the taxpayer borrows money to pay income tax.

While IT 2582 has a reference to companies carrying on a business, ATO Interpretative Decision ATO ID 2006/269 states that the same approach is applicable to an individual carrying on a business as a sole trader.

Based on the above, it is considered that you are entitled to a deduction under section 8-1 of the ITAA 1997 for the interest incurred on moneys borrowed to meet your PAYG instalment tax obligations.

Note:

A taxpayer who earns personal services income (PSI) may be affected by certain PSI measures. Where the PSI measures apply, they operate to prevent a taxpayer from claiming greater deductions than those available to employees. That is, the taxpayer would not be able to claim business deductions.

The PSI measures do not apply to a taxpayer who is conducting a personal services business. A taxpayer will be regarded as carrying on a personal services business if they meet any one of four tests.

One of these tests is the 'results test'. This test is based on the traditional criteria for distinguishing independent contractors from employees which have been discussed above. The test will be met if the following three criteria are met:

The individual's personal services income is income for producing a result.

The individual is required to supply the plant and equipment, or the tools of trade (if any) needed to perform the work from which the individual produces the result. In determining this it is appropriate to have regard to the custom or practice when work of that kind is performed by an entity other than an employee.

The individual is, or would be, liable for the cost of rectifying any defect in the work performed.

In your case, you are paid based on the number of patients you see rather than the amount of time you work. Therefore, your income is paid for reducing a result. With regards to the second criteria, it is common practice that non-employee medical practitioners are required to provide only a small amount of their own medical equipment (for example, a doctor's bag). Consequently, it is considered that this criteria is met. Also, the third criteria is met as you are required to have your own medical indemnity insurance and are liable for all loss, damage and injury arising out of the services you provide.

As you satisfy all the criteria of the results test, you are regarded as carrying on a personal services business. Therefore, the PSI measures do not apply to prevent you from claiming business deductions (including interest on moneys borrowed to pay tax in relation to your business).