| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of private ruling
Authorisation Number: 1011653446999
This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fac sheet has more information.
Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.
Ruling
Subject: Interest expenses - marriage breakdown
Question
Are the interest expenses incurred on a loan used to pay out your former spouse who was in a partnership business allowable as a tax deduction?
Answer: No.
This ruling applies for the following period:
Year ended 30 June 2010
The scheme commences on:
1 July 2009
Relevant facts and circumstances
The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description.
The relevant documents are:
· the application for private ruling received, and
· further information comprising of the proposed financial deal as prepared and signed by both parties and a copy of the court documents.
You are the managing partner of a business.
Your marriage failed and your spouse, who was also a partner in the partnership, left the area.
As part of the divorce settlement you made a capital payment to her. This payment took into account your spouse's share of the partnership assets.
You took out a loan in which to pay the settlement. You paid interest in relation to the loan.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Reasons for decision
Under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) you can claim a deduction for expenses to the extent to which they are incurred in gaining or producing your assessable income, or they are necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
No deduction is allowed for expenses to the extent to which they are of a capital, private or domestic nature or they are incurred in gaining or producing exempt income.
To be deductible under section 8-1 of the ITAA 1997 a loss or outgoing must have a sufficient connection with the derivation of the taxpayer's assessable income.
The deductibility of interest is determined by examining the purpose of the borrowing and the use to which the borrowed funds are put.
The basic principle is that interest will be deductible under section 8-1 of the ITAA 1997 to the extent that it is incurred on that part of the outstanding borrowed money used at that time for an income producing purpose.
In your case you borrowed funds to pay a court ordered divorce settlement. The divorce settlement did not specify that the funds were paid to your former spouse for relinquishing their share of the partnership assets. The quantum of the settlement merely took the value of the spouse's share of the partnership into account.
We have determined that you cannot claim deductions for interest expenses on the loan used to pay your divorce settlement. The payment of a divorce settlement is considered private in nature. The interest therefore is not incurred in gaining or producing your assessable income or in carrying on your business.