Edited version of private ruling

Authorisation Number: 1011675246471

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 fact 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 on loan after cessation of business

Question

Are you entitled to a deduction for interest incurred on a business loan after the business has ceased?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You conducted a business as a partner in partnership. As a partner you were jointly and severally liable for the expenses incurred by the partnership business.

You had a business loan which was refinanced and drawn down a number of times. Additional funds borrowed were only used for business related expenses.

You ceased your business. Funds from the sale of the business were used to pay trade creditors and reduce the business loan.

You have refinanced the loan since the business ceased.

Your partner was declared bankrupt. Prior to your partner's bankruptcy you were liable for half of the partnership's interest expenses. After your partner's bankruptcy you became liable for all of the partnership's interest expenses.

You state that:

· you have not drawn down additional funds

· you do not have the capacity to repay the loan in part or full, and

· you do not have any investments.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Summary

You are entitled to a deduction for the interest expense on a business loan after the business ceased as there is a connection between the expense and your prior income earning activity.

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 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 or a provision of the taxation legislation excludes it.

Taxation Ruling TR 2004/4 provides the Commissioners view on the deductibility of interest where the income-producing asset has been disposed of and the taxpayer is still liable on the balance of the loan.

In general, the interest expense will continue to be deductible where:

· the taxpayer borrowed money to acquire an income-producing asset

· the income-producing asset has been disposed of

· the proceeds from the disposal have been applied against the loan and not used for personal or non-income producing purposes

· the taxpayer does not have the legal power to repay the loan (FC of T v. Brown 99 ATC 4600, (1999) 43 ATR 1) or does not have the financial resources to repay the loan fully (FC of T v. Jones 2002 ATC 4135, (2002) 49 ATR 188), and

· is unable to avoid incurring ongoing interest liabilities.

In this situation, a nexus will continue to exist between the interest outgoings and the relevant income earning activities at least until the end of the period during which the interest cannot be avoided.

However, where it can be inferred that a taxpayer has:

· kept the loan on foot for reasons unassociated with the former income earning activities, or

· made a conscious decision to extend the loan in such a way that there is an ongoing commercial advantage to be derived from the extension which is unrelated to the attempts to earn assessable income in connection with which the debt was originally incurred,

· the nexus between the outgoings and relevant income-earning activities will be broken.

We have determined that you are entitled to claim deductions for the interest expenses related to your business loan.

Your obligation to pay the interest expenses arose from your former business partnership. The connection with the income earning activities has not been broken because the business ceased or the loan refinanced.

You have not kept the loan on foot for reasons unassociated with your former income earning activities. Nor have you made a conscious decision to extend your loan to gain an ongoing commercial advantage.

You have not had the financial means to pay out the loan.

You became entitled to claim all interest expenses on the business loan when your business partner became bankrupt.