Edited version of private ruling

Authorisation Number: 1011677569591

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Ruling

Subject: Interest Deduction

Question

Will your interest expense continue to be deductible under section 8-1 of the Income Tax Assessment Act 1997 after the investment company went into liquidation?

Answer

Yes.

This ruling applies for the following period

Year ending 2011

The scheme commenced on

1 July 2010

Relevant facts

You have a loan that still exists which was obtained for the purpose of investing in a company. The company used the money to invest in assets.

You received income in the form of interest at X% on the amounts loaned to the company. The company has since stopped trading. ASIC are in the process of investigating the owners. Administrators have been appointed but the company is not officially in liquidation as yet.

The loan you have is interest only incurring expenses, but you are not getting any income from your investment. The term of loan is 25 years. You have stated that you intend to pay the loan out as soon as possible.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Does Part IVA apply to this ruling?

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.

For more information on Part IVA, go to our website and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Any legislative references referred to herein are from the ITAA 1997, unless otherwise stated.

Taxation Ruling TR 2004/4 contains the Commissioners views on deductions for interest incurred prior to income activities commencing or after income producing activities have ceased.

Interest expenses incurred after an income producing activity has ceased will be deductible if the occasion of the interest expense is the prior income producing activity.

Deductions for interest in such circumstances will not fail to be deductible merely because:

· the loan is not for a fixed term

· the taxpayer has a legal entitlement to repay the principal before maturity, with or without penalty, or

· the original loan is refinanced, whether once or more than once.

The nexus between the outgoings of interest and the income earning activities will be broken if you:

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

· make 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.

In Placer Pacific Management Pty v. Federal Commissioner of Taxation 95 ATC 4459; (1995) 31 ATR 253 the Full Federal Court said:

In our view AGC should be taken as establishing the proposition that provided the occasion of a business outgoing is to be found in the business operations towards the gaining or producing of assessable income generally, the fact that the outgoing was incurred in a year later than the year in which the income was incurred and the fact in the meantime business in the ordinary sense may have ceased will not determine the issue of deductibility.

For a further case which applies the principle in Placer Pacific to a claim for interest deduction, see Case 17/96 96 ATC 230. These decisions establish the proposition that, at least in the context of carrying on business, recurrent expenditure may continue to be deductible, notwithstanding the cessation of the business, provided the relevant connection between the expenditure and the income earning activity still exists.

In your case, you borrowed money for the purpose of earning interest income. Even though the investment company may go into liquidation, the nexus between the outgoings of interest and the income earning activities is not broken. Therefore, you can continue to claim a deduction for the interest expense.