Edited version of private ruling

Authorisation Number: 1011705719772

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Ruling

Subject: Deductibility of interest on borrowings to make a guarantee payment

Issue 1

Question 1

Can the taxpayer claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for interest incurred on a personal borrowing used to pay out a loan under a personal guarantee for a company of which he is the sole director and shareholder?

Issue 2

Question 1

Can the taxpayer claim a deduction under section 40-880 of the ITAA 1997 for interest incurred on a personal borrowing used to pay out a loan under a personal guarantee for a company of which he is the sole director and shareholder?

The scheme commences on:

The date on which the company loan is paid out by the taxpayer

Relevant facts and circumstances

The taxpayer and his brother were directors of a company.

The bank provided the company with a large loan for working capital.

The loan was secured by properties owned by family members.

The primary guarantors of the loan are the taxpayer and family members

No remuneration was received from the company when the taxpayer went as a guarantor.

The company ceased trading on xx/xx/xxxx and is currently in the process of being wound up.

The taxpayer's brother resigned as a director of the company, sold the security and repaid the bank the proceeds from the sale.

The taxpayer became and is currently the sole director and shareholder of the company.

The remaining loan is currently secured by the taxpayer's properties

The taxpayer tried to refinance the loan in the company's name but was unable to do so.

The taxpayer intends to obtain a residential loan to be secured by the two properties. The taxpayer will be the sole guarantor of the new loan.

The taxpayer intends to use this loan to directly pay the bank the outstanding balance of the loan provided to the company. He will not be on-lending the borrowings to the company and charging interest. He will not be indemnified by the company when he satisfies the company debt to the bank.

The company is being wound up and will not be returning to trade.

By satisfying the company debt with the bank, the taxpayer hopes to avoid legal action that could result in the loss of properties used as security.

The taxpayer has not received any income from the company in the 20xx and 20xx financial years.

The taxpayer is not in a business of providing guarantees.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1 and

Income Tax Assessment Act 1997 Section 40-880.

Issue 1

Question 1

Can the taxpayer claim a deduction under section 8-1 of the ITAA 1997 for interest incurred on a personal borrowing used to pay out a loan under a personal guarantee for a company of which he is the sole director and shareholder?

The taxpayer cannot claim a deduction under section 8-(1) of the ITAA 1997 for the interest on the residential loan as he has derived no personal assessable income from the application of the borrowings.

Section 8-1 of the ITAA 1997 allows a deduction against assessable income for an expense when:

a) it is incurred in gaining or producing your assessable income; or

b) it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.

However no deduction is allowed to the extent the losses and outgoings are of a private, domestic or capital nature or are incurred in gaining or producing exempt income.

Interest may satisfy the general deduction provision in section 8-1 of the ITAA 1997 once the purpose of the borrowing and the use to which the borrowed funds are put is examined ( Fletcher & Ors v. FC of T 91 ATC 4950; (1991) 22 ATR 613). The taxpayer proposes to take out a residential loan in his own name for the purpose of satisfying a debt under a personal guarantee for a company of which he is the sole director and shareholder.

Guarantee payments are not deductible if the provision of guarantees and losses or outgoings arising under the guarantees are not regular and normal incidents of the taxpayer's earning activities. (Case Q39, 83 ATC 171 at p173).The taxpayer is not in a business of earning assessable income from providing guarantees. There is no nexus between the residential loan and the interest on the borrowings with the taxpayer's assessable income.

The taxpayer has derived no personal assessable income from the company in the 20xx and 20xx financial years .There is no prospect of future income as the company has ceased trading and is in the process of being wound up. The interest on the borrowings cannot be said to be an expense necessarily incurred gaining or producing his personal assessable income or from carrying on a business from which he has gained or produced assessable income.

Accordingly, the interest expenses are not allowable deductions pursuant to sec 8-1 of the ITAA1997.

Issue 2

Question 1

Can the taxpayer claim a deduction under section 40-880 of the Income Tax Assessment Act 1997 (ITAA 1997) for interest incurred on a personal borrowing used to pay out a loan under a personal guarantee for a company of which he is the sole director and shareholder?

Section 40-880 of the ITAA 1997 allows certain business capital expenditure to be deducted over 5 years if:

(b) a deduction is not denied by some other provision; and

(c) the business is, was or is proposed to be *carried on for a *taxable purpose.

As the interest has been denied as a deduction under section 8-1 of the ITAA 1997, paragraph 40-880(1)(b) applies so the amount cannot be considered under section 40-880.