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Edited version of private ruling
Authorisation Number: 1011806731190
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Ruling
Subject: Deduction - interest
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 ending 30 June 2011
Year ending 30 June 2012
Year ending 30 June 2013
Year ending 30 June 2014
The scheme commenced on:
1 July 2009
Relevant facts
You took out a loan to purchase a business some years ago.
The business was sold a number of years ago.
All the proceeds of the sale went to pay business creditors and no funds were left over to pay out the original business loan.
No payments from the proceeds of the business sale were in respect of private debts.
You didn't have the financial capacity to repay the original debt at the time your business ceased.
The original loan was refinanced for the purpose of consolidating debts for repayment plus additional borrowings were required for the redevelopment of an existing investment property. The interest on the loan has been pro-rated.
You have made repayments on the loan.
You hold a number of assets valued at less than the amount owing on the loan.
You expect to repay the loan in a number of years.
You intend to make repayments to the loan in future financial years from your salary and wages.
You have not refinanced or drawn down additional funds.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
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.
Taxation Ruling TR 2004/4 provides the Commissioner's view on the deductibility of interest where the income-producing asset has been disposed of and the taxpayer is still liable for 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.
In your case your obligation to pay the interest expenses arose from your former business. The connection with the income earning activities has not been broken because the business ceased or on the refinancing of the loan.
Currently you do not have the financial resources or means to pay out the loan. Therefore, you are not keeping the loan on foot for reasons unassociated with the former income earning activities, nor have you made a conscious decision to extend your loan to gain an ongoing commercial advantage.
Therefore you are entitled to claim the interest expenses incurred on the business loan after your business ceased.