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Ruling
Subject: Interest expenses
Question
Are you entitled to claim a deduction for the interest expense on a loan after the cessation of your business?
Answer: Yes
This ruling applies for the following period
Year ended 30 June 2013
Year ended 30 June 2012
Year ended 30 June 2011
Year ended 30 June 2010
The scheme commenced on
1 July 2009
Relevant facts and circumstances
In 2008 you took out a loan to purchase a business.
The loan was used to purchase the business and for set up expenses (e.g. stock, insurance)
After approximately 6 months you sold the business at a loss and you were left with the residual business loan.
You state that you used the proceeds from the sale of the business to pay off some of the loan.
You state the loan has not been extended for any reason and that you do not have the capacity to repay the loan in full but, you are paying the loan off as quickly as possible.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 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 examines the deductibility of interest after the cessation of the income earning activities. It provides that you may still be entitled to a deduction for recurrent interest expenses incurred after the cessation of your previous income earning activity. Paragraph 10 of TR 2004/4 states that the outgoing will still have been incurred in gaining or producing the assessable income if the occasion of the outgoing is to be found in whatever was productive of assessable income of an earlier period.
However, the nexus between the interest expense and the relevant income earning activities will be broken where:
· you have the ability to repay the loan but choose not to
· you make a conscious decision to extend the loan in order to derive an ongoing commercial advantage unrelated to the prior income earning activities which resulted in the debt.
In your case, it is accepted that the interest you incur resulted from a loan left after the proceeds from the sale of your business were expended on partial repayment of the loan. You state that you do not have the capacity to repay the loan in full and it is not a conscious decision to extend the loan. Accordingly, you are entitled to a deduction under section 8-1 of the ITAA 1997 for the interest incurred on the residual borrowings relating to the business.