Edited version of your private ruling

Authorisation Number: 1012366185468

Ruling

Subject: The deductibility of interest after the cessation of business and refinancing of loan.

Question

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

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You conducted a 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 are considering refinancing the loan remaining after the business ceased, with the terms of the new loan being similar to those of the original business loan, but more favourable to you.

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

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 95/25 provides the Commissioner's view regarding the deductibility of interest expenses. The ruling states that there must be a sufficient connection between the interest expense and the activities which produce assessable income. Further, it specifies that to determine whether the associated interest expenses are deductible, it is necessary to examine the purpose of the borrowing and the use to which the borrowed funds are put.

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 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.

The connection with the income earning activities has not been broken because the business ceased. Further, when you refinance your loan from one bank to another, the borrowed funds are still being used for income producing purposes.

Accordingly, you will still be entitled to a deduction for interest expense incurred on a business loan after the business has ceased, and after refinancing the loan with a similar loan product.

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