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Edited version of your private ruling
Authorisation Number: 1012445479092
Ruling
Subject: Interest deductions
Question
Are you entitled to a deduction for the interest incurred on an investment loan after the business ceased?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 2011
Year ended 30 June 2012
The scheme commences on:
1 July 2010
Relevant facts and circumstances
You took out an investment loan to invest in a scheme.
The scheme has now gone into administration.
You continue to incur interest expenses on your loan.
You have the capacity to repay the loan.
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, or relate to the earning of exempt income or a provision of the taxation legislation excludes it.
Taxation Ruling TR 2004/4 provides the Commissioners 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.
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, you took out a loan to invest in a scheme which has since gone into administration. You have stated that you have the capacity to repay the loan. Subsequently, the nexus with the income producing activity has been broken. Therefore you are not entitled to a deduction for the interest incurred after the scheme went into administration under section 8-1 of the ITAA 1997.