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Edited version of your private ruling
Authorisation Number: 1012464319164
Ruling
Subject: Cost of managing tax affairs - interest
Question 1
Can you claim a deduction for interest charged on a loan taken out to pay a personal income tax debt?
Answer
No
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
Year ended 30 June 2017
The scheme commences on:
1 July 2012
Relevant facts and circumstances
You are a salary and wage earner.
You plan to take out a loan to pay your personal income tax debt.
You will be charged interest on this loan.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 25-5
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.
The interest incurred on a loan taken out to pay a personal income tax debt is not incurred in earning your assessable income and also is private in nature. Therefore no deduction is allowable under section 8-1 of the ITAA 1997.
Subsection 25-5(1) of the ITAA 1997 allows deductions for expenditure incurred by a taxpayer to the extent that it is for managing their 'tax affairs'. Section 995-1 of the ITAA 1997 defines 'tax' to mean income tax assessed under either the ITAA 1997 or the Income Tax Assessment Act 1936 and imposed by any other Act.
The context and structure of section 25-5 of the ITAA 1997 makes it clear that 'tax affairs' is intended to have a wide operation. The section is wide enough to cover interest incurred as a direct consequence of paying an income tax debt.
However, paragraph 25-5(2)(c) of the ITAA 1997 expressly denies a deduction for 'expenditure for borrowing money', including payments of interest, in respect of money borrowed and spent on managing certain aspects of your tax affairs, including payments of:
(a) *tax; or
(b) an amount withheld or payable under Part 2-5 or Part 2-10 in Schedule 1 to the Taxation Administration Act 1953 .
Therefore, you cannot claim a deduction for interest charged on funds borrowed to pay your tax debt.