Edited version of your private ruling

Authorisation Number: 1012470566668

Ruling

Subject: Interest expense

Question

Are you entitled to a deduction for interest incurred on business related loans after the business has ceased?

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

Year ended 30 June 2017

The scheme commenced on

1 July 2012

Relevant facts and circumstances

You operated a franchised business as a sole trader.

You established the business with a number of loans.

You sold the business. The proceeds from the sale of the business were applied to loan one reducing the balance to nil.

Lease assets were sold and the sale funds were applied to loan two.

Loan two will be paid out in the 20XX financial year.

Other business assets are subject to a dispute. When the dispute is settled, any funds received will be applied against the loan accounts.

You do not have the capacity to repay the loans in full.

You are applying all available funds to the loan balances and will apply any tax refunds to the loans.

You do not have any investments.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Summary

You are entitled to a deduction for the interest expense on the business loans after the business ceased as there is a connection between the expense and your prior income earning activity.

Detailed reasoning

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.

We have determined that you are entitled to claim deductions for the interest expenses related to your business loans as:

· Your obligation to pay the interest expenses arises from your former business activity. The connection with the income earning activities has not been broken because the business has ceased.

· You have not kept the loan on foot for reasons unassociated with your former income earning activities. Nor have you made a conscious decision to extend your loan to gain an ongoing commercial advantage.

· You do not have the financial means to pay out the loan.