Edited version of your private ruling

Authorisation Number: 1012482549995

Ruling

Subject: Interest expenses

Question

Are you entitled to a deduction for the interest you incur on an investment loan after the investments have been sold?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You have an investment loan.

You have sold all of the investments in the portfolio and paid down the investment loan.

After selling all of the investments there is still a balance in the investment loan that you have to repay.

You do not have the capacity to repay the loan.

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 investment loan after the investments have been sold 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 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.

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 investment loan.

Your obligation to pay the interest expenses arose from your former investments. The connection with the income earning activities has not been broken because the investments have been sold.

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.