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Edited version of your private ruling
Authorisation Number: 1012580105153
Ruling
Subject: Deductibility of interest expenses
Question and answer
Are you entitled to a deduction for interest expenses incurred on a business loan for a company that has been liquidated where you are the guarantor of the loan?
No.
This ruling applies for the following periods:
Year ended 30 June 2012
Year ended 30 June 2013
Year ending 30 June 2014
Year ending 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
Year ending 30 June 2018
The scheme commenced on:
1 July 2011
Relevant facts and circumstances
In 20AA, Company X borrowed a sum of money from Entity Y.
You were the director of Company X and guaranteed the loan.
Company X went into liquidation in 20BB and was deregistered in 20CC.
You now make the capital and interest repayments on the loan to Entity Y.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Section 8-1.
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows you a deduction for any loss or outgoing that is incurred in gaining or producing your assessable income, to the extent that it is not of a private, capital or domestic nature.
In your case, you have taken over a loan from Company X in your capacity as guarantor and have been making capital and interest repayments on that loan.
The legal system has held firmly, for most purposes, to a distinction between a company as one legal entity, and its promoters or shareholders. As a shareholder in the company you can potentially derive income through the company conducting the business. The potential to derive income does not come about because you have gone guarantor. At the time of going guarantor you do not incur any liability, you only have a potential future liability.
In Willersdorf-Greene v FC of T 2009 ATC 10-102; 76 ATR 688 it is noted at paragraph 78 and 79:
Generally;
"…. A guarantee is essentially a promise to answer for the debt, default or miscarriage of another, and it does not include as such the case of a person incurring an additional liability in respect of a sum of money for which he is already liable."
Therefore, it is a promise that is dependant upon the occurrence of specified events at some future time. Those events may not occur.
You did not incur any liability until the company went into liquidation, the business ceased and you were called upon to meet your obligation under the guarantee.
At the time of incurring these interest expenses, you cannot potentially derive any income from the activities of the company business.
The expenses of making the payments and the associated interest are not incurred in deriving assessable income and therefore are not deductible.