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Edited version of your private ruling
Authorisation Number: 1012601614542
Ruling
Subject: Interest deductions
Question 1
Are you entitled to a deduction for a portion of the interest expense on your loan after the cessation of your business?
Answer
Yes.
This ruling applies for the following periods:
Year ending 30 June 2014
Year ending 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
The scheme commences on:
1 July 2012
Relevant facts and circumstances
Your business ceased with two loans in existence.
You have asked the bank to loan you additional for a private purpose.
The bank has asked you to consolidate all the loans together and have one loan.
The new loan will be a principal and interest loan, and the repayments will be made as per the banks specification and applied to the loan as a whole.
You wish to claim deductions for the business related portion of the interest.
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.
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.
As your loan is for mixed purposes, you will need to apportion the expenses between the private and business portions of the loans. Only that portion of the expenses relating to the prior business use will be allowed as a deduction.