| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of private advice
Authorisation Number: 1012627346003
Ruling
Subject: Interest expense
Question
Are you entitled to claim a deduction for the interest expense on a loan after the cessation of your business?
Answer:
Yes
This ruling applies for the following periods
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 20XX
Relevant facts
In 20XX, you took out a loan (with an approximate life of 25 years) to purchase a business.
After approximately 6 months you sold the business at a capital loss and you were left with the residual business loan.
You used the proceeds from the sale of the business to pay off some of the loan.
The loan has not been extended for any reason and that you do not have the capacity to repay the loan in full but, you are paying the loan off as quickly as possible.
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 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.
Taxation Ruling TR 2004/4 examines the deductibility of interest after the cessation of the income earning activities. It provides that you may still be entitled to a deduction for recurrent interest expenses incurred after the cessation of your previous income earning activity. Paragraph 10 of TR 2004/4 states that the outgoing will still have been incurred in gaining or producing the assessable income if the occasion of the outgoing is to be found in whatever was productive of assessable income of an earlier period.
However, the nexus between the interest expense and the relevant income earning activities will be broken where:
• you have the ability to repay the loan but choose not to
• you make a conscious decision to extend the loan in order to derive an ongoing commercial advantage unrelated to the prior income earning activities which resulted in the debt.
In your case, it is accepted that the interest you incur resulted from a loan left after the proceeds from the sale of your business were expended on partial repayment of the loan. You state that you do not have the capacity to repay the loan in full and it is not a conscious decision to extend the loan. Accordingly, you are entitled to a deduction under section 8-1 of the ITAA 1997 for the interest incurred on the residual borrowings relating to the business.