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Edited version of private advice
Authorisation Number: 1012649102621
Ruling
Subject: Business expenses
Question
Are you entitled to a deduction expenses incurred after the cessation of your business?
Answers
Yes.
This ruling applies for the following period
Year ended 30 June 2014
Year ended 30 June 2015
The scheme commenced on
1 July 2013
Relevant facts
Your business closed in mid 20XX. You traded on a cash receipts basis and you were unable to pay all of your expenses prior to the business ceasing.
You are still paying outstanding non-capital expenses, credit card interest for business related expenses and loan expenses.
You do not have the ability to repay the expenses in a lump sum.
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.
Taxation Ruling TR 2004/4 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities examines the deductibility of interest after the cessation of the income earning activities. 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 the credit card interest and interest on the loan are considered to be deductible as the nexus between the expenses and the relevant income earning activities has not been broken as you do not have the ability to repay the expenses in a lump sum and it is not a conscious decision to extend the loan. Similarly the non-capital expenses you are paying are considered deductible.