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Edited version of private advice
Authorisation Number: 1012654760371
Ruling
Subject: Interest
Question
Are you entitled to a deduction for interest and bank charges on the company overdraft?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2014
The scheme commenced on
1 July 2013
Relevant facts
You and your spouse were the directors and only shareholders of a company which has now been de-registered.
You undertook a guarantee to the bank for an overdraft for the company.
As the company could not pay the overdraft, you both became responsible for the debt.
You are paying the overdraft which is incurring interest and bank charges.
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.
An outgoing is considered to be incurred in gaining or producing assessable income if there is a sufficient connection between the outgoing and the activities which produce or are expected to produce assessable income (Ronpibon Tin NL v. FC of T (1949) 78 CLR 47). The essential character of an outgoing is generally determined objectively. As a general rule, an outgoing will not be deductible unless it is incurred in gaining or producing the assessable income of the taxpayer who incurs it.
Taxation Ruling TR 96/23 Income tax: capital gains: implications of a guarantee to pay a debt, discusses the deductibility of payments made under guarantee. The ruling states that liabilities arising under contracts of guarantee will not be deductible if the provision of guarantees is not a regular and normal part of your income earning activities, that is, where you are not in the business of giving guarantees.
Only if a taxpayer acts as guarantor to such a degree as to amount to his or her usual practice, say, as a solicitor, in the ordinary course of business will the payments be deductible as a revenue outgoing and not of a capital nature: Jennings (Inspector of Taxes) v. Barfield & Barfield [1962] 2 All ER 957; 40 TC 365.
In case L3, 79 ATC 14 (Case L3), the taxpayer, a director, shareholder and employee of two companies, gave a number of personal guarantees in respect of each company's overdraft at the bank. When the companies went into liquidation, the bank recovered judgment against the taxpayer as one of the guarantors. The taxpayer claimed a deduction for the amount paid by him under the guarantees. The Board held that the claim should be disallowed as the payment was not incurred in gaining or producing the assessable income and in any event was an outgoing of capital, or of a capital nature.
Your case is analogous with Case L3 and similarly, your expenses for interest and bank charges are not allowable.