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Edited version of your written advice
Authorisation Number: 1051373271958
Date of advice: 15 May 2018
Ruling
Subject: Deductions on interest of money borrowed to pay taxation obligations.
Question 1
Is a deduction allowed for interest incurred on a loan to the extent that the borrowed money is used to pay income tax and PAYG instalments?
Answer
Yes
You are entitled to a deduction for all losses and outgoings to the extent that they are incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature (section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)).
Whether interest has been incurred in the course of producing assessable income generally depends on the use to which the borrowed funds have been put. Where a borrowing relates to an income producing activity, the interest on the borrowing is considered to be incurred in the course of producing assessable income. (Taxation Ruling TR 95/25)
Question 2
Is a deduction allowed for interest incurred on a loan to the extent that the borrowed money is used to pay net GST amounts and PAYG withholding amounts on Business Activity Statements?
Answer
Yes
You are entitled to a deduction for all losses and outgoings to the extent that they are incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature (section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)).
Whether interest has been incurred in the course of producing assessable income generally depends on the use to which the borrowed funds have been put. Where a borrowing relates to an income producing activity, the interest on the borrowing is considered to be incurred in the course of producing assessable income. (Taxation Ruling TR 95/25)
Question 3
Is a deduction allowed for 100% of the interest incurred for the payment of the taxation amounts if the loan is held in joint names?
Answer
Yes
Where money is borrowed jointly by a taxpayer and their spouse, and the borrowed money is used in the income producing activity of only one of those parties, it is the party who incurs the costs in their income producing activities that is entitled to claim a deduction for the interest (Taxation Ruling TR 93/32).
In your case you will incur interest on borrowings made jointly with your spouse that will be used to pay taxation obligations incurred in your individual income producing business. The interest on these borrowings will be considered to be incurred for the purpose of gaining or producing your assessable income, and as such you will be entitled to a deduction for the interest incurred under section 8-1 of the ITAA 1997. The use of the family home as security for the borrowings, and the fact that the borrowings have been made jointly with your spouse, do not alter this conclusion.
This ruling applies for the following period:
Financial year ended 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You operate an income producing business as a sole trader.
You have ongoing Business Activity Statement and Income Tax obligations to pay as a result of your income producing activities.
You intend to establish a loan facility with a commercial lender in order to meet these taxation obligations.
The lender requires the loan facility to be in joint names with your spouse as the facility will be secured by a property held in joint names of you and your spouse.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1