Edited version of private advice

Authorisation Number: 1051996561682

Date of advice: 22 June 2022

Ruling

Subject: Deductions - interest expense

Question

Can you claim a deduction for the interest expenses incurred in relation to the business loan?

Answer

Yes.

It is accepted that the loan was initiated to purchase the business which would allow you to produce assessable income via xxxxX Pty Ltd. Applying your circumstances to Taxation Ruing (TR) 2004/4 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities, you did not make a conscious decision to extend the loan in such a way that there would be an ongoing commercial advantage to be derived from the extension. Rather the loan was only kept on foot because of an economic inability to repay. Consequently, you can continue to claim the interest expenses incurred after the business had ceased until the loan was repaid.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You and your spouse decided to purchase a business in xxxx. A company (xxxx Pty Ltd) was set up to purchase the business and your residence was security for a xxxx loan used to fund the purchase of the business. The business loan was in your name.

You were the sole shareholder and owned 100% of xxxx Pty Ltd.

You on lent the loan proceeds to xxxx Pty Ltd to purchase the business. No written agreement to on lend the funds to xxxx Pty Ltd was entered into at the time of the initial borrowing nor since.

You and your spouse have since divorced and the loan remained in place though refinanced with xxxx. Your main residence was again used as security for the loan.

Until the business conducted by xxxx Pty Ltd was sold in 20XX-XX the interest expenses incurred on the loan were paid for by the company.

When the business was sold, the sale proceeds were insufficient to pay out the xxxx loan. The loan proceeds were put into a separate bank account to be sure funds were available to make future loan repayments, until such time your house could be sold and the business loan could be paid out in full.

Following the sale of the business, the only source of income available to make loan repayments was your reduced salary and you had concerns that this income would be insufficient to meet the future loan repayments.

There were business suppliers accounts to be settled after the business was sold and business sale proceeds were used to clear these accounts.

The loan repayments were fixed and would not have reduced if the sale proceeds had been applied to the loan.

You remained employed by the new business owner with reduced hours of work and consequently a significantly reduced wage.

The only source of funds to make the loan payments were your wages and the sale proceeds set aside.

It was never your intention to gift the money to xxxx Pty Ltd to buy the business. From the outset of on lending the funds to the company it was expected all money would be repaid.

xxxx Pty Ltd was deregistered in xx/20XX.

Your house was sold and sale proceeds deposited into your personal bank account on xx/xx/20XX. The business loan (financed through xxxx) was discharged on the same date.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1