| Disclaimer 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: 1051642625348
Date of advice: 07 April 2020
Ruling
Subject: Interest deduction on funds borrowed to pay income tax
Question 1
Are you entitled to a deduction for interest incurred on money borrowed to pay income tax and PAYG instalment amounts that arise from you carrying on a business?
Answer
Yes
Question 2
Are you entitled to a deduction for interest incurred on money borrowed to pay your income tax liabilities that arise from your non-business income?
Answer
No
This ruling applies for the following periods:
Year ending 30 June 2020
Year ending 30 June 2021
Year ending 30 June 2022
Year ending 30 June 2023
The scheme commenced on:
1 July 2019
Relevant facts and circumstances
You are a medical practitioner.
You operate your own private practice.
You also derive some employment income from the Department of Health.
You are planning to borrow in order to pay PAYG instalments and/or year-end tax liabilities.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Income Tax Assessment Act 1997 section 25-5.
Reasons for decision
Section 8-1 of the Income Tax Assessment Act (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income or necessarily incurred in carrying on a business to gain or produce assessable income except where the outgoings are of a capital, private or domestic nature.
Subsection 25-5(1) of the ITAA 1997 allows a deduction for expenditure incurred in managing your tax affairs; however, paragraph 25-5(2)(c) specifically excludes a deduction under subsection
25-5(1) for expenses associated with borrowing money (including payments of interest) to pay a tax liability.
Taxation Ruling IT 2582 (IT 2582) considers the deductibility of interest incurred on money borrowed by companies to pay income tax, and provides that where a taxpayer carries on a business for the purpose of gaining or producing assessable income and, in connection with the carrying on of that business, borrows money to pay income tax then it is considered that the interest incurred on those borrowings is a normal incident of conducting that business.
The same approach is applicable to an individual carrying on a business as a sole trader; however it does not apply to interest on borrowings that are not connected with the carrying on of a business for the purpose of producing assessable income.
Based on the above, you will be entitled to a deduction under section 8-1 of the ITAA 1997 for interest incurred on money borrowed to meet the income tax and PAYG instalment tax obligations that arise from your sole trader business. However, any interest incurred on money borrowed to pay your income tax liabilities that arise from non-business income, such as employment or investment income, will not be deductible under section 8-1 or subsection 25-5(1) of the ITAA 1997. As such, any interest incurred on money borrowed to pay your income liabilities that arise from both business and non-business income will need to be apportioned on a reasonable basis.