Edited version of private advice

Authorisation Number: 1051616287081

Date of advice: 5 December 2019

Ruling

Subject: Interest expenses incurred to pay tax debt - business income - non-business income

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

The scheme commenced on

1 July 2019

Relevant facts and circumstances

You are a medical practitioner.

You operate as a sole trader.

You also derive some employment income.

You are considering borrowing money to use to meet your quarterly instalment and income tax obligations.

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. That is, such an expense is an expense incurred in carrying on that business and hence qualifies for deduction.

While IT 2582 has a reference to companies carrying on a 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.

ATO ID 2002/607, which considers the deductibility of interest expenses incurred on a loan taken out to pay the tax debt of an individual not carrying on a business, provides that the interest expenses are not deductible. The interest expenses are not deductible under section 8-1 of the ITAA 1997 as they are not incurred in earning assessable income as well as being private in nature, and they are not deductible under subsection 25-5(1) as they are specifically excluded by paragraph 25-5(2)(c).

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). 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.

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