ATO ID 2002/607: Deductibility of interest on loan taken out to pay a tax debt
Date of decision: 1 August 2001
Year of income: Year ended 30 June 2001 Year ending 30 June 2002 Year ending 30 June 2003
Business line: Small Business/Individual Taxpayers

Issue
Is a deduction allowable under either section 8-1 or section 25-5 of the Income Tax Assessment Act 1997 (ITAA 1997) for interest incurred by an individual taxpayer on a loan taken out in order to pay a tax debt?

Decision
No. A deduction is not allowable under either section 8-1 or section 25-5 of the ITAA 1997 for interest incurred by an individual taxpayer on a loan taken out in order to pay a tax debt.

Facts
The taxpayer, an individual with investment income, had a large tax debt which wass due for payment. The taxpayer borrowed funds to pay this tax debt and incurred interest on the loan.

Reasons for decision
Summary: Section 8-1 of the ITAA 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. The interest expense was not incurred by the taxpayer in earning their assessable income and also is private in nature. Therefore no deduction is allowable to the taxpayer under section 8-1 of the ITAA 1997. Subsection 25-5(1) of the ITAA 1997 allows a deduction for expenditure incurred in managing the taxpayer's tax affairs. However, paragraph 25-5(2)(c) of the ITAA 1997 specifically precludes a deduction under subsection 25-5(1) of the ITAA 1997 for expenses associated with borrowing money by an individual taxpayer (including payments of interest) to pay a tax liability. The interest expense incurred by the individual taxpayer is therefore not deductible under subsection 25-5(1) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 8-1 subsection 25-5(1) paragraph 25-5(2)(c)
Subject references: Deductions and expenses Interest expenses