Private ruling: Interest deduction
Date of advice: 30 October 2017
Published: March 2018
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you entitled to claim a portion of the interest of a loan relating to your former farming business? | A1: Yes

Relevant facts and circumstances: You and your spouse purchased a property with a view to generating income. The property was not successful and you then decided to lease out the property which you later sold. The property was sold at a loss and the debt was not fully paid out. You transferred the unpaid debt to your home loan which is being repaid in instalments.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 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. At the time the borrowing was taken out there was clearly a sufficient nexus or connection between the assessable income and the interest incurred on the borrowing. This is because the borrowed funds were used to purchase an asset that produced assessable income. However, what needs to be considered is whether the relevant nexus was subsequently broken, either when the asset was sold or when the loan was refinanced. In your situation, you borrowed money to purchase a business, the business has now ceased and you have sold the business at a loss. The proceeds from the sale were not enough to pay out the loan and you transferred the unpaid debt to your home loan which is being repaid in instalments. It is accepted that the relevant nexus between the interest expense and the assessable income earned previously from the asset is not broken. Accordingly, you are entitled to a deduction for the interest on the residual borrowings relating to the business.

The advice in the Register has been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict ATO policy or decisions.