Private ruling: Deduction - Interest
Date of advice: 15 December 2015
Published: February 2016
Ruling period: 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Can you claim deductions for interest expenses continuing to be incurred after the cessation of your investment with Business X? | A1: Yes

Relevant facts and circumstances: You borrowed funds from your bank to invest in Business X. You borrowed the funds over a period of few years. You received regular return from your investment and expected this to continue long term. You declared the amounts received from the investment as assessable income in your tax returns. Your tax agent advised that you recently discovered that Business X was involved in fraudulent activities. Business X went into administration. Business X later went into liquidation. The Liquidator confirmed that you are an unsecured creditor of Business X. The liquidator confirmed that a dividend return for unsecured creditors is uncertain. You advised that your income from Business X has ceased and that you do not expect to receive further income from the investment. As a result of Business X going into liquidation, you experienced financial difficulty You consolidated your investment loan with your housing loan.

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

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. Taxation Ruling TR 2004/4 provides the Commissioner's view on the deductibility of interest where the income-producing asset has been disposed of and the taxpayer is still liable for the balance of the loan. In general, the interest expense will continue to be deductible where: • the taxpayer borrowed money to acquire an income-producing asset • the income-producing asset has been disposed of • the proceeds from the disposal have been applied against the loan and not used for personal or non-income producing purposes • the taxpayer does not have the legal power to repay the loan or does not have the financial resources to repay the loan fully, and • is unable to avoid incurring ongoing interest liabilities. In your case, a nexus will continue to exist between the interest outgoings and the relevant income earning activities at least until the end of the period during which the interest cannot be avoided. However, where it can be inferred that a taxpayer has: • kept the loan on foot for reasons un-associated with the former income earning activities, or • made a conscious decision to extend the loan in such a way that there is an ongoing commercial advantage to be derived from the extension which is unrelated to the attempts to earn assessable income in connection with which the debt was originally incurred the nexus between the outgoings and relevant income-earning activities will be broken. In your case, your investment with Business X has ceased and no further income or return of the invested funds is expected. The loan you took to invest in Business X has now been consolidated to your housing loan. We accept that a nexus continues to exist between the interest outgoings and the relevant income earning activities. Therefore, you will be entitled to a deduction for interest incurred as long as the nexus does not break and you do not receive further dividend.