Private ruling: Storm Financial collapse - Deductibility of interest following cessation of relevant income earning activities
Ruling period: Year ended 30 June 2010. | Year ended 30 June 2011.
Date scheme commenced: 1 July 2004.

Ruling: Q1: Is your claim for interest deduction no longer allowable because your underlying investment ceased to exist? | A1: No.

Relevant facts and circumstances: You owned your home outright. You then took advice and made your first investment in Storm badged products sometime later, with a loan secured against the equity in your home. Your borrowings continued to increase because you sought successive revaluations of your home and reached a maximum borrowing of a certain amount. At the time of the Storm collapse in December 2008, the principle amount of your loan was the maximum borrowing. Your Storm investments no longer exist. You still have the loan, however you have dramatically reduced the amount outstanding. Your loan was only used to invest in Storm. The loan has not been used for any other purpose. You will not continue to keep the loan for any reason not associated with your former Storm investment, (i.e. you will not use the loan for another purpose for its duration). You have not claimed interest as a deduction in your income tax return since 2008, (on the basis that you thought that because the investments no longer existed you could not claim the interest).

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

Reasons for decision: Summary: Summary Your claim for interest deduction will continue to be allowable even though the underlying investment no longer exists. Detailed reasoning Section 8-1 of the Income Tax Assessment 1997 generally allows a deduction for interest on a loan used to derive assessable income. Taxation Ruling TR 2004/4 Income Tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities (TR 2004/4) considers the deductibility of interest expenditure after the cessation of the relevant income earning activities, specifically at paragraphs 40 to 50. At paragraph 44 of TR 2004/4, reference is made to court cases Full Federal Court in FC of T v. Brown 99 ATC 4600; (1999) 43 ATR 1 (Brown) & FC of T v. Jones 2002 ATC 4135; (2002) 49 ATR 188 (Jones), where the Court had no difficulty in holding, in both instances, that interest incurred on loans continued to be deductible despite the cessation of the relevant income earning activities. Even though Brown and Jones involved taxpayers who carried on a business, the ATO accepts that the same principle should apply to income earning activities that do not constitute a business, such as passive investments. A key factor in determining the deductibility of interest incurred after the income earning activities have ceased is whether or not the continuing liability to interest is seen as a burdensome legacy of the past (suggestive of a continuing nexus with prior assessable income) or whether the liability is seen to be associated with present or future advantages (suggestive of a broken nexus). In your case, your continuing liability to interest is seen as a burdensome legacy of the past, it is a direct result of you having invested in Storm and your investments ceasing to exist when Storm collapsed sometime in December 2008. This means that you are entitled to claim your unclaimed interest deductions from the time that Storm collapsed.

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