Private ruling: The deductibility of interest after the cessation of business and refinancing of loan.
Published: March 2013
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction for the interest incurred on a business loan after the business has ceased and the loan refinanced? | A1: Yes.

Relevant facts and circumstances: You conducted a business. You had a business loan which was refinanced and drawn down a number of times. Additional funds borrowed were only used for business related expenses. You are considering refinancing the loan remaining after the business ceased, with the terms of the new loan being similar to those of the original business loan, but more favourable to you. You state that · you have not drawn down additional funds · you do not have the capacity to repay the loan in part or full, and · you do not have any investments.

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. Taxation Ruling TR 95/25 provides the Commissioner's view regarding the deductibility of interest expenses. The ruling states that there must be a sufficient connection between the interest expense and the activities which produce assessable income. Further, it specifies that to determine whether the associated interest expenses are deductible, it is necessary to examine the purpose of the borrowing and the use to which the borrowed funds are put. 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 on 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 ( FC of T v. Brown 99 ATC 4600, (1999) 43 ATR 1) or does not have the financial resources to repay the loan fully ( FC of T v. Jones 2002 ATC 4135, (2002) 49 ATR 188), and · is unable to avoid incurring ongoing interest liabilities. In this situation, 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. The connection with the income earning activities has not been broken because the business ceased. Further, when you refinance your loan from one bank to another, the borrowed funds are still being used for income producing purposes. Accordingly, you will still be entitled to a deduction for interest expense incurred on a business loan after the business has ceased, and after refinancing the loan with a similar loan product. | Detailed Reasoning - Disclaimer: You cannot rely on the rulings in the Register of private binding rulings in your tax affairs. You can only rely on a private ruling that we have given to you or to someone acting on your behalf. The Register of private binding rulings is a public record of private rulings issued by the ATO. The register is an historical record of rulings, and we do not update it to reflect changes in the law or our policies. The rulings in the register have 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.