Private ruling: Income Tax deductions
Date of advice: 15 November 2016
Published: March 2017
Ruling period: Year ended 30 June 201X | Year ending 30 June 201X | Year ending 30 June 201X | Year ending 30 June 201X | Year ending 30 June 20XX
Date scheme commenced: 1 July 201X

Ruling: Q1: Can you claim a deduction under section 8-1 of the ITAA 1997 for interest on funds borrowed to pay income tax liabilities arising from conducting a business as a sole trader? | A1: Yes.

Relevant facts and circumstances: You carry on a business. You have borrowed funds to assist with meeting your income tax obligations. You and your spouse have additional loans in relation to the purchase of your home. You apply net income from your business activities to offset the home loans. You are considering further loans to fund future income tax liabilities. Your overall debt position will remain approximately the same, however your home loans will reduce and your loans to pay your tax liabilities will increase.

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

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income or necessarily incurred in carrying on a business to gain or produce assessable income except where the outgoings are of a capital, private or domestic nature. Taxation Ruling IT 2582 states that the interest incurred on moneys borrowed to pay income tax will be deductible provided that the taxpayer is carrying on a business for the purpose of gaining or producing assessable income and, in connection with the carrying on of that business; the taxpayer borrows money to pay income tax. While IT 2582 has a reference to companies carrying on a business, ATO Interpretative Decision ATO ID 2006/269 states that the same approach is applicable to an individual carrying on a business. Based on the above, it is considered that you are entitled to a deduction under section 8-1 of the ITAA 1997 for the interest incurred on moneys borrowed to meet your tax obligations.