Private ruling: Deductibility of interest expenses after cessation of business
Date of advice: 12 August 2016
Published: September 2016
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to claim a deduction for the interest expenses incurred on a business loan after the cessation of the business? | A1: Yes

Relevant facts and circumstances: You were the owner/operator of a business that you established in 199X. The business ceased trading in 20XX You had a business loan for purchases enable further growth of the business; this loan was solely for business purposes. You sold the assets of the business when it ceased operating. The proceeds of the sale of the assets was put towards the outstanding debt of the business loan, however it not enough to pay off the entire loan. You are not currently in a financial position to pay off the loan in a lump-sum. You are making regular weekly payments off the loan. You have not extended the loan in any way. You do not want to keep the loan on foot to derive any ongoing commercial advantage from it or any other reason.

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 2004/4 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities examines the deductibility of interest after the cessation of the income earning activities. Paragraph 10 of TR 2004/4 states that: the outgoing will still have been incurred in gaining or producing the assessable income if the occasion of the outgoing is to be found in whatever was productive of assessable income of an earlier period. TR 2004/4 considers the implications for the decision of the FC of T v. Brown 99 ATC 4600 and FC of T v. Jones 2002 ATC 4135 cases (Brown and Jones), where the court found that the 'interest incurred on the loans continued to be deductible despite the cessation of the relevant income earning activities.' However, the nexus between the interest expense and the relevant income earning activities will be broken where you keep the loan on foot for reasons unassociated with the former income earning activities or make a conscious decision to extend the loan in such a way that there is an ongoing commercial advantage. Application to your circumstances TR 2004/4 details the treatment of interest expenses after the cessation of a business, which directly relates to your current circumstance. The cases of Brown and Jones are very similar to your situation where you had a business loan, you ceased trading, you sold off the assets but the proceeds did not fully cover the costs of the loan. Consequently, you were left with loan amounts to pay and continued to incur interest expenses. You have advised that you have not extended the loan, or kept the loan on foot for any reasons unassociated with the former income earning activities; therefore the nexus between the interest expense and income earning activities has not been broken. Therefore you are entitled to claim deductions for the interest expenses incurred relating to your business loan under Section 8-1 of the ITAA 1997. It is noted that you asked for the private ruling to apply for the life of the loan. The Commissioner does not rule for indefinite or extended periods as there may be changes to the facts of the arrangement or the law in question. Also, a public ruling may issue which affects the private ruling. Therefore, we have only ruled for the 2014-15 to 2018-19 financial years.