Private ruling: Interest deduction
Published: June 2012
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for the interest you incur on the loan for an asset for use in a partnership? | A1: Yes.

Relevant facts and circumstances: · You were a partner in a partnership that carried on a business however no income was generated from the business. · The partnership purchased an asset and both partners each borrowed approximately half the cost of the asset. · You started out with the intention to make a profit however you were unable to achieve this goal due to a number of factors. · The business became unsustainable and it was decided to dissolve the partnership and a receiver was appointed. · The receiver sold the asset for less than the purchase amount and you received only a fraction of the amount you had borrowed from the sale. The loan amount remains outstanding and continues to accrue interest on an interest only basis.

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, or relate to the earning of exempt income or a provision of the taxation legislation excludes it. Taxation Ruling TR 2004/4 provides the Commissioners 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. However, where it can be inferred that a taxpayer has: · kept the loan on foot for reasons unassociated 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. We have determined that you are entitled to claim deductions for the interest expenses related to your business loan. Your obligation to pay the interest expenses arose from your former business partnership. The connection with the income earning activities has not been broken because the business ceased or the loan refinanced. You have not kept the loan on foot for reasons unassociated with your former income earning activities. Nor have you made a conscious decision to extend your loan to gain an ongoing commercial advantage

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