Private ruling: Interest deduction on funds borrowed to pay income tax
Date of advice: 7 April 2020
Published: May 2020
Ruling period: Year ending 30 June 2020 | Year ending 30 June 2021 | Year ending 30 June 2022 | Year ending 30 June 2023
Date scheme commenced: 1 July 2019

Ruling: Q1: Are you entitled to a deduction for interest incurred on money borrowed to pay income tax and PAYG instalment amounts that arise from you carrying on a business? | A1: Yes | Q2: Are you entitled to a deduction for interest incurred on money borrowed to pay your income tax liabilities that arise from your non-business income? | A2: No

Relevant facts and circumstances: You are a medical practitioner. You operate your own private practice. You also derive some employment income from the Department of Health. You are planning to borrow in order to pay PAYG instalments and/or year-end tax liabilities.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 25-5.

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. Subsection 25-5(1) of the ITAA 1997 allows a deduction for expenditure incurred in managing your tax affairs; however, paragraph 25-5(2)(c) specifically excludes a deduction under subsection 25-5(1) for expenses associated with borrowing money (including payments of interest) to pay a tax liability. Taxation Ruling IT 2582 (IT 2582) considers the deductibility of interest incurred on money borrowed by companies to pay income tax, and provides that where a taxpayer carries on a business for the purpose of gaining or producing assessable income and, in connection with the carrying on of that business, borrows money to pay income tax then it is considered that the interest incurred on those borrowings is a normal incident of conducting that business. The same approach is applicable to an individual carrying on a business as a sole trader; however it does not apply to interest on borrowings that are not connected with the carrying on of a business for the purpose of producing assessable income. Based on the above, you will be entitled to a deduction under section 8-1 of the ITAA 1997 for interest incurred on money borrowed to meet the income tax and PAYG instalment tax obligations that arise from your sole trader business. However, any interest incurred on money borrowed to pay your income tax liabilities that arise from non-business income, such as employment or investment income, will not be deductible under section 8-1 or subsection 25-5(1) of the ITAA 1997. As such, any interest incurred on money borrowed to pay your income liabilities that arise from both business and non-business income will need to be apportioned on a reasonable basis.