Private ruling: Interest expense
Date of advice: 21 May 2018
Published: July 2018
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

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

Relevant facts and circumstances: You took out a loan to purchase a business. After several months you sold the business at a capital loss and you were left with the residual business loan. You used the proceeds from the sale of the business to pay off some of the loan. The loan has not been extended for any reason and that you do not have the capacity to repay the loan in full but, you are paying the loan off as quickly as possible.

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 (ITAA 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 examines the deductibility of interest after the cessation of the income earning activities. It provides that you may still be entitled to a deduction for recurrent interest expenses incurred after the cessation of your previous income earning activity. 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. However, the nexus between the interest expense and the relevant income earning activities will be broken where: ● you have the ability to repay the loan but choose not to ● you make a conscious decision to extend the loan in order to derive an ongoing commercial advantage unrelated to the prior income earning activities which resulted in the debt. In your case, it is accepted that the interest you incur resulted from a loan left after the proceeds from the sale of your business were expended on partial repayment of the loan. You state that you do not have the capacity to repay the loan in full and it is not a conscious decision to extend the loan. Accordingly, you are entitled to a deduction under section 8-1 of the ITAA 1997 for the interest incurred on the residual borrowings relating to the business.