Borrowed money to pay a business tax debt? Is the interest deductible?
It was about 1990 when the ATO was asked about the tax deductibility of interest on a loan a business may have taken out to repay a tax debt.
It was the third time, according to ATO records, that the matter was raised. Of the two previous requests for clarification, one was made as far back as 1951 and the other even further back in time, in 1921.
The 1990 query resulted in the ATO issuing a taxation ruling to put the matter to bed, which has stood ever since. There are however curly caveats and conditions attached.
By way of background, the ATO admitted in its ruling that there were, and are, a number of “practical difficulties” associated with denying such a specific deduction for taxpayers carrying on a business. The difficulty goes right to the heart of the Income Tax Assessment Act 1997 (ITAA97), although at the time of the ruling’s issue some of the relevant sections were still in the Income Tax Assessment Act 1936.
Specifically, subsection 8-1(1) ITAA97 says: “You can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income or it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income, except to the extent to which it is a loss or outgoing of capital, or of a capital, private or domestic nature, or incurred in relation to the gaining or production of exempt income.”
The “difficulties” the ATO refers to come about due to the fact that paying a tax debt is neither of a capital nature nor done to gain “exempt” income.
The above tax ruling says: “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 (whether to preserve the assets of the business, maximise the return on them, retain sufficient money to fund the business or otherwise) then it is considered that the interest incurred on those borrowings is a normal incident of conducting that business.”
“That is, such an expense is an expense incurred in carrying on that business and hence qualifies for deduction under the second positive limb of subsection 8-1(1) of the act.”
Care needs to be taken however, as the ruling would not apply to interest on borrowings that are not connected with the carrying on of a business for the purpose of producing assessable income.
Note however that the ruling does not consider situations where individuals borrow to pay off a tax debt. In these cases, interest incurred by an individual on a loan to pay off a tax debt is not deductible.
Tax & Super Australia
www.taxandsuperaustralia.com.au
Hot Issues
- FBT Reminder – Odometer Reading
- ATO’s debts on hold campaign prompts new IGTO guidance
- A comprehensive collection of small business benchmarks
- The 2025 Financial Year tax & super changes you need to know!
- Underperforming employees: When can you terminate?
- A comprehensive list of guides to industry specific tax deductions.
- ‘Renewed concerns’ about economy sees consumer sentiment dip: Westpac
- Oldest Buildings in the World.
- Small businesses may ‘collapse under strain of payday super’, IPA warns
- ATO’s hands tied with scrapping on-hold debts, expert says
- What Drives Your Business Growth and Profits?
- Australian Taxation Office (ATO) shifting to firmer debt collection activity
- Why employee v contractor comes down to fine print
- Sharing economy reporting regime for platform operators
- Countries producing the most solar power by gigawatt hours
- Illegal access nets $637 million
- Accessing superannuation benefits.
- Does your business have a company Power of Attorney?
- Labor tweaks stage 3 tax cuts to make room for ‘middle Australia’
- GrantConnect
- 2 in 3 SMEs benefit from instant asset write-off, survey reveals
- Updated guidance on R&D claims
- Do you know how to recover debts?
- Wheat Production by Country
- Types of small business benchmarks
- What is a Commercial Lease?
- ATO warns advisers against suspect R&D tax claims
- The year of workplace law upheaval
- Vimeo test
Article archive
- January - March 2024
- October - December 2023
- July - September 2023
- April - June 2023
- January - March 2023
- October - December 2022
- July - September 2022
- April - June 2022
- January - March 2022
- October - December 2021
- July - September 2021
- April - June 2021
- January - March 2021
- October - December 2020
- July - September 2020
- April - June 2020
- January - March 2020
- October - December 2019
- July - September 2019
- April - June 2019
- January - March 2019
- October - December 2018
- July - September 2018
- April - June 2018
- January - March 2018
- October - December 2017
- July - September 2017
- April - June 2017
- January - March 2017
- October - December 2016
- July - September 2016
- April - June 2016
- January - March 2016
- October - December 2015
- July - September 2015
- April - June 2015
- January - March 2015
- October - December 2014
January - March 2017 archive
- Impending GST changes good news for SMEs
- SMSF related-party borrowing arrangements
- Primary Producer Income Tax Averaging
- Active vs passive assets and the small business CGT concession
- ATO issues further taxpayer alerts on key focus areas
- Borrowed money to pay a business tax debt? Is the interest deductible?
- Online Selling
- The dangers of income splitting
- Clients failing on depreciation front - property investment
- Home office deductions: What substantiation will the ATO accept?
- ATO advises accountants on client data swoop
- ATO issues stern reminder on new backpacker tax
- Debt Recovery
- Government takes next step in tax cheats crackdown
- Car salary packages and the deductibility of after-tax running costs
- Choosing an Executor
- ATO fires warning shots at cash economy exploiters
- Getting a tax valuation from the ATO
- 5 tips to get home office deductions right
What our clients say about us