ATO Interpretative Decision
ATO ID 2006/269 (Withdrawn)
Deductions and Expenses: interest incurred on moneys borrowed by a sole trader to pay income tax
FOI status: may be released
Status of this decision: Decision withdrawn 31 March 2017.
|CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.|
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Is a sole trader entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for interest incurred on moneys borrowed to pay income tax?
Yes. A sole trader is entitled to a deduction under section 8-1 of the ITAA for interest incurred on moneys borrowed to pay income tax.
The taxpayer carries on a business as a sole trader.
The business is the taxpayer's only source of income and they incurred an income tax liability in respect of that business income.
The taxpayer borrowed money to pay the income tax liability and incurred interest on the borrowing.
Reasons for Decision
Section 8-1 of the 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.
Taxation Ruling IT 2582 states that the interest incurred on moneys borrowed to pay income tax will be deductible provided that the taxpayer is carrying on a business for the purpose of gaining or producing assessable income and, in connection with the carrying on of that business, the taxpayer borrows money to pay income tax.
While IT 2582 has a reference to companies carrying on a business, the same approach is applicable to an individual carrying on a business as a sole trader.
Therefore, in the circumstances here, the taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for the interest incurred on moneys borrowed to pay their income tax.
Note: The position with respect to partners borrowing to pay their personal income tax remains as set out in Taxation Determination TD 2000/24, where the relevant interest incurred is said to be not deductible.
Date of decision: 4 September 2006
|Year of income:||Year ended 30 June 2006|
Income Tax Assessment Act 1997
Related Public Rulings (including Determinations)
Taxation Determination TD 2000/24
Taxation Ruling IT 2582
Borrowings & loans
Carrying on a business
Deductions & expenses
Entities & taxpayer groups
Ordinary course of business
Siebel/TDMS Reference Number: 3834453; 1-AWUAV76
Business Line: Small Business/Individual Taxpayers
Date of publication: 22 September 2006