Interest on loan to pay ATO?

[Pablo]

Hello,

In january I paid back some money I owed to the tax department for something I claimed back in 2000 that they said was not a legal deduction. I had to pay back the rebate, a penalty, and interest.

I claimed the interest part on the 04-05 tax as allowable but it only just clicked that as I drew the money out of my home loan to pay off the ATO I may also be able to claim the interest charged on the money I borrowed.

Is interest on money borrowed to pay ATO debts claimable as a tax deduction?

If so is the interest on the whole amount claimable or only part of it eg the interest paid on the penalty etc. ?

Also as I drew it out of my home loan how would I go about working out which part of the interest is for what?

Sorry if this is a bit confusing but I just wanted to get some advice before I go and see my accountant.

Thanks.

[DaleGG]

Hi Pablo

No, the interest should not be tax deductible unless the debt was incurred by your business and not by you personally.

See here:

IT 2582

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FOI status: May be released
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TAXATION RULING NO. IT 2582

INCOME TAX : DEDUCTIBILITY OF INTEREST» INCURRED ON MONEYS BORROWED TO PAY INCOME TAX

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PREAMBLE



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Recently this Office was asked to consider whether «interest» incurred on moneys borrowed by companies to pay income tax qualified for deduction under the general deductions provision of the Income Tax Assessment Act.

2. The question of a taxpayer's entitlement to such a deduction, where carrying on a business, has been the subject of detailed examination in this Office on two previous occasions, one as far back as 1921, the other in 1951.

3. Those reviews recognised a number of practical difficulties associated with denying a deduction for taxpayers carrying on a business.

4. Consequently, it was decided that "where a taxpayer carries on a business producing assessable income and pays «interest» on an overdraft, no action is to be taken to disallow the «interest» attributable to a part of the bank overdraft equal in amount to the income tax paid out of the bank account which is in debit" (paragraph 6, Canberra Income Tax Circular Memorandum No. 616). This practice has ensued till the present day.

5. The recent representations have caused this Office to, once again, consider whether «interest» on moneys borrowed by businesses to pay income tax qualifies for deduction. In doing so, particular attention has been given to the overall purpose for the making of such borrowings.

RULING



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6. 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 limb of subsection 51(1) of the Act. The judgment in Begg v. FC of T (1937) 4 ATD 257 is considered to add weight to this decision.

7. This Ruling 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.


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COMMISSIONER OF TAXATION
18 April 1990


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ATO references:
NO 89/9235-5
FOI number: I 1012131

Date of effect:
Immediate

Related Rulings/Determinations:
CITCM 616

Subject References:
BORROWINGS «TO» «PAY» «TAX»
«INTEREST

Legislative References:
51(1)

[geoffw]

I was caught by something similar.

I had a fine, and I was paying the ATO something like 11% until the amount was paid off. I drew against the house to pay the ATO, so I was paying around 7%. I found out later that the 11% GIC (ATO's interest) was deductible, but the 7% was off- so I was in fact worse off, at my tax rate, for doing the right thing.

[Pablo]

Dale, Geoff

Thanks for the info. I guess it was just wishful thinking on my part.

Cheers.

[Mry]

Dale, Geoff

Thanks for the info. I guess it was just wishful thinking on my part.

Perhaps a better question would be - How can I make the interest borrowed in my own name to pay the interest on my business's ATO debts deductible?