Borrowing to pay tax?

[JIT]

Hi there,

Can I borrow to pay tax and claim the interest on this as tax deduction?

Eg. Selling an IP with a 300k CG, and paying say approx. 50 K CGT, and borrowing to pay this 50k amount, that way the full 300k cash could be used as a deposit on a PPOR?

Does it make any difference if you are a contractor or an employee?

Thanks.

 

[ianvestor]

When you don't pay your tax when it's due, you're kind of borrowing the amount from the tax office. And the interest they charge you for the privilege of paying it late is tax-deductible.

So I'd guess if you borrowed from elsewhere to pay your tax bill, the interest would be deductible just the same.

 

[Rixter]

So I'd guess if you borrowed from elsewhere to pay your tax bill, the interest would be deductible just the same.

I'd guess the ATO dont accept guesses.

Better to get it straight from the horse mouth, I guess .

My accountant advises against claiming the interest.

 

[JIT]

Rick,

I just googled and found this:

http://law.ato.gov.au/atolaw/view.htm?docid=AID/AID2006269/00001

 

[Rixter]

Rick,

I just googled and found this:

http://law.ato.gov.au/atolaw/view.htm?docid=AID/AID2006269/00001

Jit,

Facts

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.

Aren't you an PAYG employee tho and not a business trading under sole trader entity?

 

[JIT]

Jit,

Facts

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.

Aren't you an PAYG employee tho and not a business trading under sole trader entity?

I'm a sole trader now.

The ''only source of income'' bit is where my case may fall over...

Will need to clarify this.

The business is my only source of active/exertional income.

Then there's passive rent income from RIPs.

 

[Rixter]

I'm a sole trader now.

The ''only source of income'' bit is where my case may fall over...

Will need to clarify this.

The business is my only source of active/exertional income.

Then there's passive rent income from RIPS.

Yeah best get ATO ruling.

 

[Rob G.]

Hi there,

Can I borrow to pay tax and claim the interest on this as tax deduction?

Eg. Selling an IP with a 300k CG, and paying say approx. 50 K CGT, and borrowing to pay this 50k amount, that way the full 300k cash could be used as a deposit on a PPOR?

Does it make any difference if you are a contractor or an employee?

Thanks.

s.26-5 ITAA97 No deductions for paying tax, also no deductions for interest on borrowings to pay tax.

There is not usually a rigid tracing of funds where there is a mixed purpose loan in a business.

If you were a business of developing, CGT would not apply to the property.

If you are a conducting a profit making scheme relating to land, then this would usually be something less than a business in this activity and CGT would apply.

You could also be assessed as income rather than CGT where speculating on land, and yet still not be considered a business.

Cheers,

Rob

 

[JIT]

Thanks for that clarification Rob.

I suppose that one could still borrow to pay this with a non-deductible loan initially and then debt recycle to make it deductible?

Or, if you had a trust, use the 're-financing principle' to borrow money to give to a benefeciary where they can use the $ for whatever reason and the interest to the trust is tax deductible against income in the trust?

So paying the tax with OPM, other people's money, rather than your own...

 

[Rixter]

So paying the tax with OPM, other people's money, rather than your own...

Yes thats what we do, using personal LOC funds. Come to think of it we've been paying all our living expenses from OPM since 1997

 

[Rob G.]

Or, if you had a trust, use the 're-financing principle' to borrow money to give to a benefeciary where they can use the $ for whatever reason and the interest to the trust is tax deductible against income in the trust?

QUOTE]

Refinancing principle requires much more than a mere borrowing of money to pay distributions.

Cheers,

Rob

 

[CruzAccountant]

If your tax payable is due to income earning activities (which they generally are), then it is deductible. JIT mentioned an ATO interperative decision above, which is along similar lines (although it says sole trader).

ATO interperative decisions (ID) are not law, but are only the ATO's view on a particular topic. In this case, the ID was in reply to a specific question on a sole trader, but section 8-1 is a more general area of deductions.

Section 26-5 which was mentioned above is about penalties. Interest on tax is not the same as penalties.

 

[Rob G.]

Section 26-5 which was mentioned above is about penalties. Interest on tax is not the same as penalties.

Typo ... my days start at 5.00 am !

s.25-5 allows deductions for tax related expenses BUT NOT for the paying of tax nor for borrowings to pay tax.

Paying tax is not for a purpose of deriving assessable income, it is levied on your taxable income. Therefore no deduction under s.8-1 just on those facts.

Practice is not to trace purpose through a business overdraft which is also used for deductible expenditure.

If an investor or employee borrows to pay tax, they would need a compelling reason to claim interest.

There has been cases where companies and trusts have borrowed to pay back equity or pay distributions where it can be demonstrated that the capital was otherwise used for a taxable purpose (refinance principle).

Many people get confused about borrowing purpose ... see Munro's case.

Otherwise penalties may apply, which would also not be deductible under s.26-5.

Cheers,

Rob

 

[CruzAccountant]

Hi Rob

I appreciate your viewpoint. If you believe that interest paid on outstanding tax is not deductible for non-business owners, then can you elaborate on why:

1) When tax agents download a pre-filling report for a client, the interest income and expense are assigned (by the ATO) to the relevant sections on the tax return. See here.

2) When the ATO charge interest on an outstanding tax debt, they classify this as a deduction (as per point 1) whilst the late payment or late lodgement penalty is not mentioned anywhere on the pre filling report.

Also, refer to section 103 of the following link: GIC

For readers of this thread, I guess the best way to go is to call the ATO and ask them specifically for your own circumstance.

 

[Rob G.]

GIC is an administrative charge, and not a penalty.

You can deduct under s.25-5 for the costs of managing your tax affairs, including GIC which is a compliance cost ... not a tax.

Cheers,

Rob

 

[bene313]

For readers of this thread, I guess the best way to go is to call the ATO and ask them specifically for your own circumstance.

And if you don't like their response, call them back, speak to a different operator, and you'll probably receive a completely different answer!

 

[Luv2Travel]

And if you don't like their response, call them back, speak to a different operator, and you'll probably receive a completely different answer!

Very true, I'd never rely on anything I'm told on the telephone from the ATO!

To answer the question, agree with Rob, interest on loans to pay personal income tax is not deductible.

 

[dan c]

I'm with Rob.

s25-5 clearly states that GIC is a deductible expense, but expenditure incurred on borrowing money to pay a tax amount is specifically excluded, in s25-5(2).

 

[CruzAccountant]

Yes, it's specifically excluded in section 25-5(2)(c).

So, referring to the question which started this thread, if the tax liability as a result of Capital Gains Tax was borrowed through a bank, then it's not deductible. If it were "borrowed" through the ATO (probably via a payment plan), then the interest paid on the amounts owing (ie GIC) are tax deductible.

 

[dan c]

The original question doesn't say anything about borrowing from the ATO. He talks of 'borrowing to pay tax', instead of using the proceeds from sale.