A common question I'm always asked is "Can I claim a deduction for borrowings to pay my income tax bill?"
It depends. The question of when interest incurred on borrowings used to pay a tax bill as a deduction came up for a Ruling in 1920, 1951 and even as recent as 1990 (IT 2582). The 1990 view continues to this day.
s51(1) of the old tax act (ITAA36) considers an outgoing incurred in the producing of assessable income, or necessarily incurred in carrying on a business...shall be deductible.
The 1990 ruling considered that it paying a tax debt is neither capital expenditure nor done in producing exempt income. The outcome is that where the taxpayer carries on a business no action shall be taken by the ATO to deny a deduction attributable to that part of a loan or overdraft that is equal to an amount that is income tax paid out of the account .
For some taxpayer who may satisfy the claim that their property investment is on sufficient scale to be considered a business this may mean that they can utilise loans drawdown to pay taxes and claim the resulting interest. However this comes with a caution - Many IP owners will NOT be able to establish that their scale is that of a business.
A prudent taxpayer may seek a ruling on their circumstance so that they have confidence their deduction claim is valid. A ruling is likely to be requires as there is no specific ATO guidance on what constitutes a business of IP rental. A block of apartments may. A single dwelling or two not.
It depends. The question of when interest incurred on borrowings used to pay a tax bill as a deduction came up for a Ruling in 1920, 1951 and even as recent as 1990 (IT 2582). The 1990 view continues to this day.
s51(1) of the old tax act (ITAA36) considers an outgoing incurred in the producing of assessable income, or necessarily incurred in carrying on a business...shall be deductible.
The 1990 ruling considered that it paying a tax debt is neither capital expenditure nor done in producing exempt income. The outcome is that where the taxpayer carries on a business no action shall be taken by the ATO to deny a deduction attributable to that part of a loan or overdraft that is equal to an amount that is income tax paid out of the account .
For some taxpayer who may satisfy the claim that their property investment is on sufficient scale to be considered a business this may mean that they can utilise loans drawdown to pay taxes and claim the resulting interest. However this comes with a caution - Many IP owners will NOT be able to establish that their scale is that of a business.
A prudent taxpayer may seek a ruling on their circumstance so that they have confidence their deduction claim is valid. A ruling is likely to be requires as there is no specific ATO guidance on what constitutes a business of IP rental. A block of apartments may. A single dwelling or two not.