TR 2004/4 considers the implications of the Full Federal Court decisions in Federal Commissioner of Taxation v Brown (Browns Case) and Federal Commissioner of Taxation v Jones (Jones Case).
In Browns Case, the taxpayer partners borrowed to acquire a delicatessen. After a number of years of trading, the business was sold at a loss. The proceeds of the disposal were made over to the bank but were insufficient to satisfy the liability fully. There was no entitlement under the relevant loan agreement to repay the loan prior to its term without prior agreement of the bank.
In Jones Case, the taxpayer, together with her husband, borrowed money to fund a trucking and equipment hire business. After her husband's death, Mrs Jones sold the assets of the business. The proceeds (plus other amounts on hand) were insufficient to pay out the loan and she was unable to fully repay the loan.
Brown and Jones Cases accordingly demonstrate that the occasion of interest expenditure can be found in the relevant income earning activities even where those activities are now defunct and all the borrowings (or assets representing those funds) are lost.
Whether or not the occasion of the outgoing of interest is to be found in what was productive of assessable income of an earlier period requires a judgment about the nexus between the outgoing and the income earning activities.
If the taxpayer:
- keeps the loan on foot for reasons unassociated with the former income earning activities;
or
- makes a conscious decision to extend the loan in such a way that there is an ongoing commercial advantage to be derived from the extension which is unrelated to the attempts to earn assessable income in connection with which the debt was originally incurred,the nexus between the outgoings of interest and the relevant income earning activities will be broken.
sounds like that is what your friend will be doing. interest denied. Computer says NO
