Tax Tip 17: Divorce and Deductibility of interest

Tax Tip 17: Divorce and Deductibility of interest

No, Divorces are not tax deductible!

But there are issues with deductibility of interest following a relationship breakdown where there is a property settlement.

Where property changes hands under a property settlement and there are also loans needed to pay out the ex spouse the interest on these loans will not be deductible. The ATO will consider the property settlement a private matter and any borrowings in relation to the property settlement will not be related to borrowings for property, but borrowings for the settlement which is a private expense.

e.g. Borat and Bruno are a defacto couple and have a relationship breakdown. They jointly own one investment property worth $200,000 with a $100,000 loan outstanding. Borat agrees to pay Bruno $50k as that is his share of the equity. Borat hasn’t got $50k cash so he borrows against the property to pay Bruno. The property loan is now $150,000 and the loan and the property is solely in Borat’s name. But Borat could only claim interest on $50k of the loan as his 50% share of the property would mean he had 50% of the outstanding loan at the time of the break up. Borat increases his loan by $50k to pay out Bruno’s share of the loan and then another $50,000 to give a cash settlement to Bruno.

Stay tuned for tomorrow as there may be a way around this or to lessen the blow at least.

CGT will also not be triggered on the transfer but Borat will inherit a CGT pregnant property and when he sells he will cop CGT on the whole property as if he owned it from the beginning. But there should be no stamp duty on the transfer so that is a bonus.

For a guide see 3 private binding rulings:

Authorisation Number 86082 https://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/86082.htm

Authorisation Number 75717 https://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/75717.htm

Authorisation Number: 1011326614325 https://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/1011326614325.htm

 

I have come across another private ruling on this topic involving a business. The response by the ATO is very poorly argued and worded


Authorisation Number: 1051710727660

1051710727660 | Legal database