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Tax Tip 72: Borrowing to Pay Income Tax and Deductibility of Interest

Discussion in 'Accounting & Tax' started by Terry_w, 29th Oct, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Unfortunately, for individuals, it is not possible to claim interest on money borrowed to pay your income tax.

    Expenses are only deductible if they are incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing such income.

    A payment of income tax plays no part in the derivation of assessable income.

    see Case V48, Administrative Appeals Tribunal of Australia, 25 February 1988
    http://www.iknow.cch.com.au/#!/docu...ppeals-tribunal-of-australia-25-february-1988

    s25-5(2)(c) ITAA97 expressly prohibits interest on borrowing money to pay tax. http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s25.5.html

    Credit Card Fees on transactions to pay tax

    And you might get frequent flyer rewards, but you cannot claim a credit card fee incurred on paying a tax bill:
    ID 2010/159 https://www.ato.gov.au/law/view/document?docid=AID/AID2010159/00001
    ID 2010/160 https://www.ato.gov.au/law/view/document?docid=AID/AID2010160/00001


    Business
    It seems the ATO accept that a ‘business’ can borrow to pay tax and claim the interest in some circumstances. This includes sole traders.

    IT 2582 Income tax : deductibility of interest incurred on moneys borrowed to pay income tax (1990) https://www.ato.gov.au/law/view/document?locid='ITR/IT2582/NAT/ATO'

    ID 2006/269 Income Tax Deductions and Expenses: interest incurred on moneys borrowed by a sole trader to pay income tax https://www.ato.gov.au/law/view/document?docid=AID/AID2006269/00001


    Partners
    But partners cannot borrow to pay tax, and claim the itnerest, TD 2000/24 (see also tax tip 66 on the refinancing principle)

    CASE 14/98, Administrative Appeals Tribunal of Australia (Victoria), 28 July 1998
    http://www.iknow.cch.com.au/#!/document/atagUio538768sl16704323/case-14-98


    General Interest Charge
    The GIC is deductible against other income. GIC is interest the ATO charges on late tax payments.
    s29-5(1)(c) ITAA97
    http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s25.5.html

    The GIC is around 9.14% at the moment, so if you cannot afford to pay your tax with cash it is still worthwhile considering borrowing the money from a LOC etc so you will get a lower interest rate - but the interest is not deductible. Make sure you don't end up with mixed purpose loan either.
     
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  2. htopg

    htopg Well-Known Member

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    If I borrow to pay land "tax" for IP, is the interest deductable?
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes - I should have added income tax to the title above! - I was able to edit and i have just changed it. Thanks Htopg
     
  4. Bran

    Bran Well-Known Member

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    Terry,

    Thanks for sharing!

    As a sole trader, do you think it would be wise to separate loans that are being used for 1) general business expenses (only) and 2) borrowings to pay income tax? In my eyes, there is no reason too?

    This is huge for me in terms of possible debt recycling. Wow.
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes, best to separate in case the interest is denied on one of them.

    You also need to seek specific tax advice...
     
  6. Bran

    Bran Well-Known Member

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    My sole trader income is also not my only source of income, I'm also a government employee, so I think this probably won't work for me.
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Best to seek tax advice just in case.
     
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