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

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

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker 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 Lawyer, Tax Adviser and Mortgage broker 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 Lawyer, Tax Adviser and Mortgage broker 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 Lawyer, Tax Adviser and Mortgage broker Business Member

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    Best to seek tax advice just in case.
     
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  8. Elives

    Elives Well-Known Member

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    Hi Terry, from july 1st i'll be running the business structure from a trust, does this allow for me claim borrowed funds for payments of income tax and gst? or is this tax rule only if the business is traded from a company? i'm currently a sole trader but going to trust structure from july 1st

    Cheers, Elives
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    no

    A trust is a separate tax entity to you, so you could not claim any interest.
    Also trusts generally do not pay tax.

    Seek specific advice
     
  10. Elives

    Elives Well-Known Member

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    so i would need to go back to being a sole trader? bit confusing as it says a business can claim it, which entity would that be?

    also will the ppor have problems with CGT if i were to sell it due to claiming interest on the loan? Cheers, Elives
     
    Last edited: 21st Jun, 2019
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    It doesn't follow that you should go back to being a sole trader. I wouldn't be basing an ownership structure on the ability to borrow to pay tax.

    If you run a business from home and claim interest on a loan then the home would be subject to CGT unless a small business concession applied. But if a trustee is running a business from your home you couldn't claim any interest.

    Sounds like you are confused on multiple fronts and haven't received any advice.
     
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  12. Elives

    Elives Well-Known Member

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    Hi Terry,

    maybe you could enlighten me then? :D
    i'm a tradie so the business is on the road, but do not have a office etc. if the property would then be subject to CGT i feel this strategy is pointless then. i don't understand why the property is then subject to CGT when the ppor property it self is not used in any way to help produce an income.
    cash from offset would go back into ppor loan and then redrawn to pay income tax / gst and other business expenses.
    from my understanding the trading entity is a trust with a company as a trustee.

    Cheers, Elives
     
  13. archer77

    archer77 Member

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    I've always wondered whether I could borrow money in Hong Kong (super low interest rates) where I work, to pay off my mortgage in Australia as I have some short-term no-pay leave coming up.
     
  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    If you could qualify for the loan then it would be possible, but a foreign lender would be reluctant to take a mortgage over an asset in a foreign jurisdiction.
    Foreign branches of Australian banks this to lend, e.g. Tokyo branch of the NAB used to lend to Aussies working in Japan earning Yen at Japanese interest rates. But if you moved back to Australia, or left Japan, you would have needed to refinance.
     
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  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    You can't claim the interest on a property and not have it subject to CGT.
     
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  16. Elives

    Elives Well-Known Member

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    Hi Terry,

    I called the ato and they said that no cgt would apply if i was claiming interest on the loan due to other investments etc pay 50k off loan then redraw and invest in shares. they said as long as the property wasn't being used to produce an income this was perfectly fine etc renting out a room or running a business from home. not sure why you say it does apply? :s

    Cheers, Elives
     
  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    I agree with the ATO. Perhaps I misunderstood you above
     
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  18. Elives

    Elives Well-Known Member

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    awesome news ! yea just wanted to confirm everything before i did anything cheers!
     
  19. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    Well don't rely on what I have written, get your own legal advice.
     
  20. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker Business Member

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    Anyone borrowing to pay their tax on sole trader income? I have come across 2 sole traders this week that this tip might apply to.
     
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