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Is a deduction allowable under either section 8-1 or section 25-5 of the Income Tax Assessment Act 1997 (ITAA 1997) for interest incurred by a taxpayer on a loan taken out in order to pay a tax debt?

No, a deduction is not allowable under either section 8-1 or section 25-5 of the ITAA 1997 for interest incurred by a taxpayer on a loan taken out in order to pay a tax debt.

The taxpayer has a large tax debt which is due for payment.

The taxpayer borrowed funds to pay this tax debt and incurred interest on the loan.

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.

The interest expense was not incurred by the taxpayer in earning their assessable income and also is private in nature. Therefore no deduction is allowable to the taxpayer under section 8-1 of the ITAA 1997.

Subsection 25-5(1) of the ITAA 1997 allows a deduction for expenditure incurred in managing the taxpayer's tax affairs.

However, subsection 25-5(2) of the ITAA 1997 specifically precludes a deduction under subsection 25-5(1) of the ITAA 1997 for expenses associated with borrowing money (including payments of interest) to pay a tax liability. The interest expense incurred by the taxpayer is therefore not deductible under subsection 25-5(1) of the ITAA 1997.