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Is the taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the judgment debt interest expenses that they have incurred in respect of their personal income tax debt?

No. The taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for the judgment debt interest expenses that they have incurred in respect of their personal income tax debt.

A judgment debt was obtained in a local Court against the taxpayer in respect of their outstanding personal income tax liability.

The taxpayer incurred judgment debt interest expenses in respect of the judgment debt.

The taxpayer is not carrying on a business.

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, or relate to the earning of exempt income.

In Case V48; AAT Case 4178 [1988] AATA 70; 88 ATC 380; (1988) 19 ATR 3334 the Tribunal confirmed that the interest paid on a loan taken out to pay personal income tax is not deductible under section 51 of the Income Tax Assessment Act 1936 (ITAA 1936) (the equivalent of section 8-1 of the ITAA 1997), because payments made pursuant to the original assessments were not made in gaining or producing assessable income, nor were the payments necessarily incurred in carrying on a business for the purpose of gaining or producing such income.

Taxation Ruling IT 2582 provides that where a taxpayer carries on a business for the purpose of producing assessable income and in connection with the carrying on of that business borrows money to pay income tax, the interest on the borrowings is a deductible business expense under the second limb of subsection 51(1) of the ITAA 1936.

However, IT 2582 also provides that the Commissioner does not accept that interest is deductible under section 51 of the ITAA 1936 in relation to payments of income tax which are not business-related. The interest expense is not incurred by the taxpayer in earning their assessable income and is also private in nature.

The principles relating to the deductibility of interest incurred on borrowings to pay income tax are equally applicable to the payment of judgment debt interest in that the interest expense is not incurred by the taxpayer in gaining or producing their assessable income and is also private in nature.

Therefore, the taxpayer is not entitled to deduction under section 8-1 of the ITAA 1997 for the judgment debt interest expenses that they have incurred in respect of their personal income tax liability.

Date of amendment Part Comment 26 February 2016 Reason for Decision Updated references.

Date of amendment | Part | Comment

26 February 2016 | Reason for Decision | Updated references.