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Income tax: does the interest paid by an employee on a loan to purchase a motor vehicle used for income-producing purposes continue to be an allowable deduction under subsection 51(1) of the Income Tax Assessment Act 1936 after disposal of the vehicle?

Preamble

The deductibility of the interest expenses after disposal of the vehicle will depend upon whether the borrowed money is still used for income-producing purposes.

After the vehicle is sold, the employee may use the money received from the sale to gain or produce assessable income. In that case, the interest paid by the employee is still deductible. However, if the money is used for some other purpose, such as a private purpose or to gain or produce exempt income, the interest will not be deductible under subsection 51(1).

A portion of the continuing interest on the loan may be deductible if the motor vehicle is sold for less than the balance outstanding under the loan at that time. If the money received from the sale is used to produce assessable income, the interest on an equal amount of the loan principal is a deductible expense. The rest of the interest expense relates to a loss of the capital value of the vehicle; that portion is not an allowable deduction after the vehicle is sold.

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