Deductions and Expenses: interest incurred on moneys borrowed by a sole trader to pay income tax

Is a sole trader entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for interest incurred on moneys borrowed to pay income tax?

Yes. A sole trader is entitled to a deduction under section 8-1 of the ITAA for interest incurred on moneys borrowed to pay income tax.

The taxpayer carries on a business as a sole trader.

The business is the taxpayer's only source of income and they incurred an income tax liability in respect of that business income.

The taxpayer borrowed money to pay the income tax liability and incurred interest on the borrowing.

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 or necessarily incurred in carrying on a business to gain or produce assessable income except where the outgoings are of a capital, private or domestic nature.

Taxation Ruling IT 2582 states that the interest incurred on moneys borrowed to pay income tax will be deductible provided that the taxpayer is carrying on a business for the purpose of gaining or producing assessable income and, in connection with the carrying on of that business, the taxpayer borrows money to pay income tax.

While IT 2582 has a reference to companies carrying on a business, the same approach is applicable to an individual carrying on a business as a sole trader.

Therefore, in the circumstances here, the taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for the interest incurred on moneys borrowed to pay their income tax. Note: The position with respect to partners borrowing to pay their personal income tax remains as set out in Taxation Determination TD 2000/24, where the relevant interest incurred is said to be not deductible.