Preamble
No. For interest to be deductible under section 8-1 of the Income Tax Assessment Act 1997 it must be either incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing such income.
The personal expenses of an individual partner are not incurred in the carrying on of a partnership business. Any borrowing by the individual partner on account of income tax relates to that partner's personal income tax obligation and lacks any direct connection with the business or income activities of the partnership. See Case 14/98 98 ATC 201; AAT Case 13,135 (1998) 39 ATR 1105.
Nor can it be said that the interest expense is incurred in deriving assessable income. A payment of income tax plays no part in the derivation of assessable income (see Case V48 88 ATC 380; AAT Case 4178 (1998) 19 ATR 3334). Nor does the fact that it may obviate the need to withdraw partnership equity give it the requisite essential character (see FC of T v. Munro (1926) 38 CLR 153).
Taxation Ruling TR 95/25 considers the deductibility of interest on funds borrowed by a partnership to refinance partnership equity. A rigid tracing approach to the application of those distributed funds e.g., where the funds have been applied by an individual partner to the payment of income tax, does not determine the question of deductibility of interest on any borrowing to the partnership.
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