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ATO ruling on interest deductions released

The Australian Taxation Office (ATO) has issued a ruling on the deductibility of interest on borrowed funds incurred before the commencement of a business activity, or after it has ceased.

The broad principle behind the ruling is that the deductibility of interest is determined by examining the purpose of the borrowing and the use to which the funds are put. If the interest is charged to a revenue account, this conclusion is not altered even if the borrowed funds have been used to purchase a capital asset, the ruling says.

The ruling follows several recent High Court and Federal Court decisions.

The ATO says interest paid before assessable income was derived will be deductible providing that:

The interest is not preliminary to the income earning activities;
The interest is not private or domestic;
The period of interest payments before income was derived is not so long as to lose the necessary connection;
The interest is incurred only with the goal of earning assessable income; and
Continuing efforts are made to earn that income.
The ruling also spells out cases where the interest payment may or may not be allowed as a deduction where interest has been incurred after the relevant borrowings or assets have been lost, and income has ceased.

Further reading:
Taxation Ruling TR 2004/4

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