Tax Tip 118: Deductibility of interest where settlement never happens and deposit lost

Deductibility of interest where settlement never happens and deposit lost


Where you borrowed money and paid a deposit directly to a developer and that developer became insolvent before completing (or starting) the project and the deposit is lost, any interest on loans used to fund the deposit may still be deductible.


In the PBR 1012829320996, the taxpayers were ripped off by a development together with their accountant and financial planner. They borrowed and paid cash for a property in full before any work was started. The vendor was a company, and you guessed it, the company was wound up before doing anything.


The ATO in this instance allowed the interest on this loan to be deductible because:

They met the following criteria, based on the Steele case and the ATO’s interpretation of this case as outlined in TR 2004/4, namely:

● the interest is not incurred too soon, is not preliminary to the income earning activities, and is not a prelude to those activities;

● the interest is not private or domestic;

● the period of interest outgoings prior to the derivation of relevant assessable income is not so long, taking into account the kind of income producing activities involved, that the necessary connection between the outgoings and assessable income is lost;

● the interest is incurred with one end in view, the gaining or producing of assessable income; and

● continuing efforts are undertaken in pursuit of that end.



TR 2004/4 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities TR 2004/4 - Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities (As at 9 June 2004)


PBR 1012829320996

Austax

 

Its one of those areas of tax advice where I would be recommending a client obtain their own BPR.