Deductibility of interest on loan to pay tax?

The deductibility of an interest on loan acquired to pay tax will depend on the taxes you pay.

The starting point would be section DB 7(1) of ITA 07. A company is allowed a deduction for interest incurred.  However, section DB7 (5) states that subsection 1 does not apply to interest for which a person is denied a deduction under section DB1. Thus, it is important to look at section DB 1. Section DB 1 denies deduction for income tax. It means that if interest is related to payment of income tax, it is not deductible.

However, if the loan is to pay of PAYE, FBT, it is still deductible. Moreover, under section DB 3B, a taxpayer is permitted a deduction for use of money interest incurred on underpaid tax.

In conclusion, interest on loan acquired to pay for overdue income tax is not deductible. But one can argue that interest on loan acquired to pay other taxes (deductible expense), PAYE, FBT are deductible. Use of money interest incurred by underpayment of tax is deductible.  

Disclaimer: The following answer necessarily sets out general principles only. The facts of particular cases always need to be considered carefully, and it may be necessary to obtain advice from a tax expert.

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