Joe had for several years run a pizza outlet in Toowoomba. In setting up the business in several years ago, he had borrowed from the Witch Bank Ltd. The loan was to be repaid over a period of 10 years. Unfortunately for Joe his business suffered from the cut price competition undertaken by some large operators early in the previous tax year and as result he closed his outlet in April of the previous tax year and returned to his work as a concert pianist employed in a national orchestra. During the current tax year ended 30 June, Joe paid a total $12 000 interest under the loan relating to the pizza business. Joes business was profitable for the whole period he operated it until the last two income years. The tax treatment of the amount would be:

Select one:

1.

Joe could deduct the entire amount of the interest because the expense relates to a previous income earning activity.

2.

Joe can capitalise the interest paid and claim a capital loss.

3.

Joe could not deduct any of the interest as there is no longer any corresponding income to match it against.

4.

Joe could deduct the amount but only if he has income that is recognized on the accruals basis and cannot be matched against wages because that is recognized on a cash basis.

5.

Joe would not be able to deduct the interest because it is a capital expense associated with buying the asset that was the pizza business.