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Income tax: when Division 16D of Part III of the Income Tax Assessment Act 1936 applies to an arrangement, a proportion of each arrangement payment, representing the notional principal amount, may be treated as non-assessable by the operation of subsection 159GK(1). In such cases is a proportion of the costs relating to the non-assessable amount not deductible under subsection 51(1)?

No. We consider that the otherwise deductible costs of an arrangement to which Division 16D applies relate wholly to the assessable notional interest amount. No deduction will be denied under subsection 51(1) merely because the amount in question relates to the notional principal amount.

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