Deductions: interest on late payment of local government rates

Whether interest charges on late payment of local government rates and charges in respect of a rental property are deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Yes. Interest charges for late payment of local government rates and charges in respect of a rental property are deductible under section 8-1 of the ITAA 1997 in the year incurred.

The taxpayer, the owner of a rental property, failed to pay local government rates and charges for the property by the dates due and payable and is liable to pay interest charges calculated in accordance with the relevant state Local Government Act.

The taxpayer claims the late interest charges as a tax deduction on the basis that the charges are not excluded by the penalty provisions of section 26-5 of the ITAA 1997.

Taxation Determination TD 94/84 gives the Commissioner's view of what constitutes a 'penalty' for the purposes of section 26-5 of the ITAA 1997 (formerly subsection 51(4) of the Income Tax Assessment Act 1936 ). In contrast to the example in TD 94/84, the imposition of interest in the present circumstances is not a pecuniary punishment for a breach of the Local Government Act but an administrative charge recognising the time value of money. The use of a time factor in the calculation is designed to compensate the local government for the full amount of rates and service charges not having been paid by the due date. The interest payment is accordingly deductible to the taxpayer in the year in which it is incurred.