Deductibility of General Interest Charge (GIC) - when incurred or when paid

Can a taxpayer claim a deduction for an amount of GIC under paragraph 25-5(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) in the income year in which the notice of amended assessment (which includes the GIC) issues or in the year when the GIC was paid?

The taxpayer can claim a deduction for GIC under paragraph 25-5(1)(c) of the ITAA 1997 in the income year in which the notice of amended assessment (which includes the GIC) issues notwithstanding that the GIC was paid in a later year of income.

The taxpayer's notice of amended assessment issued in December 2000 for the year of income ended 30 June 2000.

The notice of amended assessment: • included an amount of GIC imposed for tax shortfall as the result of an the taxpayer's income tax liability; and • contained a statement that the amount of GIC is tax deductible in the year the amount of GIC was paid.

The taxpayer paid the notice of amended assessment (which includes the GIC) in July 2001.

Paragraph 25-5(1)(c) of the ITAA 1997 states that a taxpayer can deduct expenditure incurred to the extent it is for the GIC under Division 1 of Part IIA of the Taxation Administration Act 1953 .

To be deductible in a particular year, the expenditure must generally have been incurred in that year.

The courts have considered the meaning of the word 'incurred'. In New Zealand Flax Investments Limited and the Federal Commissioner of Taxation (1938) 61 CLR 179, the High Court said: 'Incurred does not only mean defrayed, discharged, or borne, but rather it includes encountered, run into, or fallen upon ......... But it does not include a loss or expenditure which is no more than impending, threatened, or expected.'

For an amount of GIC to have been incurred it need not be paid but it must not include a debt or liability which is impending, threatened or expected. In other words, for the debt to be incurred, the issue of the notice of assessment is sufficient to establish the amount of GIC. As the taxpayer has been notified of the amount of GIC, the GIC is no longer impending, threatened, or expected.

Accordingly, the taxpayer is entitled to a deduction for the amount of the GIC in the 2001 income year even though the taxpayer did not pay the GIC until the 2002 income year.