Deductions: judgment debt interest imposed on a judgment debt for outstanding income tax liabilities

Is the taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for judgment debt interest?

No. The taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for judgment debt interest.

A judgment debt was obtained in a local Court against the taxpayer in respect of their outstanding personal income tax liability.

The taxpayer incurred judgment debt interest in connection with the judgment debt. This interest was levied under legislation governing the Local Court.

One of the taxpayer's income producing activities is carrying on a business as a sole trader.

Section 8-1 of the ITAA 1997 allows a deduction for all losses or outgoings to the extent to which they are incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

However, where another provision of the income tax legislation deals specifically with the deductibility of a particular expense, it is first necessary to consider whether that provision provides for the deductibility of such an expense.

Section 25-5 of the ITAA 1997 allows a deduction for various tax related expenses including, at paragraph 25-5(1)(c) of the ITAA 1997, the general interest charge (GIC) under Division 1 of Part IIA of the Taxation Administration Act 1953 (TAA 1953).

The judgment debt interest levied in respect of the taxpayer's outstanding income tax liability was imposed under legislation governing the Local Court.

Paragraph 25-5(1)(c) of the ITAA 1997 is strictly limited to a deduction for GIC raised under the TAA 1953.

Accordingly, the taxpayer is not entitled to a deduction under paragraph 25-5(1)(c) of the ITAA 1997 for the judgment debt interest that they have incurred in respect of their income tax debt.

The application of section 8-1 of the ITAA 1997 to the judgement debt interest incurred by the taxpayer must therefore be considered.

It is important to note that payment of GIC would not, but for paragraph 25-5(1)(c) of the ITAA 1997, be regarded as a deductible expenditure.

Judgment debt interest amounts are amounts in the nature of interest payable for underpayment or late payment of income tax and relate to a taxpayers' failure to fully satisfy their income tax obligations. Such amounts are awarded to compensate the revenue for the full amount of income tax not being paid by the due date. The judgment debt interest expense is not incurred by the taxpayer in gaining or producing their assessable income or necessarily incurred in carrying on a business for gaining or producing assessable income.

Therefore, the taxpayer is not entitled to deduction under section 8-1 of the ITAA 1997 for the judgment debt interest that they have incurred in respect of their income tax liability.