Income tax: when Division 16D 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 will a proportion of the funding costs relating to the non-assessable amount be disallowed under subsection 51(1)?

No. The funding costs of an arrangement to which Division 16D applies are considered to relate wholly to the assessable notional interest amount. No deduction will be denied under subsection 51(1) in relation to the notional principal amount of any arrangement payment.