Can a deduction be claimed under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for interest in advance incurred in the year ending 30 June 20XX, where the payment of that interest took place in a later income year?
Yes. This ruling applies for the following period : Year ended 30 June 20XX The scheme commenced on: D M 20XX
You own x rental property. The property has been rented or available for rent since purchased. You entered into Home Loan Interest Only In Advance arrangement. You have a dedicated x account for drawing and depositing into for transactions associated with the Home Loan Interest Only In Advance. You provided a copy of the statement for the x account. You provided a copy of the bank statement for your H/Loan Interest Only in Advance. You contacted your bank in M 20XX to confirm you would be paying interest in advance. You checked with the bank and was told by the bank to deposit the funds into the x account. You deposited $XX,000 into the x account to cover interest in advance. You contacted the bank as the funds for the interest had not been deducted from the x account. The bank deducted $XX,000 from the x account on D M 20XX. You provided a copy of a letter from bank which states: 'We have processed your interest in Advance for the above loan on D/M/20XX. For taxation purposes, this letter confirms that you have incurred the interest owing to x in the financial year ended D/M/20XX' A response from Case Manager of the bank about your complaint states:
'Please utilise the tax letter provided to lodge your tax request, if upon the lodgment you had incurred a loss we are happy to review these further if required provided we receive evidence of the loss incurred. As highlighted in our previous response at this stage we are unable to provide further changes to the transactions beyond the letter confirming the interest being incurred in the previous tax year, and the delayed charge being due to x delays.'
Income Tax Assessment Act 1997 section 8-1.
Summary The interest expense was incurred in the year ended 30 June 20XX as you had a presently existing liability to pay the interest during that year. You are therefore entitled to a deduction for the interest in the year ended 30 June 20XX. Detailed reasoning Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in 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 or a provision of the taxation legislation excludes it. Taxation Ruling TR 97/7: Income Tax: section 8-1 - meaning of 'incurred' - timing of deductions sets out the Commissioner's view about the meaning of incurred which explains that you incur an expense when you have a presently existing liability to pay a pecuniary sum equal to that expense, or when payment of the expense is made in the absence of such a presently existing liability. Paragraph 3 of TR 97/7 outlines that to qualify for deduction under section 8-1 of the ITAA 1997, a loss or outgoing must have been incurred.
Paragraph 5 of TR 97/7 outlines that as a broad guide, you incur an outgoing at the time you owe a present money debt that you cannot escape. Paragraph 6 of TR 97/7 states: 6. The courts have been reluctant to attempt an exhaustive definition of a term such as 'incurred'. The following propositions do not purport to do this, they help to outline the scope of the definition. The following general rules, settled by case law, assist in most cases in defining whether and when a loss or outgoing has been incurred: (a) a taxpayer need not actually have paid any money to have incurred an outgoing provided the taxpayer is definitively committed in the year of income. Accordingly, a loss or outgoing may be incurred within section 8-1 even though it remains unpaid, provided the taxpayer is 'completely subjected' to the loss or outgoing. That is, subject to the principles set out below, it is not sufficient if the liability is merely contingent or no more than pending, threatened or expected, no matter how certain it is in the year of income that the loss or outgoing will be incurred in the future. It must be a presently existing liability to pay a pecuniary sum;..... Prepaid expenses
Section 82KZM of the Income Tax Assessment Act 1936 (ITAA 1936) contains rules which affect the timing of deductions for certain prepaid expenses. In particular, if the eligible service period is 12 months or shorter but ends after the last day of the year of income after the one in which the expenditure was incurred, section 82KZM of the ITAA 1936 applies and evenly spreads the deduction for prepaid expenses over the years comprising the eligible service period. A prepaid expense will not be subject to these timing rules where the following factors exist: • the interest is otherwise deductible under section 8-1 of the ITAA 1997 • the taxpayer is an individual • the expenditure was not incurred in carrying on a business • the eligible service period is 12 months or less, and • the eligible service period ends in the expenditure year or the income year immediately following. Application to your circumstances The loan relates to an investment property. Rent received from an investment property is assessable income; therefore the loan interest is an allowable deduction.
You were definitely committed to the outgoing in the year ended 30 June 20XX and it was only due to a bank error that the relevant transactions did not occur until a later income year. Therefore, the interest expense was incurred in the year ended 30 June 20XX As you have prepaid the interest expense, the application of the prepayment rules contained in section 82KZM of the Income Tax Assessment Act 1936 (ITAA 1936) must be considered. In your case you are an individual and the interest expense is deductible under section 8-1 of the ITAA 1997. The eligible service period is 12 months, ending in the income year immediately following the year in which the expense was incurred. In addition, the expenditure was not incurred in carrying on a business. Accordingly, the interest is not subject to the prepayment rules in section 82KZM of the ITAA 1936 and is deductible in the year in which it is incurred.