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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of private advice

Authorisation Number: 1012618760573

Ruling

Subject: Income - repayment

Question 1

Are you entitled to a deduction for the interest you will repay after an interest rate reduction is applied to funds withdrawn from a term deposit prior to its maturity?

Answer

No.

Question 2

Can you reduce your assessable income by the difference in interest received after an interest rate reduction is applied to funds withdrawn from a term deposit prior to its maturity?

Answer

Yes.

Question 3

Are you entitled to a deduction for administration fees incurred after funds are withdrawn from a term deposit prior to its maturity?

Answer

Yes.

This ruling applies for the following periods:

n Year ended 30 June 2013

n Year ended 30 June 2014

n Year ended 30 June 2015

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You deposited a sum of money in a term deposit with a financial institution.

You are looking to withdraw the funds from the term deposit prior to maturity.

You will incur an administration charge and an interest rate reduction will be applied to the funds withdrawn early, based on a percentage of the original term that has elapsed.

Relevant legislative provisions

Reasons for decision

Amounts that are income according to ordinary concepts are included in assessable income by section 6-5 Income Tax Assessment Act 1997 (ITAA 1997). Interest received on a term deposit is income according to ordinary concepts.

The interest repaid is not an allowable deduction under section 8-1 of the ITAA 1997, as it is not incurred in the course of earning or deriving assessable income.

Where an amount is repaid the treatment of the repayment depends upon whether the amount is repaid in the financial year the payment was derived, or in a later financial year.

If you repay the amount in the year the income was derived, that amount you repay is not included in your assessable income. However if you repay the amount in a later year of income, section 59-30 of the ITAA 1997 may apply to exclude the income from being assessable.

Section 59-30 of the ITAA 1997 states that an amount you receive is not assessable and is not exempt income for an income year if:

a) you must repay it; and

b) you repay it in a later income year; and

c) you cannot deduct the repayment for any income year.

In your case, if you withdraw funds from your term deposit prior to its maturity the interest rate you were entitled to is reduced. As the interest has already been paid to you at the higher rate, you will be required to repay the difference to the financial institution, which will occur in a later financial year.

As you have satisfied the conditions of section 59-30 of the ITAA 1997, the overpaid interest amounts will not be assessable to you. As such you are entitled to amend you prior year income tax returns to reduce the interest income by the interest amounts you must repay.

In addition, the administration charge is an allowable deduction under section 8-1 of the ITAA 1997.

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