Edited version of private ruling

Authorisation Number: 1011709117716

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Ruling

Subject: Repaid income

Question 1

Are you entitled to reduce your income by the amount you were required to repay?

Answer

Yes.

Question 2

Are you entitled to a deduction for interest on a loan taken out to repay income?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commenced on

01 July 2005

Relevant facts

You entered into a scholarship agreement which required that for you to fulfil the terms of the contract you were required to work for the provider for a period of four years after completion of your degree. If you did not comply with the conditions, you were required to repay any money received under the scholarship and may also be required to pay penalties.

You resigned and did not complete the four years required under the agreement.

The provider required you to repay the whole amount of the scholarship. However, they did not require you to pay penalties.

Under the agreement, you received amounts in the 2007 to 2010 income years. These amounts were declared in each respective income tax return.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 59-30(1)

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Repaid income

Subsection 59-30(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that an amount you receive is not assessable income, and is not exempt income, for an income year if:

· you must repay it; and

· you repay it in a later income year; and

· you cannot deduct the repayment for any income year.

In your case, you received an assessable scholarship in each of the 2007 to 2010 income years which you were required to repay and have repaid. Therefore, as you have previously declared the income in the respective years and this income has been repaid, you are entitled to amend your assessments to exclude the relevant income.

Are you entitled to a deduction for interest on a loan taken out to repay income?

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in the course of gaining or producing assessable income, but are not allowable to the extent that they are of a capital, private or domestic nature.

The courts have considered the meaning of 'incurred in gaining or producing assessable income'. In Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431 the High Court stated that:

For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing assessable income it must be incidental and relevant to that end. The words "incurred in gaining or producing assessable income" mean in the course of gaining or producing such income.

The expenditure must therefore be related to the production of assessable income.

In your case, the loan you have taken out is to repay scholarship income.

As stated above, the income you repaid is not assessable income and is not exempt income. Therefore, it cannot be said that interest on the loan you took out to repay the scholarship income is incurred in producing your assessable income. Accordingly, you are not entitled to a deduction for interest on a loan taken out to repay the scholarship income.