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Ruling
Subject: deductibility of prepaid interest expense
Where you prepay 12 months of rental and share investment loan interest before 30 June 2012, can you claim a deduction for this prepayment in addition to the monthly loan interest incurred during the 2011-12 financial year up to the date of the prepayment?
Question 1
Yes.
This ruling applies for the following period
Year ended 30 June 2012.
The scheme commences on
01 July 2012.
Relevant facts and circumstances
You have rental and share investments and pay interest on loans associated your investments.
Your employment circumstances are changing and these changes will be finalised prior to 30 June 2012.
As part of your planning for this, you have reached an agreement with your bank to prepay 12 months of interest on your loans and to make this payment prior to 30 June 2012.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Reasons for decision
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.
Whether interest has been incurred in the course of producing assessable income generally depends on the use to which the borrowed funds have been put. Where a borrowing is used to acquire an income producing asset, the interest on this borrowing is considered to be incurred in the course of producing assessable income.
Generally, a prepaid expense is immediately deductible to a taxpayer who is an individual and the expenditure is not incurred in carrying on a business if:
o the payment is made for a period of service of 12 months or less, and
o the period of service ends in the next income year.
This is commonly known as the 12-month rule.
In your case, you are an individual who is not carrying on a business, who had borrowed to purchase rental property and shares.
You have reached an agreement with your bank to prepay the interest for 12 months.
You have said you intend to make this payment prior to 30 June 2012 with the payment period ending 12 months from the date that you make this payment. This payment would satisfy the 12-month rule.
Therefore, the prepaid interest expense would be an allowable deduction under section 8-1 of ITAA 1997 in the financial year ended 30 June 2012.