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Edited version of your private ruling
Authorisation Number: 1012469530972
Ruling
Subject: Interest on overpayment and deductibility of interest to pay income tax
Question 1
Is interest on overpayment included in your assessable income?
Answer
Yes.
Question 2
Are you entitled to a deduction for the additional interest you incurred on your home loan as a result of withdrawing money from your home loan offset account to pay your income tax debt?
Answer
No.
This ruling applies for the following period
2012-13 income year
The scheme commences on
1 July 2012
Relevant facts and circumstances
You lodged your 2011-12 income tax return in the 2012-13 income year.
Your 2011-12 notice of assessment issued with an amount due and payable in the 2012-13 income year.
You requested an amendment to your 2011-12 notice of assessment.
You paid the amount payable on your 2011-12 notice of assessment using funds withdrawn from your home loan offset account.
Your 2011-12 notice of amended assessment issued which effectively reduced the amount due and payable to nil.
You were paid interest on overpayment in relation to the amount of overpaid tax.
You did not carry on a business in the 2011-12 income year.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Income Tax Assessment Act 1997 section 15-35
Income Tax Assessment Act 1997 section 25-5
Income Tax Assessment Act 1997 paragraph 25-5(2)(c)
Reasons for decision
Summary
Interest paid on overpayments of income tax is included in your assessable income.
Interest incurred on money borrowed to pay income tax, or to pay private expenses (such as a home loan), is not deductible.
Detailed reasoning
Interest on overpayment
Your assessable income includes interest payable to you under the Taxation (Interest on Overpayments and Early Payments) Act 1983. The interest becomes assessable when it is paid to you or applied to discharge a liability you have to the Commonwealth (section 15-35 of the Income Tax Assessment Act 1997 ITAA 1997)).
In your case, you were paid interest for an overpayment of income tax in relation to your 2011-12 notice of assessment.
The interest is included in your assessable income in the 2012-13 income year, the income year that it was paid to you.
Interest on borrowed money
Certain expenditure is expressly denied from being claimed as a deduction. You cannot deduct payments of interest on money borrowed and spent on managing certain aspects of your tax affairs, including payments of income tax (paragraph 25-5(2)(c) of the ITAA 1997).
In addition, you did not actually borrow money to pay your income tax debt. You withdrew money from your home loan offset account which resulted in you incurring more interest on your home loan. Interest on money borrowed to purchase a home is a private expense is not deductible under any provision of the ITAA 1997.
As such, you are not entitled to a deduction for the additional interest you incurred on your home loan as a result of withdrawing money from your home loan offset account to pay your income tax debt.