Edited version of your written advice

Authorisation Number: 1012762367215

Ruling

Subject: The general interest charge

Question 1

Are you entitled to a deduction for the general interest charge (GIC) payable under the settlement agreement between you and the Australian Taxation Office (ATO) that formed part of the 'primary debt' owed by entity A?

Answer

No.

Question 2

Are you entitled to a deduction for the 'further GIC' incurred by you under the terms of the settlement agreement between you and the ATO?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commenced on

1 July 2013

Relevant facts

Entity A ceased trading and was wound up.

Due to your relationship with entity A, the ATO pursued you for entity A's tax debt which included GST, PAYGW, administrative penalties and GIC (the 'primary debt').

Under the terms of the settlement agreement reached with the ATO, you were required to pay the primary debt as well as further GIC.

Relevant legislative provisions

Income Tax Assessment Act 1997 Paragraph 25-5(1)(c)

Income Tax Assessment Act 1997 Section 995-1

Taxation Administration Act 1953 Subsection 8AAB(2)

Taxation Administration Act 1953 Subsection 8AAB(4)

Reasons for decision

Paragraph 25-5(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) states that you can deduct expenditure you incur to the extent it is for the general interest charge.

General interest charge is defined in section 995-1 of the ITAA 1997 to mean the charge worked out under Part IIA of the Taxation Administration Act 1953 (TAA).

Subsection 8AAB(2) of Part IIA of the TAA states that a person is only liable to pay the charge on an amount if a provision specifies that the person is liable to pay the charge on the amount. The provisions that make persons liable to pay the GIC are listed at the table in subsection 8AAB(4) of the TAA. The amount of GIC payable is worked out under section 8AAC of the TAA by multiplying the running balance account (RBA) deficit at the end of a day, or the unpaid amount, by the GIC rate.

In this case, the terms of settlement agreement include GIC as part of the primary debt payable by you under the agreement, as well as further GIC pursuant to section 8AAZF and Part IIA of the TAA.

Although the amount that is included in the primary debt in the Terms of Settlement agreement as GIC calculated up to and including xx/xx/xxxx represents an amount that was worked out under Part IIA of the TAA, it was not worked out for you. The primary debt amount included in the amount payable under the agreement was an amount payable by entity A and the words used in the agreement are an explanation of how that amount was calculated for the purposes of recovery of the amount from you. Therefore, the amount does not satisfy the definition of GIC in section 995-1 of the ITAA 1997 as you are not liable to pay the amount because of a provision listed at subsection 8AAB(4) of the TAA. Although an amount has been called GIC and included in the amount payable by you under the Terms of Settlement agreement, that amount is not incurred as GIC by you. Rather it is incurred by entity A. Therefore no amount from the primary debt is deductible to you.

However, the Terms of Settlement agreement includes in the amount payable 'further GIC pursuant to section 8AAZF and Part IIA of the TAA 1953 calculated upon an amount or amounts and for a period or periods'.

As the 'further GIC' is payable under section 8AAZF of the TAA and is worked out under Part IIA of the TAA on an amount due by you, being an RBA deficit debt, the 'further GIC' satisfies the definition of GIC in section 995-1 of the ITAA 1997.

Accordingly, you can deduct expenditure for the 'further GIC' at the time you incur the expenditure. GIC in these circumstances accrues daily.