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Edited version of your written advice
Authorisation Number: 1012916388811
Date of advice: 1 December 2015
Ruling
Subject: Penalty interest
Question
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your assessable income by the difference in interest received after an interest rate reduction is applied to funds withdrawn from a term deposit prior to its maturity?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.
This ruling applies for the following periods:
Year ended 30 June 2014
Year ended 30 June 2015
The scheme commences on:
1 July 2013
Relevant facts and circumstances
You have a term deposit.
You have received annual interest payments.
You requested that the term deposit be closed.
Your interest payments were adjusted by deducting it from your principal.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 59-30
Reasons for decision
Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes all ordinary income derived directly or indirectly from all sources. Interest income is normally regarded as ordinary income and therefore forms part of a taxpayer's assessable income.
Interest income is normally regarded as ordinary income and therefore forms part of a taxpayer's 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, you closed your term deposit prior to its maturity and the interest rate you were entitled to, was reduced. As the interest has already been paid to you at the higher rate, you were required to repay the difference to the financial institution.
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.