Edited version of your written advice

Authorisation Number: 1051334626717

Date of advice: 21 March 2018

Ruling

Subject: Interest deduction - Timing

Question

Is the interest paid by you in the 20XX income year totalling $X tax deductible to you in the 20XX income tax year?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You borrowed a sum of money to invest in a primary production project (loan 1).

You borrowed a sum of money to invest in a primary production project (loan 2).

You joined a class action and were involved in court proceedings in relation to these loans.

During this class action, you did not pay interest on the loans as you believed the loans would not be payable.

The outcome of the class action was unfavourable to you.

The bank issued a notice of payout figure in the 20XX income year (notice date). The following amounts where payable:

● Current Balance

● Interest to notice date

● Early Payout Interest Cost

● Overdue Interest to notice date

You paid the total amount payable in the 20XX income year.

You have supplied bank statements from the bank outlining the amount of interest and the dates on which this interest accrued.

You have not received any distribution for the liquidator and do not expect to receive a distribution.

At the time of the final payout, you had ceased carrying on a business.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Interest is deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to the extent that it is incurred in gaining or producing assessable income or in carrying on a business for that purpose, except to the extent that the expense is of a capital, private or domestic nature or incurred in gaining or producing exempt income.

Product Ruling XXXX and Product Ruling YYYY, explains how a Grower's participation in the project constituted the carrying on of a business of primary production. The product rulings outlined the deductions under section 8-1 of the ITAA 1997 they were entitled to claim. The ruling confirms that interest incurred on loans taken out to fund participation in the project, is an allowable expense when it is incurred.

Class Ruling ZZZZ, covers the group’s liquidation for PR XXXX. However, the same legislative principles would apply for PR YYYY. Paragraph 35 of CR ZZZZ states that is that the interest will continue to be deductible provided the requirements in Taxation Ruling TR 2004/4 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities are satisfied being that the nexus between the outgoings of interest and the relevant income earning activities are not broken.

As the requirements of TR 2004/4 are satisfied, after cessation of the business, the interest will continue to be deductible when it is incurred under section 8-1 of the ITAA 1997.

Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions provides guidance on when an expense is incurred. There is no statutory definition of the term 'incurred'; however, the ruling outlines general rules, settled by case law, which will assist in most cases in defining when an outgoing is incurred.

Broadly, an expense is incurred at the time that a present money debt is owed and cannot be escaped. Importantly, a taxpayer need not have actually paid any money to have incurred such an outgoing, providing they are definitively committed to it in the year of income. That is, an expense may be incurred where there is a presently existing liability to pay a pecuniary sum.

Paragraph 19 of TR 97/7 states that a taxpayer can be completely subjected to a liability even if it is defeasible, refer to Commonwealth Aluminium Corporation Ltd v. FC of T 77 ATC 4151 at 4160; (1977) 7 ATR 376 at 386.

In the interim of the class action, you are still subject to the terms and conditions of the loan arrangement you entered into, which includes the obligation of interest. Therefore you have a presently existing liability at the point the interest accrues each month.

The amount relating to future interest, showing on the Notice of Payout Figure as the ‘early payout interest cost’ would be incurred at the point when there is a presently existing liability. This would be when the notice was issued on the notice date which is in the 20XX income year. No amounts are deductible in the 20XX income year.

Although interest is an allowable deduction under section 8-1 of the ITAA 1997, it is not deductible in the 20XX income year when it was paid.