ATO ID 2012/59: Reduction in shortfall interest charge: credit amendment: assessable recoupment
Date of decision: 27 June 2012
Year of income: Year ended 30 June 2011
Business line: Private Groups and High Wealth Individuals

Issue
If an amount of shortfall interest charge (SIC) is reduced following a credit amendment to a taxpayer's assessment, is the amount of the reduction in the SIC an assessable recoupment for the purposes of section 20-20 of the Income Tax Assessment Act 1997 (ITAA 1997) so that it must be included in the taxpayer's assessable income under subsection 20-35(1) of the ITAA 1997?

Decision
Yes. The amount of the reduction in SIC is an assessable recoupment for the purposes of section 20-20 of the ITAA 1997 so that it must be included in the taxpayer's assessable income under subsection 20-35(1) of the ITAA 1997 for the year of income in which the Commissioner gives the taxpayer a notice of amended assessment giving effect to the reduction.

Facts
A taxpayer omitted to include an amount of interest income in their tax return for the 2008-09 income year. The taxpayer's affairs were reviewed by the Commissioner and the shortfall identified. The taxpayer was issued with an amended assessment on 1 December 2009 which increased the taxpayer's tax liability for the 2008-09 income year. On the same day, the taxpayer also received a notice of their liability to pay SIC on the shortfall amount. The taxpayer claimed a deduction for the SIC in their income tax return for the 2009-10 income year. On 15 December 2010, the taxpayer objected to the amended assessment for the 2008-09 income year as the taxpayer argued that the Commissioner had incorrectly included interest attributable to the taxpayer's partner in the taxpayer's assessable income. The objection was allowed and an amended assessment was given to the taxpayer on 1 February 2011, reducing the taxpayer's liability for tax and SIC. The taxpayer did not include the amount of the reduction in SIC in their assessable income for the 2010-11 income year.

Reasons for decision
Summary: A taxpayer is entitled to a tax deduction for an amount of SIC they incur: paragraph 25-5(1)(c) of the ITAA 1997. SIC is incurred for the purposes of paragraph 25-5(1)(c) of the ITAA 1997 in the year of income the Commissioner gives a taxpayer a notice of amended assessment: see Taxation Determination TD 2012/2. However, if some of this expenditure is recouped, it may result in the amount being treated as an assessable recoupment. Under section 20-35 of the ITAA 1997, your assessable income includes an assessable recoupment of a loss or outgoing if you can deduct the whole of the loss or outgoing for the current year or you have deducted or can deduct the whole of the loss or outgoing for an earlier income year. The meaning of an assessable recoupment is set out in section 20-20 of the ITAA 1997. Recoupment of a loss or outgoing includes any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery however described and a grant in respect of the loss or outgoing: subsection 20-25(1) of the ITAA 1997. In this situation, the taxpayer has recouped an amount as their liability for SIC has been reduced as a result of an objection that has been allowed. The taxpayer has already claimed a deduction for this amount in the 2009-10 income year. The amount will be an assessable recoupment under subsection 20-20(2) of the ITAA 1997 if it is considered to be received by way of insurance or indemnity and the taxpayer can deduct or has already claimed a deduction for it. In this case the recoupment is not received by way of insurance. The term 'indemnity' as used in subsection 20-20(2) of the ITAA 1997 is not a defined term and is given its ordinary meaning. The issue of whether an amount is received by way of indemnity for the purposes of the predecessor provision to subsection 20-20(2) of the ITAA 1997 (paragraph 26(j) of the Income Tax Assessment Act 1936 ) has been considered in a number of cases including: Federal Commissioner of Taxation v. Wade (1951) 84 CLR 105; (1951) 9 ATD 337; 5 AITR 214, Robert v. Collier's Bulk Liquid Transport Pty Ltd (1959) VR 280, Goldsbrough Mort & Co Ltd v. FC of T (1976) 76 ATC 4343; (1976) 6 ATR 580 and Commercial Banking Company of Sydney Limited v. FC of T 83 ATC 4208 (1983); 14 ATR 142. These cases make it clear that an amount received by way of indemnity is not restricted to payments received under a contract of indemnity. The cases also make it clear that an amount received by way of indemnity would include a receipt pursuant to an antecedent obligation (whether by virtue of a contract, statute or a breach of some common law duty of care) to make good or compensate for a loss which arises after the obligation comes into existence. The reduction in the amount of SIC incurred by the taxpayer as a result of the allowed objection can be considered to be an amount received to make good or compensate the taxpayer for a loss which arises after the original obligation to pay SIC came into existence. Therefore the amount can be considered to fall within the broad meaning of the term indemnity. The reduction in SIC can be considered to be an assessable recoupment under subsection 20-20(2) of the ITAA 1997 as the amount is received by way of indemnity and the taxpayer claimed a deduction for the amount in the 2009-10 income year. Nonetheless, subsection 20-20(3) of the ITAA 1997 provides that an amount you have received as recoupment of a loss or outgoing (except by way of insurance or indemnity) is an assessable recoupment if you can deduct an amount for the loss or outgoing for the current year or you have deducted or can deduct an amount for the loss or outgoing for an earlier income year under a provision listed in section 20-30 of the ITAA 1997. Tax related expenses under section 25-5 of the ITAA 1997 are listed in item 1.3 of the table in subsection 20-30(1) of the ITAA 1997. In these circumstances, if the reduction in SIC is not considered to have been received by way of insurance or indemnity, the reduction will still be an assessable recoupment as the taxpayer is entitled to a deduction and has deducted an amount of SIC under paragraph 25-5(1)(c) of the ITAA 1997. This is a provision dealing with tax related expenses and is one of the expenses listed in the table in subsection 20-30(1) of the ITAA 1997. The reduction in SIC is therefore considered to be an assessable recoupment in accordance with section 20-20 of the ITAA 1997 and should be included in the taxpayer's assessable income for the 2010-11 income year under subsection 20-35(1) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1936 section 26(j)
Case references: Commercial Banking Company of Sydney Limited v FC of T (1983) 70 FLR 433 83 ATC 4208 (1983) 14 ATR 142
Related public rulings and determinations: TD 2004/21 | TD 2012/2
Related ATO interpretative decisions: ATO ID 2010/218 | ATO ID 2011/82
Subject references: amendment of assessments assessable recoupments indemnity shortfall interest charge tax related expenses