Private ruling: Timing of deductions for general interest charges and shortfall interest charges
Published: April 2012
Ruling period: Year ended 30 June 2006 | Year ended 30 June 2007 | Year ended 30 June 2008 | Year ended 30 June 2009 | Year ended 30 June 2010
Date scheme commenced: 1 July 2005

Ruling: Q1: Is the compounded daily interest charge deductible? | A1: Yes. | Q2: Is the compounded amount of general interest charge (GIC) referable to the year ended 30 June 2006, 30 June 2007, 30 June 2008 and 30 June 2009 deductible in the respective year? | A2: No. | Q3: Is the compounded amount of shortfall interest charge (SIC) referable to the year ended 30 June 2006, 30 June 2007, 30 June 2008 and 30 June 2009 deductible in the respective year? | A3: No. | Q4: Is the GIC and SIC which resulted from an amended assessment deductible in the year in which the related notice of amended assessment issued? | A4: Yes. | Q5: Is the GIC which resulted from late payment of tax deductible in the year in which you are notified of its imposition? | A5: Yes. Issue 2 | Q6: Can the amount of the GIC remission be included as assessable income in the year ended 30 June 2010? | A6: Yes.

Relevant facts and circumstances: You made a voluntary disclosure during the 2008-09 year of income. . The disclosure covered multiple years of income. As a result of the disclosure, notices of amended assessment for these years issued during the 2009-10 year of income. You were charged GIC and SIC as a result of the amendments. You were notified of these amounts during the 2009-10 year of income. GIC for late payment of tax was also imposed. Some of the GIC and SIC was remitted during the 2009-10 year of income.

Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 51(5) | Income Tax Assessment Act 1936 Section 170AA | Income Tas Assessment Act 1936 Subsection 204(1A) | Income Tas Assessment Act 1936 Subsection 204(3) | Income Tax Assessment Act 1997 Section 5-10 | Income Tax Assessment Act 1997 Section 5-15 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 10-5 | Income Tax Assessment Act 1997 Division 20-A | Income Tax Assessment Act 1997 Subsection 20-20 | Income Tax Assessment Act 1997 Subsection 20-25(2A) | Income Tax Assessment Act 1997 Section 20-30 | Income Tax Assessment Act 1997 Section 20-35 | Income Tax Assessment Act 1997 Section 25-5 | Income Tax Assessment Act 1997 Paragraph 25-5(1)(c) | Taxation Administration Act 1953 Section 8AAE | Taxation Administration Act 1953 Schedule 1 Division 280 | Taxation Administration Act 1953 Schedule 1 Section 280-100 | Taxation Administration Act 1953 Schedule 1 Section 359-10

Reasons for decision: Summary: The GIC or SIC imposed as a result of your assessments for the 1996-97 to 2007-08 years of income being amended by the Commissioner to increase your tax liabilities for these years is deductible in the 2009-10 year of income. The GIC imposed on late payment of tax, including unpaid GIC or SIC, is deductible in the year of income you are notified of the imposition of the GIC. | Detailed Reasoning - Detailed reasoning: Where a tax assessment has been amended to increase the amount of tax payable the taxpayer is liable to pay interest on the amount of the increase. The period in respect of which the interest is payable is essentially the period commencing on the day on which the underpaid tax should have been paid (usually the due date for payment of the original assessment) and ending on the date on which the assessment is amended. The provisions which impose the liability for interest on amended assessments for the 1996-97 to 2007-08 years of income, inclusive, varies as does the name of the interest. The applicable provisions are: former section 170AA of the Income Tax Assessment Act 1936 (ITAA 1936) for the 2003-04 and earlier years of income - referred to as 'interest' or 'general interest charge' (GIC), and Section 280-100 of Schedule 1 to the Taxation Administration Act 1953 (TAA) for the 2004-05 and later years of income - referred to as 'shortfall interest charge' (SIC). Where the tax payable, including any accrued GIC or SIC, remains unpaid in whole or in part, the taxpayer is liable to interest on the unpaid amount. This interest is calculated on a daily basis. The provisions which impose the liability for interest on the late payment of tax, referred to as GIC, are contained in the following provisions: former subsection 204(3) of the ITAA 1936 for the 2009-10 and earlier years of income, and section 5-15 of the Income Tax Assessment Act 1997 (ITAA 1997) for the 2010-11 and later years of income. | Detailed Reasoning - Amounts of GIC or SIC imposed are deductible under the following legislative provisions:: · former subsection 51(5) of the ITAA 1936 for the 1996-97 year of income, and · paragraph 25-5(1)(c) of the ITAA 1997 for the 1997-98 and subsequent years of income. Both GIC and SIC are deductible when they are 'incurred'. Taxation Determination TD 2012/2 provides the Commissioner's view of when SIC is incurred for the purposes of paragraph 25-5(1)(c) of the ITAA 1997. TD 2012/2 states SIC is incurred for the purposes of paragraph 25-5(1)(c) of the ITAA 1997 in the year of income in which the Commissioner gives a taxpayer a notice of amended assessment. This is the case even if the SIC liability is notified separately from the notice of amended assessment, or if the SIC is unpaid at the end of that income year (for example, because the due date of the SIC falls in the next year of income). For years of income preceding the application of SIC, we take the same view of when the GIC is incurred by a taxpayer who is liable to pay GIC because an additional amount of tax is payable under an amended assessment. In your case, you made a voluntary disclosure which resulted in your assessments for multiple years being amended. Notices of amended assessment issued. GIC and SIC were imposed as a result of the amendments. You are arguing that the GIC and SIC imposed should be deductible in the year to which the GIC or SIC is referable. For example, if the SIC is calculated for the period 1 March 2008 to 15 August 2008, the total SIC should be claimed over the two years. That is, the portion of the SIC which was calculated in relation to the period 1 March 2008 to 30 June 2008, inclusive, should be allowed as a deduction in the 2007-08 year of income. Whilst the remaining SIC should be an allowable deduction in the 2008-09 year of income. To support your argument, you refer to the Full Federal Court decision in Federal Commissioner of Taxation v. H (2010) 188 FCR 440; [2010] FCAFC 128 ( H's case ). That case concerned the calculation of a company's 'distributable surplus' for the purposes of Division 7A of the ITAA 1936. The Court concluded that prior to an assessment being made the company had an obligation to pay income tax arising from the operation of the Income Tax Act 1986 (ITA 1986). The present legal obligation came into existence on 30 June of the year of income in which the income was derived. At worst that obligation might be a contingent obligation (contingent on the assessment being made), but that does not disqualify it as a present legal obligation in the sense that it exists at 30 June, though the obligation is to do something at a future date. On the making of the assessment, the present legal obligation arising from the ITA 1986 matures into an enforceable debt that becomes due and payable. The Court also agreed with the observations of the Administrative Appeals Tribunal that GIC is a present legal obligation on each day that tax which should have been paid remains unpaid. However, H's case was concerned with the meaning of 'present legal obligation' for the purposes of section 109Y of the ITAA 1936. The Court's interpretation of the phrase 'present legal obligation' in the context of section 109Y of the ITAA 1936 is not relevant to the substantial body of jurisprudence on the meaning of 'incurred' in section 8-1 of the ITAA 1997, which is directly relevant to section 25-5 of the ITAA 1997. A liability to pay the SIC is contingent on an amended assessment increasing the amount of tax payable. It does not arise from the operation of the ITA 1986 itself. You also argue that the operation of the relevant provisions of the ITAA 1936, ITAA 1997 and the TAA support the deductibility of GIC and SIC in the year to which they are referable. The basis for this is: · you become liable to pay tax for a year of income by 1 December of the following income year when it became 'due and payable' (subsection 204(1A) of ITAA 1936), that is, for example, the tax payable for the 1999-2000 year of income was due and payable by 1 December 2001 · on this basis, the liability to pay the tax arises on 30 June of a year of income · in respect of the tax shortfall that arose in respect of a year of income, you became liable to pay GIC on the shortfall amount for 'each day' of the shortfall period from 1 December of the following income year, that it, for example, for a tax shortfall that arose in the 1999-2000 year of income, you were liable for GIC on the shortfall amount for each day from 1 December 2001, and · the GIC for each day was 'due and payable' at the end of that day (section 8AAE of the TAA 1953). As discussed above, under section 25-5 of the ITAA 1997 and former subsection 51(5) of the ITAA 1936 GIC and SIC are deductible when they are incurred. TD 2012/2 discusses the meaning of 'incurred' as this is not defined within the income tax legislation. The word 'incur' in subsection 25-5(1) of the ITAA 1997 has the same meaning as in the context of the general deduction provision of section 8-1 of the ITAA 1997. Taxation Ruling TR 97/7 explains the meaning of 'incurred' for the purposes of section 8-1. It sets out general rules, settled by case law, that assist in most cases in determining whether and when a loss or outgoing has been incurred. The key principles are: · incurred does not equate to having been paid · the taxpayer must be definitely committed to the outgoing in the year of income. That is, it must be a presently existing liability to pay a pecuniary sum · it is not a presently existing liability if it is contingent, and · incurred does not include amounts which are merely impending, threatened or expected. Whether there is a presently existing pecuniary liability in a year of income requires consideration of the facts of each case, having regard to the source of the liability. The source of a taxpayer's liability to pay SIC is found in Division 280 of Schedule 1 to the TAA for the 2004-05 and later years of income. A liability for SIC arises on an additional amount of income tax that a taxpayer is liable to pay because the Commissioner amends their relevant tax assessment for a year of income. The SIC liability exists for each day in the income period that the tax was understated. This would generally be from the day the tax under the original assessment was due (or would have been due if there had been any tax payable) to the day before the Commissioner gave the taxpayer a notice of amended assessment. The Commissioner must give a notice stating the amount of SIC the taxpayer is liable to pay. This notice can be combined with another notice - such as the notice of amended assessment that gives rise to the SIC liability. The total SIC payable by a taxpayer is due and payable 21 days after the day on which the Commissioner gives the taxpayer a notice of their SIC liability. The language of the relevant provisions in Division 280 of Schedule 1 to the TAA makes clear that a liability to SIC is contingent on an amended assessment being made and that the taxpayer must be liable pay an additional amount of tax. The note to section 5-10 of the ITAA 1997 (which forms part of the Act) also provides support for the view that the SIC is only imposed if the Commissioner amends an assessment and it results in an increase of tax payable. The service of a notice of (amended) assessment is the essential final step in making the assessment (see Batagol v. Commissioner of Taxation (1963) 109 CLR 243 and Commissioner of Taxation v. Prestige Motors Pty Ltd (1994) 181 CLR 1; [1994] HCA 39). Although the SIC is calculated retrospectively for each day in the SIC liability period, the earliest time at which the SIC liability crystallises into a presently existing liability is when all of the steps necessary for its imposition have occurred - namely the making of an amended assessment by the Commissioner with an increased amount of tax payable. At this time a taxpayer becomes 'definitely committed' and therefore incurs the liability to SIC. Until all those steps are completed, any liability to pay the SIC is at most 'impending or threatened'. This means that, where the SIC liability period spans more than one year of income, the SIC is not deductible in each of the years to which the liability relates. On the last day of each of those earlier years of income, the SIC is at most 'impending or threatened'. It also means the SIC is incurred when the taxpayer is issued with the notice of amended assessment, even if they are not notified of the amount of SIC payable until a later date or if the SIC is unpaid at the end of that year of income. As stated above, SIC applies to amendments of assessments of income tax for the 2004-05 and later years of income. For years of income preceding the application of SIC, a taxpayer who is issued with an amended assessment increasing the amount of income tax is liable to pay the GIC on the unpaid tax. As with SIC, the GIC is calculated retrospectively from the due date for payment of the original assessment. The liability to pay GIC in these circumstances is also contingent on the taxpayer being issued with an amended assessment. Accordingly, we take the same view of when GIC is incurred for the purposes of section 25-5 where it applies to the understatements of tax for income years preceding the introduction of SIC. In your situation, at the time you lodged your tax returns for each income year and the appropriate tax became due and payable it was not known with any certainty that the assessments would be amended. Whilst the Commissioner had the power under the income tax legislation to amend the assessments, this was contingent on either action initiated: · by yourself in the form of an amendment request or voluntary disclosure, or · by the ATO through reviews, audits or other action. Thus, your liability to GIC and SIC on the increased tax payable was not created until the Commissioner amended your assessments following a voluntary disclosure. | Summary: The GIC remitted during the 2009-10 year of income forms part of your assessable income for that year of income. | Detailed Reasoning - Detailed reasoning: Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. Section 10-5 of the ITAA 1997 lists those provisions about assessable income. Included in the list is subdivision 20-A of the ITAA 1997 which involves recoupment for certain losses and outgoings that are deductible. Subdivision 20-A of the ITAA 1997 states your assessable income may include an amount that you receive by way of insurance, indemnity or other recoupment if: · it is for a deductible expense, and · it is not otherwise assessable income. A recoupment of a loss or outgoing includes any kind or recoupment, reimbursement, refund, insurance, indemnity or recovery, however described, and a grant in respect of the loss or outgoing. Subsection 20-25(2A) states that if you have incurred expenditure that consists of a GIC or SIC and the Commissioner has remitted any of that charge then you are taken to receive the remitted amount as recoupment of that expenditure. Recoupments which are included in your assessable income are known as assessable recoupments. However, only certain recoupments are assessable by virtue of subdivision 20-A of the ITAA 1997. To be assessable under this subdivision, the amount you received as a recoupment of a loss or outgoing must have been deductible in the current or an earlier year of income under a provision which is listed in section 20-30 of the ITAA 1997. Item 1.3 of the table in subsection 20-30(1) of the ITAA 1997 includes tax related expenses deductible under section 25-5 of the ITAA 1997. Paragraph 25-5(1)(c) of the ITAA 1997 states that expenditure for the GIC and SIC is a deductible tax related expense. Where the whole of the loss or outgoing is deductible either in the current or an earlier income year, section 20-35 of the ITAA 1997 provides that the taxpayer's assessable income includes the amount of the recoupment up to the amount of the loss or outgoing. Accordingly, your assessable income will include the amount of GIC remitted in the 2009-10 year of income under section 6-10 of the ITAA 1997

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