Private ruling: Interest repayment
Published: March 2015
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you able to claim a reduction in the amount of tax payable on any interest earnings in the current financial year? | A1: No | Q2: Can your previous year's tax returns be adjusted to remove the repaid interest income? | A2: Yes

Relevant facts and circumstances: You opened a term deposit in 20YY You were paid interest on a monthly basis into this account, at a rate that was based on you keeping those funds in the term deposit until maturity. You made an early withdrawal from that term deposit in 20XX. As a consequence, the financial institution recalculated the interest already paid to you from the time you opened the account in 20YY, up until 20XX, reducing the interest rate payable over that time by a percentage per annum. This recalculation resulted an adjustment on your term deposit in 20XX, recouping an amount from your account, being a 'Prepayment Interest Adjusted'. You have declared the interest income from that account in each year of accrual in your tax returns.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 59-30

Reasons for decision: Summary: 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 is assessable income under section 6-5 of the ITAA 1997 in the year in which it is received ((1958) 9 TBRD Case J20 ; 7 CTBR (NS) Case 130 ; and (1958) 9 TBRD Case J60 ; 8 CTBR (NS) Case 50 ). The fact that the receipt may have to be repaid if certain events subsequently occur does not affect the character of the receipt (Case A59 69 ATC 334; 15 CTBR (NS) Case 34 ). The repayment of the interest is not an allowable deduction under the general deductions provisions in section 8-1 of the ITAA 1997 as it is not incurred in the course of earning or deriving assessable income ((1958) 9 TBRD Case J20 ; 7 CTBR (NS) Case 130 ; and (1958) 9 TBRD Case J60 ; 8 CTBR (NS) Case 50 ). The repayment is an amount paid for breach of contract ((1958) 9 TBRD Case J60 ; 8 CTBR (NS) Case 50 ; and (1963) 14 TBRD Case P20 ; 11 CTBR (NS) Case 58 ). Accordingly, you are not entitled to claim a deduction in the year of repayment of the interest. However, subsection 59-30(1) of the Income Tax Assessment Act 1997 states that an amount you receive is not assessable income, and is not exempt income, for an income year if: • you must repay it; and • you repay it in a later income year; and • you cannot deduct the repayment for any income year. Therefore, you are entitled to request an amendment of your tax returns for both 20ZZ and 20XX to remove the repaid interest amounts from the assessable income for the years in which it was assessed.