Private ruling: Deductibility of shortfall interest charge and general interest charge
Published: June 2013
Date scheme commenced: 1 July 2005

Ruling: Q1: Is general interest charge (GIC) only deductible for each of the members of the Group in the income year in which the liability is paid? | A1: No. | Q3: Is shortfall interest charge (SIC) only deductible for each of the members of the Group in the income year the liability is paid? | A2: No. | Q4: If the answer to question 4 is no, when is SIC deductible for each of the members of the Group? Advice SIC is deductible in the year in which it is incurred.

Relevant facts and circumstances: You were one of several associated entities that were subject of an audit. As a result of the audit, various notices of assessment, amended assessment and shortfall penalty issued to you and some of the associated entities. GIC and SIC was imposed on any understated tax. GIC for late payment of tax and penalties was also imposed. The GIC and SIC remains unpaid. Objections have been lodged against the notices of assessment, penalty and SIC. Most of the entities within the group do not carry on businesses and prepare their financial accounts on a cash basis. Assumption None of the members of the Group are Simplified Tax System taxpayers (STS). Under the STS, outgoings that are deductible under paragraph 25-5(1)(c) are deemed to be incurred when paid.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 166A | Income Tax Assessment Act 1936 Section 170AA | Income Tax Assessment Act 1936 Section 174(1) | Income Tax Assessment Act 1936 Subsection 204(1A) | Income Tax 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 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 | Acts Interpretation Act 1901 Section 28A | Acts Interpretation Act 1901 Section 29 | Evidence Act 1955 Section 160

Reasons for decision: Summary: GIC imposed on the assessment of income tax is deductible in the year of income the Commissioner gives a taxpayer a notice of assessment. GIC imposed on any unpaid SIC, GIC, primary tax or tax shortfall penalty is deductible in the income year in which you are notified of the imposition of the GIC. SIC imposed on the assessment of income tax is deductible in the year of income the Commissioner gives a taxpayer a notice of assessment. | 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 provision which imposes the liability for interest on an original or amended assessment for the 2004 income year and earlier years is former section 170AA of the Income Tax Assessment Act 1936 (ITAA 1936). The GIC imposed on an amended assessment is calculated retrospectively from the due date of payment of the original assessment. GIC on an original assessment is calculated retrospectively from the due date for lodgement of the original income tax return. Where an assessment for the 2005 and later years of income is amended to increase the tax payable, the taxpayer is liable to pay interest on the amount of the increase. The interest that is imposed under section 280-100 of Schedule 1 of the Taxation Administration Act 1953 (TAA) is referred to as 'shortfall interest charge' (SIC). For the 2005 and later income tax years, GIC is also payable on income tax, tax shortfall penalty, GIC or SIC that remains unpaid after the due date for payment. The GIC is calculated on a daily basis. The provisions which impose the liability for GIC on the late payment of tax 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. GIC and SIC is deductible under paragraph 25-5(1)(c) of the ITAA 1997 in the year in which it is 'incurred'. Taxation Determination TD 2012/2 provides the Commissioner's view of when GIC is incurred for the purposes of paragraph 25-5(1)(c) of the ITAA 1997. The Commissioner's view is clearly communicated in paragraphs 1 & 2 of TD 2012/2, as follows: 1. Shortfall interest charge (SIC) is incurred for the purposes of paragraph 25-5(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) in the year of income 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 year of income (for example, because the due date for payment of the SIC falls in the next year of income). 2. For years of income preceding the application of SIC, we take the same view of when the general interest charge (GIC) is incurred by a taxpayer who is liable to pay GIC because an additional amount of tax is payable under an amended assessment. TD 2012/2 discusses the meaning of 'incurred' as this is not defined within the income tax legislation. The word 'incur' in paragraph 25-5(1)(c) 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. · Incurred does not include amounts which are merely impending, threatened or expected. In the ITAA 1997, the legislature has used various phrases to communicate the availability of income tax deductions. For example, under Division 8 of the ITAA 1997, the phrase 'You can deduct …losses or outgoings incurred' is used to explain the deductibility of general expenses. Under Division 25 of the ITAA 1997, the phrase 'You can deduct expenditure you incur' is used in relation to tax-related expenses, repairs, borrowing expenses etc. and 'You can deduct a payment you make' is used in relation to pensions, gratuities and payments to associations etc. The question at issue here is whether the phrase 'You can deduct losses or outgoings incurred' is synonymous with 'You can deduct expenditure you incur' . The leading authorities concerning deductions under the former section 51(1) of the ITAA 1936 provide the answer to this issue. In New Zealand Flax Investments Ltd v F.C of T . (1938) 61 C.L.R. 179 Dixon J concluded: To come within that provision there must be a loss or outgoing actually incurred. 'Incurred' does not mean only defrayed, discharged or borne, but rather it includes encountered, run into, or fallen upon. It is unsafe to attempt exhaustive definitions of a conception intended to have such a various or multifarious application. But it does not include a loss or expenditure which is no more than impending, threatened, or expected. (emphasis added). In determining the meaning of 'incurred', the High Court made no distinction between 'outgoing' and 'expenditure'. By referring to 'expenditure that is no more impending, threatened or expected', the High Court has shown that expenditure is a reference to an outgoing that has not been paid. Also in John Fairfax Pty Ltd v F.C. of T . (1959) 101 CLR 370, the High Court in considering the first and second limbs of section 51(1) referred to `expenditure incurred' rather than loss or outgoings in the following passage: The two categories of s. 51(1) are clearly not mutually exclusive, and it has indeed been said that "in actual working" the addition of the second category "can add but little to the operation of the leading words 'losses or outgoings to the extent to which they are incurred in gaining or producing the assessable income': Ronpibon Tin N.L. and Tongkah Compound N.L. v Federal Commissioner of Taxation. But it was not denied that there may be cases which fall outside the first category and within the second. The first is directed to expenditure incurred in the actual course of producing assessable income: Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation and W. Nevill & Co Ltd v Federal Commissioner of Taxation. It is, primarily at least, concerned with expenditure voluntarily incurred for the sake of producing income. Its scope is not, of course, confined to cases where the income is derived from carrying on a business. The second may be thought to be concerned rather with cases where, in the carrying on of a business, some abnormal event or situation leads to an expenditure which it is not desired to make, but which is made for the purposes of the business generally and is reasonably regarded as unavoidable: Hannan, Principles of Income Taxation (1946) p. 291: Federal Commissioner of Taxation v Snowden & Willson Pty Ltd. More recently in the F.C.of T. v Nash 2013 ATC 20-384 (a case concerning the deductibility of GIC), Griffiths J. specifically considered this issue in paragraphs 64-66 of his decision: 64. Another matter which warrants some discussion is the significance, if any, of the fact that the word "expenditure" is used in s 25-5(1), rather than the phrase "loss or outgoing" as appears in s 8-1 of the 1997 Act (and also appeared in the former s 51(1) of the 1936 Act). 65. In my view, no relevant significance attaches to the use of the word "expenditure". The phrase "loss and outgoing" has been treated as synonymous with the word expenditure in various authorities (see, for example, Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation (1935) 54 CLR 295 at 303 per Latham CJ and at 309 per Dixon J see also NZ Flax at 207). 66. It is, of course, now well established that, while the word "outgoing" might suggest that there needs to be an actual disbursement, that interpretation has not been preferred in the construction of s 51(1) of the 1936 Act, largely because of the use of the word "incurred" in that provision (see James Flood at 506). In my view, a similar approach should be taken in relation to s 25-5(1) having regard to the juxtaposition of the words "expenditure" and "incur". No particular significance should attach to the use of the present tense i.e. "you incur" in s 25-5 of the 1997 Act, as opposed to the past tense "incurred" used in s 8-1 of the 1997 Act and s 51(1) of the 1936 Act in circumstances where a taxation statute speaks to the relevant year of income (see Cronulla Southerland Leagues Club Limited v Commissioner of Taxation (1990) 23 FCR 82 at 89 per Lockhart J and at 116 and 117 per Beaumont J). In conclusion, it is the Commissioner's view that no significance can be drawn from the use of 'expenditure you incur' in paragraph 25-5(1)(c) of the ITAA 1997. It is recognised that where a taxpayer disputes an amended assessment and the imposition of SIC the taxpayer may not be committed to paying the liability until the dispute is resolved. However, the above analysis shows the liability for SIC crystallises at the time the assessment is given. An objection against the assessment and SIC does not change that the SIC has been incurred. The Commissioner's view is apparent in ATO Interpretative Decision ATOID 2012/59 which considers a situation where a taxpayer objects to an amended assessment that includes SIC on the tax shortfall. The objection is subsequently allowed in a later year and the taxpayer's liability to tax and SIC reduced. The taxpayer incurred the SIC in the year the amended assessment issued. The subsequent recoupment of SIC is treated as an assessable recoupment under section 20-20 of the ITAA 1997 and included in the taxpayer's taxable income. Although ATOID 2012/59 refers to SIC the view expressed therein equally applicable to GIC. You have also submitted that a taxpayer returning income on a cash basis should not incur expenses on an accrual basis. However, it is clear from TR97/7 and ATO Interpretative Decision ATOID 2010/192 that the taxpayer's basis of accounting for income (i.e. cash or accruals) does not affect the time at which a loss outgoing is incurred. In ATOID 2010/192 the taxpayer was not carrying on a business and returned income on a cash basis. The taxpayer did not pay land tax for several years. The relevant authority became aware of this and assessed the taxpayer for land tax in arrears on the prior years. The taxpayer claimed a deduction in the current year when the land tax was paid. However, ATOID 2010/192 concludes that the land tax expenses for the purposes of section 8-1 of the ITAA 1997 were incurred in each income year for which each land tax liability was payable, and not in the income year in which the arrears were paid. Before any amount of tax is payable a taxpayer must be served a notice of assessment that ascertains the amount of taxable income and tax payable. See Batagol v Federal Commissioner of Taxation (1963) 109 CLR 243; Federal Commissioner of Taxation v Prestige Motors Pty Ltd (1994) 181 CLR 1; and Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168. For full self-assessment taxpayers a notice of assessment is deemed, under section 166A(3) of the ITAA 1936, to be made on the day the income tax return is lodged by the taxpayer. The liability to pay GIC or SIC is contingent on the taxpayer being issued with a notice of assessment. Even though the GIC or SIC is calculated retrospectively, the earliest time at which the GIC or SIC liability crystallises into a presently existing liability is when the Commissioner gives the taxpayer a notice of assessment. Therefore, the taxpayer is entitled to claim a deduction for GIC or SIC in the year in which the relevant notice of assessment is given by the Commissioner. The question of what is meant by 'the day the Commissioner gives notice' has particular relevance for members of the Group as some assessments have issue dates close to the end of the financial year and may not have been received until the following financial year. Under section 174(1) of the ITAA 1936, the Commissioner shall serve notice of assessment in writing by post or otherwise upon the person liable to pay the tax. Section 174(1) of the ITAA 1936 also states that, the notice is to be served 'conveniently…after any assessment is made'. Section 28A of the Acts Interpretation Act 1901 (AIA) provides that: Service of documents (1) For the purposes of any Act that requires or permits a document to be served on a person, whether the expression "serve", "give" or "send" or any other expression is used, then the document may be served: (a) on a natural person: by delivering it to the person personally; or by leaving it at, or by sending it by pre-paid post to, the address of the place of residence or business of the person last known to the person serving the document; or (b) on a body corporate-by leaving it at, or sending it by pre-paid post to, the head office, a registered office or a principal office of the body corporate. The phrase 'serve by post' is clarified in section 29 of the AIA that provides: (1) Where an Act authorizes or requires any document to be served by post, whether the expression "serve" or the expression "give" or "send" or any other expression is used, then the service shall be deemed to be effected by properly addressing, prepaying and posting the document as a letter and, unless the contrary is proved, to have been effected at the time at which the letter would be delivered in the ordinary course of post. (2) This section does not affect the operation of section 160 of the Evidence Act 1995. Section 160 of the Evidence Act 1995 (Evidence Act) provides: | Detailed Reasoning - Postal articles: (1) It is presumed (unless evidence sufficient to raise doubt about the presumption is adduced) that a postal article sent by prepaid post addressed to a person at a specified address in Australia or in an external Territory was received at that address on the fourth working day after having been posted. (2) This section does not apply if: (a) the proceeding relates to a contract; and (b) all the parties to the proceeding are parties to the contract; and (c) subsection (1) is inconsistent with a term of the contract. (3) In this section: "working day" means a day that is not: (a) a Saturday or a Sunday; or (b) a public holiday or a bank holiday in the place to which the postal article was addressed. In a recent AAT case, Optimise Group Pty Ltd v FC of T 2010 ATC 155, the Tribunal was required to consider an argument by the applicant that the making of the assessment and the service of notice of the assessment (under section 174(1) of the ITAA 1936) were two different things. The Tribunal at paragraphs 79-85, turned to the AIA and the Evidence Act to conclude the following: · The time at which service is effected is important as section 204 of the ITAA 1936 uses the date on which a notice of assessment is given to the taxpayer as one of the dates that triggers when tax is due and payable. · Service is deemed to have been effected at the time at which the assessment would be delivered in the ordinary course of post, unless the contrary is proved to be the case. Assuming there is no evidence to the contrary, section 160 of the Evidence Act presumes it will be delivered on the fourth working day after it was posted. · Actual receipt of a notice of assessment by a taxpayer is not necessary in determining whether tax is due and payable as receipt is deemed. · The deemed date becomes the day that is used in determining the date on which tax becomes due and payable under section 204 of the ITAA 1936 because it becomes the date on which the notice is given to the taxpayer. · The making of an assessment incorporates its service. Until the Commissioner serves the notice, the process of assessment is incomplete. Only when it has been served either by pre-paid post or directly given is the assessment complete and so made. · Serving is the giving or sending of the notice and has nothing to do with its receipt. In Deputy Commissioner of Taxation v Taylor 83 ATC 4539, Lee J. considered the question whether a notice of assessment of income tax, served on the taxpayer by pre-paid post, operates to create a liability to the taxpayer even though the notice has not come to the taxpayer's knowledge. His Honour, in considering the operation of section 174(1) of the ITAA 1936 and the relevant provisions of the AIA, concluded at p. 4542: I am unable to see anything in sec. 174 alone or in association with any other sections of the Act which requires a conclusion that a notice of assessment must be shown to have come to the notice of the taxpayer before the liability referred to in sec. 204 arises. Also, see Bayeh v DFC of T 99 ATC 4895, where the Federal Court considered whether objections were lodged within the prescribed 60 day period. In this case, the Federal Court factored in the statutory presumption (that you allow four working days for pre-paid post to arrive) in its deliberations. TD 2012/2 states at paragraph 17: The service of 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). And at paragraph 1: Shorfall interest charge (SIC) is incurred in the year of income the Commissioner gives a taxpayer a notice of assessment. In conclusion, for an expense to be 'incurred' it must be a 'presently existing liability' and not merely 'threatened or expected'. New Zealand Flax Investments Ltd v F.C of T . (1938) 61 C.L.R. 179. Until being notified of the notice of assessment, the taxpayer does not have a presently existing liability to pay GIC or SIC. The liability may be 'threatened or expected' but it has yet to 'come home'. Therefore, for the purposes of paragraph 25-5(1)(c) of the ITAA 1997, GIC and SIC are incurred on the date on which the notice is given to the taxpayer. Unless the facts suggest otherwise, the assessment will be deemed to be given to the taxpayer on the fourth working day after it was posted. GIC that accrues daily on tax and penalties outstanding is incurred when the taxpayer is notified of the liability.

Question 2: If the answer to question 1 is no, when is GIC deductible for each of the members of the Group? | GIC is deductible in the year in which it is incurred.