Private ruling: Income - interest
Published: June 2012
Ruling period: 1 July 2011 to 30 June 2012

Ruling: Question and Answer | Are you entitled to a deduction for interest paid on pecuniary legacies? | Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. On xx xx xx the deceased passed away. The Will specified certain pecuniary legacies to extended family with the residual of the Estate being payable to the residuary beneficiary. A relative of the deceased, excluded from the legacy, formally contested the Will on the grounds that the deceased owed the relative an obligation due to personal circumstances. Some months later probate was granted. Just before expiry of the contest of the Will the relative filed a claim on the Will. The relatives claim resulted in the Executors deferring distribution of the Estate assets until the dispute was resolved. The residuary beneficiary was consulted by the Estates legal representatives in respect to the relatives claim and they determined that they would not relinquish any part of the residuary estate to the benefit of the relative. From the time the Will was contested until settlement negotiations were conducted between the Executors, the beneficiaries of the Will and the relative. This included a time consuming attempt by the residuary beneficiary to have the relatives claim struck out by the Supreme Court. The strike out action failed. From date of death until settlement of the matter, the accumulated funds of the Estate were invested on term deposit with the banks. The term deposit earned interest at rates of at least the interest rate you were required to pay under law to the beneficiaries. A formal mediation hearing was conducted and settlement was reach. At the request of the Executors, permission was sought and granted to pay out the legacies as soon as possible with interest at x% as required by Common Law. After the mediation the remaining term deposit were closed and the legacies paid out with interest. The balances of funds remaining were set aside for action as agreed in the "Terms of Settlement". The invested money earned more than the interest you paid.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Summary: Interest is deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to the extent to which it is incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income except to the extent it is capital or of a capital, private or domestic nature. | Detailed Reasoning - Application to your circumstances: A sum of interest was earned on term deposits from death until settlement. You paid interest on pecuniary legacies of x% as required by common Law which was less than the interest earned on those funds. The investment money while it was held was used to produce assessable income; therefore the interest on pecuniary legacies is deductible under section 8-4 of the ITAA 1997.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.