Private ruling: Deductibility of prepaid expenses
Date of advice: 19 September 2016
Published: November 2016
Ruling period: Year ended 30 June 2017
Date scheme commenced: 01 July 2016

Ruling: Q1: Are you entitled to a deduction for the amount of prepaid interest on your investment loans for the 2018 financial year prior to 30 June 2017? | A1: Yes.


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

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature. Whether interest has been incurred in the course of producing assessable income generally depends on the use to which the borrowed funds have been put. Where a borrowing is used to acquire an income producing asset, the interest on this borrowing is considered to be incurred in the course of producing assessable income. Generally, a prepaid expense is immediately deductible to a taxpayer who is an individual and the expenditure is not incurred in carrying on a business if: • the payment is made for a period of service of 12 months or less, and • the period of service ends in the next income year. This is commonly known as the 12-month rule. In your case, you are an individual who is not carrying on a business, who had borrowed to purchase income producing assets. You intend to reach an agreement with your bank to prepay the interest for 12 months. You have said you intend to make this payment prior to 30 June 2017 with the payment period ending 12 months from the date that you make this payment. This payment would satisfy the 12-month rule. Therefore, the prepaid interest expense would be an allowable deduction under section 8-1 of ITAA 1997 in the financial year ended 30 June 2017.

Relevant facts: You have loans with financial institutions solely for the purpose of income producing activities and pay interest on loans associated with your investments. | As part of your planning for your wealth creation you have reached agreement with your lenders to prepay 12 months of interest on your loans and to make this payment prior to 30 June 2017. | Other references (non ATO view, such as court cases): Deductions for Prepaid Expenses 2016 QC48083