Private ruling: Deductions
Date of advice: 22 October 2025
Published: 8 December 2025
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you able to claim a deduction for the 12 months prepaid interest on a loan established to refinance your rental property in the income year ending 20XX? | A1: No. Under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), a deduction is allowable for all losses and outgoings to the extent to which they are incurred in gaining and producing assessable income. You have incurred expenses for pre-paid interest on a loan which is solely used for a property which you produce assessable income. There was not a presently existing liability at the time the letter of offer was signed therefore, the prepayment of the 12 months interest was incurred at the time of payment. As you incurred the expense on XX/XX/20XX, a deduction is not allowable in the income year ending 20XX. However, the deduction can be claimed in the 20XX income year when the expense was incurred.

Relevant facts and circumstances: On XX/XX/20XX, you purchased a property (the property). You lived in the property prior to commencing to lease it out from XX/XX/20XX. At the start of X 20XX, you refinanced the loan on the property. The property was refinanced into two separate loan agreements. The main loan was an Interest in Advance loan for $0 with a fixed rate. The Interest in Advance Loan product is only available with the prepayment of 12 months of interest at the commencement of the loan. On XX/XX/20XX the letter of offer was executed by the bank. As detailed in the letter of offer the 1 yearly payment of interest commences on the date of advancement which was XX/XX/20XX. On XX/XX/20XX you accepted the offer. The loan settlement was arranged by the bank to occur on XX/XX/20XX. The 12-month interest payment in advance of $0 was to occur at the same time. Due to a technical error, the settlement did not occur on XX/XX/20XX as planned. A letter dated XX/XX/20XX, detailed a complaint made by you to the bank. You raised issues about: • the delay of the refinance settlements • the tax implications caused by the delay, since one of the loans was structured with interest to be paid in advance. The banks' findings for the delay in settlement were as follows: • on XX/XX/20XX, the application file was ready for settlement • on XX/XX/20XX, settlement was booked to occur on the portal • on XX/XX/20XX, a system error occurred, and the file was not in the correct queue for settlement to occur • on XX/XX/20XX, the settlement time rolled over until Xpm and then was cancelled. The bank confirmed that the refinance applications were rebooked for settlement to occur on XX/XX/20XX. The settlement was detailed in a letter dated XX/XX/20XX. Settlement was completed on XX/XX/20XX. You provided a transaction report showing the payment of the interest amount of $0 on XX/XX/20XX. You will continue to lease out the property until XX/XX/20XX.

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, or relate to the earning of exempt income or a provision of the taxation legislation excludes it. Taxation Ruling TR 95/25: Income tax: deductions for interest under section 8-1 of the ITAA 1997 following FC of T v. Roberts; FC of T v. Smith provides that the deductibility of interest on borrowed funds is determined by the use of the borrowed money. The use test, established in FC of T v. Munro (1926) 38 CLR 153, is the basic test for the deductibility of interest and looks at the application of the borrowed funds as the main criterion. Where a borrowing is used to acquire an income producing asset or relates to an income producing activity, the interest on this borrowing is considered to be incurred in the course of producing assessable income. | Detailed Reasoning - Interest Incurred: Taxation Ruling TR 97/7: Income Tax: section 8-1 - meaning of 'incurred' - timing of deductions sets out the Commissioner's view about the meaning of incurred which explains that you incur an expense when you have a presently existing liability to pay a pecuniary sum equal to that expense, or when payment of the expense is made in the absence of such a presently existing liability. The following subparagraphs in paragraph 6 of TR 97/7 provide that: (d) whether there is a presently existing liability is a legal question in each case, having regard to the circumstances under which the liability is claimed to arise; (e) in the case of a payment made in the absence of a presently existing liability (where the money ceases to be the taxpayer's funds) the expense is incurred when the money is paid; (f) while the above principles may be applied to both losses and outgoings, the distinct nature of losses must be considered. A loss must be definitively encountered, run into, or fallen upon by the taxpayer. For a loss to be incurred it must be realised and more than impending, threatened or expected. A taxpayer will not have incurred a loss if some contingency means that they are not 'definitively committed' or 'completely subjected' to it. For a loss or outgoing to be incurred for the purposes of section 8-1 of the ITAA 1997, it must therefore be a liability in the sense of an existing obligation to pay an amount, rather than a probable future payment. Taxation Ruling TR 94/25: Income tax: implications of the decision in Coles Myer Finance Ltd v. FC of T for the timing of deductions for prepaid expenses continues the commissioners view specifically for prepaid interests in that at paragraph 7: 'That line of authority generally accepts that a prepaid expense which is on revenue account is fully deductible in the year in which the payment is made. For example, see Emu Bay Railway Co Ltd v. FC of T (1944) 71 CLR 596 per Latham CJ at 606; Foxwood (Tolga) Pty Ltd v. FC of T 80 ATC 4096 per Deane J at 4100, (1980) 10 ATR 676 at 680; FC of T v. Ilbery 81 ATC 4661, (1981) 12 ATR 563; Alloyweld Pty Ltd v. FC of T 84 ATC 4328, (1984) 15 ATR 614; FC of T v. Lau 84 ATC 4929, (1984) 16 ATR 55; FC of T v. Solling & Pepper 85 ATC 4518, (1985) 16 ATR 753; FC of T v. Creer 86 ATC 4318, (1986) 17 ATR 548; FC of T v. Gwynvill Properties Pty Ltd 86 ATC 4512; (1986) 17 ATR 844.' In Emu Bay Railway Co Ltd v. FC of T (1944) 71 CLR 596 Chief Justice Latham examines at 606 that: 'As things stand at present, the interest has not become pay- able, and all that can be said is that there exists at the present time the possibility of a liability accruing in the future, such possibility depending, not only upon the derivation of net income, but also upon the amount of such income derived.' | Detailed Reasoning - Application to your circumstances: The borrowing was used to acquire an income producing asset, the interest on this borrowing is considered to be incurred in the course of producing assessable income. Therefore, the interest is an allowable deduction under section 8-1 of the ITAA 1997. It is also relevant to consider when an expense is incurred. Taxation Ruling TR 97/7 provides guidance on when an expense is incurred. There is no statutory definition of the term 'incurred'; however, the ruling outlines general rules, settled by case law, which will assist in most cases in defining when an outgoing is incurred. Broadly, an expense is incurred at the time that a present money debt is owed and cannot be escaped. Importantly, the taxpayer need not have actually paid any money to have incurred such an outgoing, providing they are committed to it in the year of income. However, a prepayment is a payment which extinguishes an existing liability or prevents a liability coming into existence at some time in the future. What exists at the time of signing the letter of offer is the possibility of a liability accruing in the future, such possibility depending, not only upon the derivation of net income, but also upon the amount of such income derived. Therefore, there is no presently existing liability, only the possibility of a liability which up until the moment of payment doesn't crystallise into an existing liability. We refer here to TR 97/7 paragraph 6 (e) in the case of a payment made in the absence of a presently existing liability (where the money ceases to be the taxpayer's funds) the expense is incurred when the money is paid. Therefore, while we appreciate that the payment was due to be made on XX/XX/20XX, it did not occur due to an error. As detailed above in TR 97/7 and TR 94/25, there was no existing liability until the actual payment is made which was made on XX/XX/20XX. Consequently, settlement occurred on XX/XX/20XX the expense was incurred in the income year ending 20XX. Therefore, the amount incurred is claimable in the income year ending 20XX.