Private ruling: Lump sum - recoupment of interest paid
Date of advice: 3 March 2021
Published: June 2021
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX.

Ruling: Q1: Will the lump sum you received as a result of the overpayment of interest be assessable in the year ended 30 June 20XX? | A1: Yes

Relevant facts and circumstances: You acquired a residential property in August 20XX. The property is used as an investment property. You financed the purchase of the investment property with a loan from a bank. During an eight year period you claimed deductions for expenses relating to the investment property totalling $X. During the same period you were overcharged $X in interest by the bank. This amount represents the difference between the interest charged on your loan facility and the interest the bank would have charged you had you been given a comparable home loan. In September 20XX you received an interest refund of $X ( the lump sum ) from your bank.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 20-A | Income Tax Assessment Act 1997 Section 20-20 | Income Tax Assessment Act 1997 Section 20-25 | Income Tax Assessment Act 1997 Subsection 20-35(1)

Reasons for decision: Detailed Reasoning - Assessable recoupment: A taxpayer is entitled to a deduction for some expenses they incur in relation to rental properties. If some of the expenditure is recouped, it may result in the amount being treated as an assessable recoupment. Under section 20-35 of the Income Tax Assessment Act 1997 ( ITAA 1997), your assessable income includes an assessable recoupment of a loss or outgoing if you can deduct the whole of the loss or outgoing for the current year or you have deducted or can deduct the whole of the loss or outgoing for an earlier income year. The meaning of an assessable recoupment is set out in section 20-20 of the ITAA 1997. Recoupment of a loss or outgoing includes any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery (subsection 20-25(1) of the ITAA 1997). | Detailed Reasoning - Application to your circumstances: The bank refunded you the excess interest you had paid on your loan, and you therefore received a lump sum in September 20XX. Interest charged on the loan were deductible expenses. As you were entitled to claim a deduction for the interest charges, the lump sum that you received from your bank is an assessable recoupment under subsection 20-20(2) of the ITAA 1997. The lump sum should be included in your assessable income in the year ended 30 June 20XX under subsection 20-35(1) of the ITAA 1997, as it is taxable in the year that it is received.