Private ruling: Income - repayment
Published: April 2014
Ruling period: n Year ended 30 June 2013 | n Year ended 30 June 2014 | n Year ended 30 June 2015
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction for the interest you will repay after an interest rate reduction is applied to funds withdrawn from a term deposit prior to its maturity? | A1: No. | Q2: Can you reduce your assessable income by the difference in interest received after an interest rate reduction is applied to funds withdrawn from a term deposit prior to its maturity? | A2: Yes. | Q3: Are you entitled to a deduction for administration fees incurred after funds are withdrawn from a term deposit prior to its maturity? | A3: Yes.

Relevant facts and circumstances: You deposited a sum of money in a term deposit with a financial institution. You are looking to withdraw the funds from the term deposit prior to maturity. You will incur an administration charge and an interest rate reduction will be applied to the funds withdrawn early, based on a percentage of the original term that has elapsed.

Relevant legislative provisions: • Income Tax Assessment Act 1997 Section 6-5 | • Income Tax Assessment Act 1997 Section 8-1 | • Income Tax Assessment Act 1997 Section 59-30

Reasons for decision: Summary: Amounts that are income according to ordinary concepts are included in assessable income by section 6-5 Income Tax Assessment Act 1997 (ITAA 1997). Interest received on a term deposit is income according to ordinary concepts. The interest repaid is not an allowable deduction under section 8-1 of the ITAA 1997, as it is not incurred in the course of earning or deriving assessable income. Where an amount is repaid the treatment of the repayment depends upon whether the amount is repaid in the financial year the payment was derived, or in a later financial year. If you repay the amount in the year the income was derived, that amount you repay is not included in your assessable income. However if you repay the amount in a later year of income, section 59-30 of the ITAA 1997 may apply to exclude the income from being assessable. Section 59-30 of the ITAA 1997 states that an amount you receive is not assessable and is not exempt income for an income year if: a) you must repay it; and b) you repay it in a later income year; and c) you cannot deduct the repayment for any income year. In your case, if you withdraw funds from your term deposit prior to its maturity the interest rate you were entitled to is reduced. As the interest has already been paid to you at the higher rate, you will be required to repay the difference to the financial institution, which will occur in a later financial year. As you have satisfied the conditions of section 59-30 of the ITAA 1997, the overpaid interest amounts will not be assessable to you. As such you are entitled to amend you prior year income tax returns to reduce the interest income by the interest amounts you must repay. In addition, the administration charge is an allowable deduction under section 8-1 of the ITAA 1997.