Penalty interest deductibles

Penalty interest deductibles


The ATO has recently replaced the Taxation Ruling (TR) 93/7W on whether penalty interest is deductible to the new TR 2019/2. This new ruling highlights the circumstances in which penalty interest is deductible and the situations where it is not.

“Penalty interest” refers to an amount charged by a lender to a borrower under a loan agreement if instalments are not paid. The payable amount is then calculated by reference to a number of months of interest that would have been received.

The new ruling made provisions that directly related to the previous rulings of:

  • Section 8-1: general deductions.
  • Section 25-25: borrowing expenses.
  • Section 25-30: expenses of discharging a mortgage
  • Section 25-90: specific debt deductions relating to foreign non-assessable non-exempt income.
  • Section 40-880: business-related costs.

TR 2019/2 says that penalty interest is generally deductible under section 8-1 where:

  • The borrowings are incurred when gaining or producing your assessable income; or
  • It is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

Penalty interest that is incurred to discharge a mortgage is also deductible under section 25-30, to the extent that borrowed funds were used to produce assessable income. The ATO makes a note that unlike the general deduction provisions, there’s no influence from the expense being capital or revenue in nature.

You cannot deduct a loss or outgoing under section 8-1(2) to the extent that:

  • It is of capital or capital in nature.
  • It is of a private or domestic nature.
  • It is incurred in relation to gaining or producing your exempt income; or
  • A provision of the Act prevents you from deducting it.
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If you believe the matters discussed above are relevant to your business, please contact Darren Smith of our office to discuss further.


Darren is a Chartered Accountant with extensive experience, including working in the big 4 and medium sized firms before becoming a partner of a city based firm in 2000.

He has gained much experience and has extensive knowledge in providing business and taxation advice, superannuation planning, negotiation of sales and acquisitions of businesses and property development. His client base covers a wide range of industry groups.

Darren works with business owners to grow their businesses and create personal wealth within and outside of their business.


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