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ATO sounds a warning in Steele Draft Ruling

Publication date: 22 Oct 97 | Source: THE TAX INSTITUTE

Although the Taxation Institute of Australia welcomes the ATO's Draft Taxation Ruling TR 97/D18, taxpayers continue to be left hanging in the air on issues affecting deductibility of interest expenditure and the broader application of Steele's Case.

"This draft ruling effectively issues a warning to taxpayers that a fundamental shift in the principles governing deductibility of expenditure looms on the horizon, pending the decision of the appeal to the High Court," Taxation Institute of Australia President, Mr Richard Gelski said.

"If the appeal to the High Court supports the Tao's reasoning in the draft ruling, there will be a major shift in the interpretation and application of Section 51 (1) of the Income Tax Assessment Act 1936 as well as Section 8-1 of the Income Tax Assessment Act 1997," Mr Gelski said.

The ATO has warned that interest expenditure may be nonetheless 'not deductible even where it satisfies the positive tests (in Section 51 (1)), on the basis that the expenditure is an affair of capital.'

"Taxpayers will continue to be confused about the deductibility of interest in circumstances similar to Steele's Case, as well as the application of the Rulings the ATO withdrew as a result of Steele," Mr Gelski said.

"One might ask if the ATO can seriously confine the implications of this draft ruling to the deductibility of interest alone."

"Not only does this draft ruling fail to resolve the application of Steele's case, but it also undermines the authority of cases such as the Travelodge Case."

"As a bare minimum it would be prudent of advisers to tread very carefully when considering the deductibility of interest expenditure in construction projects at this point in time," he said.