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Clarification on Steele's Case urgently needed, says TIA

Publication date: 11 Sep 97 | Source: THE TAX INSTITUTE

Leading tax professionals are extremely concerned that there has been no action taken to clarify whether or not taxpayers are able to claim the interest on borrowings for capital development following the landmark Steele's Case decision earlier this year.

Speaking at the Taxation Institute of Australia's State Convention in Tasmania, Institute President, Mr Richard Gelski said there is an urgent need for clarification of this issue of interest deductibility for all taxpayers.

"Taxpayers have been left hanging on this issue and the resulting uncertainty may put question marks above some construction projects," Mr Gelski said.

In March 1997, the full Federal Court disallowed an interest deduction to Ms Steele who had borrowed money to build and operate a motel. The deduction was disallowed because the Court found that the advantage sought by the payment was the creation of a capital asset but that the interest was incurred far too early, that is, before the commencement of income producing activities.

"In addition to uncertainty about the deductibility of interest in circumstances similar to Steele's Case, taxpayers are confused as to what extent they can continue to rely on previously published and now withdrawn ATO Rulings regarding interest deductibility," Mr Gelski said.

"The obvious example here is the Travelodge Case also concerning interest deductibility in respect of the development phase of the hotel."

"Even though the cases are distinguishable by reason of the fact that Ms Steele never actually commenced construction, many advisers feel that there is an inconsistency between Steele and Travelodge and for this reason, it is incumbent on the ATO to clarify the issue for all taxpayers, particularly those who have taken out loans or rolled over loans in the period post the decision in Steele."

"The Taxation Institute urges the ATO to release a Ruling setting out how taxpayers will be affected by the decision in Steele. Taxpayers currently need to know how they should be treating interest deductions and particularly, when they can regard a business activity as existing," he said.