The case concerned the question whether a taxpayer is entitled to claim a deduction for general interest charge (GIC) in each year in which GIC becomes due and payable.
The only issue raised in the Federal Court was whether the expenditure for the GIC was incurred within the meaning of s 25-5(1)(c) ITAA 1997 in the years in which the GIC accrues on the tax debts to which it relates or whether it was incurred only when an assessment is issued for those tax debts. The Commissioner argued that on a proper construction of s 25-5(1)(c) ITAA 1997, GIC is incurred and therefore deductible only upon the issue of an assessment for the tax liability on which the GIC has accrued. The Commissioner argued that there was no entitlement to a deduction for GIC referable to tax liabilities for income tax years 2003 to 2007, and that GIC in respect of those years was deductible in 2008 once an assessment was made. The Commissioner’s appeal was allowed.
In the view of the ATO, the decision is consistent with its long-standing view that income tax (and any GIC on unpaid income tax) is due and payable only once income tax has been assessed. Although GIC is calculated retrospectively for each day in the GIC liability period, the earliest time the GIC liability crystallises into a presently existing liability is when all of the steps necessary for its imposition have occurred - namely the making of an assessment by the Commissioner with the amount of tax payable.
This decision, whilst concerning GIC, is consistent with the ATO view as to the deductibility of any shortfall interest charge (SIC) in relation to an amended assessment. Taxation Determination TD 2012/2 provides that SIC is incurred for the purposes of s 25-5(1)(c) ITAA 1997 in the year of income the Commissioner gives a taxpayer a notice of amended assessment.
The Court’s decision concerned GIC imposed as a result of unpaid income tax as a result of a late lodgement of an income tax return, and does not apply to GIC accruing after the issue date of the assessment, which is deductible on a daily basis.