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17 Nov 1010 Payment paid on purchase of property as "interest" not deductible - Sinclair

The AAT has held that a taxpayer was not entitled to a deduction in the amount of $99,000 which the taxpayer incurred in relation to the acquisition of a property from a company in financial difficulty.

On 30 June 2005, the taxpayer entered a contract to purchase the property on certain terms and conditions. Among them was a term that he pay on that day $99,000 to the vendor’s mortgagee to cover the interest due and payable by the vendor under the mortgage for the period from 30 June 2005 to 15 December 2005. The taxpayer settled the contract by way of a vendor loan of $1,949,000 payable on 15 December 2005.

The taxapayer argued that the $99,000 was a prepayment of interest on the vendor loan. This argument was rejected by the AAT on the basis that the interest was due and payable by the vendor to the vendor’s mortgagee. It was not interest payable on any loan from the vendor to the taxpayer. Thus, the expenditure was capital expenditure incurred as part of the purchase of the property, and so was excluded from deductibility by s 8-1(2)(a) of ITAA 1997. Further, the taxpayer did not gain any assessable income from the property, and the expenditure was not incurred in so doing or for that purpose.

The AAT also upheld the imposition of a penalty under s 284-75(1) of the Taxation Administration Act 1953 on the grounds that the taxpayer had made a statement that was false or misleading in a material particular, despite the fact that he had been advised by his accountant that the amount was deductible: Sinclair and FCT [2010] AATA 902 (AAT, Forgie DP,16 November 2010).


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