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Tax Tip 142: Deductibility of Stamp Duty Penalty Interest

Discussion in 'Accounting & Tax' started by Terry_w, 29th Jul, 2016.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Deductibility of Stamp Duty Penalty Interest

    Earlier today I wrote a legal tip about penalty interest on stamp duty for long settlements in NSW

    Legal Tip 142: Stamp duty on Long Settlements


    A quick summary of this is – if you don’t pay your stamp duty on time there could be penalty interest added and this interest could be as high as 10% p.a.


    If this happens and the property an investment property will this interest be deductible?


    I don’t think it would be.

    This ‘interest’ arises because of a tax default (in NSW – may be different in other states) and a ‘penalty’ applies to tax defaults.


    Under the Commonwealth Income Tax Assessment Act 1997 there is a section which specifically states that penaties are not tax deductible, s 26-5 ITAA97:

    (1) You cannot deduct under this Act:

    (a) an amount (however described) payable, by way of penalty, under an * Australian law or a * foreign law;


    Therefore you should try to pay your stamp duty on time, perhaps borrowing to do so and incurring lower interest rates with this interest possibly being deductible.
     
  2. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    I had a similar issue with a client who defaulted and "penalty interest" applied under the contract OR loss of deposit. The contract was worded so that the amount was a fixed sum of something like $10K per period of 28 days. The deferred settlement was like 8 weeks late. (Cause = They didnt apply for finance until after one of them lost their job after signing the contact!)

    ATO view was it was a penalty and not interest as interest is a cost which applies at a rate to a sum advanced or a discharge of a liability. No advance was given and no rate was set.

    So it was a capital cost.
     
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  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    its the word 'interest' that throws people
     
  4. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    I have a lack of interest in this thread. ;)
     
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