Tax Tip 142: Deductibility of Stamp Duty Penalty Interest

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.

 

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.

 

its the word 'interest' that throws people

 

I have a lack of interest in this thread.