Base price adjustment calculation

Section EW 31(4) of the Income Tax Act 2004 and the Income Tax Act 2007

Key features

Section 34 of the Taxation (Tax Administration and Remedial Matters) Act 2011 improves the cross-referencing for sections EW 31(4) in both the 2004 and 2007 Acts and ensures that the outcome from the interaction between section EW 31(4) and the related interest deduction rules in Part D gives the same outcome as under the corresponding provisions in the 1994 Act.

Application date

The amendment to section EW 31(4) applies, with retrospective effect, from the beginning of the 2005-06 income year.

Detailed analysis

Section EW 31(4) of the 2004 and 2007 Acts requires a taxpayer to perform the base price adjustment for a financial arrangement on disposal or maturity of that financial arrangement. The base price adjustment is a "wash-up" calculation, which requires a taxpayer to compare total cashflows (received and paid) under the terms of the arrangement against the income and deductions from that arrangement.

If the base price adjustment produces a negative result, the negative amount is treated as interest expenditure. The "normal rules" in Part D for the deductibility of interest are applied to determine whether that negative amount is deductible (ie, incurred in deriving income, or carrying on a business, or incurred by certain companies).

If any part of that negative result to the extent it relates to income returned in a prior income year is not deductible under those "normal rules" of deductibility for interest, then section DB 11 provides for a statutory deduction. That statutory deduction is limited to the extent that the negative amount represents a "reversal" of assessable income derived in prior years or in the current income year.