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22 Nov 2013

Income tax – deductibility of expenditure incurred in borrowing money – section DB 5 – transitional operational statement

CIR's operational position following interpretation statement IS 13/03, relating to income tax and the deductibility of expenditure incurred in borrowing money.

The Interpretation Statement IS 13/03 replaces the item “Deductibility of mortgage repayment insurance taken out to obtain a business loan”, Tax Information Bulletin Vol 6, No 9 (February 1995). It is now considered that that earlier item incorrectly states the law in concluding that mortgage repayment insurance would be deductible under the predecessor to s DB 5. Some taxpayers may have relied on the 1995 TIB item as supporting the deductibility of other insurance premiums (such as term life insurance premiums) under s DB 5.

The Commissioner recognises that taxpayers may have incorrectly relied on the 1995 TIB item on mortgage repayment insurance premiums when entering into other insurance contracts. Therefore, the Commissioner will not actively apply her resources to seek to disallow certain deductions claimed for insurance premiums prior to the beginning of a taxpayer’s 2015 income year.

This approach applies only to term life insurance contracts entered into prior to the publication of the Interpretation Statement in circumstances where: (i) the policy was required by the lender, and (ii) the taxpayer has, prior to finalisation of the Interpretation Statement, been treating those premiums as deductible under s DB 5.

To the extent that an insurance contract relates to any period subsequent to the commencement of the taxpayer’s 2015 income year, this approach will not apply.