Capitalised Interest deductibility

[Tasman]

Hello,
this question is not about the prime eligibility of capitalized interest being a valid business expense, as I believe it can be depending on the circumstances of interest incurred, but on the issue of when the expense is claimed.

Question is, if you capitalize interest on a loan account within a financial year, then as you have not made a payment for the expense how can you claim an expense deduction? Later when you start repaying interest? I hypothesize that the increase of your loan debt by the capitalized interest amount is considered equivalent by ATO to an expense event charged and paid by the fact that your loan balance has increased, i.e.; you have paid for the interest by the fact the interest is capitalized.

Thanks for any clarifying response

 

[Mry]

Question is, if you capitalize interest on a loan account within a financial year, then as you have not made a payment for the expense how can you claim an expense deduction?

Because the interest has been incurred. A liability has been quantified and accrued against your account. You have paid it, much like the way that you pay bank fees. It is claimed as a deduction when the interest is quantified and at the date it is recognised as a liability.

There are some exceptions to this rule. For example, you can write to your bank and ask what interest was accrued to the 30th of June and claim that on your tax return despite the interest not showing on the statement as the interest has been quantified and identified.

 

[Tasman]

Hi Mry, thankyou for clarifying the timing of when interest charges become claimable tax deductions.



Tasman