The Issues Log

The predecessor to sections EW 31(4) and DB 11 (section EW 31(4) and DB 9 of the Income Tax Act 2004) is section EH 47(4) of the Income Tax Act 1994.

A deduction for negative base price adjustment expenditure was permitted under section EH 47(4) to the extent that income had previously been derived from the relevant financial arrangement and provided no other deduction was otherwise available under the Act. In other words, section EH 47(4) provided a deduction for base price adjustments only when no other deductions (eg for interest expenditure) were available under the Act.

Section EW 31(4) of the Income Tax Act 2007 now refers directly to section DB 11. The express ability of a taxpayer to first claim a deduction under another provision of the tax legislation has been removed. Although section DB 11 states that it supplements the general permission and overrides all the general limitations, it is not immediately clear that deductions must first be claimed under other provisions of the tax legislation. When applied in certain circumstances, section EW 31(4) could be interpreted as denying deductions which should be allowed.

For example, assume a taxpayer takes out a $100 loan for a year and pays interest of $10. When the loan is repaid at the end of the year, a negative base price adjustment of $10 arises as a result of the interest paid.

There would appear to be no deduction for the interest expenditure under section EW 31(4) of the Income Tax Act 2007. Although negative base price adjustment expenditure arises, no income has been derived in previous years and the requirements of section DB 11 are not met. As sections EW 31(4) and DB 11 do not specifically refer to other deduction provisions in the legislation, it is not clear whether the taxpayer is entitled to an interest deduction in the year in which a base price adjustment is performed.

In contrast, section EH 47(4) of the Income Tax Act 1994 looks to the interest deduction provisions first. This makes it clear that the taxpayer is allowed a deduction for interest paid on the loan.

An identical issue arises in respect of sections EW 31(4) and DB 9 of the Income Tax Act 2004.

The changes in wording of the sections are not listed in either Schedule 22A of the Income Tax Act 2004 or Schedule 51 of the Income Tax Act 2007.

We question whether the last sentence in section EW 31(4) of the Income Tax Act 2007 and the Income Tax Act 2004 should be removed.