Penalty interest can be deductible, under specific conditions
A new ruling has been released by the ATO on the deductibility or otherwise of "penalty interest". The term penalty interest refers to an amount payable by a borrower under a loan agreement when the lender agrees to an early repayment of a loan. The amount payable is commonly calculated by reference to the number of months of interest payments that would have been received but for the early payment.
The ATO ruling stresses that the deductibility or otherwise of penalty interest needs to the determined based on case by case circumstances. The ATO also emphasises that different provisions of the tax law will also influence a taxpayer's deduction claim outcomes.