Section 82KK of the Income Tax Assessment Act 1936 is an often overlooked section which can act to deny deductions incurred by a taxpayer.
In effect, section 82KK applies to transactions between associates where a tax deduction would ordinarily crystallise to one of the parties prior to the other party having to recognise the amount in their assessable income.
Where section 82KK is triggered, deductions claimed by a taxpayer are deferred until their associated party recognises the corresponding income.
One of the most common scenarios where section 82KK could apply is where there is a loan between associated parties and one of the associated parties seeks to claim interest deductions incurred (based on an accruals basis) whereas the other associated party does not seek to recognise the interest income on the basis that it has not been paid or credited to them yet. Section 82KK could equally similarly apply to other transactions where the nature of the income being derived is accepted by the ATO as being derived on a cash basis (eg rent and royalties).
Similarly, as outlined in ATO ID 2014/34, section 82KK could also apply where one associate accounts on an accruals basis while the other associate, relying on the ATO’s views contained in TR 98/1, accounts on a cash basis.