The ATO disallowed the expense of the Interest of $5,000 paid on the investment loans. The $5,000 disallowed represented a prepayment of 5 additional months of interest for the period January 2023 to May 2023.

Sam advises that the $5,000 was the additional interest the Bank allowed him to prepay. It was paid on 29 June 2022.

Question:

What is the ATO ruling, legislation and a related case to refer to. why did the ATO disallow this expense and were the ATO correct to disallow this? (500 words)