ATO Interpretative Decision

ATO ID 2002/777 (Withdrawn)

Income Tax

• This ATO ID is withdrawn from the database as the ATO view is contained in chapter 2 of ClubPack (NAT 2442).
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the taxpayer, a non-profit organisation, entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 ('ITAA 1997') for expenses incurred in deriving investment income, where the expenses also relate to income received from members of the organisation?

Decision

Yes. The taxpayer, a non-profit organisation, is entitled to a deduction under section 8-1 of the ITAA 1997 for the proportion of the expenses, which are incurred in deriving the investment income.

Facts

A non-profit organisation derived income from members. It also derived non-member income in the form of rent and interest.

The organisation incurred various expenses including rent, telephone, electricity, accounting fees, insurance and office expenses, which could not be identified as relating specifically to either the member income or the investment income.

Reasons for Decision

Subsection 8-1(1) of the ITAA 1997 allows a deduction for any loss or outgoing to the extent that it is incurred in gaining or producing assessable income, or is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. Subsection 8-1(2) of the ITAA 1997 however, excludes a loss or outgoing of a capital, private or domestic nature, or where the loss or outgoing is incurred in gaining or producing exempt income.

Under the mutuality principle, the assessable income of non-profit organisations only includes income which relates to non-members, or is received from an outside source, such as interest, dividends or other income derived from investment of moneys. Therefore, under subsection 8-1(1) of the ITAA 1997, where the non-profit organisation is not carrying on a business, losses or outgoings which are not excluded under subsection 8-1(2) of the ITAA 1997, are only deductible where they are incurred in gaining or producing income from non-members or from outside sources.

Expenses incurred by a taxpayer in protecting investment income and in managing investments are generally deductible (F C of T v. Green (1950) 81 CLR 313). These expenses can include collection expenses, bookkeeping and secretarial expenses, audit fees, management fees and office expenses. The expenses incurred by the non-profit organisation were incurred to some extent in gaining or producing assessable income for the purposes of subsection 8-1(1) of the ITAA 1997, as they were partly incurred in protecting the investment income of the organisation, and in managing the investments.

However, as the expenses have been incurred in earning both assessable income and non-assessable amounts, they must be apportioned.

In this situation, the non-profit organisation can choose a practical and suitable method of apportioning the expenses. The method will be acceptable provided:

1.

There is a reason for apportioning the expenditure,

2.

The method chosen is suitable for that type of expenditure,

3.

The method chosen is reasonable and is not arbitrary, and

4.

It gives a correct reflection of the expenditure incurred.

Where there is no special relationship between the income and expenditure which would indicate the portion of an expense incurred in producing a particular income type, the following formula may be used to determine the proportion of the total expenditure which relates to both member and investment income.

Total expenses relating to both member and investment income * (Investment income / Total income)


The amount calculated by this formula would be an allowable deduction for the non-profit organisation under section 8-1 of the ITAA 1997.

Year of income:  Year ending 30 June 2001 Year ending 30 June 2002 Year ending 30 June 2003 Year ending 30 June 2004

Legislative References:
Income Tax Assessment Act 1997
   section 8-1
   subsection 8-1(1)
   subsection 8-1(2)

Case References:
F C of T v. Green
   (1950) 81 CLR 313
   (1950) 4 AITR 471
   (1950) 9 ATD 142

Keywords
Mutuality principle
Investment income
Deductions & expenses

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  31 July 2002

ISSN: 1445-2782