Edited version of private ruling

Authorisation Number: 1011450765724

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Ruling

Subject: Deduction relating to an investment scheme

Question 1

Can a deduction be claimed in the recent tax year for a payment made to the particular entity (the assignee)?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2010.

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You participated in the investment scheme (the Project), commencing in the particular income year.

You took out a loan to participate in the project, on the understanding that the loan would be repaid from the proceeds of sale of produce from the Project.

You claimed income tax deductions in relation to the Project in your income tax returns for the numerous income years.

The ATO formed the view that income tax deductions were not allowable for participation in the Project for the following reasons:

· Part IVA of ITAA 1936 applied to cancel any tax benefits;

· The expenditure was not incurred in gaining or producing assessable income;

· The expenditure was not incurred in carrying on a business; or

· The expenditure was incurred for a purpose other than to derive assessable income.

The deductions you had claimed were therefore disallowed by way of amended assessments.

You entered into a mass marketed investment scheme settlement arrangement with the ATO whereby income tax deductions for the Project were limited to actual cash payments.

You entered into a Deed of Release and Assignment with the Assignee, whereby:

· You assigned to the Assignee all of your rights, title and interest in the Project - for this you received $1.00 from the Asignee; and

· the Assignee released you from all claims, obligations, costs and expenses arising under the Loan and other agreements for the Project - for this you agreed to pay the Assignee $X,xxx.

A letter from the Assignee advised that the Deed of Release and Assignment had been executed and that they had received the relevant net amount.

Relevant legislative provisions

Income Tax Assessment Act 1936, Part IVA.

Income Tax Assessment Act 1936, subsection 51(1).

Income Tax Assessment Act 1997, section 8-1.

Reasons for decision

The payment of $X,000 to the Assignee was under the Deed of Release and Assignment dated in the recent year (the Deed).

Under the Deed, the payment comprised two parts:

· $1 payable by the assignee to you, as consideration for acquiring your allotment in the mass marketed investment scheme (the Project)

· $X,001 payable by you, in exchange for the assignee releasing you from all claims costs and expenses that have or may arise in connection with the your investor loan agreement, other related deeds and agreements, or the Project in general.

In the particular calendar year, the ATO formed the view that income tax deductions claimed with respect to your participation in the mass marketed primary production investment scheme (the Project were not deductible under subsection 51(1) of the Income Tax Assessment Act 1936 (ITAA 1936) in the 1996-97 income year or section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in the 1997-98 and following income tax years, or that alternatively Part IVA of ITAA 1936 operated to cancel any taxation benefits obtained in connection with the scheme associated with the Project. The ATO therefore disallowed the relevant income tax deduction by way of amended assessments issued in the particular year.

Note that whilst the issue of income tax deductions for the Project have not been considered in the courts, the decisions for other mass marketed investment schemes reinforce the ATO position that income tax deductions are not allowable for the Project - see for example Federal Commissioner of Taxation v Sleight (2004) 136 FCR 211; [2004] FCAFC 94; 2004 ATC 4477; (2004) 55 ATR 555.

You subsequently entered into a legally enforceable settlement agreement with the ATO in relation to your participation in the Project. The settlement allowed income tax deductions for specific cash payments made under the terms of the original contracts for the Project. Amended assessments subsequently issued in the particular year give effect to the settlement agreement.

The issue of the deductibility or not of the $X,000 therefore rests not on an interpretation of the income tax legislation but on the interpretation of the settlement agreement that you entered into with the ATO.

The settlement agreement defined the cash payments allowable as deductions under settlement as 'the actual money which was paid to the promoter, trustee or lender under the original contractual obligations by the investor.' A covering letter to the settlement deed provided further explanation that deductions would not be allowed for amounts paid under revised contracts, and that any cash payments made other than under the terms of the original contracts could only be offset against (i.e. to the extent of) any income received from the Project.

You have not advised that your income for the recent income year will include any income from the Project.

As the Deed is a new contract or agreement, the settlement agreement that you entered into with the ATO therefore prevents the amount of $X,000 from being an allowable income tax deduction in any income tax year - it can only be offset against any income received from the Project in future income tax years.

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