Edited version of private ruling

Authorisation Number: 1011501099082

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Ruling

Subject: loss of income for providing free services

Are you entitled to a deduction for forgone income in providing free services to clients?

No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You are a professional.

To help increase your client base, you wish to advertise a free half hour of your services.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Summary

The provision of a service for no cost does not constitute a deductible expense. A tax deduction is only allowed where you incur an actual loss or outgoing.

Detailed Reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.

To qualify for a deduction under section 8-1 of the ITAA 1997, a loss or outgoing must have been 'incurred'. The meaning of 'incurred' is discussed in Taxation Ruling TR 97/7. As outlined in TR 97/7, you generally incur an outgoing at the time you owe a present money debt that you cannot escape.

Taxation Determination TD 2003/20 discusses allowable deductions to a reward provider under a consumer loyalty program. Although your situation is slightly different, the principles outlined are relevant. Paragraph 5 of TD 2003/20 states that for a loss or outgoing to be incurred there needs to be a presently existing liability of a pecuniary character - Nilsen Development Laboratories Pty Ltd & Ors v. Federal Commissioner of Taxation (1981) 144 CLR 616; 81 ATC 4031; (1981) 11 ATR 505.

Taxation Determination TD 92/136 was written to discuss the tax implications of forgone income under the Training and Skills Program. Although this Determination was withdrawn when the program was altered, it raised a relevant point. The Commissioner stated that income foregone is an opportunity cost and, not being an actual outgoing or loss incurred, was not therefore deductible.

When you provide free services to clients, you do not have a presently existing liability. That is, you are not actually incurring a cost or liable to pay an amount of money directly related to this service. As there is no actual expenditure in relation to providing this service, you have not incurred a loss. The provision of one's own labour does not constitute a deductible expense.

As you have not incurred a loss or outgoing, you are not entitled to a deduction under section 8-1 of the ITAA 1997 for providing free services to clients. There are no other provisions in the ITAA 1997 that allows you a deduction in these circumstances.

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