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Edited version of private ruling

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Ruling

Subject: Timing of deductions

Question 1

Are backdated payroll tax assessments deductible in the year in which they are paid or the year in which they are raised?

Answer

Backdated payroll assessments (default assessments) are deductible in the respective years in which the liability for payroll tax is incurred rather than when the default assessments are paid. The payroll tax expense is incurred in each income year for which each payroll tax liability is payable.

Question 2

Is the penalty tax on backdated (default) payroll assessments deductible?

Answer

No. Penalty tax on backdated (default) payroll assessments is not deductible.

Relevant facts and circumstances

You were subject to an audit with regard to payroll back dating back to the 2005 year. You were issued default assessments for a number of years

Question 1

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states:

You can deduct from your assessable income any loss or outgoing to the extent that:

However, you cannot deduct a loss or outgoing under this section to the extent that:

Pay-roll tax is a tax on the taxable wages paid or paid by an employer to an employee. The taxpayer has incurred payroll tax in the course of carrying on a business, and therefore the expense qualifies as a deduction in the year in which it is incurred under section 8-1 of the ITAA 1997.

Taxation Ruling TR 97/7 gives the Commissioners view of the meaning of incurred. Paragraph 6 of this ruling provides the following general rules, settled by case law, in determining whether and when a loss or outgoing has been incurred.

In Layala Enterprises Pty Ltd (In Liq) v FC of T (1998) 86 FCR 348; 98 ATC 4858; (1998) 39 ATR 502 (Layala's case), the Full Federal Court was required to determine the time in which an employer had incurred a loss or outgoing under subsection 51(1) for pay-roll tax assessed to the employer by the Commissioner of State Taxation under the Pay-roll Tax Assessment Act 1971 (WA) (PTAA). Under the PTAA, the employer became liable to pay- roll tax when it paid or became liable to pay taxable wages in any months. However, the pay-roll tax only became due and owing when the pay-roll tax amount could be calculated at the end of each month.

Taxation Determination 2004/20 discusses Layala's case, paragraph 4 states:

Cooper J described the employer's liability in paying taxable wages as a contingent liability that matured into a debt which was owing when it was ascertainable at the end of each month. The debt then became due and recoverable seven days after the end of each month, which was when the tax was payable. His Honour found that that a liability for the pay-roll tax was incurred when it became due and owing (86 FCR364; 98 ATC 4869; 39 ATR 516). The same principle applied whether the employer lodged a pay-roll tax return or the Commissioner issued a default assessment, as the PTAA and the Pay-roll Tax Act 1971 (WA) operated in such a way that liability for pay-roll tax did not depend on an assessment of that tax. The purpose of the return was not to create the employer's liability, but instead to enable the Commissioner 'to decide whether the pay-roll tax voluntarily paid is the proper or a sufficient amount' (86 FCR 359; 98 ATC 4865; 39 ATR 511). A default or amended assessment was issued to an employer when there was not tax remitted or less than payable by law.

In Layala's case there was a presently existing liability to pay the payroll tax. Similarly in this instance there is a presently existing liability to pay payroll tax in the relevant financial years. In keeping with Layala and TR 97/7 given that there is a presently existing liability for each of the years in question with regard to payroll tax, the expense is incurred in each relevant financial year, rather than when the backdated (default) pay-roll tax assessments are paid.

As with ATO ID 2010/192 which considered land tax paid in arrears, you have incurred the payroll tax expenses for the purposes of section 8-1 of the ITAA in each income year for which each payroll tax liability was payable, and not the year in which the arrears were paid.

Question 2

Detailed reasoning

Section 8-1 of the ITAA allows a deduction for any loss or outgoing to the extent that it is incurred in gaining or producing assessable income or it is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, you cannot deduct a loss or outgoing to the extent that it is capital, or of a private or domestic nature.

Section 26-5 of the ITAA 1997 generally denies a deduction for penalties or fines.

Under subsection 26-5(1) you cannot deduct

Australian law is defined as a Commonwealth Law, a State law, or a Territory law.

In your circumstances penalty tax has been imposed under section 58 of the Taxation Administration Act 2001 when the default assessments have been issued. Given that this penalty has been imposed under a state law, any penalty tax paid or payable is not deducible due to section 26-5 of the ITAA.


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