Edited version of private ruling

Authorisation Number: 1011677113608

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

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:

· it is incurred in gaining or producing your assessable income; or

· it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

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

· it is a loss or outgoing of capital, or of a capital nature; or

· it is a loss or outgoing of a private or domestic nature; or

· it is incurred in relation to gaining or producing your exempt income or your non assessable non exempt income; or

· a provision of this Act prevents you from deducting it.

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.

· it is not necessary for a taxpayer to have actually paid any money for an outgoing to have been incurred provided the taxpayer is definitively committed in the year of income there must be a presently existing liability to pay a pecuniary sum;

· a taxpayer may have a presently existing liability, even though the liability may be defeasible by others;

· a taxpayer may have a presently existing liability, even though the amount of the liability cannot be precisely ascertained, provided it can be reasonably estimated;

· whether there is a presently existing liability is a legal question in each case, having regard to the circumstances under which the liability is claimed to arise;

· where a taxpayer makes a payment when there is no presently existing liabilities, the expense is incurred when the money is paid.

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

· an amount (however described) payable, by way of penalty, under an Australian law or a foreign law; or

· an amount ordered by a court to be paid on the conviction of an entity for an offence against an Australian law or foreign law.

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.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).