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Edited version of your private ruling
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Ruling
Subject: Business deductions
Question 1
Is the purchase of sample stock deductible under section 8-1 of the ITAA 1997?
Answer
No
Question 2
Is the decline in value of sample stock deductible under Division 40 of the ITAA 1997?
Answer
Yes
This ruling applies for the following periods:
Year ended 30 June 2012
Year ending 30 June 2013
Year ending 30 June 2014
Year ending 30 June 2015
The scheme commenced on:
I July 2011
Relevant facts and circumstances
You run a business selling products on behalf of another company.
You receive a commission for any orders placed by customers.
You are required to have a sample of the products available for the customers to view.
You have incurred expenses to purchase samples of the items that are available for sale. You hold these items while they are available for sale, and when that is no longer the case, the items are generally scrapped.
The sample items themselves are never sold.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Division 40
Income Tax Assessment Act 1997 Section 40-25
Income Tax Assessment Act 1997 Subsection 40-30(1)
Reasons for decision
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, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.
The guidelines for distinguishing between capital and revenue outgoings were laid down in the Sun Newspapers Ltd. & Associated Newspapers Ltd. v. F.C. of T. (1938) 61 CLR 337; 5 ATD 87. There it was pointed out that expenditure in establishing, replacing and enlarging the profit-yielding structure itself is capital and is to be contrasted with working or operating expenses. Expenditure is capital in nature where it is made with a view to bringing into existence an asset or an advantage (tangible or intangible) for the enduring benefit of the business (British Insulated & Helsby Cables v Atherton (1926) AC 205).
The purchase of the sample stock provides you with an enduring benefit and is a capital expense. Accordingly, you are not entitled to a deduction for the purchase of sample stock under section 8-1 of the ITAA 1997.
Division 40 of the ITAA 1997 allows a taxpayer to deduct an amount equal to the decline in value for an income year of a depreciating asset that they held for any time during that year. However, the deduction is reduced to reflect the extent to which the asset was used during the income year for a purpose other than a 'taxable purpose' (for example, private or domestic purposes or to produce exempt income).
A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used (subsection 40-30(1) of the ITAA 1997).
The items of sample stock you have purchased are depreciating assets. Accordingly, you are entitled to a deduction for the decline in value of the samples to the extent they are used for a taxable purpose.
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