Edited version of your private ruling

Authorisation Number: 1012557746606

Ruling

Subject: Payments

Question 1

Will specific payments made by entity A to entity B be deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will specific payments received by entity A from entity B be assessable income when derived pursuant to section 6-5 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Years ended 30 June 2014 - 2018

The scheme commences on:

1 July 2013

Relevant facts and circumstances

Entities A and B have entered into a contractual arrangement allowing for payments between themselves to recognise contributions made by each entity..

A Board of members will determine the payments which an entity will be required to pay from time to time.

The payment will become due and payable at the point at which such a determination is made and an invoice will be raised.

It is intended that any payment will be recorded as an expense in the income statement of the entity making the payment. Conversely, an income amount will be recorded in the income statement of the recipient.

Relevant legislative provisions

Section 6-1 of the Income Tax Assessment Act 1997

Section 6-5 of the Income Tax Assessment Act 1997

Section 8-1 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Section 8-1 of the ITAA 1997 states:

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

(a) it is incurred in gaining or producing your assessable income; or

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

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

(a) it is a loss or outgoing of capital, or of a capital nature; or

(b) it is a loss or outgoing of a private or domestic nature; or

(c) it is incurred in relation to gaining or producing your exempt income; or

(d) a provision of this Act prevents you from deducting it.

Business expenditure is deductible if it has the necessary and relevant connection with the operation or activities which directly gain or produce assessable income.

Provided that a loss or outgoing can be objectively viewed as a necessary or natural consequence of the taxpayer's income earning activities, it will be 'incidental and relevant' to the income earning activities of the taxpayer (Steele v. Deputy Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; 41 ATR 139).

The Commissioner accepts that any payment will have sufficient nexus to the producing of income of Entity A, and therefore fulfils the positive test for a deduction under subsection 8-1(1) of the ITAA 1997.

Deductions for expenditure must also be considered in light of the negative limbs of section 8-1 of the ITAA 1997. In this case the relevant negative limb for consideration is contained in paragraph 8-1(2)(a) for:

… a loss or outgoing of capital, or of a capital nature.

The general test for when expenditure is capital or capital in nature is provided in Sun Newspapers Ltd and Associated Newspapers Ltd v FCT (1938) 61 CLR 337; 1 AITR 353 per Dixon J at 363:

'There are, I think, three matters to be considered, (1) the character of the advantage sought, and in this its lasting qualities may play a part, (2) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (3) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.'

The character of the advantage sought generally provides some guidance as to the nature of the expenditure as it says most about the essential character of the expenditure itself. The decision of the High Court in G.P. International Pipecoaters v. Federal Commissioner of Taxation 90 ATC 4413 (1990) 170 CLR 124; 21 ATR emphasised this, stating:

'… the character of expenditure is ordinarily determined by reference to the nature of the asset acquired or the liability discharged by the making of the expenditure, for the character of the advantage sought by the making of the expenditure is the chief, if not the critical, factor in determining the character of what is paid: Sun Newspapers Ltd and Associated Newspapers Ltd v FCT (1938) 61 CLR 337, at 363; 1 AITR 353.'

The Commissioner accepts that any payment paid by Entity A will reflect a cost that will be incurred in the process of obtaining its assessable income. Therefore, the Commissioner considers that a payment made by Entity A will not be capital or capital in nature.

Therefore, any payment paid will be deductible to Entity A.

Question 2

Section 6-1 of the ITAA 1997 provides that a taxpayer's assessable income includes ordinary income and statutory income. Ordinary income, pursuant to section 6-5 of the ITAA 1997, is income according to ordinary concepts.

The courts have identified a number of factors which indicate whether an amount has the character of income. A frequent characteristic of income receipts is an element of periodicity, recurrence or regularity. However these characteristics are not always essential as in some circumstances proceeds from an isolated transaction received as a lump sum may also be income.

The Commissioner considers that any receipt of the payment will constitute assessable income to Entity A pursuant to section 6-5 of the ITAA 1997.

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