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Edited version of your written advice
Authorisation Number: 1012759926960
Ruling
Subject: Aeroplane costs
Question 1
Is a deduction allowed for any expenses in relation to purchasing a plane and the associated running costs?
Answer
No.
Question 2
Is a deduction allowed for the decline in value of the plane?
Answer
No.
Question 3
Is a deduction allowed for the training costs incurred in obtaining a pilot's license?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 2015
The scheme commenced on:
1 July 2014
Relevant facts
Entity A operates as a business.
The director of entity A has begun to fly a plane in their leisure time.
Costs for training and obtaining a pilot's license will be incurred. The cost of the plane will be incurred. Costs will also be incurred for fuel, repairs and maintenance.
The director will be taking out existing and prospective clients for joy rides as a form of advertising and promotion of the business.
Operating a plane is not part of the ordinary course of business of entity A.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Income Tax Assessment Act 1997 Section 32-5.
Income Tax Assessment Act 1997 Section 32-10.
Income Tax Assessment Act 1997 Section 32-15.
Income Tax Assessment Act 1997 Section 32-45.
Income Tax Assessment Act 1997 Section 40-25.
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for a loss or an outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature.
A number of significant court decisions have determined that for an expense to be an allowable deduction:
• it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T; (1958) 100 CLR 478),
• there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47), and
• it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).
A general prohibition on the deductibility of entertainment expenses is provided by section 32-5 of the ITAA 1997 which states that to the extent that you incur a loss or outgoing in respect of providing entertainment, you cannot deduct it under section 8-1. However, there are exceptions which are set out in Subdivision 32-B.
Entertainment means entertainment by way of food, drink or recreation. Recreation includes amusement, sport or similar leisure-time pursuits (section 32-10 and subsection 995-1(1) of the ITAA 1997). You are taken to provide entertainment even if business discussions or transactions occur.
The expenses of purchasing and using a plane for joy rides are regarded as expenses "in respect of providing entertainment." Therefore a deduction will be denied by section 32-5 of the ITAA 1997 unless the expenses fall within one of the exceptions set out in Subdivision 32-B.
The only exception that is relevant to the present situation is the one provided under section 32-45 of the ITAA 1997 which relates to promotion and advertising expenses. This section sets out 3 situations in which these types of entertainment expenses will be deductible.
Section 32-5 does not stop you deducting a loss or outgoing for
• providing entertainment if you provide it to an individual under a contract to supply him or her with goods or services in the ordinary course of your business; and you incur the loss or outgoing to promote or advertise to the public your business or its goods or services.
• providing or exhibiting your business's goods or services if you incur the loss or outgoing to promote or advertise those goods or services to the public.
• providing entertainment to promote or advertise to the public a business or its goods or services. But the exception does not apply if some people have a greater opportunity to get the benefits of the entertainment than ordinary members of the public have.
As the plane expenses are not part of the ordinary course of the business and are not expenses incurred in providing or exhibiting the business's goods or services, the first and second situations do not apply.
The third situation also does not apply as the entertainment is provided to particular clients of the firm and not available to members of the general public.
As the plane and associated expenses do not fall within any of the exceptions provided under Subdivision 32-B of the ITAA 1997, the expenses are specifically excluded from deductibility under Division 32 of the ITAA 1997.
Section 32-15 of the ITAA 1997 states that to the extent that you use property in providing entertainment, your use of the property is taken not to be for the purpose of producing assessable income. As the plane is used to provide entertainment, it is not used for the purpose of producing assessable income. Consequently, no deduction for the decline in value is allowed under Division 40 of the ITAA 1997.
The training and obtaining of a pilot's licence is not sufficiently connected to the income earning activities of the business and therefore no deduction is allowed for these costs.
Therefore a deduction is not allowed for any portion of the costs incurred in purchasing a plane, the running costs of the plane, depreciation or training costs in order to obtain a pilot's license.
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