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Edited version of your written advice

Authorisation Number: 1012829312776

Date of advice: 24 June 2015

Ruling

Subject: Deduction for the reimbursement of expenses and deferred losses

Question 1

Is the entity entitled to claim a deduction for the reimbursement of expenses incurred by the sole director when the activity was conducted by them as a sole trader?

Answer

No

Question 2

Is the entity entitled to claim a deduction for the reimbursement of deferred losses incurred by the sole director when the activity was conducted by them as a sole trader?

Answer

No

This ruling applies for the following periods

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

The scheme commenced on

1 July 2015

Relevant facts

You undertook activities and incurred associated expenses to commence and operate a business as a sole trader.

None of these activities have produced any assessable income at this stage.

You recorded these expenses as business expenses and have deferred the business losses.

You intend to change the structure of your activities from 1 July 2015 from that of a sole trader to a company structure.

You will be the sole director of the entity.

There will be no change to the operations or strategic plans when this change of structure occurs.

You wish to be reimbursed by the entity for the expenses you incurred personally as a sole trader. You also want the expenses which the entity will reimburse to you be allowed as a deduction to the entity. You also want deferred losses which you personally incurred to be available to the entity where those losses will be able to be utilised by the entity.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Division 35

Reasons for decision

Question 1

Summary

The entity is not entitled to claim a deduction for an amount it pays to the sole director as the original expenses were not incurred by the entity.

Detailed reasoning

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.

In this case if the entity chooses to pay the sole trader for expenses he incurred, it will not be entitled to claim a deduction. The sole director incurred the expenses (whilst as a sole trader), the company did not.

According to the Macquarie Dictionary the word "reimburse" means

The sole director paid the expenses in his capacity as a sole trader and not on behalf of any other entity. Technically if the entity pays the sole director for expenses they incurred as a sole trader it is not considered a reimbursement because the company is a separate legal entity to the sole director.

The expenses were incurred by the sole director and not the entity, therefore the entity is not entitled to claim a deduction for amounts paid to the sole director as it was they who incurred the expenses and not the entity.

Question 2

Division 35 of the ITAA 1997 discusses non-commercial losses.

Division 35 applies to prevent losses from a non-commercial business activity carried out by an individual taxpayer (alone or in a partnership) being offset against other assessable income in the year in which the loss is incurred.

In this case the sole director (as a sole trader) incurred losses whilst operating a business as a sole trader. As none of the exceptions under Div 35 applied you had to defer the losses. Only you, as an individual can use the deferred losses and no other entity. If the entity pays you an amount for your deferred losses it is not entitled to claim a deduction.

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