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Edited version of your written advice
Authorisation Number: 1013098988923
Date of advice: 28 September 2016
Ruling
Subject: Expenses after business has ceased
Question 1
Are you entitled to a deduction for lease expenses of storage facilities incurred after the cessation of your business?
Answer
Yes.
Question 2
Are you entitled to a deduction for professional indemnity insurance expenses incurred after the cessation of your business?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2016
Year ending 30 June 2017
Year ending 30 June 2018
Year ending 30 June 2019
Year ending 30 June 2020
The scheme commenced on:
1 July 200X
Relevant facts and circumstances
You conducted professional services as a sole trader for a number of years.
Recently, you ceased this operation and commenced work as an employee.
In accordance with the relevant legislation you are required to generally hold documents for a period of not less than seven years before they can be disposed of or destroyed.
In order to comply with this, you have been paying for storage fees for these documents since you ceased business.
You have also been paying premiums for professional indemnity insurance since you ceased business to cover you in respect of any professional indemnity claims arising from your practice during the period of its operation.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
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.
In your case the lease and insurance expenses will continue to be incurred by you as a direct result of the carrying on of your former business. As such, the occasion of the expenses in question is to be found in the business operations when you conducted business and not after the business ceased.
Taxation Ruling TR 2004/4 states that expenses are still deductible if the income earning activities, which gave rise to the expense, have ceased. The fact that an outgoing is incurred after the business had ceased does not sever this connection.
In Placer Pacific Management Pty Ltd v. FC of T 95 ATC 4459; (1995) 31 ATR 253 the taxpayer was the manufacturer of a conveyor belt system. It sold this business to another entity. As part of the sales agreement it continued to be liable for any repairs arising from the installation of systems prior to the sale. Sometime after the business was sold a claim was made against the taxpayer. A settlement was reached whereby it paid a lump sum amount. It also incurred legal expenses.
In allowing the deduction for both expenses the Full Federal Court after referring to the High Court decision in AGC (Advances) Ltd v. Federal Commissioner of Taxation (1975) 132 CLR 175; 75 ATC 4057; (1975) 5 ATR 243 unanimously held that:
In our view AGC should be taken as establishing the proposition that provided the occasion of a business outgoing is to be found in the business operations directed towards the gaining or production of assessable income generally, the fact that that outgoing was incurred in a year later than the year in which the income was incurred and the fact that in the meantime business in the ordinary sense may have ceased will not determine the issue of deductibility. ... Provided the occasion for the loss or outgoing is to be found in the business operations directed to gaining or producing assessable income, that loss or outgoing will be deductible
Therefore, you are entitled to a deduction under section 8-1 of the ITAA 1997 for the lease and insurance expenses incurred by you as a direct result of the carrying on of your former business.
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