Edited version of private advice

Authorisation Number: 1052406829894

Date of advice: 10 June 2025

Ruling

Subject: Deductions

Question

Are the payments deductable under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the income year ended 30 June 20XX?

Answer

No.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Background

The Company is the head company of a tax consolidated group for the purposes of the Income Tax Assessment Act 1997 (ITAA 1997).

The tax consolidated group was established to participate in projects under a Commonwealth's Government Scheme.

Within the tax consolidated group, there are Entities that carry on primary production business activities.

From 20XX, the Commonwealth Government announced changes providing an alternative pathway to satisfy specific contractual obligations.

There were eligibility criteria and an application process that a contract holder was required to meet to participate.

Application process

The Entities lodged notices with applications for a variation to their contracts with the Commonwealth.

The Commonwealth issued letters to the Entities that applied for a variation to notify them that a variation had been approved.

Between the XX and XX the Entities received emails confirming their notice were accepted. This acceptance was conditional upon full payment of invoices attached to the emails.

The invoices were paid by the Entities on XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Deductibility of Losses or Outgoings

The general deduction provision, section 8-1 of the ITAA 1997 relevantly provides:

8-1(1) You can deduct from your assessable income any loss or outgoing to the extent that:

(a) ...

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

Meaning of 'incurred'

The word 'incurred' is not defined in the legislation.

Taxation Ruling TR 97/7 Income Tax: section 8-1 - meaning of 'incurred' - timing of deductions sets out the Commissioner's view about the meaning of incurred which explains that you incur an expense when you have a presently existing liability to pay a pecuniary sum equal to that expense, or when payment of the expense is made in the absence of such a presently existing liability.

Paragraph 16 of TR 97/7 explains that:

16. A loss or outgoing may be incurred for the purposes of section 8-1 even though no money has actually been paid out. In W Nevill & Company Ltd v. FC of T (1937) 56 CLR 290 at 302 it was said:

'the word used is 'incurred' and not 'made' or 'paid'. The language lends colour to the suggestion that, if a liability to pay money as an outgoing comes into existence, [the section is satisfied] even though the liability has not been actually discharged at the relevant time ... it is only the incurring of the outgoing that must be actual; the section does not say in terms that there must be an actual outgoing - a payment out.'

(See also New Zealand Flax Investments Ltd v. FC of T (1938) 61 CLR 179 at 207 (New Zealand Flax); FC of T v. James Flood Pty Ltd (1953) 88 CLR 492 at 506 (James Flood); Nilsen Development Laboratories Pty Ltd & Ors v. FC of T (1981) 144 CLR 616 at 624 (Nilsen Development Laboratories); FC of T v. Firstenberg 76 ATC 4141 at 4148; (1976) 6 ATR 297 at 305.)

Subparagraph 6(d) of TR 97/7 provides that determining whether the taxpayer has a presently existing liability is a legal question in each case, having regard to the circumstances under which the liability is claimed or arises.

For a loss or outgoing to be incurred for the purposes of section 8-1 of the ITAA 1997, it must therefore be a liability in the sense of an existing obligation to pay an amount, rather than a probable future payment.

On 30 June 20XX, the Entities, did not have a presently existing obligation and were not completely subjected, or definitely committed to an existing liability for the payments.

Accordingly, the payments were not incurred in the income year ended 30 June 20XX.

ATO view documents

Taxation Ruling TR 97/7

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