Edited version of your written advice

Authorisation Number: 5010048332070

Date of advice: 5 February 2018

Ruling

Subject: Deduction for payment of director penalty notice amounts

Question

Are you entitled to a deduction for payments made under a Directors Penalty Notice (DPN)?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

You were a director of an Australian incorporated company (the company).

You were issued with Director Penalty Notices advising you of your parallel liability for the amount of PAYG Withholding which the company had not remitted to the Australian Taxation Office.

The company was placed into liquidation and deregistered, there were insufficient dividends to address the amounts outstanding.

You paid the outstanding PAYGW/director penalty amount on 16 November 2016.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25-5

Income Tax Assessment Act 1997 Section 26-5

Taxation Administration Act 1953 Schedule 1

Reasons for decision

You advised that you consider that an employing entity may claim deductions for PAYG withholding as a cost of employing staff and that a director may be reimbursed by a company for payments that a director makes.

We acknowledge that companies may be allowed certain deductions however this does not mean such expenses are allowable by other entities such as directors. Where a company is not in a position to reimburse a director the director cannot claim a deduction in their own income tax return. There are several sections of legislation that preclude this as outlined below;

Section 26-5

Section 26-5 of the ITAA 1997 is about the non-deductibility of penalties. It states you cannot deduct under this Act an amount (however described) payable, by way of penalty, under an Australian law or a foreign law. The only exception it provides is it does not apply to an amount payable, by way of penalty, under Subdivision 162-D of the GST Act.

Division 269 of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that directors can incur penalties equal to their company's unremitted PAYG withholding liabilities or SGC or unpaid estimates of those liabilities. Section 269-20 in the Division specifically classifies the liability as a ‘penalty’.

Therefore, in your case, section 26-5 of the ITAA 1997 explicitly prohibits a deduction for liability payments made in respect to a DPN.

Section 25-5

Subsection 25-5(1) of the ITAA 1997 provides a deduction for certain tax related expenses, including to the extent that it is for managing your tax affairs or complying with an obligation imposed on you by a Commonwealth law, insofar as that obligation relates to the tax affairs of an entity.

However, subsection 25-5(2) of the ITAA 1997 prohibits a deduction under section 25-5 for tax or an amount withheld or payable under Part 2-5 (PAYG Withholding) or Part 2-10 (PAYG Instalments) in Schedule 1 to the TAA.

In your case, you have stated the nature of a DPN liability is that of the PAYG Withholding liability, which is a tax, rather than a penalty. Although section 269-20 of the TAA explicitly classifies a DPN as a penalty, if a DPN was the payment of tax, subsection 25-5(2) of the ITAA 1997 would prohibit the deductibility of such a tax.

Section 8-1

Section 8-1 of the 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 where specific provisions under other sections preclude a deduction.

As discussed above the specific provisions under sections 25-5 and 26-5 of the ITAA 1997 deny you a general deduction for payment of DPN amounts under section 8-1 of the ITAA 1997.

You also state that your position is based on the premise that “a director is only liable because the director is engaged in the pursuit of earning assessable income by virtue of his or her personal effort.”

The payment of the DPN amount was not incurred "in the course of" your deriving assessable income from undertaking the duties of your employment as a director of the company because it was placed into liquidation in 2012. Accordingly, there was no actual or expected income as a director of the company in the 2017 financial year. This view is supported by The AAT ruling in the case of Healy and the Federal Commissioner of Taxation.

In conclusion it is determined that the payment of DPN amounts in not an allowable deduction in the 2016 – 2017 income tax year, or any other year. If you have claimed a deduction for the payment of DPN amounts in your individual income tax returns you will need to lodge an amended return to rectify that.

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