Edited version of private ruling

Authorisation Number: 1011792397762

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Ruling

Subject: Deductible amounts

Question

Will the amounts payable by A to the B be deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) when the amounts payable are incurred?

Answer

Yes.

Relevant facts and circumstances

A and B will enter into an agreement under which:

a. B will grant to A an non-exclusive licence (Licence') to enter, use and occupy an area of land ('land') required by A to undertake particular activities; and

b. A will pay to B an amount payable periodically for the Licence.

The Licence will not create nor give A any estate or interest in the land or any right to remove assets affixed to the area of the land that is subject to the Licence.

A will not hold any assets and title and interests and rights in relation to the land and any improvements will be held by B at all times.

Under an associated agreement, upon the expiration of the arrangement A is required to transfer or procure the transfer of all title, interest and rights in relation to the land and any improvements made to the land by A.

Reasons for decision

Summary

The amounts payable by A to B will be deductible under section 8-1 of the ITAA 1997 when the amounts payable are incurred.

Detailed reasoning

Subsection 8-1(1) of the ITAA 1997 provides that you can deduct from your assessable income any loss or outgoing to the extent that:

a. it is incurred in gaining or producing your assessable income; or

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

Subsection 8-1(2) provides that you cannot deduct a loss or outgoing under section 8-1 to the extent that:

a. it is a loss or outgoing of capital, or of a capital nature; or

b. …'

Business expenditure is deductible as a general (revenue nature) deduction if it has the necessary and relevant connection with the operation or activities which directly gain or produce assessable income (Charles Moore & Co (WA) Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344; Federal Commissioner of Taxation v. Smith (1981) 147 CLR 578; Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47.).

Provided that a loss or outgoing can be objectively viewed as a necessary or natural consequence of the taxpayer's income earning activities, it will be 'incidental and relevant' to the income earning activities of the taxpayer and deductible as a revenue deduction under section 8-1 of the ITAA 1997, except to the extent that it is a loss or outgoing of capital or of a capital nature (see discussion of the High Court in Steele v. Deputy Commissioner of Taxation (1999) 197 CLR 459).

The established principles on the distinction between capital and income are well known; (see for example, Dixon J's judgement in Sun Newspapers Ltd & Associated Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; and Full Federal Court decision in FC of T v. Email (1999) 99 ATC 4868 at 4873) the character of the advantage sought provides guidance as to the nature of the expenditure as it says most about the essential character of the expenditure itself.

The decision of the High Court in G.P International Pipecoaters v. Federal Commissioner of Taxation 90 ATC 4413; (1990) 170 CLR 124; (1990) 21 ATR 1) in a joint judgement by Brennan, Dawson, Toohey, Gaudron and McHugh JJ.: emphasised this, stating:

'the character of expenditure is ordinarily determined by reference to the nature of the asset acquired or the liability discharged by the making of the expenditure, for the character of the advantage sought by the making of the expenditure is the chief, if not the critical, factor in determining the character of what is paid: Sun Newspapers Ltd and Associated Newspapers Ltd v FCT (1938) 61 CLR 337, at 363 …'

A will carry on the business activities of managing and maintaining a facility located on an area of land in return for periodic service charges.

A is granted a licence to access the area of land by B. A is required to pay fees to B in respect of the licence which enables A to perform its contracted services of managing and maintaining the facility.

We accept that there is an outgoing incurred by A constituted by the fees.

The periodic service charges are assessable income of A in the conduct of its business, and are to be derived over the period of the scheme.

In our view the fees have the requisite nexus with the derivation of assessable income, being the monthly service changes. The payment of the fees satisfies the positive limb of general deduction test.

A deduction is however, not allowable to the extent that the outgoing is of capital or of a capital nature (a negative limb).

The fees are to be payable periodically and will be both relatively uniform and referable only to the licensed access to the area of land. A will not acquire an asset or anything of an enduring nature by paying the fees.

After a fixed time, A will hand back the facility to B for nil consideration and it will no longer have access to the area of land.

Accordingly, the payment of the fees is not considered to be an outgoing of capital or of a capital nature.

The liability A has to pay the fees to the B fulfils the requirements for a general deduction under section 8-1 of the ITAA 1997.