Edited version of private ruling

Authorisation Number: 1011811991448

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Ruling

Subject - Work related expenses

Question

Are you entitled to claim a deduction for amounts you are required to pay in order to cover fraudulent credit card transactions?

Answer

No.

This ruling applies for the following periods

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

The scheme commenced on

1 July 2010

Relevant facts

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling

· copy of the agreement

· copy of the deed

· written response to request for further information.

The agreement comprises a contractual arrangement between:-

· company A

· company B

· guarantor

You are an employee of company B and are paid an annual salary.

You are not a director or shareholder of company B.

You are engaged as a manager by company B. You sell products and services as specified by company A to clients and potential client under the direction of the company A on behalf of company B.

Fraudulent credit card transactions occurred, which resulted in a number of credit card charge backs being incurred by company A.

Company B holds professional indemnity and public risk insurance, but was advised by their insurer that they were not covered for this type of claim.

Company A have enforced a certain clause of the agreement and as guarantor you have agreed to settle the resulting debt on a without admissions basis.

You signed a deed of release between yourself and company A. This document was signed after you sought and received independent legal advice.

You have paid an initial lump sum amount from your own funds. The remainder of the debt will be repaid within a 5 years term.

You have no intention of pursuing company B for reimbursement of the debt.

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 or related to the earning of exempt income.

Expenses that are 'incidental and relevant' to the taxpayer's income earning activities are considered to be sufficiently connected with the derivation of assessable income and therefore will be an allowable deduction under section 8-1 of the ITAA 1997 (Ronpibon Tin NL & Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431).

In your application you refer to ATO Interpretive Decision 2002/918 where it was found the amount paid by an employee stockbroker to cover an outstanding client bad debt was a natural or necessary consequence of their employment. The employee stockbroker incurred a loss or outgoing in gaining their assessable income because it was a contractual obligation of their employment to make up the losses.

Your contractual obligation is not as an employee. Under the terms of the agreement the business arrangement is between Company A and Company B, with you being listed as the guarantor.

Liabilities arising under contracts of guarantee will not be deductible under section 8-1 of the ITAA 1997 if the provision of guarantees and the losses or outgoings under the guarantees are not regular and normal incidents of the taxpayer's income earning activities. In Case Q39 83 ATC 171 at 173; (1983) 26 CTBR (NS) Case 103 at 691, Mr KP Brady, Chairman, referred to a line of Board cases stretching from 1946 which concluded that payments under guarantees are capital.

The purpose of your action was not to directly produce any assessable income, but to fulfil your commitment as guarantor. It is not considered that the provision of the guarantee was undertaken by you as a regular and normal incident of your income earning activities, and as such, it is considered that the payment to Company A for the fraudulent credit card transactions is capital in nature.

Therefore you are not entitled to a deduction under section 8-1 of the ITAA 1997 for the satisfaction of the payment of the fraudulent credit card transactions.