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Ruling

Subject: Company expenses paid by a director

Question 1

Are expenses, paid by you, in respect of a company that you were a director and shareholder of, deductible when these expenses were paid as a result of directors' guarantees which were enforced by one of the company's suppliers?

Answer

No

Question 2

Is the interest paid by you on a personal credit card, used to pay company debts, deductible?

Answer

No

Question 3

Are legal expenses incurred by the company, but paid by you, deductible?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The company operated a business for many years and was placed in the hands of a liquidator.

You were a director and shareholder of the company.

You signed personal guarantees with a creditor of the company.

As a result of personal guarantees given by you (and another director) as a director of the company, you were required to pay an amount to one of the company's suppliers in satisfaction of the company's debt.

You (and the other director) paid legal fees in respect of the liquidation of the company and a further amount in respect of the payment under the personal guarantee.

While the company was trading, you (and the other director) paid expenses on behalf of the company using your personal credit card. You are currently paying off that debt and incurred interest in the 2010-11 financial year. You (and the other director) are making regular payments in an attempt to pay off the balance.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Question 1

Section 8-1 of the Income Tax Assessment Act 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 relate to the earning of exempt income.

Taxation Ruling TR 96/23 discusses the deductibility of payments made under guarantee. TR 96/23 states that liabilities arising under contracts of guarantee will not be deductible if the provisions of the guarantees and the losses or outgoings under the guarantees are not regular and normal incidents of the taxpayer's income earning activities.

As a director you became a guarantor for credit extended by a supplier to the company. When the company went into liquidation you were required to pay the credit extended to meet your guarantor obligations. The purpose of the borrowings was not to directly produce assessable income but to fulfil your commitment as a guarantor.

In Case L3, 79 ATC 14, the taxpayer, a director, shareholder and employee of two companies, gave a number of personal guarantees in respect of each company's overdraft at the bank. When the companies went into liquidation, the bank recovered judgment against the taxpayer as one of the guarantors. The taxpayer claimed a deduction under sec 51(1) for the amount paid by him under the guarantees. The Board held that the claim should be disallowed as the payment was not incurred in gaining or producing the assessable income under the first limb of sec 51(1) and in any event was an outgoing of capital, or of a capital nature.

You are therefore not entitled to a deduction for the expense paid to satisfy your responsibility as a guarantor as it does not relate to the earning of your assessable income. 

Question 2 & 3

The Courts and Tribunals have consistently held that a deduction is not allowable for company expenses paid by directors as they have not been incurred in gaining or producing assessable income in the taxpayer's capacity as a director. The expenses were not incurred by the taxpayer in earning his assessable income but rather the income of the company (FC of T v Munro (1926) 38 CLR 153).

In Case U134 87 ATC 780, expenses incurred on behalf of a family company by a director of the company were not deductible. The expenses had not been incurred in gaining or producing his assessable income in his capacity as a director and there was not a sufficient connection between the expenses and dividend income he received as a shareholder, nor was there a sufficient connection between the expenses and his business of a shareholder holding shares in the family company.

In Case L86 (1961) 11 TBRD, the taxpayer, a public accountant, paid during the year of income amounts to a company, which he had formed and of which he was the managing director, for the purpose of enabling it to pay its debts. The taxpayer claimed that it was necessary for him to keep faith with his many business associates, who had assisted the company with credit, because of his reputation and that if he had not contributed money to the company to pay its creditors his reputation would have suffered and it would not have been practicable for him to continue in the practice of his profession. It was held that the deduction was not allowable.

In your case, you paid company expenses using a personal credit card. You also paid legal expenses in relation to the liquidation of the company and personal guarantees. These expenses were paid on behalf of the company and are not referable to your income producing activities and as such, no deduction is allowable to you.