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Ruling
Subject: Deductibility of loss of funds to purchase capital equipment
Question
Is the entity entitled to a deduction for the loss of funds paid to a distributor for the purchase of capital equipment?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 2009
The scheme commences on:
1 July 2008
Relevant facts and circumstances
The entity is in business.
The entity contracted with a distributor to purchase new capital equipment. This is normal practice in the industry as manufacturers do not generally retail directly to individual firms.
A loan was arranged and the proceeds were paid by the finance company to the distributor.
The distributor did not pass the funds on to the manufacturer, although the order had been placed and the manufacturer had manufactured the required equipment.
When it emerged that the loan proceeds paid to the distributor were not paid to the manufacturer, the entity was obliged to pay the purchase price directly to the manufacturer from other funds to secure the required equipment.
Since that time the entity has attempted to recover the proceeds from the distributor. The distributor had other substantial creditors and was placed into liquidation.
Some time later the entity received advice from the liquidator which stated that there was no foreseeable dividend payable to creditors.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Income Tax Assessment Act 1997 Section 25-35.
Income Tax Assessment Act 1997 Section 25-45.
Reasons for decision
Section 8-1 of the ITAA 1997 allows a deduction for a loss or outgoing to the extent that it is incurred in the gaining or producing of assessable income, or in the carrying on of a business to gain or produce assessable income. However, no deduction is allowable to the extent that the expenditure is private, domestic or capital in nature.
The funds that were paid to the distributor, and not able to be retrieved, were being used to purchase capital equipment. Funds which are used to purchase capital items are capital in nature. The loss of these funds retains this capital nature. Therefore, no deduction is allowable under section 8-1 of the ITAA 1997.
Sections 25-35 and 25-45 of the ITAA 1997 which deal with bad debts and theft respectively, also require consideration.
Section 25-35 of the ITAA 1997 states you are allowed a deduction for a debt that you write off as bad if:
(a) The amount was previously included in your assessable income. For example, a taxpayer provides goods or services to a client/customer under credit and declares the income from the transaction but later has to write off the debt as bad.
or
(b) The amount was lent by you in the course of a business of money lending.
The situation in this case does not fall under either (a) or (b). Therefore, the entity is not entitled to a deduction under section 25-35 of the ITAA 1997.
Section 25-45 of the ITAA 1997 states you can deduct a loss in respect of money if:
(a) you discover the loss in the income year; and
(b) the loss was caused by theft, stealing, embezzlement, larceny, defalcation or misappropriation by your employee or agent (other than an individual you employ solely for private purposes); and
(c) the money was included in your assessable income for the income year, or an earlier income year.
In the present case, the loss was not caused by the actions of an employee or an agent of the entity. Rather the loss was caused by a distributor with whom the entity had contracted to make a purchase. Also, the funds lost were not included in the entity's assessable income. Therefore, a deduction is not allowable under section 25-45 of the ITAA 1997.