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Edited version of your private ruling
Authorisation Number: 1012450150722
Ruling
Subject: Expenses - managing tax affairs
Question 1
Are expenses you incurred in managing debt created by a director penalty notice deductible tax affairs expenses?
Answer
Yes.
This ruling applies for the following period:
Year ended 30 June 2012
The scheme commences on:
1 July 2011.
Relevant facts and circumstances
You received a director penalty notice (DPN) in respect of unpaid PAYG tax as director of a company.
You sought advice to reduce your level of debt under the DPN to a level you could afford to pay.
A debtor proposal was drafted by the firm you engaged and presented to the Tax Office.
In return for negotiating and administering this arrangement you paid fees to this firm.
The fees related to this totalled $X.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 25-5
Income Tax Assessment Act 1997 section 8-1
Income Tax Assessment Act 1997 subsection 995(1)
Income Tax Assessment Act 1936 section 222AOC
Reasons for decision
Section 25-5 of the Income Tax Assessment Act 1997 discusses tax-related deductions
Subsection 25-5(1) states that you can deduct expenditure you incur to the extent that it is for:
(a) managing your tax affairs; or
(b) complying with an obligation imposed on you by a Commonwealth law, insofar as that obligation relates to the tax affairs of an entity; or
(c) expenditure for borrowing money (including payments of interest) to pay an amount covered by paragraph (a) or (b); or
(d) expenditure for a matter relating to the commission (or possible commission) of an offence against an Australian law or a foreign law; or
(e) a fee or commission for advice about the operation of a Commonwealth law relating to taxation, unless that advice is provided by a recognised tax adviser.
In your situation you paid fees to a firm to negotiate your level of debt. We consider that this is managing your tax affairs.
However, subsection 25-5(2) states that you cannot deduct under subsection 25-5(1) certain expenditure, including the following:
You cannot deduct under subsection (1):
(a) tax; or
(b) an amount withheld or payable under Part 2-5 or Part 2-10 in Schedule 1 to the Taxation Administration Act 1953; or
(c) expenditure for borrowing money (including payments of interest) to pay an amount covered by paragraph (a) or (b); or
(d) expenditure for a matter relating to the commission (or possible commission) of an offence against an Australian law or a foreign law; or
(e) a fee or commission for advice about the operation of a Commonwealth law relating to taxation, unless that advice is provided by a recognised tax adviser.
Subsection 995-(1) of the Income Tax Assessment Act 1997 defines a recognised tax adviser as
(a) a registered tax agent or BAS agent; or
(b) a legal practitioner.
In your situation, the representative who acted on behalf of the firm you engaged is not a registered tax or BAS agent, and is not a legal practitioner. They therefore do not meet the definition of recognised tax adviser.
Your expenses therefore do not meet the requirements of section 25-5, and accordingly are not deductible under this section.
Section 8-1 of the Income Tax Assessment Act 1997 outlines general deductions, and subsection 8-1(1) states that you can deduct any loss or outgoing from your assessable income 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.
We accept that the director penalty notice is directly related to your income earning activities as a director.
Subsection 8-1(2) states that you cannot deduct a loss or outgoing to the extent that:
(a) it is a loss or outgoing of capital, or of a capital nature; or
(b) it is a loss or outgoing of a private or domestic nature; or
(c) it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or
(d) a provision of this Act prevents you from deducting it.
We do not consider that the expenses you incurred met any of the above conditions. Therefore, the cost of obtaining advice and managing your debt is deductible under section 25-5.
Conclusion
The expenses you incurred in managing debt created by a director penalty notice are deductible under section 8-1 of the Income Tax Assessment Act 1997.