Edited version of your private ruling

Authorisation Number: 1012516951369

Ruling

Subject: Deductions and expenses

Question 1

Are the legal and other expenses incurred by a third party company pursuant to a leased premises deductible to you under section 8-1 of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Answer

No

Question 2

Are you entitled to an input tax credit under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in relation to expenses incurred by a third party company?

Answer

No

This ruling applies for the following period(s)

Year ended 30 June 2012
Year ended 30 June 2013

The scheme commences on

1 July 2011

Relevant facts and circumstances

The company ('You') operated a retail business from premises leased by a third party company ('X Pty Ltd') for a number of years.

Due to a dispute the landlord took possession of the premises and you were not allowed back into the premises to resume operating your business, so trading ceased.

X Pty Ltd (as lessee) commenced legal proceedings against the landlord in relation to damages for loss of trade. The judgement referred to X Pty Ltd as though it were operating the retail business.

The respondent (landlord) argued that X Pty Ltd carried on a retail business in breach of the lease conditions.

X Pty Ltd (as lessee) admitted in the proceedings that it made retail sales on the subject premises.

The proceedings were dismissed.

The landlord utilised the bond amount to cover some expenses plus rent and outgoings for the period since it was re-possessed.

X Pty Ltd (as lessee) was liable for repairs to 'make good' and other expenses.

You provided copies of documentation for legal and other expenses that were invoiced to the landlord. Although X Pty Ltd (as lessee) was liable for these expenses, you state that you have paid these expenses 'directly'.

You also wish to claim a deduction for rent arrears that X Pty Ltd was liable for.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1
A New Tax System (Goods and Services Tax) Act 1999 Section 11-20

Reasons for decision

Summary

Based on the facts provided, you are not entitled to a deduction under section 8-1 for the ITAA 1997 for the expenses you have paid on behalf of another company. Therefore, it follows that you are not entitled to claim the input tax credits.

Detailed reasoning

Whether deductible under Section 8-1 of the ITAA 1997

Section 8-1 of the ITAA 1997 allows a deduction for all losses or outgoings to the extent that they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, no deduction is allowed to the extent that the losses or outgoings are of a capital, private or domestic nature or are incurred in gaining or producing exempt income.

As a general rule, an outgoing will not be deductible unless it is incurred in gaining or producing the assessable income of the taxpayer who incurs it (Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153). In that case, the expenses were not incurred by the taxpayer in earning his assessable income in his capacity as director but rather the income of the company. There is no nexus between the outgoing and the assessable income of the taxpayer in such a case as to characterise the outgoing as incidental and relevant to the gaining of assessable income of the taxpayer.

Taxation Ruling TR 97/7 explains the meaning of 'incurred'. Paragraph 5 of TR 97/7 states, as a broad guide that 'you incur an outgoing at the time you owe a present money debt that you cannot escape'.

From the information provided, the expenses you paid on behalf of X Pty Ltd were incurred by, and referable to, that company and not properly referable to the earning of any income by you.

You have not provided any evidence of a sub-lease, any order or other evidence that you were liable to pay the expenses or that you paid the expenses 'directly' as you claim.

Even if you could substantiate that you paid the expenses, any expenses you paid on behalf of X Pty Ltd (as lessee) were not incurred in gaining or producing your assessable income. A company is a separate legal entity (Salomon v. A Salomon & Co Ltd (1897) AC 22) and is taxable in its own right. A company cannot pay the expenses of a third party company and receive a deduction for it.

We have determined that, on the facts provided, you are not entitled to a deduction under section 8-1 for the ITAA 1997 for the expenses you have paid on behalf of X Pty Ltd. Rather, any payment of the expenses incurred by the third party company would be more characteristic of a loan of capital to that company.

Whether a creditable acquisition

Section 11-20 A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that you are entitled to the input tax credits on any creditable acquisition that you make. Section 11-5 of the GST Act gives the meaning of a creditable acquisition. You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered, or *required to be registered.

* denotes terms defined in the GST Act

You need to satisfy all of the above criteria in order for the acquisition to be a creditable acquisition.

Paragraph 11-5(a) refers to a 'creditable purpose' which is defined in section 11-15 of the GST Act :

(1) You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.

(2) However, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be *input taxed; or

(b) the acquisition is of a private or domestic nature.

In your case you did not acquire anything in carrying on your enterprise because the acquisitions related to the enterprise of X Pty Ltd. Therefore you did not acquire anything for a creditable purpose. It follows that you were not entitled to claim the input tax credits because the acquisitions did not satisfy the conditions in section 11-5 of the GST Act.