Edited version of your private ruling

Authorisation Number: 1012585955582

Ruling

Subject: Assessability of income and deductibility of expenses

Question 1

Should the company declare in its tax returns the entire income of the business?

Answer

Yes.

Question 2

Can the company claim under the relevant sections of the Income Tax Assessment Act 1997 (ITAA 1997), expenses incurred in running the business?

Answer

Yes.

Question 3

Is the interest payable to the bank on a portion of the funds deductible to the company?

Answer

No.

This ruling applies for the following period

1 July 20XX to 30 June 20YY

The scheme commenced on

1 July 20XX

Relevant facts

A business that was previously conducted by a sole trader was seized and conducted by a company due to unusual circumstances regarding the original funding to buy the business.

The company had to establish new accounts with suppliers and also met some outstanding debts to allow the business to keep trading.

The company is an Australian resident company.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 40-25

Reasons for decision

Summary

All income derived in the business when it was operated by the company should be declared in their relevant year's income tax return.

All expenses in relation to conducting the business, incurred after the takeover period, should be claimed by the company under the relevant taxation sections. It is only the expenses actually incurred by the company after this point in time that will be deductible to it. The outstanding debts that had accumulated to the previous operator were not incurred by the company and are not deductible to them, even if they may have paid them off.

The interest expenses in relation to the monies taken from the bank accounts by the other party are not deductible to anyone. These interest expenses were not incurred in deriving assessable income by either entity.

Detailed reasoning

Under section 6-5 of the ITAA 1997, as an Australian resident you are assessable on income from all sources derived in or out of Australia.

You have indicated that you took over the running of the business. You made changes so that the income derived from the business was banked into your account. Your ABN was quoted to suppliers and they were notified that you were now conducting the business. The previous operator of the business notified you through their accountant that they would no longer account for anything from the business. They had previously tried to sell it, but could not gain a sale.

You were seen as the operator of the business and dealt with the income as if it were yours. Therefore income derived by the business from this time is considered to be your income for income tax purposes.

General deductions incurred in deriving your assessable income are deductible under section 8-1 of the ITAA 1997. Expenses incurred in obtaining depreciable items are deductible under section 40-25 of the ITAA 1997.

You have incurred expenses in this period in relation to deriving assessable income through the operation of the business therefore these expenses will be deductible against the assessable income derived.

The liabilities that were outstanding at the time of you taking over the business (unpaid bills) were not expenses that were incurred by you. They are expenses that were incurred by the previous operator and are therefore not deductible to you, even though you may have had to pay off these debts.

If you are in a loss situation, you will be required to lodge each year's returns to be able to carry these losses forward. To take advantage of these losses you need to take into account the company loss rules.

The interest expenses that had to be paid in relation to the monies that were taken from the bank accounts are not deductible. They were not incurred by you in deriving assessable income.