Edited version of your private ruling

Authorisation Number: 1012590954777

Ruling

Subject: Whether entity is entitled to a deduction for value of issued shares

Question

Is the entity entitled to a deduction for a loss or outgoing in the form of issuing shares in lieu of paying cash for services provided?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

During the relevant financial year the entity were supplied with various services.

The invoice stated in dollars the amount payable by the entity for the services rendered.

The invoice does not mention that payment should be made in the form of shares in the entity.

The entity and the entities providing the services have agreed that the debt would be satisfied by the entity issuing shares to them. The number of shares issued was determined in reference to market value of the shares at that time as quoted on the Australian Stock Exchange such that the total market value of the shares issued was equal to the dollar amount stated on the invoice.

There was no agreement between the entity and the entities supplying the services that bound the entity to issue shares to them. If the entity had paid the invoices in cash, the individual suppliers of the services would have accepted the cash in full satisfaction of the amount owed to them.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Taxation Ruling TR 2008/5 discusses tax consequences for a company of issuing shares for assets or for services.

Paragraph 2 states when a company issues shares as consideration for assets or for services, the issue of its shares is neither a loss nor an outgoing of the company and so not deductible under section 8-1, no matter what the character of the assets or services or their intended use. Nor are the shares issued as expenditure of the company.

Paragraph 4 states however, when a company which has incurred a loss or outgoing or expenditure, that is something other than an obligation to issue its shares, to acquire assets or services and sets off its obligation in satisfaction of an obligation of the vendor of the assets or provider of the services to subscribe for shares in the company, the fact that the loss or outgoing arising for the acquisition of the assets or services has been set-off against and so is satisfied by, the loss or outgoing incurred to subscribe for the issue of shares does not affect any deductions under section 8-1 to which the company would otherwise be entitled. The two obligations, one to pay for assets or for services other than by issuing shares, the other to subscribe for shares, are then each paid by the set-off.

In this case, entities supplied services to the entity. The entity has therefore incurred a loss or an outgoing in that it has an obligation to pay for receiving those services. The obligation to pay for those services is not an obligation to issue its shares to acquire those services. The entity and the suppliers of the services have agreed that the entity can pay for those services by cash, however it has chosen to pay for the services by way of issuing shares at market value to the directors in lieu of paying cash. If the entity had paid for the services by cash it would have been entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997. The two obligations, one to pay for the services provided by the service suppliers (other than by issuing shares), the other to subscribe to shares, are then each paid by the set-off.

The entity is therefore entitled to a deduction under section 8-1 for the value of the shares issued to the service suppliers in lieu of a cash payment for the services provided.