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Edited version of your written advice
Authorisation Number: 1051405385970
Date of advice: 1 August 2018
Ruling
Subject: Debt agreement payments
Question
Are you entitled to a deduction for your Debt Agreement payments?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 2016
Year ended 30 June 2017
The scheme commenced on:
1 July 2015
Relevant facts
You operated a business.
The business was sold a few years ago.
You entered into a Debt Agreement after struggling to repay your business expenses.
The debt agreement relates to accumulated tax debts and credit card debts. The credit card debts are solely related to the day to day business expenses. You had an overdraft facility to cover business expenses.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Income Tax Assessment Act 1997 Section 25-35.
Reasons for decision
Allowable deductions
Section 8-1 of the Income Tax assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.
A number of significant court decisions have determined that for an expense to be an allowable deduction:
● it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T; (1958) 100 CLR 478),
● there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47), and
● it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).
Business expenses such as wages are an allowable deduction in the year they are incurred.
In your case, your business has been sold and no longer operates. The debt agreement and the associated payments are not regarded as business expenses.
It is acknowledged that you have payments to make under the debt agreement and the debt relates to your previous business expenses. However, at the time the business expenses were incurred, the wages and other deductible business expenses were allowable deductions. A further deduction for the outstanding business debt is not allowed again in the 2015-16 or 2016-17 income years.
Your debt agreement is an arrangement to reduce your debt. That is, the debt arose in the past when you were operating your business. Paying the outstanding debt now is not a new expense of the business. It represents an unpaid expense from previous years. That is, the debt is not an additional amount you have incurred. The payments are not sufficiently related to your previous business income and do not relate to any other assessable income. Therefore no deduction is allowed under section 8-1 of the ITAA 1997. There is no other provision in the ITAA 1997 that allows a deduction for the debt agreement payments.
Tax debt
Subsection 25-5(1) of the ITAA 1997 allows a deduction for expenditure incurred in managing your tax affairs. However, paragraph 25-5(2)(a) of the ITAA 1997 denies a deduction for tax. Therefore any amount incurred to pay your tax debt is not an allowable deduction under section 25-5 of the ITAA 1997.
Paragraph 25-5(1)(c) of the ITAA 1997 allows a deduction for the general interest charge or the shortfall interest charge. Therefore if any of your tax debt includes general interest or shortfall interest you are allowed a deduction for these charges in the year they were incurred.