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Edited version of your written advice
Authorisation Number: 1051500500555
Date of advice: 1 April 2019
Ruling
Subject: Deductibility of payment
Question
Can the company claim a deduction for a payment made to organisation X?
Answer
No
This ruling applies for the following period:
Year of income ended 30 June 2018
The scheme commences on:
1 July 2017
Relevant facts and circumstances
The company operates in an industry that is regulated.
The relevant regulatory authority commenced an investigation into the company regarding certain specified matters.
The regulatory authority’s investigation concluded that the company may have contravened certain provisions of Australian Act A.
As a result of the regulatory authority’s investigations, the company entered into an enforceable undertaking in accordance with Australian Act B.
In accordance with the undertaking, the company paid an amount to an organisation, an approved deductible gift recipient (DGR).
Relevant legislative provisions
Income Tax Assessment Act 1997 section 26-5
Reasons for decision
Section 26-5 of the ITAA 1997 specifically denies a deduction under any section of the income tax act for any amounts that are:
● payable, by way of penalty, under an Australian law or a foreign law (paragraph 26-5(1)(a)); or
● ordered by a court to be paid on the conviction of an entity for an offence against an Australian law or a foreign law (paragraph 26-5(1)(b)).
In the current case it is not necessary to further consider paragraph 26-5(1)(b) because the amount paid to the DGR was not payable following a conviction of the company for an offence against an Australian law or a foreign law.
Is the amount in the nature of a penalty imposed under an Australian law?
The word ‘penalty’ is not defined in the tax legislation and therefore, in relation to the operation of section 26-5, ‘penalty’ will have its ordinary meaning. As discussed in Taxation Determination TD 94/84, the ordinary meaning of ‘penalty’ is a ‘punishment (which may be pecuniary) for a breach of the law’. This view was also expressed by Perram J when considering an appropriate penalty to be applied in relation to misleading and deceptive conduct under the Trade Practices Act 1974 (Australian Competition and Consumer Commission (ACCC) v Singtel Optus Pty Ltd (No 4) (2011) 282 ALR 246; (2011) ATPR 42-362; [2011] FCA 761). Perram J stated at para 75:
... the purpose of a penalty is deterrence; deterrence of the contravener,..., but deterrence also of those onlookers who might, but for the penalty inflicted on the contravener, be tempted to engage in the same behaviour themselves.
TD 94/84 also notes that for the purposes of section 26-5, an amount only needs to be an amount payable ‘by way of’ a penalty, it is not necessary for the amount to be an actual penalty. For instance, TD 94/84 provides the example of a late lodgement fee payable under the Corporations (Fees) Regulations 2001, concluding it is an amount that is ‘by way of penalty’, stating:
... the late lodgment fee is imposed as a pecuniary punishment for a breach of the Corporations Act 2001. It is not, in our view, simply an administrative charge to recognise any additional cost of promptly processing late documents.
Deputy President McDonald at the Administrative Appeals Tribunal has referred to an ‘enforceable undertaking’ as being a ‘lesser penalty’ than other options (TNST v Australian Securities and Investments Commission [2009] AATA 1003 at para 54).
The regulatory authority’s investigation concluded that the company may have contravened several provisions of the Australian Act A.
Australian Act B provides for the regulatory authority to accept a written undertaking in connection with a matter within its jurisdiction. Breaches of any undertaking entered into are enforceable by the courts.
By entering into the undertaking the company has avoided any further action being taken by regulatory authority, either administrative or through the civil courts, in relation to the matters investigated.
The undertaking has identified the provisions of the Australian law that the regulatory authority considers that the company may have contravened. The undertaking between the regulatory authority and the company includes a number of actions that the company must undertake, including the payment to the DGR.
Therefore, the payment is considered to be a ‘punishment for a breach of a law’ (as per TD 94/84), and will be an ‘amount payable by way of penalty under an Australian law’ and excluded from deduction under any provision of the Income Tax Act by section 26-5 of the ITAA 1997.