Edited version of private advice

Authorisation Number: 1051619184718

Date of advice: 17 December 2019

Ruling

Subject: Deductions - business guarantor payments

Question

Are you entitled to a deduction under 8-1 of the Income Tax Assessment Act 1997 in relation to expenses you paid as guarantor?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

Relevant facts and circumstances

You were an employee of a company and held a percentage of the shares in the company.

Your role in the company you were a manager in the company and, your work duties entailed: quoting jobs, ordering equipment for the jobs as well as oversee and allocate workers to the jobs. You were also a guarantor.

The company went into liquidation last year. You have provided details of the costs you incurred and paid as guarantor of the company.

You have not been reimbursed by the company for the above expenses that were paid out of your personal funds.

Relevant legislative provisions

Income Tax Assessment Act 1997section 8-1

Reasons for decision

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, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

An outgoing is considered to be incurred in gaining or producing assessable income if there is a sufficient connection between the outgoing and the activities which produce or are expected to produce assessable income (Ronpibon Tin NL v. FC of T (1949) 78 CLR 47). The essential character of an outgoing is generally determined objectively. 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.

In Case U134 87 ATC 780; Case 92 (1987) 18 ATR 3646 the taxpayer was a shareholder and director of a company who paid some of the company's expenses but was not reimbursed by the company for these expenses. The taxpayer did not receive any director's fees from the company in the relevant income year. The Administrative Appeals Tribunal held that the expenses were not deductible as the taxpayer incurred the expenses in his capacity as a director but did not derive any assessable income in that capacity.

Taxation Ruling TR 96/23 Income tax: capital gains: implications of a guarantee to pay a debt discusses at paragraph 45 the deductibility of payments made under guarantee. The ruling states that liabilities that arise under contracts of guarantee will not be deductible under section 8-1 of the ITAA 1997 if the provisions of guarantees and losses or outgoings under the guarantees are not regular and normal incidents of the taxpayers' income earning activities. The ruling further states that if the provision of guarantees is not a regular and normal incident of the taxpayers income earning activities, any payments made under those guarantees will be capital in nature.

In your case, you provided guarantee for the company's lease's and business equipment. When the company went into liquidation, you were required to make the outstanding payments under the guarantees. The purpose of the payments was not to directly produce your assessable income but to fulfil your commitment as a guarantor, as you have provided no indication that you are in the business of providing guarantees.

As you are not in business of providing guarantees and the purpose of the action was not to produce any assessable income for yourself, you are not entitled to claim a deduction for these expenses under 8-1 of the ITAA 1997.