ATO ID 2010/160: Deductibility of card payment fee incurred in paying income tax liability under section 25-5, section 25-25 or section 8-1 of the ITAA 1997
Date of decision: 2 September 2010
Year of income: Year ended 30 June 2009
Business line: Small Business/Individual Taxpayers

Issue
Can a salary or wage earner claim a deduction under sections 25-5, 25-25 or 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for a card payment fee they are charged by the Australian Taxation Office (ATO) for using a credit card to pay their personal income tax debt?

Decision
No. A salary or wage earner cannot claim a deduction under sections 25-5, 25-25 or 8-1 of the ITAA 1997 for a card payment fee they are charged by the ATO for using a credit card to pay their personal income tax debt.

Facts
The taxpayer is a salary or wage earner and uses a credit card to pay their personal income tax debt. The taxpayer agrees to pay the card payment fee charged by the ATO in order to pay their personal income tax debt by using their credit card. On accepting the charge, a contract is formed between the ATO and the taxpayer for the payment of the card payment fee. The payment is then processed and the taxpayer's card is charged separately for the amount of the card payment fee and the amount of the liability they are paying. In using the credit card to pay their personal income tax debt, the taxpayer borrows money from the credit card provider.

Reasons for decision
Summary: Subsection 25-5(1) of the ITAA 1997 allows deductions for expenditure incurred by a taxpayer to the extent that it is for managing their 'tax affairs'. Section 995-1 of the ITAA 1997 defines 'tax' to mean income tax assessed under either the ITAA 1997 or the Income Tax Assessment Act 1936 (ITAA 1936) and imposed by any other Act. The context and structure of section 25-5 of the ITAA 1997 makes it clear that 'tax affairs' is intended to have a wide operation. The section is wide enough to cover a card payment fee incurred as a direct consequence of paying an income tax debt. However, paragraph 25-5(2)(c) of the ITAA 1997 expressly denies a deduction for 'expenditure for borrowing money', including payments of interest, in respect of money borrowed and spent on managing certain aspects of your tax affairs, including payments of: If a taxpayer uses a credit card and that use results in the card issuer providing credit, then the taxpayer has borrowed money from the credit card provider (Taxation Ruling TR 2000/2 at paragraph 43). In Ure v. FC of T 81 ATC 4100; (1981) 11 ATR 484 ( Ure's Case ), Deane and Sheppard JJ, in discussing what constituted expenditure in borrowing money for the purpose of the former section 67 of the ITAA 1936, said: The words "expenditure incurred... in borrowing money" in the context of sec. 67(1) of the Act, refer in our view to the "cost of the borrowing" as distinct from the "cost" of the money. The expenditure on account of legal expenses and valuation fees was plainly a "cost" of the borrowing: it was incurred in relation to the actual establishment of the relevant loan. ... Ordinarily, we would have little hesitation in concluding that guarantee fees paid by a borrower in respect of a guarantee necessary for the establishment of a loan were expenditure incurred in borrowing money for the purposes of sec. 67(1) of the Act... (Emphasis added) The phrase 'expenditure incurred ... in borrowing money' as used in the former subsection 67(1) of the ITAA 1936 is narrower than the phrase 'expenditure for borrowing money' in paragraph 25-5(2)(c) of the ITAA 1997. This is because in addition to the types of expenditure discussed in Ure's Case , paragraph 25-5(2)(c) of the ITAA 1997 explicitly includes interest as a type of expenditure in borrowing money. Beyond this, for present purposes there is no material difference between the concept of 'expenditure incurred in borrowing money' used in the former subsection 67(1) of the ITAA 1936 and 'expenditure for borrowing money' used in paragraph 25-5(2)(c) of the ITAA 1997. It follows 'expenditure for borrowing money' under paragraph 25-5(2)(c) of the ITAA 1997 must be broad enough to include 'costs of the borrowing' as contemplated by Deane and Sheppard JJ in Ure's Case . The proper characterisation of a card payment fee is a question of fact to be decided on a case by case basis by reference to the precise circumstances of each case. Based on the facts here, the card payment fee is incurred by the taxpayer as a necessary step in the process of borrowing money from the credit card provider. It is a 'cost of the borrowing' in the sense contemplated by Deanne and Sheppard JJ in Ure's Case . Further, as a question of fact, the borrowed monies are used to pay income tax. Therefore, the card payment fee is properly characterised as a cost of borrowing monies used to pay for expenses incurred in managing the taxpayer's tax affairs. Therefore, while the taxpayer has incurred an outgoing which is incurred in 'managing their tax affairs' within the meaning of paragraph 25-5(1)(a) of the ITAA 1997, it is also 'expenditure for borrowing money' to pay for expenses incurred in managing their tax affairs identified by paragraph 25-5(2)(c) of the ITAA 1997. It follows that the fee is not deductible under section 25-5 of the ITAA 1997. Subsection 25-25(1) of the ITAA 1997 allows a deduction for expenditure incurred 'for borrowing money to the extent that you use the money for the purpose of producing assessable income'. As previously stated above, if a taxpayer uses a credit card and that use results in the card issuer providing credit, then the taxpayer has borrowed money from the credit card provider (Taxation Ruling TR 2000/2 at paragraph 43). Section 67 of the Income Tax Assessment Act 1936 (ITAA 1936), the previous version of section 25-25 of the ITAA 1997, was considered in Ure v. FCT 81 ATC 4100; (1981) 11 ATR 484 ( Ure's Case). Deane and Sheppard JJ, in discussing what constituted expenditure incurred in borrowing money for the purpose of the former section 67 of the ITAA 1936, said: The words "expenditure incurred... in borrowing money" in the context of sec. 67(1) of the Act, refer in our view to the "cost of the borrowing" as distinct from the "cost" of the money. The expenditure on account of legal expenses and valuation fees was plainly a "cost" of the borrowing: it was incurred in relation to the actual establishment of the relevant loan. ... Ordinarily, we would have little hesitation in concluding that guarantee fees paid by a borrower in respect of a guarantee necessary for the establishment of a loan were expenditure incurred in borrowing money for the purposes of sec. 67(1) of the Act... (Emphasis added) For present purposes there are no material differences between the former section 67 of the ITAA 1936 and section 25-25 of the ITAA 1997. Consequently, this explanation applies equally to section 25-25 of the ITAA 1997. The proper characterisation of a card payment fee is a question of fact to be decided on a case by case basis by reference to the precise circumstances of each case. Based on the facts, the card payment fee incurred by the taxpayer is a necessary step in the process of borrowing money from the credit card provider. It is an 'expenditure incurred in borrowing money' in the sense contemplated by Deanne and Sheppard JJ in Ure's Case. The definition of 'purpose of producing assessable income' in section 995-1 of the ITAA 1997 covers both: The construction of this definition covers essentially the same ground as the positive limbs of section 8-1 of the ITAA 1997. The application of section 8-1 of the ITAA 1997 in the context of a card payment fee does not raise any novel or difficult issues. It is essentially a question of applying the well known judicial 'tests' or 'interpretive approaches' to the particular facts. See for example the High Court's decisions in Federal Commissioner of Taxation v. Payne (2001) 202 CLR 93; 2001 ATC 4027; (2001) 46 ATR 228 per Gleeson CJ, Kirby and Hayne JJ; Federal Commissioner of Taxation v. Day (2008) 236 CLR 163; 2008 ATC 20-064; (2008) 70 ATR 14 per Gummow, Hayne, Heydon and Kiefel JJ; Spriggs v. Federal Commissioner of Taxation ; Riddell v. Federal Commissioner of Taxation (2009) 239 CLR 1; 2009 ATC 20-109; (2009) 72 ATR 148. It is necessary to determine if there is a sufficient connection between the incurrence of the card payment fee and the process by which the taxpayer gains or produces their assessable income. Given the nature of the fee this question will generally be answered by a careful analysis of the objective circumstances that gave rise to the liability being discharged by the use of the card. A careful analysis of the character of the fee indicates that it is not an expense incurred in earning the taxpayers assessable income - salary or wages. It is a payment out of income after it has been earned. It is clear from the authorities that such outgoings do not satisfy the tests for deductibility for a salary or wage earner under section 8-1 of the ITAA 1997 ( Ure v. FC of T 81 ATC 4100; (1981) 11 ATR 484; Cliffs International Inc. v. FC of T 85 ATC 4374; (1985) 16 ATR 601; Case V48 88 ATC 380; AAT Case 4, 178 (1988)19 ATR 3334; Case 14 / 98 98 ATC 201; AAT Case 13, 135 (1998) 39 ATR 1105). It follows that the fee is not incurred for the purpose of producing assessable income. Therefore no deduction is available under section 25-25 of the ITAA 1997 for the card payment fee incurred by the taxpayer in paying their personal income tax debt.

Legislative references: Income Tax Assessment Act 1997 section 8-1 section 25-5 subsection 25-5(1) paragraph 25-5(1)(a) paragraph 25-5(2)(c) section 25-25 subsection 25-25(1) section 995-1
Case references: Federal Commissioner of Taxation v. Payne (2001) 202 CLR 93 2001 ATC 4027 (2001) 46 ATR 228
Related public rulings and determinations: Taxation Ruling TR 2000/2
Subject references: Deductions & expenses Tax related expenses