ATO ID 2002/1091: Lease expenses - deductions for lease payments after business ceased
Date of decision: 28 October 2002
Year of income: Year ended 30 June 2000 Year ended 30 June 2001 Year ended 30 June 2002
Business line: Private Groups and High Wealth Individuals

Issue
Is the taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for rent paid after the cessation of a business?

Decision
Yes. The taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for rent paid after the cessation of a business.

Facts
The taxpayer operated a business. They entered into a fixed term lease agreement for their business premises. The business ceased prior to the expiration of the lease. The taxpayer failed to pay the rent due under the lease after the business ceased. They did not use the premises for any other purpose after the business ceased. The lessor took legal action to recover the unpaid rent. After negotiations the taxpayer paid the outstanding rent.

Reasons for decision
Summary: Section 8-1 of the ITAA 1997 allows a deduction for a loss or outgoing to the extent to which it is incurred in gaining or producing assessable income except where the loss or outgoing is of a capital, private or domestic nature, or relate to the earning of exempt income. In Placer Pacific Management Pty v. Federal Commissioner of Taxation 95 ATC 4459; (1995) 31 ATR 253 the Court said: In our view AGC should be taken as establishing the proposition that provided the occasion of a business outgoing is to be found in the business operations towards the gaining or producing of assessable income generally, the fact that the outgoing was incurred in a year later than the year in which the income was incurred and the fact in the meantime business in the ordinary sense may have ceased will not determine the issue of deductibility. The decisions in Federal Commissioner of Taxation v. Brown (1999) 43 ATR 1; 99 ATC 4600, and Evenden v. Federal Commissioner of Taxation 99 ATC 2297; (1999) 42 ATR 1208 support the view that the principle applies equally to recurring expenses such as rent. It follows that if the rent has been incurred then it may be an allowable deduction, notwithstanding that the business ceased, provided that the occasion of the rent arose out of the previous business operations. An expense is incurred if a taxpayer is 'definitively committed' or has 'completely subjected' itself to the liability even though the taxpayer has not paid the amount ( Federal Commissioner of Taxation v. James Flood Pty Ltd (1953) 88 CLR 492; (1953) 10 ATD 240; (1953) 5 AITR 579). Under the fixed term lease the taxpayer had a contractual obligation to pay the rent notwithstanding that the business ceased. It follows that the taxpayer was 'definitively committed' and had 'completely subjected' themselves to the expense. That obligation arose out of the taxpayer's previous business activities which gave rise to assessable income earned in earlier years. Accordingly the taxpayer is entitled to a deduction for the rent which was paid after the cessation of their business.

Legislative references: Income Tax Assessment Act 1997 section 8-1
Case references: Placer Pacific Management Pty Ltd v. Federal Commissioner of Taxation (1995) 31 ATR 253 95 ATC 4459
Subject references: Deductions & expenses Interest expenses Rental expenses