ATO ID 2004/648: Deductions: annual operating fee paid by taxi licensee
Date of decision: 21 July 2004
Year of income: Year ended 30 June 2004
Business line: Small Business/Individual Taxpayers

Issue
Is the taxpayer, a taxi driver who carries on a business under their own taxi licence, entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the cost of the annual operating fee?

Decision
Yes. The taxpayer, a taxi driver who carries on a business under their own taxi licence, is entitled to a deduction under section 8-1 of the ITAA 1997 for the cost of the annual operating fee.

Facts
The taxpayer carries on a business of taxi driving. The taxpayer holds a taxi licence granted by the government of the State in which they operate. Under the terms of the licence agreement, the taxpayer pays an up-front annual operating fee, described as payment for the right to operate under their taxi licence for a period of twelve months. If the annual operating fee is not paid promptly upon falling due, the licence is revoked. The right to operate under the taxi licence is not transferable or assignable.

Reasons for decision
Summary: Section 8-1 of the ITAA 1997 allows a general deduction for losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, no deduction is allowed where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. For losses and outgoings incurred in carrying on a business 'necessarily incurred in' is taken to mean 'clearly appropriate or adapted for' ( Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; 8 ATD 431; (1949) 4 AITR 326). The expenditure the taxpayer has incurred is integral to the production of their business income and is in the nature of an advance payment of an ongoing operational cost. As such it is considered that there is sufficient connection for it to be taken as 'necessarily incurred in' the course of carrying on that business. However, it must also be determined whether or not the expenditure is excluded from deductibility on the basis that it is capital in nature. The following characteristics are accepted as an indication that an outgoing is on capital account ( Sun Newspapers Ltd and Associated Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 87; (1938) 1 AITR 403): In the taxpayer's circumstances, the expenditure in question is part of the process by which they operate to obtain regular returns by means of regular outlay. The expenditure does not confer a lasting or enduring benefit and is, by its nature, recurrent and ongoing. Given this, it is considered that the expenditure in question is not capital in nature. Accordingly, the taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for the cost of the annual operating fee.

Legislative references: Income Tax Assessment Act 1997 section 8-1
Case references: Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47 8 ATD 431 (1949) 4 AITR 326
Subject references: Deductions & expenses Government fee expenses Statutory licence expenses Taxi expenses Taxi industry