Applicant and Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (2008/5347 & 2008/5348)
Judgment date: 16 January 2012
Date published: 16 March 2012

Summary of decision:
Outlines the ATO response to this case which concerned whether the taxpayer's personal services entity incurred any outgoings in the 2004 and 2005 income years on software licence fees under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Overview of facts:
Following a personal services income audit, an issue arose about whether the taxpayer was entitled to deductions for software licence fees in the 2004 and 2005 income years against his personal services income. | However, the Commissioner accepted before the Tribunal that deductions were allowable against the taxpayer's personal services income for the relevant years if the taxpayer could establish that the licence fees were incurred by his personal services entity (KRI). | At issue was whether the taxpayer could discharge the burden of proof that KRI had acquired software under a licence agreement with Mr Michael Kirkpatrick, a South African national, and had either paid, or come under a presently existing legal liability to pay, licence fees for the software in the relevant years. | Issues decided by the tribunal | The Tribunal held that KRI incurred software licence fees in each of 2004 and 2005 income years. There was a presently existing liability to pay the fees in those years, and the Tribunal was also satisfied that the fees were paid in those years. | Notwithstanding a number of evidentiary difficulties, the Tribunal was satisfied that the taxpayer and KRI acquired the relevant software, and that there was a software licence agreement signed by KRI and Mr Kirkpatrick which stated that KRI was liable for software licence fees in the claimed amounts for the relevant income years. | The taxpayer gave evidence that, when he was a resident of South Africa, he accumulated foreign currency traveller's cheques on frequent overseas travel, even though in excess of amounts permitted under South Africa's strict exchange controls. The Tribunal was satisfied on the balance of probabilities that the taxpayer had accumulated traveller's cheques in sufficient quantity to pay Mr Kirkpatrick the relevant amounts of the licence fees, and that the taxpayer's sister-in-law in South Africa had paid those amounts in the relevant income years.

Issues decided:
The Tribunal held that KRI incurred software licence fees in each of 2004 and 2005 income years. There was a presently existing liability to pay the fees in those years, and the Tribunal was also satisfied that the fees were paid in those years. Notwithstanding a number of evidentiary difficulties, the Tribunal was satisfied that the taxpayer and KRI acquired the relevant software, and that there was a software licence agreement signed by KRI and Mr Kirkpatrick which stated that KRI was liable for software licence fees in the claimed amounts for the relevant income years. The taxpayer gave evidence that, when he was a resident of South Africa, he accumulated foreign currency traveller's cheques on frequent overseas travel, even though in excess of amounts permitted under South Africa's strict exchange controls. The Tribunal was satisfied on the balance of probabilities that the taxpayer had accumulated traveller's cheques in sufficient quantity to pay Mr Kirkpatrick the relevant amounts of the licence fees, and that the taxpayer's sister-in-law in South Africa had paid those amounts in the relevant income years.

ATO view of decision:
The ATO accepts that it was reasonably open to the Tribunal on the evidence before it to find that the taxpayer had satisfied the burden of proving that KRI had a presently existing liability to pay the licence fees, and that the fees had been paid to Mr Kirkpatrick, in the 2004 and 2005 income years.

Administrative treatment:
Implications for ATO Precedential documents (Public Rulings & Determinations etc) | None | Implications for Law Administration Practice Statements | None

Legislative references: Administrative Appeals Tribunal Act 1975 (Cth) 37(2) Exchange Control Regulations 1961 (South Africa) Regulations 1 2(4) 2(5) Income Tax Assessment Act 1997 8-1 Income Tax Assessment Act 1936 51(1) Taxation Administration Act 1953 14ZZK
Case references: Briginshaw v Briginshaw (1938) 60 CLR 336 [1938] HCA 34 Coles Myer Finance Limited v FC of T (1993) 176 CLR 640 [1993] HCA 29 25 ATR 95 93 ATC 4341 Danmark Pty Ltd v FC of T (1944) 7 ATD 333 Evans v FC of T (1988) 88 ATC 4771 19 ATR 1784 FC of T v Dalco (1990) 168 CLR 614 [1990] HCA 3 20 ATR 1370 90 ATC 4088 FC of T v James Flood Pty Ltd (1953) 88 CLR 492 Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603 [2009] NSWCA 407 Jones v Dunkel (1959) 101 CLR 298 [1959] HCA 8 MacCormack v FC of T (1979) 143 CLR 284 [1979] HCA 18 79 ATC 4111 9 ATR 610 Macmine Pty Ltd v FC of T (1979) 24 ALR 217 9 ATR 638 79 ATC 4133 New Zealand Flax Investments Limited v FC of T (1938) 61 CLR 179 Nilsen Development Laboratories Pty Ltd v FC of T (1981) 144 CLR 616 11 ATR 505 81 ATC 4031 Saunders v FC of T (1988) 88 ATC 4349 19 ATR 1289 Steinberg v FC of T (1975) 134 CLR 640 75 ATC 4221 5 ATR 565 Tisdall v Webber (2011) 122 ALD 49 [2011] FCAFC 76 Trautwein v FC of T (1936) 56 CLR 63 [1936] HCA 77 Watson v FC of T (1999) 99 ATC 5313 [1999] FCA 1796 43 ATR 549
Subject references: Outgoing incurred Software licence fees Personal services income deductions Burden of proof