Private ruling: Business deductions
Date of advice: 28 August 2018
Published: October 2018
Ruling period: 1 July 20 xx to 30 June 20 xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Can the taxpayer, as a partner in a partnership, claim a deduction for the settlement sum of $x under section 40-880 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Can the taxpayer, as a partner in a partnership, claim a deduction for the legal fees of $x under section 40-880 of the ITAA 1997? | A2: Yes | Q3: Does the Commissioner have the power to amend an income tax assessment for an income year under section 170(6) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A3: Invalid We cannot rule on this, as there is not a year to which this applies. The Commissioner would have to decide at the time it is lodged if an extension of time will be allowed.

Relevant facts and circumstances: X partners created a business in x location. At that location, another business (XX) existed with a similar name. XX believed that because of the trading name issues they lost clients. As a result, XX started legal proceeding for compensation. An agreement for repayment was reached. After x year the X partners sold their business to Y. Y was to continue paying the compensation to XX but discontinued to do so. XX continued proceedings against Y and X partners. One of the partners, the taxpayer, agreed to pay the remaining settlement amount on behalf of the other defendants. The taxpayer incurred legal fees because of the proceedings.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 40-880

Reasons for decision: Summary: The underlying issue with your client’s legal and settlement expenses is whether the expenditure is of a revenue nature (deductible under section 8-1(1)) of the ITAA 1997 or of a capital nature and made non-deductible by section 8-1(2) of the ITAA 1997. Expenses incurred in relation to the profit yielding business structure are generally of a capital nature and are made non-deductible by section 8-1(2) of the ITAA 1997. The legal and settlement fees incurred after the cessation of business would fall into this category. Some expenses held to be of a capital nature and not deductible under section 8-1 of the ITAA 1997 may qualify for deductibility, over five years, under the provisions in section 40-880 of the ITAA 1997. The object of section 40-880 of the ITAA 1997 is to make certain business capital expenditure deductible over 5 years if: (a) the expenditure is not otherwise taken into account; and (b) the deduction is not denied by some other provision; and (c) the business is, was or is proposed to be carried on for a taxable purpose . Subsection 40-880(2) of the ITAA 1997 allows you to deduct, in equal proportions over a period of five income years starting in the year in which you incur it, capital expenditure you incur: (a) in relation to your business; or (b) in relation to a business that used to be carried on; or (c) in relation to a business proposed to be carried on; or (d) to liquidate or deregister a company of which you were a member, to wind up a partnership of which you were a partner or to wind up a trust of which you were a beneficiary, that carried on a business. A deduction is also allowed if another entity carried on the business and the expense was connected with the taxpayer ‘deriving assessable income from the business’ (subsection 40-880(4) of the ITAA 1997). Your client carried on a business in 20xx, which was subsequently sold after a year. Litigation began in 20xx in relation to the trading name being used in x location. The new owner of the business did not continue the required payments agreed to in the settlement of the matter. Your client was a party of further proceedings as it was part owner of the business before its sale. The business was a partnership and your client would be liable to pay expenditure related to litigation against the partnership if the other partners were not able to pay their share. The expenses were sufficiently connected to the business that had been carried on by the partnership. As mentioned above, we regard the expenses incurred for the purposes of the trading name issue to be capital expenditure. It is accepted that the legal and settlement expenses your client incurred after the cessation of the business was expenditure which is deductible under section 40-880 of the ITAA 1997.