Private ruling: Deductions - expenses incurred by director/shareholder
Date of advice: 23 February 2017
Published: August 2017
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Questions and answers | 1. Are you entitled to a deduction for overseas travel expenses? | No | 2. Are you entitled to a deduction for a portion of interest on a loan made to the company and to purchase shares in the company? | Yes.

Relevant facts and circumstances: You have invested in a company overseas. You are a director/shareholder in the company. You travel overseas to manage this company. You incur expenses in relation to these trips overseas. The company does not pay any of your expenses associated with these trips. Your management duties include: ● Business development ● Review fleet performance (Asset management) ● Financial management ● Attend Directors / CEO meetings ● Attend customer meetings ● Meet with company analysts and managers to discuss financial matters ● Meet with investors to review investment performance ● Meet with potential investors and clients ● Meet with an relevant industry / supply chain and warehouse specialists You borrowed funds against your existing investment property in Australia to purchase shares in the company and make a loan to the company. You do not receive dividends from the company as it is running at a loss at present. You are not employed by the company.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1.

Reasons for decision: Summary: Section 8-1 of the ITAA 1997 states that you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income and is not: ● Capital, private or domestic in nature, ● Incurred in gaining or producing exempt income, or ● Prohibited by a section of the ITAA 1997 or the Income Tax Assessment Act 1936 (ITAA 1936). An outgoing is considered to be incurred in gaining or producing assessable income if there is a sufficient connection between the outgoing and the activities which produce or are expected to produce assessable income ( Ronpibon Tin NL v. FC of T (1949) 78 CLR 47). The essential character of an outgoing is generally determined objectively. As a general rule, an outgoing will not be deductible unless it is incurred in gaining or producing the assessable income of the taxpayer who incurs it. In Case U134 87 ATC 780; Case 92 (1987) 18 ATR 3646 the taxpayer was a shareholder and director of a family company who paid some of the company's expenses but was not reimbursed by the company for these expenses. The taxpayer did not receive any director's fees from the company in the relevant income year. The Administrative Appeals Tribunal held that the expenses were not deductible as the taxpayer incurred the expenses in his capacity as a director but did not derive any assessable income in that capacity. The expenses are incurred in order to manage the company, which is incurred to produce the assessable income of the company. The expenses were not incurred in relation to your status as a director or shareholder. The expenses are that of the company and are not yours to deduct. Furthermore, there is no sufficient or direct connection between the expense and your assessable income from your position as a director, as no income was derived from your position as a director. Accordingly, you cannot claim a deduction under section 8-1 of the ITAA 1997 for the expenses incurred in travelling overseas to manage the company. You are however entitled to a deduction under section 8-1 of the ITAA 1997 for the interest on the funds you borrowed against your investment property to make the loan to the company and to purchase shares in the company. The interest relates to the earning of assessable income and is therefore an allowable deduction.