Private ruling: Business deductions - after cessation
Published: February 2012
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for the cost of professional indemnity insurance and business name registration after your business activities cease? | A1: Yes

Relevant facts and circumstances: The partnership runs a business undertaking valuations. The company you perform valuations for, requires that the business maintains professional indemnity insurance. The business must also agree to maintain professional indemnity insurance cover for at least seven years after the last date on which the business conducts a valuation for the company. Your professional indemnity insurance provider included a number of restrictive clauses in the renewal of your policy in the 2011-12 income year relating to valuations. The company you perform valuations for did not accept your professional indemnity insurance as sufficient due to the restrictive clauses. You were unable to find an alternative insurance provider that would provide professional indemnity insurance without the restrictive clauses. As a result, the business is no longer able to undertake valuations. The majority of the business income is derived from valuations; therefore it is no longer financially viable for the business activities to continue. The business will cease operating in the 2011-12 income year. As a result of the agreement you made with the company you previously conducted property valuations for; costs for professional indemnity insurance will be incurred for a period of seven years after the date of the last valuation. As the professional indemnity insurance policy is taken out in the business trading name, costs will be incurred to continue to register the business name for the same period.

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

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997 ) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. Paragraph 136 of Taxation Ruling TR 95/9 states that a deduction is allowable for the cost of professional indemnity insurance taken out for work related purposes. The courts have considered a number of cases involving the deductibility of losses and expenditure incurred after the cessation of a business. Commissioner of Taxation v. Jones (2002) 117 FCR 95; 2002 ATC 4135; (2002) 47 ATR 638 ( Jones Case ) involved the deductibility of interest payments incurred on a loan refinanced prior to the cessation of a business, where the interest payments related to later years of income in which no relevant assessable income was derived. In dismissing the appeal by the Commissioner, Beaumont, Finn and Sundberg JJ agreed with the earlier reasoning of Dowsett J ( Commissioner of Taxation v. Jones 2001 ATC 4607; (2001) 47 ATR 638) that the taking out of the loan while the business was still operating created an obligation to pay interest until such time as the loan was repaid. In other words, the obligation to pay interest would continue after the business had ceased until an event or circumstance arose to break the necessary nexus. As a result, it was determined that the interest payments were allowable deductions. The decision in Jones Case also supported earlier court decisions that business losses incurred in later years of income could be deductible as long as the occasion of the outgoing could be related back to a period prior to the business ceasing operations. In this case, the business will incur expenses for professional indemnity insurance and business name registration after it ceases to operate. Due to the nature of the activities the business carried out, the insurance is required to be maintained for a period of seven years after the final valuation was carried out. The insurance is provided under the business trading name, which will be required to remain registered for the same period. As a result, the occasion for the outgoings can be directly related back to the provision of professional services in prior years of income. Accordingly, the partnership is entitled to a deduction for the cost of maintaining professional indemnity insurance and the registration of the business name after the business activities have ceased under section 8-1 of the ITAA 1997.

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