Private ruling: Deduction - Feasibility Study
Date of advice: 21 April 2017
Published: September 2017
Ruling period: 1 July 2014 to 30 June 2020
Date scheme commenced: 1 July 2013

Ruling: Questions and Answers | Are you entitled to a deduction for expenditure associated with a feasibility study? | No

Relevant facts and circumstances: You are a non-resident for taxation purposes You started a feasibility study to determine how to start your own investment fund. The fund is operated like a unit trust. You and other investors are members of the fund. The fund is investing mainly in ASX listed stocks and ETFs. Some of the fund is vested in stocks denominated in foreign currency.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 128B | Income Tax Assessment Act 1936 section 128D | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 40-830 | Income Tax Assessment Act 1997 section 40-840 | Taxation Administration Act 1953 subdivision 12-F of schedule 1

Reasons for decision: Summary: 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 or it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. Broadly speaking, an amount incurred for a feasibility study is deductible over a number of years where the feasibility study is specifically commissioned or undertaken by the taxpayer for the very project they are carrying on or are proposing to carry on for a taxable purpose. If you are a foreign resident, your assessable income includes the ordinary income and statutory income you derive directly or indirectly from all Australian sources during the income year. Some ordinary income and statutory income is rendered non-assessable, non-exempt income. This means that it is not included in the recipient's 'taxable income', hence not included in an Income Tax Return. One example of non-assessable, non-exempt income is dividends, royalties or interest that has been subject to withholding tax. Franked dividends are excluded from the withholding tax provisions; however, franked dividends paid to a non-resident are also non-assessable, non-exempt income. Withholding tax is an income tax payable mainly by foreign residents on the dividend, interest or royalty (DIR) income they derive paid mainly to them by Australian residents. The person deriving the DIR (i.e. the DIR recipient) is the person liable to pay Withholding Tax. Under the Pay As You Go (PAYG) withholding regime in Schedule 1 to the Taxation Administration Act 1953 ('TAA 1953') the payer of the DIR income 'collects' the amount needed to cover the recipient's withholding tax liability by retaining (withholding) the tax amount and then remitting the withheld amount to the Australian Taxation Office (ATO) on the recipient's behalf, as a credit against the recipient's liability. The tax is calculated as a percentage of the gross DIR income amount (i.e. no expense deductions are allowed in calculating the tax): for non-treaty countries the percentages are 30% on dividends and royalties; 10% on interest. Withholding tax is a 'final' tax. It is imposed under the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 on 'outbound' income and is ascertained under section128B 11A of the Income Tax Assessment Act 1936 ('ITAA 1936'). Many exemptions from withholding tax exist, e.g. for fully franked dividends (and the franked part of a partly franked dividend), for interest paid on widely held debentures and for interest derived by a foreign resident in carrying on business in Australia at or through a permanent establishment (an Australian branch office for example). DIR income to which withholding tax applies (and some DIR income expressly exempted from withholding tax) is generally rendered 'non-assessable' and 'non-exempt' income, meaning it is not included in the calculation of the recipient's 'taxable income', hence not included in an Income Tax Return, and does not form part of any income tax 'assessment'. Withholding tax is due and payable at the expiration of 21 days after the end of the month in which the DIR recipient derived the DIR income. However, when a DIR payer withholds an amount the DIR recipient is automatically credited that amount against their Withholding Tax liability, regardless whether the DIR payer remits the withheld amount to the ATO or not. If the DIR payer fails to withhold, the DIR recipient is still liable to the ATO for the underlying Withholding Tax. The Withholding Tax is due and payable at the expiration of 21 days after the end of the month in which the DIR recipient derived the DIR. A payer's obligation to withhold from interest or a royalty subsists even if the income is not actually paid over to the recipient but is reinvested, accumulated, capitalized, carried to any reserve, sinking fund or insurance fund however designated, or otherwise dealt with on behalf of the recipient or as the recipient directs. Examples include interest due and payable but capitalized on a loan that is rolled over for a further term, and royalties payable monthly but held over until year's end. A person is deemed to have received an amount of ordinary income as soon as it is applied or dealt with in any way on the person's behalf or as it directs. The PAYG rules require a DIR payer to withhold from a payment if according to the payer's records relating to the DIR transaction the shareholder or other recipient has an address outside Australia. An entity in Australia receiving a DIR payment on behalf of a foreign resident must also withhold (TAA 1953 Sch 1 Subdivision 12-F). As you are a non-resident, the income you receive from the project is non-assessable, non-exempt income; the project is not being carried on for a taxable purpose. Accordingly, you are not entitled to a deduction for expenses incurred in conducting a feasibility study.