Private ruling: Deductions - company expenses paid by employee
Date of advice: 10 October 2016
Published: November 2016
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 20XX

Ruling: A1: No

Relevant facts and circumstances: You were a director and employee of your company. In the 20XX-XY financial year the company went firstly into voluntary administration, then into liquidation. Liquidators were appointed. The liquidators determined that the company had traded while insolvent, and were intending to commence court action against you as director. Although you disagreed with this determination, you offered to pay the liquidators an amount to satisfy the claims of the creditors of the company. These payments are ongoing. They are not of the nature of a fine or penalty. Your employment at your company was your primary source of income.

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

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 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 directors 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 were incurred in order to satisfy debt of the company, which was initially incurred to produce the assessable income of the company, rather than your own salary and wages. The expenses were not incurred in relation to your employment as a technician. There is therefore no connection between the expense and your salary and wage income. 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 repaying the debts of the company.

Are you entitled to claim a deduction for amounts paid to the liquidator of the company of which you were an employee and director?