Private ruling: Deductions – business expenses
Date of advice: 18 April 2019
Published: June 2019
Ruling period: Year ending 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Are you entitled to claim a deduction under section 40-880 of the Income Tax Assessment Act 1997 (ITAA1997) in respect of the expenditure that you incurred to suit your business needs? | A1: Yes

Relevant facts and circumstances: The entity signed a commercial lease for a period of several years with an option to further extensions to the lease. The entity relocated its business from its old premises to the new leased premises. The Lessor is not related to the entity in anyway. The entity incurred expenditure in the leases premises to suit its business needs that was permitted in the lease agreement. The lessor did not reimburse nor will they in future reimburse any expenses incurred by the entity.

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

Reasons for decision: Summary: Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997 . The entity is not entitled to an immediate deduction for expenses they incurred in the leases premises under section 8-1, as these outgoings are not incurred in, nor did they arise out of their day to day income-earning activities. We consider the expenditure is capital in nature and incurred in relation to the business for the purposes of paragraph 40-880(2)(a). As none of the limitations and exceptions contained in subsections 40-880(3) to 40-880(9) apply, the capital expenditure is deductible over a period of five years. | Detailed Reasoning - Detailed reasoning: Subsection 8-1(1) allows a deduction for any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income; or (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, subsection 8-1(2) provides that a loss or outgoing is not deductible to the extent that: (a) it is a loss or outgoing of capital, or of a capital nature; (b) it is a loss or outgoing of a private or domestic nature; (c) it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or (d) a provision of the ITAA 1997 or the ITAA 1936 prevents you from deducting it. The expenses incurred by the entity in the business premises to suit their business needs is considered to be a loss or outgoing of capital, or of a capital nature. As such they are not entitled to a deduction for these expenses under section 8-1. | Detailed Reasoning - Section 40-880: TR 2011/6 sets out the Commissioner's views on the interpretation of the operation and scope of section 40-880. The object of section 40-880 is to make certain business capital expenditure deductible over five years if the expenditure is not deductible under another part of the Act; and another provision of the Act does not deny a section 40-880 deduction; and the expenditure relates to a business which is, was or is proposed to be carried on for a taxable purpose. The Commissioner considers that the taxpayer qualifies for a deduction under paragraph 40-880(2)(a) as the capital expenditure is in respect of their existing business in the relevant years. Therefore under paragraph 40-880(2)(a) the entity is entitled to claim the expenses in equal proportion over a period of five years starting in the year in which they incurred the expense in relation to their business needs.