Private ruling: General Deductions
Date of advice: 6 November 2015
Published: November 2015
Ruling period: 01 July 2015 - 30 June 2016
Date scheme commenced: 01 July 2015

Ruling: Q1: Are the payments made by the company to under-performing community based entities deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: 1. The company is a wholly-owned subsidiary of the Commonwealth of Australia. 2. The company's primary business activity is to provide support services to community based entities. 3. The community based entities are primarily tax exempt entities or public benevolent institutions that are deductible gift recipients (DGRs). 4. The company assists the community based entities to perform their agreed community service and not-for-profit purposes. 5. The company is not endorsed as tax exempt. 6. To support its business activities, the company receives assistance from the Commonwealth Government and State and Territory Governments which provide various grants and funding support. The purpose of these grants and funding is to enable the company to provide operational subsidies to those community based entities that are not presently profitable and to assist it to benefit the communities it supports. 7. The company is considering making additional payments to support any under-performing community based entities to ensure that they continue to trade and provide the essential social benefits as required. 8. No payments have ever been made from trading profits. 9. The company earns its income primarily through management fees charged to various community based entities.

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

Reasons for decision: Summary: The payments made by the company to community based entities are deductible under section 8-1 of the ITAA 1997 . | Detailed Reasoning - Detailed reasoning: Section 8-1 of the ITAA 1997 Broadly, section 8-1 of the 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 to the extent the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. Paragraph 21 of Taxation Ruling TR 95/25 states that expenditure will be deductible under section 8-1 if its essential character is that of expenditure that has sufficient connection with the operations or activities which more directly gain or produce that taxpayer's assessable income, provided that the expenditure is not of a capital, private or domestic nature. Paragraph 24 of TR 95/25 states where the taxpayer carries on a business the second limb of section 8-1 requires there to be a relevant connection between the outgoing and the business. In deciding whether the expense is 'necessarily incurred' in the sense of 'clearly appropriate' to that business, regard must be had to the nature of the business activity, the business purpose for which the outgoing was incurred, the objective circumstances surrounding the incurring of the expenditure, and the character of the expense. The company receives grants from the Commonwealth, State and Territory governments. These grants form part of the company's assessable income for the purposes of section 6-5 of the ITAA 1997. The purpose of these grants and funding is to enable the company to provide operational subsidies to those community based entities that are not presently profitable. In addition to the government grants, the company gains assessable income from the sale of goods and management fees charged to the community based entities. The company is considering making additional payments to support any under-performing community based entities to ensure that they continue to operate and provide the essential social benefits. Deductibility of the Payments The operational activities of the company are in line with Commonwealth directives. The additional payments to be made by the company to underperforming community entities will align with these directives to ensure their continuity. It is considered that the additional payments are necessarily incurred by the company in the course of gaining or producing its assessable income. The nature of the company's business necessarily dictates its business activity insofar as assisting the community based entities to remain viable. The additional payments will be provided to support any under-performing community based entity to ensure that the entity continues to provide the essential social benefits as set out above. There will be no requirement for the entity to repay the monies as the payments are not loans; rather they are subsidies to those community based entities that are not presently profitable, and assists the entity to benefit the communities it supports. The additional payments will be voluntary payments made by the company and are not necessitated by a presently existing pecuniary liability. The character of the expense creates a nexus between the payments themselves and the receipt of income in the management of the community based entities. The essential character is that of expenditure that has sufficient connection with the operations or activities which more directly gain or produce the company's assessable income. Therefore, the expenses are incurred at the time the payment is made and are deductible under section 8-1 of the ITAA 1997.