Private ruling: Deductibility of expenses
Date of advice: 3 March 2026
Published: 4 May 2026
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are the scheme administration costs under Settlement 1 deductible to the Scheme Administrator, either as a general deduction under section 8-1 of the ITAA 1997 or a specific deduction under section 8-5 of the ITAA 1997? | A1: No. | Q2: Are the scheme administration costs under Settlement 2 deductible to the Scheme Administrator, either as a general deduction under section 8-1 of the ITAA 1997 or a specific deduction under section 8-5 of the ITAA 1997? | A2: No.

Relevant facts and circumstances: Class actions were taken against Employer 1 and Employer 2. Both cases concerned the underpayment of workers. Settlements were reached in relation to the 2 proceedings: Settlement 1 in relation to the class action against Employer 1, and Settlement 2 in relation to the class action against Employer 2. The Scheme Administrator for Settlement 1 is responsible for ensuring that the respective claimants are paid their entitlements under Settlement 1. The Scheme Administrator for Settlement 2 is responsible for ensuring that the respective claimants are paid their entitlements under Settlement 2. Class variations to rate of PAYG withholding By letter dated DD MM YYYY, the Commissioner of Taxation granted the Scheme Administrator for Settlement 1 a class variation to the rate of PAYG withholding of XX% for remediation back payments to Australian and foreign residents who are eligible claimants in Settlement 1. The Scheme Administrator for Settlement 2 intends to make a similar application to the Commissioner of Taxation for a class variation to the rate of PAYG withholding for remediation back payments to Australian and foreign residents who are eligible claimants in Settlement 2. Scheme administration costs Apart from settlement amounts, specific amounts were payable under both Settlement 1 and Settlement 2 by Employer 1 and Employer 2 respectively for the administration of the relevant settlement scheme (Administration Costs Sum). Such administration involves the implementation and operation of the claims assessment and settlement scheme process, including the distribution of settlement amounts to all individual claimants. This includes calculating the individual entitlements of the claimants, remitting the appropriate PAYG withholding, reporting the amounts withheld to the ATO and reporting the same amounts to the respective claimants so they can include the amounts withheld and the payments to them in the appropriate place in their respective income tax returns as income. The Scheme Administrator for each settlement is largely responsible for carrying out this function for the relevant settlement. Payment for their services is made from the Administration Costs Sum under each settlement.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 8-5 | Income Tax Assessment Act 1997 subsection 25-5(1) | Income Tax Assessment Act 1997 paragraph 25-5(1)(b)

Reasons for decision: Summary: Subsection 8-1(1) of the ITAA 1997 allows deductions for any loss or outgoing to the extent they are incurred in gaining or producing assessable income (or necessarily incurred in carrying on a business for that purpose). There is little judicial guidance on the meaning of the terms 'loss' and 'outgoing'. Regard is to be had to the plain, and largely uncontroversial, meaning of the terms. Subsection 8-5(1) provides that you can also deduct from your assessable income an amount that a provision outside Division 8 allows you to deduct. Such a deduction is called a 'specific deduction'. Section 25-5 of the ITAA allows a specific deduction for certain tax compliance expenditure. Subsection 25-5(1) states: (1) You can deduct expenditure you incur to the extent that it is for: (a) managing your *tax affairs; or (b) complying with an obligation imposed on you by a Commonwealth law, insofar as that obligation relates to the tax affairs of an entity In Healy v Federal Commissioner of Taxation , the Tribunal outlined four requirements to paragraph 25-5(1)(b): [1] 1) expenditure be "incurred" by a taxpayer; 2) the expenditure is incurred by the taxpayer to "comply" with an "obligation"; 3) the obligation be one which is imposed on the taxpayer by a Commonwealth law; and 4) the obligation be one that relates to the "tax affairs" of another taxpayer The Tribunal stated that, like section 8-1 of the ITAA 1997, paragraph 25-5(1)(b) 'requires that the relevant expense be 'incurred' by the taxpayer concerned.' [2] The term 'incurred' is not defined in the ITAA 1997 or ITAA 1936. Taxation Ruling TR 97/7 provides that the term refers broadly to 'a present money debt that you cannot escape'. In Nilsen Development Laboratories , with reference to subsection 51(1) of the ITAA 1936, the High Court held for expenditure to have been 'incurred', there must be a 'presently existing liability'. [3] Under each of Settlement 1 and Settlement 2, an Administration Costs Sum was paid by Employer 1 and Employer 2 respectively for costs incurred in the administration of the relevant scheme. The administrative process is undertaken by the Scheme Administrators. It involves the calculation of individual entitlements, remission of the appropriate PAYG withholding, reporting of the amounts withheld to the ATO and reporting of the same amounts to the respective claimants in order that they can include the amounts withheld and the payments to them in the appropriate place in their respective income tax returns as income. No part of Administration Costs Sums is an expense incurred by the Scheme Administrators. Nor can it be said that any part of the amount is a 'loss or outgoing' (per section 8-1) to the Scheme Administrators. In fact, the obverse is true: the Scheme Administrators will ultimately receive this sum as income. Specifically, amounts received by the Scheme Administrators from the Scheme Administration Costs Sums represent amounts paid to them for services rendered in the administration of the schemes. These amounts do not represent any cost, expense or outgoing to the Scheme Administrators. For this reason, the Scheme Administrators cannot deduct the Scheme Administration Costs Sum under as a general deduction under section 8-1 of the ITAA 1997 or a specific deduction under section 8-5 of the ITAA 1997. [1] Healy v Federal Commissioner of Taxation [2013] AATA 281 at [126] [2] Healy v Federal Commissioner of Taxation [2013] AATA 281 at [128] [3] Nilsen Development Laboratories Pty Ltd v Federal Commissioner Of Taxation (1981) 33 ALR 161 at 168