Private ruling: Business deduction
Date of advice: 4 May 2017
Published: September 2017
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is your company entitled to a deduction for expenses to restore your former shop to its original condition at the end of your lease? | A1: Yes.

Relevant facts and circumstances: Your company had a lease on a shop in a shopping centre. At the end of your lease with the shopping centre, you incurred a make good expenditure to restore the shop to its original condition.

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

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (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 where the outgoings are of a capital, private or domestic nature. In your case the company incurred expenditure at the end of the lease. Such expenses were incurred as a direct result of the carrying on of your business, even when the lease has ceased. As such, the occasion of the expense in question is to be found in the business operations when you conducted business and not after the business, or lease ceased. Taxation Ruling TR 2004/4 states that expenses are still deductible if the income earning activities, which gave rise to the expense, have ceased. The fact that an outgoing is incurred after the business had ceased does not sever this connection. In Placer Pacific Management Pty Ltd v. FC of T 95 ATC 4459; (1995) 31 ATR 253 the taxpayer was the manufacturer of a conveyor belt system. It sold this business to another entity. As part of the sales agreement it continued to be liable for any repairs arising from the installation of systems prior to the sale. Sometime after the business was sold a claim was made against the taxpayer. A settlement was reached whereby it paid a lump sum amount. It also incurred legal expenses. In allowing the deduction for both expenses the Full Federal Court after referring to the High Court decision in AGC (Advances) Ltd v. Federal Commissioner of Taxation (1975) 132 CLR 175; 75 ATC 4057; (1975) 5 ATR 243 unanimously held that: In our view AGC should be taken as establishing the proposition that provided the occasion of a business outgoing is to be found in the business operations directed towards the gaining or production of assessable income generally, the fact that that outgoing was incurred in a year later than the year in which the income was incurred and the fact that in the meantime business in the ordinary sense may have ceased will not determine the issue of deductibility. ... Provided the occasion for the loss or outgoing is to be found in the business operations directed to gaining or producing assessable income, that loss or outgoing will be deductible Therefore, you are entitled to a deduction under section 8-1 of the ITAA 1997 for the make good expenses incurred by you as a direct result of the carrying on of your former business.