Private ruling: Business - deductions
Published: January 2014

Ruling: 1. Is the whole amount paid under the Deed of Settlement deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | No. | 2. Is part of the amount paid under the Deed of Settlement and for which you have a tax invoice less any input tax credit, deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | Yes.

Relevant facts and circumstances: You carry on an enterprise which involves the acquisition, development and sale of land. Lawyers for the other entity, wrote to you and advised you they had been instructed to commence legal proceeding in the Supreme Court to enforce an agreement between you and the entity which was made before 1 July 2000 (Agreement). Pursuant to that Agreement damages were sought in the sum of X plus interest to be paid within 14 days failing which legal proceedings would be commenced. The sum of $X plus interest was not paid by you. By an action instituted in the Supreme Court by the entity a claim was made against you for $X plus interest. The facts are set out in the statement of claim S Cl 1 attached to the writ. S Cl 1 relevantly sets out the facts of the dispute between you and the entity. You confirmed in a letter that no supplies of services were made to you by the entity pursuant to the Agreement referred to in S Cl 1 prior to 1 July 2000. You treated the sale of the developed lots you sold as taxable supplies on which GST was payable. You accounted for the GST on those taxable supplies in the relevant activity statements. The entity, or any other party, had not invoiced you for the services performed pursuant to the Agreement nor had you paid any amount to the entity, or any other party, on account for the services performed pursuant to the Agreement. On a later date the entity commenced proceedings Statement of Claim S Cl 2 against a number of related parties including you for various matters. The trustees named in S Cl 2 commenced proceedings Statement of Claim S Cl 3 against the entity and the entity brought a counter-claim. Unlike S Cl 1, neither party involved in S Cl 2 and S Cl 3 sought monetary damages. In the course of the subsequent trial, in relation to proceedings S Cl 2 and S Cl 3, the parties agreed to settle all three disputes, including S Cl 1, on the terms set out in a Deed of Settlement. The Deed of Settlement provides for mutual releases from all claims and counter-claims and provides for the payment by you of the settlement sum. The Deed of Settlement provided for the payment of the settlement sum of $X to be paid by you. The Recitals to the Deed of Settlement sets out the details of all three claims. The Recitals refer to S Cl 1 and a claim for damages in the sum of $X being the proceeds to which the entity was entitled to from the sale of the lots by you for having carried out the work etc. Other paragraphs in the Recitals provide details in relation to S Cl 2 and S Cl 3 The Recitals to the Deed of Settlement state that the parties have agreed to settle the Proceeding and their dispute upon the terms of the Deed of Settlement. No clauses were identified in the Deed of Settlement in respect of the operation and effect of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) nor was the settlement sum dissected or apportioned. To date you have not requested a tax invoice from the entity in relation to the payment of the settlement sum you paid pursuant to the Deed of Settlement. You have not claimed any input tax credits in any GST return in relation to services made to you by the entity. You advise that the Australian Business Register (ABR) indicates that the entity was registered for GST with effect from 1 July 2000. Given that the Agreement referred to in S Cl 1 was entered into before 1 July 2000 you considered the potential implications of the GST Transition Act and in particular section 13 of the GST Transition Act (section 13). You contend that section 13 has no application on the basis that the letter referred to in the S Cl 1'does not amount to a written agreement'. 1 July 2012 to 30 June 2013 Income Tax Assessment Act 1997 Section 8-1 Income Tax Assessment Act 1997 Section 8-1(2) Income Tax Assessment Act 1997 Section 27-5


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, or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, no deduction is allowed under subsection 8-1(2) of the ITAA 1997 for expenses to the extent that they are of a capital, private or domestic nature. Taxation Ruling TR 95/33 at paragraph 11 states: Where, having regard to the overall objective circumstances, there is an obvious commercial connection between the loss or outgoing and the carrying on of the taxpayers' business, it will not be generally necessary to have regard to the taxpayer's subjective purpose, motive or intention. Payments which arise from legal settlements are generally deductible if the expenditure: Where there is no dissection, Taxation Ruling TR 95/33 at paragraph 83 - 84 states; …. Similarly, if the amount is received from a number of heads of claim (e.g. lost profits, interest and punitive damages), the amount also needs to be apportioned between the items. 84. Subsection 160ZD(4) provides: 'where any consideration paid or given in respect of a transaction relates in part only to the disposal of a particular asset, so much of that consideration as may reasonably be attributed to the disposal of the asset shall be taken to relate to the disposal of the asset.' 85. This provision requires the taxpayer to allocate receipts between the relevant assets. If the taxpayer allocates amounts between different assets on a reasonable basis we will generally accept that basis of allocation. | Detailed Reasoning - Application to your circumstances: On the facts disclosed by you, in carrying on a property development enterprise it was expected that you would acquire acquisitions of development services. According to the deed of settlement (the deed) the other entity was carrying on the business of the development and sub-division of land for residential and commercial purposes. The deed refers to an agreement between you and the other entity and/or the director under which the other entity was to carry out, coordinate and supervise all works necessary in relation to the development, subdivision and sale of your lots. The deed provides for the payment of a specific settlement sum which was not divided or dissected but was paid in two instalments pursuant to the Deed of Settlement. There are two monetary claims made in the deed: · the first is for the payment of money due under the Agreement for the provision of services and · the second is for 'interest'. As the deed does not divide or dissect the settlement sum, you will be required to reasonably apportion the payment into amounts representing the relevant heads of claim. Therefore, the amount of payment, reasonably apportioned and evidenced by a tax invoice, of the deed which was incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income is an allowable deduction under section 8-1 of the ITAA 1997. This deductible amount is reduced by any input tax credit pursuant to section 27-5 of the ITAA 1997. Consequently the balance of payment under the deed which was not incurred in gaining or producing assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income is not an allowable deduction under section 8-1 of the ITAA 1997.

Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not considered the application of Part IVA to the arrangement you asked us to rule on. | arose out of, or concerned the day to day income producing activities of the taxpayer ( Herald and Weekly Times Ltd v. Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 39 ALR 46; (1932) 2 ATD 169) | is not undertaken to protect the taxpayer's profit yielding subject | has more than a peripheral connection to the taxpayer's business (Magna Alloys and Research Pty Ltd v. Commissioner of Taxation (1980) 49 FLR 183; (1980) 11 ATR 276; 80 ATC 4542; (1980) 33 ALR 213; Putnin v. Commissioner of Taxation (1991) 27 FCR 508; 91 ATC 4097; (1991) 21 ATR 1245) | may arise out of litigation concerning the taxpayer's professional conduct ( Magna Alloys Case and Putnin's Case ).