Private ruling: Deductibility of expenses
Date of advice: 14 April 2026
Published: 6 July 2026
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 17 September 20XX

Ruling: Q1: Can a deduction be made under section 25-5 of the Income Tax Assessment Act 1997 (ITAA 1997) in calculating the net income of the Trusts for expenditure incurred in managing the tax affairs of the Trusts, and in complying with obligations imposed on the Trusts by a Commonwealth law that relate to the tax affairs of an entity? | A1: Yes | Q2: Can a deduction be made under section 8-1 of the ITAA 1997 in calculating the net income of the Trusts for losses or outgoings incurred in gaining or producing assessable income of the Trusts? | A2: Yes

Relevant facts and circumstances: Class actions were taken against Employer 1 and Employer 2. Settlements were reached in relation to the 2 proceedings: the first in relation to the class action against Employer 1, the second in relation to the class action against Employer 2. The Scheme Administrator is responsible for ensuring that the respective claimants are paid their entitlements under the settlements. Apart from settlement amounts, specific amounts were payable under the settlements 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 making applications to the Commissioner of Taxation for class variations to the rate of PAYG withholding for payments to eligible claimants, 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 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 of the settlements. The Scheme Administrator has invested all the funds in short-term deposits and derives interest income from this investment. A proportion of the Scheme Administrator's costs relate to the derivation of this interest income.

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)

Reasons for decision: Summary: Section 25-5 is a specific deduction provision allowing a deduction for tax-related expenses, independently of s 8-1, subject to prescribed exclusions. It permits a deduction for expenditure incurred to the extent it is for specified tax-related purposes: 25-5(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; or... The section is intended to ensure that taxpayers are not denied deductions for necessary costs of engaging with the tax system. In regard to the primary elements that comprise the provision: • The term ' incurred ' is not defined in the ITAA 1997 or ITAA 1936. A loss or outgoing is ' incurred ' when the taxpayer is definitively committed to the expenditure - not merely when it is paid, expected, or anticipated: FCT v James Flood Pty Ltd (1953) 88 CLR 492. 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 '. [1] • A taxpayer may deduct expenditure incurred to the extent it is for managing its tax affairs which includes, for example, preparing, lodging, or objecting to assessments, or seeking private rulings. ' Tax affairs ' means affairs relating to tax: subsection 995-1(1). ' Tax ' means income tax assessed under the Assessment Act, whether imposed by the Income Tax Act 1986 or imposed as such by any other Act: subsection 995-1(1). Matters relating to income tax, franking deficit tax and Medicare levy are included within its scope. • A taxpayer may also deduct expenditure incurred in complying with obligations under Commonwealth laws insofar as those obligations relate to the tax affairs of another entity. Such obligations include those that relate to PAYG withholding and PAYG instalments. Subsection 25-5(2), 25-5(3) and 25-5(4) contains specified exclusions from the scope of the provision. The Scheme Administrator is the trustee of the trusts, each of which holds the settlement amounts and the Administration Costs Sum. It is considered that, in this case: • Deductions are allowable for expenses incurred by the Scheme Administrator, as trustee, that fall within the scope of subsection 25-5(1)(a) or (b), including: - costs incurred in making applications to the Commissioner of Taxation for class variations to the rate of PAYG withholding for payments to Australian and foreign residents who are eligible claimants; - expenses in respect of other matters relating to the remission of the appropriate PAYG withholding; - reporting the amounts withheld to the ATO; and - other expenses incurred in respect of the management of the tax affairs of the relevant trust, including matters pertaining to the preparation of income tax returns and applications for tax rulings. None of the exclusions in subsections 25-5(2), 25-5(3) and 25-5(4) apply as deductions are not sought for the amounts paid to the claimants, nor PAYG withholding (and Superannuation obligations, where applicable) payable on behalf of the claimants. • Such expenses are ' incurred ' by the Scheme Administrator as trustee of the each of the trusts, and on behalf of the relevant trust. They are therefore deductible in the calculation of the relevant trust's net income. In this regard: - Section 95 of the Income Tax Assessment Act 1936 (ITAA 1936 ) provides that: " net income, in relation to a Trust estate, means the total assessable income of the Trust estate calculated under this Act as if the Trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions..." - The expenses for which deductions are claimed are those outlined above to which the Scheme Administrator has definitely committed on behalf of the relevant trust (being the legal person who contracts with 3 rd parties and incurs the relevant liabilities); or are the Scheme Administrator's own invoices issued for the provision of the relevant administration services, which it ' incurs ' - in its representative capacity as trustee of the relevant trust - and which will satisfied from payment out of the trust's assets. 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. The definition of ' incurred ' has been considered in question 1. In this case, deductions are sought for losses and outgoings that are incurred in gaining or producing assessable income of the trusts. The assessable income in this respect refers to the interest income earned by the trusts from the investment of the trust funds in short-term deposits. A proportion of the Scheme Administrator's costs relate to the derivation of this interest income. It is considered that, in this case: • The costs incurred in respect of the investment of the trust funds in the short-term deposits are losses and outgoings ' incurred in gaining or producing..assessable income ' under the terms of paragraph 8-1(1)(a). • Such expenses are ' incurred ' by the Scheme Administrator as trustee of each of the trusts, and on behalf of the relevant trust. They are therefore deductible in the calculation of the trusts' net income. In this regard: - Section 95 of the Income Tax Assessment Act 1936 (ITAA 1936) provides that: " net income, in relation to a Trust estate, means the total assessable income of the Trust estate calculated under this Act as if the Trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions..." - The expenses for which deductions are claimed are those outlined above to which the Scheme Administrator has definitely committed on behalf of the relevant trust (being the legal person who contracts with 3 rd parties and incurs the relevant liabilities); or are the Scheme Administrator's own invoices issued for the provision of the relevant administration services, which it ' incurs ' - in its representative capacity as trustee of the relevant trust - and which will satisfied from payment out of the trust's assets. [1] Nilsen Development Laboratories Pty Ltd v Federal Commissioner Of Taxation (1981) 33 ALR 161 at 168