Private ruling: Deduction - ongoing fees and loan
Date of advice: 8 January 2016
Published: March 2016
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction in the 20XX-YY financial year for the amount that was paid in that financial year for ongoing fees? | A1: No, as the fees were incurred in the 20WW-XX financial year are therefore deductible in that financial year. | Q2: Will you be entitled to a claim a capital loss for the amount paid to entity B if your right to recover the amount ends without you receiving any amount? | A2: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1. Income Tax Assessment Act 1997 s ection 102-20 Income Tax Assessment Act 1997 s ection 104-25 Income Tax Assessment Act 1997 paragraph 108-5(1)(b) Reason for decision | Summary | You are not entitled to a deduction in the 20XX-YY financial year for ongoing fees you paid to Entity C in that year. This is because the expense was incurred in the 20WW-XX financial year and so is deductible in that financial year. You advised that you have already claimed a deduction for the fees in your 20WW-XX tax return. | You acquired a contractual right by entering into the loan agreement. As Entity B failed to fulfil its obligations under the agreement by not paying your ongoing fees for the project, you have a right to recover the amount you paid under the agreement. You will be entitled to claim a capital loss for that amount if your right to recover the amount ends without you receiving any amount. This will occur if the receiver officially declares that you will not receive any amount in relation to the debt owed to you or the company is dissolved without you receiving an amount. | Detailed reasoning | Ongoing fees | 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 purposes of gaining or producing such income, except where the outgoings are of a capital, private or domestic nature. | The Commissioner states in the relevant Product Ruling that the project's ongoing fees are deductible in the income year in which the fees are incurred. | Taxation Ruling TR 97/7 discusses the meaning of 'incurred' and clarifies when a deduction is allowable. The ruling states that as a broad guide, you incur an outgoing at the time you owe a present money debt that you cannot escape. There must be more than just an expectation and there must be a right for the payee to demand payment at the present time. | In your case, Entity C, the responsible entity for the project, issued a tax invoice for the payment of the fees during the 20WW-XX financial year. As Entity C was the responsible entity for the project and had a right to demand payment for the ongoing fees it is considered at that time you owed a debt that you could not escape. Accordingly, the expense was incurred during the 20WW-XX financial year; therefore, you are not entitled to a deduction in the 20XX-YY financial year for the ongoing fees you paid to Entity C in that year. As the expense was incurred in the 20WW-XX financial year, it is deductible in that year and you have advised that you have already claimed a deduction for the fees in your 20WW-XX tax return. | Repayment of a loan | As noted above outgoings that are of a capital, private or domestic nature are not deductible under section 8-1 of the ITAA 1997. In your case, you entered into a loan agreement with Entity B to fund the payment of ongoing fees. | The amount you paid to Entity B as a repayment of a loan is capital in nature and therefore a deduction under section 8-1 of the ITAA 1997 is not allowed. | However as a result of entering into the loan arrangement, it is considered that you acquired contractual rights. These contractual rights are a Capital Gains Tax (CGT) asset (paragraph 108-5(1)(b) of the ITAA 1997). As Entity B did not fulfil its obligations under the agreement, you have a right to recover the amount you paid under the agreement. | Section 102-20 of ITAA 1997 provides that you make a capital gain or capital loss if and only if a CGT event happens. The gain or loss is made at the time of the CGT event. | The CGT event most relevant to your situation is CGT event C2 which happens when your ownership of an intangible CGT asset, such as a debt owed to you, ends by the asset: | (a) being redeemed or cancelled | (b) being released, discharged or satisfied | (c) expiring; or | (d) being abandoned, surrendered or forfeited | It is accepted that CGT event C2 will occur in your case if the receiver officially declares that you will not receive any amount in relation to the debt owed to you or the company is dissolved without you receiving an amount. At that time, you will be considered to have made a capital loss of the amount of the loan repayment. | If you receive an amount in relation to the debt, then the capital loss will be reduced by the amount received. | A capital loss cannot be used to offset income other than capital gains. A capital loss can be claimed against capital gains derived during the same income year. If no capital gain is made that year or the capital gain is less than the capital loss, then the remaining capital loss can be carried forward to future tax returns and progressively claimed against any capital gains made in those years. This process can be repeated until the loss carried forward has been reduced to nil. There is no time limit on how many years you can carry forward net capital losses.

Reasons for decision: Summary: Summary You are not entitled to a deduction in the 20XX-YY financial year for ongoing fees you paid to Entity C in that year. This is because the expense was incurred in the 20WW-XX financial year and so is deductible in that financial year. You advised that you have already claimed a deduction for the fees in your 20WW-XX tax return. You acquired a contractual right by entering into the loan agreement. As Entity B failed to fulfil its obligations under the agreement by not paying your ongoing fees for the project, you have a right to recover the amount you paid under the agreement. You will be entitled to claim a capital loss for that amount if your right to recover the amount ends without you receiving any amount. This will occur if the receiver officially declares that you will not receive any amount in relation to the debt owed to you or the company is dissolved without you receiving an amount. | Detailed Reasoning - Detailed reasoning: Ongoing fees 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 purposes of gaining or producing such income, except where the outgoings are of a capital, private or domestic nature. The Commissioner states in the relevant Product Ruling that the project's ongoing fees are deductible in the income year in which the fees are incurred. Taxation Ruling TR 97/7 discusses the meaning of 'incurred' and clarifies when a deduction is allowable. The ruling states that as a broad guide, you incur an outgoing at the time you owe a present money debt that you cannot escape. There must be more than just an expectation and there must be a right for the payee to demand payment at the present time. In your case, Entity C, the responsible entity for the project, issued a tax invoice for the payment of the fees during the 20WW-XX financial year. As Entity C was the responsible entity for the project and had a right to demand payment for the ongoing fees it is considered at that time you owed a debt that you could not escape. Accordingly, the expense was incurred during the 20WW-XX financial year; therefore, you are not entitled to a deduction in the 20XX-YY financial year for the ongoing fees you paid to Entity C in that year. As the expense was incurred in the 20WW-XX financial year, it is deductible in that year and you have advised that you have already claimed a deduction for the fees in your 20WW-XX tax return. Repayment of a loan As noted above outgoings that are of a capital, private or domestic nature are not deductible under section 8-1 of the ITAA 1997. In your case, you entered into a loan agreement with Entity B to fund the payment of ongoing fees. The amount you paid to Entity B as a repayment of a loan is capital in nature and therefore a deduction under section 8-1 of the ITAA 1997 is not allowed. However as a result of entering into the loan arrangement, it is considered that you acquired contractual rights. These contractual rights are a Capital Gains Tax (CGT) asset (paragraph 108-5(1)(b) of the ITAA 1997). As Entity B did not fulfil its obligations under the agreement, you have a right to recover the amount you paid under the agreement. Section 102-20 of ITAA 1997 provides that you make a capital gain or capital loss if and only if a CGT event happens. The gain or loss is made at the time of the CGT event. The CGT event most relevant to your situation is CGT event C2 which happens when your ownership of an intangible CGT asset, such as a debt owed to you, ends by the asset: (a) being redeemed or cancelled (b) being released, discharged or satisfied (c) expiring; or (d) being abandoned, surrendered or forfeited It is accepted that CGT event C2 will occur in your case if the receiver officially declares that you will not receive any amount in relation to the debt owed to you or the company is dissolved without you receiving an amount. At that time, you will be considered to have made a capital loss of the amount of the loan repayment. If you receive an amount in relation to the debt, then the capital loss will be reduced by the amount received. A capital loss cannot be used to offset income other than capital gains. A capital loss can be claimed against capital gains derived during the same income year. If no capital gain is made that year or the capital gain is less than the capital loss, then the remaining capital loss can be carried forward to future tax returns and progressively claimed against any capital gains made in those years. This process can be repeated until the loss carried forward has been reduced to nil. There is no time limit on how many years you can carry forward net capital losses.

Relevant facts: You hold an investment in a project (the project). | Entity A was the responsible entity for the project until the directors and public officers resigned and Entity C was appointed the responsible entity of the project. | Entity B provided finance for the investors in the project. | Near the end of the 20WW-XX financial year you took out a loan with Entity B to pay ongoing fees for the project. The loan repayment was subsequently discounted so the amount required to be paid was reduced. | During the 20XX-YY financial year you repaid the loan to Entity B. | You claimed a deduction for the fees in your 20WW-XX tax return. | A receiver has been appointed to Entity B. | Entity C has advised you that they have not been paid the ongoing fees by Entity B and that you were legally required to pay the ongoing fees to the rightful owner of the project. | Entity C also advised that investors who fail to pay the fees will be subject to legal action as the viability of the project could be under treat. | During the 20XX-YY financial year you paid Entity C the amount of the ongoing fees. | You have contacted the receiver of Entity B seeking to reclaim the amount paid as repayment of the loan but you believe that it is unlikely you will receive any amount.