Private ruling: deductibility of payment for rectification work
Published: November 2012
Ruling period: Year ended 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Are expenses paid by you, in relation to rectification work required which were originally done by a company, deductible to you? | A1: No


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

Reasons for decision: Detailed Reasoning - Detailed reasoning: Section 8-1 of the Income Tax Assessment Act 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, or relate to the earning of exempt income. The Courts and Tribunals have consistently held that a deduction is not allowable for company expenses paid by directors as they have not been incurred in gaining or producing assessable income in the taxpayer's capacity as a director. The expenses were not incurred by the taxpayer in earning his assessable income but rather the income of the company (FC of T v Munro (1926) 38 CLR 153). In Case U134 87 ATC 780, expenses incurred on behalf of a family company by a director of the company were not deductible. The expenses had not been incurred in gaining or producing his assessable income in his capacity as a director and there was not a sufficient connection between the expenses and dividend income he received as a shareholder, nor was there a sufficient connection between the expenses and his business of a shareholder holding shares in the family company. In Case L86 (1961) 11 TBRD, the taxpayer, a public accountant, paid during the year of income amounts to a company, which he had formed and of which he was the managing director, for the purpose of enabling it to pay its debts. The taxpayer claimed that it was necessary for him to keep faith with his many business associates, who had assisted the company with credit, because of his reputation and that if he had not contributed money to the company to pay its creditors his reputation would have suffered and it would not have been practicable for him to continue in the practice of his profession. It was held that the deduction was not allowable. In your case, you paid company expenses resulting from rectification work organised and billed by the authority. These expenses were incurred by the company and paid on behalf of the company and are not referable to your income producing activities and as such, no deduction is allowable to you.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: The company was a registered organisation with an authority. | The company conducted relevant work. | You were the nominee supervisor, director of the company and held the same licence. | The company's licence was cancelled. | The company was deregistered. | After deregistration the authority issued a tax invoice for a rectification claim that was settled for faulty work completed by the company prior to the licence being cancelled. | Pursuant to the relevant Act, you are liable for these debts as the company is now insolvent. | You have an arrangement with the authority to pay off the debt on a periodic basis.