Private ruling: Assessable income and Deductions
Date of advice: 11 December 2019
Published: February 2020
Ruling period: Financial year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are the amounts that were found to be incorrect payments received and repayable by the taxpayer due to the outcome of compliance activities assessable in the 20XX financial year? | A1: No. The amounts that have been incorrectly received by the taxpayer and are required to be repaid are not assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), as the taxpayer was never beneficially entitled to receive these amounts. There are also no other provisions within the ITAA 1997 that would include the amounts as being statutory income under section 6-10 of the ITAA 1997. Therefore, the amounts are not assessable income. | Q2: Is the taxpayer entitled to a deduction in relation to the reduced service fees only? | A2: Yes. Section 8-1 of the ITAA 1997 provides a deduction from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income; or it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. An expense will be incurred where there is a presently existing liability to which a taxpayer is definitively committed. Based on the terms of the contracts the fees were set as a proportion of the professional fees earned by the taxpayer. As a result of the compliance activities the taxpayer is only entitled to a deduction based on the recalculated and reduced amount of fees. The difference between the service fee initially invoiced and the reduced service fee is not an amount that was incurred by the taxpayer. | Q3: Will business A and business B only be assessable on the reduced service fee? | A3: Yes. The amounts invoiced to the taxpayer are to be recalculated to take into account the incorrect payments received by the taxpayer. Business A and B will only be assessable on the reduced service fee as the taxpayer was never entitled to the incorrect payments received. Business A and B were not entitled to a service fee on that amount. They will only be entitled to the reduced service fee.

Relevant facts and circumstances: The taxpayer is a professional that was contacted to provide services out of several locations. The businesses had entered into contracts with the taxpayer where they provided premises, staff and administration services in exchange for a services fee which was based on the professional fees earned by the taxpayer. The taxpayer was the subject to compliance activities where it was found that they had been in receipt of payments they were not entitled to. The taxpayer's required to repay the incorrectly paid amounts. The fees paid to businesses will be recalculated and reduced to take into account the incorrect payments received (reduced service fee). The businesses have already made partial payments back to the taxpayer in relation to the difference between the fees initially invoiced and the reduced fees. The remainder of the amount will be recorded as a loan from the taxpayer to the business.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 8-1