Private ruling: Deductibility of unwanted alarm charges.
Published: November 2012
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction for unwanted alarm charges incurred? | A1: Yes.

Relevant facts and circumstances: You run a hotel. The hotel contains cooking facilities in the common areas. Smoke generated from guest's cooking and cigarettes often set off the fire alarms. This occurs numerous times per year. When the fire department attends in response to an alarm and there is no fire, they charge you an 'unwanted alarm charge'. The charge is imposed under the Fire and Rescue Service Act 1990 as a service charge, and is not a fine or penalty.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 26-5.

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for 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. However, you cannot deduct a loss or outgoing to the extent that it is capital, or of a private or domestic nature. Section 26-5 of the ITAA 1997, is the provision which deals specifically with the deductibility of fines and penalties. It states that you cannot deduct an amount (however described) payable, by way of penalty, under an Australian law or a foreign law. Taxation Determination TD 94/84 discusses the definition of the word 'penalty' and states that it is not defined in the ITAA 1997 and, in its context in section 26-5 of the ITAA 1997, bears its ordinary meaning. According to dictionary meanings, a 'penalty' is a punishment (which may be pecuniary) for a breach of the law. Section 144 of the Fire and Rescue Service Act 1990 states under 'Charges for services', that the owner of prescribed property is not liable for any charge for a service of attending to a fire in or on that property or endangering that property, other than an unwanted alarm charge. As the amounts paid are not a fine or penalty, but a charge for providing a service, it may be deductible under section 8-1 of the ITAA 1997 if the requisite connection with income exists. The principles in relation to whether expenditure is deductible as expenditure incurred in gaining or producing assessable income are well established through case law. The case Ronpibon Tin NL & Tong Kah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47 states that for an outgoing to be deductible from your assessable income, the expenditure must have been incidental and relevant to the gaining or producing of your assessable income. Several case authorities point to the need to examine the scope of the operations undertaken by the taxpayer for the production of assessable income, to determine whether the relevant expenditure is incidental and relevant to the derivation of assessable income from those operations. In Commissioner of Taxation v Cooper (1991) 29 FCR 177 ( Cooper ), Hill J said at p 198: 'It will often, therefore, be necessary to analyse with some care what the operations or activities are that are regularly carried on by the taxpayer for the production of income, and to determine whether the outgoings (or where relevant the losses) are incidental and relevant to those operations or activities'. As noted by Goldberg J in Morris v. Commissioner of Taxation (Cth) [2002] FCA 616;2002 ATC 4404;50 ATR 104: 'It should be emphasised that the relevant inquiry to be made is whether the outgoing was incurred in the course of deriving assessable income, and not whether it was incurred for the purpose of deriving assessable income. Your income producing activity is the running of a hotel, and it is these facilities which are utilised by your customers. As a result of this use, you incur costs associated with a service provided by the fire department for unwanted fire alarms. It is considered that it is the nature of your income earning activity which gives rise to the expenditure you incur. There is a direct nexus between your income producing activity and the expenditure. As such the unwanted fire alarm charges are deductible expenses.

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