Private ruling: Deductibility of partnership expenses after cessation
Published: October 2011
Ruling period: Year ended 30 June 2009 | Year ended 30 June 2010
Date scheme commenced: 1 July 2008

Ruling: Q1: Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for partnership business expenses, incurred by the partnership whilst in business, that you paid after the cessation of your partnership? | A1: No | Q2: Are you entitled to a deduction under section 40-880 of the ITAA 1997 for partnership business expenses, incurred by the partnership whilst in business, that you paid after the cessation of your partnership? | A2: No | Q3: Are you entitled to a deduction for interest on an overdraft that the partnership incurred prior to the cessation of your partnership business? | A3: No | Q4: Are you entitled to a deduction for your partnership share of interest on an overdraft that you incurred after the cessation of your partnership business? | A4: Yes


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

Reasons for decision: Summary: 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, except where the outgoings are of a capital, private or domestic nature. Taxation Ruling TR 97/7 explains the meaning of 'incurred'. Paragraph 5 states, as a broad guide, that 'you incur an outgoing at the time you owe a present money debt that you cannot escape'. Paragraph 6 provides, in accordance with case law, that: · a loss or outgoing may be incurred, even though it remains unpaid, provided the taxpayer is definitively committed in the income year · it is not sufficient if the liability is merely contingent or no more than pending, threatened or expected, no matter how certain it is in the income year that the loss or outgoing will be incurred in the future; and · a taxpayer may have a presently existing liability, even though the amount of the liability cannot be precisely ascertained, provided it is capable of reasonable estimation. The cost of advertising, fuel and electricity is deductible at the time the expenditure is incurred (under section 8-1 of the ITAA 1997). Whilst the partnership was in existence, it was the partnership that incurred these expenses. Any rent pursuant to a lease agreement which is incurred by a partner for a period after a partnership business ceases, as a direct result of the carrying on a former business, will generally be deductible in the year it is incurred. However, you state that the rent in question was the existing rent at the time of the cessation of the partnership. Therefore, the rent was also an expense incurred by the partnership. Expenses incurred by a partnership are deductible to the partnership in the year in which they were incurred. We acknowledge that, as a partnership is not a separate legal entity, each partner is jointly and severally liable for the debts of the partnership. However, where a partnership incurs expenditure that qualifies for deduction under section 8-1 of the ITAA 1997, the expenditure is taken into account in the calculation of the net income of the partnership (or partnership loss), as the case may be. The net income or loss of the partnership is then distributed to the partners in accordance with the partnership agreement. Each partner is not deemed to have incurred a share of the expenditure. | Detailed Reasoning - Business related costs under section 40-880 of the ITAA 1997: Subject to the limitations and exceptions contained in subsections 40-880(3) to 40-880(9) of the ITAA 1997, subsection 40-880(2) of the ITAA 1997 provides that you can deduct, in equal proportions over a period of 5 income years starting in the year in which you incur it, capital expenditure you incur: (a) in relation to your business (b) in relation to a business that used to be carried on (c) in relation to a business proposed to be carried on, or (d) to liquidate or deregister a company of which you were a member, to wind up a partnership of which you were a partner or to wind up a trust of which you were a beneficiary that carried on a business. The leading authority on the distinction between revenue and capital outgoings is the judgment of Dixon J in Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 23; 1 AITR 403. Dixon J set out three matters to be considered (at CLR 363): (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it, that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment. In applying these factors to the expenses of rent, fuel, electrcity and advertising, clearly they were recurrent expenses and did not provide an enduring benefit for the business. Rather, they were day-to-day running expenses and not capital expenses. Therefore, they are not deductible under section 40-880 of the ITAA 1997. | Detailed Reasoning - Overdraft Interest imposed before the cessation of the partnership business: Like other expenses incurred before the cessation of the partnership business, overdraft interest imposed before the cessation of the partnership business was also an expense incurred by the partnership and deductible to the partnership in the year in which it was incurred. This is taken into account in the calculation of the net income of the partnership (or partnership loss) in that year. | Detailed Reasoning - Overdraft Interest imposed after the cessation of the partnership business: Taxation Ruling TR 2004/4 examines the deductibility of interest after the cessation of the income earning activities. You may still be entitled to a deduction for recurrent interest expenses incurred after the cessation of your previous income earning activity. Paragraph 10 of TR 2004/4 states that the outgoing will still have been incurred in gaining or producing the assessable income if the occasion of the outgoing is to be found in whatever was productive of assessable income of an earlier period. However, the nexus between the interest expense and the relevant income earning activities will be broken where: · you have the ability to repay the loan but choose not to · you make a conscious decision to extend the loan in order to derive an ongoing commercial advantage unrelated to the prior income earning activities which resulted in the debt. In your situation, it is accepted that any interest on the overdraft imposed after the cessation of the partnership business was incurred by you as a direct result of the carrying on of your former business. As such, the occasion of the expenses in question is to be found in the business operations when you conducted business and not after the business ceased. Provided you did not have the ability to repay the overdraft in a lump sum and it was not a conscious decision to extend the overdraft, you are entitled to a deduction for your 50% share of any interest you incurred, that was imposed after the cessation of the partnership business, in the year it is incurred.

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 arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: | · your application for private ruling; and | · further information provided by you. | You carried on a business in partnership with your spouse. | The partnership business ceased trading in the year ended 30 June 20XX. | There were liabilities of the partnership that still existed after cessation of the partnership that were only made known to you when debt collectors informed you of the existence of the debts. | You have since become aware of the partnership's liabilities and have proceeded to meet these financial obligations. Your former partner has made no further contribution to the outstanding liabilities of the partnership. | The partners continued to be liable for expenses of the partnership after 30 June 20XX. The payments made by you exclusively include rent, fuel, electricity, advertising and overdraft interest. | You state that you also made payments on the 'Partnership credit card' | The rent paid was the existing rent at the time of the cessation of the partnership. | You were locked out of the business premises by the landlord and had no access to stock or business records. For this reason records have not been readily available for the history of rent paid, other than documents relating to rental arrears. | The fuel payments were made when you were made aware of the outstanding partnership debt by your supplier. It was the only garage the business used for fuel and there was a long standing business relationship between the partnership and the supplier. | You have provided documentation to substantiate some of the payments made to satisfy the partnership debts. | You have provided documentation showing repayments for the partnership's overdraft account. The account was in the name of the partnership. | You have not provided a breakdown of the overdraft interest. | You believe that the balance of the overdraft account at cessation of the business was the same as the balance before interest charges as the overdraft facility was not used after the cessation of the business.