Private ruling: Indemnity payment
Date of advice: 15 January 2026
Published: 2 March 2026
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is your indemnity payment to cover the cost of replacing equipment deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) because it is revenue in nature in the relevant income year? | A1: Yes. Section 8-1 of the ITAA 1997 allows a deduction for losses or outgoings to the extent they are incurred in gaining or producing assessable income, provided they are not capital, private, or domestic in nature. You entered into an agreement with the Company which included an indemnity clause requiring you to compensate the Company for any claims or damages arising from the performance of your services. While the underlying equipment is a capital asset for its owner, your indemnity payment is incidental to carrying on your business and does not create or improve a capital asset for you. Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions (TR 97/7) provides the expense will be incurred to you when a present and enforceable obligation to pay arises. This occurred through the invoice raised by the Company to you on the relevant date. Accordingly, the indemnity payment is revenue in nature and deductible under section 8-1 of the ITAA 1997 in the relevant income year.

Relevant facts and circumstances: You entered into an agreement to provide business services to the Company. You agreed to indemnify the Company for any claims and damages that may arise directly from the performance of your services. The Company then entered into an agreement with a Third Party to hire equipment to be used by you and the Company under the existing consultancy agreement. The Third Party owns the equipment. You are not related to the Company, or the Third Party. The equipment was damaged while performing your business services. The equipment underwent assessment locally and overseas to determine whether the equipment could be repaired, rebuilt or scrapped and replaced. After quotes were provided, you and the Company decided to replace the equipment rather than repair it. The Company advised you in writing that their insurances would not cover the replacement cost amount. The Third Party raised an invoice to the Company. The Company raised an invoice to you on the relevant date with 30 days to pay.

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