Private ruling: Administration costs
Date of advice: 10 November 2015
Published: November 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a deduction under section 40-880 Income Tax Assessment Act 1997 (ITAA 1997) for costs of administration incurred in relation to the winding-up of the company? | A1: Yes. | Q2: Are you entitled to a deduction for the interest expenses incurred? | A2: No.

Relevant facts and circumstances: You were a shareholder and director of a company. The company was the trustee company for a trust which operated businesses. The company was forced into voluntary administration and an administrator was appointed to sell the assets. A number of fees were incurred during the time that the administrator had taken over operations of the business, including but not limited to legal fees and accounting fees. As director you were required to fund the administration costs associated with winding up the business, as the business did not have the funds to be able to pay for these costs. You continue to incur interest on bank loans originally associated with the purchase and operation of the businesses as there was not enough funds upon the wind up of the company to repay the loans in full. You, acting as director, beneficiary and guarantor, derived assessable income in the form of trust distributions. You are not in the business of guaranteeing loans.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 40-880 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 subsection 960-130(1)

Reasons for decision: Detailed Reasoning - Administration costs: Subject to the limitations and exceptions contained in subsections 40-880(3) to (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; or (b) in relation to a business that used to be carried on; or (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. Subsection 960-130(1) of the ITAA 1997 describes a member of company as a stockholder in the company. In your case, you were a shareholder in a company which was forced into voluntary administration. You incurred expenses in regards to the winding up of the company. Therefore, you are entitled to a deduction under section 40-880 of the ITAA 1997 for the expenses incurred over a period of 5 income years from the year the expenditure was incurred. | Detailed Reasoning - Interest: Section 8-1 of the 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, 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. Taxation Ruling TR 96/23 at paragraph 45 discusses the deductibility of payments made under guarantee. The ruling states that liabilities that arise under contracts of guarantee will not be deductible under section 8-1 of the ITAA 1997 if the provisions of guarantees and losses or outgoings under the guarantees are not regular and normal incidents of the taxpayers' income earning activities. The ruling further states that if the provision of guarantees is not a regular and normal incident of the taxpayers income earning activities, any payments made under those guarantees will be capital in nature. In your case, you incurred interest expenses in relation to bank loans of the business. As per Case U134 you are not entitled to a deduction for the interest incurred as they are not referable to your income producing activities as a director or shareholder but rather in the income producing activities of the company. Additionally, as you are not in the business of guaranteeing loans, you are not entitled to a deduction for the expenses incurred in your position as guarantor as they are capital in nature. Therefore, you are not entitled to a deduction for the interest incurred on the bank loans in your capacity as a director, beneficiary or guarantor.