Private ruling: Deductibility and apportionment of expenses.
Date of advice: 1 December 2015
Published: May 2016
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a deduction for fees on the basis that the extent to which they are incurred in gaining or producing your assessable income is based on the time spent in relation to deriving assessable income compared to time spent in relation to deriving exempt income? | A1: Yes.

Relevant facts and circumstances: You are an early stage venture capital limited partnership. You did not derive any exempt income from your Eligible venture capital investments (EVCI)s; however, you derived assessable interest income on monies held in the bank ready to invest in EVCIs. You incurred fees to manage both your ECVIs and excess monies held in the bank. Assumption(s) None.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 subsection 8-1(1) | Income Tax Assessment Act 1997 paragraph 8-1(2)(c)

Reasons for decision: Summary: You can deduct 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 purposes of gaining or producing your assessable income (subsection 8-1(1) of the Income tax Assessment Act 1997 (ITAA 1997)). However, you cannot deduct a loss or outgoing to the extent that it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income (paragraph 8-1(2)(c) of the ITAA 1997). The words ‘to the extent that’ indicate that an expense may be apportioned if it is partly deductible and partly non-deductible. In Ronpibon Tin v. FC of T (1949) 78 CLR 47; 4 AITR 236 ( Ronpibon Tin ) the High Court expressed the view that ... there are at least two kinds of items of expenditure that require apportionment. These were generally: those items that are capable of dissection; and those that cannot be dissected but should be apportioned on the basis that they serve more than one object indifferently. In Ronpibon Tin the High Court held (CLR at 59; AITR at 247) that the correct method for apportioning an expense is a question of fact. However, the method adopted in any particular case must be both fair and reasonable in all the circumstances, and should reflect the extent to which the expense is incurred to gain or produce assessable income, and the extent to which it is incurred in relation to gaining or producing exempt income. In your application, it is suggested that a fair and reasonable method of apportioning the fees is to apportion them based on actual exempt income and assessable income derived (the actual income method). In the alternative, you suggest a method based on the relative value of investments (the value of investments method). However, these methods of apportionment do not fairly or reasonably reflect the extent to which the expenses were incurred to gain or produce assessable interest income. Even though no exempt income was derived, the expenses were incurred, in the main, in the pursuit of such exempt income. As such, a ‘time spent’ method of apportionment is considered to give a fair and reasonable outcome in your circumstances.