Private ruling: Deductions - card payment fees
Published: October 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 01 July 2011

Ruling: Q1: Are you entitled to claim a deduction for the card payment fees related to your pay as you go (PAYG) instalments? | A1: No

Relevant facts and circumstances: You are a sole trader. You paid your quarterly business activity statements (BAS) with your credit card. Your BAS liabilities relate to your PAYG withholding for your employee and your PAYG instalments. You incurred card payment fees for these transactions.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 25-5 | Income Tax Assessment Act 1997 paragraph 25-5(1)(a) | Income Tax Assessment Act 1997 paragraph 25-5(2)(c) | Income Tax Assessment Act 1997 subsection 25-25(1) | Income Tax Assessment Act 1997 section 995-1

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 to the extent that they are of a capital, private or domestic nature, or relate to the earning of exempt income. A number of significant court decisions have determined that, for an expense to satisfy the tests in section 8-1 of the ITAA 1997, it must have the essential character of an outgoing incurred in gaining assessable income ( Lunney v. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 ATR 166) and there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income ( Ronpibon Tin N.L.Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236). As such, it is necessary to determine if there is a sufficient connection between the card payment fee and the earning of assessable income. This question will generally be answered by a careful analysis of the objective circumstances that gave rise to the liability being discharged by the use of the card. In your case, you incurred the card payment fees by using your credit card to pay your PAYG instalments. A careful analysis of the character of the fee indicates that it is not an expense incurred in earning your assessable income. It is a fee incurred as a result of a payment made by you after you had earned your assessable income. Therefore, the card payment fees are not deductible under section 8-1 of the ITAA 1997. | Detailed Reasoning - Managing tax affairs: Subsection 25-5(1) of the ITAA 1997 allows deductions for expenditure incurred by a taxpayer to the extent that it is for managing their tax affairs. Section 995-1 of the ITAA 1997 defines 'tax' to mean income tax assessed under either the ITAA 1997 or the Income Tax Assessment Act 1936 and imposed by any other act. The context and structure of section 25-5 of the ITAA 1997 makes it clear that 'tax affairs' is intended to have a wide operation. The section is wide enough to cover a card payment fee incurred as a direct consequence of paying an income tax liability. However, paragraph 25-5(2)(c) of the ITAA 1997 expressly denies a deduction for 'expenditure for borrowing money', including payments of interest, in respect of money borrowed and spent on managing certain aspects of your tax affairs, including payments of tax or amounts withheld or payable under Part 2-5 or Part 2-10 in Schedule 1 to the Taxation Administration Act 1953 . If a taxpayer uses a credit card and that use results in the card issuer providing credit, then the taxpayer has borrowed money from the credit card provider (Taxation Ruling TR 2000/2 at paragraph 43). Based on the facts in your case, the card payment fee is incurred by you as a necessary step in the process of borrowing money from the credit card provider. It is simply a cost of the borrowings. Although you have incurred an outgoing to manage your tax affairs within the meaning of paragraph 25-5(1)(a) of the ITAA 1997, it is also 'expenditure for borrowing money' to pay for expenses incurred in managing your tax affairs as in paragraph 25-5(2)(c) of the ITAA 1997. Therefore, the card payment fees are not deductible under section 25-5 of the ITAA 1997. | Detailed Reasoning - Borrowing expenses: Subsection 25-25(1) of the ITAA 1997 allows a deduction for expenditure you incur for 'borrowing money' to the extent that you use the money for the purpose of producing assessable income. If a taxpayer uses a credit card and that use results in the card issuer providing credit, then the taxpayer has borrowed money from the credit card provider (Taxation Ruling TR 2000/2 at paragraph 43). The proper characterisation of a card payment fee is a question of fact to be decided on a case by case basis by reference to the precise circumstances of each case. Based on the facts in your case, the card payment fee incurred by you was a necessary step in the process of borrowing money from the credit card provider. It was an expenditure incurred in borrowing money to pay your PAYG instalments. Therefore, a careful analysis of the character of the fee indicates that it was not an expense incurred in earning your assessable income. It was a payment out of income after it had been earned. It follows that the fee was not incurred for the purpose of producing your assessable income. Therefore, the card payment fees are not deductible under section 25-25 of the ITAA 1997.

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