Private ruling: Deductibility of expenses
Date scheme commenced: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows you to deduct any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income. However, you cannot deduct a loss or outgoing under section 8-1 of the ITAA 1997 to the extent that the loss or outgoing is capital or private or domestic in nature.

Ruling: Question and answer: | Are the payments you made deductable? | No.


Relevant legislative provisions: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows you to deduct any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income. However, you cannot deduct a loss or outgoing under section 8-1 of the ITAA 1997 to the extent that the loss or outgoing is capital or private or domestic in nature. | The distinction between capital and revenue expenditure was considered in Sun Newspapers Ltd and Associated Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 87; (1938) 1 AITR 403. Dixon J held that the difference between capital and revenue expenditure corresponds to the difference between the business structure and the business operations. His Honour when on to say that in relation to making the distinction between capital and revenue: | There are, I think, three matters to be considered, (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. | His Honour, in providing these characteristics of the capital or revenue nature of expenditure, also considered the judgement of Viscount Cave in British Insulated and Helsby Cable Ltd v. Atherton [1926] AC 205. At page 213 of this case Viscount Cave stated that expenditure was capital in nature when: | ...an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. | In your case, your payments to both the separate entities created a right that enables you to receive a future income stream. This right has enduring benefit to you and was obtained via a one off payment that secured the future use of the right. The right is therefore a capital asset. | Consequently, you cannot deduct those payments under section 8-1 of the ITAA 1997 because they have a capital nature. | General taxation advice | The following information is provided as guidance only. | A capital payment forms part of the cost base of a right to receive commission. | These payments may be taken into consideration when any loss or gain is made when the right to receive the income ceases. | This advice provides you with the following level of protection: | Interest and penalty protection | You can rely on this advice to provide you with protection from interest and penalties in the way explained below. | If the advice turns out to be incorrect and you underpay your tax as a result, you will not have to pay a penalty. Nor will you have to pay interest on the underpayment provided you reasonably relied on the advice in good faith. However, even if you don't have to pay a penalty or interest, you will have to pay the correct amount of tax.

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows you to deduct any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income. However, you cannot deduct a loss or outgoing under section 8-1 of the ITAA 1997 to the extent that the loss or outgoing is capital or private or domestic in nature. The distinction between capital and revenue expenditure was considered in Sun Newspapers Ltd and Associated Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 87; (1938) 1 AITR 403. Dixon J held that the difference between capital and revenue expenditure corresponds to the difference between the business structure and the business operations. His Honour when on to say that in relation to making the distinction between capital and revenue: There are, I think, three matters to be considered, (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. His Honour, in providing these characteristics of the capital or revenue nature of expenditure, also considered the judgement of Viscount Cave in British Insulated and Helsby Cable Ltd v. Atherton [1926] AC 205. At page 213 of this case Viscount Cave stated that expenditure was capital in nature when: ...an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. In your case, your payments to both the separate entities created a right that enables you to receive a future income stream. This right has enduring benefit to you and was obtained via a one off payment that secured the future use of the right. The right is therefore a capital asset. Consequently, you cannot deduct those payments under section 8-1 of the ITAA 1997 because they have a capital nature. | Detailed Reasoning - The following information is provided as guidance only.: A capital payment forms part of the cost base of a right to receive commission. These payments may be taken into consideration when any loss or gain is made when the right to receive the income ceases. | Detailed Reasoning - Interest and penalty protection: You can rely on this advice to provide you with protection from interest and penalties in the way explained below. If the advice turns out to be incorrect and you underpay your tax as a result, you will not have to pay a penalty. Nor will you have to pay interest on the underpayment provided you reasonably relied on the advice in good faith. However, even if you don't have to pay a penalty or interest, you will have to pay the correct amount of tax.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | This ruling applies for the following period: Year ended 30 June 2009 The scheme commenced on: 1 July 2008 Relevant facts You made payments to a number of people to secure an income stream. | Relevant legislative provisions Income Tax Assessment Act 1997 Section 8-1 Reasons for decision