A recent Administrative Appeals Tribunal (AAT) decision in the matter of Desalination Technology Pty Ltd (DST) and Commissioner of Taxation [2013] resulted in a rare win in favour of the taxpayer.

Specifically, the AAT decision related to when the expenditure was deemed incurred within the meaning of Section 73B (14) of the Income Tax Assessment act 1936 (ITAA1936) during the relevant income year.

Background

In the 2009 income year, DST paid only $149,964 of an invoiced total of $1,065,625 from Innovative Design Technologies Group Pty Ltd (IDTG). The balance amount was settled by debiting an inter-company loan account between DST and IDTG, as detailed in a service agreement between DST and IDTG from May 2010.

Issue

The main issue in this case was to determine whether DST was eligible for a tax offset of $363,281in the 2009 income year. The Commissioner only allowed $56,236 on grounds that the balance corresponded to expenditure amounts that had not been ‘incurred’.

Decision

The AAT ruling declared that the expenditure was in fact incurred during the 2009 financial year given that DST has a debt to IDTG for the value of the invoiced work, as evidenced by the service agreement. The work was seen as being financed by IDTG due to lending of the invoiced amount to DST so that the invoices did not remain outstanding.

Key Points

The payment arrangements surrounding this case were not straightforward and could have resulted in a less than desirable outcome for DST, as proven by other recent AAT decisions. It is highly recommended that companies aim to ‘keep it simple’ by having an invoice and its matching evidentiary payment document, such as a bank statement for easy proof of payment and determining whether expenditure was in fact ‘incurred’ in a relevant financial year.

The transcript for this matter is available here.