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Are warranty costs incurred after the cessation of a partnership business deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The partnership is entitled to a deduction under section 8-1 of the ITAA 1997 for warranty costs. There is a direct nexus between the warranty costs and the income activities of the partnership business.

The partnership was involved in the business of importing and selling goods. These goods were sold with a ninety day warranty.

When the partnership business ceased trading it remained liable for any future warranty costs and incurred warranty costs after the business had ceased.

No income was derived by the partnership in the year the warranty costs were incurred.

Section 8-1 of the ITAA 1997 allows a deduction for all losses or outgoings to the extent that they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, no deduction is allowed to the extent that the losses or outgoings are of a capital, private or domestic nature or are necessarily incurred in gaining or producing exempt income.

In Placer Pacific Management Pty Ltd v. FC of T 95 ATC 4459; (1995) 31 ATR 253 the Full Federal Court had to consider the deductibility of expenses incurred subsequent to the sale and termination of a business. The Court stated that a deduction would not be denied merely because a business had ceased, nor because the expense was incurred in a year later than the income was incurred. If the occasion for the business outgoing could be found in the business operations directed towards the gaining or producing of assessable income, that loss or outgoing would be deductible unless it is capital or of a capital nature.

The partnership was liable for any warranty costs incurred after the business ceased. The warranty costs they incurred have a direct nexus with the assessable income of the partnership in the previous financial year and are therefore deductible under section 8-1 of the ITAA 1997.