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Can a taxpayer claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for amounts paid to an approved deposit-taking institution (ADI) in respect of a fee payable by the ADI under the Australian Government Guarantee Scheme for Large Deposits and Wholesale Funding (the Guarantee Scheme)?

Yes. A taxpayer can claim a deduction under section 8-1 of the ITAA 1997 for amounts paid to an ADI in respect of a fee payable by the ADI under the Guarantee Scheme.

Under the Guarantee Scheme, an eligible ADI can obtain a government guarantee for certain deposit balances for a customer that total more than $1 million.

The eligible ADI pays a fee to the Reserve Bank of Australia for this guarantee. The fee is payable on a monthly basis. The Guarantee Scheme rules do not prevent the eligible ADI from passing the fee or some component of it on to the customer. This could be done either by way of an increase in an existing fee or as a new fee.

The taxpayer is a depositor with an eligible ADI. The total amount the taxpayer holds in deposit accounts with the eligible ADI exceeds $1 million. The funds are held in interest-earning accounts. Under the Guarantee Scheme, the Australian Government has guaranteed the deposits in the accounts held by the taxpayer. The eligible ADI regularly pays a fee to the Reserve Bank for this guarantee. The taxpayer periodically pays an amount to the eligible ADI in respect of the fee the eligible ADI pays to the Reserve Bank.

Section 8-1 of the ITAA 1997 allows a deduction for losses or outgoings to the extent they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for that purpose. However, a deduction is not allowable where the losses or outgoings are of capital or of a capital, private or domestic nature.

Outgoings to operate, maintain or protect an income producing asset can be outgoings incurred in gaining or producing assessable income (see for example comments in the majority judgment in Australian National Hotels Limited v. Federal Commissioner of Taxation (1988) 19 FCR 234; 88 ATC 4627; (1988) 19 ATR 1575).

In the present case, the fees paid by the taxpayer have the character of outgoings incurred in operating, maintaining or protecting the taxpayer's income producing investments.

They are considered to be outgoings incurred in gaining or producing the taxpayer's assessable income.

However, outgoings of capital or of a capital nature will not be deductible under section 8-1 of the ITAA 1997, even if they are incurred in gaining or producing assessable income.

The decision of the High Court 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 ( Sun Newspapers ) is the leading Australian authority on the distinction between revenue and capital expenditure.

In Sun Newspapers , Dixon J stated that there are three matters to be considered when deciding whether expenditure is revenue or capital in nature. These are: (a) the character of the advantage sought by making the outgoing (b) the manner in which the advantage is to be used, relied upon or enjoyed by the taxpayer, and (c) the means adopted to obtain the advantage.

The character of the advantage sought by making the outgoing is the chief, if not the critical factor that distinguishes revenue from capital outgoings ( GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1). To a similar end, in Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 8 ATD 190; (1946) 3 AITR 436 Dixon J said that the distinction between an outgoing of capital and one on account of revenue 'depends on what the expenditure is calculated to effect from a practical and business point of view'.

In the present case, the fees paid by the taxpayer are periodic outlays relating to the operation maintenance or protection of the taxpayer's income producing investments for a particular and limited period. They are not once only outgoings to secure a benefit or advantage of an enduring nature.

In the circumstances, they are not considered to be capital or capital in nature.

As the fees are not capital or capital in nature, and are incurred in gaining or producing assessable income, the fees are deductible under section 8-1 of the ITAA 1997.