Tax-related expenses - penalty not deductible

Is the taxpayer entitled to a deduction under section 25-5 of the Income Tax Assessment Act 1997 (ITAA 1997) for payment of a penalty imposed on the taxpayer as a director of a company under subsection 222AQA(2) of the Income Tax Assessment Act 1936 (ITAA 1936)?

No. The taxpayer is not entitled to a deduction under section 25-5 of the ITAA 1997 for payment of a penalty imposed on the taxpayer as a director of a company under subsection 222AQA(2) of the ITAA 1936.

A company of which the taxpayer was a director entered into an agreement with the Commissioner of Taxation under section 222ALA of the ITAA 1936 to pay specified amounts, on specified days, for the purpose of discharging a specified liability.

As the company did not pay the specified amounts as required under the agreement, a penalty equal to the balance payable under the agreement was imposed on the taxpayer as a director of the company under subsection 222AQA(2) of the ITAA 1936.

The penalty was subsequently paid by the taxpayer.

Subsection 25-5(1) of the ITAA 1997 allows a deduction for certain types of tax-related expenses. These include costs related to managing tax affairs, the costs of complying with obligations imposed by a Commonwealth law, or the general interest charge.

However, subsection 26-5(1) of the ITAA 1997 states that 'an amount (however described) payable, by way of penalty, under an Australian law or a foreign law', is not deductible under either the ITAA 1997 or the ITAA 1936.

The amount payable by the taxpayer under subsection 222AQA(2) of the ITAA 1936 is imposed as a penalty. Therefore, as a result of the operation of subsection 26-5(1) of the ITAA 1997, this amount is not deductible under subsection 25-5(1) of the ITAA 1997 or any other provision.