Partnership deductions - necessary connection to assessable income

Is the taxpayer, a partner in a partnership able to claim a deduction for losses incurred by the partnership under subsection 92(2) of the Income Tax Assessment Act 1936 (ITAA 1936)?

No. There is no partnership loss available to be claimed by the taxpayer under subsection 92(2) of the ITAA 1936 as the expenses incurred by the partnership are not deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

The taxpayer is a partner in a partnership. The partnership obtained a loan, the loan funds being used by a discretionary trust of which the taxpayer was a beneficiary. Expenses incurred in respect of the loan (interest, bank charges and borrowing costs) were claimed as a deduction by the partnership.

The partnership did not derive income from any source during the year of income and as a result of claiming the loan expenses a loss was incurred.

The partnership did not receive income either directly or indirectly, by way of interest or otherwise as a result of having allowed the trust to use the loan funds.

The partnership's claim for a deduction under section 8-1 of the ITAA 1997 was disallowed.

Under subsection 92(2) of the ITAA 1936 a resident partner can claim a deduction for their individual interest in any partnership loss. In broad terms, a partnership loss is defined in section 90 of the ITAA 1936 as the excess of the allowable deductions over the assessable income of the partnership calculated as if the partnership were a taxpayer who was a resident.

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income or is necessarily incurred in carrying on a business except where the outgoings are of a capital, private or domestic nature. The test of deductibility under paragraph 8-1(1)(a) of the ITAA 1997 is that 'it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income' ( Ronpibon Tin NL and Tongkah Compound NL v. FC of T (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431).

The funds borrowed by the partnership were not used for an income producing purpose by the partnership. No income was derived by the partnership from the on-lending of the funds to the discretionary trust. Consequently, the expenses incurred by the partnership in respect of the loan (interest, bank charges and borrowing cost) are not allowable as deductions to the partnership under section 8-1 of the ITAA 1997.

There is no partnership loss available to be claimed by the taxpayer under subsection 92(2) of the ITAA 1936 as the expenses incurred in respect of the loan by the partnership are not deductible under section 8-1 of the ITAA 1997.