Issue
Can the income injection test, pursuant to Division 270 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936), apply to a deduction for a bad debt where the debt was incurred prior to the date the scheme commenced?
Decision
Yes. The income injection test pursuant to Division 270 of Schedule 2F to the ITAA 1936 can apply to bad debts where the debt was incurred prior to the date the scheme commenced.
Facts
The trust is a non-fixed trust. The trustee of the trust has not made a family trust election pursuant to section 272-80 of Schedule 2F to the ITAA 1936.
On 1 January 2001 the trustee of the trust made a sale to Debtor and the income was included in the trustee's income tax return for the year ended 30 June 2001.
After repeated payment demands, the trustee of the trust wrote off the debt as a bad debt pursuant to section 25-35 of the Income Tax Assessment Act 1997 (ITAA 1997) during the income year ended 30 June 2002.
For the purposes of subsection 270-10(1) of Schedule 2F to the ITAA 1936, a scheme was identified, commencing on 1 July 2001. All the other elements required under subsection 270-10(1) in relation to the income injection test were present in the relevant income year.
The trust is not prevented by the other tests prescribed in section 267-20 of Schedule 2F to the ITAA 1936 in claiming a debt deduction.
Reasons for Decision
Division 270 of Schedule 2F to the ITAA 1936 operates to disallow deductions related to scheme assessable income where a scheme exists to take advantage of those deductions.
The requirement of paragraph 270-10(1)(a) of Schedule 2F to the ITAA 1936 is that 'a deduction is allowable to a trust for the income year'.
Paragraph 25-35(1)(a) of the ITAA 1997 provides that you can deduct a debt (or part of a debt) that you write off as bad in the income year if 'it was included in your assessable income for the income year or for an earlier income year'.
For the income injection test to apply, there must be an allowable deduction to a trust for the income year pursuant to paragraph 270-10(1)(a) of Schedule 2F to the ITAA 1936. Although the bad debt was originally incurred before the scheme commenced, the deduction for the bad debt written off is sought to be claimed in the income year, and after the date the scheme commenced. Consequently, the income injection test can apply to bad debts incurred prior to the date the scheme commenced, but written off in the income year.