Deductions: amount payable under section 60 of the Excise Act

Is a taxpayer, who manufactures excisable goods in the course of their business, entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), for a payment made under section 60 of the Excise Act 1901 (Excise Act) as a result of failing to keep those goods safely?

Yes. A taxpayer who manufactures excisable goods in the course of their business, is entitled to a deduction under section 8-1 of the ITAA 1997 for a payment made under section 60 of the Excise Act, as a result of failing to keep those goods safely.

The taxpayer is a licensed manufacturer of excisable goods.

The taxpayer held some goods that were yet to be entered and delivered for home consumption. Excise duty had not been paid for these goods under Part VI of the Excise Act. The goods were stolen from the taxpayer's premises.

The taxpayer received a demand from the Commissioner that required the taxpayer to pay an amount under section 60 of the Excise Act. The amount payable under section 60 of the Excise Act is equated to the amount of the excise duty which would have been payable on those goods if they had been entered for home consumption on the day on which the Commissioner made the demand. The taxpayer paid the amount demanded.

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 • necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

However, no deduction is allowed where the losses or outgoings are of a capital, private or domestic nature; relates to the earning of exempt income; or another provision prevents the taxpayer from deducting them.

The demand issued by the Commissioner has resulted from the failure of the taxpayer to account for excisable goods to the Commissioner's satisfaction.

If the taxpayer still owned the goods, and paid excise duty in the normal manner, the excise duty would have been deductible under section 8-1 of the ITAA 1997 as part of the cost of the trading stock. This would be the case regardless of whether those goods were ultimately sold in the course of business, or stolen.

In this instance, the goods have been stolen prior to their sale. The Commissioner's demand under section 60 of the Excise Act represents an amount equivalent to the duty that would have been payable if those goods had been sold by the taxpayer and delivered to customers.

As the goods were held by the taxpayer with a view to sale, the payment of an amount equivalent to duty has a similar flavour to the payment of the actual duty. In both instances, the expenses have the requisite connection with the taxpayer's business. The payment of the amount demanded by the Commissioner under section 60 of the Excise Act is also not of a capital, private or domestic nature and was not incurred in gaining or producing exempt income. Therefore, the amount will be deductible under section 8-1 of the ITAA 1997 provided the payment is not prevented from being deductible by any provision of the ITAA 1997.

Paragraph 26-5(1)(a) of the ITAA 1997 provides that an amount (however described) payable, by way of penalty under an Australian law or foreign law is not deductible. Accordingly, the payment of an amount under section 60 of the Excise Act would be precluded from being deductible if it is an amount payable by way of penalty under the relevant law.

It is considered that an amount payable under section 60 of the Excise Act is not a penalty under a law. Therefore, paragraph 26-5(1)(a) of the ITAA 1997 does not apply. This conclusion is supported by the following factors: • The penalty provisions in the Excise Act are expressed in a form that specifies the penalty at the foot of the particular provision (see for example, sections 26 to 33, 61 and Part X of the Excise Act). Section 60 of the Excise Act is not expressed in this particular form. This suggests that section 60 of the Excise Act is not intended to be a penalty provision. • The approach of the courts to section 60 of the Excise Act also confirms that the provision is not a penalty provision. In Collector of Customs (NSW) v. Southern Shipping Co Ltd (1962) 107 CLR 279, Menzies J stated, at page 302, that section 60 of the Excise Act is a provision of the same character as section 54 of that Act because 'its operation depends upon the Excise Tariff defining excisable goods and imposing duties to be paid thereon'. Menzies J further stated that 'if section 60 of the Excise Act 1901 imposed a tax, the tax which it imposes is an excise duty'.

Accordingly, it is considered that an amount payable under section 60 of the Excise Act is a payment of the same nature as a payment of actual excise duty. In this instance, the payment was necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income and was not of a capital, private or domestic nature or incurred in gaining or producing exempt income. Nor are there any provisions in the ITAA 1997 that deny deductibility. Therefore, the payment is deductible under section 8-1 of the ITAA 1997.