Deductions and expenses: taxi licences

Is a taxpayer who carries on a business of on leasing taxi licences to taxi cab operators, entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the cost of leasing taxi licences?

No. The taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for the cost of leasing taxi licences.

The taxpayer carries on a business of on leasing taxi licences to taxi cab operators.

The taxpayer is currently leasing taxi licences from the government which has made further taxi licences available for lease to the taxi industry.

The taxpayer applied for additional taxi licences each of which permits the holder to operate a taxi cab for a period of fifty years.

According to the lease conditions, the full consideration payable for leasing each taxi licence is by means of a once-only payment in advance.

Section 8-1 of the ITAA 1997 allows a general deduction for losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, or are necessarily incurred in gaining or producing assessable income. However, no deduction is allowed where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

For losses and outgoings incurred in carrying on a business, the term 'necessarily incurred in' is taken to mean 'clearly appropriate or adapted for' ( Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 326). The expenditure the taxpayer has incurred is integral to the production of their business income and therefore the expenditure is considered to be 'necessarily incurred in' the course of carrying on that business.

However, it must also be determined whether or not that expenditure is excluded from deductibility on the basis that it is of a capital nature.

The decision in Sun Newspapers and Associated Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 87; (1938) 1 AITR 403) ( Sun Newspapers Case ) is a leading authority on the distinction between revenue and capital expenditure.

The test laid down in this case involves the consideration of three matters, none of which is in itself decisive: • the character of the advantage sought by the outgoing • the manner in which the advantage is to be used, relied upon or enjoyed by the taxpayer, and • the means adopted to obtain the advantage, such as by recurring payments.

In relation to the first two matters it is necessary to examine whether the expenditure secures an enduring benefit for the business ( British Insulated and Helsby Cables Ltd v. Atherton [1926] AC 205). The cost to the taxpayer of leasing taxi licenses gives rise to an advantage which has a lasting and enduring character. Under the terms of the lease the taxpayer is permitted to operate a taxi cab licence for a duration of fifty years which brings into existence an asset of enduring benefit for the business.

Further, the expenditure enlarges the profit yielding structure by increasing the number of taxi licenses which the taxpayer can on lease for income producing purposes.

The third matter involves a consideration of whether the outlay is a periodic one covering the use of the asset or advantage during each period or whether the outlay is calculated as a single final provision for the future use or enjoyment of the asset or advantage.

The advance payments made by the taxpayer for the lease of taxi licences are once only and therefore do not represent recurrent expenditure for the taxpayer's business.

Having considered the matters arising from the test in the Sun Newspapers Case, it is concluded that the cost of leasing the taxi licences is an outgoing of a capital nature and therefore the taxpayer is not entitled to a deduction for that cost under section 8-1 of the ITAA 1997.