Income tax: Offshore Banking Units (OBU) - must an OBU enter details of expenditure that it intends to claim as allowable offshore banking (OB) deductions or allowable non-OB deductions in its relevant books of account at the time of incurring that expenditure?

Yes, where the expenditure is to be claimed as either an exclusive OB deduction or an exclusive non-OB deduction.

However, where the expenditure relates to both OB and non-OB activities it will constitute either a general OB deduction or an apportionable OB deduction. The expenditure must, therefore, be apportioned between OB and non-OB activities using the formulas set out in subsection 121EF(4) and (5) of the Income Tax Assessment Act 1936 which are based on the OBU's [1] assessable income for the year of income.

As the assessable income of the OBU will not be known until the end of the year of income, the OBU will be unable to enter details of general or apportionable expenditure until balance date. All expenditure of this type could, therefore, be recorded in the general ledger of the company. When the OBU's adjusted assessable OB income and adjusted total assessable income are determined at the time of preparing the company's taxation return, the correct apportionment of expenses can be made in the taxation return.

Alternatively, all expenditure of this type could be separately identified and recorded as potential general and apportionable OB deductions until the OBU's adjusted assessable OB income and adjusted total assessable income are determined. Example An OBU derives a fee of $100 000 for providing advice to an offshore person in accordance with subsection 121D(7). It incurred exclusive OB expenditure of $30 000 and general expenditure of $10 000. The fee and exclusive OB expenditure should be entered in the separate OB books of account at the time the moneys were derived and incurred respectively. The general expenditure may be recorded separately, perhaps in a special register kept for this purpose, or in the company's general ledger and then apportioned in the tax return.