Academy Cleaning & Security Pty Ltd v Deputy Commissioner of Taxation

The case involved an appeal by Academy Cleaning & Security Pty Ltd (the taxpayer) against the Deputy Commissioner of Taxation's decision to disallow the taxpayer's objection to an amended income tax assessment for the 2009 year. The central issue was whether a $420,000 outgoing claimed as a deduction by Academy under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) was allowable. This outgoing related to an agreement entered into on 29 June 2009 with BR Redd Ltd for the purchase of three contract lots of "sequestered carbon". Academy paid a non-refundable deposit of $63,000 and intended to pay the $357,000 balance at a future, uncertain time when the property became deliverable. The taxpayer argued that the $420,000 was either incurred in gaining or producing its assessable income or necessarily incurred in carrying on its business for that purpose. The Commissioner contended that the outgoing was not incurred, was capital in nature, and was part of a scheme with the dominant purpose of obtaining a tax benefit, to which Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applied. The court heard evidence about the context of the proposed Carbon Pollution Reduction Scheme, Academy's business of providing cleaning and security services, its director Mr. Hughes' understanding of environmental sustainability's importance in winning tenders, and expert evidence regarding the carbon credit market. Ultimately, Justice Rares dismissed Academy's appeal, finding that the $357,000 balance was not definitively incurred in the 2009 year, that the $420,000 outgoing was not necessarily incurred in carrying on Academy's business, and that the dominant purpose of entering into the agreement was to obtain a tax benefit, thus Part IVA of the ITAA 1936 applied to disallow the deduction.