ATO Interpretative Decision

ATO ID 2002/341

Income Tax

Deductions - employee pays employer company's operating expenses
FOI status: may be released

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If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Can the taxpayer claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for expenses incurred by them on behalf of their employer?

Decision

No. The taxpayer cannot claim a deduction under section 8-1 of the ITAA 1997 for expenses incurred by the taxpayer on behalf of their employer, as the expenses were incurred for the purposes of generating the assessable income of the employer, rather than the assessable income of the taxpayer.

Facts

The taxpayer is a shareholder, director and employee of a small private company.

The taxpayer is responsible for the management and day to day operations of the company. The taxpayer is often required to pay the company's expenses out of their salary and wages.

The taxpayer did not receive director's fees or dividend income from the company in the income year.

Reasons for Decision

Section 8-1 of the ITAA 1997 states that you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income and is not:

Capital, private or domestic in nature,
Incurred in gaining or producing exempt income, or
Prohibited by a section of the ITAA 1997 or the Income Tax Assessment Act 1936 (ITAA 1936).

An outgoing is considered to be incurred in gaining or producing assessable income if there is a sufficient connection between the outgoing and the activities which produce or are expected to produce assessable income (Ronpibon Tin NL v. FC of T (1949) 78 CLR 47). The essential character of an outgoing is generally determined objectively. As a general rule, an outgoing will not be deductible unless it is incurred in gaining or producing the assessable income of the taxpayer who incurs it.

In Case U134 87 ATC 780; Case 92 (1987) 18 ATR 3646 the taxpayer was a shareholder and director of a family company who paid some of the company's expenses but was not reimbursed by the company for these expenses. The taxpayer did not receive any directors fees from the company in the relevant income year. The Administrative Appeals Tribunal held that the expenses were not deductible as the taxpayer incurred the expenses in his capacity as a director but did not derive any assessable income in that capacity.

The taxpayer incurred the expenses in order to produce the assessable income of the company rather than the taxpayer's own salary and wages. There is no sufficient or direct connection between the expense and the taxpayer's assessable income for the income year.

Accordingly, the taxpayer cannot claim a deduction under section 8-1 of the ITAA 1997 for the expenses incurred on behalf of the company.

Date of decision:  8 March 2002

Legislative References:
Income Tax Assessment Act 1997
   section 8-1

Case References:
Ronpibon Tin NL v FC of T
   78 CLR 47

AAT Case U134
   87 ATC 780

Case 92
   18 ATR 3646

Related ATO Interpretative Decisions
ATO ID 2001/738

Keywords
Deductions & expenses
Business income
Work related expenses

Siebel/TDMS Reference Number:  DW321656; 1-56M5MNS; 1-C9QC4R0

Business Line:  Small Business/Individual Taxpayers

Date of publication:  28 March 2002
Date reviewed:  24 October 2017

ISSN: 1445-2782