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Edited version of private ruling
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Ruling
Subject: Promotion expenses
Question
Is a deduction allowable where you refund a portion of the commission you receive from an insurer to a client who has taken out an insurance policy with the insurer?
Answer
Yes.
Relevant facts and circumstances
You conduct business. You receive upfront commissions from insurance providers when your clients take out particular policies with the providers as well as trailing commissions when those policies are renewed in the following years.
As a promotional tool, you intend to pay part of the upfront commission received by you from the insurer directly to your clients subject to the condition that they hold the policy for at least one year. In effect your clients, after paying one year's premium on a particular insurance policy, will be reimbursed for a portion of the total cost of that premium by you.
The promotion is open and available to all of your clients.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Reasons for decision
Summary
The portion of your commission earned and returned to your clients as part of a promotion is an allowable deduction as it is a loss or outgoing incurred in gaining your assessable income.
Detailed reasoning
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for losses or outgoings incurred in gaining or producing your assessable income or in carrying on a business, so long as the loss or outgoing is not of a capital, private or domestic nature and is not incurred in deriving exempt income.
Taxation Ruling IT 2626 provides the Commissioner's views on the treatment of commission income derived by insurance agents and brokers. At paragraphs 23 and 24 the ruling looks at the circumstance where commission is repaid. It determines that where the amount repaid has been previously included in the assessable income of the agent or broker, the amount of the repayment would represent a loss or outgoing incurred in gaining or producing the assessable income of the agent or broker and therefore would be allowable as a tax deduction in the year of the repayment.
In your case, you have made a decision to voluntarily refund a portion of the commission received from an insurer to your clients who have taken out particular insurance policies. You are treating this as a promotional exercise to expand your business.
The commission received from the insurer is assessable income in your hands and the outgoing whereby you return a portion of this sum to your client is considered to be incurred in carrying on your business. As the expense to you is not of a capital, private or domestic nature and is not incurred in deriving exempt income, the deduction is allowable in terms of section 8-1 of the ITAA 1997.
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