Edited version of private ruling

Authorisation Number: 1011573053887

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Ruling

Subject: personal assistant expenses

Question

Are you entitled to a deduction for the cost of a personal assistant?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You are a real estate agent employee working for an agency.

The agency pays you a retainer. You also earn commission income from the sale of properties.

The retainer does not affect the level of commission you receive.

If you ceased working for the agency, you would be required to repay any amount paid to you as a retainer for which you have not generated sufficient commission income in respect of properties sold.

You wish to hire an employee to act in the role of a personal assistant. The personal assistant's duties would include drawing up contracts and making bookings for inspections. All of the duties of the personal assistant are currently done by you.

By having a personal assistant to carry out administrative duties which form part of working as a real estate agent, you would have more time to spend seeking listings, talking to and showing properties to prospective buyers. It is anticipated that this will significantly increase your income receipts.

Expenses incurred will relate to gross wages, superannuation and worker's compensation.

The personal assistant will not be a family member or associate.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Summary

As an employee, your payments for a personal assistant to perform services on your behalf are not considered to be expenses incurred in gaining or producing your assessable income. Rather, these expenses are considered to be incurred in lightening your workload, or for some other private reason. These payments are therefore not an allowable deduction.

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income, or a provision of the ITAA 1997 prevents it.

A number of significant court decisions have determined that for an expense to be an allowable deduction:

· it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T; (1958) 100 CLR 478 (Lunney's case)),

· there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47), and

· it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).

Taxation Ruling TR 98/6 discusses the deductibility of expenses for real estate salespersons. Paragraph 210 of TR 98/6 states that a deduction is allowable where real estate salespersons who only earn commission income incur a wages expense to provide services and assistance relating directly to their income. Commission only real estate salespersons perform their work activities under significantly different circumstances to most employees, with considerable flexibility in how they perform their duties. However, a deduction is not allowable to such salespersons if the expenditure is private or domestic in nature.

The Board of Review has dealt with the issue of wages paid by an employee in Case M55 80 ATC 366; (1980) 24 CTBR (NS) Case 30 (Case M55). In that case an employee pathologist was denied a deduction for wages paid to his wife to take messages for him when he was on call. The Board considered that the expenditure was not incurred in gaining or producing the assessable income and was of a private or domestic nature. Dr Beck stated at ATC page 368, CTBR (NS) page 242 that:

If an employee pays another party to render some of the services for which the employee is paid, this expenditure is not a cost of deriving the income. It can be regarded as a cost of lightening the work load, of gaining time off, of filling a gap in the employees competence, or, perhaps of rendering service beyond that which he is being paid for, and all expenditure of this kind is private and hence specifically excluded ...[from being deductible]

In Case S84 85 ATC 618, the taxpayer was a relieving magistrate. He paid his wife to undertake secretarial duties, principally answering the phone, whilst he was travelling as a relieving magistrate between different venues. It was agreed that his wife performed the duties however the claim was disallowed on the grounds that it was essentially expenditure of a private or domestic nature unrelated to the derivation of the taxpayer's income.

Where an employee makes an arrangement for someone else to perform part of their duties, it is generally characterised as a private arrangement.

In Australian Air Express Pty Limited v. Langford [2005] NSWCA 96 it was found that an employee does not have the power to delegate. This being so, any expense so incurred would not accordingly be deductible. It was accepted of course that such a limitation would not apply to an independent contractor.

An employee's inability to delegate was also discussed by Dr Gerber in Case M55 at ATC page 367:

Much reliance was placed by the taxpayer's representative on a series of decisions dealing with the remuneration of doctor's wives, and it was submitted that their duties were not readily distinguishable from those carried out by this taxpayer's wife. This submission is unexceptionable as far as it goes. There is, however, one critical distinction - the doctors in those cases were either self-employed or worked in partnership, This enabled them to employ their wives, an indulgence denied to servants. I have concluded that, for tax purposes, the rule delegatus non potest delgare applies with like effect to employees, save in exceptional circumstances, of which this case is not one.

This decision was followed in Case Q80, 83 ATC 409 and in Case N87, 81 ATC 466. In Case Q80, a shire clerk paid his wife a salary for taking phone messages, operating a base radio from council chambers in weekend emergencies, attending meetings and taking minutes in her husband's absence, planning and organising civic receptions and other events, and typing confidential council letters. The Administrative Appeals Tribunal held that no deduction was allowable for the cost of the taxpayer's wife's salary, saying that the expenditure on his wife's wages was not incurred in gaining or producing his assessable income, and was private in nature.

In Case N87, a field engineer employed by a large oil company was required to have a current driver's license as his duties involved calls on customers. The taxpayer lost his licence, after a driving offence, for three months. He obtained the employer's consent to engage his son to drive him to his customer calls for the period that he was unlicensed. The Administrative Appeals Tribunal disallowed the wages paid to the son as private expenditure.

What all of these cases show is that as an employee, you gain your income by performing personal services for your employer. A personal service is one that you perform yourself, it does not extend to services performed on your behalf. This means that payments by an employee to others to perform services on their behalf are not considered to be expenses incurred in gaining or producing their employment income. Instead, these expenses are characterised by their effect on the employee. They generally have the effect of allowing greater leisure time, or of lightening the employee's workload. These effects are private in nature. Therefore the expenses are not an allowable deduction under section 8-1 of the ITAA 1997.

A distinction has been drawn in TR 98/6 between commission only agents and salespeople who receive remuneration by a retainer and commission. Where an agent receives retainer plus commission, only part of their income is directly related to the amount of success that they enjoy. At law, this puts those employees in the same position as an employee who is remunerated solely by salary or wage. As has already been stated, the expenses for services, which are part of their employment duties, paid by employees remunerated by salary or wages are regarded as private in nature and not incurred in gaining or producing their assessable income.

In the case of an agent remunerated by commission only, clearly their income is directly and wholly related to the degree of success that they enjoy. Also, a commission only agent is generally not required to adhere to any detailed set of duties set by their employer. Equally clearly then, any expense incurred that increases that success rate can only be incurred in gaining or producing the assessable income and must be an allowable deduction.

In summary, the courts have held that no deduction for wages or service fees paid is allowable where:

The taxpayers were employees, deriving their income from one source, and

The services paid for by the taxpayer formed part of the taxpayer's employment duties.

Also, as indicated above, the view of the Commissioner is that a deduction for wages can only be claimed by an employee who earns commission only income.

In your situation, you are an employee for taxation purposes and your income from your work comes from one source - your employer only. You render services only to your employer, and only the services that are required by your employer.

You contend that in your case your retainer is merely an advance on future commission income. However, it is only in one particular circumstance that you may be required to repay some of your retainer, that being if you cease employment and your commission income generated has not been considered sufficient. In the normal course of events, you receive both your retainer and the full amount of any commission. That is, your employer does not deduct from the commission you are paid any retainer amounts you have previously received. Therefore, it is not considered that the retainer is an advance on your commission income.

It is acknowledged that your personal assistant will not be a relation or friend. However, this does not change the above principles. In your case, the expense of hiring a personal assistant merely lightens your work load and gives you more time to do your various duties as a real estate agent. The payments to a personal assistant are not a cost of performing the work but are a voluntary payment not directly incurred in the derivation of your income.

Based on the above cases and the guidelines set out in TR 98/6, you are not entitled to a deduction for expenses in relation to a personal assistant as you are not working on a commission only basis. As in Case M55, the payments for a personal assistant are not made in deriving your assessable income. Your need for assistance arises from your personal situation, albeit in connection with you having more time to carry out your duties. Therefore no deduction for a personal assistant is allowable under section 8-1 of the ITAA 1997.

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