Edited version of your private ruling

Authorisation Number: 1012470324775

Ruling

Subject: deductibility of expenses paid as an agent

Question

Are you entitled to a deduction for the expenses of a company, invoiced to you and paid by you, while you are acting as an agent for a company under an agency agreement where you are entitled to claim reimbursement from the company for these amounts?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on:

1 July 2011

Relevant facts

You (Agent) entered into an agency agreement with the company (Principal). You signed the Agency Agreement to act on behalf of the company.

You have provided a full copy of the Agency Agreement and its details have been used in this ruling.

The following are clauses from the Agency Agreement:

1.3 Services means Consulting services provided by the Agent including:

1.3.1 negotiating on behalf of the Principal in relation to GST taxable supplies that are to be made by the Principal to third parties.

1.3.2 To pay all expenses and other charges, insurance premiums, expenses and outgoings payable by the Principal in the course of providing management and consulting services to the Principal.

1.3.3 To obey the Principal's instructions and in the absence of any instructions for any particular matter to act in a manner as the agent ought reasonably to have considered to be most beneficial to the Principal.

1.3.4 To provide advice, agency and management services in an orderly and business like manner.

2.1 This contract establishes the relationship of principal and agent between the Principal and the Agent for the provision of Services for the Term of the Agreement.

4. Agent Under Division 153 of the GST Act

In relation to the provision of the Services by the Agent, the Agent will, for the purposes of Division 153 of the A New Tax System (Goods and Services Tax) Act 1999, on the Principal's behalf:

(a) make supplies to third parties; or

(b) make acquisitions from third parties; or

(c) make both supplies to third parties and acquisitions from third parties.

5. Agency Fees and Out of Pocket Expenses

5.1 In consideration for the services provided by the Agent under the Agreement, the Principal agrees to pay any reasonable fee charged by the Agent from time to time.

5.2 On request of the Agent the Principal shall reimburse the Agent for all out of pocket costs the Agent incurs in providing the Services.

5.3 The Principal may request at any time that the Agent provide an account of the Services provided on a month by month basis itemising the Services provided including an account for any out of pocket costs paid by the Agent in that month.

The expenses include insurance premiums, advisors costs, accounting fees and legal fees as well as an annual fee.

There is a very reasonable prospect that you will withdraw a lump sum amount from the Company in respect to your role as agent. The lump sum is anticipated to be in excess of the costs that you have incurred and in addition to any future director fees.

The invoices are in the name of the Agent to satisfy the requirements of Division 153 and in particular section 153-30 of the A New Tax System (Goods & Services Tax) Act 1999.

To date you have not received any payments, been reimbursed any expenses or received any director's fees.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Summary

Under the agreement you are paying the expenses "payable by the Principal", as their agent. You step into the shoes of the Principal. These expenses are incurred by the Principal in conducting their activity. They are not incurred by you in deriving your assessable income (agent's fee) in providing your services as an agent. Therefore these expenses you pay on behalf of the Principal are not deductible to you.

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for a loss or an outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature.

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), 

§ 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).

As a general rule, a loss or outgoing will not be deductible unless it is incurred in gaining or producing the assessable income of the taxpayer who incurs it (Federal Commissioner of Taxation v Munro (1926) 38 CLR 153).

A company is a separate entity from its directors and agents and is taxable in its own right. Therefore it is necessary to determine who incurred the various expenses in order to determine if a deduction is allowed.

General law and agency relationships

An intermediary may be authorised by another party to do something on that party's behalf. Generally, the intermediary is called an agent. The party who authorises the agent to act on their behalf is called the principal.

For commercial law purposes, an agent is a person who is authorised, either expressly or impliedly, by a principal to act for that principal so as to create or affect legal relations between the principal and third parties.

The principal is bound by the acts of an agent as a result of the authority given to the agent. In cases of actual authority, the relationship between a principal and an agent is a consensual one so that no party can claim to be a principal's agent unless both parties consent to the creation of the agency.

Further, a principal may be bound by the acts of another person if the principal acts in a way that a third party believes that the other person is authorised to act as the principal's agent when this previously has not been the case. The authority for the agent to act for the principal in this circumstance is termed 'ostensible authority'. The principal will be liable for acts of the agent within the scope of the authority that the principal gives to the agent by virtue of his or her conduct and actions.

The characteristics of actual authority and ostensible authority were summarised in Equiticorp Finance Ltd (in liquidation) v. Bank of New Zealand (1993) 32 NSWLR 50. As Clarke JA and Cripps JA stated at 132:

'An agent may have actual authority to bind a principal which is quite distinct from, but may overlap, ostensible authority. Actual authority may be express or implied. There is no evidence that Hawkins had express authority to commit the use of the liquidity reserve and the only question is whether implied actual authority or ostensible authority was established.

Actual authority arises where a principal grants, and an agent accepts, authority for the agent to perform specific tasks on behalf of the principal - in short there must be a consensual agreement between the principal and agent. Notwithstanding the absence of an express agreement, the parties, that is, the principal and agent, may conduct themselves in such a way that it is proper to infer that the relevant authority has been conferred on the agent.

When an agent uses his or her authority to act for a principal, then any act done on behalf of that principal is an act of the principal. Also, a principal is not bound by acts that are not within the expressed, implied or ostensible authority conferred on the agent. However, the principal may ratify or confirm an unauthorised dealing.

You have entered into a specific agency agreement with the company and are therefore expressly authorised to act on behalf of the Principal.

Agency relationship and disbursements

In the ordinary course of providing services to their clients, in the capacity of agents, such service providers may incur expenses on a client matter both as an agent of the client and as a principal of their own business. The treatment of reimbursement of such expenses varies.

Where goods or services are supplied to the agent to enable him/her to perform the services supplied to the client, the expenses are incurred by the agent in providing their services as an agent. In such circumstances it does not make any difference if the client was provided with a separate itemised account for additional expenses or included as part of the agent's overall fee. Such reimbursements form part of the consideration payable by the client for services supplied by the agent.

However, if expenses are met by an agent and incurred in his/her capacity as a 'paying agent' for a particular client, they are not expenses incurred by the agent in deriving their assessable income for acting as an agent. The reason for this is that the goods or services in respect of which the reimbursement was made are supplies by third parties to the client (Principal), not to the agent. When the person acts as an agent for the client, under the general law of agency the agent is standing in the shoes of the client. Such reimbursements do not form part of the consideration payable by the client for supply of services by the agent, but to those third parties concerned.

We need to determine whether the expenses you want to claim a deduction for are incurred by you in providing your services as an agent or whether they are paid by you in your capacity as a paying agent for the principal.

Application to your case

The 'Background' section in the agreement outlines that the Principal carries on a business. You (Agent) have entered into an Agency Agreement with the company (Principal). As agent you provide consulting services.

Under the agency agreement you are required to pay all expenses and other charges, insurance premiums, expenses and outgoings "payable by the Principal".

On request the Principal shall reimburse you under the agreement.

(a) In consideration for providing these services the Principal agrees to pay any reasonable fee charged from time to time.

(b) It also allows for the principal to reimburse the Agent for all out of pocket expenses.

There are two separate items, one is the reimbursement of expenses paid as an agent (paying agent) on behalf of the Principal and secondly a fee paid to you as Agent for actually doing the work.

Clause at 1.3.2 outlines that you will pay the expenses and outgoings 'payable by the Principal' and it identifies one of these expenses as insurance premiums. You have listed the expenses in question as including insurance premiums, advisors costs, accounting fees and legal fees as well as an annual fee. These would appear to be expenses that are 'payable by the Principal' as they would be incurred in conducting their business.

We consider that when you pay these expenses you would be paying them as a 'paying agent' for the Principal. This is an act done on behalf of the Principal. You would normally be able to claim a reimbursement from the Principal for these expenses. You would not be able to claim a tax deduction for paying these expenses and the reimbursement payment from the principal would not form part of your assessable income.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).