Edited version of your private ruling

Authorisation Number: 1012492064989

Ruling

Subject: payment of expenses and income tax deductions

Issue 1

Question 1

Is the Company entitled to an income tax deduction under section 8-1 of the ITAA 1997 in respect of the reimbursement of relocation accommodation expenses?

Answers

No

Question 2

Is the Company entitled to an income tax deduction under section 8-1 of the ITAA 1997 in respect of the reimbursement of relocation flight expenses?

Answers

No

Question 3

Is the Company entitled to an income tax deduction under section 8-1 of the ITAA 1997 in respect of the reimbursement of relocation delivery and shipping expenses for household effects?

Answers

No

Question 4

Is the Company entitled to an income tax deduction under section 8-1 of the ITAA 1997 in respect of the reimbursement of visa costs including compulsory medical examination?

Answers

No

Question 5

Is the Company entitled to an income tax deduction under section 8-1 of the ITAA 1997 in respect of the reimbursement the cost of redirecting the mail?

Answers

No

Question 6

Is the Company entitled to an income tax deduction under section 8-1 of the ITAA 1997 in respect of Membership Fee?

Answers

Yes

Question 7

Is the Company entitled to an income tax deduction under section 8-1 of the ITAA 1997 in respect of the reimbursement of expense A?

Answers

No

Question 8

Is the Company entitled to an income tax deduction under section 8-1 of the ITAA 1997 in respect of the reimbursement of obtaining copies of documentation?

Answers

No

Question 9

Is the Company entitled to an income tax deduction under section 8-1 of the ITAA 1997 in respect of the reimbursement of a registration fee?

Answers

No

This ruling applies for the following periods

Year ended 30 June 2013

The scheme commences on

1 July 2012

Issue 2

Question 1

Is the Company entitled to an income tax deduction under section 8-1 of the ITAA 1997 in respect of the expense incurred in purchasing a car?

Answers

No

Question 2

Is the Company entitled to an income tax deduction under section 8-1 of the ITAA 1997 in respect of the ongoing expenses incurred in running the car?

Answers

No

Question 3

Is the Company entitled to an income tax deduction under section 8-1 of the ITAA 1997 in respect of the ongoing loan repayments in respect of the car?

Answers

No

Question 4

Is the Company entitled to an income tax deduction under section 8-1 of the ITAA 1997 in respect of the payment of ongoing private health cover?

Answers

No

Question 5

Is the Company entitled to an income tax deduction under section 8-1 of the ITAA 1997 in respect of the payment of a drivers licence?

Answers

No

Question 6

Is the Company entitled to an income tax deduction under section 8-1 of the ITAA 1997 in respect of the payment of personal liability Insurance premiums?

Answers

No

This ruling applies for the following periods

Year ended 30 June 2013

The scheme commences on

1 July 2012

Relevant facts and circumstances

Issue 1

The Company was registered on Date X.

Person A and B are shareholders and directors of the Company.

On a date prior to Date X Person A and B relocated to Location A to work for Entity A under a subclass 457 visa and incurred a number of expenses as part of that relocation.

These include visa costs, costs of transferring household effects, temporary accommodation expenses, redirection of mail and flights. All were incurred prior to Date X.

Other expenses were incurred prior to Date X which allowed Person A to perform specific duties related to their profession.

Person A is also employed by entity B

Issue 2

Car

A car was purchased jointly by Person A and B on a date prior to Date X

Car insurance and a loan to finance the purchase were taken out at the same time.

Driver's Licence

A driver's licence for both Person A and B were issued on the same date. This date is prior to Date X.

Private health insurance

Private health cover, for both Person A and B is an ongoing expense which is paid fortnightly.

This cover is a condition of the visa.

Liability Insurance

This policy is to protect Person A against claims made against them whilst earning their assessable income.

Relevant legislative provisions

ITAA 1997 Section 8-1

ITAA 1997 section 25-55

ITAA 1997 subsection 40-30(4)

FBTAA subsection 136(1)

Reasons for decision

Summary

The assessable income being generated is either income of Person A or B and not income of the Company.

Any deductions available under section 8-1 of the ITAA 1997 will be available to either Person A or B and not the Company.

Detailed Reasoning

Section 8-1 of the ITAA 1997 provides the rules for when a taxpayer can claim an income tax deduction and states:

8-1(1) You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.

8-1(2) However, you cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature; or

(b) it is a loss or outgoing of a private or domestic nature; or

(c) it is incurred in relation to gaining or producing your *exempt income or your *non-assessable non-exempt income; or

(d) a provision of this Act prevents you from deducting it.

This means that for the Company to be able to claim a deduction for various relocation expenses those expenses have to be either:

· incurred in gaining or producing the Company's assessable income; or

· necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

In addition the expense cannot be capital or private or domestic in nature.

In looking at this application the income being received is from Entity A or from Entity B.

If we look at this income, under the requirements of the 457 visa Person A and B are sponsored to provide services to Entity A. Under the Entity B agreement it is Person A and not the Company who has been employed.

In addition these agreements were entered into prior to Date X. So the company did not exist when Entity A or B entered into the agreements with Person A or B. This further supports a conclusion that the income is income of Person A or B

Any assessable income generated from the work undertaken for Entity A and B is not income of the Company. Any expense in respect of the earning of that income is not deductible to the Company under section 8-1 of the ITAA 1997.

The income is assessable income of either Person A or B and it is either Person A or B who would be entitled to any allowable deduction under section 8-1 of the ITAA 1997.

This is the case even if the income is paid into Company bank accounts.

For the Company to have assessable income it must being doing something in its own right which generates income and there is no evidence that the Company is earning its own assessable income.

As there is no evidence to suggest the Company is producing its own assessable income then there is no assessable income against which the Company can claim a deduction against.

Return to shareholders

Both Person A and B are shareholders and directors of the Company and as a result have multiple roles.

In looking at multiple roles and deductibility paragraph 7, 8 and 9 of Miscellaneous Taxation Ruling MT 2019 Fringe benefits tax: Shareholder employees of family companies and directors of corporate trustees states:

The question whether a benefit is provided for employment-related reasons is one that also arises under the income tax law. The income tax position is that expenses incurred in respect of benefits provided for employment-related reasons are generally deductible to the company even where the recipient is also a shareholder. However, if the benefit is not employment-related but, in effect, represents a distribution of income to shareholders, the expenses incurred in providing the benefit are not deductible. Furthermore, section 108 of the Income Tax Assessment Act 1936 provides that payments by way of advances or loans made by the company on behalf of, or for the individual benefit of, any of its shareholders shall to the extent that they represent distributions of income be deemed to be dividends paid by the company. As such they are assessable in the hands of the shareholders. The payment of any amount that is deemed to be a dividend under a provision of the Income Tax Assessment Act 1936 is specifically excluded from the definition of "fringe benefit" under the FBT legislation.

Where a benefit is provided to a shareholder/employee of a family company in connection with the performance of his or her duties as an employee, it is considered that the benefit is provided in respect of the person's employment. For example, where a car owned by a family company is used by a shareholder/employee in the course of his or her employment by the company, it is considered that any use, or availability for use, of the car by the employee (or an associate) for private purposes is a benefit provided in respect of his or her employment. Similarly, where a shareholder/employee uses his or her home telephone in the course of employment by the company, the payment of the telephone account by the company is considered to be a benefit provided in respect of the person's employment. (The extent of business use of the phone would be taken into account in arriving at the amount subject to tax.)

In relation to benefits that are not expressly linked to the carrying out of the employee's duties, it is necessary to examine all the facts and circumstances of the case to establish whether the benefit is fairly to be regarded as having been granted to the shareholder/employee in his or her capacity as an employee or as a shareholder. Factors such as the nature of the benefit, any cash remuneration paid, the nature and extent of any trading activities of the company, the extent of any services rendered by the shareholder/employee and the extent of his or her shareholding may be relevant in concluding whether a non-cash benefit was provided as remuneration for services or in the capacity of shareholder.

These paragraphs have the effect of saying that where a person has a dual role there has to be a clear link between the benefit and the production of assessable income to be deductible. In other words the payments have to be in respect of employment.

Whether a payment was in respect of employment was later clarified in J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22, (Knowles), and the full Federal Court in examining its meaning in relation to Fringe Benefits Tax (FBT) noted that:

   ... what must be established is whether there is a sufficient or material, rather than a causal connection or relationship between the benefit and the employment...

The Court also suggested that it would be useful to ask 'whether the benefit is a product or incident of the employment'.

The effect of Knowles is that where an individual has more than one relationship with an entity then there has to be sufficient evidence available to demonstrate that the benefits they receive are in respect of an employment relationship. If insufficient evidence exists then it has to be concluded that the benefit is provided in a capacity other than as their role as employee. In this case that capacity would be in respect of shareholding.

In this case as there are no evidence to suggest that either Person are employees of the Company. This is because there is no evidence that suggests the Company requires employees at this stage of its existence. So we can only look at whether the benefits are provided in respect of shareholding or directorship.

In looking at the dual roles there would need to be clear evidence that the benefit is a product of directorship for the payment to become deductible. For example benefits are paid for in lieu of director's fees.

However, as we have concluded above, any income being received by the Company is actually income of Person A or B. As such any payments made on their behalf out of Company accounts is simply Person A or B withdrawing their income to meet their own expenses.

On this basis we must conclude that the withdrawals to meet payment of expenditure incurred by Person A or B is in respect of their shareholding.

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).