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Edited version of your written advice
Authorisation Number: 1012743536781
Ruling
Subject: Product purchases
Question
Are you entitled to a deduction for expenses incurred in purchasing products each month when they are used personally?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2015
The scheme commenced on
1 July 2014
Relevant facts
You derive income from a business that promotes products as part of a multilevel marketing system.
You hold events for any interested parties. These promotional events involve discussing the products and benefits of the products.
For you to be eligible to participate in the multilevel marketing system, you are required to use their products. You need to purchase products totalling a minimum value each month to remain active. You use these products for personal use.
You have been operating the business for the 2014-15 financial year.
The products you use personally are not trading stock for your business.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Reasons for decision
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.
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).
Taxation Ruling TR 95/10 Income tax: employee shop assistants - allowances, reimbursements and work-related deductions discusses allowable deduction for shop assistants. Although you are not a shop assistant, the principles in this ruling are relevant in your circumstances. Paragraph 70 of TR 95/10 states:
In certain men's and women's clothing stores the employer requires that staff wear clothing from their range. The fact that the shop assistant is required or encouraged to buy this clothing does not convert the expense into an allowable deduction. It is our view that expenditure in these circumstances is not incurred in gaining and producing assessable income and is of a private nature.
Similarly, in your situation, although you are required to become and remain a user of the product, this does not automatically mean you are entitled to a deduction for the associated expenses. The expenses must meet the criteria for deductibility under section 8-1 of the ITAA 1997.
In your case, you purchase products and use them personally. Although the products are present at your promotional events, the Commissioner considers the purchase of products used personally do not have a genuine commercial aspect. Furthermore, the expenses are considered to be private in nature. Using the products for demonstration and then later using them personally does not change the fundamental nature of the purchases.
We acknowledge that you are required to purchase products to remain active, however, this does not in itself mean that the expenditure was incurred in gaining or producing assessable income if you use those products personally.
Expenditure on the products that you use personally is not deductible, even though the expenditure has a causal connection with the earning of income. The expenditure is inherently of a private or domestic nature and not incurred in gaining or producing your assessable income. Therefore no deduction is allowable under section 8-1 of the ITAA 1997.
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