Edited version of your written advice

Authorisation Number: 1012783588685

Ruling

Subject: Payments to spouse

Question

Are you entitled to a deduction for payments made to your spouse?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts

You own investment properties.

You have a high level full time job which includes travel away from home. You have very little time to manage your own personal investments.

You rely on your spouse, as your power of attorney, to fill in this role for you.

You wish to pay your spouse for the management of your rental properties and the provision of administration support. Payments will be time based, being an hourly rate of $X in addition to reimbursement of applicable travel and incidental expenses.

Your spouse travels to inspect the properties, monitors the rental income and expenses and attends to tenants' enquiries. Your spouse also pays the bills and attends to telephone calls.

Your spouse does not look after other rental properties and does not have previous experience in this area.

Your spouse has no other job.

You intend to have a written agreement with your spouse in relation to the above.

Currently you have real estate agents for your properties. These may be reduced in the future.

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 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 (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).

Fees paid to a real estate agent for rent collection and other management fees for income producing properties are generally an allowable deduction under section 8-1 of the ITAA 1997 if they relate sufficiently to the gaining or producing of assessable income and are not capital or private in nature.

Taxation Ruling IT 2167 Income Tax: rental properties - non-economic rental, holiday home, share of residence, etc. cases, family trust cases examines the situation where a property is let to relatives and non-arms-length transactions. Where a property is let to relatives, the essential question is whether the arrangements are consistent with normal commercial practices. Where the arrangement is not at arms-length, an apportionment of losses and outgoings incurred is generally required. Although the ruling mainly focuses on rent let at less than commercial rent, the principles are also relevant in your case.

The test that should be considered to show whether the arrangement is at arms-length, is whether a reasonable person with no relationship to either party would enter into this arrangement using exactly the same terms and conditions. If the answer is yes, then it would be an arms-length arrangement.

Whether parties are at arm's length in relation to a rental property is a question of fact. The amounts to be paid should reflect the commercial and economic standing of the parties.

The courts have addressed issues where a person pays their spouse for services.

In Case M55 80 ATC 366; (1980) 24 CTBR (NS) Case 30, 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 employee's 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.

Although the above cases relate to employees, the principles are relevant in your circumstances.

In your case, your rental income is not related to the support from your spouse. That is, the amount of assessable rent income received is not increased by the services of your spouse. The expense of paying your spouse is a voluntary payment not directly incurred in the derivation of your rental income.

It is questionable whether you would enter into such an arrangement with an unrelated party. The hourly rate is well above the average rate paid for property management. Your willingness to pay a higher hourly rate than the normal market rate does not reflect a normal commercial arrangement. The fact that a written agreement may be prepared does not change the arrangement to being commercially realistic.

Following the above guidelines, it is considered that the arrangement is not at arm's length and not commercially realistic. It is not considered that the main purpose of the arrangement is to produce assessable income.

In your case, your spouse is not an experienced real estate agent, however is helping you by providing administration support to you in relation to your properties. The arrangement and associated expenses are private in nature. You are not entitled to a deduction for expenses in relation to the payments made. The payments are not made in deriving your assessable income. Your need for assistance arises from your busy work commitments. The expenses incurred are not sufficiently connected to the gaining or producing of your assessable income. Therefore no deduction for payments made to your spouse is allowable under section 8-1 of the ITAA 1997.

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