| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1051193166223
Date of advice: 21 February 2017
Ruling
Subject: Deductibility - Gifts Provided to Employees of Partnership
Issue 1
Question 1
Are the expenses towards the gifts individual A provided to the employees of the partnership and its associated service company allowable deductions under section 8-1 of the Income Tax Assessment Act 1997?
Answer
No.
This ruling applies for the following periods:
Income years ended 30 June 2012 to 30 June 2020
The scheme commences on:
01 July 2011
Relevant facts and circumstances
A is a partner of a partnership. The partnership has an associated service company.
As part of their practice, A provided small gifts each year to the key staff employed by the partnership or its service company. The staff report directly to A at the workplace.
The gifts are of small amounts each time. They are usually provided for birthdays, Christmas or occasional farewells.
A provided the gifts in recognition of services by the staff and to appropriately encourage their future services.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 8
Income Tax Assessment Act 1936 Division 5
Reasons for decision
The general deduction provision in section 8-1 allows a deduction for a loss or outgoing to the extent that it has the relevant connection with income or business activities, and that is not of a capital, private or domestic nature.
Subsection 8-1(1) is divided into two positive limbs:
(a) it is incurred in gaining or producing the taxpayer's assessable income, or
(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing the taxpayer's assessable income.
To consider deductibility of expenses under the second limb, the question of whether “a business is being carried on” is fundamental to determining whether the earnings or proceeds of a business are to be included in assessable income, and whether deductions are allowable for all revenue expenses incurred in the course of deriving that income.
Taxation Ruling TR 94/8 Income Tax: whether business is carried on in partnership (including 'husband and wife' partnerships) (TR 94/8) outlines factors we take into account in deciding whether persons are carrying on business as partners for income tax purpose .
Paragraph 4 of the TR 94/8 provides the following factors in deciding whether persons are carrying on business as partners in a given year of income:
Intention
● the mutual assent and intention of the parties
Conduct
● joint ownership of business assets
● registration of business name
● joint business account and power to operate it
● extent to which parties are involved with the conduct of the business
● extent of capital contributions
● entitlements to a share of net profits
● business records
● trading in joint names and public recognition of the partnership
In this case, the partnership maintains business records in the name of the partnership, the partners have demonstrated mutual assent and intention to act as partners and share between them the profits and losses of the partnership activities. The partnership exists, relevant business income is derived by the partnership, and the business is carried on by the partnership.
Partnership is defined in section 995-1 as:
(a) an association of persons (other than a company or a limited partnership) carrying on a business as partners or in receipt of ordinary income or statutory income jointly; or
(b) a limited partnership.
Although a partnership is not a separate and distinct legal entity for income tax purpose, under section 90 of the Income Tax Assessment Act 1936 (ITAA 1936), in calculating net partnership income (or loss), the partnership is treated as an entity independent of the partners.
A is a partner to the partnership, which cannot itself conclude that he is carrying on any business. He works at the partnership; as a result, receive a distributive share of the partnership net income.
It is therefore considered that the expenses towards the gifts provided were not incurred in carrying on a business for purposes of gaining your assessable income, paragraph 8-1(1)(b) is not applicable.
As the second positive limb does not apply to the current case, exposition of the meaning of the word 'necessarily' in paragraph 8-1(1)(b) is not considered in this document.
Even if the first or second positive limb in subsection 8-1(1) is satisfied, a deduction is not allowed under subsection 8-1(2) to the extent that the loss or outgoing is:
(b) private or domestic nature.
The main source of income is the distributive share of the partnership net income.
For the expenses towards the gifts provided to form an allowable deduction as an outgoing incurred in gaining or producing your assessable income under the first limb of subsection 8-1(1), they must be incidental and relevant to that end, that is, to the gaining or producing your assessable income.
Paragraph 24 of the Taxation Ruling TR 95/33 Income tax: subsection 51(1) - relevance of subjective purpose, motive or intention in determining the deductibility of losses and outgoings (TR 95/33) states that, in Full High Court of Australia in Fletcher and Ors v. FC of T at 91 ATC 4957; 22 ATC 621-622, their Honours said:
The question whether an outgoing was, for the purposes of s. 51(1), wholly or partly “incurred in gaining or producing the assessable income” is a question of characterisation. The relationship between the outgoing and the assessable income must be such as to impart to the outgoing the character of any outgoing of the relevant kind.
In this case, it is not sufficient or necessary that the occasion of the expenses towards the gifts could be found in producing your assessable income or would be expected to produce your assessable income.
When considering the subjective purpose, motive or intention in incurring the gifts, paragraph 13 of the TR 95/33 requires that regard must be had to the purpose or motive that the taxpayer had in mind when the outgoing was incurred.
As part of A's personal practice, they chose to express their appreciation towards the work performed by their subordinates by providing the gifts.
It is considered that, there is no nexus between the expenses towards the gifts and your assessable income, and the expenditure is of a private nature, therefore not deductible under section 8-1.
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).
