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Edited version of your written advice
Authorisation Number: 1051467991896
Date of advice: 19 December 2018
Ruling
Subject: Assessable income
Question 1
Assessable Income under subsection 6-5(1) of the ITAA 1997
Under subsection 6-5(1) of the ITAA 1997 an amount is assessable income if it is income according to ordinary concepts (ordinary income).
The charges, fees and GST paid by the Company on behalf of its customers are disbursements made as a general law agent within its authorisation of appointment.
The reimbursements received by the Company from its customers are pursuant to its contractual and general law right to indemnification as a general law agent. Such amounts do not represent a gain to the Company but merely represent the repayment of amounts due to the Company pursuant to its right of indemnification.
By way of illustration, a payment made by ‘B’ to ‘C’ on ‘D’s’ behalf such that ‘D’ immediately becomes indebted to ‘B’, is commercially equivalent to ‘B’ making a loan to ‘D’ and ‘D’ making a payment directly to ‘C’. The repayment of the amount by ‘D’ to ‘B’ is plainly not income of ‘B’ as a matter of ordinary concepts and usage.
For these reasons, the reimbursements are not ordinary income of the Company.
Assessable Income under subsection 6-10(1) of the ITAA 1997
Under subsection 6-10(1) assessable income includes amounts termed statutory income. Subdivision 20-A of the ITAA 1997 is a statutory income provision.
Subdivision 20-A of the ITAA 1997 includes an amount in assessable income if the taxpayer receives the amount as an assessable recoupment. Broadly, section 20-20 of the ITAA 1997 provides that an assessable recoupment will arise if:
● an amount is received as insurance or indemnity and you can deduct an amount under any provision of the ITAA 1997 or Income Tax Assessment Act 1936 (subsection 20-20(2)); or
● an amount is received as a recoupment and you can deduct the amount under a provision listed in section 20-30 of the ITAA 1997 (subsection 20-20(3)).
The reimbursements are not assessable recoupments under Subdivision 20-A of the ITAA 1997 because subsection 20-20(2) is not satisfied.
Subsection 20-20(2) is not satisfied because as is explained below, the charges, fees and GST paid by the Company on behalf of its customers (being the amounts which are recouped) are not deductible outgoings to the Company.
In addition, the Company cannot deduct these amounts under any provision listed in section 20-30 of the ITAA 1997.
Question 2 Small Business Entities – Division 328
Division 328 of the ITAA 1997 provides for the meaning of a small business entity relevant to an entity accessing various tax concessions. In determining whether an entity meets the criteria necessary to satisfy the definition of a small business entity, subsection 328-110(1) of the ITAA 1997 requires determination of the entity’s ‘aggregate turnover’.
The meaning of ‘aggregate turnover’ is contained in section 328-115 of the ITAA 1997, which broadly is the sum of the relevant ‘annual turnovers’.
Section 328-120 of the ITAA 1997 contains the meaning of ‘annual turnover’. The general rule under subsection 328-120(1)of the ITAA 1997 is that the ‘annual turnover’ of an entity for an income year will be the total ordinary income the entity derives in the ordinary course of carrying on its business.
Consequently, in order to establish whether an entity is a small business entity it is necessary to consider what constitutes the entity’s ordinary income such that its annual turnover for the relevant income year can be determined.
As explained in Question 1, the amounts received by the Company pursuant to its right of indemnification as a general law agent are not ordinary income and as such are not included in working out annual turnover for the purposes of Division 328 of the ITAA 1997.
Question 3 Deductions – Section 8-1 of the ITAA 1997
Section 8-1 of the ITAA 1997 allows a deduction for a loss or an outgoing to the extent to which it is incurred by the taxpayer in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature. 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).
Under the general law doctrine of agency, everything that an agent does within their authorisation is done not in their own capacity, but in the capacity of their principal. That is, payments which are made by an agent, and within their authorisation, are not an outgoing of the agent, but rather are an outgoing of the principal.
This is illustrated in Sheil v. FC of T 86 ATC 4731; (1986) 17 ATR 1097, where the taxpayer claimed a deduction for interest payments made by him on behalf of another person who later could not repay the taxpayer. The court held that where a payment out is intended to be matched by an immediate appropriate indebtedness to the payer by another person, there is no real outgoing. Accordingly, the payments of interest by the taxpayer did not have the character of an ‘outgoing’.
The charges, fees and GST paid by the Company are not outgoings of the Company, but rather due to the general law doctrine of agency are outgoings of its customers. They are disbursements of a general law agent made on behalf of their principal.
In addition, as was determined for Question 1, the indemnifications received from the customers are not assessable income of the Company meaning the required nexus with assessable income necessary to entitle a deduction under section 8-1 of the ITAA 1997, is in any event absent.
The disbursements made by the Company as agent for and on behalf of its customers are therefore not deductible expenses to the Company under section 8-1 of the ITAA 1997.
This ruling applies for the following periods:
1 July 2017 to 30 June 2019
The scheme commences on:
1 July 2017
Relevant facts and circumstances
1. A general law agency relationship exists between the Company and the customer.
2. Under the agency relationship the Company is required to meet the invoiced costs as the agent for its customers in the ordinary course of providing their services to the customer.
3. A reimbursement is then sought by the Company from the customer in respect of the amounts paid on their behalf for which the customer is primarily liable.
4. The amounts paid by customers to reimburse the Company for various payments are made in satisfaction of the Company’s contractual and general law right to indemnification as an agent.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Subdivision 20-A
Income Tax Assessment Act 1997 20-20(2)
Income Tax Assessment Act 1997 20-20(3)
Income Tax Assessment Act 1997 Division 328
Income Tax Assessment Act 1997 Section 328-110(1)
Income Tax Assessment Act 1997 Section 328-115
Income Tax Assessment Act 1997 Section 328-120
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