Edited version of private ruling

Authorisation Number: 1011637673421

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Ruling

Subject: Deduction - deductibility of the costs incurred to engage a migration agent to secure a foreign employee

Can you deduct an amount paid to a migration agent to secure a foreign employee to work in your business under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You carry on your business for the purpose of producing assessable income.

Due to the unavailability of employees that possess the particular skills you require of an employee in your business, it was necessary for you to engage a Migration Agent (the agent), also known as an Immigration Consultant, to source a foreign individual who possesses those skills. This arrangement with the agent is referred to as 'business sponsorship'.

Once arranged, you intend to employ that individual within your business. The foreign individual that comes to Australia to work as your employee will do so under a category 457 visa.

The services of the agent are on a one-to-one basis, where, if the employee obtained does not work out, the same, or similar, cost would be incurred to obtain another employee.

The agent issued a tax invoice to you detailing their work to process the application for an overseas employee to work in Australia and also showing the total amount payable for those services. You have paid the amount shown on that tax invoice during the income year ended 30 June 2010.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1.

Reasons for decision

These reasons for decision accompany the Notice of private ruling.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Detailed reasoning

General discussion of the law

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. Further, paragraph 8-1(1)(b) allows a deduction for a loss or outgoing that is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

However, no deduction is allowable if the outgoing is of a capital, private or domestic nature.

Taxation Ruling 97/7 discusses the meaning of 'incurred' as a result of various court cases and its application in section 8-1 of the ITAA 1997. In particular, to clarify when a deduction is said to have been 'incurred'.

TR 97/7 sets out that an amount may be considered to be 'incurred' even though it may not have been paid within the income year to which it relates.

Further, the courts have considered the meaning of 'incurred in gaining or producing assessable income'. In Ronpibon Tin N.L.Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236 (Ronpibon Tin) the High Court stated that:

For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing assessable it must be incidental and relevant to that end. The words "incurred in gaining or producing the assessable income" mean in the course of gaining or producing such income.

Alternatively, in British Insulated & Helsby Cables v. Atherton (Inspector of Taxes) (1926) AC 205 (British Insulated) it was demonstrated that expenditure which is made once and for all to obtain an enduring advantage will ordinarily have the character of capital.

Application of the law

As you have paid the amount shown on the agent's tax invoice within the income year ended 30 June 2010, it is clear that you have incurred those costs, for the purposes of section 8-1 of the ITAA 1997, in that year.

Further, you have incurred those costs in relation to obtaining an employee for your business. It was necessary for your business to employ an individual with certain skills, which in your case meant sourcing such an individual from overseas.

In considering the principles of Ronpibon Tin case, it is considered that incurred those costs of sourcing that employee in the course of carrying on your business. Further, you carry on your business for the purpose of producing assessable income.

As it could be reasonably expected that you would incur those costs, or similar costs, to obtain an additional employee, there appears to be no enduring benefit from having incurred those costs. Therefore, in considering the principles of British Insulated case, those costs are considered not to be of a capital nature.

Therefore, you can deduct an amount paid to a migration agent to secure a foreign employee to work in your business under section 8-1 of the ITAA 1997.