Edited version of private ruling

Authorisation Number: 1011677951633

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Ruling

Subject: derivation of assessable income

Does the payment of your income tax by another entity on your behalf constitute assessable income for the year ended 30 June 2011?

No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You incurred an expense and claimed it as a deduction in your income tax return.

A change in circumstances resulted in this expense not being deductible.

You amended your tax return to remove the deduction. This resulted in an increased tax liability.

Another entity paid the tax liability on your behalf.

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 15-2

Income Tax Assessment Act 1997 Section 20-20

Income Tax Assessment Act 1997 Section 20-25

Income Tax Assessment Act 1997 Section 20-30.

Reasons for decision

Summary

The payment of tax on your behalf is not considered to form part of your assessable income as it is not ordinary income nor does any other provision of the income tax legislation include the amount as assessable income.

Detailed reasoning

Under subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997), an amount is assessable income if it is income according to ordinary concepts (ordinary income).

Relevant factors in determining whether an amount is ordinary income include:

· whether the payment is the product of any employment, services rendered, or any business

· the quality or character of the payment in the hands of the recipient

· the form of the receipt, that is, whether it is received as a lump sum or periodically, and

· the motive of the person making the payment. Motive, however, is rarely decisive as in many cases a mixture of motives may exist.

The payment of your tax liability on your behalf cannot be said to have been 'earned' as it was not paid as a direct reward for services performed. It was a lump sum payment to cover an expense you incurred.

It is considered that the payment does not possess the characteristics of ordinary income. As such the payment is not income under ordinary concepts and therefore is not assessable income under section 6-5 of the ITAA 1997.

Allowance or reimbursement

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income.

Under section 15-2 of the ITAA 1997 the value of all allowances, gratuities, compensation, benefits, bonuses and premiums allowed, given or granted directly or indirectly in respect of employment or services rendered is included in assessable income.

Paragraph 2 of Taxation Ruling TR 92/15 states that a payment is an allowance when a person is paid a definite amount to cover an estimated expense. It is paid regardless of whether the recipient incurs the expected expense. The recipient has the discretion whether or not to expend the allowance.

Paragraph 3 of TR 92/15 provides that a payment is a reimbursement when the recipient is compensated exactly (meaning precisely, as opposed to approximately), whether wholly or partly, for an expense already incurred although not necessarily disbursed. A requirement that the recipient vouch expenses and refunds unexpended amounts adds weight to the presumption that the payment is a reimbursement rather than an allowance. TR 92/15 also provides that where there is an upper limit of the amount that can be claimed this limit does not alter the character of the payment.

The meaning of the word reimburse includes payments made in advance of expenditure as long as those payments possess the characteristics outlined above.

There is no general principle which establishes that a payment made as a reimbursement of, or compensation for, an expense previously deducted is inherently income (Federal Commissioner of Taxation v. Rowe (1997) 187 CLR 266; 97 ATC 43317; (1997) 31 ATR 392), although there are specific statutory provisions dealing with recoupment. The High Court decided that an ex gratia lump sum payment by the state government as a reimbursement of costs incurred by a local government employee in connection with an inquiry into his performance was not assessable.

The payment of tax on your behalf is considered to be in the nature of a reimbursement of an expense. It was not paid as an allowance or as any of the other kinds of payments in respect of employment or services rendered. The payment is therefore not assessable income under section 15-2 of the ITAA 1997.

Assessable recoupment

An amount is not an assessable recoupment to the extent that it is ordinary income, or statutory income because of a provision outside Subdivision 20-A of the ITAA 1997.

Subdivision 20-A of the ITAA 1997 only includes an amount in assessable income if the taxpayer receives the amount as an assessable recoupment. Section 20-20 of the ITAA 1997 provides that an assessable recoupment will arise if:

· an amount is received as a recoupment, and

· the recoupment is of a loss or outgoing that you can deduct under a provision listed in section 20-30 of the ITAA 1997.

Recoupment is defined in section 20-25 of the ITAA 1997 to include any kind of reimbursement.

Subsection 20-30(1) and (2) of the ITAA 1997 provides a table of the deductions available in the ITAA for which recoupments are generally assessable under Subdivision 20-A of the ITAA 1997. If the amount received is not a recoupment within the meaning of that term in section 20-25 of the ITAA 1997, or if the recoupment is not of a loss or outgoing that can be deducted, then the amount cannot be an assessable recoupment for the purposes of Subdivision 20-A of the ITAA 1997.

In your case, the reimbursement is considered to be a recoupment. However, the expense was in relation to a taxation liability. As you are not entitled to a deduction for your taxation liability the reimbursement you received is not an assessable recoupment. There is no provision of the income tax legislation which would include the reimbursement you received in your assessable income.