Edited version of private ruling

Authorisation Number: 1011703083597

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Ruling

Subject: Wages paid to spouse

Question

Are you entitled to a deduction for wages paid to your spouse?

Answer: Yes.

This ruling applies for the following periods:

Year ended 30 June 2010
Year ending 30 June 2011
Year ending 30 June 2012
Year ending 30 June 2013
Year ending 30 June 2014
Year ending 30 June 2015

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You are a self employed consultant and travel away from home to perform your business activities.

Your consultancy activities include conducting feasibility studies, negotiating contracts and developing business opportunities overseas.

Your spouse supports your business activities by organising your travel arrangements, typing reports, accounting, responding to your clients' emails and enquiries and communicating with clients on your behalf when you are away.

You have self-assessed your income to be personal services income and your consultancy activities not to constitute a personal services business.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 318
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 85-20

Reasons for decision

Summary

You are not entitled to a deduction for wages paid to your spouse as the work she performs does not amount to principal work.

Detailed reasoning

Subsection 8-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that you can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

However, no deduction is allowable where a provision of the tax legislation prevents you from deducting the loss or outgoing.

Part 2-42 of the ITAA 1997 contains the special rules for the tax treatment of personal services income (PSI) earned by sole traders including contractors and consultants. These rules do not apply to individuals or entities who conduct personal services businesses.

Division 85 of the ITAA 1997 sets out amounts, relating to personal services income, that an individual cannot deduct. In particular, deductions that are unavailable to an employee are similarly unavailable to an individual who has personal services income and who is not an employee.

Section 85-20 of the ITAA 1997 states a taxpayer cannot deduct any payment made to an associate to the extent that the payment relates to gaining or producing your personal services income. The exception to this is where the associate performs part of the principal work from which you gain or produce your personal services income.

The term 'principal work' is not defined in the tax legislation but its meaning is discussed in Taxation Ruling TR 2001/8 at paragraphs 58 and 59:

58. The term 'principal work' can be described as that work which fulfils the obligations under the agreement with the service acquirer. It is the work that generates the personal services income of the test individual or personal services entity under the contract.

59. The concept of principal work does not include work which is ancillary such as helping or aiding the work of the test individual, unless this directly contributes to the generation of the relevant personal services income under the agreement. Work that is associated with administration such as bookkeeping, answering telephones or other clerical work is ancillary and not principal work (unless the work to be performed for the service acquirer includes that administrative work). This work does not have the relevant connection with the generation of the personal services income and does not form part of the principal work from which the personal services income is derived.

An 'associate' has the same meaning as in section 318 of the Income Tax Assessment Act 1936 (ITAA 1936). For an individual it includes their spouse or relative.

Application to your circumstances

You receive personal services income for your consultancy activities and have self-assessed your activities not be a personal services business.

Your consultancy activities include conducting feasibility studies, negotiating contracts, and developing business opportunities in overseas markets.

Your spouse supports your consultancy activities by answering emails, preparing accounts, typing reports, arranging your travel and communicating with clients on your behalf when you are overseas.

The duties performed by your spouse are considered to be ancillary to the principal work by which you derive your personal services income.

Therefore, under section 85-20 of ITAA 1997, you are not entitled to claim a deduction for salary and wages paid to your spouse for providing these services.

It should be noted that under subsection 85-20(3) of the ITAA 1997, where an amount or payment is not deductible because of the application of section 85-20 of the ITAA 1997, that amount is neither assessable income nor exempt income of your spouse.