Edited version of private ruling

Authorisation Number: 1011830442815

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Ruling

Subject: local councillor expenses

Questions

Are you carrying on a business as a member of a local government?

Answer: No.

Are you assessable on gifts and donations received by you in your role as a member of a local government?

Answer: Yes.

Are you entitled to a deduction for expenditure incurred on:

- community messages and announcements

- phone calls, travel and accommodation incurred in relation to your role as a member of a local government

Answer: Yes

Are you entitled to a deduction for expenditure incurred on your re-election campaign up to $1,000?

Answer: Yes

Are you entitled to a deduction for expenditure incurred in raising funds to support community organisations and activities?

Answer: Yes

Are you entitled to a deduction for all expenditure incurred in supporting community organisations and activities for which you have substantiation?

Answer: Yes

Are you entitled to a deduction for membership of community organisations when you can prove a direct connection between your work related activities and the organisation, and the organisation was not established mainly to provide facilities for the use or benefit of its members for drinking, dining, recreation or entertainment?

Answer: Yes.

Are you entitled to a deduction for expenditure incurred on:

- attending fundraising events

- - entertainment expenses

- - business lunches

- - social functions

Answer: No

This ruling applies for the following period:

Year ended 30 June 2008

The scheme commenced on

1 July 2007

Relevant facts and circumstances

You are a member of a local government.

You receive remuneration as a member of a local government.

You are involved in community organisations in your capacity as a member of a local government.

You organise various fundraising events to solicit funding for re-election and to fund your community support activities.

You incur various expenses in relation to arranging and hosting fundraising events in respect of your re-election campaign and community activities.

You maintain separate accounts and records for funds raised for re-election and funds raised for community purposes.

No funds were spent to provide a benefit to either yourself or your family.

You keep records of all expenses incurred.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25-65

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary and statutory income derived from all sources during the income year. However, if an amount is exempt income, it is not assessable income (section 6-15 of the ITAA 1997).

Section 8-1 of the ITAA 1997 states that you can deduct from your assessable income any loss or outgoing to the extent that: it is incurred in gaining or producing your assessable income; or it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, any deduction that you claim for expenditure that is generally allowable under s 8-1 may be denied as a deduction by the provisions of Division 900 of ITAA 1997 if you are unable to comply with a notice to produce appropriate records and other documents of that expenditure in support of the deductions you have claimed.

Carrying on a member of a local government

Business is defined in s 995-1 of the ITAA 1997 to include "any profession, trade, employment, vocation or calling, but does not include occupation as an employee".

Taxation Ruling 1999/10 (TR 1999/10), (paragraph 102) states that the words 'vocation or calling in the above definition of 'business' are wide enough to encompass a 'profession' (Robbins Herbal Institute v FC of T (1923) 32 CLR 457 at 460-461) or 'trade', as does 'employment'. It is apparent that there is considerable overlap in the terms 'profession, trade, employment, vocation or calling'. The categories referred to in the definition of business under subsection 995-1(1) of the ITAA 1997, represent occupations that have the potential to constitute businesses carried on for the purpose of gaining or producing assessable income as required by paragraph 8-1(1)(b)of the ITAA 1997. Whether or not a particular occupation is carried on as a business for the purpose of gaining or producing assessable income is a question that can only be decided on the facts of the particular case.

The courts have considered the meaning of the phrase 'carrying on a business' on many occasions and have determined that, among other things, it is necessary for the activities under consideration to amount to a commercial enterprise. In State Superannuation Board v FC of T (1988) 21 FCR 535; (1988) 85 ALR 125; (1988) 20 ATR 211; 89 ATC 4078) the court stated that a 'business must have organisation. It usually has capital, plant, employees and consumables. It must derive income and it must trade with or deal with another person or persons'.

Taxation Ruling TR 1999/10 (paragraph 109) explains that the Commissioner disagrees with the Board of Review cases, Case N26 81 ATC 143; 24 CTBR (NS) Case 98 and Case M71 80 ATC 492; 24 CTBR (NS) Case 46 where it was decided that the Members of Parliament were carrying on the business of a political vocation and were entitled to have their deductions considered under paragraph 8-1(1) (b) of the ITAA 1997. The above TR states that a Member's primary and pivotal role is that of a Parliamentarian, the duties of whom are the same as those of the Parliament which he or she serves. The activities of Parliaments cannot be described as being commercial in nature and consequently the TR considers the activities of Members do not constitute a commercial enterprise.

The question as to whether campaigning for mayor was a business was addressed in Evans v FC of T 89 ATC 4540 (Evans case). In that case, the appellant expended money on items such as printing campaign material, hiring contractors and motor vehicle expenses, with the object of being elected as mayor. As mayor, she would earn assessable income. In that instance the taxpayer was found not to be carrying on a business as her activities failed to demonstrate any of the usual indicia of business and that her activities lacked the colour of a business.

In Evans Case Hill J said at 4554-4555:

The question of whether a particular activity constitutes a business is often a difficult one involving as it does questions of fact and degree. Although both parties referred me to comments made in decided cases, each of the cases depends upon its own facts and in the ultimate is unhelpful in the resolution of some other and different fact situation.

There is no one factor that is decisive of whether a particular activity constitutes a business....

...profit, motive, scale of activity, whether ordinary commercial principles are applied characteristic of the line of business in which the venture is carried on, repetition and a permanent character, continuity, and system are all indicia to be considered as a whole, although the absence of any one will not necessarily result in the conclusion that no business is carried on.

In your case we consider that you are not carrying on a business as a member of a local government. Your activities lack the commercial flavour and profit motive of a business and cannot be said to contain the usual characteristics of a business such as capital, plant, employees and consumables.

Assessability of gifts and donations in your role as a member of a local government

Taxation Ruling TR 1999/10 discusses the assessability of donations and gifts received by Members of Parliament. Although this ruling specifically relates to Members of Parliament the ruling has application to your situation. Paragraph 19 of TR 1999/10 states:

A donation or gift does not form part of a Member's assessable income where it is given for personal reasons unconnected with any work related activities of the Member. However, if a donation or gift is made because of, in respect of, for, or in relation to, his or her work-related activities, the donation or gift forms part of the Member's assessable income.

In your case, you hold various fundraising activities in your capacity as a member of a local government in order to generate funds to carry out community works. The funds you receive from these activities are connected with your work activities and are not received in any personal capacity. In accordance with Paragraph 19 of TR 1999/10 the funds raised in this capacity by you would be assessable.

Expenses

It is impractical for our office to private you a ruling on each individual expense item you have incurred or will incur in your role as a member of a local government. Therefore we provide the following guidance in relation to categories of expenses.

Work related expenses - phone calls, travel and community announcements

Expenses that you incurred in carrying out your council duties such as those incurred on community announcements, phone calls and travel are necessarily incurred in the earning of your assessable income and are therefore deductible.

Re-election expenses

Under section 25-65 of the ITAA 1997 a deduction of up to $1,000 is allowed for expenses incurred in seeking election to a local government body. The $1,000 limit applies to each election contested, whether successfully or not, and whether the expenditure is incurred in one or more years of income.

As such you are entitled to a deduction, up to $1,000, for expenses incurred in relation to your re-election campaign.

Expenses incurred in raising funds for community activities

As the gifts and donations you receive in your role as a member of a local government are considered to be assessable, it follows that the expenses incurred in holding events in which to raise these funds would be considered incidental and relevant to the collection of assessable income.

Therefore, provided the funds obtained are deposited in your community fund account and used towards that end, the expenses incurred in generating these funds would be considered deductible under section 8-1 of the ITAA 1997.

Donations to local organisations

According to Taxation Ruling TR 1999/10, patron expenses are allowable under section 8-1 of the ITAA 1997 where there is a direct connection between the position of a Member of Parliament as a patron and their income earning activities. Where a Member of Parliament acts as patron for personal reasons any expenses incurred in relation to that position are not allowable deductions because they are private or domestic in nature.

In your case, you are a patron, honorary member and ambassador of various organisations.

Supporting local organisations is incidental and relevant to your council responsibilities. There is a direct connection between the expenses incurred by you and the assessable income derived from your council position. As a result, the principle in TR 1999/10 of allowing a deduction under certain circumstances for patron expenses incurred by a Member of Parliament can be extended to you in this case.

Therefore as a member of a local government, you are entitled to a deduction for expenses incurred in relation to your community based activities.

Please note however that you are not entitled to a deduction for donations made under an arrangement for the specific purpose of enabling the recipient to provide entertainment, or to compensate or reimburse the recipient for the cost of providing entertainment, whether made for fund raising purposes or otherwise.

Community group membership fees:

TR 1999/10 discusses community group membership fees for Members of Parliament. The ruling states that a deduction is not allowable for membership fees of a community group unless there is a direct connection between a Member's work-related activities and the Member's involvement with the community group, and the fees are not of a private nature.

A deduction is not allowable for membership fees where a community group is established or carried on mainly to provide facilities for the use or benefit of its members for drinking, dining, recreation or entertainment.

Therefore you are only entitled to a deduction for these fees when there is a direct connection between the community group and your work related activities and the group does not fall into one of the categories mentioned above.

Attendance at fundraising events, business lunches and social functions

A deduction is not allowable under the general deduction provisions of section 8-1 of the ITAA 1997 for the provision of entertainment (see section 32-5 of the ITAA 1997).

Broadly, the 'provision of entertainment' means entertainment by way of food, drink, recreation, accommodation or travel whether made for fundraising purposes or otherwise (provided to you, or acquired by you). Entertainment includes business lunches and social functions, but excludes meals purchased during overnight work-related travel.

As such you are not entitled to a deduction for the costs of attending fundraising events, business lunches or social functions in your capacity as a member of a local government, as these expenses are considered private.