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Ruling

Subject: PAYG Withholding obligations & Business expenses

Question 1

Are you required to withhold Pay As You Go (PAYG) withholding tax for cash payments made to customers as a referral incentive?

Answer

No

Question 2

Are the payments made to customers as a referral incentive, a deductible expense?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2012

The scheme commences on:

1 June 2011

Relevant facts and circumstances

You are a business and provide a cash payment to customers as a referral incentive.

The customers refer other customers to your business to install your product.

The individuals who receive the referral incentive payment are non business individuals who do not hold an ABN.

The transaction takes place after the new customer has installed and paid for their new product.

Relevant legislative provisions

Taxation Administration Act 1953 Sch1-12-35

Taxation Administration Act 1953 Sch1-12-190

Taxation Administration Act 1953 Sch1-12-190(1)

Taxation Administration Act 1953 Sch1-12-190(4)

Taxation Administration Act 1953 Sch1-12-190(6)

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

The PAYG withholding provisions are contained in Part 2-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA).

Section 12-35 in Schedule 1 to the TAA provides that an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual employee. If, however, the payments are outside an employee/employer relationship, there may be no requirement for any amounts to be withheld from payments.

However, payments outside an employer/employee relationship may still be subject to withholding through application of Section 12-190 of Schedule 1 to the TAA.

Subsection 12-190(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that an entity must withhold an amount from a payment it makes to another entity if:

(a) the payment is for a supply that the other entity has made, or proposes to make, to the payer in the course or furtherance of an enterprise carried on in Australia by the other entity; and

(b) none of the exceptions in this section applies

Subsections (2)-(6) of 12-190 of Schedule 1 to the TAA, set out the exceptions to the requirement to withhold. The primary exception is that the supplier has quoted their ABN to the payer on an invoice or some other document relating to the supply at or before the time of payment.

The meaning of an entity carrying on an enterprise is discussed in Taxation Ruling TR 2002/09 Income tax: withholding from payments where recipient doe not quote ABN.

Paragraph 21 of TR 2002/9 provides that a 'supply' is defined in section 9-10 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act 1999) and is any form of supply whatsoever and includes:

· a supply of goods;

· a supply of services;

· a provision of advice or information; …

Paragraph 40 of TR 2002/9 provides that an 'enterprise' is defined in section 9-20 of the GST Act 1999. It is a broad term and includes an activity or activities, done:

· in the form of a business;

· in the form of an adventure or concern in the nature of trade;

· on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; ........

A payer does not have to withhold an amount from a payment for a supply if;

(1) the payment is made otherwise than in the course of furtherance of an enterprise carried on in Australia (paragraph 12-190(4)(a)of the TAA), or

(2) the payee is an individual and has given the payer a written statement to the effect that the supply is made in the course of a private recreational pursuit or hobby or is wholly of a private or domestic nature for the payee (subsection 12-190(6) of the TAA.).

In the current arrangement, you provide cash incentives to customers when they refer your business to other customers and those referrals result in new business, that is, a new installation of your product.

The customers who refer the business to you and receive the cash incentive are not related to your company and are non business individuals who do not hold an ABN.

We consider that the customers are providing a supply to you in the form of new business (customer referrals). However it is not considered that the customers are providing a supply to you in the course of carrying on an enterprise. Rather, they are making the supply in their capacity as individuals.

On this basis, the arrangement is considered private or domestic in nature.

Accordingly, there is no obligation to withhold tax on the payments made to the customers pursuant to section 12-35 of Schedule 1 to the TAA.

Question 2

Summary

The incentive payments are revenue in nature therefore they are deductible business expenses pursuant to section 8-1 of the ITAA 1997.

Detailed reasoning

Deductibility of referral incentive payments

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, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

A taxpayer can generally deduct business expenses if the expenses are necessary to carrying on a business for the purpose of earning assessable income, provided a business has commenced and the expenses are not of a capital nature.

The incentive payments are incurred on the attainment of new business referred your way. The expenses are therefore considered of a revenue nature and will be incurred in carrying on a business.

Accordingly, the expenses will be deductible under section 8-1 of the ITAA 1997.