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Ruling

Subject: Taxable professional income

Question

Do deductions in respect of cost of managing tax affairs reasonably relate to your special professional income, for the purposes of working out your taxable professional income for averaging?

Answer: No.

This ruling applies for the following period

Year ended 30 June 2009

The scheme commenced on

1 July 2008

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 are an artistic director.

You have earned taxable professional income.

You have incurred expenses in respect of managing your tax affairs.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 405

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

The cost of managing tax affairs does not fall within the present definition of apportionable deductions as contained in Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Section 405 of the ITAA 1997 explains how to work out taxable professional income for use in the calculation of the averaging adjustment. Taxable professional deductions are calculated according to the Method statement in section 405-45 as the sum of the following deductions:

(1) the deductions (other than defined 'apportionable deductions') which reasonably relate to the taxpayer's assessable professional income; and

(2) that part of the taxpayer's defined 'apportionable deductions' that is to be counted as assessable professional income according to the formula in Step 2 of the Method statement.

The wording used in the Method statement effectively means that not only defined 'apportionable deductions' are apportioned. Those deductions which have a component that 'reasonably relates' to taxable professional income may also be apportioned.

In Case 67/96 ATC 598; AAT Case 11,375 (1996) 34 ATR 1034, the Administrative Appeals Tribunal (AAT) held that the superannuation deduction was not appropriately or for that matter in any way connected with the derivation of the foreign income and should not be apportioned.

While this case concerned foreign income and 'other taxable income', we consider that the same principles apply to calculating 'taxable professional deductions' in subsection 405-45 of the ITAA 1997, which is similarly worded. Subsequent to the aforementioned case, Taxation Determination TD 2000/12 represents our view on the matter.

Superannuation contributions, by their nature, do not relate to any specific income. Therefore, they could not be considered as reasonably relating to any income and we do not consider that they should be apportioned for the purposes of determining assessable professional income.

On the other hand, the cost of managing tax affairs, is considered to relate to your private tax affairs and therefore are not apportioned for the purposes of determining assessable professional income.