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Edited version of your private ruling
Authorisation Number: 1012097180564
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Ruling
Subject: Assessable income and business expenses
Question 1
Is the gross income of your business wholly assessable to you under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as a sole trader?
Answer
Yes
Question 2
Can a portion of the assessable income of your business be claimed as wages under section 8-1 of the ITAA 1997, where no wages were actually paid to your truck driver (an associate)?
Answer
No
This ruling applies for the following period
Year ended 30 June 2010
The scheme commenced on
1 July 2009
Relevant facts
You purchased a truck from your spouse several years ago to commence a freight transport business.
The name of the business was registered.
You represented yourself as a sole trader in your dealings with the ATO.
You applied for and obtained an Australian Business Number (ABN) as a sole trader and Business Activity Statements (BAS) have been issued to you.
You operated the business bank account in your name only. You did not have a joint business account.
You operated the office and maintained the business records.
You do not have a truck licence.
Your spouse operated the truck but refused to allow you to have any income in their name to avoid child support obligations.
You did not record him as an employee or pay him any wages.
Your spouse regularly withdrew arbitrary amounts of cash from your account as required for living expenses.
The only amounts you deposited into your spouse's bank account were amounts for truck fuel, which your spouse used to refuel the truck whilst on business journeys.
You did not employ any other employees or subcontractors.
You sold the truck and ceased business in 2009.
There was no public recognition of any partnership.
No partnership agreement was drawn up, nor was a partnership TFN application lodged.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Summary
The overall impression gained indicates that there was no general law partnership for the business. From the facts provided, we have concluded that for taxation purposes a partnership does not exist.
Therefore, you are assessable under section 6-5 of the ITAA 1997 on the whole of the income of the business.
Further, as you do not have any documentary evidence of any wages expense, you are not entitled to a deduction for wages.
Detailed Reasoning
Your spouse would only be assessable on a share of the income of the business if the business was carried on as a partnership.
Taxation Ruling TR 94/8 outlines the factors in deciding whether persons are carrying on business as partners in a given year of income. The relevant factors to consider are:
Intention
This covers the mutual assent and intention of the parties.
Conduct
(a) joint ownership of business assets
(b) registration of business name
(c) joint business account and power to operate it
(d) extent to which parties are involved in the conduct of the business
(e) extent of capital contributions
(f) entitlement to a share of net profits
(g) business records
(h) trading in joint names and public recognition of the partnership.
The mutual assent and intention of the parties
You have not entered into any agreement with your spouse to create any partnership for any purpose.
The conduct of the activity as described gives the overall impression that you have not acted as partners in the business. From a legal perspective you were not carrying on business in common with a view to profit.
Conduct
(a) Joint ownership of business assets
In your case, the truck was purchased by you as owner of the business and there is no evidence of joint ownership of any assets relating to the business
(b) Registration of business name
The name of the business was registered.
(c) Joint business account and power to operate it
A joint bank account was never established, you operated the bank account for the business.
(d) Extent to which the parties are involved in the conduct of the business
Your spouse was engaged as the truck driver and there is no evidence they were otherwise engaged in the conduct of the business.
(e) Extent of capital contribution.
There is no evidence that your spouse contributed any capital to the business.
(f) Entitlement to share of net profits
Your spouse has not formally drawn or received any remuneration from the business.
(g) Business records
You operated the office and maintained the business records. You applied for and obtained an ABN as a sole trader and BAS's have been issued to you.
(h) Trading in joint names and public recognition of the partnership
You intended to operate the business as a sole trader. There was no public recognition of any partnership.
In Case 3/2003 2003 ATC 137; AATA Case 568 (2003) 53 ATR 1017, a lack of documentary evidence of a partnership (no partnership tax returns, no partnership agreement, representations to the bank of an entity other than a partnership) meant that there was no partnership.
On review, the overall impression gained from the above factors indicates that you operated the business as a sole trader and there was no partnership for tax purposes.
Therefore, there is no evidence that your spouse was entitled to any share of the net operating profits.
Deductibility of 'wages' expense
You have asked if you can claim a deduction for 'wages' of your spouse 'as a default amount of 50%' of the assessable income of the business.
The onus is on the taxpayer to show that expenses have been incurred.
We find that you have not satisfied that onus and no deduction for cash withdrawal outlays are considered appropriate given the lack of evidence that the funds were used to pay wages expenses for your business activity.