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Ruling

Subject: Agent expenses

Question

Are you entitled to a deduction for the expenses of a company paid for whilst acting as an agent for a company?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on

1 July 2011

Relevant facts

You were an employee. During this employment you invented and developed a new product. Patent applications were lodged and Intellectual Property Licence Agreements entered into between you and entity A.

In the relevant year you assigned your interest in the patent to entity B (the company).

You entered into an agreement with the company. You signed the Agency Agreement to act on behalf of the company. You are also a director of the company.

You have paid expenses as agent to assist the company and will be properly reimbursed for these costs. The expenses include insurance premiums, advisors costs, accounting fees and legal fees as well as the annual fee for the intellectual property licence agreement.

The purpose in providing services as agent is to assist in carrying out your duties as a director, public officer and to promote the purpose of the company being the commercialisation of the patent to willing buyers with a view to sale.

You have a reasonable prospect of deriving equivalent or greater income from the company as reimbursement for your costs plus any future director fees.

To date you have not been reimbursed any expenses or received any director's fees. You are hoping to receive these in the subsequent income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for a loss or an outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature.

A number of significant court decisions have determined that for an expense to be an allowable deduction:

· it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T; (1958) 100 CLR 478), 

· there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47), and

· it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).

As a general rule, a loss or outgoing will not be deductible unless it is incurred in gaining or producing the assessable income of the taxpayer who incurs it (Federal Commissioner of Taxation v Munro (1926) 38 CLR 153).

A company is a separate entity from its directors and agents and is taxable in its own right. Therefore it is necessary to determine who incurred the various expenses in order to determine if a deduction is allowed.

Taxation Ruling TR 97/7 sets out the Commissioner's views on the meaning of incurred. Generally, a taxpayer incurs an expense at the time they owe a present money debt that they cannot escape.

Therefore, where a document, such as an invoice is made out in the company's name, it is considered that the company has a present existing liability to pay the specified amount and incurs the associated expense. Where such expenses are incurred for the production of assessable income, then it follows that a deduction is generally allowable under section 8-1 of the ITAA 1997 for the company.

Where expenses are incurred by the company and paid for by a director or agent, a deduction is not allowable to the director or agent. It is acknowledged that paying the expenses of the company is part of your agency agreement. However, such expenses do not sufficiently relate to your income earning activities. They more directly belong to the company. That is the expenses belong to the company and you pay the expenditure on behalf of the company.

Directors or agents of a company would not ordinarily be expected to pay the company's expenses. Expenses are normally incurred by a company in relation to their operations and, thus, the earning of the company's assessable income.

In your case, you have paid the company's premiums and other fees. The purpose of your action was not to directly produce any assessable income for yourself, but to fulfil your commitment as agent.

It should be noted that a reimbursement of an expense paid is not generally regarded as assessable income as outlined in Taxation Ruling TR 92/15. The reimbursement paid by the company is not regarded as an assessable allowance or as any of the other kind of payment in respect of employment or services rendered.

Therefore a deduction for paying the company's expenses is not allowable under section 8-1 of the ITAA 1997 as it relates to the company's affairs and not your assessable income.