Edited version of your private ruling

Authorisation Number: 1012598170280

Ruling

Subject: Expenditure incurred and paid by employer in relation to salary and wages.

Question 1

Has expenditure been incurred and paid by Company A for salary or wages, arising from the four separate employment contracts detailed in the relevant facts and circumstances of the private ruling, during the relevant income years?

Answer

Yes.

This ruling applies for the following periods:

30 June 2011

30 June 2012

The scheme commences on:

1 July 2010.

Relevant facts and circumstances

Company A is an Australian proprietary company limited by shares and which was incorporated in 2007.

Company A has four employees: Employee A; Employee B; Employee C; and Employee D. The four employees are governed by four separate employment agreements. The employment agreements specify the remuneration package for each employee.

The document titled Agreement between Company A and Employee A was executed in 20XX (Employee A Agreement). The Employee A Agreement relevantly provides for an annual remuneration package where a proportion is paid and the remaining proportion is loaned to the company with interest paid at the rate of X% per annum.

The document titled Agreement between Company A and Employee B was executed in 20XX (Employee B Agreement). The Employee B Agreement relevantly provides for an annual remuneration package where a proportion is paid and the remaining proportion is loaned to the company with interest paid at the rate of X% per annum.

The document titled Agreement between Company A and Employee C was executed in 20XX (Employee C Agreement). The Employee C Agreement relevantly provides for an annual remuneration package where a proportion is paid and the remaining proportion is loaned to the company with interest paid at the rate of X% per annum.

The document titled Agreement between Company A and Employee D was executed in 20XX (Employee D Agreement). The Employee D Agreement relevantly provides for an annual remuneration package where a proportion is paid and the remaining proportion is loaned to the company with interest paid at the rate of X% per annum.

The actual salary and superannuation paid to the employees and loaned to the company in the year ended 30 June 20YY are summarised below:

The actual salary and superannuation paid to the employees and loaned to the company in the year ended 30 June 2012 are summarised below:

Relevant legislative provisions

Income Tax Assessment Act 1936 6(1)

Income Tax Assessment Act 1936 51(1)

Income Tax Assessment Act 1997 6-5(2)

Income Tax Assessment Act 1997 6-5(4) and

Income Tax Assessment Act 1997 8-1.

Reasons for decision

Has Company A incurred expenditure?

The word 'incurred' although used in various provisions is not defined in the Income Tax Assessment Act 1997 (ITAA 1997). The word 'incurred' therefore takes its general legal meaning.

Useful guidance on the meaning of 'incurred' can be found in Taxation Ruling TR 97/7 Income Tax: section 8-1 - meaning of 'incurred' - timing of deductions (TR 97/7) which sets out in detail the view of the Commissioner on whether an outgoing is 'incurred' for the purposes of section 8-1 of the ITAA 1997.

TR 97/7 provides that a taxpayer incurs an outgoing at the time that they owe a present money debt that they cannot escape. In incurring an outgoing a taxpayer need not actually have paid any money provided that the taxpayer is definitively committed in the year of income. A loss or outgoing may be incurred even though it remains unpaid provided that the taxpayer is 'completely subjected' to the loss or outgoing. That is, it must be a presently existing liability to pay a pecuniary sum, even though the liability may be defeasible by others and even though the amount of the liability cannot be precisely ascertained, provided it is capable of reasonable estimation. Whether there is a presently existing liability is a legal question in each case, having regard to the circumstances under which the liability is claimed to arise.

The High Court of Australia considered the meaning of 'incurred' in section 51(1) of the ITAA 1936 which was the predecessor to section 8-1 of the ITAA 1997 in a number of decisions, including: Commissioner of Taxation (Cth) v James Flood Pty Ltd (1953) 88 CLR 492, Nilsen Development Laboratories Pty Ltd v Commissioner of Taxation (Cth) (1981) 144 CLR 616 and Coles Myer Finance Ltd v Commissioner of Taxation (1993) 176 CLR 640.

The meaning of 'incurred' in section 8-1 of the ITAA 1997 has been considered in a number of decisions, including: Malouf v Federal Commissioner of Taxation (2009) 174 FCR 581, Commissioner of Taxation (Cth) v CityLink Melbourne Ltd (2006) 228 CLR 1 and Transurban City Link Ltd v Commissioner of Taxation (2004) 135 FCR 356.

The meaning of 'incurred' in the R&D context has been considered in recent times by the Administrative Appeals Tribunal in a number of decisions, including: Outbound Logistics Pty Ltd v Federal Commissioner of Taxation [2012] AATA 899, Hadrian Fraval Nominees Pty Ltd v Federal Commissioner of Taxation [2013] AATA 127, Ozone Manufacturing Pty Ltd v Federal Commissioner of Taxation [2013] AATA 420, Vision Intelligence Pty Ltd and Commissioner of Taxation [2013] AATA 527 and Desalination Technology Pty Ltd v Federal Commissioner of Taxation [2013] AATA 846.

Company A has an obligation to pay an annual remuneration package to each of the four employees consistently with the Employee A Agreement, Employee B Agreement, Employee C Agreement and Employee D Agreement (together the Agreements). There is nothing in the Agreements to suggest that payment of the remuneration package to each of the four employees was contingent in any way upon the occurrence of any future event. Indeed, the Agreements recognise that in the event an amount cannot be paid it is to be converted into a loan between the relevant employee and Company A.

The Commissioner is satisfied that Company A incurred expenditure of $X in relation to salary or wages as a result of the Agreements as Company A had a presently existing liability in the income year ended 30 June 2011. Similarly, the Commissioner is also satisfied that Company A incurred expenditure of $X in relation to salary or wages as a result of the Agreements as Company A had a presently existing liability in the income year ended 30 June 2012.

Has Company A paid expenditure?

The word 'paid' although used in various provisions is not defined in the ITAA 1997. A limited definition exists in subsection 6(1) of the Income Tax Assessment Act 1936. The word 'paid' therefore takes its general legal meaning which includes both actual and constructive payment.

The ordinary meaning of 'paid' was considered by the Federal Court of Australia in ABB Australia Pty Ltd and Another v Federal Commissioner of Taxation (2007) 162 FCR 189 (ABB). In ABB Lindgren J said at page 226 that:

It is said that in order for payment to occur, there must be a monetary obligation, the offer of an act by the debtor in discharge of it, and an acceptance of that offer by the creditor; see Proctor C, Mann on the Legal Aspect of Money (6th ed, Oxford University Press, 2005) at [7.04]; Brindle M and Cox R (eds), The Law of Bank Payments (3rd ed, Sweet & Maxwell, 2004) at [1-002] ff, and cases referred to in those works, including Libyan Arab Foreign Bank v Bankers Trust Company [1989] QB 728 at 764 per Staughton J; Goode RM, Payment Obligations in Commercial and Financial Transactions (London, Sweet & Maxwell, 1983) p 11 ff; and Derham SR, The Law of Set-Off (3rd ed, Oxford University Press, 2003) at [16.01] and fn 2. These conditions are satisfied in the present case. ABB Australia had a monetary obligation to ABB Zurich; these companies were in agreement that that monetary obligation should be discharged by ABB Australia's paying the amount to BAL.

In East Finchley Pty Ltd v Commissioner of Taxation (1989) 90 ALR 457 (East Finchley) an issue to be considered was whether a payment had been made by a set-off arrangement. Hill J observed at page 470 that:

…I can see no reason why the combination of the two letters should not in any event have constituted a sufficient demand for payment to bring about a situation that there was an obligation in equity by force of the trust deed to pay to the beneficiaries and an obligation by virtue of the loan agreement between the trustee and beneficiaries in law to pay by way of loan the moneys to the trustee by the beneficiaries so that the principle in Spargo's case brought about the result that there was in law a payment.

In the circumstances of this case there is both actual and constructive payment.

As explained above, Company A had an obligation to pay salary or wages to each of the four employees consistently with the Agreements. Actual payment occurred when a proportion of salary or wages were paid to the relevant employees during the relevant income years.

In the circumstances the balance of the salary or wages which were not actually paid will be included in the ordinary income derived by each of the four employees for the purposes of subsection 6-5(2) of the ITAA 1997 during the relevant income years. That is because the amounts have been derived as they have applied or dealt with on behalf of or as directed by each of the four employees for the purposes of subsection 6-5(4) of the ITAA 1997. Constructive payment occurred when the balance of the salary or wages which were not actually paid but were due to each of the four employees were loaned back to Company A by each of the four employees at an interest rate of X% per annum consistently with the Agreements.

The Commissioner is satisfied that Company A has paid expenditure of $X in relation to salary or wages through both actual and constructive payment during the year ended 30 June 2011. Similarly, the Commissioner is also satisfied that Company A has paid expenditure of $X in relation to salary or wages through both actual and constructive payment in the income year ended 30 June 20YY.