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Edited version of private advice
Authorisation Number: 1012649390525
Ruling
Subject: Administration fee
Question
Are you entitled to a deduction for the cost of administration fees paid to the salary sacrifice arrangement (SSA) provider?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2014
The scheme commenced on
1 July 2013
Relevant facts
You have entered into a SSA with your employer.
You are required to pay an administration fee to the SSA provider that your employer engaged to administer the SSA.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5.
Income Tax Assessment Act 1997 Section 6-15.
Income Tax Assessment Act 1997 Section 8-1.
Income Tax Assessment Act 1936 Section 23L.
Reasons for decision
Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) includes in the assessable income of a taxpayer all the ordinary income they derive.
Section 6-10 of the ITAA 1997 further includes in the assessable income of a taxpayer all the statutory income they derive, that is, amounts not in the nature of ordinary income which are specifically included in assessable income by a provision of tax law.
When an employee enters into an 'effective' SSA, they forgo an expected entitlement to an amount of salary and wages before it is earned in return for benefits of a similar value (Taxation Ruling TR 2001/10, paragraph 77).
Benefits in the nature of income are classed as either ordinary or statutory income and are initially caught under section 6-5 or 6-10 of the ITAA 1997. However, subsection 6-15(2) of the ITAA 1997 operates to exclude from assessable income those amounts that are made exempt by a provision of tax law. In the case of benefits provided under an 'effective' SSA, section 23L of the Income Tax Assessment Act 1936 (ITAA 1936) provides that income derived in the form of fringe benefits or exempt fringe benefits is exempt income. As the benefits arising from 'effective' SSAs constitute either fringe benefits or exempt fringe benefits, they are exempted by this provision.
Turning to the nature of the administration fees, the cost of structuring the SSA is incurred with the aim of foregoing or reducing rather than gaining or producing assessable income.
The portion of your entitlements that will ultimately form assessable income is in no way a product of the SSA and the cost of engaging the services of the SSA provider cannot be said to be incurred in gaining or producing that income. Indeed, the expected amount of assessable income that a taxpayer might derive from their employment in the form of salary and wages must already be set before an 'effective' SSA can be entered into and any associated cost incurred.
In relation to the income on which an employee with an 'effective' SSA is ultimately assessed, the costs of structuring the SSA are not deductible because the connection between expenditure and income required by section 8-1 of the ITAA 1997 is absent.
Accordingly, the costs of administration fees in relation to an 'effective' SSA are not incurred in earning your assessable income and are therefore not an allowable deduction.