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Edited version of your written advice
Authorisation Number: 1013110706301
Date of advice: 19 October 2016
Ruling
Subject: Assessable income
Question
Is the commission income assessable income?
Answer
No.
This advice applies for the following period
Year ended 30 June 20XY
The scheme commenced on
1 July 20XX
Relevant facts
Entity A was formed in 20XX.
The directors of the company were X family members.
One family member signed up with entity B in 20YY. Entity B is a X company that produces various products.
The main purpose to become a member was to enable the family to enjoy member's prices.
As the family members started to use the products, they started to tell friends about entity B and the friends signed up with the registered member as the sponsor.
Overtime, downlines grew due to the effort of the X family members and commission income increased. The commission was paid to the registered member.
Realising that entity B was in fact a family business, the company was formed.
The registered member of entity B then requested the commission amounts to be paid to the company. Entity B would not agree to this.
Relevant legislative provisions
Income Tax Assessment Act 1936 section 6-5.
Reasons for decision
A company is a separate legal entity from its directors and shareholders.
Under Division 6 of the Income Tax Assessment Act 1997 (ITAA 1997), the assessable income of a company includes amounts the company receives in the ordinary course of running its business. Such income generally includes income from selling trading stock or providing services.
In this case the company is not actually selling stock or providing services. That is, it is not considered that the company is running the business. There is no indication that the money is being paid into the company's bank account.
The individual family members were carrying out the various activities before the company was formed. The way the activities are being carried out has not substantially changed since the company was formed. It remains that the commission is being paid to an individual family member and not to the company.
Any agreement to pass on the commission to the company does not mean that the company is deriving assessable income.
The fact that the company is registered and has an ABN does not mean it is now deriving the commission income.
The commission income is not assessable income to the company.