Edited version of private advice

Authorisation Number: 1051673612759

Date of advice: 11 May 2020

Ruling

Subject: Section 8-1 deductibility

Question

Are the brokerage fees paid by Company A to Entity B deductible in the year in which it incurred under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

The income year ended 20XX

The scheme commences on:

00 Month 20XX

Relevant facts and circumstances

Company A is the head company of an Australian tax consolidated group (the Group).

As the holder of Australian Financial Services Licences (ASFLs), Company A is allowed to market and manage funds.

Company A's primary sources of income are from management and performance fees received from fund management business.

Company A engaged an independent third party, Entity B, to conduct the marketing and selling process of the product to investors in return for the payment of brokerage fees.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Summary

The brokerage fees paid by Company A to Entity B are deductible in the year in which it is incurred under section 8-1 of the ITAA 1997.

Relevant connection between the outgoing and the business

For an outgoing incurred to be deductible under section 8-1 of the ITAA 1997, there must be a relevant connection between the outgoing and the business.

An outgoing has the relevant connection to the business when it is 'desirable or appropriate in the pursuit of the business ends of the business' (Ronpibon Tin NL and Tongkah Compound NL v. FC of T (1949) 78 CLR 47; Magna Alloys & Research Pty Ltd v. Federal Commission of Taxation (1980) FCA 150).

The Group holds ASFLs which allow them to market and manage funds. Through the management of these funds Company A derives revenue in the form of management and performance based fees.

The brokerage fees paid by Company A to Entity B for the purpose of marketing its product are desirable or appropriate in the pursuit of the business ends of Company A.

The brokerage fees satisfy the requirement of being necessarily incurred by Company A in carrying on its business for the purpose of gaining or producing assessable income for the purposes of subsection 8-1(1) of the ITAA 1997.

Outgoing must not be capital or of a capital nature

Even where an outgoing satisfies the requirements of subsection 8-1(1) of the ITAA 1997, it will not be deductible under section 8-1 if capital or of a capital nature.

The nature of an outgoing as either capital or revenue can generally be determined by examining the character of the advantage sought, the manner in which it is to be used, relied upon or enjoyed, and the means adopted to obtain it (Sun Newspapers Ltd and Associated Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337 at 363; [1938] HCA 73; (1938) 1 AITR 403 at 413; (1938) 5 ATD 87 at 96).

The test for determining whether an outgoing is incurred on revenue or capital account primarily depends on what the outgoing is calculated to effect from a practical and business point of view (paragraph 18 of Commissioner of Taxation vs Sharpcan Pty Ltd 2019 HCA 36 ('Sharpcan')):

Authority is clear that the test of whether an outgoing is incurred on revenue account or capital account primarily depends on what the outgoing is calculated to effect from a practical and business point of view. Identification of the advantage sought to be obtained ordinarily involves consideration of the manner in which it is to be used and whether the means of acquisition is a once-and-for-all outgoing for the acquisition of something of enduring advantage or a periodical outlay to cover the use and enjoyment of something for periods commensurate with those payments. Once identified, the advantage is to be characterised by reference to the distinction between the acquisition of the means of production and the use of them; between establishing or extending a business organisation and carrying on the business; between the implements employed in work and the regular performance of the work in which they are employed; and between an enterprise itself and the sustained effort of those engaged in it. Thus, an indicator that an outgoing is incurred on capital account is that what it secures is necessary for the structure of the business. [1]

Company A holds AFSLs which allow them to market and operate investment products from which it derives management and performance fees.

It is considered that the payment of brokerage fees was in the nature of a commission or marketing expense incurred on revenue account.

Conclusion

The brokerage fees paid by Company A to Entity B are deductible to Company A in the year in which it is incurred under section 8-1 of the ITAA 1997 because:

(a)  they are incurred by Company A in gaining or producing its assessable income; or

(b)  it is necessarily incurred by Company A in carrying on a business for the purpose of gaining or producing is assessable income, and

(c)   they are not outgoings of capital or of capital in nature under paragraph 8-1(2)(a) of the ITAA 1997.

Accordingly, Company A is entitled to a deduction for payment of the brokerage fees paid to Entity B under section 8-1 of the ITAA 1997.

[1] Footnotes extensively referencing relevant case law deleted.