Edited version of private advice

Authorisation Number: 1051683937721

Date of advice: 20 May 2020

Ruling

Subject: Work related expenses

Questions

Isthe cost of the portrait deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Ifthe cost were capital in nature, would the portrait be regarded as a 'depreciable asset' for the purposes of Division 40 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are an elected public servant and receive remuneration for your role.

You are required to commission a portrait at your own cost and to be gifted for public viewing.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 40-30

Income Tax Assessment Act 1997 section 40-300

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Taxation Ruling TR 1999/10 Income tax and fringe benefits tax: Members of Parliament - allowances, reimbursements, donations and gifts, benefits, deductions and recoupments, provides, at paragraph 38, that:

38. ... Member of an Australian Parliament is specifically incorporated into the definition of 'employee' by virtue of the definitions of 'salary or wages' and 'eligible person' in section 221A of the ITAA 1936. The person or government body who pays a Member's Parliamentary remuneration is also defined in section 221A as the Member's 'employer'.

It further states, at paragraph 27, that:

27. We consider that a Member's activities cannot be characterised as a business carried on for the purpose of gaining or producing assessable income. Therefore, claims for deduction of losses and outgoings incurred in the course of gaining or producing assessable Parliamentary remuneration may only be considered under paragraph 8-1(1)(a) ...

Paragraph 8-1(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Whether an expense is incurred in gaining or producing assessable income is discussed in Taxation Ruling TR 2020/1 Income tax: employees: deductions for work expenses under section 8-1 of the Income Tax Assessment Act 1997, at paragraph 13, which states:

13. The pivotal element of section 8-1 for work expenses is the requirement that expenses be incurred 'in gaining or producing assessable income'. The High Court majority in Payne said it is well established that these words are to be understood as meaning incurred 'in the course of' gaining or producing assessable income, and do not convey the meaning of outgoings incurred 'in connection with' or 'for the purpose' of deriving assessable income.

And further, at paragraphs 22 and 23:

22. The requirement that expenses be incurred in the course of producing assessable income means that it is not enough to show only that there is some general link or causal connection between expenditure and the production of income. The expenditure must have a sufficiently close connection to performance of the employment duties and activities through which the employee earns income.

23. Accordingly, in some cases, expenditure would be regarded as too remote from the income-earning activities or incurred only as a prerequisite to earning income, and not incurred in the course of producing that income.

TR 2020/1 also discusses the relevance of employer requirements, at paragraphs 26 and 27:

26. A common issue relating to the deductibility of employee expenses is the relevance of express or implied conditions of employment. In this regard, a question that frequently arises is whether an expense becomes deductible merely because an employer specifically requires the employee to incur the expense.

27. In these circumstances, the employer's requirements do not determine the question of deductibility. This question is always to be answered by reference to the statutory test which involves an objective determination of the connection between the expense and the employee's income-earning activities.

In your case, while the costs incurred for the portrait have a general link or casual connection to your income producing activities, the expenditure is too remote from your actual income producing activities and is therefore not deductible.

The most appropriate characterisation of this expenditure is that it is capital in nature as an item of intellectual property.

An item of intellectual property is defined in section 995-1 of the ITAA 1997 as follows:

Intellectual property: an item of intellectual property consists of the rights (including equitable rights) that an entity has under a • Commonwealth law as:

(a) the patentee, or a licensee, of a patent; or

(b) the owner, or a licensee, of a registered design; or

(c) the owner, or a licensee, of a copyright;

As the person ordering the portrait, you are the owner of the copyright in the portrait (section 35(5) Copyright Act 1968), and as an item of intellectual property, copyright is a depreciating asset as listed in paragraph 40-30(2)(c) of the ITAA 1997

Under item 7 of the table in subsection 40-300 (2) of the ITAA 1997 the termination value when making a gift is the market value of the asset transferred. By gifting the portrait for public viewing the balancing adjustment amount is reduced to nil.

In summary, the portrait is considered capital in nature and the costs incurred are not deductible under section 8-1 of the ITAA 1997.