Edited version of private advice

Authorisation Number: 1051971856740

Date of advice: 19 April 2022

Ruling

Subject: Deductions related to office holder income earned as a sole trader independent assessor

Question

Can you deduct expenses incurred in carrying on your business for the purpose of gaining or producing office holder income as an independent assessor for a statutory body?

Answer

Yes, to the extent the expenses are not capital, private or domestic in nature.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The taxpayer is a professional who has run a sole trader specialist practice business for many years.

In addition to providing services to the public the taxpayer performs work as an independent assessor for a statutory body on a fee for service basis.

The assessment work for the statutory body is considered to be that of an office holder under paragraph 12-45(b) of Schedule 1 of the Taxation Administration Act 1953 (TAA). The taxpayer is not an employee of the statutory body.

The statutory body withholds tax on the payments for the taxpayer's independent assessments.

The independent assessment work completed by the taxpayer for the statutory body is similar to the work the taxpayer does for other clients.

The taxpayer utilises their business facilities and employees to carry out the independent assessments. The taxpayer is also required to be registered and have indemnification to carry out the assessment work.

The taxpayer provides a tax invoice for the services provided to the statutory body.

The taxpayer is registered for GST and submits quarterly business statements.

Relevant legislative provisions

Section 12-45 of Schedule 1 to the Taxation Administration Act 1953

Section 8-1 of the Income Tax Assessment Act 1997

Reasons for decision

Summary

To the extent the expenses are not are of a capital, private or domestic in nature, the taxpayer can deduct expenses for carrying on their business for the purpose of gaining or producing office holder income earned as a independent assessor for a statutory body. The expenses for the office holder income will need to be apportioned on a reasonable basis and reported separately from the taxpayer's other business expenses.

Detailed reasoning

Deductible expenditure under section 8-1 of the ITAA 1997 must first satisfy either of the positive limbs of the provision.

The first limb allows a deduction for any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income (paragraph 8-1(1)(a) of the ITAA 1997).

The second positive limb allows a deduction for a loss or outgoing to the extent it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income (paragraph 8-1(1)(b) of the ITAA 1997).

To claim a deduction under section 8-1 of the ITAA 1997 it is therefore necessary to establish sufficient connection link or nexus, between the loss or outgoing and the production of assessable income (in the case of the first positive limb) and or the carrying on of a business for the purpose of producing assessable income (in the case of the second positive limb).

Regardless of which positive limb is satisfied, a deduction will not be allowed under section 8-1 of the ITAA 1997 for expenses which are capital, private or domestic in nature.

Application to your circumstances

The taxpayer undertakes independent assessment work for the statutory body on a fee for service basis. The taxpayer regards this work and the income it produces as part of their normal business operations. The taxpayer incurs business expenses in relation to the office holder income including for the business premises and support employees used to carry out the assessments.

The Commissioner accepts that where these expenses are incurred either directly in earning the office holder income, or necessarily incurred in conducting the taxpayer's business for the purpose of earning the office holder income, they can be deducted under section 8-1 of the ITAA 1997, to the extent they are not capital, private or domestic in nature. The expenses related to the office holder income will need to be apportioned on a reasonable basis.

The office holder income and expenses will be reported separately to the other business income and expenses. The office holder income and expenses are to be reported in the salary and wage section of the taxpayers return.