Edited version of private advice

Authorisation Number: 1052317910046

Date of advice: 15 October 2024

Ruling

Subject: Non-assessable income - private agreement

Question

Is the amount received from your siblings relating to business travel expenses you personally incurred assessable under 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Person A (You) is a partner in a partnership that carries on a primary production business.

Person B and Person C are your siblings and are the other partners in the partnership.

The partnership has no formal written partnership agreement.

The partnership was formed under the verbal agreement that any business profit or loss would be distributed evenly between the 3 partners.

The partnership did not have any agreement regarding business expenses.

During a specified time, you personally incurred vehicle and travel expenses on behalf of the business.

You kept a logbook, recording each business trip and the kilometres travelled.

You were not reimbursed from the business or partners at the time of incurring the expenses.

You have claimed these expenses in your individual tax return each financial year under 'Other Deductions' by either the cents per kilometre or logbook method.

A discussion was had in approximately the 20XX calendar year regarding repayment of expenses; however, details of any arrangement were not finalised.

No further attempts at finalising an arrangement were made until the 20XX calendar year.

On a specified date, Person B and Person C paid you the same amount, each from their personal bank accounts to repay you for expenses.

The amount included a portion for the actual expense which was calculated using the ATO cents per kilometre method and a portion for interest.

The interest was calculated based on interest rates for the applicable periods available at a specified bank.

Person B and Person C agreed to pay interest to replace interest that could have been earned in the personal account had the expense not been incurred personally.

The vehicle expenses were not claimed in the partnership tax return.

There have been no other partnership expenses that were incurred personally from any partner.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 15-70

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Ordinary income

Subsection 6-5(1) of the ITAA 1997 provides that your assessable income includes income according to ordinary concepts, which is called ordinary income.

Subsection 6-5(2) of the ITAA 1997 states that if you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia during the income year.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

(a) are earned

(b) are expected

(c) are relied upon, and

(d) have an element of periodicity, recurrence or regularity.

If the income has characteristics of the four listed above, then it can be considered as ordinary income under section 6-5 of the ITAA 1997.

Application to your circumstances

The primary production business you are involved in with your siblings has no formal written or verbal partnership agreement that outlines how business expenses would be incurred or reimbursed. In a specific time period, you personally incurred travel expenses on behalf of the business. You kept a logbook to record the business travel kilometres travelled.

A discussion was held in the 20XX calendar year with your siblings regarding reimbursement; however, no further action was taken until the 20XX calendar year when the issue was re-raised, and an agreement reached. On a specified date you received a payment from each sibling individually from their personal bank account and not the partnership bank account. The payment was not related to the rendering of personal services, income from property and was not directly earned through the carrying on of your primary production business activities.

Conclusion

You came to a private agreement with your siblings on how much you would be paid for the expenses you incurred by using your own motor vehicle for business related tasks over the course of several income years. Consequently, the full payment you received in the relevant income year from your siblings in relation to business travel expenses you personally incurred is not considered ordinary income and is not reportable or assessable under 6-5 of the ITAA 1997.