Decision impact statement
Park and Commissioner of Taxation
Venue: Administrative Appeals Tribunal
Venue Reference No: 2010/4239-4240
Judge Name: Senior Member Frost
Judgment date: 18 August 2011
Appeals on foot: No.
Decision Outcome: Partly Adverse
Impacted Advice
Relevant Rulings/Determinations:
Subject References:
Personal services income
Personal services entity
Personal services business
Results test
Précis
Outlines the ATO's response to this case which concerned whether the personal services income of Photocom Pty Ltd (Photocom), a personal services entity, was properly attributed to the applicant under section 86-15 of the ITAA 1997.
Brief summary of facts
The Applicant was the director of Photocom.
During the 2006 and 2007 income years, the Applicant, on behalf of Photocom, performed computer programming services for the clients of Candle Australia Ltd (Candle). Candle is a labour hire firm.
During the relevant years, the Applicant maintained a residence in Sydney. Also, during that period, the Applicant provided services to a client of Candle in Perth and while performing this role, he rented an apartment in Perth and purchased household items to furnish the apartment.
During the 2007 income year, the Applicant withdrew amounts from Photocom's business bank account and claimed these withdrawals as a payment of Living Away From Home Allowance (LAFHA).
Photocom and the Applicant were subject to an income tax audit for the 2006 and 2007 income years. As a result of the audit, amended assessments issued which attributed personal services income to the Applicant and disallowed rental expenses deductions.
Issues decided by the tribunal
The Tribunal concluded that the Applicant's personal services income derived by Photocom was attributable to the Applicant in the relevant income years. However, the attributed income was reduced by rental expenses incurred by Photocom in relation to the Perth apartment.
The Tribunal reached this conclusion on the basis that section 86-60 permits the rental expenses to reduce attributable income if the Applicant would have been entitled to a deduction under section 8-1 for those expenses, if he himself had derived the income directly from Candle, and incurred the rent expense.
The Tribunal found that the Applicant would have been entitled to a deduction for the rental expenses because the "occasion" of the applicant's expenditure was the income-producing activities conducted under the contractual arrangement with Candle, and the expenditure was not of a private or domestic nature.
The Tribunal went on to find that section 85-15, a provision which disallows rental expenses in certain circumstances, did not apply. As the Applicant was an associate of Photocom, the deduction would only be denied if the apartment was the Applicant's residence. The Tribunal found that it was not his residence.
ATO view of Decision
The ATO view on the correct interpretation of section 86-60 can be found in Taxation Ruling TR 2003/10 at paragraphs 96 to 102.
TR 2003/10 explains that section 86-60 requires consideration of the circumstances that gave rise to Photocom's entitlement to a deduction and then those circumstances are applied to the relevant individual. Photocom is conducting a business and, in the course of that business, it incurred expenditure in providing accommodation to its employee. Applying the ATO view the question that should be asked is: would an individual who is conducting a business be entitled to a deduction under section 8-1 for expenditure incurred in providing accommodation to an employee?
In this case, the answer to that question is yes unless section 85-15 applies to prevent Photocom from deducting the costs of renting the Perth apartment on the basis that the expense was in respect of the residence of an associate of Photocom. The Tribunal found that it was not his residence. This decision was open on the facts of the case.
The concern arising from the Tribunal's interpretation of section 86-60 is that others may seek to apply the same interpretation; and depending on the factual situation an incorrect outcome could potentially be obtained.
Administrative Treatment
Implications for ATO precedential documents (Public Rulings & Determinations etc)
None
Implications for Law Administration Practice Statements
None
Court citation:
[2011] AATA 567
2011 ATC 10-198
(2011) 84 ATR 672
Legislative References:
Income Tax Assessment Act 1997 (Cth)
8-1
85-15
86-20
86-60
87-18
Taxation Administration Act 1953 (Cth)
280-160
280-170
298-20
Division 284
Division 298
Case References:
C of T v Day
[2008] HCA 53
(2008) 236 CLR 163
70 ATR 14
Taneja v C of T
[2009] AATA 87
(2009) 75 ATR 111
2009 ATC 10-078
Skiba v FC of T
[2007] AATA 1705
2007 ATC 2467
67 ATR 682