Private ruling: Deductions for payments to related entity
Published: July 2014
Ruling period: Year ended 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2013

Ruling: Question and answer | Are you entitled to claim a deduction for payments made to a relative for duties performed in relation to the operation of your business? | Yes.

Relevant facts and circumstances: You run a professional practice. The business income you derive is not subject to the Personal Services Income rules. There are numerous administrative duties involved with running your practice. The time required of you to fulfil the required administrative duties limits the time you can make available for your clients. You intend to employ a relative to carry out the required administrative duties. Your relative has many years' experience in running professional practices of the type you are involved in. You will pay your relative an hourly rate calculated at the award rate for a person of your relative's qualifications as determined by Fair Work Australia for the hours worked including PAYG withholding and Superannuation Guarantee contributions.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 subsection 26-35(1)

Reasons for decision: Summary: Section 8-1 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. Subsection 26-35(1) of the ITAA 1997 provides that where a payment is made to a related entity, you can only deduct so much of the amount that the Commissioner considers to be reasonable. A 'related entity' includes a relative or a partnership in which a relative is a partner. Taxation Ruling TR 1999/10 Income tax and fringe benefits tax: Members of Parliament - allowances, reimbursements, donations and gifts, benefits, deductions and recoupments (TR 1999/10) sets out the Commissioner's view on what is considered to be a reasonable amount when making payments to a related entity in terms of subsection 26-35(1) of the ITAA 1997. Paragraph 346 of TR 1999/10 states that when making payments to a related entity, the Commissioner has regard to the amount the payer would be expected to pay to an unrelated person with similar skills and experience for provision of the same services. A deduction will generally be allowable where the rate of payment is commensurate with commercial rates for the type of work performed (paragraph 348 of TR 1999/10). In your case, you will be employing a relative to carry out the administrative duties required with running your practice and will be paying your relative the award rate for a person of your relative's qualifications. Consequently, it is considered that the amount of the payments is reasonable for the purposes of subsection 26-35(1) of the ITAA 1997. The remuneration you pay to your relative will be an expense incurred in producing your assessable income and is therefore an allowable deduction against your business income.