Private ruling: Foreign sourced income and expenses
Published: December 2014
Ruling period: Year ended 30 June 2010
Date scheme commenced: 1 July 2009

Ruling: Q1: Are you assessable on funds received from an overseas company in order for you to carry out company business? | A2: Yes

Relevant facts and circumstances: You left full time employment to start a company (Company A) You were a director as well as shareholder of Company A. There were no written agreements between you and Company A. Company A did not issue employee agreements You undertook considerable travel The Company paid you money; some of this was used on travel expenses.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Subsection 6-5(1) | Income Tax Assessment Act 1997 section 8-1

Reasons for decision: Summary: Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income). The legislation does not provide specific guidance on the meaning of income according to ordinary concepts. However, a substantial body of case law exists which identifies likely characteristics. In GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124 at 138, the Full High Court stated: To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business. Amounts that are periodical, regular or recurrent, and relied upon by the recipient for their regular maintenance and paid to them for that purpose are likely to be ordinary income, as are amounts that are the product in a real sense of any employment of, or services rendered by, the recipient. Amounts paid in substitution for salary or wages foregone or lost may also be ordinary income. Ultimately, whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient. The whole of the circumstances must be considered and the motive of the payer may be relevant to this consideration. In your case, you received regular payments from Company A to enable you to carry out services on behalf of the company. These services included extensive travel in order to solicit funding to build gaming and mobile marketing technology. You used the funds to pay for your travel accommodation and living expenses whilst you carried out duties on behalf of the company. We consider that these payments have the characteristics of ordinary income in that you received these payments for services rendered by you for Company A. Additional characteristics are evident; the payments were recurrent and received regularly over a number of years. Furthermore the payments were relied upon as you had no other source of income for the financial years in question. What's more the relationship between you and Company A is similar to that of an employee/employer relationship in that although you had no formal contract with Company A, the services you provided were akin to that which would be expected from an employee. In summary, the Commissioner considers the money you received from Company A to be income from ordinary sources and assessable under section 6-5 of the ITAA 1997 | Detailed Reasoning - Expenses: Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, no deduction is allowed to the extent that the losses or outgoings are of a capital, private or domestic nature or are necessarily incurred in gaining or producing exempt income. In considering whether a deduction is allowable, it is necessary to consider: • whether the expense has actually been incurred and • meets the deductibility tests. If the deduction is allowable, it must also satisfy the substantiation rules as per Division 900 of ITAA 1997. In your case you have provided sufficient evidence to demonstrate the nexus between your expenses and the assessable income received from Company A in such a case as to characterise the outgoing as incidental and relevant to the earning of that income. | Detailed Reasoning - Alternative reasoning: An alternative argument is that the funds which you received in relation to expenses incurred on behalf of the company are not part of your assessable income; nor are the expenses deductible to you. Only those funds received from the company for your personal use would be assessable income. However, as the net outcome remains the same as the previous reasoning, this alternative reasoning will not be considered further at this stage.

Are you entitled to a deduction for expenses incurred in carrying out company business?