Private ruling: Apportioning expenditure and attributing income
Date of advice: 8 December 2015
Published: February 2016
Ruling period: Income year ending 30 June 2013 | Income year ending 30 June 2014 | Income year ending 30 June 2015
Date scheme commenced: 1 July 2012

Ruling: Q1: Can the Practice Fee paid in the 20XX income year by Company A be deducted under section 8-1 of the Income Tax Assessment Act 1997 in the years that the expenditure relates to? | A1: Yes | Q2: On the basis that the answer to Question 1 is 'Yes', can the current year accounting profits of Company A (after the adjustment for the Practice Fee as set out in Question 1), be attributed to Taxpayer B and such income will not be assessable to Company A as it would otherwise be double taxed? | A2: Yes | Q3: On the basis that the answer to Question 2 is 'Yes', can the dividends paid to Taxpayer B by Company A in the relevant years, be disregarded for income tax purposes by both Company A and Taxpayer B and are non-assessable non-exempt income to Taxpayer B as the dividends represent the accounting profits that have been attributed to Taxpayer B as set out in Question 2? | A3: Yes

Relevant facts and circumstances: Company A is an incorporated company and has provided professional services since incorporation. Taxpayer B has at all times been the nominated professional person for Company A and is the sole shareholder of Company A. Company A and Taxpayer B have prepared and lodged their income tax returns themselves since incorporation. They have recently employed a tax agent to lodge their 20YY returns and prepare the private ruling request. Company A and Taxpayer B are bound by an Australian Industrial Agreement relevant to their profession. Under this agreement Company A must pay an annual Practice Fee (PF) to a Government Department. The PF is based on the gross fees collected by Company A per financial year. There is a formula used to calculate the amount payable and payment is due yearly. The PF for the 20VV to 20WW financial years was incorrectly calculated and underpaid by Company A. Company A paid an amount to the Government Department in the 20XX income year representing the amount they believe had been underpaid for the 20VV to 20WW years. They calculated and apportioned the amount paid over the years 20VV to 20WW, based on fees collected in those years. Company A and Taxpayer B incorrectly determined that the Company's activities were from a business structure, not personal services activities. Some profits were retained in Company A and used primarily for investment purposes including investment in term deposits and purchasing shares in Australian stock exchange companies. Company A and Taxpayer B want to rectify the position and take corrective action to ensure profits are paid out of Company A to Taxpayer B and not retained in the company.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 86-15 | Income Tax Assessment Act 1997 Section 86-30 | Income Tax Assessment Act 1997 Section 86-35

Reasons for decision: Summary: The Practice Fee would be considered an outgoing incurred in gaining or producing assessable income. Ensuring that the PF is properly referable to the particular income year will require consideration of the period in which the services were provided that relates to that liability. Therefore the PF deductions will need to be apportioned according to the income years in which the services were provided. | Detailed Reasoning - Question 2: On the basis that the answer to Question 1 is 'Yes', can the current year accounting profits of Company A (after the adjustment for the Practice Fee as set out in Question 1), be attributed to Taxpayer B and such income will not be assessable to Company A as it would otherwise be double taxed? Under section 86-15(1) ITAA 1997 ordinary or statutory income of a personal services entity that is the personal services income (PSI) of an individual is attributed to that individual, that is, it is included in the individual's assessable income. This ensures that an individual's PSI is attributed to them regardless of the fact that it comprises the ordinary income or statutory income of a personal services entity. Under section 86-30 ITAA 1997 the ordinary income or statutory income of the personal services entity is neither assessable nor exempt income of the entity to the extent that it is PSI included in the individual's assessable income under 86-15. | Summary: The current year accounting profits of Company A (after the adjustment for the PF as set out in Question 1), will be attributed income to Taxpayer B and such income will not be assessable to Company A. | Detailed Reasoning - Question 3: On the basis that the answer to Question 2 is 'Yes', can the dividends paid to Taxpayer B by Company A in the relevant years, be disregarded for income tax purposes by both Company A and Taxpayer B and are non-assessable non-exempt income to Taxpayer B as the dividends represent the accounting profits that have been attributed to Taxpayer B as set out in Question 2? Taxation Ruling TR 2003/6 Income tax: attribution of personal services income deals with the alienation of personal services income and explains how amounts distributed from a personal services entity, not conducting a personal services business, that are attributed personal services income are not taxed twice. Under paragraph 28 of the Ruling, if the personal services entity has income that constitutes PSI of an individual, the PSI is included in the assessable income of the individual by sections 86-15 and 86-20. This income is excluded from the assessable and exempt income of the personal services entity by section 86-30. Paragraph 32 of the Ruling states 'A personal services entity that is a company may still have accounting profits even if all of its profits are personal services income and the net personal services income has been attributed. The profits may be distributed by the personal services entity. If distributed to the test individual or to an associate of the test individual, to the extent that the distribution represents personal services income of the test individual that has been or will be attributed to the individual under subsection 86-15(1), the distribution will not be assessable or exempt income of the recipient (see subsection 86-35(1)).' | Summary: The dividends from Company A which represent personal services income of Taxpayer B and have previously been attributed to them will not be assessable or exempt income of Taxpayer B and will be disregarded.

Can the Practice Fee paid in the 20XX income year by Company A be deducted under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in the years that the expenditure relates to?: 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, except where the outgoings are of a capital, private or domestic nature. | The main issues governing when a deduction is allowable are the time when expenditure is incurred and the period to which it is properly referable. The time at which an expense is incurred is considered in Taxation Ruling TR97/7 Income Tax: section 8-1 - meaning of 'incurred' - timing of deductions. There is no statutory definition of the term 'incurred'. As a guide, you incur an expense at the time you owe a debt that you cannot escape. | Taxation Ruling TR94/26 Income tax: subsection 51(1) - meaning of incurred - implications of the High Court decision in Coles Myer Finance sets out the ATO's views on the interpretation of the word 'incurred' and what is meant by the phrase 'properly referable' following the decision of the High Court in Coles Myer Finance Pty Ltd v FCT ATC 4214; 25 ATR 95. In the Coles Myer case it was found that a liability must presently be existing in order to be incurred within the meaning of section 8-1 (former s 51(1)). Paragraph 11 of the ruling states that the courts have provided little guidance as to the meaning of 'properly referable'. The ATO believes that 'properly referable' is concerned with the period during which the benefit obtained from the liability is used in the taxpayer's assessable income producing activity. Generally, this will be the period in which the goods or services to be provided as a result of the liability are in fact provided. | Paragraph 17 sets out that only so much of the expense as is properly referable to the particular income year is an allowable deduction in that year. This means that the expense must be apportioned over the period to which it is properly referable.