Private ruling: Contract with an income restrictive covenant
Published: August 2011
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: 1 July 2009

Ruling: Questions and answers | 1. Is your income received as director's fees included in your assessable income? | Yes | 2. Are you entitled to a deduction for the payment of your directors fees received from an independent company, payable to your employer, in the financial year which the obligation to your employer to make the payment arises? | Yes

Relevant facts and circumstances: You were approached to become an independent director of a company unrelated to your employer. It is a requirement of your employment contract with your employer that the employer approves your appointment as director of the independent company prior to you taking that appointment. In approving your appointment to the board of the independent company, the employer issued a statement of terms relating to the board appointment. In terms set by the employer, you were not permitted to receive additional remuneration over and above the remuneration you receive from your employer. Accordingly, where director's fees are received from the independent company, it is a requirement that those fees for your services be paid over to your employer. Your employer has invoiced you for the amount of director's fees that the independent company paid to you through the year ended 30 June 2010. You have paid the amounts over to your employer.

Relevant legislative provisions: Income Tax Assessment Act Section 6-5 | Section 8-1

Reasons for decision: Detailed Reasoning - Directors fees: Section 6-5 of the Income Tax Assessment Act of 1997 (ITAA 1997) provides that an amount is assessable income if it is income according to ordinary concepts. The income which is the subject of this ruling is Director's fees paid for rendering services to the board of the independent company. Directors fees which are paid for a taxpayer's services are considered to be ordinary income and form part of a taxpayers assessable income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Deductibility of director's fees paid over to your employer: Section 8-1 of the ITAA 1997 provides that you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing assessable income and is not: · Capital, private or domestic in nature; · Incurred in gaining or producing exempt income; or · Prevented from being deductible another provision in the ITAA 1997 As a term of maintaining your employment with your employer and subsequently taking up the role of board member of the independent company, you agreed to a statement of terms put forward by the employer requiring that you pay onwards to the employer any amount of remuneration gained for your services as a board member of the independent company. You are required, as a condition of being appointed to the board of the independent company, to pay amounts earned from the independent company to the employer. Your employer does not permit officers who are appointed as an external director to be remunerated without the express written consent of the Chief Executive of the employer. The amount you earn as a board member is payable to the employer as consideration for allowing you to engage in services as an external director. That is, the amounts are payable to your employer, to satisfy the condition that you do not receive any further remuneration for you appointment as external director of the independent company. In these circumstances, the amounts payable to the employer are outgoings that the board member necessarily incurs in producing his assessable income being the director's fees. Under subsection 8-1(1) of the ITAA 1997, you are entitled to claim a deduction for amounts payable to the employer to the extent of fulfilling the statement of terms that has been set out. | Detailed Reasoning - Timing of an expense: You incur an expense in an income year when: · you receive a bill or invoice for an expense that you are liable for and must pay (even if you don't pay it until after the end of the income year); or · you do not receive a bill or invoice but you are charged and you pay for the expense. The point at which you are liable to pay the director's fees to the employer is the time you are entitled to the deduction.

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