Private ruling: Deductibility of commission fees and PAYG withholding tax
Date of advice: 14 June 2016
Published: August 2016
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is the referral fee paid to an individual for referring a loan to the business deductible under section 8-1 of ITAA 1997? | A1: Yes. | Q2: Is the referral fee paid to a company for referring a loan to the business deductible under section 8-1 of ITAA 1997? | A2: Yes. | Q3: Will an amount be required to be withheld under Division 12 of Schedule 1 of the Taxation Administration Act 1953 in respect of commission payments made to non-resident commission agents which are individuals? | A3: No. | Q4: Will an amount be required to be withheld under Division 12 of Schedule 1 of the Taxation Administration Act 1953 in respect of commission payments made to non-resident commission agents which are companies? | A4: No

Relevant facts and circumstances: The entity provides mortgage broker services in Australia. The entity targets both local and international customers. The entity has a good business network in overseas countries.. The entity has an oral agreement with individual persons based overseas. If the overseas individuals refer a client to the entity, and the deal is successful, the entity will pay commission or referral fees to the overseas individual. The amount of referral fees is based on the size of the individual loans. For example, a resident in an overseas country referred a deal to the entity. The loan application was successful and the entity received a bank commission. After the loan settled, as per the agreement between the entity and the overseas agent, the entity paid 20% of the commission to the overseas agent.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Tax Administration Act 1953 section 12-35

Reasons for decision: Detailed Reasoning - Question 1 and 2: Under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) you can claim deductions for expenses 'to the extent' they are incurred in gaining or producing your assessable income, or they are necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. You cannot claim deductions under section 8-1 of the ITAA 1997 for expenses 'to the extent' to which they are of a capital, private or domestic nature or they are incurred in gaining or producing exempt income. | Detailed Reasoning - Necessarily incurred: The phrase 'necessarily incurred' does not mean that the expense was unavoidable or logically necessary. The expense must be clearly and appropriately adapted for the ends of the business. Where the expense is voluntary, the controlling factor is whether the expense can objectively be seen to be appropriate to the business activity ( Magna Alloys & Research v. FC of T 80 ATC 4542; (1980)11 ATR 276 ( Magna Alloys )). It may be necessary to examine the taxpayer's subjective purpose where there is no obvious commercial connection with the business activity or where the expense does not achieve its intended result (Taxation Ruling TR 95/33). In your case, the payment has the necessary nexus with the carrying on your business to produce your assessable income. This type of payment is considered to be an ordinary consequence of the day to day activities of your business and is, therefore, an allowable deduction under section 8-1 of the ITAA 1997. | Detailed Reasoning - Question 3 and 4: The pay as you go (PAYG) provisions contained in Part 2-5 of Schedule 1 of the Taxation Administration Act 1953 (TAA) require amounts to be withheld from various types of payments. Section 12-35 of Schedule 1 of the TAA requires that an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity) The term 'employee' is not defined in the TAA, therefore it has its ordinary meaning. In most cases, it will be self-evident whether an employer/employee or principal/independent contractor relationship exists. Whether a person is an employee of another is a question of fact to be determined by examining the terms and circumstances of the contract between them having regard to the key indicators expressed in the relevant case law. Taxation Ruling TR 2005/16 considers the various indicators the courts have considered in establishing whether a person engaged by another individual or entity is an employee within the common law meaning of the term and states at paragraph 17: The relationship between an employer and employee is a contractual one. It is often referred to as a contract of service . Such a relationship is typically contrasted with the principal/independent contractor relationship that is referred to as a contract for services . An independent contractor typically contracts to achieve a result whereas an employee contracts to provide their labour (typically to enable the employer to achieve a result). Based on the information provided, it appears the referral fees are paid to the overseas agents in their capacity as independent agents and not as employees. Accordingly, as the relevant payments for services are made to non-resident commission agents, there is no requirement to withhold an amount under section 12-35 of Schedule 1 of the TAA. Payments made to persons other than individuals Section 12-35 of Schedule 1 to the TAA 1953 applies to payments made to individuals in their capacity as employees. It does not apply to payments made to other entities - provided the arrangement is not a sham or a mere redirection of an employee's salary or wages. A sham is an arrangement that creates the appearance of rights and obligations different from those actual rights and obligations that the parties intend to create. The parties must have a common intention that the arrangement is a mere facade, disguise or false front for a sham arrangement to exist