Private ruling: Tax treatment of commission payment
Date of advice: 31 May 2018
Published: September 2018
Ruling period: From 1 July 20xx to 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Is the Commission received by the Trustee from a third party, Y, in relation to a service received by its employee, X, an assessable income for the Trustee under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Is the payment of the Commission from the Trustee to X an allowable deduction to the Trustee under section 8-1 of the ITAA 1997? | A2: Yes. | Q3: Is the payment of the Commission from the Trustee to X an assessable income to X under section 6-5 or section 15-2 of the ITAA 1997? | A3: No. Issue 2 | Q4: Is the payment of the Commission from the Trustee to X a fringe benefit as defined in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A4: No.

Relevant facts and circumstances: ● The Trustee entered into an agreement (Agreement) with Y that every time the Trustee refers a client to avail Y’s service, it will pay a set amount as commission to the Trustee. ● The Trustee’s general practice is to keep its regular hourly rate as its cost from the commission and forward the rest to its clients. ● X is an employee of the Trustee. ● X accessed the service provided by Y. ● The Trustee received the Commission from Y as per the Agreement. ● The Trustee proposes to forward the entire Commission amount to X as it did not spend any professional time and resources for the service accessed by X. X did all necessary work to successfully achieving the service from Y outside the work hours.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 15-2 | Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Reasons for decision: Detailed Reasoning - Question 1: Subsection 6-5(1) of the ITAA 1997 states that: Your assessable income includes income according to ordinary concept, which is called ordinary income. There is no definition of ordinary income in the tax legislation and therefore takes its ordinary meaning. The courts have identified a number of factors that indicate whether an amount has the character of income according to ordinary concepts. In all cases, the initial and most important enquiry is to determine the character of the item or receipt in the recipient’s hand ( McLaurin v. FCT (1961) 104 CLR 381; Federal Coke Co Ltd v. FC of T 77 ATC 4255). This is again determined having regard to the “totality of the circumstances” ( FCT v. Anstis (2010) 76 ATR 735; (2010) HCA 40). In the present case, every time a client of the Trustee accessed the service provided by Y, the Trustee is guaranteed to receive a set commission as per the terms of the Agreement. The receipt is therefore relied upon and expected. Hence the Commission is income according to ordinary concept in the hand of the Trustee and assessable under section 6-5 of the ITAA 1997. | Detailed Reasoning - Question 2: Section 8-1 of the ITAA 1997 sets out the general rules for deductibility of outgoings. Under this section, the two positive limbs of the provision are contained in subsection 8-1(1) of the ITAA 1997, which provides that a taxpayer can deduct from its assessable income any loss or outgoing to the extent that: a) it is incurred in gaining or producing their assessable income, or b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing their assessable income. The four negative limbs of the provision are contained in subsection 8-1(2) of the ITAA 1997, which qualifies the application of the positive limbs by providing that a taxpayer cannot deduct any loss or outgoing to the extent that: a) it is a loss or outgoing of capital, or of a capital nature b) it is a loss or outgoing of a private or domestic nature c) it is incurred in relation to gaining or producing the taxpayer’s exempt income or non-assessable non-exempt income, or d) a provision of the Act prevents the taxpayer from deducting it. The Commission received by the Trustee is assessable as ordinary income under section 6-5 of the ITAA 1997 as explained above. The payment to X only occurs upon the Trustee receiving the Commission payments from Y and deducting any outgoings incurred. This payment is therefore incidental and relevant to the Commission and necessarily incurred in gaining or producing the assessable income. The payment to X is not of a capital nature, nor of a private nature. It is not incurred in gaining exempt income or non-assessable non-exempt income and no provision in the ITAA 1997 prevents it from being deducted. Therefore, the payment of the Commission from the Trustee to X is deductible under section 8-1 of the ITAA 1997. | Summary: The payment from the Trustee to X is not an assessable income for X under section 6-5 or section 15-2 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 6-5 of the ITAA 1997 includes income according to ordinary concept in a taxpayer’s assessable income. While there are various indices to consider whether a receipt is income according to ordinary concept, the initial and most important enquiry for considering the character of an amount received is its character in the hand of the recipient. There is no connection between the Commission payment and X’s employment. Therefore, it is not ordinary income under section 6-5 of the ITAA 1997. Section 15-2 of the ITAA 1997 includes the value of allowances, gratuities, compensation, benefits, bonuses and premiums provided to a taxpayer in respect of employment or services by such taxpayer. The proposed payment from the Trustee to X is not in relation to X’s employment but in relation to a personal matter. Since the payment is not a consequence of employment, section 15-2 of the ITAA 1997 does not apply to treat the payment as assessable income. | Detailed Reasoning - Question 1: A benefit provided in relation to an employee of an employer will only be a fringe benefit where it is provided in respect of the employment of the employee. The payment of the Commission to X is not in relation to X’s employment with the Trustee. Had X not been an employee of the Trustee but any other client, the Trustee would still be making the Commission payment to X. Therefore there is no sufficient nexus between the payment and X’s employment to constitute the payment a benefit as defined in subsection 136(1) of the FBTAA. The fact that the Trustee in this case will not withhold any amount from the Commission but will forward all to X does not change the character of the payment. Therefore the proposed payment of the Commission is not a fringe benefit under subsection 136(1) of the FBTAA.