ATO Interpretative Decision

ATO ID 2006/239 (Withdrawn)

Income Tax

• This ATO ID is withdrawn. Guidance on the issue contained in this ATO ID can be found in Taxation Ruling TR 98/6 Income tax: real estate industry employees - allowances, reimbursements and work-related deductions.
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Issue

Is the taxpayer, who is an employee who also receives performance bonuses, entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for payments to their spouse for assisting them in their work?

Decision

Yes. The taxpayer, who is an employee who also receives performance bonuses, is entitled to a deduction under section 8-1 of the ITAA 1997 for payments to their spouse for assisting them in their work.

Facts

The taxpayer is a salaried employee who also receives performance bonuses based on the number of clients they secure.

The taxpayer pays an amount to their spouse to assist them in their work.

The taxpayer claims that this assistance enables them to obtain their performance bonuses and thus increase their assessable income.

The amount paid is equivalent to what the taxpayer would pay to an arm's length employee.

Reasons for Decision

In relation to an employee, section 8-1 of the ITAA 1997 allows a deduction for any loss or outgoing incurred in gaining or producing their assessable income to the extent that it is not of a private, domestic or capital nature.

In Wells v. FC of T 2000 ATC 2077; (2000) 45 ATR 1145 (Wells Case) the taxpayer was an employee of a bank. As a Business Development Manager he arranged loans on behalf of his employer. He was paid on a retainer plus commission basis.

The taxpayer employed a company which in turn employed his wife to perform all the necessary paperwork required for the loans.

The Administrative Appeal Tribunal allowed a deduction for the expense on the basis that there was a real connection between the services provided by his wife and the taxpayer's increased commissions. It also held that no part of the payment was a private expense.

The taxpayer in the present case is in a similar situation to that of the taxpayer in Wells Case. They are able to generate additional income in the form of performance bonuses due to the assistance provided by their spouse. As such, there is sufficient connection between the payments for assistance provided by the spouse and the performance bonuses to conclude that the payments are incurred in gaining or producing the taxpayer's assessable income and are not private in nature.

Section 26-35 of the ITAA 1997 limits the amount otherwise deductible for a payment made to a relative to so much of the amount as the Commissioner considers reasonable. As the amount paid to the spouse in the present case is equivalent to an arm's length payment, the whole payment would be considered to be a reasonable amount.

As such, the taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for the payments to their spouse for assisting them in their work.

Year of income:  Year end 30 June 2005

Legislative References:
Income Tax Assessment Act 1997
   section 8-1

Case References:
Wells v. FC of T
   2000 ATC 2077
   (1975) 5 ATR 3380

Related ATO Interpretative Decisions
ATO ID 2002/472

Keywords
Deductions & expenses
Salary and wages expenses
Wages

Business Line:  Small Business/Individual Taxpayers

Date of publication:  1 September 2006

ISSN: 1445-2782