the report tax news | views | clues No deduction for therefore deductible as an the provision of engineering franchisee fee outgoing of a revenue nature. services. The AAT upheld the Readers may remember that the In a recent decision, the Commissioner’s position. PSI rules apply where the income Administrative Appeals Tribunal It indicated that there was no is derived mainly as a reward for (AAT) disallowed deductions for business being conducted and the the individual’s personal efforts or the payment of an initial upfront expenses were not incurred in the skills. fee to participate in a franchisee production of assessable income. arrangement. In such circumstances, the income Instead the AAT held that the taxpayers had made a capital represents the individual’s PSI, A group of taxpayers were irrespective of whether or not that involved in an arrangement investment. income is derived in another whereby they would pay an TIP: Broadly, a tax deduction will entity, such as a company. upfront amount to secure franchise be available where it can be rights. They also paid legal and shown that the expense is The Commissioner attributed the administration fees in respect of incurred in carrying on a business company’s income to the taxpayer the franchise. to produce assessable income, directly. as opposed to acquiring a capital These outgoings were claimed as or investment asset. In his view, the taxpayer was not a deduction by all taxpayers, in operating a personal services their income tax returns. Personal services business and therefore the PSI income rules should apply. The franchise business involved marketing financial services to Broadly, the taxpayer argued the accounting firms in certain areas In a recent decision, the company satisfied two of the four throughout Australia. Administrative Appeals Tribunal tests required for a personal (AAT) held that consultancy services business. These tests The Commissioner amended the income derived by a company was were: taxpayers’ assessments for the personal services income (PSI). periods in question, disallowing The income was earned by the the results test — where at the deductions for the franchise company for the provision of the least 75% of the personal fee and administration fees on the services of an engineer, who was services income derived is for basis they were outgoings of a also the sole director of the producing a result; and capital nature. company. the unrelated clients test — The taxpayers objected to this The taxpayer consulted as an where a taxpayer derives decision arguing that the payments electrical engineer through his personal services income from were made in the course of company. Over several contracts at least two entities which are carrying on a business and were the company derived income for not associates of each other. October 2007 The AAT held that the management fee and marketing The taxpayer claimed to Commissioner had correctly fee paid as part of their misunderstand the advice given attributed the income of the investment, despite the fact that to them by the Tax Office and company to the taxpayer as they were largely funded by indicated that he did not have an personal services income and limited recourse loans. intention to mislead or avoid any that a personal services business payment of GST. The Commissioner amended did not exist in the each of the taxpayer’s As the relevant law and the circumstances of the case. assessments and applied Part calculation of the liability was IVA of ITAA 1936 to each complex, the AAT held that, Deductions taxpayer. under the circumstances, disallowed for He argued that the sole or reasonable care was taken by scheme dominant purpose of entering the taxpayer in relation to the BASs. into the arrangement was to In a recent decision, the Federal obtain a tax benefit. He indicated Court has upheld the that this argument was based on Tax Office Commissioner’s decision to disallow deductions in relation the overall size of the Compliance to management fees, license fees management fee paid relative to program the income earned and the fact and marketing fees paid by that the scheme lacked The Tax Office has released investors. commercial substance. their compliance program for the A partnership of individuals and 2007/2008 financial year, In conclusion, the Federal Court a company were established to indicating their tax priorities for held that the taxpayers had invest in a business which the year include the following entered into a scheme for the provided an information product issues: sole benefit of obtaining a tax to travel agents. benefit as the deductions reviewing whether taxpayers As part of their involvement in claimed were far in excess of have correctly accounted for this business, each partner was any funds each of the taxpayers CGT on the disposal of required to pay license fees, actually contributed. assets; management fees and marketing Each taxpayer’s deductions were work-related expenses, fees. These fees were largely disallowed to the extent that they specifically regarding funded by limited recourse exceeded their actual cash tourism workers, travel loans. outlays. consultants, fitness and Broadly, under the limited sporting industry employees, recourse loan arrangement, the TIP: Taxpayers should be wary construction industry when entering into lender only had access to 50% of arrangements that involve employees, mining the gross income from exploiting limited recourse debt and employees and guards and the licenses in overseas should seek advice as to the security employees; territories (after deducting availability of deductions. company executives with certain expenses for recovery of remuneration in excess of the loan). Penalties for $1 million who aren’t fully The Tax Office’s position on recklessness in reporting income; limited recourse finance is that deductions are only available for preparing BAS rental income and expenses with a specific focus on amounts actually paid. In a recent decision, the unusual patterns of rental Administrative Appeals Tribunal Amounts not ultimately incurred claims; and (AAT) has set aside a decision as a result of the limited recourse regarding shortfall penalties of aggressive tax planning nature of the loan will not be approximately $134,000 where taxpayers are creating deductible. imposed on the taxpayer for losses through the In this instance, the taxpayers recklessness in preparing two acquisition of prepaid claimed a deduction for the business activity statements warrants, and through new entire amount of the license fee, (BASs). financial products. Important: This is not advice. Clients should not act solely on the basis of the material contained in this Bulletin. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. The Bulletin is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.
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