Recent decisions and rulings

Bonuses and Superannuation Guarantee

In a recent case, the AAT has affirmed the Commissioner’s decision that bonus payments paid by an employer to its employees should be taken into account when calculating the employees’ superannuation guarantee.

The taxpayer had established a profit-share bonus scheme whereby they retained the discretion to make the payments. Following a superannuation guarantee audit by the Tax Office, the Commissioner determined that the taxpayer had not provided the minimum level of superannuation guarantee for its employees for the years ended 30 June 2000 and 30 June 2001. Therefore, the Commissioner held that the taxpayer was liable for the SGC.

The taxpayer objected to the Commissioner's assessment, however the objection was disallowed. The issue in dispute was whether the bonus payments were considered OTE of the employees. The Tribunal said that the taxpayer's discretion to make the payments did not convert these payments into ex gratia payments. In determining the true nature of the payments, the Tribunal said that it must look at the substance of the payments and not the label that had been ascribed.

The Tribunal found that the bonuses paid by the taxpayer were paid in an employment context and by reference to the specific performance of its employees as a group. Further, the Tribunal also found that the payments could be properly regarded as over-award payments. Therefore, the Tribunal was satisfied that the payments were OTE and should be taken into consideration when calculating the SGC.

Self Education Expenses

In a recent case, the AAT has affirmed the Commissioner's decision to deny a taxpayer a deduction for self-education expenses.

The Tribunal held that the taxpayer had not shown that the expenses were incidental and relevant to the gaining of assessable income.

In summary, the facts of the case were:

• The expenses were the payment of university fees for a Bachelor degree.
• The course initially required 500 hours of practical experience.
• After completing the compulsory 500 hours of industry placement, the taxpayer continued working at establishment while at the same time completing his degree.
• During this time, the taxpayer’s career progressed.
• The taxpayer claimed that his course was relevant to his progression at establishment. However, he conceded that it was not a condition of his continued employment that he continued his studies and that his rate of pay was determined by his job scope, not his formal qualifications.

The AAT held that the taxpayer had not shown that the expenses were incidental and relevant to the gaining of assessable income. In addition, the expenses did not have the essential character of an outgoing incurred in gaining assessable income. The Tribunal considered that the expenses were concerned with the gaining of employment in the future and, therefore, not deductible.

Generally, self-education expenses are deductible if there is a sufficient connection with the taxpayer's income-producing activities.

Based on case law,

• expenses incurred in maintaining or improving the taxpayer's skills and knowledge in her or his present occupation should be deductible, particularly if they are likely to lead to a pay increase;
• the cost of acquiring knowledge is not of itself an outgoing of a capital nature; and
• self-education expenses incurred before employment commences or to obtain new employment are not deductible.

As a general rule, self-education expenses incurred before employment commences or to obtain new employment are not deductible.

TIP: The Tax Office has indicated that one of the areas it is focusing on is anomalous or "out-of-pattern" self-education claims.

Business Establishment Costs

In two separate but related Interpretative Decisions, the Tax Office states the deductibility of business establishment costs for a proposed business to be carried on.

Generally, a taxpayer is entitled to a deduction for capital expenditure incurred for a business proposed to be carried on. This is the case when a taxpayer can demonstrate a commitment of some substance to commence the proposed business.

In one such case, there existed sufficient identity about the business to be carried on and, accordingly, it was concluded that the business was proposed to be carried on within reasonable time.

The facts of this case were:

The taxpayer incurred capital expenditure to incorporate a company where the taxpayer was a director and shareholder. Within two months of its incorporation, the company:

• entered into a lease agreement for business premises and pre-paid 2 months’ rent;
• purchased materials to fit out the business premises;
• entered into an agreement with another entity for the supply of services clients;
• printed letterhead and business cards, and had keys cut for the premises; and
• insured the business premises.

However, the company never traded and the taxpayer resigned as director after several months. Therefore, the business never did commence trading.

In a second case the Tax Office stated that a taxpayer who incurred capital expenditure travelling to another country to investigate the viability of a business venture in that country was not entitled to a deduction because the taxpayer had failed to demonstrate that, at the time the expenditure was incurred, there existed sufficient identity about the business proposed to be carried on.

The facts of this case were:

Prior to incurring the expenditure, the taxpayer conducted research into the viability of a business venture in another country and developed a business plan. At the time the taxpayer incurred the expenditure, various decisions as to the business entity, activities, etc, had not been made. Following the taxpayer's return to Australia, a decision was made not to proceed with the business venture.

The deductibility of expenses in advance of the business being carried on will rest on the facts on each case, but this commitment and identity must be tangible; that is, there would need to be some evidence that would enable an objective assessment of the existence of that commitment and identity.

Such commitment could be shown by, but is not limited to, at least some of the following:

• a business plan;
• the establishment of a business premises;
• research into the likely markets or profitability of the business; and
• capital investment in assets of the business