I went digging on the ATO website, dont know if this is of any use (dont know if the link would work so I cut and pasted). I think I'm reading this right in that if the income distributed to the partners is assessable. Noting partners here is in a different context.
http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/16023.htm
16023
Printable version
EDITED VERSION OF NOTICE OF PRIVATE RULING
Authorisation Number: 16023
This Ruling is a 'Private Ruling' for the purposes of Part IVAA of the Taxation Administration Act 1953.
YEAR(S) OF INCOME TO WHICH THIS RULING APPLIES:
Year ending 30 June 2002
TAX LAW:
Income Tax Assessment Act 1997 section 8-1.
Income Tax Assessment Act 1997 section 6-5.
WHAT THIS RULING IS ABOUT:
1. Is the rulee's share of rebates of commission to J organisation assessable income of the rulee?
2. If so, is the rulee's share of the payments of the rebates by J organisation to its clients deductible from the rulee's assessable income?
3. Are the rebates paid to J organisation, assessable income to those clients?
4. Is J organisation, a GST registered taxpayer, liable to GST on those rebates?
THE SUBJECT OF THE RULING:
The rulee is a partner, with another, in a partnership of solicitors and business lawyers. The rulee is considering entering a contract with a mortgage broker, and may also contract with other mortgage brokers, but all on the same terms.
Under the arrangement the rulee will refer clients seeking mortgage finance to a mortgage broker. The broker will locate suitable finance for the client from a range of lenders which it is anticipated will be mainly banks and major financial institutions.
The broker will receive a rebate from the lenders of varying amounts and structured in different ways. The most common structure will comprise a lump sum rebate from the lender to the broker on the loan being settled, with annual trailing fees to be paid during the term of the loan.
Under the terms of the proposed contract between the rulee, including the rulee's partner, and the broker part of those rebates will be paid to the partnership.
The rulee proposes to pass onto its clients all the rebates received by the partnership with no deduction for handling charges.
The rulee in conjunction with its partner is also seriously considering entering into retainers with the clients it refers to brokers on the basis that the partnership will charge the client the normal fees for acting on the mortgage and any associated transactions plus a component to cover the cost of handling the passing on of rebates.
COMMENCEMENT OF ARRANGEMENT:
30/06/2002
RULING:
1. Is the rulee's share of rebates of commission to J organisation assessable income of the rulee?
Yes.
2. If so, is the rulee's share of the payments of the rebates by J organisation to its clients deductible from the rulee's assessable income?
Yes
3. Are the rebates paid to J organisation's clients, assessable income to those clients?
The Commissioner is unable to answer this question as this question involves the taxation affairs of persons other than the rulee.
4. Is J organisation, a GST registered taxpayer, liable to GST on those rebates?
Yes.
EXPLANATION: (This does not form part of the Notice of Private Ruling)
Assessable income is divided into two categories:
(i) ordinary income (being income according to ordinary concepts) which is made assessable by section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997); and
(ii) statutory income which is made assessable by section 6-10 of the ITAA 1997 (being amounts made assessable under specific provisions of the ITAA 1997 or the Income Tax Assessment Act 1936).
Otherwise, sub-section 6-15(1) of the ITAA 1997 states that if an amount is not ordinary income, and is not statutory income, it is not assessable income.
Income according to ordinary concepts (ordinary income) is assessable income under section 6-5. Therefore the rulee's request requires consideration of the principle legislation, specifically Section 6-5 of the ITAA 1997.
The Australian Tax Handbook 1999 at p41 says
'Income according to ordinary concepts has generally been held to include three categories, namely income from rendering personal services, income from property and income from carrying on a business.''
In the present case the commissions paid by the broker will be received in consequence and as an incident of the carrying on of a business as a partner in a partnership. Whilst the rulee is a partner in a partnership which carries on a business as solicitors, the proposed arrangement is merely an extension of the activities conducted by the rulee.
It is the Commissioner's opinion therefore, that the commissions paid to the rulee as a partner in the partnership of J organisation will be assessable income.
Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, except to the extent they are losses or outgoings of capital or of a capital, private or domestic nature.
For a loss or outgoing to be deductible there must be a nexus between the loss or outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v FC of T (1949) 78 CLR 47; 8 ATD 431; (1949) 4 AITR 236).
Whether a taxpayer is entitled to a tax deduction depends upon the application of section 8-1 of the Act 1997, which provides:
'(1) You can deduct from your assessable income any loss or outgoing to the extent:
(a) it is incurred in gaining or producing your assessable income; or
(b) it is necessarily incurred in carrying on a business for the purpose of
gaining or producing your assessable income.
(2) However, you cannot deduct a loss or outgoing under this section to the extent:
(a) it is a loss or outgoing of capital, or of a capital nature; or
(b) it is a loss or outgoing of a private or domestic nature; or
(c) it is incurred in relation to gaining or producing your exempt income; or
(d) a provision of this Act prevents you from deducting it.'
The Courts have, over a period of time, proposed various tests used in determining the true nature of an item of expenditure. These tests were reviewed by Dixon J in the High Court in the case of Sun Newspapers Ltd & Associated Newspapers Ltd v FC of T (1938) 61 CLR 337; (1938) 1 AITR 403; [1939] ALR 10 (Sun Newspapers Case). In Sun Newspapers Case Dixon J referred to British Insulated and Helsby Cables Ltd v Atherton [1926] AC 205, where it was stated that the lasting nature of the expenditure was only relevant in assisting the court to decide whether the expenditure was on capital account or revenue account, as follows:
'In an attempt, by no means successful, to find some test or standard by the application of which expenditure or outgoings may be referred to capital account or revenue account the courts have relied to some extent upon the difference between an outlay which is recurrent, repeated or continual and that which is final or made once for all…'
A framework for determining whether a payment in any given case is on account revenue will be decided taking into account a number of principles. The principles are as follows:
1 The character of the "right" or "thing" (the terminology used in GP International Pipecoaters v. FC of T (1988) 19 ATR 1739; (1988) 88 ATC 4823) or "advantage" (the term used by Dixon J in Sun Newspapers Case) disposed of in exchange for the receipt.
2 Whether it is a flow detached from the asset or activity which generated it.
3 The periodicity, regularity or recurrence of the receipt or payment
These are the principles that must be considered before an item of expenditure can be considered for deductibility. In the absence of specific provisions within the ITAA 1997 or ITAA 1936 these principles must apply.
Thus in determining the nature of the rebate of commissions, it is considered that the essential character of the expenditure is such that the payments would be deductible.
The rebates of commission will be GST inclusive.
Disclaimer
The Register of Private Binding Advice is published as a public record of the binding advice issued by the ATO. Each piece of advice is based on a specific set of circumstances advised to the ATO and the law in force at the time of the advice, and is considered binding only in respect of the person/s or entity/ies on whose behalf the advice was sought. The Register is a historical record of advice provided, and is not updated to reflect changes in the law, withdrawal of advice or any other change in circumstance. Each piece of advice has been edited to avoid disclosing the identity of the person or entity on whose behalf advice was sought and published advice may therefore not disclose all the relevant facts or circumstances on which the advice was based. For these reasons, advice published in this Register cannot be relied upon as precedent for any other person or entity.
© Commonwealth of Australia 2011
This work is copyright. You may download, display, print and reproduce this material in unaltered form only (retaining this notice) for your personal, non-commercial use or use within your organisation. Apart from any use as permitted under the Copyright Act 1968 all other rights are reserved. Requests for further authorisation should be directed to the Manager, Commonwealth Copyright Administration, Intellectual Property Branch, Department of Communications, Information Technology and the Arts, GPO Box 2154, Canberra ACT 2601, or by email to
[email protected]