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Is the taxpayer, an Australian resident company, entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the monthly agency fee paid to a non-related overseas company for various services?

Yes. The taxpayer, an Australian resident company, is entitled to a deduction under section 8-1 of the ITAA 1997 for the monthly agency fee paid to a non-related overseas company for various services.

The taxpayer enters into an agency arrangement with the non-related overseas company for the sourcing of the goods, coordinating deliveries between the factories overseas and monitoring production schedules to ensure the goods are produced on time. The taxpayer has two subsidiary companies to import and retail products. The income of the taxpayer consists of management fee receivable from both subsidiary companies.

Section 8-1 of the ITAA 1997 provides that expenditure will generally be deductible if its essential character is that of expenditure that has a sufficient connection with the operations or activities which more directly gain or produce assessable income, provided that the expenditure is not of a capital, private or domestic nature.

There is a sufficient nexus between the management and service fees derived and the agency fees paid by the taxpayer to the unrelated overseas agent to satisfy the provisions of section 8-1 of the ITAA 1997. The monthly agency fee is an outgoing of a revenue nature, therefore, it is an allowable deduction.