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Is the taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for an agency commission they incurred in claiming assessable pension payments?

Yes. The taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for an agency commission they incurred in claiming assessable pension payments.

The taxpayer used the services of an agency to claim an overseas pension to which they were entitled.

Under the terms of their agreement with the agency, the taxpayer was required to pay the agency a commission if they were successful in their claim for the overseas pension.

The commission was calculated as a percentage of any backpay of pension received by the taxpayer as a result of that claim.

The taxpayer was advised that, based on their application for the overseas pension, they were to receive a monthly overseas pension. The taxpayer also received a lump sum payment for monthly payments that accrued from the date they were entitled to receive the overseas monthly pension payments to the day before the date they actually commenced receiving monthly payments.

The taxpayer paid a commission to the agency as required by the terms of their agreement.

The taxpayer's overseas pension is assessable income under subsection 6-5(2) of the ITAA 1997.

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 except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Ronpibon Tin NL and Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236 established the use of the 'incidental and relevant test' to determine whether there was a connection or nexus between a loss or outgoing and the derivation of assessable income. The Court found that for a loss to come within the meaning of in the course of gaining or producing assessable income it is 'both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income.'

The essential character test was developed by the Courts as a supplement or qualification to the incidental and relevant test. The deductibility of expenditure depends on whether the essential character of the expenditure is that of an income producing revenue expense.

In Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 8 ATD 190; (1946) 3 AITR 436, the Court, amongst other things, established that the nature or character of the legal expenses follows the advantage which is sought to be gained by incurring the expenses. If the advantage to be gained is of a capital nature then the expenses incurred in gaining the advantage will also be of a capital nature. If the advantage gained is of a revenue nature, then the expenses incurred in gaining the advantage will also be of a revenue nature.

The payment the taxpayer made to the agency is comparable to payments made to a legal practitioner for their assistance in claiming assessable periodic payments, such as periodic workers compensation payments.

The expenses were incurred in claiming an assessable overseas pension. The expenses were not incurred in purchasing or establishing an income producing asset or activity. The taxpayer did not have to do anything more to receive the assessable pension payments to which they were entitled other than submit the application which was used to confirm that they met the relevant eligibility criteria. Consequently, the nature of the advantage gained from the expenditure, and therefore the essential character of the expenditure, is revenue in nature.

Accordingly, there is a sufficient connection between the payment of the agency commission in claiming the overseas pension and receiving assessable pension payments, such that the expenditure is incidental and relevant to the derivation of the taxpayer's assessable income. The essential character of the expenditure is that of an income producing revenue expense.

Therefore, the payment of the agency commission was incurred in gaining the taxpayer's assessable income and is deductible under section 8-1 of the ITAA 1997.