Reasonable benefit limit - arm's length salary

Can a public servant have an arm's length salary (ALS) determined pursuant to paragraph 47(3)(c) of the Income Tax Regulations 1936 (ITR 1936)?

No, the taxpayer, a public servant, cannot have an ALS determined under paragraph 47(3)(c) of the ITR 1936, as the taxpayer is not an associate of the employer.

The taxpayer requested an ALS determination.

The Commissioner did not accept the taxpayer as an associate and stated that business losses that incurred from a forestry business are included as part of salary.

Later, the taxpayer objected to the first determination and requested a further determination to be made for the year in question.

The taxpayer is employed in the public sector. The taxpayer participated in a primary production venture and commenced a forestry business in the 1992 year. In that year, a loss was incurred in relation to the establishment phase of the forestry business.

The taxpayer carried on the forestry business as part of a project. The forestry business is fully managed for the taxpayer by a company that is not associated with the taxpayer. The taxpayer spends very little time engaged in the business; less than one hour per week.

Individual taxpayers have received favourable binding private rulings in relation to deductions claimed on the same basis as the taxpayer. Afforestation scheme participants have been accepted as carrying on a business for income tax purposes.

'Salary' for reasonable benefit limit (RBL) purposes is defined in subregulation 47(1) of the ITR 1936 subject to subregulations 47(3) and (4) of the ITR.

For an ALS to be determined under paragraph 47(3)(c) of the ITR 1936, the person must be an 'associate' of the person's 'employer'.

Section 140C of the Income Tax Assessment Act 1936 (ITAA 1936) in relation to the definition of 'associate' for RBL purposes defines 'associate' to have the same meaning as in subsection 26AAB(14) of the ITAA 1936.

Subsection 26AAB(14) of the ITAA 1936 defines an 'associate' of a 'taxpayer'. For the purposes of this definition a 'taxpayer' includes a natural person, company, a trustee of a trust estate and a partnership.

The taxpayer's only employment is with a public sector employer. A public sector employer is not included in subsection 26AAB(14) of the ITAA 1936 and so the taxpayer is not an associate of that employer. Therefore, the taxpayer is not entitled to have an ALS determined under paragraph 47(3)(c) of the ITR 1936.