Deductibility of administration fee for salary sacrifice arrangement

Is the taxpayer, an employee who has entered into an 'effective' salary sacrifice arrangement (SSA) with their employer, entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the cost of administration fees paid to the SSA provider?

No. The taxpayer, an employee who has entered into an 'effective' SSA with their employer, is not entitled to a deduction under section 8-1 of the ITAA 1997 for the cost of administration fees paid to the SSA provider.

The taxpayer entered into an 'effective' SSA with their employer.

The taxpayer is required to pay an administration fee to the SSA provider that the employer engaged to administer the SSA.

The SSA provider levies the administration fee directly to the taxpayer - it does not form part of the taxpayer's sacrificed entitlements.

The administration fee is made up of two components: • an amount to cover the cost of the service provided by the SSA provider, and • an amount to cover the additional costs to the employer generated by processing the SSA, for example additional payroll costs.

Section 8-1 of the ITAA 1997 allows a general deduction for 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.

Section 6-5 of the ITAA 1997 includes in the assessable income of a taxpayer all the ordinary income they derive. Section 6-10 of the ITAA 1997 further includes in the assessable income of a taxpayer all the statutory income they derive, that is, amounts not in the nature of ordinary income which are specifically included in assessable income by a provision of tax law.

When an employee enters into an 'effective' SSA, they forgo an expected entitlement to an amount of salary and wages before it is earned in return for benefits of a similar value (Taxation Ruling TR 2001/10, paragraph 77).

Benefits in the nature of income are classed as either ordinary or statutory income and are initially caught under section 6-5 or 6-10 of the ITAA 1997. However, subsection 6-15(2) of the ITAA 1997 operates to exclude from assessable income those amounts that are made exempt by a provision of tax law. In the case of benefits provided under an 'effective' SSA, section 23L of the Income Tax Assessment Act 1936 (ITAA 1936) provides that income derived in the form of fringe benefits or exempt fringe benefits is exempt income. As the benefits arising from 'effective' SSAs constitute either fringe benefits or exempt fringe benefits, they are exempted by this provision.

Where an 'effective' SSA converts expected entitlements into contributions to an employee's superannuation fund, the amounts do not form ordinary income and initially fall for consideration as statutory income or 'Allowances in relation to employment' under paragraph 26(e) of the ITAA 1936. However, subparagraphs 26(e)(iv) and 26(e)(v) of the ITAA 1936 exclude fringe benefits and exempt fringe benefits from inclusion under this provision. In turn, subsection 6-15(1) of the ITAA 1997 operates to exclude from assessable income those amounts that are not ordinary or statutory income. Hence, expected entitlements channelled as part of an 'effective' SSA to an employee's superannuation fund do not form part of assessable income.

As may be seen, benefits that arise from 'effective' SSAs are either exempt income or are not assessable income at all.

Turning to the nature of the administration fees, it is clear that the cost of structuring the SSA is incurred with the sole aim of foregoing or reducing rather than gaining or producing assessable income.

The portion of a taxpayer's entitlements that will ultimately form assessable income is in no way a product of the SSA and the cost of engaging the services of the SSA provider cannot be said to be incurred in gaining or producing that income. Indeed, the expected amount of assessable income that a taxpayer might derive from their employment in the form of salary and wages must already be set before an 'effective' SSA can be entered into and any associated cost incurred.

In relation to the income on which an employee with an 'effective' SSA is ultimately assessed, the costs of structuring the SSA are not deductible because the connection between expenditure and income required by section 8-1 of the ITAA 1997 is absent.

Accordingly, the costs of administration fees in relation to an 'effective' SSA are not incurred in earning the taxpayer's assessable income and are therefore not an allowable deduction under section 8-1 of the ITAA 1997.