Deduction for patron expenses

Is the taxpayer, who is the mayor of a local council, entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for patron expenses?

Yes. The taxpayer who is the mayor of a local council, is entitled to a deduction under section 8-1 of the ITAA 1997 for patron expenses.

The taxpayer is the mayor of a local council and receives an assessable allowance from the local council.

Following the taxpayer's election as mayor of a local council, the taxpayer was appointed the patron of several local organisations. The taxpayer intends to act as patron for these organisations only whilst in the position of mayor.

Donations to the local organisations were made by the taxpayer as a goodwill gesture. None of the organisations were deductible gift recipients under Division 30 of the ITAA 1997.

The taxpayer does not hold any other interest in these organisations and no private benefits were received from making the donations.

Section 8-1 of the ITAA 1997 allows a deduction for all losses or outgoings to the extent that they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for that purpose. However where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income they will not be deductible. In addition, losses or outgoings will not be deductible under section 8-1 of the ITAA 1997 where another provision prevents it.

The courts have established that for a loss or outgoing to be deductible under section 8-1 of the ITAA 1997: (a) it must have the essential character of a loss or outgoing incurred in gaining assessable income or, in other words, of an income producing expense ( Lunney & Hayley v. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 AITR 166) (b) 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. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 7 AITR 236 (the Ronpibon Case ), and (c) it is necessary to determine the connection between the particular loss or outgoing and the operations or activities by which the taxpayer more directly gains or produces his or her assessable income ( Charles Moore & Co (WA) Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344; (1956) 11 ATD 147; (1956) 6 AITR 379; Federal Commissioner of Taxation v. Hatchett (1971) 125 CLR 494; 71 ATC 4184; (1971) 2 ATR 557).

According to Taxation Ruling TR 1999/10, patron expenses are allowable under section 8-1 of the ITAA 1997 where there is a direct connection between the position of a Member of Parliament as a patron and their income earning activities. Where a Member of Parliament acts as patron for personal reasons any expenses incurred in relation to that position are not allowable deductions because they are private or domestic in nature.

In this case the taxpayer intends to be a patron only whilst in the position of council mayor and has made donations to the local organisations as a goodwill gesture.

Becoming a patron of community organisations is incidental and relevant to the taxpayer's mayoral responsibilities which include supporting community organisations and activities (the Ronpibon Case ).

There is a direct connection between the patron expenses incurred by the taxpayer and the assessable income derived from the mayoral position. As a result, the principle in TR 1999/10 of allowing a deduction under certain circumstances for patron expenses incurred by a Member of Parliament can be extended to the taxpayer in this case.

Therefore the taxpayer, who is the mayor of a local council, is entitled to a deduction under section 8-1 of the ITAA 1997 for patron expenses.