Will the investments Person A places with Bank A be treated as investments of Company A by reason of the doctrine of undisclosed principal such that any income will be assessable to Company A under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) and any loss deductible by Company A under section 8-1 of the ITAA 1997?
No. This ruling applies for the following period : Year ending 30 June 20XX The scheme commenced on: 1 July 20XX
Company A is wholly owned by Person A. Company A is an Australian tax resident. During a period of x years, Person A was a non-resident of Australia for tax purposes as they permanently resided overseas. During that period, Person A primarily banked with an overseas financial institution (Bank A) and made investments in various investments products promoted by Bank A. As a result of returning to become an Australian tax resident, Bank A have advised that it can continue to offer investment products and banking services to Person A as an existing client, but it cannot accept any new clients that are Australian tax residents. Person A and Company A intend to enter into an agency agreement pursuant to which: (i) Person A agrees to act as agent for Company A in placing investments with Bank A using funds provided by Company A, and; (ii) Company A indemnifies and holds Person A harmless for their role in acting as agent. Subclause 23(c) of the Terms and Conditions of Bank A states the following:
(c) unless we acknowledge otherwise in writing, you are entering into each and every Investment or Transaction as principal for your own account and not as agent for any person; accordingly, you shall be liable to us as principal for all obligations in respect of each Investment or Transaction; Subclause 9.1(j) of another arm of Bank A Terms and Conditions document states the following: (j) Principal. except as disclosed to us in the Account Application, you are entering into this Agreement, and each transaction pursuant to this Agreement, as principal and not as agent of any person.
Income Tax Assessment Act 1997 section 6-5 Income Tax Assessment Act 1997 section 8-1
The Oxford Australian Law Dictionary, 3rd Edition [2018] broadly states that the agency law doctrine is that the acts of the agent are treated at law as the acts of the principal. This means that when an agent (recognised as such at law) enters into a contract on behalf of a principal, any assessable income derived or losses incurred will be those of the principal and not the agent. The relationship of principal and agent may be express or implied depending upon particular legal testing and includes what is termed the doctrine of undisclosed principal (LexisNexis, Halsbury's Laws of Australia , 15 Agency, 'Relationships between principal and third persons' [15-255] (at 21 January 2025). The doctrine of undisclosed principal simply stated is that the law may recognise the existence of an agency relationship in circumstances where that relationship is not disclosed to the party with whom the agent is dealing. However, there are instances where the doctrine will not apply even though the principal and agent intend their arrangement to be one of agency in such dealings with a third party. In FC of T v Metaskills Pty Ltd 2003 ATC 4644 Lindgren J said at paragraph 126:
The doctrine of the undisclosed principal cannot operate if it would be inconsistent with the terms of the agreement for it to do so; see, for example, GE Dal Pont, Law of Agency (Butterworths, Sydney, 2001) at [19.32]-[19.40] and cases there referred to. Dal Pont refers to the line of authorities including Smith v Wheatcroft (1878) 9 Ch D 223 at 23 and explains that the doctrine of undisclosed principal will not apply when a third party contracts with an agent representing a principal that the third party has declined or refused to deal with. Subclause 23(c) of the Terms and Conditions of DBS Private Bank states the following: (c) unless we acknowledge otherwise in writing, you are entering into each and every Investment or Transaction as principal for your own account and not as agent for any person; accordingly, you shall be liable to us as principal for all obligations in respect of each Investment or Transaction; Subclause 9.1(j) of the DBS Treasures Private Client Terms and Conditions document states the following:
(j) Principal. except as disclosed to us in the Account Application, you are entering into this Agreement, and each transaction pursuant to this Agreement, as principal and not as agent of any person Application to your circumstances In the circumstances here, Bank A has informed Person A that they will not accept any Australian tax resident companies as a new client and will only deal with Person A in their own legal capacity. Further, as Person A is its sole controlling mind, Company A also has this knowledge. As the doctrine of undisclosed principal can be excluded by terms of agreement between an agent and a third party, whether actual or implied, these extracts from Bank A's terms and conditions mean that the agreement under which Person A makes the investments with Bank A specifically excludes Person A from making investments as an undisclosed agent for Company A. Therefore, the doctrine of undisclosed principal does not apply in these circumstances, meaning any assessable income derived from Bank A on the proposed investments will be assessable to Person A under section 6-5 of the ITAA 1997 and any losses deductible under section 8-1 of the ITAA 1997.