Edited version of private ruling

Authorisation Number: 1011488616118

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Ruling

Subject: business expenses

Can you claim a deduction for costs incurred for flying lessons for an employee in order to service your remote clients?

Yes.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

1 July 2009

Relevant facts

The company is a consultancy firm and has clients in very remote areas of Australia.

The company is required to charter flights and pilots in order to service these remote clients.

The cost of each flight is around $5,000.

The company is currently providing flying lessons for an employee in an effort to reduce the travel costs incurred to service its remote clients.

The company has conducted a cost benefit analysis and believes the cost savings in having their own pilot will be in the region of 80-85%.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 8-1

Reasons for decision

Under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) you can claim deductions for expenses 'to the extent' they are incurred in gaining or producing your assessable income, or they are necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

You cannot claim deductions under section 8-1 of the ITAA 1997 for expenses 'to the extent' to which they are of a capital, private or domestic nature or they are incurred in gaining or producing exempt income.

Necessarily incurred

The phrase 'necessarily incurred' does not mean that the expense was unavoidable or logically necessary. The expense must be clearly and appropriately adapted for the ends of the business.

Where the expense is voluntary, the controlling factor is whether the expense can objectively be seen to be appropriate to the business activity (Magna Alloys & Research Pty Ltd v. FC of T 80 ATC 4542; (1980) 11 ATR 276 (Magna Alloys)).

Taxation Ruling TR 95/33 indicates that if the outgoing produces no assessable income, or the amount of assessable income is less than the amount of outgoing, it may be necessary to examine all the circumstances surrounding the expenditure to determine whether the outgoing is wholly deductible. This may, depending on the circumstances of the particular case, include an examination of the taxpayers subjective purpose, motive or intention in incurring the expenditure.

This position is further confirmed in the case of Federal Commissioner of Taxation v. Smith (1981) 147 CLR 578 at 587, where it was stated:

The section does not require that the purpose of the expenditure shall be the gaining of the income of that year, so long as it was made in the given year and is incidental and relevant to the operations or activities regularly carried on for the production of income. What is incidental and relevant in the sense mentioned falls to be determined not by reference to the certainty or likelihood of the outgoing resulting in the generation of income but to its nature and character, and generally to its connection with operations which more directly gain or produce the assessable income.

In the case of a company, the relevant purpose is the corporate purpose. This requires an examination of the purpose, motive or intention of the company's directors, officers and employees. However, the subjective purpose of any particular director, officer or employee will not by itself be determinative; see Magna Alloys per Deane and Fisher JJ 80 ATC 4542 at 4558; 11 ATR 276 at 294. (Paragraph 13 of TR 95/33).

Deane and Fisher JJ in Magna Alloys rely on authorities which support the view that, in a case where the outgoing is voluntary in the sense that it was volitionally incurred in the pursuit of a particular advantage or object, the taxpayer's subjective purpose or motive or assessment of appropriateness to the ends of the business is of critical importance to the decision as to whether the outgoing was necessarily incurred in carrying on the relevant business (at p. 4558).

However, their Honours suggest that the determining factor is that, viewed objectively, the outgoing must, in the circumstances, be reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of the business being carried on for the purpose of earning assessable income (at p. 4559).

In this case, the company has voluntarily incurred the cost of flying lessons for one of its employees in an effort to reduce the cost of servicing it remote clients. Being able to service clients in an efficient and cost effective manner is relevant to the company's corporate purpose as a consultancy firm. Therefore, the expenses incurred for flying lessons for an employee of the company are deductible under section 8-1 of the ITAA 1997 as they are considered to be necessarily incurred in carrying on your business.

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