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Edited version of private ruling
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Ruling
Subject: Cost of attending theatres
Is the trust entitled to claim a deduction for the cost of employees attending theatres to view movies?
No.
Relevant facts and circumstances
The trustee carries on a DVD rental and retail business.
Two employees of the trustee who are also beneficiaries of the trust attend theatres to view movies before they are released to the rental and retail stores by the distributors in order to determine the quantity that will be purchased. The cost of attending the theatres is met by the trustee.
The trustee considers that the benefits to the business are that the number of DVDs purchased from the distributors will reflect the number that can be optimally rented and customers can rely on recommendations by the employees as to what titles to hire.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Reasons for decision
Summary
The cost to the trustee of having employees attend theatres for the purpose of appraising movies is not an allowable deduction as the connection to the earning of assessable income is too general or tenuous.
Detailed reasoning
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all 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.
A number of significant court decisions have determined that, for an expense to satisfy the tests in section 8 1 of the ITAA 1997:
· it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 ATR 166)
· there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin N.L.Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236), and
· there must be a connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces their 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. Cooper (1991) 29 FCR 177; 91 ATC 4396; (1991) 21 ATR 1616; Roads and Traffic Authority of New South Wales v. FC of T (1993) 43 FCR 223; 93 ATC 4508; (1993) 26 ATR 76; Federal Commissioner of Taxation v. Hatchett (1971) 125 CLR 494; 71 ATC 4184; (1971) 2 ATR 557).
In most circumstances, the cost of attending a theatre would be considered a private expense. In some limited circumstances this expense may be characterised as an income producing expense and may be an allowable deduction. However, there is an onus on the taxpayer to prove that such an outlay should be an allowable deduction.
This was highlighted in Case P30 82 ATC 139; (1982) 25 CTBR (NS) Case 94 when the Board of review disallowed a claim for the purchase of newspapers by a real estate salesman. The real estate salesman would gather information from the daily papers to assist him in selling real estate. The salesman was, however, unable to demonstrate that his income was affected by expenditure on the newspapers. The expense retained its private character and the deduction was not allowed.
In this instance, although having employees watch movies at a theatre may improve their general knowledge of particular films and may improve their relationship with customers, the expense is not necessarily incurred in order to earn the income of the trustee. The watching of movies at a theatre has the character of a private expense in that it is generally seen as a social occasion. The necessary connection is too general or tenuous to allow a deduction for any portion of the cost. Accordingly, the trustee is not entitled to a deduction for the cost of employees attending theatres to view movies under section 8-1 of the ITAA 1997.
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