Edited version of private ruling

Authorisation Number: 1011555687476

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Ruling

Subject: Overseas travel expenses

Question 1

Is the income you receive from services performed as a consultant for Company X in Country A assessable in Australia?

Answer

Yes

Question 2

Are you entitled to a deduction for your personal travel costs between Australia and Country A and between Country A and Country B/Country C?

Answer

No

Question 3

Are you entitled to a deduction for the cost of the apartment lease in Country A as part of your travel expenses?

Answer

No

Question 4

Are you entitled to any other work related expenses?

Answer

Yes, in part.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2008

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You are an Australian citizen.

You retired a few years ago and you receive a pension.

You work as a consultant.

Your work as a consultant has led to short term work in a number of overseas countries. This work included locating to Company X a number of times over the last few years for short term work.

Company X has you under contract as a consultant to manage their activities.

You are required to work for Company X mainly at their office in Country A and you are paid an amount in Country A dollars per working day.

You are provided an office by Company X for the purpose of performing your consulting work with them.

· Your statement of services provides, but is not limited to the following services:

· Provide leadership and direction.

· Contribute to business planning and direction setting.

· Contribute to leadership as a member of the senior management team.

· Ensure a people focus, that is, "people planning" and ongoing development of staff skills.

· Promote knowledge sharing practices.

You renewed your consultant agreement with Company X.

Your consultant agreement provides that the consultant will be reimbursed for authorised reasonable business travel incurred in the performance of the services.

You have not travelled to different premises/locations of Company X. You have travelled to other countries and visited other companies and suppliers on behalf of Company X.

Your consulting services to Company X are provided at both the company's premises and from your serviced apartment in Country A (approximately 75% at the company's premises and 25% at the serviced apartment via 'teleworking').

You have been allocated an office at Company X.

The replacement will move into this office and will gradually take on his required full management duties under your tutelage.

You are also employed by Company Y in Australia as a part time employee.

You were required to attend Company Y in Australia for over 30 working days in the recent income year.

You also act as a consultant for Company Z; an Australian company. This work is mainly carried out via the internet, but does require face to face contact when you are in Australia. You include GST on these earnings. Over the recent income year, you averaged approximately less than 3 days per month on this task.

Company Z also requires you to audit one of their investments which has required you to travel to Country B and Country C for short visits. The time devoted to this function is included in the 3 days mentioned in the above fact. The base for this operation is your serviced apartment in Country A (that is, you travel from Country A to Country B or Country C to perform the audit and write relevant reports etcetera at the apartment on return).

Ninety percent of the consultancy work for Company Z is performed at the serviced apartment. The remainder (10%) is performed in Country B and Country C.

You travel between Australia and Country A approximately once every quarter to fulfil your Company Y and Company Z obligations, staying in Australia for approximately one month per visit.

You maintain a serviced apartment in Country A on a renewable 12 month lease.

Your apartment in Country A is a two bedroom apartment. One bedroom is used as a study for your business. It occupies about 33% of the apartment area.

There is a desk and chair, your personal computer and associated equipment, a cupboard and sideboard for files within the second bedroom area. There is no bed, although there is a lounge in this area.

The area was used for the full income year. It is left idle when you are in Australia on business but you still pay full rent.

You have a rental home in Australia for use when you return from your Country A trips.

You are paying withholding tax in Country A on all Country A earnings.

You are treated as an independent contractor, responsible for your own expenses in Country A and expenses whilst travelling between Australia and Country A. You have no rights to sick leave, paid vacation leave, Country A holidays or any other benefits normally accrued by employees of Company X.

You submit an invoice and you are paid by cheque which is mailed to the serviced apartment. You submit your invoice every two to three weeks and you are usually paid within three weeks. Your invoice covers the number of working days excluding Country A holidays and days when you travel and work on behalf of Company Z. It also excludes days when you travel to/from Australia to attend to Company Y work.

Your apartment is within walking distance of Company X. You have a briefcase on wheels which you use everyday to transport your computer, relevant files and your other tools. The wheeled trolley bag with contents weighs 10 to 12 kilograms and is 450mm by 350 mm by 250mm.

You do not carry bulky tools or equipment.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Division 8

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 8-5

Income Tax Assessment Act 1997 Section 12-5

Income Tax Assessment Act 1997 Section 25-100

International Tax Agreements Act 1953

Reasons for decision

Question 1

Summary

The income you receive from services performed as a consultant for Company X in Country A is assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly and indirectly from all sources, whether in or out of Australia, during the income year.

Consultancy fees are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

In determining liability to Australian tax on foreign sourced income it is necessary to consider not only income tax laws, but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (the Agreements Act).

The Agreements Act contains the tax treaty between Australia and Country A (the Country A Agreement). The Country A Agreement operates to avoid the double taxation of income received by residents of Australia and Country A.

An article in the Country A Agreement provides that income derived by an individual who is a resident of Australia in respect of professional services or other independent activities of a similar character shall be taxable only in Australia unless a fixed base is regularly available to the individual in Country A for the purpose of performing the individual's activities. If the individual has such a fixed base, the income may also be taxed in Country A but only so much of it as is attributable to the activities exercised from that fixed base.

It is considered that the payments you receive from your contract to manage Company X's activities in Country A constitutes 'professional services' as defined under another article of the Country A Agreement.

As you are an Australian resident for tax purposes:

· professional services income derived by you in Country A for the services performed at Company X shall be taxable in Australia pursuant to an article of the Country A Agreement, and

· professional services income derived by you in Country A from services performed at your apartment (fixed base) for Company X shall be taxable in Australia and Country A pursuant to an article of the Country A Agreement.

Accordingly, the income you receive from services performed as a consultant for Company X in Country A is assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997).

Note

Foreign Income Tax Offset (FITO)

A FITO is a non-refundable tax offset, and will reduce the Australian tax that would be payable on foreign income which has been subjected to foreign income tax by an amount equal to the foreign income tax paid.

Question 2

Summary

Your travel expenses between Australia and Country A and Country A and Country B/Country C are considered to be private in nature and not incurred in the course of gaining or producing your assessable income. A deduction is not allowable under section 8-1 of the ITAA 1997 for the cost of your travel, or part thereof, between Australia and Country A and Country A and Country B/Country C.

Detailed reasoning

The deduction provisions are contained in Division 8 of the ITAA 1997.

Section 8-1 of the ITAA 1997 allows a deduction for all losses or outgoings to the extent to which they are incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, except to the extent that they are outgoings of a capital, private or domestic nature.

Section 8-5 of the ITAA 1997 deals with specific deductions and allows deductions where an amount can be deducted under a specific provision of the ITAA 1997, other than within Division 8 of the ITAA 1997.

Section 12-5 of the ITAA 1997 lists those provisions dealing with specific deductions. Included in this list is section 25-100 of the ITAA 1997 which deals with transport expenses incurred in travelling between workplaces.

Section 25-100 of the ITAA 1997 provides a specific deduction for transport expenses incurred for travel between two workplaces where certain conditions are met. These conditions include:

· the individual must have incurred transport expenses in travelling between two workplaces

· the purpose of the travel between workplaces is to earn assessable income at the second workplace

· the individual does not reside at either place, and

· expenses incurred must not be capital, or of a capital nature.

In your case, you maintain a serviced apartment in Country A. Ninety percent of the consultancy work for Company Z and 25% of the consultancy work for Company X is performed at your serviced apartment in Country A. As you reside at one of the workplaces that you travel between you are not entitled to a deduction for the cost of your travel, or part thereof, under section 25-100 of the ITAA 1997.

While travel to and from a taxpayers home is specifically excluded under section 25-100 of the ITAA 1997, it is not intended to override the general deduction provision, which continues to allow a deduction for home to work travel incurred in the course of gaining or producing assessable income.

The case of Lunney & Hayley v. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 7 AITR 166; (1958) 11 ATD 404 settled the principle that travel to and from work is ordinarily not deductible. The Full High Court held that costs incurred by a taxpayer in travelling to the place where they work are expenses incurred in order to enable them to earn income but are not expenses incurred in the course of earning that income. The travel is considered to be of an essentially private or domestic nature.

However, where a taxpayer carries on a business from their home and also has employment or provides services to an unrelated business located elsewhere, the cost of travel may be deductible if the travel is part and parcel of the taxpayer's income-producing activities.

Paragraph 6 of Taxation Ruling IT 2199 provides it is necessary that the income producing activity carried on at the taxpayer's home should constitute an employment or a business. It is not sufficient that a room in the home is used in association with an employment or business conducted elsewhere.

In your case:

· you travel between Australia and Country A approximately once every quarter to fulfil your obligations to Company Y and Company Z, staying approximately one month per visit

· you were required to attend Company Y in Australia for over 30 working days in the recent income year

· your work for Company Z was mainly carried out via the internet but does require face to face contact when you are in Australia (you averaged approximately 3 days per month on this task - including travel to Country B and Country C to audit one of Company Z's investments)

· you travel from Country A to Country B or Country C to perform the audit and write relevant reports etcetera at the apartment on return.

· Accordingly, the travel undertaken by you between Australia and Country A and Country A and Country B/Country C is not on work, but rather to work. That is, to put you in a position to provide services to Company Y and Company Z.

Taxation Ruling TR 95/34 provides other circumstances where expenses incurred in travelling to and from work are considered to have been incurred in the course of gaining or producing assessable income and are deductible including:

· where the purpose of the travel is to transport bulky equipment that is used in the activities that produces assessable income

· where the work is inherently of an itinerant nature, and

· where the activity that produces assessable income can be construed as having commenced before or at the time of leaving home.

In your case, you do not transport bulky equipment nor is your employment inherently of an itinerant nature. Travel is not a fundamental part of your work and while you carry out income-producing activities at a number of workplaces, these locations are fixed.

When travelling between Australia and Country A and Country A and Country B/Country C you are not travelling for the purposes of producing your assessable income. The travel is not undertaken in the performance of your work. The travel is undertaken to put you in a position to provide your services to Company Y and Company Z.

In the case of FC of T v.Toms 89 ATC 4373; (1989) 20 ATR 466 the Federal Court disallowed a forest worker's deduction for the cost of maintaining a caravan and other living expenses. The taxpayer incurred the expenses in providing temporary accommodation at the base camp because the taxpayer had chosen to reside at a place far from the worksite. These expenses were dictated not by work but by private considerations. Therefore, the essential character of the expenditure is considered to be of a private or domestic nature as it arises due to the taxpayer's choice of where to live and at what distance from work.

In your situation you have a contract with Company X. As a self employed contractor you obtained work in a location away from your home in Australia. In order to undertake this work you have had to live away from your normal place of residence and accordingly you have incurred travel expenses between Australia and Country A and Country A and Country B/Country C so that you can perform services for Company Y and Company Z.

The travel expenses between Australia and Country A and Country A and Country B/Country C are not considered to be an integral part of earning your assessable income in providing your services to Company Y and Company Z. This expense you incur whilst living away from your home is considered to be of a private or domestic nature as you choose the location of your normal place of residence.

Your travel expenses between Australia and Country A and Country A and Country B/Country C are considered to be private in nature and not incurred in the course of gaining or producing your assessable income. A deduction is not allowable under section 8-1 of the ITAA 1997 for the cost of your travel, or part thereof, between Australia and Country A and Country A and Country B/Country C.

Question 3

Summary

The bedroom in your apartment does not fit the criteria as being a place of business and you are not entitled to a deduction for the cost of the apartment lease in Country A under section 8-1 of the ITAA 1997.

However, the bedroom area you have set aside for doing work for Company X and Company Z is used in connection with your income earning activities and therefore expenses associated with your apartment may be deductible under section 8-1 of the ITAA 1997.

Detailed reasoning

Generally you are entitled to a deduction for any expense or outgoing that is incurred in gaining or producing assessable income, if that expense is not private or domestic in nature, capital or used to produce exempt income (section 8-1 of the ITAA 1997).

Taxation Ruling TR 93/30 provides that normally expenses that are associated with your home are private or domestic in nature and therefore you are not entitled to a deduction for them. However, expenses associated with your home may be deductible if:

Part of your home is used for income producing activities and has the character of a place of business.

Part of your home is used in connection with income earning activities but does not constitute a place of business.

For part of a home to have the character of a place of business it needs to have an area that is clearly identifiable as a place of business, the area is not easily adaptable for private or domestic use, it is used exclusively or almost exclusively for carrying on a business and the area is used regularly for visits by clients or customers.

You use a bedroom in your apartment in Country A as a study for your business. It occupies 33% of the apartment area. There is a desk and chair, your personal computer and associated equipment, a cupboard and sideboard for files. There is no bed, although there is a lounge in this area.

As a result, the bedroom in your apartment does not fit the criteria as being a place of business and you are not entitled to a deduction for the cost of the apartment lease in Country A under section 8-1 of the ITAA 1997.

However, the bedroom area you have set aside for doing work for Company X and Company Z is used in connection with your income earning activities and therefore expenses associated with your apartment may be deductible under section 8-1 of the ITAA 1997. See below.

Question 4

Summary

You are entitled to a deduction for additional home running costs that you may incur in the course of gaining or producing your assessable income for the work you do for Company X and Company Z under section 8-1 of the ITAA 1997.

The expense incurred in acquiring your visa is not deductible under section 8-1 of the ITAA 1997.

Detailed reasoning

Taxation Ruling TR 93/30 provides that the deductible expenses in respect of a home can be divided into two broad categories:  

Expenses relating to ownership or use of a home which are not affected by your income earning activities (that is, occupancy expenses). These include rent, mortgage interest, municipal and water rates and house insurance premiums.

Expenses relating to the use of facilities within the home (that is, running expenses). These include electricity charges for heating/cooling, lighting, cleaning costs, depreciation, leasing charges and the cost of repairs on items of furniture and furnishings in the office.

The Commissioner considers that where an area of the home is simply used in connection with income producing activities, but does not have the character of a place of business, only expenses in the latter category (the running expenses) are allowable. The amounts allowable as deductions are the additional expenses incurred as a result of income producing activities.

A deduction is allowable only where additional running costs are incurred because of income producing activities. Also, the income producing use of the home needs to be substantial and not merely incidental.

Apportionment - Running expenses

Law Administration Practice Statement PSLA 2001/6 provides that to calculate running expenses, the Tax Office accepts a diary kept for a period of four weeks in order to establish the pattern of use for the whole income year. Two acceptable methods taxpayers can use are:

· Option one - calculating the actual running expenses and apportioning them according to the pattern of business/employment use shown in the diary, or

· Option two - claiming a rate of 26 cents for each hour of business/employment use. A diary can show the pattern of use. Note that decline in value of home office furniture is included in this calculation but a taxpayer needs to separately calculate some items (for example, telephone expenses, and decline in value of computers) and apportion according to the business/employment use.

In your case:

· the cost of international work related calls made from the apartment in Country A via a phone card can be deducted.

· a portion of the internet costs incurred at the apartment in Country A can be deducted. 

· a portion of the ancillary stationary and computer costs can be deducted.

· the cost of shipping home your files and office equipment are deductible where the items are used predominantly in earning assessable income.  However, any costs involved in shipping personal belongings are private expenses and are not deductible. 

Therefore you are entitled to a deduction for additional home running costs that you may incur in the course of gaining or producing your assessable income for the work you do for the Company X and Company Z under section 8-1 of the ITAA 1997.

Expenses associated with acquiring visas relate primarily to a taxpayer's personal right to travel to any overseas destination. They closely parallel the costs associated with obtaining a driver's licence, which were characterised as being of a private nature (Case P55 82 ATC 253; 25 CTBR (NS) 824 Case 117). Thus expenditure in obtaining a visa is generally private in nature.

Therefore it is considered that the expense incurred in acquiring your visa is not deductible under section 8-1 of the ITAA 1997.

Note

For assistance on claiming a deduction for home office expenses, the ATO has a Home Office Expenses Calculator which can be accessed via our website at www.ato.gov.au >What do you want to do > Find a rate or calculator > Individuals & families > Calculators: Work related expenses

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