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Ruling

Subject: Deduction for a business expense

Question 1

Are you entitled to a deduction for the costs incurred for an overseas trip as business expenses?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2012

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You are a director of company and you organised a team building exercise for yourself and a full-time employee of your business.

The intention of the exercise was to build a strong working relationship, trust, integrity and team play with the employee.

It was also intended at ensuring the transferring to the workplace of these new skills including the ability to better contribute to the team when handling contractors.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

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.

To satisfy the first limb of section 8-1 of the ITAA 1997, a loss or outgoing must be relevant and incidental to the operations or activities from which assessable income is produced: Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; 8 ATD 431; (1949) 4 AITR 326. This principle is also expressed in terms of there having to be a sufficient nexus or connection between the outgoing and the production of assessable income.

What is involved is a process of identifying the essential character of the expenditure to determine whether it is in reality an outgoing incurred in gaining or producing assessable income.

The activity was self improvement exercise for both yourself and your employee, and this can be described as self education in nature.

Taxation Ruling TR 98/9 provides the Commissioner's view on the deductibility of self-education expenses. It states that self-education expenses are incurred in gaining or producing assessable income if they are directly relevant to the person's employment activities or are likely to lead to an increase in income from those activities.

TR 98/9 explains that airfares, accommodation and meal expenses incurred on overseas study tours or sabbaticals, on work-related conferences or seminars, or attending an educational institution are deductible if the necessary connection with a person's income producing activity exists.

However, TR 98/9 explains that if the subject of the self-education is too general in terms of the taxpayer's income-earning activities, the necessary connection between the expense and the income-earning activity does not exist.

The ruling also states that the intention or purpose in incurring an expense can be an element in determining whether the whole or part of the expense is an allowable deduction.

The Taxation Boards of Review have considered a number of teachers seeking income tax deductions for overseas travel expenses. Most of the claims were rejected because the teachers were not able to establish a positive connection between the overseas travel and the performance of their duties of employment as teachers.

One particular case is Case U109 87 ATC 657. In this case, the taxpayer was a science teacher who specialised in geology and was the head of the school science department. He undertook a 17 day trip to Indonesia organised by a natural museum history society of which he was a member. During the course of the trip, he visited several volcanoes and other geological sites, and attended a geological congress. He also visited some tourist attractions. The taxpayer took many slides of the geological sites and prepared a taped commentary which he used in his teaching on his return. The Administrative Appeals Tribunal (AAT) concluded that the trip was essentially recreational in character and not deductible. The AAT also stated that some taxpayers are fortunate in finding personal and recreational satisfaction in their field of endeavour and that in this case the trip was recreational in character and not deductible.

In your case, you and your employee travelled overseas. This trip may have broadened your leadership skills and knowledge, and may have improved your ability to handle contractors for your work.

However, these reasons are not enough to demonstrate a sufficient connection between the travel and your income producing activities. Furthermore there is no evidence presented to show that your travel will increase income in your current work activities.

The trip may make you and your employee better workers, but the knowledge or skills that you both gained from the trip are too general in nature for the expenses to be incurred in the trek of gaining your assessable income.

Accordingly the trip for you and your employee is not considered to have a sufficient connection to your employment duties, and your company is not entitled to a deduction for expenses incurred in travelling overseas.

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