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Edited version of your private ruling
Authorisation Number: 1012433259088
Ruling
Subject: Travel expenses
Question
Can you claim a deduction for overseas travel expenses to establish contacts for your business?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 2012
Year ended 30 June 2013
The scheme commences on:
1 July 2011
Relevant facts and circumstances
You are employed full time.
Prior to moving to Australia you also worked in the same industry overseas.
You are in the process of setting up a business of connecting Australian businesses to overseas professionals.
You believe there is a business opportunity in Australia as overseas professionals with a particular skill are cheaper than Australian professionals with the same skills.
You are approaching Australian businesses in an attempt to sell your business services.
You have travelled overseas to find suitable contacts with the desired skills that you can use with your business idea.
You work your full time employment and have spare time to work on your business idea after hours.
You have not earned income from your business services.
You do not advertise your business services.
You do not have a business plan.
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, or necessarily incurred in carrying on a business for the purpose of 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 be an allowable deduction:
· 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. FC of T; (1958) 100 CLR 478),
· 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 NL v. FC of T, (1949) 78 CLR 47), and
· it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).
Generally, the expenses connected with the acquisition, establishment and enlargement of a business or with the acquisition of fixed capital assets, are not deductible under section 8-1 of the ITAA 1997.
The costs of establishing a business are not considered as a cost of carrying on the business for the purpose of gaining or producing assessable income, unless it is an operating expense.
This is supported by the comments of Menzies J in John Fairfax & Sons Pty Ltd v. Federal Commissioner of Taxation (1959) 101 CLR 30; (1959) 11 ATD 510; (1959) 7 AITR 346:
To make a payment to acquire or to defend the acquisition of a favourable position from which to earn income or to enter into arrangements that will yield income, is not in general an outlay incurred either in gaining or in carrying on business for the purpose of gaining assessable income; such a payment in the case of a trading company, occurs at a stage too remote from the receipt of income to be so regarded. To be deductible an outlay must be part of the cost of trading operations to produce income, i.e., it must have the character of a working expense.
Expenses associated with the establishment or purchase of a business, are incurred at a point too soon to be regarded as being incurred in carrying on the business.
In your case, you incurred travel expenses in travelling overseas to establish contacts to use in your business. The expenses are considered preliminary to the income earning activities, and are incurred at a point too soon. As such they are not deductible under section 8-1 of the ITAA 1997.
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