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Edited version of your written advice
Authorisation Number: 1012979073597
Date of advice: 2 March 2016
Ruling
Subject: Overseas travel expenses
Question 1
Is entity A entitled to a deduction for 100% of the overseas airfare expenses?
Answer
No.
Question 2
Is entity A entitled to a deduction for 50% of the overseas airfare expenses?
Answer
Yes.
Question 3
Is entity A entitled to a deduction for travel expenses incurred for travel directly to and from business meetings?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2016
The scheme commenced on
1 July 2015
Relevant facts
Entity A is paying for a person to travel overseas for business purposes.
The person will meet various representatives from relevant areas and hopes to obtain more clients.
The meetings have been prearranged. As the timeframe for the discussions is uncertain, the person will remain overseas for some period to complete all tasks and negotiations.
While overseas, the person will continue working remotely on behalf of entity A for an Australian customer.
During the time overseas, the person also plans to have a personal vacation.
The person would not be taking a personal trip if it was not for the business trip.
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 are 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, or a provision of the ITAA 1997 prevents it.
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 (Ronpibon's case)), 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).
To determine whether the expenses are deductible, the essential character of the expenditure must be considered. It is necessary to determine whether there is a sufficient nexus between the expenditure and the comcpany's current income-earning activities. 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 words 'to the extent to which' signify that an expense may be apportioned if it is only partly incurred to produce assessable income. In Ronpibon's case, the High Court expressed the view that '... there are at least two kinds of items of expenditure that require apportionment'. These were generally: those items that are capable of dissection; and those that cannot be dissected but should be apportioned on the basis that they serve more than one object indifferently. The latter would clearly apply to an airfare purchased for both work and other purposes (Case R13 84 ATC 168; 27 CTBR (NS) Case 64).
Taxation Ruling TR 98/9 Income tax: deductibility of self-education expenses incurred by an employee or a person in business discusses the apportionment of overseas travel expenses where there is a dual purpose for the travel. Although this ruling deals with deductions of self-education expenses, the principles are the same for all cases requiring apportionment and could equally apply to the airfare expenses.
As highlighted in TR 98/9, if the purpose of the travel was for income earning purposes, the existence of an incidental private purpose does not affect the characterisation of the related expenses as being incurred in gaining assessable income. However where there are two equal purposes of the travel, 50% of the expenses would be deductible.
In this case, it is not considered that the airfare expenses are wholly incurred in gaining assessable income. The time required for the meetings is uncertain, yet the person will be overseas for some period. The person is also planning a two to three week vacation while overseas. The private purpose of the trip is not considered to be incidental due to the time allowed for the personal vacation. It is accepted that the business meetings have a direct nexus to producing entity A's assessable income. However, the time spent on vacation is not connected to the income producing activities. Therefore the airfare expenses are not wholly deductible under section 8-1 of the ITAA 1997.
It is acknowledged that the person would not be taking a personal trip if it wasn't for the business trip, however it remains there is a significant time while overseas will be devoted to personal pursuits.
After considering the specific circumstances, it is considered reasonable to allow a deduction equal to 50% of the return airfares.
Travel to meetings
A deduction is generally allowable for the cost of travelling to and from a business meeting under section 8-1 of the ITAA 1997.
In this case, where the travel costs such as a taxi fare relate solely for business purposes to attend business meetings, the associated costs are an allowable deduction. Similarly, the cost of the return trip is also an allowable deduction.
Please note that where the travel costs relate to both business and private purposes, only the business related portion is an allowable deduction.
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