Edited version of your written advice

Authorisation Number: 1051271113037

Date of advice: 6 October 2017

Ruling

Subject: A payment to you by your employer

Question 1

Is the payment paid to you from your employer, in the circumstances described, assessable income within the meaning of the Income Tax Assessment Act 1997?

Answer

No

Question 2

What if any amounts paid under the tenancy agreement are deductible outgoings within the meaning of the Income Tax Assessment Act 1997?

Answer

No amounts are deductible.

This ruling applies for the following period:

Year ended 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

From early 2016 to early 2017 you were employed as a graduate.

As a graduate you were required to complete the graduate program.

You were offered the opportunity to work interstate as part of the graduate program for 3 months. You accepted this offer.

To undertake the rotation you temporarily relocated interstate for the duration of the relevant period and entered into a Residential Tenancy Agreement.

You continued to rent your home property during the relevant period, and returned to stay there on at least one occasion for at least two days. You kept all of your furniture in your home property and only took a small number of clothing and personal effects interstate. You did not redirect your mail, and did not change your electoral role or car registration details. You always intended to return to your home property.

Your employer made a payment to you towards the expenses you incurred in respect of your rotation interstate. Your employer required you to produce the Residential Tenancy Agreement as evidence of your expenditure before it agreed to pay the payment.

Your employer did not ask you to, and you did not, provide a declaration in relation to living away from your usual place of residence.

Your employer did not include the payment in your employee payment summary for the year ended 30 June 2017, as either an allowance or as salary and/or wages.

Your employer did not include the payment on your payslip.

You provided the following documents with your Application for private ruling which form part of the facts:

● Annexure A – Residential Tenancy Agreement

● Annexure B – Email from your employer

● Annexure C – Remittance Advice for the payment

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 23L(1)

Income Tax Assessment Act 1936 subsection 23L(1A)

Income Tax Assessment Act 1997 subsection 6-1(1)

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 6-15

Income Tax Assessment Act 1997 subsection 6-15(1)

Income Tax Assessment Act 1997 subsection 6-15(2)

Income Tax Assessment Act 1997 subsection 6-15(3)

Income Tax Assessment Act 1997 subsection 8-1(1)

Income Tax Assessment Act 1997 paragraph 8-1(2)(b)

Income Tax Assessment Act 1997 section 15-2

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Taxation Administration Act 1953 subsection 359-5(1) of Schedule 1

Taxation Administration Act 1953 section 359-35 of Schedule 1

Reasons for decision

Question 1

Summary

The payment of $2000 you received from your employer is not included in your assessable income.

Detailed reasoning

Subsection 6-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states your assessable income consists of your ordinary income and your statutory income.

Ordinary income is defined in section 6-5 of the ITAA 1997 as income according to ordinary concepts. Examples of income include salaries, wages, rent, interest, dividends and proceeds of carrying on a business.

Statutory income consists of amounts that are not ordinary income but which are deemed to be income under specific provisions within the income tax legislation (section 6-10 of the ITAA 1997). In particular, section 15-2 of the ITAA 1997 states that your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you.

In addition to specific provisions including amounts in your assessable income, specific provisions also exclude certain amounts from your assessable income. Section 6-15 of the ITAA 1997 sets out three situations where an amount is not assessable income:

● If an amount is not ordinary income, and is not statutory income, it is not assessable income - subsection 6-15(1) of the ITAA 1997.

● If an amount is exempt income, it is not assessable income - subsection 6-15(2) of the ITAA 1997.

● If an amount is non-assessable non-exempt income, it is not assessable income - subsection 6-15(3) of the ITAA 1997.

Some amounts paid to employees may be allowances or may be a reimbursement, as discussed in Taxation Ruling TR 92/15 Income tax and fringe benefits tax: the difference between an allowance and a reimbursement (TR 92/15).

An allowance is the payment of a predetermined amount to cover an estimated expense and is paid to the recipient regardless of whether the recipient incurs the expected expense (paragraph 2 of TR 92/15). Whether the recipient expends the allowance is at the discretion of the recipient.

In contrast, a reimbursement is a payment to compensate a recipient exactly, in whole or part, for an expense incurred, although not necessarily disbursed. A requirement that a recipient substantiate the expense lends weight to a payment being a reimbursement rather than an allowance (paragraphs 3 and 9-10 of TR 92/15).

Allowances are generally regarded as assessable income except where they are fringe benefits within the Fringe Benefits Tax Assessment Act 1986 (FBTAA). Income derived by a taxpayer by way of fringe benefit is not assessable income and is not exempt income of the taxpayer (subsection 23L(1) of the Income Tax Assessment Act 1936 (ITAA 1936)). Therefore, a fringe benefit received by a taxpayer is not included in the taxpayer’s assessable income by subsection 6-15(3) of the ITAA 1997, which provides that if an amount is non-assessable non-exempt income, it is not assessable income.

A reimbursement is generally either:

● a fringe benefit that is excluded from a taxpayer’s assessable income by subsection 23L(1) of the ITAA 1936 and subsection 6-15(3) of the ITAA 1997; or

● an exempt benefit which is exempt income that is not included in the employee’s assessable income by subsection 23L(1A) of the ITAA 1936 and subsection 6-15(2) of the ITAA 1997.

In your situation, you received the payment from your employer for the rent expense you would incur under the Residential Tenancy Agreement you entered. You incurred the rental expense because you were living away from your usual residence, undertaking a work rotation interstate. Whilst you were paid a predetermined amount, you were required to substantiate your rental expense with proof of your expenditure under the Residential Tenancy Agreement before being entitled to the payment from your employer. Consequently, the payment is considered to be a reimbursement because it was paid to compensate you for an expense you would incur and the payment was conditional upon you providing your employer with evidence of the expense, as explained in TR 92/15. Therefore the payment is not included in your assessable income because it is excluded from your assessable income by subsection 6-15(2) or subsection 6-15 (3) of the ITAA 1997.

Question 2

Summary

You are not entitled to a deduction under subsection 8-1(1) of the ITAA 1997 for any expenditure that you incurred under the Residential Tenancy Agreement because the expenses are of a private or domestic nature.

Detailed reasoning

Subsection 8-1(1) of the ITAA 1997 allows a deduction for losses and outgoings to the extent that they are incurred in gaining or producing assessable income.

However, outgoings that are of a capital, private or domestic nature, or relate to the earning of exempt income are specifically excluded from being deductible. In particular, paragraph 8-1(2)(b) of the ITAA 1997 specifically denies a deduction for expenditure that is of a private or domestic nature. Expenditure that is private in nature generally relates to a taxpayer in their personal or private capacity.

An employee’s ordinary costs of maintaining a home are of a private or domestic nature and are not deductible. Such costs are preliminary to work and are not incurred in performing work activities, in the same manner as travel expenses to and from work are preliminary to work and are not incurred in performing work activities. These expenses are incurred to enable an employee to commence their income earning activities and are therefore considered private in nature.

Similarly the costs of relocating for work or living away from home to work are preliminary to work and are not deductible, regardless of whether commencing new employment or transferring within an existing employment. The costs of relocating or living away from home are not incurred in performing an employee’s work activities. They are of a private or domestic nature and reflect an employee’s choice about where to live. This is the case even though a taxpayer may, as a matter of practicality need to incur the expenditure to earn assessable income.

It is also the case that an employee is not entitled to deduct an expense simply because they receive an allowance or other payment for that expense. The nature of the expense and its connection to the income producing activities determine whether the expense is deductible.

The issue of expenses incurred in relation to accommodation near the work place while maintaining a residence in another location has been considered by the courts on a number of occasions.

In the case Federal Commissioner of Taxation v. Charlton 84 ATC 4415; (1984) 15 ATR 711 (Charlton’s Case), the taxpayer was a pathologist employed to carry out autopsies for the local coroner in Bendigo. He rented a flat in Bendigo while maintaining a permanent family home in Melbourne. The taxpayer claimed that the rental expenses were incurred in the production of assessable income. Crockett J stated at 84 ATC 4419-4420:

The Commissioner contends (correctly in my view) that, if the taxpayer should choose to reside so far from the place where it is necessary for him to be in order to gain his income that he not only needs to incur expense in travelling to that place but also to incur expense in the provision to him of some accommodation transitory or discontinuous in its use and secondary to or temporarily supplemental of his actual home, then that expense, too, is for the same reason non-deductible.

…

The taxpayer's election to live in Melbourne and not in Bendigo meant that the rental expended on the flat in order to enable him to secure accommodation in which to recuperate from the rigours of travel and the nature of his work was an expenditure dictated not by his work but by private considerations.

The decision in Charlton’s Case is supported by the decision in Federal Commissioner of Taxation v. Toms 89 ATC 4373; (1989) 20 ATR 466 (Toms’ Case), where the Federal Court held that expenses incurred in relation to accommodation near the work place while maintaining a family residence in another location were not an allowable deduction as they were considered to be private expenses.

The principle from Charlton’s Case and Toms’ Case, that expenses for accommodation near the workplace while maintaining a residence elsewhere are private in nature, is applicable to your case. You temporarily lived away from your home to undertake a rotation of your graduate program interstate. Whilst interstate you rented accommodation in which to live and you continued to maintain your usual home. Your rental expenses and any other expenses you incurred under the Residential Tenancy Agreement were incurred as a result of your temporary relocation to gain closer proximity to your workplace and were not incurred in the actual performance of your work duties. The expenses you incurred under the Residential Tenancy Agreement are expenses of a private or domestic nature. Therefore you are not entitled to a deduction for your expenses under section 8-1 of the ITAA 1997, as the expenses were not incurred in gaining or producing assessable income and were expenses of a private or domestic nature (paragraph 8-1(2)(b) of the ITAA 1997).

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