Edited version of private ruling

Authorisation Number: 1011656588761

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Ruling

Subject: travel expenses

1. Are you entitled to a deduction for expenses in travelling to and from Australia while under an overseas contract?

No.

2. Are you entitled to a deduction for travel expenses to and from a new location when working under a new contract?

No.

3. Are you entitled to a deduction for travel between home and work?

No.

This ruling applies for the following period

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You were invited to sign a contract to work over the 2009 winter with organisation 1.

Following this you obtained a contract to work for organisation 2 as a full time employee over a period.

You were again contracted with organisation 1.

You stay with family members while in city A.

You use your computer and internet in relation to your income producing activities.

For two weeks you worked with an Australian organisation and were approached by an overseas organisation to join them at the commencement of a period.

For approximately seven months you will remain overseas.

You intend to then return to Australia.

You now have an ABN.

You will incur expenses in travelling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Summary

The costs of travel to and from a new location in relation to a new contract are not an allowable deduction as the costs are not incurred in earning your assessable income. Furthermore, the costs are considered to be private in nature. Similarly, your travel from home to work is not regarded as an expense in gaining your assessable income.

Detailed reasoning

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, 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. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 ATR 166 (Lunneys case)),

· 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 N.L.Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236), 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. Federal Commissioner of Taxation (1956) 95 CLR 344; (1956) 11 ATD 147; (1956) 6 AITR 379 and Federal Commissioner of Taxation v. Hatchett (1971) 125 CLR 494; 71 ATC 4184; (1971) 2 ATR 557).

Relocating expenses

In considering the deductibility of travel expenses, a distinction is made between travel to work and travel on work. It is only if the duties of the job require a taxpayer to travel that the taxpayer's travel expenses may be deducted (Taylor v. Provan [1975] AC 194).

Taxation Ruling IT 2481 provides the Commissioner's view on the deductibility of relocation expenses. When a taxpayer transfers employment from one locality to another and incurs expenditure in moving from one place of residence to a new place of residence to take up the duties of the new position, that expenditure is not incurred, in the Commissioner's view, in gaining or producing assessable income and is not deductible under section 8-1 of the ITAA 1997. The taxpayer is not travelling on his or her work but is travelling to his or her work. The employment duties do not commence until the employee reports for work at the new location. This is consistent with the view in the Federal Court case Fullerton v. Federal Commissioner of Taxation (1991) 32 FCR 486; 91 ATC 4983; (1991) 22 ATR 757 (Fullerton's case).

In Fullerton's case, as a result of a reorganisation, the taxpayer's position ceased to exist. In order to avoid retrenchment, he had no choice but to accept a transfer to a different location. The employer reimbursed a portion of the relocation expenses and the taxpayer claimed the remainder as a tax deduction. It was held that the expenditure on the taxpayer's domestic or family arrangements is not deductible, even though the expenditure had a causal connection with the earning of income. The outgoing was not incurred in the gaining or producing of income, notwithstanding that the relocation was in response to the changing necessities of work.

This view is also supported in the following cases:

· In Case U91 87 ATC 525, the taxpayer, a Commonwealth public servant, was transferred at the request of his employer from a State office to the central office of the department in Canberra. He was denied a deduction for expenses incurred in attempting to auction his house. It was held that the expenses were too remote from the income producing process to be incurred in gaining or producing assessable income.

· Similarly in Case V31 88 ATC 282; AAT Case 4,100 (1988) 19 ATR 3211, it was found that the relocation expenses were of a private and domestic nature and were therefore not deductible.

Therefore, whether the transfer is voluntary or at an employer's request, relocation and moving expenses are not allowable deductions under section 8-1 of the ITAA 1997. They are considered to be incurred prior to gaining assessable income, not in carrying out the duties of employment. That is, the expenses are a prerequisite to earning that income and consequently are of a private nature. Whether an employee is commencing a new employment or transferring within an existing employment, the relocation expenses remain private in nature and are not deductible.

In your situation, you will be in overseas for approximately seven months in relation to a new contract. It is considered that overseas is your normal place of work for this period.

While it is acknowledged that your family remain in city A, it is not considered that your travel between Australia and overseas is work related travel. Rather it is private travel carried out to enable you to commence your new contract duties. That is, your travel between Australia and overseas will not be travel undertaken as part of your contract duties. Thus, it is considered you will be travelling to work and not on work. Therefore the associated expenses in your initial and subsequent trips to and from Australia during this contract are not an allowable deduction.

The number of trips undertaken or the length of stay in Australia during your contract does not alter the nature of the travel. Furthermore, the distance of the travel does not alter the private nature of the travel.

As your travel expenses are not directly incurred in producing your assessable income, they are not deductible under section 8-1 of the ITAA 1997. Similarly, your accommodation and meal expenses while overseas are private in nature and not deductible.

It also follows, that travel expenses associated with relocating to a new area or town for work purposes on the completion of your overseas contract are not deductible. The expenses are a prerequisite to the earning of assessable income and are not incurred in producing that income. They remain private expenses that are not allowable as a deduction under section 8-1 of the ITAA 1997.

Home to work travel

Generally, a deduction is not allowable for the cost of travel between home and work as it is considered a private expense. Expenditure incurred in travelling to work is a prerequisite to the earning of assessable income rather than being incurred in the course of producing that income. Such expenses are incurred as a consequence of living in one place and working in another. That is, the essential character of the expenditure is of a private or domestic nature, relating to personal and living expenses and therefore not an allowable deduction (Lunney's case and Federal Commissioner of Taxation v. Cooper (1991) 29 FCR 177; 91 ATC 4396; (1991) 21 ATR 1616).

The essentially private character of travel between home and work is not affected by factors such as the mode of transport, the availability of transport, the lack of suitable public transport, the erratic times of employment, the time of travel, the distance of travel and the necessity of travel (Taxation Ruling IT 2543).

Certain expenditure is incurred in order to be in a position to be able to derive assessable income, for example, unless a person arrives at work it is not possible to derive income. This does not mean that the expenditure is incurred in the course of gaining or producing assessable income (Case V111 88 ATC 712).

Section 25-100 of the ITAA 1997 allows a deduction for the cost of travelling directly between two workplaces. However, subsection 25-100(3) of the ITAA 1997 states that travel between two places is not travel between workplaces if one of the places you are travelling between is a place at which you reside.

In your case, you use your home to do computer and internet work in relation to your income earning activities. However, this does not convert your home office to a work place or place of business. Your travel from home to work is a regular part of your income earning activities. Such travel is regarded as private travel between home and work and therefore not an allowable deduction.

Please note the above principles apply equally whether you are an employee or a contractor working for your own business.