Edited version of private ruling

Authorisation Number: 1011667363536

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Ruling

Subject: Work related expenses

Question 1

Is the living away from home allowance (LAFHA) assessable income?

Answer

No.

Question 2

Are you entitled to a deduction for living expenses while residing in town A?

Answer

No.

Question 3

Are the reimbursed car expense payments assessable income?

Answer

No.

Question 4

Are you entitled to a deduction for unreimbursed car expenses incurred for trips between town A and town B for training, meetings and other work related purposes?

Answer

Yes.

Question 5

Are you entitled to a deduction for travel expenses incurred for trips between town A and town B for visiting family and other private purposes?

Answer

No.

Question 6

Are you entitled to a deduction for travel expenses incurred for interstate trips to research future business opportunities?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 July 2009

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.

The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling,

· employment contract, and

· additional information including a travel diary.

You are a full time employee. You commenced work in town A several months ago. You expect to be in town A for some months.

Prior to this, you worked for the company in town B for 12 months.

After town A, you may work interstate.

Many of your belongings remain in town C. You pay a friend to store these belongings.

As outlined in your employment contract, the company provides share accommodation, utilities being electricity, gas and internet usage for the duration of your stay.

You are paid a LAFHA per week. You provided your employer with a declaration regarding your usual place of residence.

You advised that this allowance started from January in the particular year. The total amount of allowance you received in the relevant income year was less than $10,000.

Your employer advised that the LAFHA is subject to fringe benefits tax and is not included in your gross payment amount on your PAYG payment summary.

Your PAYG payment summary does not show any allowances.

You travel between town A and town B to attend work related training seminars and meetings.

The course provided relevant information in your field. The course is part of your professional development recommended by your employer.

You also travel to town B for other recommended courses.

As manager of the town A premises, you are required to attend monthly meetings in town B.

When in town B you stay with friends.

You use your own car for this travel. A letter from your employer states that you use your personal car to travel from place to place to complete work for the company. Your employer reimburses you for the car petrol amounts as per your receipts presented. The reimbursed car petrol expenses are not included on your PAYG payment summary.

You plan to open up a business or invest into a related field in a subsequent year. You have travelled interstate for this business research. You incurred expenses for your airfare, accommodation and meals for these trips.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 23L

Income Tax Assessment Act 1936 Section 51AH

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Division 28

Fringe Benefits Tax Assessment Act 1986 Section 20

Fringe Benefits Tax Assessment Act 1986 Section 30

Reasons for decision

Summary

The LAFHA and reimbursement of your car petrol expenses are not assessable income. Your living expenses incurred while residing in town A are not an allowable deduction. Your work related car expenses deduction is reduced by the amount of the reimbursements you have received. No deduction is allowed for your interstate travel as the expenses are incurred at a point too soon to be regarded as being incurred in gaining your assessable income.

Detailed reasoning

Living away from home allowance

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 through the provision of a fringe benefit by an employer is not assessable income in the employees hands by the operation of section 23L of the Income Tax Assessment Act 1936 (ITAA 1936).

In your case, you received a LAFHA from your employer.

Subsection 30(1) of the FBTAA defines LAFHA benefits and states:

Where:

(a)    at a particular time, in respect of the employment of an employee of an employer, the employer pays an allowance to the employee; and

(b)    it would be concluded that the whole or a part of the allowance is in the nature of compensation to the employee for:

(i)      additional expenses (not being deductible expenses) incurred by the employee during a period; or

(ii)    additional expenses (not being deductible expenses) incurred by the employee, and other additional disadvantages to which the employee is subject, during a period;

by reason that the employee is required to live away from his or her usual place of residence in order to perform the duties of that employment;

the payment of the whole, or of the part, as the case may be, of the allowance constitutes a benefit provided by the employer to the employee at that time.

If all these conditions are met, the allowance paid to the employee is a LAFHA and subject to fringe benefits tax.

A LAFHA is subject to tax in the hands of the employer and is not regarded as assessable income for the employee.

In your case you received a LAFHA from your employer. Your LAHFA is a fringe benefit under the FBTAA. Under section 23L of the ITAA 1936, it therefore does not form part of your assessable income.

Reimbursement for car expenses

The term reimbursement refers to when an employee receives a payment from their employer for the actual amount of the expenses incurred.

If a payment received from an employer is for an estimated expense, the amount received by the employee is considered to be an allowance (not a reimbursement) and this allowance is to be treated as fully assessable income by the employee.

Taxation Ruling TR 92/15 provides guidance on distinguishing between an allowance and a reimbursement.

An allowance is payment of a predetermined amount to cover an estimated expense. It is paid regardless of whether the expense is incurred, either at that time, or at all.

A reimbursement is compensation, whether wholly or partly, which is applied specifically to an expense already incurred. Generally the recipient would need to show evidence of the expenditure, and refund any unexpended amount. The burden of the expense is transferred from the employee to the employer (Case 153 10 TBRD 480). In general, the expenditure is incurred by the recipient, on behalf of the provider.

In your case, you received payment from your employer for your petrol expenses. As the payment you received is an exact payment of your actual petrol expenses it is regarded as a reimbursement and not an allowance.

Section 20 of the FBTAA states that reimbursement of an expense is a fringe benefit.

As stated above, income derived through the provision of a fringe benefit is not assessable income for the employee under section 23L of the ITAA 1936. Consequently the petrol reimbursements you receive are not included as part of your assessable income.

Allowable deductions

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, or are specifically excluded by a section of the income tax legislation.

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 (see Lunney v. FC of T; (1958) 100 CLR 478 (Lunney's 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 (see 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 (see Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).

Living expenses

Expenditure on the daily necessities of life (for example, accommodation and food) are generally not deductible as it is not incurred in gaining or producing assessable income and is also considered to be private or domestic in nature.

An employee is not automatically entitled to a deduction for expenses incurred if they receive an allowance. The expenses must meet the criteria for deductibility under section 8-1 of the ITAA 1997.

In your case you are living and working in town A for several months. The expenses of moving and living in town A are private in nature and therefore not an allowable deduction. Furthermore, as you receive a LAFHA, and this allowance is not included in your assessable income, you are not entitled to any deduction for your associated expenses. Your expenses are not incurred in earning your assessable income. Therefore no deduction is allowable under section 8-1 of the ITAA 1997.

Please note that if you were to receive an assessable allowance in relation to your living expenses in Town A such expenses remain private in nature and therefore not an allowable deduction.

Work related car expenses

Division 28 of the ITAA 1997 allows a deduction for car expenses when your car is used in the course of producing your assessable income.

Expenses of travelling between home and work are generally not deductible as this expenditure is of a private nature. The cost of travel between home and work is generally incurred to put the employee in a position to perform duties of employment, rather than in the performance of those duties (Lunney's Case); Taxation Ruling IT 112).

A deduction is allowable for the cost of travel from a person's normal workplace or home to an alternative workplace. The cost of travel from the alternative workplace back to the normal workplace or home is also an allowable deduction (Miscellaneous Taxation Ruling MT 2027). This travel is undertaken in the performance of a person's normal duties. It is incurred in the course of gaining assessable income.

A deduction is also allowable for the costs of travelling to attend work related training and meetings.

In your case, your travel from your home to work in town A is regarded as private home to work travel and therefore no deduction is allowable for this travel.

However, your travel to town B for your work related training and meetings is considered to be sufficiently connected to your income earning activities. Therefore the associated car expenses are an allowable deduction.

In calculating your allowable car expenses deduction, the reimbursement of your petrol costs needs to be considered.

Section 51AH of the ITAA 1936 states that where a taxpayer is reimbursed in whole or in part in respect of an expense and the reimbursement constitutes a fringe benefit, then the amount of the deduction that has been allowed or would have been allowed is to be reduced by the amount of the reimbursement.

The reimbursement of your car petrol costs is a fringe benefit. Therefore, your deduction for work related car expenses is required to be reduced by any amount reimbursed by your employer, under section 51AH of the ITAA 1936.

If the amount of reimbursement received exceeds the total amount of deductible car expenses incurred, no deduction will be allowable under section 8-1 of the ITAA 1997.

Your work related car expenses deduction is allowable using one of the four methods contained in Division 28 of the ITAA 1997.

The four statutory methods are:

· cents per kilometre

· 12% of original value

· one-third of actual expenses, and

· log book.

If you elected to use the cents per kilometre method you calculate your deduction by multiplying the total number of business kilometres your car travelled in the income year by the number of cents based on your cars engine capacity. The number of business kilometres is limited to the first 5,000. Any business kilometres travelled in excess of 5,000 is disregarded.

In your case, you have work related travel in excess of 5,000 kilometres during the particular income year. If you use the cents per kilometre method, you can only claim up to 5,000 kilometres with the remaining business kilometres travelled disregarded.

The following is a summary of the other three methods available under Division 28 of the ITAA 1997. You are entitled to choose the method that provides you with the largest deduction provided you have the necessary evidence. 

12 percent of original value method: this method is based on 12 percent of the original value of your car. You can use this method if you used your car to travel more than 5,000 business kilometres during the tax year. No written documentation is required if you use this method. However, you must be able to show how you worked out your business kilometres.  

One-third of actual expenses: this method allows you to claim one-third of each car expense. It does not include capital costs such as the initial cost of your car or improvements to your car. You can use this method if you used your car to travel more than 5,000 business kilometres during the tax year. You must keep all written documentation for all of your car expenses except for fuel and oil costs which can be calculated by receipts, odometer records or a reasonable estimate.  

Logbook: this method allows you to claim based on the business use percentage of each car expense. You need to keep a log book, so you can work out that percentage and keep odometer readings for the start and end of the period you owned the car. You must keep written evidence for all the other expenses for your car. You can claim fuel and oil costs based on odometer records.  

A log book is a document in which an entry is recorded in respect of each business journey made during the applicable log book period, and section 28-125 of the ITAA 1997 requires that each entry must state: 

· the date the journey began and ended

· the odometer readings at the start and end of the journey

· the number of kilometres travelled, and

· the purpose of the journey.

Please ensure the calculated deduction is reduced by any amount of reimbursement received.

Interstate travel expenses

Expenses incurred by an employee in finding employment are not deductible because the expenses come at a point in time too soon to be regarded as being incurred in gaining assessable income. The expenditure is incurred in getting, not in doing, work.

The leading case on this issue is FC of T v Maddalena 71 ATC 4161; (1971) 2 ATR 541. In that case, a taxpayer who earned his living as an employee electrician and as a professional footballer claimed for travel and legal expenses incurred in seeking and obtaining a contract with another rugby league club. It was held that the expenditure claimed was not deductible. The costs did not form an outgoing incurred in the course of earning assessable income.

In Case U74 87 ATC 451, an academic on fixed term employment claimed expenses in looking for new employment after his present contract expired. The expenses were not deductible because they came at a point too soon to be properly regarded as incurred in gaining assessable income. 

Similar principles apply when researching a future business or investment.

In your case you have incurred expenses in travelling interstate for business research purposes. Such expenditure incurred is not an outgoing incurred in gaining your current income, and the expenditure is incurred at a point too soon to be properly regarded as gaining or producing your future assessable income. Therefore, no deduction is allowable for your airfare, accommodation, meals and other interstate travel expenses.