Edited version of private ruling

Authorisation Number: 1011692258220

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Ruling

Subject: Work-related expenses

Questions and answers:

Question 1

Is the income you receive from Company X your personal services income (PSI)?

Answer

Yes.

Question 2

Do the PSI rules apply to the income you receive from Company X?

Answer

Yes.

Question 3

Are you entitled to a deduction for travel expenses incurred for travel between your home and work?

Answer

No.

Question 4

Are you entitled to a deduction for expenses incurred purchasing meals when you are away from the worksite and receive an allowance?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commenced on:

1 July 2009

Relevant facts and circumstances

You are a contractor. You are contracted to Company X in the capacity of labour hire.

You invoice Company X on a weekly basis for services provided at an agreed hourly rate.

You pay the costs of travelling from your home to your workplace.

The cost of any travel required by Company X after you arrive at your workplace is paid for by Company X.

Basic meals and accommodation are paid by Company X when you are at the work site. However, you are often sent to other areas to work and at such times you are unable to return to your usual accommodation. In these circumstances you are responsible for providing your own meals, and Company X pays you a set amount per day towards these meals.

You do not receive an allowance or reimbursement for your travel between your home and your workplace.

You undertake some work from home. The work you undertake at home is organising travel arrangements and tools for your next job as well as book work and invoicing. As you are sent to different locations, when you return home you need to organise equipment and paperwork before leaving home again. You have a designated room as your office that has a computer and other relevant equipment. The room is used solely for your business affairs.

Before leaving home you load your tools, you phone ahead to confirm upcoming jobs and organise travel arrangements.

You have a work roster but you are still 'on call' if jobs change.

You are required to carry a safety harness for working at heights and an assortment of hand tools for general work.

You carry two bags that weigh 15kg each.

You are unable to store this equipment at work as you go work at a different location each time.

You have kept all relevant documents to substantiate your claim.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Income Tax Assessment Act 1997 Divisions 84 to 87.

Income Tax Assessment Act 1997 Section 84-5.

Income Tax Assessment Act 1997 Section 85-10.

Income Tax Assessment Act 1997 Section 87-18.

Income Tax Assessment Act 1997 Section 87-20.

Income Tax Assessment Act 1997 Section 87-25.

Income Tax Assessment Act 1997 Section 87-30.

Reasons for decision

Personal services income (PSI)

The definition of PSI refers to income (including ordinary income or statutory income of any entity) that is mainly a reward for an individual's personal efforts or skills (section 84-5 of the Income Tax Assessment Act 1997 (ITAA 1997)).

If you receive PSI, then certain rules (known as the PSI rules) may apply, that limit the deductions you can claim against this income and affect your tax reporting obligations.

In your case the income you receive as a mining contractor is PSI as it is income you receive mainly as a reward for your personal efforts or skills.

The PSI rules do not apply if you meet one of the four tests:

· results test

· unrelated clients test

· employment test

· business premises test

Results test (section 87-18 of the ITAA 1997)

You pass the results test in the income year if you can answer yes to all three of the following questions for at least 75% of your PSI:

1. Under your contract or agreement, will you only receive payment when the work has been completed - that is, after producing the contracted result?

2. Do you need to provide the equipment or tools necessary to do the work?

3. Do you have to rectify defects in the work, or are you liable for the cost of rectifying defects?

The meaning of the phrase 'producing a result' means the performance of a service by one party for another where the first-mentioned party is free to employ his/her own means (i.e., third party labour, plant and equipment etc) to achieve the contractually specified outcome. The essence of the contract has to be to achieve a result and not to do work.

The consideration often is a fixed sum on completion of the particular job as opposed to an amount paid by reference to hours worked.

The Explanatory Memorandum to the Alienation of Personal Services Income Act 2000 provides:

The individual must actually be paid on the basis of achieving a result, rather than for example, for hours worked. (paragraph 1.114)

If remuneration is payable when, and only when, the contractual conditions have been fulfilled, the remuneration is for producing a given result.

In your case 100% of your PSI comes from Company X. You invoice Company X on a weekly basis for services provided at an agreed hourly rate. You therefore do not meet the requirement of 'producing a result', as the contract with Company X is for you to do work for which you are paid on an hourly rate, rather than you working to achieve a result and then being remunerated for that result.

In order to meet the results test, you must satisfy all three limbs of the test. As you have not met the first limb of being paid after producing the contracted result, we have not considered the second two limbs.

Therefore, you do not meet the results test.

Unrelated clients test (section 87-20 of the ITAA 1997)

You pass the unrelated clients test in an income year if you answer yes to both of the following questions:

1. Do you receive PSI from two or more unrelated clients?

2. Do you provide your services as a direct result of making offers or invitations (such as advertising) to the public?

You do not meet the unrelated clients test as you only have PSI from one client, Company X.

Employment test (section 87-25 of the ITAA 1997)

You pass the employment test in an income year if you answer yes to one of the following questions:

1. Do you get employees, partners (in a partnership) or other contractors to perform at least 20% (by market value) of the principal work?

2. Do you have one or more apprentices for at least half of the income year?

You do not meet the employment test as you do not have any employees, partners or apprentices.

Business premises test (section 87-30 of the ITAA 1997)

You pass the business premises test in an income year if you answer yes to all parts of the following question:

At all times in the income year were the business premises:

· owned or leased by you

· used for personal services work more than 50% of the time

· used exclusively by you

· physically separate from your residence and your associates' residences, and

· physically separate from the business addresses of clients and their associates?

You do not meet the business premises test as you do not meet any of the above points. You do most of your work at the Company X worksite, and although you do some work in your home office, this does not meet the requirements of the business premises test as it is not physically separate from your residence.

You do not meet the results test, the unrelated clients test, the employment test or the business premises test. This means that the PSI rules will apply to you.

Application of the PSI rules

Subsection 85-10(1) of the ITAA 1997 limits the expenses you can deduct against your PSI:

You cannot deduct under this Act an amount to the extent that it relates to gaining or producing that part of your ordinary income or statutory income that is your personal services income if:

(a) the income is not payable to you as an employee; and

(b) you would not be able to deduct the amount under this Act if the income were payable to you as an employee.

Example:

Ruth is an architect who works as an independent contractor for one firm. She is not conducting a personal services business. On most days she travels from her home to the business premises of the firm, where she does her work. She also has a home office, where she does some of her work.

This section confirms that Ruth cannot deduct her expenses of travelling between her home and the firm's premises because she could not deduct them if she were an employee.

Taxation Ruling TR 2003/10 explains the operation of section 85-10 of the ITAA 1997. Paragraph 64 of TR 2003/10 states:

Section 8-1 is the main provision that allows deductions for amounts relating to gaining or producing 'that part of your ordinary income or statutory income that is your personal services income'. The purpose of section 85-10 is to make it clear there is no legal difference in the entitlement of employees and individuals subject to the alienation measure to deductions for amounts incurred in gaining or producing personal services income. It does this by requiring an individual who derives personal services income otherwise than as an employee to treat the income as notionally from employment for the purposes of section 8-1.

Therefore, as the income you receive from Company X is your PSI, and the PSI rules apply to the income, you can only deduct your travel and meal expenses if you could deduct them if you were an employee.

Home to work travel

Section 8-1 of the 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 deduction is generally not allowable for the cost of travel by an employee between home and their normal workplace as it is considered to be a private expense. 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 (Taxation Ruling TR 95/34 paragraph 77).

However, there are situations where it has been accepted that travel by employees from home to work is deductible. Taxation Ruling IT 2543 summarises these situations as follows:

(a) the taxpayer's home constitutes a place of employment and travel is between two places of employment or business

(b) the taxpayer's employment can be construed as having commenced before or at the time of leaving home

(c) the taxpayer has to transport by vehicle bulky equipment necessary for employment

(d) the taxpayer's employment is inherently of an itinerant nature

(e) the taxpayer is required to break his or her normal journey to perform employment duties (other than including incidental duties such as collecting newspapers, mail, etc.) on the way from home to the usual place of employment, or from the place of employment to home.

Home constitutes a place of employment

Taxation Ruling IT 2199 sets out the Commissioner's view as to when home to work travel is deductible when the taxpayer's home constitutes a place of employment.

Paragraph 6 of IT 2199 states:

It is necessary that the income producing activity carried on at the taxpayer's home should constitute an employment or a business. It is not sufficient that a room in the home is used in association with an employment or business conducted elsewhere. It is rare for a home to represent a place of employment.

In your case you undertake work in a designated home office. This work includes organising travel arrangements and tools for your next job as well as book work and invoicing. These activities are not sufficient to constitute a place of employment or a business.

Employment commences before leaving home

Taxation Ruling IT 112 sets out the Commissioner's view as to when home to work travel is deductible when the taxpayer's employment commences before leaving home.

Paragraph 21 of IT 112 states:

In the case of a taxpayer whose employment requires him to be on stand-by duty at home, the deductibility of expenditure in travelling from home to a place of work is a question of fact to be decided according to the circumstances of each case. For example, the mere fact that an airline pilot is on stand-by duty at home is not enough. However, a medical practitioner who holds an appointment at a hospital and is required by the terms of his appointment to be accessible by telephone to cope with emergency cases; and who gives instructions to the hospital staff by telephone before setting out to travel to the hospital, may incur deductible expenses in travelling to and from the hospital where it is demonstrable that his responsibility for a patient begins at home as soon as he receives a telephone call and he might properly be regarded as having commenced his duties at home on receiving the call.

In your case you have stated that you have a work roster but you are still 'on call' if jobs change. This does not constitute commencing work before leaving home. Your work commences when you arrive at your place of work, therefore, the travel expenses you incur in order to get to work occur at a point too soon to be incurred in gaining or producing assessable income.

Transporting bulky equipment

Taxation Ruling IT 112 sets out the Commissioner's view as to when home to work travel is deductible when the taxpayer transports bulky equipment.

Paragraph 21 of IT 112 states:

Expenditure on travelling may be accepted as having the essential character of expenditure incurred in gaining or producing the assessable income of a taxpayer in the relevant sense where … [the] income is earned by performing his duties at several places by using his own equipment which he brings to the place of performance; the equipment is of substantial value and of such bulk that it can only be conveniently transported by the use of a motor vehicle; and, there are justifiable reasons for the taxpayer to keep the equipment at home; and the essential character of the expenditure itself is such that the expenditure is incurred as part of the operations by which the taxpayer earns his income; there is no other practicable way of getting his equipment to the places where he is to perform; and, the expenditure may be attributed to the carriage of the equipment rather than to his travel to the place of performance.

In your case you transport a safety harness and an assortment of hand tools with you when you travel to each new job. We do not consider that such equipment is of such bulk that it can only be conveniently transported by the use of a motor vehicle.

In addition, the fact that you may also carry additional luggage containing personal items, is not relevant to determining whether you transport bulky equipment, as such luggage is personal in nature and does not relate to the gaining or producing of assessable income.

Employment is of an itinerant nature

Taxation Ruling IT 112 sets out the Commissioner's view as to when home to work travel is deductible when the taxpayer's employment is of an itinerant nature.

Paragraph 21 of IT 112 states:

Expenditure on travelling may be accepted as having the essential character of expenditure incurred in gaining or producing the assessable income of a taxpayer in the relevant sense where the office or employment of the taxpayer is precisely the same as that in Wiener, namely, it is inherently of an itinerant nature; travel must be a fundamental part of the taxpayer's work; the taxpayer must not be able to perform his duties without the use of a motor vehicle; the taxpayer's contract of employment must require him to perform his duties at more than one place of employment; the nature of the job itself must make travel in the performance of its duties essential; and, it must be able to be said of the taxpayer that he is travelling in the performance of his duties from the time of leaving home.

Taxation Ruling TR 95/34 sets out the Commissioner's view as to when a taxpayer's work is considered itinerant in nature.

TR 95/34 lists the following characteristics as indicators of itinerancy:

· travel is a fundamental part of the employee's work

· the existence of a 'web' of work places in the employee's regular employment, that is, the employee has no fixed place of work, and

· the employee continually travels from one work site to another. An employee must regularly work at more than one work site before returning to his or her usual place of residence;

Other factors that may indicate itinerancy (to a lesser degree) include:

· the employee has a degree of uncertainty of location in his or her employment (that is, no long term plan and no regular pattern exists)

· the employee's home constitutes a base of operations

· the employee has to carry bulky equipment from home to different work sites, and

· the employer provides an allowance in recognition of the employee's need to travel continually between different work sites.

Whilst the above characteristics are not exhaustive, they provide guidelines for determining whether an employee's work is itinerant. It is considered that no single factor on its own is necessarily decisive.

The question of whether an employee's work is itinerant is one of fact, to be determined according to individual circumstances. It is the nature of each individual's duties and not their occupation or industry that determines if they are engaged in itinerant work. Further, itinerant work may be a permanent or temporary feature of an employee's duties.

In your case, Company X provides you with a work roster. You travel to your work at the beginning of each contract.

As you are travelling from your home to the same workplace each time you go to work, you are not an itinerant worker. Although you may travel to many different places after you arrive at the workplace, you have certainty in where your work contract begins and ends, and any travel after you arrive at the workplace is paid for by Company X.

Break from journey to perform employment duties

Miscellaneous Taxation Ruling MT 2027 sets out the Commissioner's view as to when home to work travel is deductible when the taxpayer is required to break his or her normal journey to perform employment duties (other than including incidental duties such as collecting newspapers, mail, etc.) on the way from home to the usual place of employment, or from the place of employment to home.

Paragraph 34 of MT 2027 states:

the total journey from the employee's home to the client's premises and on to the office should be accepted as business travel… where -

· the employee has a regular place of employment to which he or she travels habitually;

· in the performance of his or her duties as an employee, travel is undertaken to an alternative destination which is not itself a regular place of employment (i.e., this approach would not apply, for example, to a plant operator who ordinarily travels directly to the job site rather than calling first at the depot or to an employee of a consultancy firm who is placed on assignment for a period with a client firm); and

· the journey is undertaken to a location at which the employee performs substantial employment duties.

In your case you travel from your home to your workplace in order to begin work. You are not required to break your journey to perform work-related duties.

Meals

Expenditure on the daily necessities of life (e.g., food and drink) are generally a private expense and are not incurred in gaining or producing assessable income. The issue of the deductibility of meals was considered by the Full Federal Court in FC of T v. Cooper (1991) 21 ATR 1616; 91 ATC 4396 where Hill J stated (ATR at page 1638; ATC at page 4415):

Food and drink are ordinarily private matters, and the essential character of expenditure on food and drink will ordinarily be private rather than having the character of a working or business expense. However, the occasion of the outgoing may operate to give to expenditure on food and drink the essential character of a working expense in cases such as those illustrated of work-related entertainment or expenditure incurred while away from home.

A deduction may be allowable for the cost of meals bought while working overtime if an award overtime meal allowance is received.

In your case you incurred expenses when you purchased meals at the times you were away from your normal accommodation where Company X provided meals to workers. Company X paid you an amount for each day you worked away and purchased your own meals.

These meal expenses were not incurred in gaining or producing assessable income, rather they were private in nature. The amount you received for each day you bought your own meals was not paid to you as an award overtime meal allowance.

Therefore, you are not entitled to a deduction for meal expenses.

Conclusion

As discussed above, you home does not constitute a place of work or employment, your work does not commence before or at the time of leaving home, you do not transport bulky equipment, your work is not of an itinerant nature and you are not required to break your normal journey to perform work duties.

Therefore, you do not meet any of the situations where the Commissioner accepts that travel by employees from home to work is deductible.

The meal expenses you incurred were of a private nature and therefore not deductible.

As explained above, subsection 85-10(1) of the ITAA 1997 limits the deductions that can be claimed against PSI to those that would be allowable if the income was salary or wages income. Subsection 85-10(1) of the ITAA 1997 applies to your situation as you receive PSI from Company X and the PSI rules apply to that income.

Although we acknowledge that as a contractor you have additional obligations such as completing business activity statements, this does not change your legal rights in regards to what income tax deductions you are entitled to. The law applies equally to all taxpayers. The Commissioner does not have any discretion to allow deductions to certain taxpayers in specific industries where they would not otherwise be available.

Therefore, you cannot claim deductions for home to work travel expenses or meal expenses, regardless of the fact that you are a contractor rather than an employee.