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Ruling

Subject: Travel: otherwise deductible rule

Question 1: For each of the six flights described in Scenario 1, is the taxable value of the expense payment fringe benefit reduced by the otherwise deductible rule under section 24 of the Fringe Benefits Tax Assessment Act 1986?

Answer: Scenario 1: Flights 1 and 5 are work related airfares reimbursed. The taxable value of these two expense payment fringe benefits may be reduced to nil by the otherwise deductible rule. However, flights 2, 3, 4 and 6 are private travel and the taxable value of these expense payment fringe benefits may not be reduced by the otherwise deductible rule.

Question 2: For the two flights described in Scenario 2, is the taxable value of the expense payment fringe benefit reduced by the otherwise deductible rule under section 24 of the Fringe Benefits Tax Assessment Act 1986?

Answer: Scenario 2: The dual purpose of the travel is business and private. The taxable value of these expense payment fringe benefits may be reduced by the otherwise deductible rule to the extent of 50%.

Question 3: For the flights described in scenario 3, is the taxable value of the expense payment fringe benefit reduced by the otherwise deductible rule under section 24 of the Fringe Benefits Tax Assessment Act 1986?

Answer: Scenario 3: The taxable value of the expense payment fringe benefit will be reduced by the cost of the airfares for the return trip home base/location A/home base and accommodation in location A. The airfares and accommodation in location B are private and the taxable value of these expense payment fringe benefits may not be reduced by the otherwise deductible rule.

Question 4: For flights one and two and accommodation provided at both project locations as described in scenario 4, is the taxable value of the expense payment fringe benefit reduced by the otherwise deductible rule under section 24 of the Fringe Benefits Tax Assessment Act 1986?

Answer: Scenario 4: Yes, however the taxable value in respect of the private accommodation for the weekend in location B may not be reduced by the otherwise deductible rule.

This ruling applies for the following periods:

1 April 2010 to 31 March 2012.

The scheme commenced on:

1 April 2010

Relevant facts and circumstances

Some employees of an employer are required to travel domestically or internationally to provide services using their skills. They can be away from their home base for up to a few months. In certain situations, employees are allowed to travel to other destinations if they do not return to the home base over the weekend (equivalent fare cost of travel).

The employees purchase their own airline-tickets and accommodation and submit claims to the employer for reimbursement of such expenditure on return to home base.

They keep travel diaries for all international/domestic travels that spans for more than X consecutive nights. These records are submitted to the employer on return.

The employer requests the Commissioner to rule on how the otherwise deductible rule (ODR) will affect the taxable value of an expense payment fringe benefit in each of the four different scenarios, which are listed below with their opinion on how the ODR would apply in each situation.

Scenario 1

Employee assigned to a project at project location W for eight weeks and decides to travel to other destinations instead of flying home to home base on some weekends.

Flight I: home base/project location W/home base

Return flight from home base to project location W at the start of the project and from project location W and the home base when the project is concluded.

Flight 2: project location W /location A/ project location W

Return flight from project location W to location A within the country on the first weekend.

Flight 3 project location W /location B/ project location W

Return flight from project location W to location B in another country on the second weekend.

Flight 4: project location W/location C/project location W

Return flight from project location W to location C in another country on the third weekend.

Flight 5: project location W/home base /project location W

Return flight from project location W to home base on fourth weekend.

Flight 6: project location W/location D/ project location W

Return flight from project location W to location D in another country on the fifth weekend.

Employee spends X days out of eight weeks outside project location W.

Employer reimburses employee all six flights and accommodation at project location W.

Scenario 2

Employee assigned to a project at project location X for four weeks; the employee decides to stay in project location X for three weekends.

When the project is completed at the end of the fourth week, the employee takes a week of vacation and travels to another destination before returning to home base. Employee purchases a round-the-world ticket.

Flight 1: home base/project location X

Flight from home base to project location X at the start of the project

Flight 2: project location X/location E/Home base

Flight from project location X to location E for one week of vacation, en-route to home base.

Employee spends X days out of four weeks abroad outside the project location X.

Employer reimburses employee all flights and accommodation in project location X only.

Scenario 3

Employee assigned to project at project location Y for three weeks and decides to stay at project location Y for the first weekend, travel to location F, on second weekend and returns to home base on the final/third weekend.

Flight 1: home base/project location Y/home base

Return flight from home base to project location Y at the start of the project and from project location Y to home base when the project is concluded.

Flight 2: Project location Y/location F/project location Y

Return flight from to project location Y to location F within the country on the second weekend.

Employee spends X days out of three months outside project location Y.

Employer reimburses employee project location Y/home base return flight, project location Y/location F return flight and accommodation at both project location Y and location F.

Scenario 4

Employee assigned to a project at project location Z for four weeks. During the second week, the employee is required to attend a business conference at location G for X days. Instead of returning to project location Z on the weekend following the conference, the employee stays at location G for the weekend and returns to project location Z on Sunday evening.

All other weekends, the employee remained at project location Z until returning to home base at the end of the project.

Flight 1: home base/ project location Z/home base

Return flight from home base to project location Z at the start of the project and from project location Z to home base when the project is concluded.

Flight 2: project location Z/location G/ project location Z

Return flight from location G to project location Z at the end of the second week.

All flights and accommodation were reimbursed by the employer.

Relevant legislative provisions

Fringe Benefits Tax Assessment Act 1986 20

Fringe Benefits Tax Assessment Act 1986 24

Fringe Benefits Tax Assessment Act 1986 132

Fringe Benefits Tax Assessment Act 1986 136(1)

Income Tax Assessment Act 1997 8-1

Reasons for decision

Detailed reasoning

Issue 1

Fringe benefits tax - otherwise deductible rule

Detailed reasoning

The employer reimburses the employee for costs incurred in respect of airfares and accommodation. The reimbursement of these expenses gives rise to expense payment benefits as outlined in section 20 of the FBTAA. The benefits are provided by the employer to the employee in respect of the employee's employment and constitute expense payment fringe benefits as defined in subsection 136(1) of the FBTAA.

In accordance with section 23 of the FBTAA, the taxable value of the expense payment fringe benefit is the amount reimbursed, which includes both business and private components.

However, section 24 of the FBTAA, allows the employer to apply a notional amount to reduce the taxable value of the expense payment fringe benefits under the otherwise deductible rule (ODR).

The ODR allows the taxable value of the expense payment fringe benefit to be reduced by the amount that an employee would have been entitled to claim as a one-off income tax deduction had the employee incurred the expense.

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows an income tax deduction for losses and outgoings to the extent that they are incurred in the course of gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature or not allowed by another section of the act.

An expense is deductible under section 8-1 of the (ITAA 1997) when it has the essential character of an income-producing expense. This means there is a, connection between the expense and the income earning activity of the employee.

The essential character is to be determined by an objective analysis of all the surrounding circumstances.

There are circumstances where apportionment under section 8-1 is required. For example, if attendance at a work-related conference or seminar is undertaken for income-earning purposes and for private purposes (holiday), it is appropriate to apportion the expenses between the two purposes.

If the income-earning purpose is merely incidental to the main private purpose, only the expenses which relate directly to the former purpose are allowable. However, if the private purpose is merely incidental to the main income-earning purpose, apportionment is not appropriate.

An airfare and accommodation expense incurred to attend a work-related project is deductible under section 8-1 of the ITAA 1997. However, where the airfare relates to both work-related and private purposes, an apportionment of the expense may be required. Any expenditure that cannot be dissected may require apportionment.

Taxation Ruling TR 98/9: Income Tax: deductibility of self-education expenses discusses the apportionment of travel expenses.

Paragraph 64 of TR 98/9 states that:

If the purpose of a study tour or attendance at a work-related conference or seminar is the gaining or producing of income, the existence of an incidental private purpose does not affect the characterisation of the related expenses as wholly incurred in gaining assessable income.

At paragraph 65 TR 98/9 further states that if travel to a work-related conference was mainly devoted to a private purpose, such as having a holiday, and the gaining or producing of income was merely incidental to the private purpose, only those expenses directly attributable to the income-earning purpose would be allowable.

In Federal Court Case Ronpibon Tin v. FC of T (1949) 78 CLR 47; 4 AITR 236 the Court expressed the view that there are generally two kinds of items of expenditure that require apportionment: 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 objective. 

The latter would clearly apply to certain airfares and accommodation purchased for both business and private purposes.

An example of apportionment between business use and private use is provided at paragraph 70 of TR 98/9.

70. Example: Francesco, a paediatrician, has 2 equal purposes when he decides to attend a five-day international conference on paediatrics in Singapore followed by a seven-day holiday in Thailand. The conference package is $2,500 ($1,000 return air fare, $500 for the cost of the conference and $1,000 for accommodation and meals at the conference venue). Francesco paid another $2,000 for accommodation, meals and car hire for a 7 day holiday in Thailand. Francesco is allowed a deduction of $1,500 for the conference cost and the accommodation and meals expenses at the conference. Only half of the return airfare ($500) is allowed as the expense was incurred for two equal purposes, one income earning and the other private. The other expenditure of $2,000 relating to the holiday in Thailand is private in nature and not allowable as a deduction.

In each scenario, an employee is required by their employer to travel and reside temporarily at a location away from their home base to provide their skills for and on behalf of the employer. This is the business purpose of the journey.

However, the employee is able to book their own flights and accommodation for business and private purposes. The employer decides what to reimburse when the employee returns from his/her duties away from the home base. Some costs are able to be dissected whilst others may need to be apportioned as the cost is not dissectible.

If certain costs are to be apportioned, each scenario has to be looked individually to ascertain whether the private purpose is merely incidental to the business purpose or not.

These factors may assist in determining whether the private purpose is incidental to the business purpose include but not limited to:

· the time spent away

· the frequency of private trips

· the presence of accompanying persons

· whether the employer is willing to pay the extra private travel and accommodation costs incurred as a fringe benefit

· the employer puts a restriction on the employee regarding private travel

· whether the travel is to another country or within Australia and

· whether the private travel is on route as part of the return trip without additional cost to the employer.

These factors need to be considered before deciding whether the essential nature of the expense can be characterised as an allowable deduction under section 8-1 of the ITAA 1997.

Where none of these factors indicates that the private purpose was more than incidental to the business purpose, we will accept that the main purpose for the overseas travel is work-related. In such a situation, the employee would have been entitled to an income tax deduction had they incurred and paid the airfares themselves.

However, where the facts indicate that the private purpose was more than incidental to the business purpose, the expenditure will need to be apportioned.

In this regard, the application of the ODR will only apply to the extent to which the expenditure would have been income tax deductible to the employee.

In applying these paragraphs to the airfares and accommodation expenses reimbursed by the employer to the employee, the following can be concluded in each scenario.

Question 1 (Scenario 1)

The employee is sent away for eight weeks.

Flights 1 and 5 are from the home base to project location W and return to home base. Due to the duration of the project, there are two return flights from the home base to project location W.

Travel undertaken for work-related activities is generally income tax deductible. In accordance with section 8-1 of the ITAA 1997, you can deduct a loss or outgoing from your assessable income to the extent that it is incurred in gaining or producing your assessable income. You cannot deduct a loss, outgoing that is of a private or domestic nature, or another section that does not allow the expenses to be income tax deductible.

The phrase "the extent to which" means that losses and outgoings are apportioned between deductible and non-deductible elements, according to whether they are incurred to produce assessable income.

The return airfares in connection with flights 1 and 5 are considered to be business travel and the ODR will reduce the taxable value of these expense payment fringe benefits to nil, as long as the substantiation requirements (detailed below) are met for all the travel taken.

Flights 2, 3, 4 and 6 are private travel from project location W to another location. These costs can be dissected into individual trips.

There is no connection between the employee's skills being performed for their employer at project location W and the costs of the private airfares. Therefore, the taxable value of these expense payment fringe benefits cannot be reduced by the ODR as they are incurred for a private purpose.

The employer will be required to pay fringe benefits tax on the amount of the reimbursement for these private airfares.

Question 2 (Scenario 2)

The employee is sent to project location X for four weeks to perform their skills for the employer's client.

The cost of the accommodation at project location X is income tax deductible as this expense is work related. These costs have the necessary connection between the expense being incurred and the employee earning assessable income.

On return to the home base, the employee is reimbursed for accommodation costs at location X. Therefore, accommodation costs will be reduced by the ODR, because these costs would have been income tax deductible if he employee had incurred these costs.

However, the employee bought a round-the-world airline ticket. He made the bookings and paid for the tickets with his/her own money. This airfare is not dissectible.

If there are two purposes for the trip, then apportionment between what should be income tax deductible and the amount not deductible has to be worked out.

The employee stays at project location X each weekend but on the return journey, the employee takes a holiday for a week in another destination.

The employee has decided that the holiday should be part of the business airfares incurred. There is a partial link between the incurring of airfares and the employee earning assessable income, because there is a dual purpose for the trip. The trip is for business and private purposes.

Therefore, 50% of the return airfares will be income tax deductible and reduces the business portion of the long airfare to nil under the ODR as long as the substantiation requirements (detailed below) are met.

The other 50% of the airfares is private expenditure and there will be no reduction of the taxable value of this portion of the expense payment fringe benefit.

Question 3 (Scenario 3)

The employee is assigned to live temporarily in the project location Y. the employee will be away for three weeks.

The employee travels to another location F for a weekend holiday. The airfares and accommodation costs are dissectible.

The employer has reimbursed the employee for the full cost of airfares and accommodation.

The private journey is subject to FBT as an expense payment fringe benefit.

The holiday may be an incidental expense to the dominant purpose being business travel but this cost is dissectible.

Location Y/location F/location Y return flight and the accommodation at location F are private expenditure. The taxable value of these expense payment fringe benefits may not be reduced by the otherwise deductible rule.

The employer can use the ODR to reduce the taxable value of the expense payment fringe benefits resulting from the business portion of the travel and accommodation costs.

Question 4 (Scenario 4)

The employee is sent to project location Z for four weeks. The employee then travels to attend a business conference in location G for three days and returns to the project location Z to complete his/her duties as required by the employer.

Whilst in location G the employee takes the weekend off for private purposes. All other weekends the employee stays at project location Z.

On return to the home base, the employer reimburses the employee for all the airfares and accommodation incurred in both countries.

The private stay at location G is incidental to the dominant purpose of the whole trip, which is business related. All the airfares are business related and the otherwise deductible rule will reduce the taxable value of this expense payment fringe benefit in respect of the airfares to nil.

However, the accommodation expense incurred by the employee in relation to the additional weekend stay at location G is a private expense and the taxable value of the expense payment fringe benefit in respect of this accommodation cannot be reduced by the ODR.

Substantiation

When the otherwise deductible rule is used, an employer must have certain documentation to substantiate the extent to which the expense payment would have been 'otherwise deductible' to the employee.

A 'travel diary' must be obtained from the employee before the due date for lodging the fringe benefits tax return.

Accordingly, while the otherwise deductible rule can be used to reduce the taxable value of the expense payment fringe benefit, it will only reduce it by the proportion that would have been otherwise deductible under section 8-1 of the ITAA 1997, and this will reduce the taxable value either to nil or some reduced amount.

A 'travel diary' as defined in subsection 136(1) of the FBTAA 1986 is a diary or similar document which shows the nature of each work activity, where and when it took place, the duration of the activity and the date the entry was made.

All receipts and other documentary evidence from the employees are required to show how the taxable value of all expense payment fringe benefits was ascertained.

In accordance with section 132 of the FBTAA, all records and declarations are to be retained for the required retention period for FBT purposes.