Edited version of private ruling

Authorisation Number: 1011847044972

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Ruling

Subject: travel expenses and home office expenses

Question 1

Are you entitled to a deduction for expenses in travelling between your home and school where you carry out casual replacement teaching?

Answer

No.

Question 2

Are you entitled to a deduction for expenses in travelling between your home and workplace where you carry out your teaching activities?

Answer

No.

Question 3

Are you entitled to a deduction for expenses in travelling between your home and client's premises?

Answer

No.

Question 4

Are you entitled to a deduction for expenses in travelling to and from professional development and training courses?

Answer

Yes.

Question 5

Is 75 cents per kilometre the correct rate when calculating your deductible car travel when using the cents per kilometre method?

Answer

Yes.

Question 6

Is the income for board assessable?

Answer

No.

Question 7

Are the payments you receive for your home tuition assessable income?

Answer

Yes.

Question 8

Are you entitled to a deduction for home occupancy costs?

Answer

No.

Question 9

Are you entitled to a deduction for the income producing portion of your home running expenses?

Answer

Yes.

Question 10

Are you entitled to a deduction for research and development?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You run a business which provides teaching and administration services.

You also do casual replacement teaching in schools.

You only travel to one school on any one day for your replacement teaching work.

You work from your home office and travel wherever is appropriate on any particular day. The administration of your business and preparation for clients occurs mostly in your home office.

Your home office has a book case, filing cabinet, desk and cupboards. No one else uses this room.

Your home does not have a business sign, however, the address is shown on various correspondence and documents.

Service interface with clients occurs in rented rooms for some clients and on client premises for others.

You rent a room on a short term basis in the city for coaching clients when needed. This rented room is only used for your income earning activities.

Clients do not come to your home as you live a few kilometres from the city.

On most days you work in your home office initially and then go to a client. Other days you work only from home.

Occasionally you engage in professional development activities, marketing or purchasing activities at other places.

You sometimes travel out of the local area for work related purposes.

Marketing occurs through personal contact at various places and business functions.

You pay road tolls. At present most road tolls are in relation to private travel, however, some are for business purposes.

When travelling you mostly have a trolley-case containing your laptop, folders and other stationery as well as meal and drink supplies. Sometimes you need to carry books as well. You usually take one or two books, however sometimes it may be a box of books. You lift the trolley-case out with both hands, then wheel the trolley to your work place.

Sometimes you use public transport when travelling to your clients.

You intend to take in an overseas boarder for an experimental period of time. The purpose of the board is for tuition.

Boarders would come to you specifically so that they could maximise their exposure to the English language, receiving constant tuition. As well as being your student, the boarder may also be in paid employment.

You intend to charge an amount for board and lodging and meals and a further amount per week for tuition.

The payment for board is based on the local standard rate for ordinary private board.

The tuition would be provided in designated daily sessions and through incidental conversation as you share living space and provide services. Your home would become an extended classroom. You may also be the student's mentor in activities outside the home.

The boarders would have exclusive use of their bedroom and share the remainder of the house. Laundry, cooking, cleaning and use of home facilities would be included.

You may have more than one boarder at times, for example, siblings or two friends.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25-100

Income Tax Assessment Act 1997 Division 28

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

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 a provision prevents you from deducting it.

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. FC of T; (1958) 100 CLR 478 (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 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 (Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).

Car expenses

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; 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. The income earning duties do not generally commence until the arrival at a place of work and will cease upon departure from work. 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.

Taxation Ruling TR 95/14 discusses the deductibility of expenses incurred by employee teachers. TR 95/14 states that a deduction is not allowable for the cost of travel by an employee teacher between home and their normal place of work. Relief or casual teachers who travel from home to a particular school in response to a telephone call do not alter the character of the travel from being private in nature. In these circumstances home is not considered to be a place of work as the employee teachers duties commence upon arrival at the school and not on receipt of the telephone call.

Although you may work from home before going to work, your employment is not considered to have commenced before or at the time of leaving home. Your circumstances are comparable to the taxpayer in FC of T v. Genys (1987) 17 FCR 495; 87 ATC 4875; (1987) 19 ATR 356). Northrop J said (FCR at 501; ATC at 4881; ATR at 362):

I am of the opinion that the mere receipt of telephone calls from the agency requesting the respondent to work a particular shift is not sufficient to constitute the respondent's home a place of work. ...Nor does the respondent commence her duties upon receipt of the call, ...the taxpayer's duties did not commence until her arrival at the hospital.

Although this case refers to relief nurses, the principles apply equally to your casual replacement teaching.

However, the Commissioner accepts that expenses incurred in travelling between home and work may be deductible in some limited circumstances, for example:

the taxpayer's employment is inherently of an itinerant nature,

the taxpayer has to transport by vehicle bulky equipment necessary for employment, or

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

Itinerant nature

Where a person is required to visit several schools or workplaces each day, they may be regarded as itinerant. Taxation Ruling TR 95/34 provides more details on itinerant workers. However, where a person is not required to visit more than one school or workplace in any given day, they are not regarded as an itinerant worker and the home to work travel is not an allowable deduction. In your case, travel is not a fundamental part of your work as you are not required to regularly travel in the performance of your work after you commence duty. Although you may travel to different sites, the degree of travel surrounding your work is not sufficient to make your work itinerant.

Bulky equipment

A deduction may be allowable for home to work travel if the transport costs can be attributed to the transportation of heavy, bulky or cumbersome equipment necessary for your work, rather than to private travel between home and work.

A deduction is not allowable if the equipment is transported to and from work as a matter of convenience or if the equipment is of a private or personal nature. Also a deduction is not allowable if a secure area for the storage of equipment is provided at the work place.

Broadly, a deduction will be allowed for the travel expenses between home and work when carrying equipment where:

· there is no secure storage area provided by the employer,

· the equipment is necessary for the completion of your employment duties, and

· the equipment is considered bulky.

The question of what constitutes bulky equipment must be considered according to the individual circumstances in each case.

In Crestani v. Federal Commissioner of Taxation 98 ATC 2219; (1998) 40 ATR 1037, a toolbox which measured 57 centimetres by 28 centimetres by 25 centimetres and weighed 27 kilograms was considered as 'bulky', in the sense of 'cumbersome', and the transport cost was 'attributable' to the transportation of such bulky equipment rather than private travel between home and work.

Senior Member J Block was of the opinion that the term 'bulky' should not be construed to refer only to an article of large size, but more aptly construed as similar to 'cumbersome' in the sense that it is not portable.

In Case 43/94 (1994) 29 ATR 1031; 94 ATC 387, a flight sergeant with the Royal Australian Air Force was denied a deduction for the cost of transporting his flying suit and other items used for work purposes. These items were carried in:

· a duffle bag measuring 75cm long x 55cm wide x 50cm deep and weighing 20 kilograms when packed,

· a suit bag which weighed 10 kilograms when packed, and

· a briefcase sized navigational bag which contained charts, work manuals and study materials.

It was held that the mode of transporting the items was simply a consequence of the means adopted by the taxpayer to convey him to work. It was considered that the duffle bag was not of sufficient size or weight to impede facile transport.

Where work equipment is not considered to be bulky, then transporting such equipment to work is not enough to change the character of travel to work from a private expense to a business or employment related expense even if it is compulsory to transport such equipment.

Your trolley case containing your laptop, folders, stationery and books is not considered to be of such bulk that it would change the primary purpose of your journey. Your meals and drink supplies are private in nature and not considered to be work equipment.

The expenses incurred are in a practical sense attributable to your travel to your place of work rather than merely to the transporting of your equipment. Therefore, you are not entitled to a deduction under section 8-1 of the ITAA 1997 for the cost of travelling to and from work on the basis that you have to transport bulky equipment necessary for your income earning activities.

Home constitutes a place of business

Taxation Ruling TR 93/30 addresses the question of whether a home has the character of a place of business. Essentially, this is a question of fact, determined by examining all the relevant factors. However, TR 93/30 sets out the following factors to be considered:

· the area is clearly identifiable as a place of business,

· the area is not readily suitable or adaptable for use for private or domestic purposes in association with the home generally,

· the area is used exclusively or almost exclusively for carrying on a business, and

· the area is used regularly for visits from clients or customers.

The existence of any of these factors or a combination of them will not necessarily be conclusive in determining whether the home constitutes a place of business in the ordinary and common sense meaning of the term. The determination will depend on a balanced consideration of the essential character of the area, the nature of the taxpayer's business and any other relevant factors.

It is not sufficient that a room in the home is used in association with an employment or a business conducted elsewhere. The fact that no other accommodation is available is not of itself sufficient to render a house as a place of business.

On a balanced consideration of the facts surrounding your circumstances, we consider that your home office does not constitute a place of business. Your home office remains private as it is not clearly identifiable as a place of business, the area is a room in the house set up as an office. You do not have clients visit you at your home. Rather you carry out your administration and preparation work from home.

Summary

In your case you provide teaching and administration services at various schools and premises. It is not considered that the different services form part of a continuing business that requires you to travel and incur expenses during the course of conducting that business for the purpose of earning assessable income. Although it is necessary to travel to different sites to earn your assessable income, this does not mean that such expenditure is incidental and relevant to the derivation of your income. The expenses are incurred before or after the activity of earning assessable income and not part of your income earning activity itself.

Each school or premises is regarded as your normal place of work for that day. The fact that you do not have a regular place of employment at one place does not change the private nature of your travel. Travelling to and from your workplaces is not travelling on work, but rather travelling to and from work and is therefore regarded as a private expense. Furthermore, the expenses are a prerequisite to the earning of assessable income and are not incurred in producing that income. The fact that income cannot be earned unless certain expenses are incurred is not determinative of deductibility. The distance of the travel does not alter the private nature of the travel. That is travel to clients outside the local area is also regarded as private in nature and not deductible. Whether you travel by car or public transport or other means also does not change the private nature of your travel. The above principles apply equally to employees or contractors. Additionally, subsection 25-100(3) of the ITAA 1997 specifically denies a deduction in your circumstances. Therefore, the associated travel expenses between home and schools or the city rented room or client's premises are not an allowable deduction under section 8-1 of the ITAA 1997.

Professional development

A deduction is allowable for the cost of attending professional development and training courses to maintain or increase the knowledge, ability or skills required for your income earning activities.

Therefore where you travel to a site for professional development, the cost of travelling to and from this training is an allowable deduction under section 8-1 of the ITAA 1997. The cost is deductible regardless of whether you use your own car or public transport for this travel.

Cents per kilometre

Division 28 of the ITAA 1997 sets out the rules for working out a deduction for car expenses. Subdivision 28-C of the ITAA 1997 outlines the requirements for the cents per kilometre method. The deduction is calculated by multiplying the number of business kilometres travelled in the income year (maximum of 5,000 km) by the relevant number of cents based on the cars engine capacity as specified in Schedule 1 to the Income Tax Assessment Regulations 1997.

In your case, your travel for professional development purposes is regarded as business travel. Where you use your car for this travel, the relevant cents per kilometre rate for the 2010-11 financial year is 75 cents.

Board

Under subsection 6-5(1) of the ITAA 1997, your assessable income includes ordinary income. Ordinary income has generally been held to include income from rendering personal services, income from property and income from carrying on a business.

Income Tax Ruling IT 2167 provides guidelines about rental properties and discusses when rental income is regarded as assessable income. Where you rent out your property or part of your property, the rental income is normally regarded as ordinary income and therefore part of your assessable income.

However, as highlighted in paragraph 17 of IT 2167, where there is a non-commercial arrangement and where a payment is received for board only or for lodging only or for both then the income is considered to be a domestic arrangement not giving rise to assessable income. It follows that the question of income tax deductions for losses and outgoings does not arise.

When using your home for students, the essential question is whether the arrangements are consistent with normal commercial practices. If an amount of board only is paid and the amount is not a commercial arrangement, then the payments for board are not regarded as assessable income.

In determining whether a particular receipt is income, consideration needs to be given as to whether the intention of providing the accommodation is to make a profit or a genuine commercial relationship exists between the parties. Where these factors exist it can be argued that such receipts are in the character of assessable income (FC of T v. Kowal 84 ATC 4001). However, the receipts will not be considered assessable if they merely defray the cost in looking after the students (FC of T v. Groser 82 ATC 4478). In such cases, there is generally no gain or benefit to the home owner. Therefore, it is not reasonably arguable that they had a profit making intention.

The typical situation for Homestay students is where a home owner has one or two students lodging with the family and charges them an amount set by the housing officers at the educational institution the students attend (or close to it). These amounts are generally regarded as contributions to the costs of accommodating the students at home. The rates are set having regards to the normal cost of supplying food and other utilities/overheads for the student. They do not appear to be true commercial rates with a rewards component for use of the home owner's house. While there may be some profit this is generally small, given the expenditure incurred. Students boarding who are treated as part of the family whilst staying with a home owner is generally regarded as a domestic and non-commercial arrangement.

In your case, you are planning to have one or perhaps two students staying with you. You will receive an amount for board which will cover their food, accommodation and laundry expenses. Although the amount is based on the local standard boarding rates, it is considered that the payments are more in relation to a domestic or social arrangement rather than a commercial transaction. Although there may be some profit, any profit is minimal. Therefore, the payments are not considered to be assessable income. Any associated losses or outgoings that you incur are not allowable as tax deductions as no assessable income has been produced.

Tuition

Income received for the provision of personal services is regarded as ordinary assessable income.

In your case you intend to charge an amount per week for your formal and informal teaching and mentoring activities. Such income is assessable under subsection 6-5(1) of the ITAA 1997. It follows that expenses on resources used for your income earning activities are an allowable deduction.

Home office expenses

TR 93/30 examines the deductibility of home office expenses and in particular, highlights the difference between the home as a place of business and an office or study at home.

A deduction is generally not allowable for the costs associated with a person's home as they are private in nature. However, a taxpayer who carries on part of their income earning activities at home may be entitled to a deduction for part of the outgoings on the home.

TR 93/30 states that home office expenses can be divided into two broad categories - occupancy and running expenses. Occupancy expenses relate to the ownership of a home such as rent, rates and insurance. Running expenses relate to the use of the facilities within the home such as electricity.

As highlighted above, it is not considered that your home office is a place of business, therefore a deduction is not allowed for your home occupancy expenses. However, as you use your office at home for administration and preparation purposes, a deduction is allowable for the additional running expenses such as electricity used exclusively for work related purposes. However, if your income producing expenses are carried out in the lounge room or another room also used by your family, the associated electricity or other expenditure retains its private or domestic character. TR 93/30 details, at paragraphs 19 to 27, how to calculate additional running expenses. Please note a diary and other written evidence is generally required to show your income producing use of your home office before a deduction is allowable.

Research and development

The research and development (R&D) tax concessions are an ongoing scheme designed to increase the amount of R&D being conducted in Australia.

R&D concessions may be claimed by eligible companies. Individuals cannot claim the concessions.

As you are an individual and not a company, you are not eligible for any R&D tax concessions.