Edited version of private ruling

Authorisation Number: 1011860730571

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Ruling

Subject: overseas travel expenses

Question 1

Are you entitled to a deduction for 100% of your overseas airfare expenses?

Answer

No.

Question 2

Are you entitled to a deduction for 50% of your overseas airfare expenses?

Answer

Yes.

Question 3

Are you entitled to a deduction for your spouse's overseas airfare expenses?

Answer

No.

Question 4

Are you entitled to a deduction for cost of the parts and manufacturing you incurred overseas?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You are a sole trader.

You researched and identified new business contacts overseas to help with the manufacturing of business parts. With your wife's assistance you found several possible business contacts.

You made two trips overseas.

Your spouse went with you on both trips and you stayed with family while overseas. Your spouse does not work in the same field as you, however helped you with the language while overseas.

Approximately half of your time overseas was spent on business activities and about half the time was on personal and family matters.

Your spouse's family were very helpful in driving you to various companies and helping you with your business activities. However many of the possible contacts were not fruitful.

On the last few days of your first trip you found a company that was willing to make a small trial batch of various parts.

You returned overseas to continue negotiations with that company.

On your return trip you found the company had a change of heart and was only willing to complete a portion of the agreed work. You paid money for the material and workmanship which was of poor quality. You are unable to on sell these products because of the poor quality. You ceased contact with this company.

Some days later you made contact with another entity which was willing to produce some business parts for you. The workmanship was good. However some of the material used had surface pitting. This was noticed later in Australia at a later process, rendering some parts useless. Other parts were used in your business. You will need to take Australian made material in the future.

You incurred costs for airfares for you and your spouse.

You have recorded the dates you met with the above companies.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

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 of the ITAA 1997 prevents 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,

· 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 (Ronpibon's case)), 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).

To determine whether your expenses are deductible, the essential character of the expenditure must be considered. It is necessary to determine whether there is a sufficient nexus between the expenditure and your current income-earning activities. The intention or purpose in incurring an expense can be an element in determining whether the whole or part of the expense is an allowable deduction. 

The words 'to the extent to which' signify that an expense may be apportioned if it is only partly incurred to produce assessable income. In Ronpibon's case, the High Court expressed the view that '... there are at least two kinds of items of expenditure that require apportionment'. These were generally: 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 object indifferently. The latter would clearly apply to an airfare purchased for both work and private purposes (Case R13 84 ATC 168; 27 CTBR (NS) Case 64).

Taxation Ruling TR 98/9 discusses the apportionment of overseas travel expenses where there is a dual purpose for the travel. Although this ruling deals with deductions of self-education expenses, the principles are the same for all cases requiring apportionment and could equally apply to business travel expenses.

As highlighted in TR 98/9, if the travel was undertaken equally for income earning purposes and for private purposes the expenses would be apportioned equally.

We accept that your business activities carried out overseas have a direct nexus to producing your assessable income. However, as you stayed with relations and spent time on private and family matters, we consider that there were two distinct purposes for the trip. Therefore, it is reasonable to apportion the cost of the airfare equally between income earning and private purposes. As such, you are entitled to a deduction under section 8-1 of the ITAA 1997 for half the cost of your return overseas airfares.

Airfares for your spouse

Expenses attributable to the travel of a family member may be deductible if the family member performs substantial duties as your employer's employee or as your employee, and it is reasonable to conclude that the family member would still accompany you, even if he or she did not have a personal relationship with you. A deduction is not allowable where the family member simply accompanies you while you travel (section 26-30 of the ITAA 1997).

In your case, whilst your spouse may have helped you with language issues she travelled with you for reasons other than in the performance of your business activities. The airfare costs associated with your spouse are considered private in nature and are not deductible.

Parts and manufacturing costs

A deduction is allowable under section 8-1 of the ITAA 1997 for items purchased for use in the income earning activities for your business. It is considered that the costs of the material and manufacturing are sufficiently connected to the gaining of your assessable income. Therefore the associated expenses incurred are deductible.

Substantiation requirements

Division 900 of the ITAA 1997 sets out the substantiation requirements for claiming expenses. Written evidence must be maintained in respect of work related travel expenses.

Section 900-20 of the ITAA 1997 provides that a travel record must be kept if the travel involves you being away from your ordinary residence for six or more nights in a row.

A travel record, that is a travel diary or similar document, is a record of activities undertaken during the travel. The purpose of a travel record is to show what activities were undertaken in the course of producing assessable income, so that expenses or portions of them can be attributed to those income-earning activities.

Section 900-150 of the ITAA 1997 states that you are required to provide the following information in your travel records: 

· the nature of the activity

· the day and approximate time when it began

· how long it lasted; and

· where it was engaged in.

Please ensure you keep the relevant records in relation to your expenses.