Edited version of your private ruling

Authorisation Number: 1011973216639

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Ruling

Subject: Travel and other expenses

Question 1

Are you entitled to a deduction for expenses in travelling between your home and your clients in town A or B?
Answer

No.

Question 2

Are you entitled to a deduction for expenses in travelling between your town B accommodation and your client in town B?
Answer

No.

Question 3

Are you entitled to a deduction for accommodation and food expenses when living in town B?
Answer

No.

Question 4

Are you entitled to a deduction for the business related electricity and gas expenses incurred?
Answer

Yes.

Question 5

Are you entitled to a deduction for the cost of your business phone calls and business use of your internet?
Answer

Yes.

Question 6

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

Answer

No.

Question 7

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

Answer

Yes.

Question 8

Are you entitled to a deduction for accommodation and meal expenses incurred on your overseas trip that are directly related to your income earning activities?

Answer

Yes.

Question 9

Are you required to keep a travel record and other documentation of your business related expenses incurred on your overseas trip?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2012
The scheme commenced on

1 July 2011

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.

You have started your own business as a sole trader.

You live in town A with your family.

You have two clients, one in town A and one in town B.

Your work in town A is on an 'as needs' basis. So far you have spent one day per week working for this client.

You have a 12 month contract with your client in town B with the option to extend it for another 12 months. In order to fulfil your work obligation with this client, you spend four days per week in town B.

Instead of travelling each day between town A and B, you have rented a flat in town B. You do not use this flat outside your business commitments. One room is set up as your office.

When visiting clients you carry your computer.

You use your pre-paid phone for work and private purposes.

You pay $30/month for your phone and $50/month for your internet.

You record the people you call, but not the duration of your calls. You do not record SMS messages. Most of your private phone calls are to your spouse when you are in town B.

You use the internet to search suppliers, equipment, design and layout ideas for the work carried out for your clients as well as emails and on-line banking.

Clients do not visit your home office.

As part of your work you need to identify equipment that will be required for your clients. Early next year you are expected to provide a purchasing recommendation to your client for new equipment that meets the project brief. Based on your recommendation, your client will raise purchase orders of over $Xm in value.

Prior to recommending new equipment, you need to ensure that the equipment meets specific requirements. Most of the equipment manufacturers are based in Europe. There are no manufacturers in Australia, only agents who do not stock the equipment.

You intend to organise test runs at the manufacturer's premise to validate the performance of the equipment prior to recommending the equipment to your client.

This equipment validation process requires you to travel to the manufacturers in Europe, conduct the validation process (2-3 days) and travel to the next manufacturer to perform the same validation. At the end of the validation process you will collate and review the results and prepare a purchasing recommendation to your client.

Prior to travelling you will contact the manufacturers to prearrange your visit. You will travel alone.

You estimate that you will spend two weeks with business activities. You also intend to extend your stay by one additional week for private purposes and visit some relations.

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 900

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.

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) (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).

Home to work travel

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. This does not mean that the expenditure is incurred in the course of gaining or producing assessable income (Case V111 88 ATC 712).

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.

Also a deduction is generally allowable for the cost of travelling to and from an alternative workplace. For example, travel to and from a different centre for a workplace meeting or training is an allowable deduction. As highlighted in paragraph 34 of Miscellaneous Taxation Ruling MT 2027, an alternative destination is not a regular place of employment.

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.

In your case, you will be working with your town A client approximately one day per week and with your town B client approximately four days per week. Both these client's premises are regular places of work for you and therefore cannot be regarded as an alternative place of work. Therefore travelling to and from these two clients is not travelling on work, but rather travelling to and from work. Regardless of whether your travel commences from your town A home or town B flat, the expense are private in nature.

You travel is not due to bulky equipment, itinerancy (TR 95/34), or your home being a place of business (TR 93/30). Additionally, subsection 25-100(3) of the ITAA 1997 specifically denies a deduction in your circumstances. Your home to work travel expenses are a prerequisite to the earning of assessable income and are not incurred in producing that income. The distance of the travel does not alter the private nature of the travel. Therefore, the associated travel expenses are not an allowable deduction under section 8-1 of the ITAA 1997.

Accommodation and food expenses

Expenditure on the daily necessities of life (for example, accommodation, food and drink) is 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.

Exceptions to this are where you are undertaking work related travel and are required to stay away overnight. However, no deduction is allowable if a taxpayer is merely maintaining accommodation close to their usual work location for convenience.

In Federal Commissioner of Taxation v. Toms 20 ATR 466; 89 ATC 4373 (Toms case), the Federal Court held that expenses incurred in relation to accommodation near the work place, while maintaining a family residence in another location, were not an allowable deduction as they were considered to be private expenses. The Federal Court disallowed the forest workers deduction for the cost of maintaining a caravan and other living expenses. The taxpayer's family home in Grafton was some 108 kilometres from the base camp so he lived in the caravan during the week and returned to the family home on weekends. The caravan was rendered necessary as much by the taxpayer's choice of the place of his residence in Grafton as by his employment in the State forest, and its purpose was to enable him to retain his residence in Grafton although he was employed in the State forest. Had he lived at a town closer to the forest, there is no question the caravan would have been unnecessary.

Although your situation is different to Toms case, the principles are relevant. In your case, you incur accommodation expenses in town B in order to see your client. We acknowledge your specific circumstances, however as town B is a regular place of work for you, your accommodation expenses are incurred to put you in a place where you are closer to your work place. Although your clients are currently in two different places, each place is regarded as your normal place of work. The accommodation expenses incurred are not sufficiently related to your actual income earning activities. They are more a convenience and a prerequisite to the earning of assessable income and are not expenses incurred in the course of gaining or producing that income. That is, the accommodation expenses incurred by you to enable you to stay in proximity to your work-place are a prerequisite to the earning of assessable income and are not expenses incurred in the course of gaining or producing that income. This is so, whether your accommodation is in a motel or flat. The essential character of the expense is of a private or domestic nature. Accordingly, you are not entitled to a deduction for the accommodation expenses or water expenses under section 8-1 of the ITAA 1997.

Similarly, your food expenses incurred at various places in town B are regarded as private in nature and not deductible under section 8-1 of the ITAA 1997.

Electricity expenses

Taxation Ruling 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 and gas used for heating a home office.

Based on the principles in TR 93/30, your home office is not considered to be a place of business, therefore a deduction is not allowed for your home occupancy expenses. However, as you use your office for preparation and business 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. The additional electricity expenses incurred for your business either at your town A home or town B flat are an allowable deduction.

Please note a diary, your electricity bills and any other relevant written evidence is generally required to show your income producing use of your home office before a deduction is allowable. Your diary should show the number of hours you use your home office for business activities. Where your use is similar throughout the year, the diary can be kept for four continuous weeks to enable you to determine the reasonable additional electricity expenses incurred for your business.

Telephone and internet expenses

A deduction is allowable under section 8-1 of the ITAA 1997 for the cost of telephone calls and internet access made in the course of earning your assessable income.

These calls may be identified from an itemised telephone account. If such an account is not provided, a reasonable estimate of call costs, based on diary entries of calls made over a period of one month, together with relevant telephone accounts, will be acceptable for substantiation purposes.

You cannot claim a deduction for the cost of connecting a telephone, telephone rental costs, mobile phone, pager or any other telecommunications equipment as they are capital expenses.

You need to ensure that you only claim the income producing use of the internet. You should keep a diary of the internet use to show your income producing hours as well as the private use by you and your family so that you can calculate the correct income producing portion.

There is no set percentage or portion that applies to calculate the allowable portion of your phone and internet expenses. The relevant records need to be kept to calculate your business related use.

Overseas travel

To determine whether your overseas travel 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.

In your situation you are travelling overseas for a business and private purpose. We accept that your business activities carried out in Europe have a direct nexus to producing your assessable income. However, as you also intend to visit relations and spend time on private 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 airfares to Europe.

The accommodation and meal expenses incurred during the two weeks spent on business activities are also an allowable deduction. However, any expenses incurred during the private portion of your trip are not an allowable deduction.

Other business related expenses such as phone calls to the manufacturers and travel from your European accommodation to the manufacturer are also allowable deductions.

Overseas travel 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 their 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.

You are also required to keep receipts and other documentation in relation to any business related accommodation, meal, travel or incidental expenses incurred.