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Ruling

Subject: scholarship expenses

Question 1

Are you entitled to a deduction for the cost of your return overseas airfare?

Answer

Yes.

Question 2

Are you entitled to a deduction for renting a unit while undertaking your scholarship activities overseas?

Answer

No.

Question 3

Are you entitled to a deduction for your living expenses such as food expenses?

Answer

No.

Question 4

Are you entitled to rely on the substantiation exceptions for your overseas food, drink, incidental or other travel expenses incurred while overseas?

Answer

No.

Question 5

Are you entitled to a deduction for your car rental costs incurred for travelling to and from the institute?

Answer

No.

Question 6

Are you entitled to a deduction for your car rental costs incurred for travelling to and from various sites?

Answer

No.

Question 7

Are you entitled to a deduction for your travel insurance costs?

Answer

No.

Question 8

Are you entitled to a deduction for your relocation costs?

Answer

No.

Question 9

Are you entitled to a deduction for the cost of redirecting your mail?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You are a resident of Australia for taxation purposes.

You received a scholarship which required you to travel overseas.

You were overseas for just over six months and were on scholarship business the entire time.

During your scholarship you undertook research.

You incurred the following expenses in relation to your scholarship:

· return airfares,

· rent for a 2 bedroom apartment, with one bedroom used as an office,

· car rental - you used the car to travel to work and to attend other sites,

· travel insurance,

· living expenses including food,

· relocation expenses, and

· mail redirection costs.

In accepting the scholarship you agreed to return to Australia at the completion of your studies and share the knowledge you have gained.

You returned to your employment position after returning from overseas.

The skills and knowledge gained directly relate to your Australian employment.

You received a travel allowance, stipend and establishment and baggage allowances.

Using your hire car, you travelled to the institute most days for collaboration and to present lectures.

As part of your scholarship you were required to visit other places. You visited each of these places once a month on separate days using your hire car.

Your family travelled with you.

You have substantiation for the expenses incurred.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Income Tax Assessment Act 1997 Section 25-100.

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 or are necessarily incurred in carrying on a business for the purpose of 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 (Lunney's 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).

A deduction is only allowable if an expense:

· is actually incurred,

· meets the deductibility tests, and

· satisfies the substantiation rules.

Airfares

Taxation Ruling TR 98/9 considers occasions where accommodation expenses and other travel expenses may have the essential character of an income-producing expense where the expenditure is incurred while away from home overnight on a work related activity or away from home overnight in connection with a self-education activity. Such expenses incurred may be deductible under section 8-1 of the ITAA 1997.

TR 98/9 states that airfares incurred on overseas study tours or sabbatical are an allowable deduction under section 8-1 of the ITAA 1997.

In your case, the purpose of your travel is for work related and scholarship purposes. It is considered this is similar to an overseas study tour. The skills and knowledge gained directly relate to your Australian employment. Therefore you are allowed a deduction for the cost incurred for your return airfares.

Accommodation expenses

In relation to accommodation expenses TR 98/9 states that where a taxpayer is away for an extended period of time and has established a new home, the associated costs including accommodation and meals remain private in nature and are not deductible under section 8-1 of the ITAA 1997.

TR 98/9 lists the key factors to be taken into account in determining whether a new home has been established. They include:

· the total duration of the travel

· whether the taxpayer stays in one place or moves frequently from place to place

· the nature of the accommodation (hotel, motel, long term accommodation)

· whether the taxpayer is accompanied by his or her family

· whether the taxpayer is maintaining a home at the previous location while away, and

· the frequency and duration of return trips to the previous location.

TR 98/9 provides examples designed to illustrate factors and circumstances that are relevant in determining whether a taxpayer has established a new home in the new location.  Example 3 is relevant in your case.

Example 3:     Katherine travelled overseas for 6 months to study at a university in Germany. She was accompanied by her husband and three children. An apartment suitable to accommodate the family was rented for the period of her stay and the family home in Australia was rented out.

The relevant factors are the period of time away, the renting of the family home and staying in one place with her family. These factors indicate that a new home was established in Germany.

In your case, you relocated overseas for your scholarship for just over six months. You travelled with your family. You stayed in accommodation with your family for this period. These factors all lend weight to the conclusion that you established a new home. Therefore, you are not entitled to a deduction for your accommodation expenses, as the expenses are not incurred in gaining or producing assessable income, but rather the expenses are a prerequisite to your scholarship activities. The expenditure is inherently of a private or domestic nature and is not allowable under section 8-1 of the ITAA 1997.

Living and food expenses

Expenditure on the daily necessities of life (for example, 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 or you work overtime and receive an overtime meal allowance.

Allowances such as travel allowances are generally assessable income. However, an employee is not automatically entitled to a deduction for expenses incurred in relation to an allowance. The expenses must meet the criteria for deductibility under section 8-1 of the ITAA 1997 before considering the substantiation requirements.

In your case you lived overseas for six months and received a travel allowance. The cost of your meals and other living expenses are considered to be private in nature and not sufficiently connected to your income earning activities. Therefore no deduction is allowable for your food or other living expenses.

It follows that the substantiation requirements under Division 900 of the ITAA 1997 are not relevant. As such the substantiation exceptions have no application.

Travel between home and work

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).

In Lunney's case, the Full High Court, in disallowing a deduction for travel expenses, held that the costs incurred by a taxpayer in travelling to the place where they work, are expenses incurred in order to enable them to earn income but are not expenses incurred in the course of earning that income. Williams, Kitto, and Taylor JJ stated:

It is, of course, beyond question that unless an employee attends at his place of employment he will not derive assessable income and, in one sense, he makes the journey to his place of employment in order that he may earn his income. But to say that expenditure on fares is a prerequisite to the earning of a taxpayer's income is not to say that such expenditure is incurred in or in the course of gaining or producing his income.

In considering the deductibility of travel expenses a distinction is made between travel to work and travel on work. It is only if the duties of the job require a taxpayer to travel that the taxpayers expenses can be deducted (Taylor v. Provan 1975 AC 194).

In your case, you incurred car hire costs to travel between your rented apartment and work. Your research and scholarship activities did not commence until your arrival at work and the expenditure incurred to travel between the two places is incurred to put you in a position to carry out your duties and not in the performance of your duties.

We acknowledge your circumstances however your circumstances do not alter the essential character of the expenses as being private in nature. As such, the cost of your travel between your home overseas and work is not deductible.

Travelling to other places

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 travel to other places once a month. These places are a requirement of your scholarship activities and are considered to be regular places of work for you and therefore cannot be regarded as alternative places of work. Therefore travelling to and from these places is not travelling on work, but rather travelling to and from work. 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 and car hire expenses are not allowable deductions under section 8-1 of the ITAA 1997.

Travel insurance

The meaning of incurred in gaining or producing assessable income was considered in Ronpibon's case where the High Court stated that:

For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing assessable it must be incidental and relevant to that end. The words incurred in gaining or producing the assessable income mean in the course of gaining or producing such income.

It is a long standing principle that a taxpayer does not satisfy section 8-1 of the ITAA 1997 merely by demonstrating a casual connection between the expenditure and the derivation of income. What must be shown is a closer and more immediate connection. The expenditure must be incurred in gaining or producing your assessable income (Lunney's case). These principles have been affirmed by the High Court in Commissioner of Taxation v. Payne [2001] HCA 3.

In Case T78 86 ATC 1094 the Administrative Appeals Tribunal allowed a deduction to a barrister for airfares to attend a work related course. However, his claim for travel insurance was found to be expenditure of a private and domestic nature and therefore not deductible. Travel insurance policies invariably cover items that are generally private in nature, for example, illness, loss of baggage and theft or damage to belongings.

The expenses you incurred for your travel insurance are therefore not allowable deductions under section 8-1 of the ITAA 1997 as they are considered to be private in nature.

Relocation expenses

The general rule is that relocation and moving expenses are not incurred in earning the assessable income but are a prerequisite to the earning of that assessable income in the same manner as travel expenses to and from work.

Taxation Ruling IT 2481 outlines the deductibility of travelling expenses of an employee moving to a new locality of employment and states that a deduction is not allowable. Where a taxpayer transfers from one locality to another, and incurs expenditure in moving from one place of residence to a new place of residence to take up the duties of the new position, that expenditure is not incurred in gaining or producing assessable income and is not deductible. The taxpayer is not travelling on his/her work, but is travelling to his/her work. Nor is the taxpayer travelling between two places of employment.

Taxation Ruling IT 2566 states that an employee who is travelling to commence employment duties at a new work location is not travelling on duty. The employment duties do not commence until the employee reports to work at the new location.

Taxation Ruling IT 2614 states that removal and relocation expenses to take up an appointment with a new or existing employer are not allowable deductions, even if an allowance or reimbursement is received. This is so whether the transfer is voluntary or at the employer's request.

This view is supported in the following cases:

In Fullerton v FC of T, 91 ATC 4983; (1991) 22 ATR 757, as a result of a reorganisation the taxpayer's position ceased to exist. In order to avoid retrenchment, he had no choice but to accept a transfer to a different location. The employer reimbursed a portion of the relocation expenses and the taxpayer claimed the remainder as a tax deduction. It was held that the expenditure on the taxpayer's domestic or family arrangements is not deductible, even though the expenditure had a causal connection with the earning of income.

In Case U91, 87 ATC 525, the taxpayer, a Commonwealth public servant, was transferred at the request of his employer from a State office to the central office of the department in Canberra. He was denied a deduction for expenses incurred in attempting to auction his house. It was held that the expenses were too remote from the income producing process to be incurred in gaining or producing assessable income.

Similarly in Case V31, 88 ATC 282, it was found that the relocation expenses were of a private and domestic nature and were therefore not deductible.

We acknowledge that your circumstances differ somewhat from the circumstances outlined above, however, the principles remain relevant.

Your relocation expenses are not incurred in carrying out your scholarship or employment duties. Such expenses are not sufficiently connected to your income earning activities. Therefore no deduction is allowable under section 8-1 of the ITAA 1997.

Redirecting mail

The costs incurred to redirect your mail are not directly related to the derivation of your assessable income. While the requirement for this cost may be seen to be a consequence of your scholarship activities, the expense remains private or domestic in nature. Accordingly you are not entitled to a deduction for the cost of redirecting your mail as the expense is regarded as a private expense.