Edited version of your private ruling

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Ruling

Subject: overseas travel expenses

Question

Are you entitled to a deduction for your overseas travel expenses?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

The arrangement that is the subject of the ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling and

· travel diary.

You have a consultancy business.

You also work as an employee.

In 2010 you were made redundant from your work. You decided to concentrate on your business.

You could see an opportunity to specialise in a new and emerging area.

With a view to furthering your knowledge in this area and develop your business, you undertook an overseas trip for approximately one month to learn more about the various issues in Europe and how they have been successfully managed there. By learning more about these matters, you felt you could better equip yourself with knowledge of how to deal with such issues back in Australia in the future.

During your trip you stayed with a relative and a friend to save on accommodation costs. You travelled by yourself.

You visited various sites which are open to the public and observed the strategies implemented.

After your trip you wrote articles for various professional magazines. You have received some interesting feedback from the articles written.

One organisation was interested in you writing a regular column. Although they did not pay you for the articles, advertising costs were reduced and the publicity and exposure were invaluable. You have received several enquiries.

Since undertaking the trip you have secured employment. You advised that the experience you obtained during your overseas trip directly contributed to your being able to secure this employment.

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), 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.

Taxation Ruling TR 98/9 considers occasions where travel expenses may have the essential character of an income-producing expense. Whilst the ruling discusses self education expenses the principles contained in it are relevant to your situation.

As outlined in TR 98/9, a deduction is allowable for self education expenses if a taxpayer's current income earning activities are based on the exercise of a skill or some specific knowledge and the subject of the self education enables the taxpayer to maintain or improve that skill or knowledge (Federal Commissioner of Taxation v. Finn (1961) 106 CLR 60, (1961) 12 ATD 348 (Finn's case).

Similarly, if the study of a subject of self education objectively leads to, or is likely to lead to an increase in a taxpayer's income from his or her current income earning activities in the future, a deduction is allowable.

However, no deduction is allowable for self-education expenses if the study is to enable a taxpayer to get employment, to obtain new employment or to open up a new income-earning activity (whether in business or in the taxpayer's current employment). This includes studies relating to a particular profession, occupation or field of employment in which the taxpayer is not yet engaged. The expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income. They are incurred in getting, not in doing, the work which produces the income (High Court decision in FC of T v. Maddalena 71 ATC 4161; (1971) 2 ATR 541 (Maddalena's case)).

TR 98/9 also explains that if the subject of the self-education is too general in terms of the taxpayer's income-earning activities, the necessary connection between the expense and the income earning activity does not exist.

Taxation Ruling IT 2198 deals with allowable deductions for voluntary expenditure incurred by employee taxpayers. Paragraph 13 states that the Taxation Boards of Review have seen a number of teachers seeking income tax deductions for overseas travelling expenses. Most of the claims were rejected because the teachers were not able to establish a positive connection between the overseas travel and the performance of their duties of employment as teachers. In the ultimate the claims have been based on a general proposition that the overseas travel has made the taxpayers better able to carry out their duties which, of itself, is not sufficient to enable the expenditure to be allowed as a deduction.

In Case R94 84 ATC 628 a college librarian was disallowed overseas travel expenses in making a study tour of China organised by the Library Association. The benefits derived by the taxpayer might have made her a better librarian, but the nexus between the outgoings and deriving assessable income was too remote. The taxpayer voluntarily made the trip and the expenditure was essentially of a private nature.

In the Board of Review Case R47 84 ATC 380; (1984) 15 ATR 824, the taxpayer, a French language teacher, claimed a deduction for part of the expenses in travelling to France. The trip was not undertaken at the request of the taxpayer's employer. She asserted that the trip increased her teaching skills.

The Board of Review stated that the fact that the taxpayer became a better teacher because of the trip did not mean that expenses were incurred in the course of gaining her assessable income as a teacher. The expenditure was incurred in relation to a period during which the taxpayer was without obligation to render service to her employer. Notwithstanding that her experience would be of value when she resumed performing the duties of her employment, the essentially recreational nature of the journey did not alter.

In Case U109 87 ATC 657, the taxpayer was a science teacher who specialised in geology and was the head of the school science department. He undertook a 17 day trip to Indonesia organised by a natural museum history society of which he was a member. During the course of the trip he visited several volcanoes and other geological sites, and attended a geological congress. He also visited some tourist attractions. The taxpayer took many slides of the geological sites and prepared a taped commentary which he used in his teaching on his return.

The Administrative Appeals Tribunal (AAT) examined previous court decisions dealing with teachers who had claimed for the cost of overseas travel. It concluded that the trip was essentially recreational in character and not deductible. The AAT also stated that some taxpayers are fortunate in finding personal and recreational satisfaction in their field of endeavour and that in this case the trip was recreational in character and not deductible.

In Case J68 77 ATC 572, the taxpayer, a geography and history teacher, and his wife travelled to South East Asia (Indonesia, Singapore and Malaysia). Prior to the relevant year, the taxpayer had attained deputy principal status. The taxpayer claimed a deduction of $720 representing expenses incurred by him in relation to the trip and this was disallowed by the Commissioner. Before the Board the taxpayer sought to justify his claim, firstly, by reference to the fact that his specialised subject was geography, the syllabus for which course included South East Asia, and, secondly, by reference to the circumstance that the school at which he was situated was part of a community school which had cultural problems with Aboriginals and that his overseas trip had enabled him to consider at first hand other cultures and their problems. The claim was disallowed as the outgoing claimed was not incurred in the gaining or production of the taxpayer's assessable income.

The circumstances of your case can be compared to the above decisions. It is acknowledged that the travel will provide you with first hand knowledge, but it does not in itself mean that the expenditure is incurred in gaining or producing your assessable income. The trip may broaden your knowledge and benefit you, however, as with the cases quoted above, the courts have held that these reasons alone are not enough to demonstrate a sufficient connection between the travel and your income-producing activities.

It is acknowledged that the experience gained helped you to get your employment. Also since the trip you have received several enquiries. However, as in Maddalena's case, the associated expenses with your overseas trip are incurred at a point too soon to be incurred in gaining your assessable income. Unlike Finn's case, at the time of going overseas, you were not employed and your business activities had not involved the relevant work. Your expenses were aimed at helping you produce future income in obtaining new employment and opening up a new aspect of your business.

Furthermore, the places visited are open to all to experience and are equally relevant to other occupations. While we acknowledge the benefits, the knowledge gained from your trip is too general in nature for the expenses to be incurred in the course of gaining your assessable income. There are many experiences and places of interest which may help, however this does not automatically mean that the associated expenses are deductible.

The purpose of your trip overseas is essentially to help you obtain future income. It is considered that there was not a sufficient connection between your travel expenses and your current income earning activities. Accordingly, the costs you incurred in relation to your travel are not deductible under section 8-1 of the ITAA 1997.