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Ruling

Subject: work related expenses

Question 1

Are you entitled to a deduction for your accommodation expenses?

Answer

No.

Question 2

Are you entitled to a deduction for travel expenses incurred between place A and place B?

Answer

No.

Question 3

Are you entitled to a deduction for your clothing, laundry and dry cleaning costs?

Answer

No.

Question 4

Are you entitled to a deduction for books and stationery expenses if you do not have the necessary substantiation?

Answer

No.

Question 5

Where the substantiation requirements are met, are you entitled to a deduction for the cost of work related books and stationery?
Answer

Yes.

Question 6

Are you entitled to a deduction for the work related use of your internet expenses?

Answer

Yes.

Question 7

Are you entitled to a deduction for the decline in value of your computer software and hard drive?

Answer

Yes.

Question 8

Are you entitled to a zone tax offset?

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 teacher in place A. You rented an apartment in place A.

In June 2010 you had a temporary appointment for six months at place B. You rented a one bedroom unit in place B.

Your family remained in place A and you continued to pay rent there.

You came home during school holidays. You travelled by train and car on your trips between place A and place B.

You prefer to wear the school sport tee-shirt and pants for school sporting events, so you purchased these items. The wearing of this uniform is not strictly enforced by the school.

As place B has extreme weather conditions, you bought winter clothes.

You purchased textbooks and stationery for teaching. These items were only used for teaching.

You pay a monthly fee for the internet. You also bought computer antivirus software and Microsoft Office software for your laptop. You use the internet and Microsoft Office software to develop and prepare teaching materials. You also bought an external hard drive for backing up your data. You use the computer for teaching purposes only. Other members of your family do not use these items.

You do not have receipts for the car expenses, clothing or computer items. You have some receipts for your books and stationery. You have credit card bills to show most of your expenses.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Income Tax Assessment Act 1997 Division 40.

Income Tax Assessment Act 1997 Section 900-115.

Income Tax Assessment Act 1936 Section 79A.

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 deduction is only allowable if an expense:

· is actually incurred,

· meets the deductibility tests and

· satisfies the substantiation rules.

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), 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).

Accommodation 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.

· 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.

· 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. When relocating to a new work site, a taxpayer is not travelling on their work, but is travelling to their work.

This view is supported in the following case. 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 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 incurred accommodation expenses in place A and B for six months. We acknowledge your specific circumstances, however, your additional accommodation expenses are incurred to put you in a place where you are closer to your place of employment. Although your place of employment changes during the year, place B is regarded as your normal place of work for the six month period. The accommodation expenses incurred were not related to the actual performance of your teaching duties. 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. Furthermore, 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 under section 8-1 of the ITAA 1997.

Travel expenses

Generally a deduction is not allowable for the cost of travel when relocating to a new job. Also a deduction is not usually 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 your case, you worked at place B for six months. This work location is a regular place of employment for you for the period. As place B was your normal place of work for you for that period, travelling to and from place B 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 distance of the travel or whether you travel by train or car 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.

Clothing expenses

Expenditure on conventional clothing is usually not an allowable deduction under section 8-1 of the ITAA 1997 because there is not a sufficient connection between the expenditure and the income-earning activities of the taxpayer. Furthermore, clothing expenses are considered to be private in nature and not deductible.

Taxation Ruling TR 97/12 discusses the circumstances where work related clothing expenses are allowable deductions. Expenditure on certain types of occupational clothing, compulsory work uniforms, registered non-compulsory work uniforms or protective clothing may give rise to an allowable deduction.

In your case you wear the school sport tee-shirt and pants for sporting events. You also purchased winter clothes.

These clothes are not regarded as occupational clothing, protective clothing or a compulsory uniform for taxation purposes.

You cannot claim expenses incurred for non-compulsory work uniforms unless your employer has registered the design on the Register of Approved Occupational Clothing. There is no evidence to show that your sport clothes or winter clothes are a registered work uniform. Therefore no deduction for a non-compulsory work uniform is allowable.

Consequently you are not entitled to a deduction for the cost of your clothing because there is not the necessary connection between the expenditure and your income earning activities. Although you may not wear these clothes out of work hours, they are considered to be conventional. Furthermore, the expenditure is of a private or domestic nature. Therefore the cost of purchasing your sport tee-shirt and pants and winter clothes are not allowable deductions. The nexus between the expenditure and your income earning activities is not sufficient and costs are non-deductible as per TR 97/12. Similarly, the associated laundry and dry cleaning costs of these clothes are also regarded as private in nature and not an allowable deduction.

Books and stationery

A deduction is generally allowed for the cost of teaching aids such as school books and stationery bought exclusively for use in the classroom or for teaching activities. However, a deduction may not be allowed if the relevant substantiation of the expenses is not kept. Please see below for further details.

Internet expenses

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

Therefore where you use the internet for teaching purposes, the associated portion of your monthly internet cost is an allowable deduction. However, 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 so that you can calculate the correct income producing portion.

Computer software and hard drive

The cost of software and a computer hard drive are of a capital nature and are therefore not deductible under section 8-1 of the ITAA 1997.

However, Division 40 of the ITAA 1997 contains the capital allowances provisions and allows a deduction for the decline in value of depreciating assets that are used for a taxable purpose.  

Section 40-30 of the ITAA 1997 states that a depreciating asset is an asset with a limited effective life and can reasonably be expected to decline in value over the time it is used. 

Paragraph 40-25(7)(a) of the ITAA 1997 states a taxable purpose is the purpose of producing assessable income. 

Software and a hard drive are depreciating assets. As you use these items for your teaching activities, you are entitled to claim a deduction under Division 40 of the ITAA 1997.

The decline in value is calculated by spreading the cost of the asset over its effective life and using either the prime cost or the diminishing value method.

Subsection 40-25(2) of the ITAA 1997 states you must reduce your deduction by the part of the asset's decline in value that is attributable to your use of the asset, or having it installed ready for use, for a purpose other than a taxable purpose, for example, for private purposes.

Therefore you are entitled to a deduction for the decline in value of your software and hard drive for the period you used the software for a taxable purpose.

More details on calculating the deductible amount is found in the Tax Office publication Guide to depreciating assets 2011. This booklet can be found on the Tax Office website www.ato.gov.au.

Substantiation

As already mentioned, the deductibility of the expenses is also subject to substantiation requirements. To claim a deduction for the expenses, you need to provide written evidence to substantiate the expenses, for example receipts.

Section 900-115 of the ITAA 1997 states that the document or receipt must set out:

· the name or business name of the supplier

· the amount of the expense, expressed in the currency in which it was incurred

· the nature of the goods or services

· the day the expense was incurred

· the day it was made out.

There are two exceptions to these requirements contained in subsection 900-115(3) of the ITAA 1997. One of these exceptions provides that if the supplier's document does not show the day the expense was incurred the taxpayer may use a bank statement or other reasonable, independent evidence that shows when it was paid (paragraph 900-115(3)(a) of the ITAA 1997). Therefore a receipt, in conjunction with the credit card slip, will generally meet the substantiation requirements under section 900-115 of the ITAA 1997.

The other exception in subsection 900-115(3) of the ITAA 1997 is that if the document from the supplier does not specify the nature of the goods or services, you may write in the missing details yourself before you lodge your income tax return for the income year.

At times a supplier will simply describe a purchase as 'goods' or 'services' or even 'sales' - for example, when multiple purchases are recorded as a single transaction on the one sales voucher. In such cases it could not be said that the document shows "the nature of those goods or services". Therefore it is necessary to write the various components by price and description. Without such separation it would not be possible to determine the extent to which the voucher represented deductible and non-deductible purchases.

Section 900-125 of the ITAA 1997 provides information for evidence of small expenses. The Commissioner allows a deduction for items costing less than $10 if a receipt is not available and the total of all expenses is less than $200 for an income year. In such instances, you can record the expense incurred in a separate document (for example a diary) and it must set out the same information as the written evidence or receipt. Therefore if some of your stationery items costs less than $10 and you have the necessary details, you may claim a deduction for the relevant work related items, up to $200.

In your case, if you do not have receipts or documents that contain the above requirements, no deduction can be claimed.

For the items where you have documentation, please ensure that all the necessary information is present. Generally a credit card bill is not sufficient evidence for substantiation requirements as all the necessary details are not present. However, if the credit card bill provides the required information or you have other documentation to show the required information, you are entitled to a deduction.

Where you do not have the required documentation, you may contact the supplier and request a copy of the relevant receipt or documentation. However, if this is not possible and you have not retained evidence of your expenses, you cannot claim a deduction for the amount incurred.

Zone tax offset

Under subsection 79A of the Income Tax Assessment Act 1936 a zone tax offset is available to individuals who are residents of specified remote areas of Australia.

Neither place A or B are listed as a remote or isolated area of Australia and a zone tax offset does not apply to residents of either location. Therefore you are not entitled to a zone tax offset.