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Ruling

Subject: overseas travel and the otherwise deductible rule

Question 1

If an employee spent the weekend in Location A in-between two business events would the airfare expenses be reduced to nil under the otherwise deductible rule contained within the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes

Question 2

If an employee remained in Location A between two business events (that are a maximum four weeks apart), rather than returning home, would the airfare expense be reduced to nil under the otherwise deductible rule contained within the FBTAA?

Answer

Yes

Question 3

If an employee remained in Location A between two business events (that are a maximum four weeks apart and during which the employee takes annual leave), rather than returning home, would the airfare expense be reduced to nil under the otherwise deductible rule contained within the FBTAA?

Answer

Yes

Question 4

If an employee is required to spend two days in Location A before a conference would the airfare expenses be reduced to nil under the otherwise deductible rule contained within the FBTAA?

Answer

Yes

Question 5

If the employee arrived four days before (including two days annual leave) the conference began would the airfare expenses be reduced to nil under the otherwise deductible rule contained within the FBTAA?

Answer

Yes

Question 6

If the employee stayed after the conference for an additional week on annual leave would the airfare expenses be reduced to nil under the otherwise deductible rule contained within the FBTAA?

Answer

Yes

Question 7

If the employee stayed after the conference for an additional four weeks annual leave would the airfare expenses be reduced to nil under the otherwise deductible rule contained within the FBTAA?

Answer

Yes

Question 8

If the employee stayed after the conference for an additional eight weeks annual leave would the airfare expenses be reduced to nil under the otherwise deductible rule contained within the FBTAA?

Answer

Yes

This ruling applies for the following periods:

Year ended 31 March 2012

Year ended 31 March 2013

Year ended 31 March 2014

Year ended 31 March 2015

The scheme commences on:

1 April 2011

Relevant facts and circumstances

The employer is rewriting its travel policy and is seeking a ruling in respect of two broad scenarios where there is a private component taken in conjunction with business travel. These are:

Private days between business events where the employee doesn't return home between the events but stays away.

Where private days are taken either after, or before a business event.

The employer has a strict policy that no costs associated with any private component of travel will be paid by them, i.e. accommodation, meals and incidental expenditure relating to private travel.

Travel will not be authorised without first there being a business need to do so and the employer would not pay for the airfares of an employee unless it is a cost necessarily incurred for the employee to fulfil their duties.

In undertaking travel employees:

§ are required to travel by the employer; and

§ have to travel on certain dates as the employer determines.

Employees who travelling overseas are required to keep a travel diary.

The employees have no other association with the employer (e.g. they are nor shareholders).

Scenario 1

Under this scenario (which covers questions 1-3) an employee will be required to travel (in this case to Location A) for two business events where there is a gap between the two events. The employer will pay the employee's airfare expenses to Location A.

Because of the gap between the two events there may be days between the events where the employee may not be performing duties of employment (referred to as private days).

The gap can be:

§ a weekend (question 1)

§ a period of up to four weeks where the employee is required to remain in Location A rather than return home between the events and is not required to take leave (question 2); or

§ the employee has chosen to remain in Location A on annual leave rather than returning home and then returning to Location A for the second event (question 3).

Business events are events (e.g. meetings) scheduled by the employer which they require the employee to attend in person.

Scenario 2

Under this scenario (which covers questions 4 to 8) an employee travels to Location A to attend a 2 week conference. The employer would provide return airfare to enable the employee to attend the conference.

Under their guidelines the employer requires the employee to arrive 2 days before the start of the conference so as to acclimatise themselves prior to the commencement of the conference (question 4).

In addition to attending the conference the employee seeks to take annual leave whilst in Location A (either before or after the conference) which would extend the period of time that the employee is away. This extention would consist of:

§ taking two days annual leave and arriving in Location A four days before the conference begins rather than the two days required by the employer (question 5)

§ taking a week of annual leave after the conference ended extending the employee's return date by a week (question 6)

§ taking four weeks of annual leave after the conference ended extending the employee's return date by four weeks(question 7); or

§ taking eight weeks of annual leave after the conference ended extending the employee's return date by eight weeks (question 8)

Relevant legislative provisions

Income Tax Assessment Act 1997 (ITAA 1997) section 8-1

FBTAA section 45

FBTAA section 52

FBTAA subsection 136(1)

Reasons for decision

The term 'benefit' is defined in subsection 136(1) FBTAA to:

Include any right (including a right in relation to, and an interest in, real or personal property, privilege, service or facility and, without limiting the generality of the foregoing, includes a right, benefit, privilege, service or facility that is, or is to be provided under:

(a) an arrangement for or in relation to:

(i) the performance of work (including work of a professional nature), whether with or without the provision of property; . . .

Providing an airfare to an employee meets the definition of a benefit.

The definition of 'fringe benefit' in also contained in subsection 136(1) of the FBTAA and in part provides that a benefit will be a fringe benefit where it is:

(i) provided to an employee or an associate of an employee;

(ii) by the employer, an associate of the employer or a third party either under an arrangement that comes within paragraph (e) of the 'fringe benefit' definition or in circumstances that come within paragraph (ea) of the 'fringe benefit' definition;

(iii) is provided in respect of the employment of the employee; and

(iv) does not come within paragraphs (f) to (s) of the 'fringe benefit' definition.

Although the airfare may have resulted from a business need for an employee to travel the definition of a fringe benefit has been satisfied as the airfare is provided to the employee in respect of their employment and none of the exclusions in the definition would apply to travel provided by the employee.

Therefore the provision of travel (transport on an airplane) is a fringe benefit to which fringe benefits tax (FBT) will apply. Where transport is provided by the employer that benefit would generally be a residual benefit under section 45 of the FBTAA.

The amount of FBT payable will depend on the application of the otherwise deductible rule (ODR) contained in section 52 of the FBTAA. The ODR reduces the taxable value of the benefit to the value of the benefit that an employee would not have been able to claim as an income tax deduction if the employee had incurred the airline expense themselves. In other words FBT is only payable on the private component of the expenditure.

However if the benefit is in respect of travel and the travel is considered to an extended travel airline transport benefit, an extended travel expense payment benefit, an extended travel property benefit or an extended travel residual benefit, an employee must maintain a travel diary. If a travel diary is not maintained the employer cannot apply the ODR.

Extended travel airline transport benefit, extended travel expense payment benefit, extended travel property benefit and extended travel residual benefit are all defined under subsection 136(1) of the FBTAA and for travel outside of Australia includes any travel where the employee is away from their usual place of residence for a continuous period of more than five nights.

The employer requires all employees travelling outside of Australia to keep a travel diary and providing that diary satisfied the definition of a travel diary it can be used to apply the ODR. A travel diary is defined in subsection 136(1) of the FBTAA as:

in relation to particular travel undertaken by the recipient of an expense payment fringe benefit, an airline transport fringe benefit, a property fringe benefit or a residual fringe benefit, means a diary or similar document, in the English language, in which, in relation to each activity engaged in by the recipient:

(a) while undertaking that travel; and

(b) in the course of producing assessable income of the recipient;

the recipient has made, before, at the time of, or as soon as reasonably practicable after, the conclusion of the activity, an entry setting out particulars of:

(c) (Omitted by No 145 of 1995)

(d) the place where the activity was undertaken;

(e) the date and approximate time when the activity commenced;

(f) the duration of the activity; and

(g) the nature of the activity;

and includes a copy of such a diary or document.

However if the employee is travelling overseas and is away from home for five or less nights the employee must provide a declaration in order to apply the ODR. This declaration is required even in circumstances where a travel diary is also kept.

Income tax deductibility of Airfares

Section 8-1 of the ITAA 1997 allows a person to deduct from their assessable income any loss or outgoing to the extent that it is incurred in gaining or producing their assessable income.

Therefore to apply the ODR we need to look at the extent to which the employee's airfare expenses (if they had been incurred by the employee) were incurred in gaining or producing their assessable income.

Taxation Ruling TR 98/9 Income tax: deductibility of self-education expenses incurred by an employee or a person in business, provides the basis of the Commissioner's view on the deductibility of travel and paragraphs 63 to 66 state:

An expense is deductible under section 8-1 when the essential character is that of an income producing expense. The essential character is to be determined by an objective analysis of all the surrounding circumstances (see Fletcher & Ors (199 ) 173 CLR 1 at 17; 91 ATC 4950 at 4957 and 4958; (1991) 22 ATR 613 at 622).

If the purpose of a study tour or attendance at a work-related conference or seminar is the gaining or producing of income, the existence of an incidental private purpose does not affect the characterisation of the related expenses as wholly incurred in gaining assessable income.

Both Ronpibon Tin NL (78 CLR at 59; 8 ATD at 437) and Fletcher & Ors (173 CLR at 16; 91 ATC at 4957; 22 ATR at 621) recognise there are at least two kinds of expenditure that require apportionment under section 8-1. The first is expenditure in respect of a matter where distinct and severable parts are devoted to gaining income and other parts are devoted to some other end. If a study tour or work-related conference or seminar was mainly devoted to a private purpose, such as having a holiday, and the gaining or producing of income was merely incidental to the private purpose, only those expenses directly attributable to the income-earning purpose would be allowable.

The second kind of apportionable expenditure is a single outlay that serves both an income-earning purpose and some other purpose indifferently. While the High Court recognised that there can be no precise arithmetical division in such cases, it said there must be some fair and reasonable division on the facts of each case. For example, if a study tour or work-related conference or seminar is undertaken equally for income-earning purposes and private purposes, it would be appropriate to apportion the expenses equally between the purposes.

In other words TR 98/9 states there are three possible ways of applying the ODR:

§ the travel is business related and the private expenditure is incidental to the business expenditure

§ the travel is predominately private with incidental business expenses where only expenses directly attributable to business are deductible: and

§ there is a dual purpose of both business and private travel where the expense has to be apportioned.

However it should also be noted that although looking at the ODR in respect of an 'airline transport benefit' (which only applies to employees of airlines and travel agents), chapter 12.4 of Fringe benefits tax: a guide for employers (NAT 1054) (Employers guide) states in part

. . .Commonly, the taxable value of an airline transport fringe benefit is wholly 'otherwise deductible' or wholly taxable. If it is wholly 'otherwise deductible', there is no FBT payable. If it is wholly taxable, there is no reduction. However, the taxable value of an airline transport fringe benefit may be partially 'otherwise deductible'.

Therefore in applying section 8-1 of the ITAA 1997 to airfares it is more common that not that the airfare will be fully deducible or not deductible at all. However chapter 12 of the Employer's guide does say there are situations where airfares are only partially otherwise deductible and an example of this is contained in paragraph 70 of TR 98/9 which states:

Francesco, a paediatrician, has 2 equal purposes when he decides to attend a five-day international conference on paediatrics in Singapore to be followed by a seven-day holiday in Thailand. The conference package is $2,500 ($1,000 return air fare, $500 for the cost of the conference and $1,000 for accommodation and meals at the conference venue). Francesco paid another $2,000 for accommodation, meals and car hire for the 7 day holiday in Thailand. Francesco is allowed a deduction of $1,500 for the conference cost and the accommodation and meals expenses at the conference. Only half of the return air fare ($500) is allowed as the expense was incurred for two equal purposes, one income-earning and the other private. The other expenditure of $2,000 relating to the holiday in Thailand is private in nature and not allowable as a deduction.

Whether the airfare expense is deductible would depend on the nexus between the incurring of the expense and the incurring of the individuals assessable income. In the above example the airfare had to be apportioned as there was two destinations with one being for a private purpose being the travel between Singapore and Thailand on holiday. Whereas there was a business nexus in respect of the cost of getting to and from home and the conference in Singapore.

Application of the ODR in this case

In this case the employer is not paying for airfare to multiple destinations (as was the case in the example in paragraph 70 of TR 98/9) and the employer will not authorise travel without first there being a business need to do so. In addition the employer would not pay for the airfares of an employee unless it is a cost necessarily incurred for the employee to fulfil their duties.

In other words the expenditure will not be incurred unless the employer concludes that it is necessary for the employee to travel to Location A to fulfil their duties of employment.

In looking at the application of section 8-1 of the ITAA 1997 to the airfares expenditure, the employer has in effect directed the employee to travel to Location A and to do so they have to travel by air. Although the employee may incur expenditure that is private which non-deductible expenditure whilst they are in Location A and also take annual leave once they arrive in Location A, there is a direct nexus between the incurring of the airline expense and the employee earning their assessable income.

This suggests that in following both chapter 12.4 of the Employers guide which states that it is more common that an airfare is either wholly deductible or non-deductible that the cost of the airfares to Location A under both scenarios are wholly otherwise deductible.

Support for this conclusion can be found in ATO Interpretative Decision ATO ID 2001/329 Income Tax Overseas travel expenses - airfares, which concluded that airfares incurred by a taxpayer to allow that taxpayer to travel to and from the United Kingdom were allowable under section 8-1 of the ITAA 1997 as they are directly connected to their existing employment duties. This was because there was a direct connection between the work the taxpayer was doing in the United Kingdom (which was an exchange program) and the taxpayer's income earning activities in Australia. The essential character of the travel costs was that of expenditure incurred in order to gain or produce assessable income because the experience gained in the United Kingdom would assist the taxpayer with their existing employment duties.

However (although not mentioned in the ATO ID) the employee once they arrived in the United Kingdom would have incurred private expenditure relating to their day to day living This private expenditure did not change the nature of the expenditure on the airfares.

Therefore (providing the substantiation requirements of either a declaration or travel diary are met), the ORD will apply to reduce the taxable value of the fringe benefit in respect of the airfares to Location A in both scenarios to nil.