Edited version of your private ruling

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Ruling

Subject: Expenses incurred in applying for a Permanent Residency Visa

Question 1

Is a taxpayer entitled to claim a deduction under section 8-1 of the income Tax Assessment Act 1997 for expenses incurred in applying for a visa to remain in Australia for its staff?

Answer

Yes

This ruling applies for the following periods:

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

The scheme commences on:

1 July 2010

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.

An employee was hired as a Manager.

The main reason for hiring the employee was his vast experiences in the employers industry.

The employee has many contacts overseas.

The employer is keen to enter overseas markets

This employee is not an Australian resident. In order to hire the employee to work for the employer, the employer has agreed to be the business sponsor and bear the costs of his visa application with the Immigration Department of Australia.

The employer applied for a permanent resident visa for this employee.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Summary

The expenditure incurred for the cost of the Permanent Residency Visa by the Trust is part of the cost of extending or renegotiating the employee contract. Therefore, this expense is an allowable deduction under section 8-1 of the ITAA 1997.

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for a loss or outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature, or relates to the earning of exempt income.

In determining whether a deduction is allowable under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered.

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA) states:

8-1(1) You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

8-1(2) However, you cannot deduct a loss or outgoing under this section to the extents that:

a) it is a loss or outgoing of capital, or of a capital nature; or

b) it is a loss or outgoing of a private or domestic nature; or

c) it is incurred in relation to gaining or producing your exempt income; or

d) a provision of this Act prevent you from deducting it.

The first limb in section 8-1 is available to all taxpayers, whether in business or not. To be deductible under the first limb, a loss or outgoing must be relevant and incidental to gaining or producing assessable income. (Ronpibon Tin NL v FCT. Tongkah Compound NL v FCT (1949) 78 CLR 47; 4 AITR 236) In other words there must be a connection between the expenditure and the operations or activities directed to the production of assessable income.

The second limb applies only where the taxpayer is carrying on a business. The two limbs are not mutually exclusive and a business expense is frequently deductible under either. To be deductible under the second limb, a loss or outgoing must be part of the cost of trading operations to produce income. (John Fairfax & Sons v FCT (1959) 101 CLR 30)

Under the second limb of section 8-1 of ITAA 1997, a taxpayer carrying on a business is entitled to deduct outgoings or losses which are necessarily incurred in carrying on a business to produce assessable income.

The expenditure in question, the cost of the Permanent Residency Visa for the employee, is considered a cost of recruitment. Expenses such as costs of recruitment are a business expense and deductible under section 8-1 of the ITAA 1997 unless capital in nature and denied by subsection 8-1(2) of the ITAA 1997.

Paragraph 13 to 16 of Taxation Ruling TR 2000/4: Income tax and fringe benefits tax: costs incurred in preparing and administering employment agreements; explain when the costs of obtaining an employment contract give rise to a deduction.

Paragraph 15 of Taxation Ruling TR 2000/5 states that the costs incurred by an established business in renewing, extending or renegotiating agreements with current employees are a normal business expense and would therefore is allowable as a deduction under section 8-1 of the ITAA 1997.

The cost of obtaining a permanent residency visa for your employee is part of the cost of extending or renegotiating their employment contract. In accordance with paragraph 15 and example 4 of TR 2000/14 this expense is an allowable deduction under section 8 - 1 of the ITAA 1997