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Ruling

Subject: work-related expenses - wine

Question 1

Are you entitled to claim a deduction for the purchase of wine used for the recommendation and education of staff and customers?

Advice/Answers

No

This ruling applies for the following period

Year ended 30 June 2012

The scheme commences on

1 July 2011

Relevant facts and circumstances

You are employed as a fine wine manager with a large liquor retailer. You receive a bonus depending on the sales performance of the store.

Your employer states that a percentage of the wine stock is compulsory lines, and it is your responsibility to decide on the remaining percentage. You are required to educate your staff on the wine lines available to purchase and the characteristics of those wines. You are also required to recommend wines for customers to purchase.

In order to assist you in these tasks you purchase wine for tasting. You also prepare reviews which are placed in the store to assist customers. You hold weekly staff tasting sessions, weekly general public tasting sessions for wines being promoted, and monthly masterclass sessions for members of the general public who have expressed an interest in enhancing their wine knowledge. You also purchase wines for tasting prior to these events to enable you to discuss and review each wine.

Your employer also requires you to maintain and constantly update your knowledge and expertise of the beverage industry to increase the store's sales. You do not receive an allowance from your employer to cover the purchase of these wines.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Under subsection 8-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) deductions for all losses and outgoings are allowed to the extent to which they:

(a) are incurred in gaining or producing assessable income; or

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

A number of significant court decisions have determined that, for an expense to satisfy the tests in subsection 8-1(1):

(a) 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; Hayley v FC of T (1958) 100 CLR 478; [1958] ALR 225; 11 ATD 404 (Lunney's case));

(b) 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; 8 ATD 431);

(c) 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 (FC of T v Cooper (1991) 29 FCR 177; 91 ATC 4396; (1991) 21 ATR 1616 (Cooper's case).

A deduction will be denied under the exception provisions of subsection 8-1(2) of the ITAA 1997 if the expense is:

(a) capital, or capital in nature; or

(b) private or domestic in nature; or

(c) incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or

(d) a provision of the Act prevents you from deducting it.

Generally speaking, food and drink consumed by an employee is considered to be a private expense and is therefore not deductible.

The Full Federal Court considered the treatment of food costs in Cooper's case . In that case, a professional footballer had been instructed to consume large quantities of food during the off-season to ensure his weight was maintained. By majority, the Full Federal Court found that the cost of additional food to add to the weight of the taxpayer was not allowable. Hill J (FCR at 199-200; ATC at 4414; ATR at 1636) said:

'The income-producing activities to be considered in the present case are training for and playing football. It is for these activities that a professional footballer is paid. The income-producing activities do not include the taking of food, albeit that unless food is eaten, the player would be unable to play. Expenditure on food, even as here "additional food" does not form part of expenditure related to the income-producing activities of playing football or training.'

In the same case, Lockhart J said:

The taxpayer incurred the expenditure on additional food and drink for the purpose of increasing his weight and thus to play professional football and earn assessable income. But its character as the cost of additional food and drink is neither relevant nor incidental to the training for and the playing of football matches, which is the activity by which he gained his assessable income. The expenditure was not incurred in or in the course of that activity. The taxpayer was paid money to train for and play football, not to consume food and drink.

In my opinion the taxpayer's expenditure on additional food and drink was not incurred in the gaining or producing of his assessable income and is therefore not deductible from his assessable income during the relevant years of income.

Further more, for the reasons already given I would regard the expenditure as being of a private nature and therefore within the exclusionary limb of s. 51(1).

Essentially the reasoning in Cooper's case was that the connection (nexus) between the expenditure and the earning of assessable income was insufficient for the deduction to be allowable under subsection 8-1(1). Additionally, the expenditure was of a private nature and therefore specifically excluded from being deductible under subsection 8-1(1).

In establishing the nexus it must be shown that the outgoing is relevant and incidental to the gaining of assessable income. In general no expenditure in itself (strictly and narrowly interpreted) gains or produces income. It is an outgoing, not an incoming. In determining the essential character of an item (Lunney v FCT, 11 ATD 404; Hayley v FCT (1958) 100 CLR 478), it is necessary to look at all the circumstances surrounding the expenditure, for example - what is the purpose of the expense? If the purpose of incurring the expenditure is not the gaining or producing the assessable income, the expenditure cannot be said to be incidental and relevant to gaining or producing assessable income; nor can the undertaking be seen to be the occasion of the expenditure.

In application to your case, wine tasting in certain circumstances may be important and relevant to your employment. This may take the form of purchasing wine for tasting purposes. However it was stated in Cooper's case:

the fact that the employee is required as a term of his employment, to incur a particular expenditure does not convert expenditure that is not incurred in the course of income producing operations into a deductible outgoing.

Based on these points in this case although the purchase of additional wine for tasting may be relevant to your employment, it is not incidental to the earning of assessable income. In this situation the nexus between the expenditure and the gaining of assessable income is not sufficient to convert the expenditure into that of a deductible nature.

In addition, the expense of purchasing wines also retains the essential character of a private expense. This is because in the process of proper wine tasting, only a small element of the product is used for tasting, the rest is more likely to represent the private element. Moreover, in your circumstances the expenditure in purchasing and consuming the wine exhibits the essential character of maintaining and developing your personal knowledge. It is considered that your income is not affected, regardless of whether or not you incur expenditure in the purchase and consumption of wine. This is because the prerequisite to earning your assessable income is to perform satisfactorily the duties of your position, not to incur the wine expenditure to educate yourself.

Although you receive a bonus for increasing sales, there are numerous factors which could lead to such an increase, such as location of the premises, local competition, promotions, the season of the year or special events. The receipt of the bonus is not wholly dependent on your knowledge or reviewing of wine.

As such, there is insufficient evidence to show that your income is affected by the wine expenditure. The evidence only shows that such wine expenditure would assist you in building up knowledge which is useful to discharge your duties. The evidence also shows that the wine expenditure is not required by, or supported by your employer, as no reimbursement or allowance is provided by your employer. This could indicate that the company regards the additional wine purchase as over and above work requirements as the amount of wine needed for tasting is minimal.

Although the knowledge gained from tasting wines that you have purchased would possibly assist you to carry out your duties more efficiently, the connection is too general or tenuous to allow a deduction for any portion of the cost.