Edited version of your private ruling

Authorisation Number: 1012441452257

Ruling

Subject: Bartering and volunteer workers

Question 1

Is the provision of labour from volunteers, and meals and accommodation from you, considered a form of bartering?

Answer

No

Question 2

Is the entity entitled to claim expenses incurred in relation to providing volunteers with accommodation and food, as a deduction?

Answer

Yes

Question 3

Is the entity entitled to claim a deduction for capital works and a deduction for the decline in value of items used in relation to volunteers?

Answer

Yes (after apportionment for non-taxable use)

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

You are in business.

Volunteers volunteer their time to assist in the business. They live and work with host families in the same way as relatives and friends do when they visit.

You provide volunteers with meals and accommodation in exchange for the volunteer's labour.

Volunteers do not pay any money for meals or accommodation.

You provide accommodation for volunteers in a purpose built, multi bed, dormitory style accommodation.

You have spent money on a capital asset used in relation to volunteers. The capital asset is also used by you for private purposes.

Assumptions

Nil

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 43-10

Income Tax Assessment Act 1997 Subsection 40-25(1)

Reasons for decision

Question 1

Bartering

Taxation Ruling IT 2668 discusses barter and countertrade transactions.

Paragraph 2 states in part in its simplest form, bartering involves the direct exchange of goods or services for other goods or services without reference to money or a money value. Barter may occur between two people on a private basis. For example, neighbours may exchange produce grown for their own consumption. Bartering may also occur in the commercial field. For example, a firm may agree to purchase goods or services from another firm provided its own products are taken in exchange, either in full or partial satisfaction of the purchase price.

Paragraph 4 states in part that the membership of the community-based countertrade organisations generally consists of private individuals and usually the organisations are run on a non-profit basis. The membership of the business-oriented countertrade organisations generally consists wholly of businesses and these organisations are usually run for profit.

Paragraph 11 states in part that consideration which is merely the proceeds of a hobby, pastime, domestic or social arrangement, or the receipt of a windfall gain would not fall within the concept of income under subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997). For example neighbours who exchange some home-grown vegetables over the back fence will not have derived income in terms of subsection 6-5(1) of the ITAA 1997. Only those transactions within these organisations which arise from carrying on of a business or the provision of skilled services would generally fall for consideration as assessable income.

In this case volunteers are expected to work daily doing unskilled work and receive meals and accommodation in return. In the spirit of cultural exchange, volunteers are expected to be treated as one of the family. Volunteering in your business is strictly voluntary. This type of arrangement, the provision of voluntary services by volunteers and the provision of meals and accommodation in return by you, are not considered to be of a commercial nature as in usual barter transactions. Because of its voluntary nature it is considered to be more in the nature of a social arrangement and therefore not bartering. You are not able to claim a deduction in relation to wages provided to the volunteers in the form of meals and accommodation as it is not considered to be bartering. Nor do you have to declare income received in the form of labour from the volunteers.

You may however be entitled to claim expenses incurred in providing meals and accommodation for the volunteers as a normal business expense. This is discussed below.

Question 2

General expenses

Under subsection 8-1(1) of the ITAA 1997 you can deduct from your assessable income any loss or outgoing to the extent that it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However under you cannot deduct a loss or outgoing to the extent that it is a loss or outgoing of capital, or of a capital nature, private or domestic nature, it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income or a provision of this Act prevents you from deducting it.

In your case you are entitled to claim expenses as a deduction for any expenditure which is necessarily incurred in carrying on your business for the purpose of gaining or producing your assessable income, provided it does not contravene subsection 8-1(2) of the ITAA 1997.

As the expenses incurred on accommodation and meals are incurred to produce your assessable income. That is, using volunteers to assist in your business, you are entitled to claim a deduction for those expenses.

Question 3

Capital items under Division 43 of the ITAA 1997

Broadly speaking, section 43-10 of the ITAA 1997 provides a deduction for capital expenditure on capital works used to produce assessable income. Capital works include a building or an extension, alteration or improvement to a building.

The capital items are separately identifiable items with their own function. As a consequence, they are an entirety in themselves and their replacement is a renewal of the entirety. The expenditure is capital in nature (Lindsay v. Federal Commissioner of Taxation (1961) 106 CLR 377; [1961] HCA 93).

The expenditure on the capital items is construction expenditure for which a deduction is available under section 43-10 of the ITAA 1997. A deduction for the expenditure is not available under Division 40 of the ITAA 1997 because a deduction is available under Division 43 of the ITAA 1997 (see subsection 40-45(2) of the ITAA 1997).

You are therefore entitled to a deduction for capital works under section 43-10 of the ITAA 1997 for the replacement of the capital items. The amount of the deduction is calculated using the formula under Section 43-210 of the ITAA 1997. As the capital asset is only partly used for the purpose of producing assessable income the allowable expense must be apportioned.

Decline in value under Division 40 of the ITAA 1997

Items such as carpets, venetian blinds, stoves, refrigerators and microwave ovens are regarded as depreciating assets and no immediate deduction is allowable for the replacement of these items.

However, section 40-25 of the ITAA 1997 allows a deduction for the decline in value of a depreciating asset to the extent that it is used for a taxable purpose. A taxable purpose includes the purpose of producing assessable income.

A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used (subsection 40-30(1) of the ITAA 1997).

If you have purchased any similar items covered by Division 40 of the ITAA 1997 and use them in relation to volunteers you are able to claim a deduction for the decline in value of those items. However, any deduction must be reduced by the part of the asset's decline in value that is attributable to your use of the asset, or you're having it installed ready for use, for a purpose other than a taxable purpose.