Edited version of your private ruling

Authorisation Number: 1012441639523

Ruling

Subject: Income tax: manager - work-related expenses

Questions and answers

Is a deduction allowable for the cost of attending theatrical productions?

Yes

Is a deduction allowable where it is incurred during periods where you are not engaged in income earning activities relevant to the deduction?

No

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

You are employed as a Manager.

You are contracted as a PAYG employee.

You had multiple employment contracts during the financial year. The employment contracts vary in duration.

You attend performances of productions so that you can be made aware of current technical practices.

Your work commonly encompasses many subjects.

You typically attend other productions during your downtime between periods of employment due to time restrictions whilst you are employed.

You have evidence of your expenses.

You separate your expenses between work-related and personal.

You attend productions critically from a technical perspective.

You identify technical aspects of productions through visual observation you then speak to the Manager of the production in order to find out how they went about achieving the outcome and see how they minimised hazards.

Your industry is dependent on peer development in order to maintain and improve skills as a whole.

Through the online forum, you are

· able to communicate with other Managers

· made aware of new productions

· able discuss aspects of direction

· given relevant contacts both from within the local industry and internationally of who can deliver specific ideas, skills and materials

· provided with information feeds on industry trends and external impacts such as tax policy

There are occasions where you will attend a production more than once. You state the reason why you would attend a production more than once is to see how the production has technically developed over time.

A manager who graduates from studies does not enter a workplace graduate/apprentice program.

They rely on seeing other manager's productions to develop.

Relevant legislative provisions

Income Tax Assessment Act 1997

Section 8-1

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 except where the outgoing are of a capital, private or domestic nature, or relate to the earning of exempt income.

Taxation Ruling TR 95/20 discusses deductions for work related expenses incurred by employee performing artists. TR 95/20 states that a deduction is allowable for the cost of theatre and film tickets if the show is directly relevant to the income earning activities of the performing artist. The Ruling states that deduction is allowable for the cost of attendance at theatre performances if the performances have a content specifically related to the employee performing artist's current work. Costs associated with attendance at performances for general interest or entertainment or other private purposes are not an allowable deduction.

In consideration to the guidelines in TR 95/20, you as a Manager are not a performing artist. Paragraph 3 of TR 95/20 states:

The Ruling does not cover the expenses of journalists, including radio and television presenters, radio and television journalists, nor the expenses of directors, producers, script writers, composers, choreographers and support personnel.

We therefore need to consider, how your experience of being a paying member of an audience would hold relevant to your income earning activities as Manager and how those expenses would contribute to you gaining or producing your assessable income. Whilst the examples of TR 95/20 are relevant in general principle, the degree to which they apply to a manager will vary from that of a performing artist.

The purchase of a ticket to attend a theatre performance is inherently private in nature the point at which it becomes a deduction is when it is identified as a work related expense.

The deductibility test

The fact that your expenses of theatre tickets are voluntarily incurred do not preclude them from being an allowable deduction (Taxation Ruling IT 2198). Private or domestic expenditure is considered to include costs of living such as food, drink, shelter and clothing. In Case T47 18 TBRD (NS) 242; 14 CTBR (NS) Case 56 , J F McCaffrey (Member) stated (TBRD at 243; CTBR at 307). Consequently, items of entertainment would generally fall into the definition of private expenses.

A deduction is only allowable if:

(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.

As you are an employee, we will not look at business expense requirements.

A number of significant court decisions have determined that, for an expense to satisfy the deductibility tests:

(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 ( Charles Moore & Co (WA) Pty Ltd v. FC of T (1956) 95 CLR 344; 11 ATD 147; 6 AITR 379; FC of T v. Cooper (1991) 29 FCR 177; 91 ATC 4396; (1991) 21 ATR 1616 ( Cooper's case); Roads and Traffic Authority of NSW v. FC of T (1993) 43 FCR 273; (1971) 125 FCR 494; 93 ATC 4508; (1993) 26 ATR 76; FC of T v. Hatchett (1971) 125 CLR 494; 71 ATC 4184; 2 ATR 557 ( Hatchett's case)).

Character

A Manager, by your admission, can be described as a foreman. The Commissioner therefore needs to understand the nexus between the expense incurred by you from an audience experience and your management activities from which you derive your income in order to determine that your deduction is not too general in nature and has the essential character of an outgoing. In this respect, the expense must be relevant to the nature of the work you do as distinct from a production that would be purely for your personal entertainment. You advise that you are able to distinguish any personal expenses from work-related ones.

Nexus

From your facts we are able to identify how 'you' from being a member of an audience uses an appreciation process that develops an observation into a technical capability, this is how you source techniques and ideas which you apply to your own productions. There is a direct relevance/nexus between the expense and your income earning activity as this is how you maintain your technical capability.

Connection

A requisite connection is not shown by demonstrating only that there is some causal connection between the expenditure and derivation of the income, nor by demonstrating that the expenditure was incurred 'in connection with' the derivation of assessable income or 'for the purpose of' deriving assessable income. What must be shown is closer and more immediate connection. The expenditure must be incurred 'in the course of' gaining or producing the assessable income. In Coopers Case, Lockhart J stated:

'The question whether additional expenditure of the taxpayer is deductible cannot be answered simply be a process of reasoning that, because expenditure of this type is a prerequisite to the earning of the taxpayer's assessable income (in the sense that it is necessary if assessable income is to be derived), it must be incidental and relevant to the derivation of income. It does not follow that such expenditure is incurred in or in the course of gaining or producing the assessable income.'

You argued that live productions have many common elements in the technical production area, this statement demonstrates to the Commissioner that the genre of the performance which we use as benchmark in TR 95/20 is less relevant and the connection to your income earning activities will be based on the presentation of the production more so than the artistic content. Furthermore, as a manager you have also listed ceremonies as being part of the type of event that you would facilitate, this is a type of activity that is generally unrelated to the performing arts industry.

When an expense is incurred in relation to income activities.

Expenditure incurred before the commencement of income-generating activity is normally excluded from deductibility under section 8-1 of the ITAA 1997, either because it lacks the necessary connection to an income earning activity or because it is capital in nature. For example, outgoings on activities preparatory to carrying on a business (eg feasibility studies or R&D expenditure) are not deductible under section 8-1 of the ITAA 1997 as they are expended "too soon" to be incurred in carrying on the business: Softwood Pulp & Paper Ltd v FCT (1976).

In Softwood Pulp & Paper Ltd v FCT (1976) 7 ATR 101, a general deduction was denied for expenditure incurred in respect of investigations, tests, preliminary plans and experts' reports on a proposal to establish a mill complex. The Victorian Supreme Court found that, at the time of the outgoings, the taxpayer was not carrying on a business as it had not "committed itself" or decided to go ahead "in any definitive sense" with the project. Accordingly, the project had not reached the stage of doing anything in the course of gaining or producing assessable income. The Court also noted that even if the necessary nexus had existed, the expenditure was capital in nature.

To this end, where you are not in the course of gaining or producing assessable income, your expenses can not be used as a deduction.

Conclusion

The expense of theatre tickets is an allowable deduction conditional to whether it was:

· purchased solely for personal entertainment,

· relevant to your income earning activities

· of a nature which isn't considered to general to be of any benefit to you

· incurred during a period of employment.