Edited version of your private ruling

Authorisation Number: 1012477294638

Ruling

Subject: Deductibility of work-related expenses

Questions and answers:

Are you entitled to a deduction for meal expenses purchased when conducting day or overnight trips for work purposes?

No.

Are you entitled to a deduction for meal and refreshment expenses for when work-related meetings with students?

No.

Are you entitled to a deduction for overseas travel expenses for the costs of meeting with your business associate or contractor?

No.

Are you entitled to a deduction for the costs of endorsements and tests which are required in order for you to continue to perform your job?

Yes.

Are you entitled to a deduction for credit card expenses used by your contractor?

Yes.

Relevant facts:

You derive your income from operating a sole-trader business.

Your business transports passengers for charter, tour and scenic trips.

You also teach and instruct others in this industry.

You are developing websites which promote the business and make administration of the business easier.

You engage contractors to work for your business.

You conduct day and overnight trips with your clients. Before and/or during these trips you purchase meals and refreshments for yourself.

On occasion you take your students to a local café for lunch, snack or a coffee to discuss the students' progress and any other related issues.

You also invite associates for a light lunch, snack or coffee to discuss students, operational issues, or planning. These associates may be other independent contractors and/or employees of the same companies you contract, or totally independent.

The total cost is mostly around $25 per time, never exceeding $50.

In the 2012-13 financial year you took three overseas business trips each lasting longer than 6 nights:

Country A and Country B you met with your business partner to work on your business website and to find a suitable person for data entry work. You did six hours of work per day and the rest of the time was spent sightseeing.

Country C to visit your business partner. You spent 1/5^th your trip working. The remaining time was spent as a holiday/pleasure trip with your child, who accompanied you on the trip.

Country D to meet with a contractor and teach him required work tasks.

You kept records of your expenses and itinerary for these trips.

You did not keep a travel diary.

You require many industry tests and endorsements in order to continue carrying out your current work tasks.

You have engaged a contractor to complete technical work for your business. The contractor is given access to a limited credit card whereby he can withdraw an agreed sum as payment for his work.

Relevant legislative provisions:

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 32-5

Income Tax Assessment Act 1997 section 32-10

ATO view documents:

Taxation Ruling TR 97/17

Taxation Ruling IT 2675

Reasons for decision:

Question 1: Are you entitled to a deduction for meal expenses purchased when conducting day or overnight trips for work purposes?

General work-related expenses may be deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). As your income is derived through your business as a sole-trader, to be deductible the expenses must be necessarily incurred in the running of the business. Expenses will not be deductible if they are private or domestic in nature.

The cost of meals and refreshments are not usually allowable tax deductions. This is because it is generally accepted that losses or outgoings that relate to day to day living costs, such as food and drink, are private in nature rather than connected to the earning of assessable income. The expense cannot normally be said to have been necessarily incurred in carrying on a business for the purpose of gaining or producing such income, and therefore does not meet the requirements for a deduction under section 8-1 of the ITAA 1997.

In your case, you state that you incur meal expenses when conducting day or overnight trips with clients or for seminar work. Your meals may be purchased before or during trips.

Your meal expenses are considered ordinary daily living costs and are therefore private expenses, rather than expenses incurred in the earning of your assessable income. You are therefore not entitled to a deduction for your meal expenses purchased for work trips.

Question 2: Are you entitled to a deduction for meal and refreshment expenses for when work-related meetings with students?

Expenditure on meals and refreshments for clients may be deductible under section 8-1 of the ITAA 1997 where they are necessarily incurred in the running of the business.

However, a deduction is not allowable for gifts that satisfy the definition of entertainment provided by way of food, drink or recreation (section 32-5 of the ITAA 1997). Meal expenses when conducting meetings with clients and other associates are commonly regarded as such 'entertainment expenses'.

The definition of 'entertainment' contained in section 32-10 of the ITAA 1997, does not prescribe that entertainment occurs every time food or drink is provided. In Taxation Ruling TR 97/17 the Commissioner's view states that only food or drink that has an element of entertainment will satisfy the definition. However, TR 97/17 also adds that in most cases the mere provision of food or drink will be considered to satisfy the 'entertainment' test and that only in a narrow category of cases will the mere provision of food or drink not amount to 'entertainment'.

TR 97/17 provides a table of common meal scenarios and gives an indication of whether or not these expenses would be considered entertainment. For example, morning teas, afternoon teas and light lunches consumed by employees on the employer's premises, for example as a working lunch, are generally not considered entertainment (see also Taxation Ruling IT 2675). However, food or drink consumed off the employer's premises, for example at a social function, will be considered entertainment.

In order to determine when the provision of food or drink to a recipient is 'entertainment', an objective analysis of all the circumstances surrounding the provision of the food or drink is required. In making this determination one must consider:

(a) Why is the food or drink being provided. This test is a 'purpose test'.

(b) What food or drink is being provided. Morning and afternoon teas and light meals are generally not considered to constitute entertainment. However, as light meals become more elaborate, the nature of the food itself takes on more of the characteristics of entertainment.

(c) When is the food or drink being provided. Food or drink provided during work time, during overtime or while an employee is travelling is less likely to have the character of entertainment.

(d) Where is the food or drink being provided. Food or drink provided on the employer's business premises or at the usual place of work of the employee is less likely to have the character of entertainment.

In your case

You state that you occasionally take your students (clients) to a local café for lunch, snacks or a coffee to discuss work related issues.

The total cost of the food and drink is around $25 per time, never exceeding $50.

On occasions you also invite industry associates for a light lunch, snack or coffee at a café whilst discussing students, operational issues or planning. The associates may be other independent contractors, employees of the same companies you contract, or totally independent.

General deduction eligibility

Your expenses must meet the deductibility requirements under section 8-1 of the ITAA 1997. It is accepted that light meals and refreshments with your clients, as described above, are sufficiently connected with your business to have been 'necessarily incurred' in the ordinary operation of business.

However, meal expenses incurred in meetings with associates, which broadly include work-related discussions, are not sufficiently connected with your business so as to be "necessarily incurred" in the ordinary operation of business. For this reason, food and refreshments expenses related to your lunches with associates are not deductible.

Entertainment expenses

While you take clients and associates out for light food and refreshments for work-related discussions, the fact that you take them away from your usual place of work, rather than holding such discussions on your business premises in usual working times, gives these occasions a significant element of entertainment. This can be distinguished from the provision of morning teas to employees on business premises, which would not be considered entertainment, on the basis that you are taking your clients off your business premises to provide meal entertainment.

We have therefore decided that a deduction for your meal and refreshment expenses incurred when meeting with students and associates are prohibited by the 'entertainment' provisions in Division 32 of the ITAA 1997.

In conclusion, you are not entitled to a deduction for meal and refreshment expenses incurred when meeting with students and/or associates, as these are considered entertainment expenses. Furthermore, meal and refreshment expenses from meeting with other associates do not have a sufficient connection with your work so as to be "necessarily incurred" in the ordinary course of business.

Question 3: Are you entitled to overseas travel expenses for the costs of meeting with your business associate or contractor?

Taxpayers who travel overseas for work purposes may be entitled to claim a deduction for the cost of airfares, accommodation, meals and incidentals under section 8-1 of the ITAA 1997.

A taxpayer may need to apportion their deduction if their trip is partly for private reasons. In such circumstances the dominant purpose of the trip must be identified. If it is for work purposes with an incidental private purpose, then a full deduction, including airfares, is available. On the other hand, if the main purpose of travel is private and the work-related aspect of travel is only incidental, most expenses, such as airfares, are private in nature and not deductible.

Substantiation

Where a taxpayer is overseas for 6 nights or more they are required to keep a travel records in order to substantiate their work expenses claims (sections 900-20; 900-55(3)). The requirements of travel records are set out in section 900-150, which states that a taxpayer must records the nature of overseas activities, in diary form or similar, at the time of the activity or as soon as possible afterwards. If you do not record a work-related activity in your travel records then that activity cannot be taken into account when working out your travel deduction.

In your case

You have stated that in the 2012-13 financial year you took three overseas business trips, each lasting longer than 6 nights:

Country A and Country B you met with your business partner to work on your business website and to find a suitable person for data entry work. You did six hours of work per day and the rest of the time was spent sightseeing.

Country C to visit your business partner. You spent 1/5^th your trip working. The remaining time was spent as a holiday/pleasure trip with your child, who accompanied you on the trip.

Country D to meet with a contractor and teach him required work tasks.

You kept records of your expenses and itinerary of all the above trips. You did not keep a travel diary.

We accept that the dominant purpose of your trips to Country A and B and Country D (trips 1 and 3) was a business purpose, with an incidental private holiday purpose. However, we have determined that the dominant purpose of your trip to Country C (trip 2) was private, given the proportion of working to holiday time. The appropriate deduction for these trips would therefore be calculated differently.

You would be entitled to claim a deduction for the airfares for trips 1 and 3. However, deductions for other expenses would need to be apportioned to reduce your claim by the amount of private expenses incurred. This would need to be calculated by claiming only work-related expenses incurred, as recorded in your travel records.

You would not be entitled to claim a deduction for airfares for trip 2. You would only be able to claim work-related expenses that you incur and that you record in your travel records.

You are only able to claim a deduction for these trips if you meet the relevant substantiation requirements. You state that you have kept an itinerary and records of expenses. You have not stated that you kept travel records where you recorded your event in a diary form, as required by division 900 of the ITAA 1997.

Therefore you are not entitled to any deduction for your overseas travel as you have failed to meet the substantiation requirements.

Question 4: Are you entitled to the costs of endorsements and tests which are required in order for you to continue to perform your job?

The cost of tests and endorsements fall within the scope of the general deduction provision section 8-1 of the ITAA 1997.

You state that your industry requires you to regularly complete many tests and checks of your various work tasks. You are also required to obtain renewed endorsements of your ability. You state that in an average year you require around five major tests and endorsements in order to continue your current job.

You state that the endorsements and tests are necessary in order for you to continue your current job.

Because the tests and endorsements are necessary for you to continue to perform your current work tasks, we accept that the expenses are 'necessarily incurred' in the course of your business. You are therefore entitled to claim a deduction for the cost of endorsements and tests which enable you to continue your current work tasks.

Question 5: Are you entitled to a deduction for credit card expense used by your contractor?

Deductions for common business operating expenses may be claimed under section 8-1 of the ITAA 1997. Such expenses commonly include salary and wages and fees to contractors.

You state that you have hired an overseas contractor to complete technical work for you. Due to difficulties in overseas payments, you state that he will be given access to a limited credit card, whereby he can withdraw an agreed sum as payment for his work.

The amount withdrawn by this contractor is an allowable deduction as the expense is necessarily incurred in the running of your business.