Edited version of private advice

Authorisation Number: 1012626881234

Ruling

Subject: Travel expenses

Question 1

Are you entitled to a deduction for a 100% of accommodation, travel and meal expenses incurred to travel to Country A?

Answer

No.

Question 2

Are you entitled to a deduction for a proportion of accommodation, travel and meal expenses incurred to travel to Country A?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2014

The scheme commences on:

1 July 2013

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.

The business is run through a partnership of two family trusts (Family Trust A and Family Trust B).

Beneficiary of Family Trust A is a worker in the business.

Beneficiary of Family Trust B is a worker in the business.

Neither Beneficiary receives salary and wages from the partnership.

In order to increase the number of clients the beneficiaries felt it was imperative to gain first-hand knowledge of the business culture in Country A. They arranged to travel to Country A for the sole purpose of gaining knowledge, technique and experience.

The beneficiaries were not accompanied by family nor did they visit family on their trip.

The beneficiaries pre-booked as many business visits as feasible and booked accommodation at one location.

Since the trip, the beneficiaries have changed a number of things in the business and included photos and comments on social media which has excited renewed interest in the business by the clientele.

The total cost of the trip including airfares, accommodation, transport, dining and restaurants was over $13,000.

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 a loss or an outgoing to the extent to which it is 'necessarily incurred' in carrying on a business for the purpose of gaining or producing your assessable income, except where the loss or outgoing is of a capital, private or domestic nature.

The phrase 'necessarily incurred' does not mean that the expense was unavoidable or logically necessary. The expense must be clearly and appropriately adapted for the ends of the business.

Where the expense is voluntary, the controlling factor is whether the expense can objectively be seen to be appropriate to the business activity (Magna Alloys & Research v. FC of T 80 ATC 4542; (1980)11 ATR 276 (Magna Alloys)).

To determine whether your expenses are deductible, the essential character of the expenditure must be considered. It is necessary to determine whether there is a sufficient nexus between the expenditure and the business income earning activities. The intention or purpose in incurring an expense can be an element in determining whether the whole or part of the expense is an allowable deduction. 

The words 'to the extent to which' signify that an expense may be apportioned if it is only partly incurred to produce assessable income. In Ronpibon Tin v. FCT (1949) 78 CLR 47; (1949) 8 ATD 431 (Ronpibon's case), the High Court expressed the view that '... there are at least two kinds of items of expenditure that require apportionment'. These were generally: those items that are capable of dissection; and those that cannot be dissected but should be apportioned on the basis that they serve more than one object indifferently. The latter would clearly apply to an airfare purchased for both work and private purposes (Case R13 84 ATC 168; 27 CTBR (NS) Case 64).

The courts have seen a number of cases where taxpayers are seeking income tax deductions for overseas travel expenses. Most of the claims were rejected because the taxpayers were not able to establish a sufficient nexus between the overseas travel expenses and the operations or activities by which the taxpayers directly gains or produces its assessable income.

In Case M51 80 ATC 352 a husband and wife were partners in a sugar cane farming business. In 1977 they went overseas on a three-week Sugar and Pineapple Tour organised by the Farmers and Graziers Co-operative Company Ltd. which supplied an escort leader. Members of the tour spent most of the time sightseeing, although they did visit some farming areas. The taxpayers claimed a deduction for part of the cost of the trip. The claim was disallowed as the main purpose of the trip was to undertake a sightseeing tour of areas in which the taxpayers had an interest. The tour was similar to an ordinary excursion trip, except that it had a small bias in favour of people having a rural interest. The expenditure claimed by the taxpayers was therefore not deductible.

In Cunliffe v FC of T 83 ATC 4380 (Cunliffes case) a taxpayer incurred expenses on overseas travel and claimed the expenses related to him being a restaurateur carrying on business (in Brisbane). The trip was undertaken by the taxpayer and his future wife and it lasted 16 months. The taxpayers claimed that the purpose of their visits to the many restaurants and associated businesses in Europe and the USA was to study their method of operation. The Judge of the Supreme Court of Queensland commented at p. 4386: -

The duration of such a journey by the taxpayer and his wife must be regarded in the light of the nature of the taxpayer's business and activities associated therewith and of the experience and knowledge which he seeks to gain for himself and for persons associated with his business. Circumstances will arise in which one may fairly say that although the experience and knowledge are such as to be of value to the taxpayer the time comes where repetition and further speculative meandering through types of areas and resorts with visits to restaurants and food outlets add nothing in any practical way to the gaining or production of assessable income. The leisurely approach inclines me to the view that the main objective was pleasurable-.

The assessment made by the Commissioner allowing in part the taxpayer's claim was not varied.

In your case, your circumstances differ to the above case because the individuals who travelled to Country A are not the business owners and are not employed by the business. However, a nexus still must be met between the expenses incurred for the trip and assessable income of the business.

In the decisions in Ronpibon's case and Fletcher & Ors v. FC of T (173 CLR 1; 91 ATC 4950; 22 ATR 613), the High Court recognised there are at least two kinds of expenditure that require apportionment under section 8-1 of the ITAA 1997. The first is expenditure in respect of a matter where distinct and severable parts are devoted to gaining income and other parts are devoted to some other end. If a study tour or work-related conference or seminar was mainly devoted to a private purpose, such as having a holiday, and the gaining or producing of income was merely incidental to the private purpose, only those expenses directly attributable to the income-earning purpose would be allowable.

There are also situations when a single outlay serves both an income-earning purpose and some other purpose indifferently. While there is no distinct separation of the portions of the expense, the High Court said there must be a fair and reasonable division based on the facts of each case. For example, when a ten day trip contains a five day work-related seminar and the remaining five days are spent touring and other private pursuits, it is reasonable to apportion the expenses equally between these purposes.

In your case, the beneficiaries work in the business but do not earn a salary or wages. The beneficiaries felt it was imperative to gain first-hand knowledge of the business culture in Country A and therefore booked a trip. They pre-booked as many business visits as feasible.

It is accepted that some of the expenditure was incurred in gathering ideas for the improvement of the business. However, given consideration of the wider circumstances, we consider it unlikely that the nature or characteristic of the travel was entirely income related. Therefore, we would consider it proper to include a private proportion.

Accordingly, the proportion of your trip expenses that relate to the business activity are deductible under section 8-1 of the ITAA 1997.

Apportioning expenses

Where expenses are incurred for dual purpose, such as an income producing purpose as well as a private purpose, any apportionment of the expenses must be on a fair and reasonable basis.