Edited version of private advice

Authorisation Number: 1012682911251

Ruling

Subject: Travel costs to investment trade show

Questions and Answers:

1. Can individual A ('Trustee') deduct the relevant travel costs?

No.

2. Can the Trust deduct or include in a CGT cost base the relevant travel costs?

No.

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

The Trust is a discretionary trust a sole trustee. The Trust made its first and, to date, only investment with Company X during the year ended 30 June 2014.

For the year ended 30 June 2014, The Trust was an investment vehicle and thus was not carrying on a business for income tax purposes. The Trust did not pay any salary or wages.

During the year ended 30 June 2014, the trustee personally incurred overseas travel costs for the purpose of investigating investment opportunities on behalf of The Trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 110-35

Income Tax Assessment Act 1997 Section 40-880

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 or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature.

Where an outgoing is capital in nature, in relation to the cost base of a CGT asset, it is accounted for under section 110-25 of the ITAA 1997, which includes subsection 110-25(2) for costs of acquiring a CGT asset and subsection 110-25(3) for associated incidental costs.

Section 110-35 of the ITAA 1997 lists ten types of incidental costs that can be included in the cost base of a CGT asset, namely: (i) remuneration for the services of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser; (ii) costs of transfer; (iii) stamp duty or other similar duty; (iv) costs of advertising or marketing to find a seller or a buyer of a CGT asset; (v) costs relating to the making of any valuation or apportionment; (vi) search fees relating to a CGT asset; (vii) cost of a conveyancing kit; (viii) borrowing expenses (such as loan application fees and mortgage discharge fees); (ix) specific expenditures related to consolidated groups; and (x) termination or other similar fees incurred as a direct result of ownership of a CGT asset ending.

Paragraph 2.137 in the Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Act 2006 states:

Search fees essentially relate to fees payable in checking land titles and similar fees and would not include costs such as travelling expenses to find an asset suitable for purchase.

Where business capital expenditure cannot be included in a CGT or other cost base (such as in an element of cost of a depreciating asset), section 40-880 of the ITAA 1997 is a provision of last resort which allows a deduction over five income years for certain business capital expenditure incurred after 30 June 2005 which is not otherwise taken into account or denied a deduction by some other provision. For example, certain due diligence costs can be deducted under paragraph 40-880(2)(c) of the ITAA 1997 as capital expenditure you incur in relation to a business proposed to be carried on.

Under section 8-1 of the ITAA 1997, an outgoing is incurred in gaining or producing assessable income if there is a sufficient connection between the outgoing and the activities which produce or are expected to produce assessable income (Ronpibon Tin NL v. FC of T (1949) 78 CLR 47) and if it is incurred in gaining or producing the assessable income of the taxpayer who incurs it (FC of T v Munro (1926) 38 CLR 153 (Munro)).

In general, in determining the tax treatment of expenditure, the nature or purpose of the expenditure must be considered (Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 3 AITR 436; (1946) 8 ATD 190). Where the expenditure is devoted towards a structural purpose (of an enduring nature) rather than an operational (recurrent) purpose, the expenditure is of a capital nature and the relevant expenses are not deductible (Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; 5 ATD 87; (1938) 1 AITR 403).

For example, in the High Court of Australia case of Federal Commissioner of Taxation v Maddalena (1971) 2 ATR 541; 71 ATC 4161 (Maddalena) it was held expenses associated with the establishment of a business are not deductible; that such expenses come at a point too soon to be properly regarded as incurred in gaining assessable income.

Taxation Ruling IT 39 provides expenditure incurred in servicing or managing income producing investments (e.g., rental properties) has an intrinsically revenue character.

Taxation Ruling IT 2385, which is about expenses incurred by beneficiaries of discretionary trusts, provides beneficiaries of discretionary trusts are unable to show a sufficient nexus between their activities and the receipt of assessable income from a discretionary trust because, at its highest, the beneficiary of a discretionary trust has the mere expectancy of receiving income from the trust. This is distinguishable from a shareholder of a company or a beneficiary of a fixed trust, who has an absolute interest in the company or trust income. This tax treatment is affirmed by Taxation Board of Review No.3 Case M36 80 ATC 280; Case 11 24 CTBR (NS) and again by Administrative Appeals Tribunal Case U44 87 ATC 318.

In your case, the trustee cannot deduct or include the relevant expenditure in a CGT cost base because: (i) it was not related to his earning of assessable income as an employee of The Trust (since he did not receive any related salary and wages); (ii) IT 2385 provides there is no nexus between expenses incurred and income earned by a discretionary beneficiary; (iii) per Munro, it was not incurred in gaining or producing his assessable income but instead incurred on behalf of The Trust; (iv) it is not related to any CGT asset that was acquired by the trustee; (v) it is not one of the ten types of incidental costs listed under section 110-35; and (vi) it is not due diligence expenses in relation to a business proposed to be carried on (since the expenditure was incurred for possible investments).

The Trust also cannot deduct or cost the relevant expenditure because The Trust did not incur the expenditure. However, if The Trust does incur the expenditure, say, via reimbursement, it cannot deduct or cost the relevant expenditure because: (i) the expenditure is not related to its earning of assessable income; (ii) it is not related to any CGT asset that was acquired by it; (iii) if it did acquire an income producing investment, the expenditure would be incurred at a point too soon (per Maddalena); (iv) if it did acquire an income producing investment, the expenditure would not be one of the ten types of incidental costs listed under section 110-35; and (v) under section 40-880, any due diligence expenditure is not business capital expenditure since The Trust is not carrying on a business.

In conclusion, the relevant travel expenses cannot be deducted or costed under any tax provision.