Edited version of your written advice

Authorisation Number: 1012719435628

Ruling

Subject: allowance

Question 1

Is the cost of living allowance assessable income?

Answer

Yes.

Question 2

Are you entitled to a deduction for your meal and incidental expenses while working overseas?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts

You are an Australian resident.

You signed a 'contractor' agreement with entity A, a non-resident entity.

You were requested to travel overseas to take up a project.

The initial project period was for a few months with a possibility of an extension. The contract was extended.

The primary worksite was located overseas, though you may be required to travel from time to time.

You were paid a standard hourly rate for up to 40 hours per week and a higher overtime rate for hours above this.

You also received a cost of living allowance while overseas.

You worked a set work cycle. The weeks on were generally worked in country A, followed by two weeks of unpaid home leave. Expenses on rotation home travel were covered by entity A. Travel expenses to country A at the commencement of the contract and from country A at the end were also covered by entity A.

In country A, you were provided with an apartment for your own use.

You believe the cost of living allowance related to additional food and ancillary costs.

Entity A paid overseas income tax on your behalf.

Entity A did not pay Australian income tax on your behalf.

Your spouse and children remained living in the family home in Australia whilst you worked overseas. You frequently returned to Australia during your home leave periods.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Income Tax Assessment Act 1997 Section 15-2.

Reasons for decision

Assessable income

Section 15-2 of the Income Tax Assessment Act 1997 (ITAA 1997) states that your assessable income includes the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums provided to you in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by you.

Allowances are generally regarded as assessable income except where they are fringe benefits within the Fringe Benefits Tax Assessment Act 1986 (FBTAA).

Income derived by a taxpayer through the provision of a fringe benefit by an employer is not assessable income in the employee's hands by the operation of section 23L of the Income Tax Assessment Act 1936 (ITAA 1936).

In your case you received an allowance while working overseas.

Taxation Determination TD 2011/1 Income tax and fringe benefits tax: can a non-resident entity be:

(a) required to withhold amounts from salary and wages paid to an Australian resident employee for work performed overseas under section 12-35 of Schedule 1 to the Taxation Administration Act 1953?

(b) subject to obligations under the Fringe Benefits Tax Assessment Act 1986 in relation to benefits provided to an Australian resident employee in relation to work performed overseas? provides guidelines in your circumstances.

TD 2011/1 states that if a non-resident entity does not have PAYG withholding obligations, no obligations under the FBTAA can arise for the non-resident entity in relation to benefits provided to that employee.

As entity A does not pay PAYG withholding tax on your behalf, the FBTAA provisions do not apply. Therefore your cost of living allowance is not regarded as a living away from home allowance under the FBTAA.

There is no other relevant exemption in relation to your allowance. Therefore your allowance is assessable under section 15-2 of the ITAA 1997.

You also ask if the allowance is a travel allowance. Subsection 900-30(3) of the ITAA 1997 states that a travel allowance is an allowance your employer pays or is to pay to you to cover losses or outgoings that you incur for travel away from your ordinary residence that you undertake in the course of your duties as an employee and that are losses or outgoings for accommodation or for food or drink or are incidental to the travel.

As outlined below, your travel is not considered to be undertaken in the course of your duties, therefore your allowance is not regarded as a travel allowance. However, as stated above, the allowance is assessable income.

Allowable deductions

Section 8-1 of the 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 outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

A number of significant court decisions have determined that for an expense to be an allowable deduction:

n 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; (1958) 100 CLR 478 (Lunney's case)), 

n 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), and

n 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; FC of T v. Hatchett, 71 ATC 4184).

Although an allowance is assessable income, you are not automatically entitled to a deduction for expenses incurred in relation to an allowance. The expenses must meet the criteria for deductibility under section 8-1 of the ITAA 1997.

Expenditure on the daily necessities of life (for example, meals) is generally not deductible as it is not incurred in gaining or producing assessable income and is also considered to be private or domestic in nature.

An exception to this is where you are undertaking work related travel and are required to stay away overnight. However, no deduction is allowable if a taxpayer is merely staying close to their usual work location.

Income Tax Ruling IT 2566 Income tax: deductibility of travelling expenses of employee, spouse and family incurred by employer in relocating the employee states that an employee who is travelling to commence employment duties at a new work location is not travelling on duty. The employment duties do not commence until the employee reports to work at the new location. This is so whether the transfer is voluntary or at the employer's request. When relocating to a new work site, a taxpayer is not travelling on their work, but is travelling to their work. Therefore any associated, travel, accommodation or meal expenses incurred are not regarded as deductible work related expenses.

Certain expenditure is incurred in order to be in a position to be able to derive assessable income, for example unless a person arrives at work it is not possible to derive income. This does not mean that the expenditure is incurred in the course of gaining or producing assessable income. Rather, the expenses are incurred to enable the taxpayer to commence income earning activities (Lunney's case).

In Federal Commissioner of Taxation v. Toms 20 ATR 466; 89 ATC 4373, the Federal Court held that expenses incurred in relation to accommodation near the work place, while maintaining a family residence in another location, were not an allowable deduction as they were considered to be private expenses. The Federal Court disallowed the forest worker's deduction for the cost of maintaining a caravan and other living expenses. The taxpayer's family home in Grafton was some 108 kilometres from the base camp so he lived in the caravan during the week and returned to the family home on weekends. The caravan was rendered necessary as much by the taxpayer's choice of the place of his residence in Grafton as by his employment in the State forest, and its purpose was to enable him to retain his residence in Grafton although he was employed in the State forest. Had he lived at a town closer to the forest, there is no question the caravan would have been unnecessary.

Although the above relates more to an employee's accommodation expenses, the principles are relevant to your circumstances. Where a person moves to a new place for work, the new place is regarded as their normal place of work. The associated accommodation and meal expenses incurred are not related to the actual performance of their duties. They are a prerequisite to the earning of assessable income and are not expenses incurred in the course of gaining or producing that income. Furthermore, the essential character of the expense is of a private or domestic nature.

Where a taxpayer is away for an extended period of time, the associated costs including accommodation and meals remain private in nature and are not deductible under section 8-1 of the ITAA 1997. Even though the expenditure had a causal connection with the earning of income, the expenditure is inherently of a private or domestic nature.

In your case your travel to country A is not considered to be work related travel. It is considered that country A is your normal place of work for the relevant period. While it is acknowledged that your main residence is in Australia, it is not considered that your travel between Australia and country A was work related travel. Rather it was private travel carried out to enable you to commence your contractual duties. The distance of the travel does not alter the private nature of the travel. That is, you were not away from home overnight for work purposes, as country A is your new work base for the period of the contract.

As country A is your normal place of work, your meal expenses were not associated with any work related travel. Similarly, any incidental expenses incurred in relation to your travel to and from country A and/or living in country A, are not incurred during the actual performance of your work, that is, during the production of assessable income. The meals and incidental expenses incurred while living and working in country A are a private expense and no deduction is allowable under section 8-1 of the ITAA 1997.