Edited version of your written advice

Authorisation Number: 1012989128910

Date of advice: 24 March 2016

Ruling

Subject: Deductibility of employee overseas travel expenses

Question 1

Are the travel expenses for airfares, car hire, accommodation and meals incurred by you in respect of your employees travelling overseas fully deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

X Family Trust operates a number of businesses including ABC Constructions.

X and Y are beneficiaries and employees of X Family Trust and directors of the trustee company.

Their children are beneficiaries and employees of X Family Trust.

X is a qualified and registered in the construction industry of more than 30 years. They have a number of other qualifications relating to the construction industry. Their position in the business also includes client liaison.

Y's day to day roles and responsibilities in the business include administration, accounts, wages, GST and tax obligations, reception and general office clerical duties, contracts, site management documentation and decor.

The children are apprentices in construction of ABC Constructions and have equal roles and responsibilities. They are learning the business from the ground up. Their duties extend to roles such as OH&S obligations, site management, pick up and deliveries to sites, plant and equipment management, site accommodation management. They attend after hours courses to expand their roles in the business quickly and play a part equally in taking the business forward.

ABC Constructions is currently constructing a building. Construction is well advanced.

X owns the land on which the building is being constructed and will be the sole owner of the building. A fixed price contract was signed for ABC Constructions to construct the building for X.

ABC Constructions is considering purchasing a building component from a manufacturer overseas. The proposed installation covers a large percentage of the construction and is a very important part of the project. There is no Australian manufacturer of the building component. ABC Constructions has been negotiating with the manufacturer for a number of months. They have agreed on a price however purchase will depend on suitability. A decision needs to be made quickly as the building component is planned to be installed within the next six months in the estimated construction timetable.

X and Y and their children (X Family) will travel overseas to spend time at the manufacturer's business premises and to visit various installations of the building component. The manufacturer is expecting X Family to travel long distances with them to projects they have completed. The manufacturer is very keen to introduce their product to Australia and ABC Constructions will be the only builders in Australia to have installed one of the building components. It could therefore have significant earning potential for the business.

The trip is necessary to establish suitability, to see various working units and to learn installation. It is a substantial purchase and the business cannot risk placing an order of this size without making the trip. All employees need to travel as they are all involved in the decision making regarding this project.

X and Y will travel in their capacity as Directors and employees of X Family Trust. X and Y will attend meetings with the manufacturer's sales team and export manager to discuss the product quality, design integration, structural engineering/permit approvals, final payment structure, logistics and general purchasing arrangements. They will have equal roles in deciding whether the unit serves the purpose for the project and on the purchase. While X will ensure the quality and structural integrity of the product, Y will assess its aesthetic suitability. If they decide to purchase the building component, Y's duties will expand to dealing with the contract between parties, payment of the deposit and shipping arrangements.

The children will travel as employees of X Family Trust (working on the construction of the commercial building) to learn how to install the building component. The manufacturer has planned trips for X Family to places where they will be able to physically inspect the installation properly, operate it and engage with the owners. The children are expected to play an important role in physically inspecting the installations and absorbing as much information as possible about the building component at these places. The manufacturer is providing X Family with a certain amount of training and the children will be participating in specific sessions relating to assembling and installation. They will learn about the componentry and operation of the unit and discuss the unpacking of the unit on site. One child (assisted by the other child) will be responsible for unpacking the container on delivery so needs to be familiar with the components so they can recognise if anything is missing. The other child is to ensure they are fully educated in the functionality and operation of the building component as they will be on-training other employees.

X Family will spend a total of XX days overseas.

X Family Trust is paying for all aspects the trip - airfares, car hire, accommodation and meals. The airfares and cost of the hire car and some accommodation will be paid before the end of the current financial year.

X Family will incorporate some personal activities into the trip. They would like to spend 2-3 days relaxing either side of the full business days but will work with the manufacturer on an exact itinerary. An estimate of time to be spent on business and personal activities has been supplied.

Each person travelling will keep an individual travel diary recording the time spent on business and personal activities.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8 -1

Income Tax Assessment Act 1997 section 26-30

Reasons for decision

Issue 1

Question 1

Are the travel expenses for airfares, car hire, accommodation and meals incurred by you in respect of your employees travelling overseas fully deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The travel expenses incurred by X Family Trust in respect of your employees travelling overseas are fully deductible under section 8-1 of the ITAA 1997.

Detailed reasoning

While cases cited in these Reasons for Decision consider deductibility under former subsection 51(1) of the Income Tax Assessment Act 1936 (ITAA 1936), the decisions in these cases have equal application to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Overview of relevant provisions

General deductions

Under section 8-1 of the ITAA 1997 you can deduct from your assessable income any loss or outgoing to the extent that (emphasis added):

a) it is incurred in gaining or producing your assessable income (the 'first limb'); or

b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income (the 'second limb').

However, you cannot deduct a loss or outgoing under this section to the extent that it is a loss or outgoing of a private or domestic nature (emphasis added).

Some amounts you cannot deduct, or cannot deduct in full

Section 26-30 of the ITAA 1997 denies the deduction of travel expenses attributed to a relative who accompanies a taxpayer while they travel in the course of performing their duties as an employee or in the course of carrying on a business for the purpose of gaining or producing assessable income.

Section 26-30 of the ITAA 1997 will not apply if, while accompanying the taxpayer, the relative performed substantial duties as an employee of the taxpayer's employer; and it is reasonable to conclude that the relative would still have accompanied the taxpayer on the travel if they did not have the personal relationship with them.

Relevant provisions in detail and applying to your circumstances

General deductions

To be deductible under the first limb of section 8-1 of the ITAA 1997, a loss or outgoing must be relevant and incidental to the gaining or producing of assessable income (Ronpibon Tin NL & Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 8 ATD 431 at 436).

The first limb applies to all taxpayers that generate assessable income, including those taxpayers carrying on business (FCT v Green (1950) 81 CLR 313).

The second limb applies only where the taxpayer carries on a business for the purpose of gaining or producing assessable income. Taxpayers carrying on a business may rely on either or both of the positive limbs (FCT v Snowden & Willson Pty Ltd (1958) 99 CLR 431).

Because you are a business taxpayer we will concentrate on the second limb.

The second limb of section 8-1 of the ITAA 1997 allows deductions for losses or outgoings to the extent they are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income (emphasis added).

Necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income

In certain circumstances, the subjective purpose, intention or motive of the taxpayer can be relevant in determining whether the outgoing has the necessary connection with the carrying on of the taxpayer's business in order to say that it was necessarily incurred in carrying on that business for the requisite purpose. However, where having regard to the overall objective circumstances, there is an obvious commercial connection between the outgoing and the carrying on of the taxpayer's business, it will not generally be necessary to have regard to the taxpayer's subjective purpose, motive or intention.

An outgoing incurred by a company will be 'necessarily incurred' if "... the outgoing was reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of that business ...'' (Magna Alloys & Research Pty Ltd v FC of T 80 ATC 4542 per Deane and Fisher JJ at p 4561) (Magna Alloys).

Where a taxpayer is carrying on a business for the purpose of gaining or producing assessable income, the commercial and practical implications of the term 'necessarily incurred' imply that voluntary expenditure incurred for business needs may be deductible. It is the taxpayer who decides whether the expenditure 'is dictated by the business ends to which it is directed' (Federal Commissioner of Taxation v. Snowden & Willson Pty Ltd (1958) 99 CLR 431; (1958) 11 ATD 463; (1958) 7 AITR 308 (Snowden & Willson's Case)).

This was further supported in Magna Alloys when the Court stated:

For practical purposes and within the limits of reasonable human conduct, it is for the man who is carrying on the business to be the judge of what outgoings are necessarily incurred

The Commissioner endorses this interpretation in Taxation Ruling TR 95/33 Income tax: subsection 51(1) - the relevance of subjective purpose, motive or intention in determining the deductibility of losses and outgoings.

In considering the commercial connection between the overseas travel expenses and the operations and activities by which ABC Constructions produces assessable income for X Family Trust, we had regard to the following objective circumstances:

• ABC Constructions is a construction business operating out of X Family Trust

• ABC Constructions entered into a fixed price contract with X to construct the building. ABC Constructions will receive payments under the contract and incur expenditure in the ordinary course of its business providing the construction services

• as part of the construction, a particular building component is being considered for installation. The building component is a significant part of the building under construction and a substantial purchase

• the building component is manufactured overseas; there is no manufacturer of the building component in Australia. There has been no face to face contact with the company to date

• four of your employees, X Family, will travel overseas to spend time at the manufacturer's premises where they will attend meetings with the sales team and export manager and receive training in the installation process; they will visit various buildings with similar building components installed and decide whether to purchase the building component

• the expenditure is required so that ABC Constructions can fulfil its obligations under the contract to deliver construction services to X, thereby deriving assessable income for the trust.

You state that the travel is necessary to establish suitability of the building component, to see various working units and learn how to install it before committing to the purchase. You state that all four employees need to travel as they are all involved in the decision regarding this project. We accept this as your determination that the travel expenditure is necessarily incurred by X Family Trust so that ABC Constructions can complete the construction of the building (achieve it business ends).

Accordingly, as it is the taxpayer who determines the nature of the expenditure to be undertaken in the conduct of their business (Snowden & Willson's Case) we accept that the travel expenses are necessarily incurred by X Family Trust carrying on a business for the purpose of gaining or producing its assessable income and are therefore deductible.

Purpose of the trip for deciding if expenses are to be apportioned

The words 'to the extent' in section 8-1 of the ITAA 1997 signify that an expense may need to be apportioned if it is only partly incurred to produce assessable income. In Ronpibon Tin v FC of T (1949) 78 CLR 47; 4 AITR 236 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. For example, if a study tour or attendance at a work-related conference is undertaken for income-earning purposes and for private purposes, it is appropriate to apportion the expenses between the purposes. If the income-earning purpose is merely incidental to the main private purpose, only the expenses which relate directly to the former purpose are allowable.

However, if the private purpose is merely incidental to the main income-earning purpose, apportionment is not appropriate.

Taxation Ruling TR 98/9 Income Tax: deductibility of self-education expenses incurred by an employee or a person in business further adds:

'If the purpose of a [trip] is the gaining or producing of income, the existence of an incidental purpose does not affect the characterisation of the related expenses as wholly incurred in gaining assessable income.'

You have stated that X Family is travelling overseas for business purposes.

In considering the need for any apportionment of the travel expenses we have taken into consideration the following circumstances:

• your employees are going overseas because ABC Constructions is considering purchasing the building component to use in the construction of the building. They will decide on the purchase. If the decision is to purchase the building component, payment and shipping arrangements will commence while they are there

• the building component is a very important part of the construction and a substantial purchase for your business. There is no manufacturer of the building component in Australia so it cannot be viewed without travelling overseas. It is understandable that you don't want to commit to the purchase without first meeting the manufacturers, have employees assess in person if it is suitable for the building both structurally and aesthetically and receive training in the installation

• the timing of the trip has been scheduled to fit in with the construction timetable

• business activity (comprising meetings with the company, training, examining and inspecting installations and conversing with owners) will occupy the greater portion of the trip

• the estimated number of days to be spent on business and private activity is currently nine days business and five days private. The final itinerary is to be worked out with the manufacturer as they are arranging visits to inspect buildings where similar building components are installed

• your employees will take the opportunity to spend some personal time while overseas. Personal activity destinations outside the proposed travel route (to places with the building component installed) is not indicated in the preliminary itinerary provided

It is the Commissioner's view that the primary purpose of the expenditure is for income-earning purposes and any private portion of this expenditure is merely incidental. As such, there is no requirement to apportion the expenditure.

Relative's travel expenses

Even though we have established that the travel expenses are deductible, as X Family are related, section 26-30 of the ITAA 1997 must be considered.

As mentioned earlier, section 26-30 of the ITAA 1997 denies the deduction of travel expenses of a relative who accompanies a business taxpayer unless, while accompanying the taxpayer, the relative performed substantial duties as an employee of the taxpayer's employer and it is reasonable to conclude that the relative would still have accompanied the taxpayer on the travel if they did not have the personal relationship.

For the purposes of applying this section to your case, we have treated X as the taxpayer (the main business traveller) and Y and their children as the accompanying relatives.

Accompanying relative's duties

The accompanying relatives will travel overseas on behalf of ABC Constructions in relation to the planned purchase of a building component as part of the construction of the building.

While overseas, Y's business-related duties and responsibilities will include:

• spending four days at the manufacturer's premises meeting with the sales team and export manager discussing the product quality, design integration, structural engineering/permit approvals, final payment structure, logistics and general purchasing arrangements

• visit various installations of the building component and engage with owners

• an equal role in deciding if the unit serves the purpose for the building - specific responsibility in relation to décor

• equal role in deciding on purchase

• administration of the contract between parties, shipping arrangements, payment of deposit (if the planned purchase is confirmed)

While overseas, the children's business-related duties and responsibilities will include:

• spending four days at the manufacturer's premises learning how to install the building component; participating in specific training sessions relating to assembling and installation; learning about the componentry and operation of the unit and unpacking of the unit on site

• visit various establishments where they will physically inspect the installation properly, operate it and engage with the owners

We consider the duties to be performed by all three relatives, while accompanying X overseas as employees of X Family Trust, are substantial duties. The duties they will perform overseas as employees of X Family Trust are commensurate with the roles and responsibilities they have in the day to day operation of ABC Constructions, particularly on this project.

We also consider it reasonable to conclude that each of the relatives would still accompany X on the trip if they did not have a personal relationship with them.

Accordingly, section 26-30 of the ITAA 1997 will not apply to deny a deduction for travel expenses attributed to Y and their children.

Conclusion

The travel expenses for airfares, car hire, accommodation and meals incurred by you in respect of your employees travelling overseas are fully deductible under section 8-1 of the ITAA 1997.