Edited version of your written advice

Authorisation Number: 1012997086265

Date of advice: 12 April 2016

Ruling

Subject: Accommodation and meal expenses

Question

Is the partnership entitled to claim rent, occupancy costs and food in Town B as deductible business expenses?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2015

The scheme commenced on:

1 July 2014

Relevant facts and circumstances

You are a partnership.

The business is based at your residence located in Town A.

In 20XX, the partnership began contracting services to an entity located in Town B.

There is no contract in place and there is no end date for the services the partnership provides to the entity.

Partner A, performs the majority of the services to the entity.

Their duties include:

• Entity Co-ordinator, involving managing funds and applying for grants,

• Hands-on role with public visitors, as well as completing worksheets and paperwork required for this,

• Project manager,

• Line manager.

Partner B's role is:

• Research for these programs and educational material, making the booklets, educational material and films. The educational material and films are sold by the entity, with the proceeds remaining with the entity.

During the relevant year, Partner A was also employed as a worker by another entity in Town B working part-time.

You determined that there was a need for accommodation, as you contend it was required in order to work in a remote area without the need to travel back and forth from the partners' residence.

There is accommodation available in Town B, though it is very limited.

Due to the difficulties and high costs in obtaining short term accommodation, Partner A, predominantly the partner who works and stays in Town B, rents a house to stay in whilst working at the entity and their other place of employment.

Partner A pays rent for this house to an unrelated third party and has a lease agreement in place in their name.

Partner A rents out a room of the house to an unrelated third party.

Partner A has access to all areas of the house except for the room that has been rented out and is solely responsible for all maintenance and other responsibilities as per the lease agreement.

The rental income received is not included in Partner A's or the partnership income tax returns.

Partner A stays at the house X nights every week, though not always the same nights of each week.

Due to their other work commitments, the partners usually don't stay at the house in Town B at the same time.

Accommodation and food expenses were incurred in relation to Town B in the relevant year.

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 all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

However, no deduction is allowed for expenses to the extent to which they are of a capital, private or domestic nature.

Generally, expenditure on accommodation while away from home cannot be deducted. Such outgoings are essentially living expenses of a private or domestic nature.

In FC of T v Green (1950) 81 CLR 313; (1950) 9 ATD 142, the Full High Court observed:

It is not enough in order to establish a right to a deduction to show that it was proper or reasonable for the taxpayer to make the expenditure which he claims as a deduction. For example, it is perfectly reasonable and proper for a taxpayer to incur living expenses and many expenses of a private or domestic nature but such expenditure is expressly excluded from deductibility by the final words of the sub-section of section 51. Thus.... a taxpayer cannot deduct ordinary living expenses. It is true that such expenses are necessarily incurred if any income is to be earned or otherwise derived, but such expenses would be incurred whether income was earned or otherwise derived or not.

In FC of T v Toms 89 ATC 4373; (1989) 20 ATR 466, the taxpayer was a self-employed forest worker. During his working week he lived in a caravan in a bush camp approximately 108 kilometres from his family home. The caravan was also used by him for storing logging equipment and as a temporary shelter when work was interrupted by bad weather. Mr Toms claimed that it was too far to travel each day to his work in the forest, so that it was necessary to establish a caravan at the base, where he stayed from Monday to Friday each week.

The deductions claimed for accommodation and living expenses were disallowed as they were considered to be of a private nature. It was held that the expenses were dictated not by work but by private considerations. The taxpayer had chosen to reside in temporary accommodation close to his work site while still maintaining his family home. Had he lived at a town closer to his work site there would have been no need for the caravan.

In FC of T v Charlton 84 ATC 4415; (1984) 15 ATR 711, the taxpayer was a pathologist whose home was in the Melbourne suburb of Fitzroy. During the relevant period, he performed a number of autopsies at Bendigo, a country town some 150 km from the family home, for which he was paid fees and in order to avoid the fatigue of the travel which would otherwise have been involved, he retained a flat at Bendigo which was available to him. He wrote up the drafts of his autopsy reports at the flat, where he also kept certain medical texts.

Crockett J., referred to the personal nature of expenses incurred by a taxpayer in travelling from his home to his place of work and added:

The Commissioner contends (correctly in my view) that, if the taxpayer should choose to reside so far from the place where it is necessary for him to be in order to gain his income that he not only needs to incur expense in travelling to that place but also to incur expense in the provision to him of some accommodation transitory or discontinuous in its use and secondary to or temporarily supplementary of his actual home, that expense too, is for the same reason non-deductible.

He went further to state that:

The taxpayer's election to live in Melbourne and not in Bendigo meant that the rental expended on the flat in order to enable him to secure accommodation in which to recuperate from the rigours of travel and the nature of his work was an expenditure dictated not by his work but by private considerations. There was an exception to this in the month of May. He was then required by his employment to work in both Wangaratta and Bendigo. The nature and circumstances of that work made the taking of rest at Bendigo necessary. The keeping of a flat during that month was dictated by his income-producing activity and was incidental to his work.

In Case H104 (1958) 8 TBRD 478; (1958) 7 CTBR (NS) Case 89 an estate agent and insurance consultant who lived 25 miles out of the city and conducted a business in the city and suburbs was denied a deduction for the cost of lodging at a city club during the week to facilitate the operation of the business. The expenditure was considered to be of a private nature in that it was the taxpayer's personal choice to stay at the club for part of each week of the relevant period.

In Case T59 (1968) 18 TBRD 312; (1968) 14 CTBR (NS) Case 76 expenses incurred by a partner in maintaining a flat when visiting a town to carry out relieving duties in a business were disallowed. It was decided that the expenses were not incurred in producing the assessable income and were private in nature.

In Case X4, 90 ATC 116; Case 5545 (1989) 21 ATR 3120 the taxpayer was a specialist radiologist with a practice in a provincial town over 100 km from a capital city. He also had professional obligations in the capital city including a practice involving a specialist procedure, honorary appointments at various hospitals and teaching commitments. In order to meet these professional obligations the taxpayer travelled to the city regularly each week and in December 1977 purchased a house in the city where he resided on his visits there. The house was also occasionally used for family purposes at weekends and by other members of the provincial practice when in the capital city in connection with the practice. Patients from his specialist practice were occasionally seen at his city residence.

It was decided in that case that the outgoings in respect of the city residence were incurred for the purpose of maintaining domestic premises or 'a second home'. While the motive for establishing such a residence arose from professional demands, the expenditure had no relevant connection with his income-producing activities. Even if it could be shown that the outgoings were incurred for the purpose of producing assessable income, they would be disallowed as outgoings of a private or domestic nature.

The Commissioner's view on accommodation expenses while away from home is given in ATO ID 2002/451 where he states that:

Various court decisions have concluded that, generally, accommodation and food expenses incurred while away from home are essentially 'living expenses' of a private or domestic nature and therefore not deductible (FC of T v. Cooper 91 ATC 4396; (1991) 21 ATR 1616; FC of T v. Toms 89 ATC 4373; (1989) 20 ATR 466).

The place where the taxpayer stays whilst away from home is considered their usual place of residence for that period. Therefore, the accommodation and meal expenses incurred during that period are private expenditure, and are not deductible under section 8-1 of the ITAA 1997.

Application of the law and the Commissioner's view on the facts of your case

Partner A has incurred accommodation and meal expenses as a result of the partnership's decision to accept work in another town to that of the partner's main residence. As this work is performed predominantly in that town, we consider that the expenses were incurred for the purpose of maintaining domestic premises or a 'second home' (albeit a rental property). The expenses were not incurred in earning the partnership's assessable income.

The essential character of the rented accommodation is that of a home. The house is used for private and domestic purposes whilst Partner A fulfilled their duties as a contractor (the partnership activity) and as an employee.

Partner A's accommodation and meal expenses arise out of their choice to stay in Town B instead of returning to Town A at the end of the day.

Given the nature of the services to be performed by the partnership, that there is no end date for the services provided and the fact that the services will be performed in Town B, Partner A's place of work whilst the services are being provided is considered to be Town B. Whilst in Town B, Partner A is not considered to be travelling in the course of performing their work duties. The accommodation and meal expenses are incurred by Partner A to enable them to stay in proximity to the Town B work place and are not expenses incurred in the gaining or producing the partnership income. They are living expenses and have been incurred for private and domestic purposes.

No deduction is allowable for Partner A accommodation and meal expenses whilst working in Town B.