Edited version of your written advice

Authorisation Number: 1013009071748

Date of advice: 10 May 2016

Ruling

Subject: Motor vehicle expenses

Question 1

Are you entitled to claim a deduction for motor vehicle expenses between home and work?

Answer

No.

Question 2

Are you entitled to claim a deduction for motor vehicle expenses between work sites whilst on work?

Answer

Yes.

Question 3

Are you entitled to claim a deduction for any motor vehicle expenses outside work hours?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2016

The scheme commenced on:

1 July 2015

Relevant facts and circumstances

You are employed as a business development manager.

One of your duties is to demonstrate new in-vehicle software system capabilities to current clients and future prospects.

There are currently vehicles equipped with this technology available for sale to the general public.

This software is not an aftermarket purchase; it is a pre-installed software system in the vehicle at the time of purchase. There are no additional attachments or bulky equipment required for its use.

You intend to purchase a vehicle with this technology and use it for demonstration purposes and continued testing of the product as well as for your own personal use.

You contend that you will be using this vehicle for testing purposes at all times you use it, both work and personal use.

It is not an absolute requirement of your employment that you test this software.

There is a vehicle supplied by your employer that has this system installed, which is used by all team members.

Prior to the purchase of your vehicle, you demonstrate this software to clients either at a bench in the office, or via the company vehicle when it is available.

You receive a reimbursement from your employer calculated on a 'cents per kilometre' basis for your current vehicle expenses, paid to you after you have submitted a claim.

When you purchase your vehicle, this form of reimbursement will continue.

You have submitted a letter from your employer confirming your role and stating your ownership of this vehicle would be of great benefit to the company.

You will use the vehicle to travel:

• between home and your work site

• between work sites, and

• for private purposes outside of work hours.

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 except where the outgoings are of a capital, private or domestic nature.

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

• 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 (Lunneys case)), 

• 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

• 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).

A deduction is only allowable if an expense:

• is actually incurred,

• meets the deductibility tests, and

• satisfies the substantiation rules

Home to work travel

Lunneys Case introduced what is now regarded as the essential character test. This test requires that for an expense to be deductible, it must have the essential character of a business or income producing expense. The taxpayer in this case sought to deduct the cost of travelling from his home to his work. The expenses were disallowed as being private and domestic, establishing the broad principle that costs incurred because of living in one place while working in another cannot be regarded as deductible. The reasons given by the High Court were twofold.

The fact that certain expenditure, such as travelling to work, must be incurred in order to be able to derive assessable income, does not necessarily mean that the expenditure is incidental and relevant to the derivation of assessable income or that it is incurred in the course of gaining or producing assessable income. It is a prerequisite to the earning of assessable income rather than being incurred in the course of gaining that income.

The essential character of the travel to and from work is that of a private and domestic nature, related to personal and living expenses as part of the taxpayer's choice of where to live, in choosing to live away from and what distance from work.

There are exceptions where travel between home and work are deductible, for example where you transport bulky tools and equipment, your home is a base of employment and you commence your duties prior to leaving home, or you regularly work at more than one site each day before returning home.

Application to your circumstances

The general principles established in Lunneys case have been followed in many subsequent cases and would hold equally for the travel expenses in your case. That is, the travel expenses are a prerequisite to the earning of your income and are not expenditure incurred in the course of gaining or producing income. Your circumstances do not meet any of the exceptions which would allow your travel expenses to be deductible.

The motor vehicle expenses incurred as a result of your travel are not considered to be as a result of your income earning activities. The expenses are incurred by putting you in a position where you can perform your duties, rather than in the performance of your duties.

The mere fact that your vehicle is fitted with the software for which you are employed to demonstrate, is not relevant to your entitlement to claim a deduction for the expenses associated with your travel between home and work. Whilst it is acknowledged that your continual use of the system will provide you with more familiarity with it, it is not a requirement of your employment that you do this.

Therefore, you are not entitled to deduction for the motor vehicle expenses you incur in your travel between home and work.

Travel between two different work sites.

Taxation Ruling TR 95/34 discusses the deductibility of motor vehicle expenses and how this can differ depending on whether the payment is considered to be an allowance or a reimbursement to the employee:

Allowances

11. The receipt of an allowance does not automatically entitle an employee to a deduction. The term 'allowance' does not include a reimbursement.

12. Allowances paid to cover transport expenses fall into the following categories:

a) fully assessable to the employee with a deduction possibly allowable for expenses incurred, depending on individual circumstances;

b) fully assessable to the employee with no deduction allowable even though an allowance is received;

c) fully assessable to the employee with a deduction possibly allowable for expenses incurred, depending on individual circumstances, but subject to special substantiation rules …

Reimbursement

13. If an employee receives a payment from his or her employer for actual expenses incurred, the payment is a reimbursement …… Generally, if an employee receives a reimbursement, the amount is not required to be included in his or her assessable income and a deduction is not allowable (see Taxation Ruling TR 92/15).

14. However, if motor vehicle expenses are reimbursed by the employer on a cents per kilometre basis, the amount is included as assessable income of the employee under paragraph 26(eaa) of the Act. A deduction may be allowable in relation to the motor vehicle expenses incurred.

15. If a payment is receive from an employer for an estimated expensed, the amount received by the employee is considered to be an allowance (not a reimbursement) and is fully assessable to the employee (see Allowances, paragraphs 11 and 12 above).

Although the amount you receive is dependent on the number of kilometres you travel, you are paid a predetermined amount per kilometre. The amount is paid to cover the estimated expenses you incur in using your car such as petrol and wear and tear on your car. You are not compensated exactly for these expenses.

Accordingly, the amount you receive from your employer is an allowance and required to be included in your assessable income and you may be entitled to a deduction for your work related car expenses.

Application to your circumstances

On the days where, after commencing your duties, you are required to travel directly from one office to another, it is considered you are travelling on work rather than to work. The travel is undertaken in the performance of your duties. Therefore where you finish work at one work site and travel directly to the next work site, you will be entitled to claim a deduction for your travel expenses for this portion of your journey only.

Motor vehicle expenses outside work hours

You contend that you are testing the software program on a continual basis. In other words, whenever you drive your car, you will be performing duties in relation to your employment even though you may not be on work time and the journey may be private in nature. You have stated that it is not an absolute requirement of your employment to do this.

It is acknowledged that you may gain a better understanding and familiarity of this software by using it constantly both at work and outside work and this in turn, will assist you when you demonstrate the system to client's at work. However, it is the Commissioner's view that there is insufficient nexus between your use of the system and the vehicle whilst on personal time and the earning of your assessable income.

It follows that your motor vehicle expenses that are not directly related to travel whilst on work are not deductible vehicle expenses.