Edited version of your written advice

Authorisation Number: 1051197775466

Date of advice: 1 March 2017

Ruling

Subject: Deductibility of travel and accommodation expenses for an employer/employee

Question 1

Can the trust claim a deduction for the cost of the employee's flights between the employee's city of residence and the city where they work, on the basis of the flights being work related travel?

Answer

No.

Question 2

Can the trust pay the employee a reasonable travel allowance as per ATO guidelines for the total number of days the employee was in the city where they worked considering they came back to their city of residence every week?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2016

The scheme commences on

1 July 2015

Relevant facts and circumstances

X specialises as a consultant providing services.

X uses a trust as an interposed entity to supply their services.

The trust has only one employee being X. They pay themselves wages which are duly reported to the ATO on the corresponding BAS.

The trust enters into contracts to supply X's services through recruitment firms.

The current contract has been for a period of approximately two years.

Most of the work is performed at the client's premises. No professional services are provided in the city where X resides or any other place since commencing the current contract.

X normally flies to the work place city on Mondays and returns to their resident city on Fridays most weeks. X has maintained their home in their resident city, where their spouse and children live and carry on their ordinary lives, work, attend school and sports.

X's family does not accompany X on these weekly trips.

The expenses incurred by the trust in relation to the provision of services in the city where X works include: Flights, accommodation, meals and incidentals.

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 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 that purpose. However, a deduction is not allowable for outgoings that are of a capital, private or domestic nature.

Travel expenses

In considering the deductibility of travel expenses, a distinction is made between travel to work and travel on work. It is only if the duties of the job require a taxpayer to travel that the taxpayer's expenses can be deducted as travel expenses.

In general, a deduction is not allowable for the cost of travel by an employee between their home and their normal workplace as it is considered private in nature. Taxation Ruling TR 95/34, paragraph 77 explains that the cost of such travel is incurred to put the employee in a position to perform their duties of employment, rather than in the performance of those duties.

The case, Lunney v. Commissioner of Taxation ALR 225; 1958 0311H HCA; 100 CLR 478; (1958) 11 ATD 404; (1958) 32 ALJR 139 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 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. 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.

In this case, X travels between their home in one city and their place of work in another city. X chooses to continue to reside in one city although their work is in another city. This travel is incurred in order to put X in a position to perform the duties of their employment; it is not incurred in the performance of the duties of their employment. Travel is not a part of their actual work duties.

Taxation Ruling TR 95/34 paragraph 22 states that for the travel to be a fundamental part of an employee's work, travel must be an essential feature of an employee's duties. An employee's duties will only commence when the employee reaches the work site where they carry out their work. An employee is not considered to be travelling in the performance of their duties from the moment they leave their home.

The flights X undertakes in travelling between their place of residence and work are private in nature. Therefore, if X incurred these expenses they would not be entitled to a deduction under section 8-1 of the ITAA 1997.

If the trust pays these expenses it is not deductible to them as a travel expense. It will be the provision of a fringe benefit to an employee and would be deductible to the trust on that basis. Because the otherwise deductible rule would not apply to these expenses, the trust would be subject to fringe benefits tax on these amounts.

Bona fide travel allowance

In income tax terms, 'travel allowances' are paid to cover expenses such as accommodation, food, drink and incidentals that employees incur in the course of travelling away overnight for work (travelling on work).

Generally, when an employee travels overnight for work, there is no change of usual employment location and accordingly no change of residence. The employee simply travels to another location, generally for a short period of time, in order to carry out the requirements of the job.

A travel allowance is an allowance an employer pays or is to pay to cover losses or outgoings:

● that an employee incurs for travel away from their ordinary residence that is undertaken in the course of their duties as an employee; and


● that are losses or outgoings for accommodation, food, drink or expenses incidental to travel, that are deductible because they are incurred in travelling on work.

The issue of expenses incurred in relation to accommodation near the work place while maintaining a family residence in another location was considered in FC of T v. Toms 89 ATC 4373; (1989) 20 ATR 466 (Toms' Case)

In Toms' Case, the taxpayer was a forest worker who during the working week lived in a caravan in a bush camp 108 kilometres from his family home in Grafton. He claimed 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 camp. He would return home on weekends. He claimed the costs of maintaining his caravan and other living expenses such as the cost of heating and lighting. The Federal Court held that the expenses incurred in relation to the temporary accommodation near the workplace while maintaining a family residence in another location were dictated not by his work but by private considerations, and therefore were not deductible.

In this case, expenses are incurred for accommodation, meals and incidentals in the city where X works to allow X to attend their work place there. However, as in Toms' Case, the expenses are a prerequisite to the earning of assessable income. They are incurred in order to enable X to earn income but are not incurred in the course of gaining or producing that income. X would not be being paid a bona fide travel allowance as X is not travelling on work. X's employer could not pay X a “bona fide travel allowance”.

If the trust were to pay these expenses it is not deductible to them as an expense incurred in paying a bona fide travel allowance. It will be the provision of a fringe benefit to an employee and would be deductible to the trust on that basis. Because the otherwise deductible rule would not apply the trust would be subject to fringe benefits tax on these amounts.