Edited version of private advice

Authorisation Number: 1051679832373

Date of advice: 2 June 2020

Ruling

Subject: Deductions - relocation allowance

Question:

Are you entitled to claim a deduction in relation the Relocation allowance under section 8-1 of the Income Tax Assessment Act 1997?

Answer:

No.

This ruling applies for the following period

Income year ending 30 June 2018

The scheme commences on

1 July 2017.

Relevant facts and circumstances

Company A is a wholly owned subsidiary of Company XYZ.

You received an offer of employment with Company A which required you undertake your employment at a different location, with your remuneration including site and shift allowance amounts.

You incurred in expenses while relocating to commence your employment role.

During the following income year Company XYZ issued a payment summary to you for a period of a month which included amounts for your salary, several allowances included Relocation allowance, and the total gross amount being the combined amounts that was taxable.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Assessable income

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Salary and wages and allowances are regarded as ordinary income and therefore assessable under subsection 6-5(2) of the ITAA 1997.

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.

Relocation expenses are not deductible to the employee, regardless of whether the employee is commencing new employment or transferring within existing employment as outlined below:

Relocation expenses may include the following:

·        travel costs incurred by the employee and his/her family in travelling to the new location,

·        removal expenses of furniture and personal effects,

·        storage, and

·        temporary accommodation costs until new accommodation is located.

Draft taxation ruling TR 2017/D6 Income tax and fringe benefits tax: when are deductions allowed for employees' travel expenses? sets out the general principles for determining whether an employee can deduct travel expenses under section 8-1 of the ITAA 1997.

The costs of relocating for work or living away from home to work are preliminary to work and are not deductible (paragraphs 16, 49 and 52 of TR 2017/D6), regardless of whether commencing new employment or transferring permanently or temporarily within an existing employment. The costs of relocating or living away from home are not incurred in performing an employee's work activities. They are of a private or domestic nature and reflect an employee's choice about where to live (paragraph 53 of TR 2017/D6). This is the case even though a taxpayer may, as a matter of practicality, need to incur the expenditure to earn assessable income.

The Commissioner's view regarding the deductibility of relocation costs incurred by an employee in transferring to a new locality of employment is made clear in Taxation Ruling IT 2481:

Where a taxpayer ... voluntarily transfers employment at his or her request from one locality to a new locality and incurs expenditure in moving from one place of residence to a new place of residence to take up the duties of the new position that expenditure is not incurred, in the Commissioner's view, in gaining or producing assessable income and is not deductible under subsection 51(1) of the Act. The taxpayer is not travelling on his or her work (c.f. Taylor v Provan [1973] A.C. 194 per Lord Wilberforce at p.215) but is travelling to his or her work. Nor is the taxpayer travelling between two places of employment.

The general rule is that relocation expenses of an employee are not incurred in earning the assessable income of the employee but are a prerequisite to the earning of that assessable income in the same manner as travel expenses to and from work.

This is consistent with cases Fullerton v FC of T 22 ATR 757; (1991) 32 FCR 486; 91 ATC 4983 (the Fullerton Case) and AAT Case U91 87 ATC 525 (the U91 Case) as follows:

In the Fullerton Case the taxpayer had worked as a professional forester. His employment position in the town in which he resided ceased to exist. The taxpayer requested a transfer to another town to avoid redundancy. His employer reimbursed a portion of the relocation expenses, and the taxpayer claimed the remaining amount as an income tax deduction. It was held that the expenditure on the taxpayer's domestic or family arrangements is not deductible, even though the expenditure had a causal connection with the earning of income.

In Case U91, 87 ATC 525, the taxpayer, a Commonwealth public servant, was transferred at the request of his employer from a State office to the central office of the department in Canberra. He was denied a deduction for expenses incurred in attempting to auction his house. It was held that the expenses were too remote from the income producing process to be incurred in gaining or producing assessable income.

These cases support the Commissioner's position, that claims for expenses incurred in moving to a new house, or travelling, when changing employment are not deductible.

It is also the case that an employee is not entitled to deduct an expense simply because they receive an allowance or other payment for that expense. The nature of the expense and its connection to the income producing activities determine whether the expense is deductible (paragraph 14 of TR 2017/D6).

Taxation Ruling IT 2614 states that removal and relocation expenses to take up an appointment with a new or existing employer are not allowable deductions, even if an allowance or reimbursement is received. This is so whether the transfer is voluntary or at the employer's request. Relocation expenses are not deductible because the expenses come at a point in time too soon to be regarded as being incurred in gaining or producing assessable income. These expenses are a prerequisite to the earning of income. They are incurred in getting, not in doing, work.

Application to your situation

In your case, you were offered a new employment role you chose to relocate to another location to commence the new role in the 2017-18 income year.

Relocation expenses are considered travel to work expenses and are not deductible, as they occur at a point too soon before the relevant employment commences. Further, in your situation some of the expenses incurred:

·        were of a private or domestic nature and are not deductible

·        should be included in the cost base of the property you sold, such as the selling agent's fees and settlement fees, which are also not deductible.

The fact that income cannot be earned unless certain expenses are necessarily incurred is not determinative of deductibility. There is not a sufficient connection between the expenses you incurred and the generation or production of assessable income in order for them to be an allowable deduction as you had incurred expenses to put you in the position to be able to commence the new role, and not in relation to the new role.

Therefore, you are not entitled to deduction under section 8-1 of the ITAA 1997 for the expenses that you incurred prior to relocating to another location to undertake the new employment role.

Note: You received income from your employer during the income year in which you relocated to undertake your new employment role and your salary and wage income was assessed as ordinary income in that income year. You received a Relocation allowance that was included in your taxable income in the income year in which you relocated for work.

Based on the information provided we have not been provided anything that would indicate that the Relocation allowance amount should not have been included in your assessable income in the income year in which you relocated. The fact that your employer included the Relocation allowance in your assessable income supports that you are not entitled to claim a deduction for the relocation allowance amount.

References were made to the following in the ruling:

·        Taxation Ruling IT 2173 Income tax: employee: transfer in locality of employment: removal expenses. This ruling was withdrawn and was replaced by Taxation Ruling IT 2614 Income tax and fringe benefits tax employee expenses incurred on relocation of employment which outlined at paragraph 26 that there was a change in policy from Taxation Ruling IT 2173 to this ruling in relation to the assessability of relocation allowances to apply in respect of all amounts paid on or after 1 July 1991 (Refer to paragraphs 20 and 21).

Your ruling relates to an income year after this ruling ceased to apply. Therefore IT 2173 is not relevant to your situation as it ceased to be our view on 30 June 1991.

·        Taxation Ruling IT 2406 Income tax: house auction expenses of public servant moving at employer's request deals with the issue of a taxpayer transferring their employment locations at the request of their employer. It outlines that the expenses incurred by the taxpayer were too remote from their income producing process to be viewed as having been incurred in gaining or producing their assessable income.

Like your situation, the taxpayer in the above ruling incurred expenses to move as a result of moving their employment locations. As outlined above, the expenses incurred in relation to the relocation were considered to have been too remote in gaining or producing assessable income. In your situation you incurred expenses as a result of taking up a new role. The expenses you incurred were at a point too soon to be regarded as having been incurred in gaining your assessable income and were incurred to put you in the position to commence your new employment role.

·        Taxation Ruling IT 2481 Income tax: travelling expenses of an employee moving to a new locality of employment outlines the expenses incurred in relation to the voluntary transfer of employment were not deductible with paragraphs 8 and 9 of the ruling stating the following:

8. The Commissioner accepts that the Federal Court was correct in deciding that there was no question of law in terms of subsection 44(1) of the AAT Act in the Tribunal's decision to enable an appeal to be lodged. However, with respect, the Commissioner does not accept that the Tribunal's decision was correct in the circumstances of this case.

9. Where a taxpayer, like the taxpayer in this case, voluntarily transfers employment at his or her request from one locality to a new locality and incurs expenditure in moving from one place of residence to a new place of residence to take up the duties of the new position that expenditure is not incurred, in the Commissioner's view, in gaining or producing assessable income and is not deductible under subsection 51(1) of the Act. The taxpayer is not travelling on his or her work (c.f. Taylor v Provan [1973] A.C. 194 per Lord Wilberforce at p.215) but is travelling to his or her work. Nor is the taxpayer travelling between two places of employment.

Like the taxpayer in the above ruling, you had chosen to relocate to another location to commence a new employment role. Such relocation expenses are travel to work expenses and are not deductible, as they occur at a point too soon to earning assessable income.

·        Taxation Ruling IT 2566 Income tax: deductibility of travelling expenses of employee, spouse and family incurred by employer in relocating the employee relates to whether an employeris eligible to claim deductions, which is not relevant to your situation.

The ruling outlines 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. Therefore, in your situation you were not travelling while at work and did not commence your employment in new role until you reported at the new work location for your first shift.

Matters we have not ruled on

The Commissioner may decline (refuse) to make a private ruling under section 359-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA)).

We have not ruled on all of your questions. Here, we list each question that we have not been able to rule on and explain why.

Question 1:

Should the relocation allowance described in the taxpayer's payment slip be included as assessable income to the taxpayer in accordance with IT2173, prevailing ATO practice, a statute or common law determination of the assessable nature of the allowance, or other applicable rulings or guidelines, or practices?

Question 2:

Where the answer to Question 1 is no, can the taxpayer disregard the inclusion of the relocation allowance in his assessable income?

Question 3:

Where the answer to Question 1 is yes, can the taxpayer seek deduction against the inclusion of the relocation allowance as assessable income to the amount of the allowance received either on a reasonable basis and/or on an actual expenses basis, up to the amount of the allowance so included?

Reasons for decision

When making our decision to decline to rule on the above questions we have taken the following into consideration:

·        A private ruling application was lodged in relation to the same issue on 11 June 2019, which was later withdrawn on 28 August 2019, when links to our web pages on our website were provided in relation to removal and relocation, allowances and reimbursements and withholding for allowances to assist in answering the questions raised in the private ruling application.

·        The same private ruling application was relodged on 13 March 2020, with some additional documentation provided, being the current private ruling application.

·        Information was requested to enable us to make a ruling decision on the following dates:

-       18 March 2020

-       6 April 2020; and

-       24 April 2020.

·        We received an email on 30 April 2020, advising that you were obtaining information from your employer and requesting further time.

·        We responded to the above email on the same day advising that:

-       we would review the information provided with the ruling

-       we didn't believe that the additional information would change the answer and that our expectation was that the answers would be unfavourable

-       we would likely decline to rule on any questions for which there was doubt about correct answer, or that become hypothetical due to other answers; and

-       new information could be provided while the review was being undertaken, with our final decision being based on the information we hold at the time we make our decision.

We have not received any response to our email at this point.

·        Question 1 queries whether there are any prevailing ATO practice, a statute or common law determination of the assessable nature of the allowance, or other applicable rulings or guidelines, or practices that identify the relocation allowance included in the pay slip as assessable income. However, if a private ruling is lodged by a tax agent they should identify which legislation they wish the ruling to address.

·        Question 1 relates to the application of Taxation Ruling IT 2173. That ruling was withdrawn and replaced by Taxation Ruling IT 2614, which issued on 27 September 1990.Therefore, IT 2173 is not the current Australian Taxation Office's view and making a decision in relation to how it relates to your situation will not have any practical consequences for you.

We are declining to give you a private ruling on the questions listed above because:

·        we have requested further information to enable us to make the ruling which has not been provided within a reasonable period in accordance with subsection 357-105(2) of Schedule 1 of the TAA; and/or

·        we consider that making the ruling may prejudice or restrict our administration of the law in accordance with paragraph 359-35(2)(a) of Schedule 1 to the TAA.

Review rights when we have declined to make a ruling

We have declined to make your private ruling and have given you the reasons. This decision may be reviewable under the Administrative Decisions (Judicial Review) Act 1977 (ADJR).

The ADJR provides you with two main rights.

1.     You can send a written notice to the Commissioner requiring him to provide a written statement of:

-   the findings of material questions of fact

-   the evidence these findings were based upon, and

-   the reasons for his decision.

2.     You can apply to the Federal Court of Australia or the Federal Circuit Court for a review of the decision.

If you decide to apply to the Federal Court or the Federal Circuit Court for a review of the decision, we suggest you seek professional advice on how to progress. In addition, the Court will be able to provide you with some direction and assistance about the process.

An application must be lodged within 28 days of the issue date on your Notice of private ruling.

You may lodge your application for review at the Federal Court or Federal Circuit Court in the State or Territory in which you ordinarily reside, or the State or Territory listed in the address for the ATO shown on your Notice of private ruling.

You can find more information on the Federal Court website fedcourt.gov.au,or the Federal Circuit Court fedcircuitcourt.gov.au