Edited version of private advice

Authorisation Number: 1051921675906

Date of advice: 25 November 2021

Ruling

Subject: Business Deductions - online educator

Question 1

Are costs in relation to filming of an online course content like clothing (including non-special occasion costumes), and cosmetics deductions under section 8-1 of ITAA 1997?

Answer

No.

Question 2

Are travel and accommodation costs business expenses under section 8-1 of ITAA 1997?

Answer

Yes.

Question 3

Can your business claim a deduction for the cost of the costumes purchased for specific events such as Easter and Christmas?

Answer

Yes.

Note: Your business can claim a deduction for travel expenses related to your business, whether the travel is taken within a day, overnight, or for many nights. More information about business travel expenses can be found by searching Quick Code QC 44448 on www.ato.gov.au

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

•                 Your company XXX is a maker of online educational videos.

•                 Person A the personal brand and face of the business.

•                 Presentations are given to a live audience and online through filming videos.

•                 Live presentations and filming video shoots are not carried out on a regular basis.

•                 Expenses are incurred to maintain Person A's consistent image.

•                 The expenses are considered an essential cost in ensuring the branding and styling of the business is uniform across all forms of media be it the website, online advertising, and course content.

•                 Clothing purchased is chosen very specifically.

•                 Person A has purchased costumes used for special occasions like Easter, Christmas etc.

•                 Additionally, other costumes are purchased to help keep the content entertaining and maintain audience attention.

•                 Person A's hair is styled the same way for each filming and advertising shoot to maintain a consistent image and brand. A wig also has been purchased that is styled the same way.

•                 Person A's nails are manicured and painted for filming purposes. This maintains Person A's image and draws the eye to the hands for the purpose of teaching.

•                 During teaching sign language facial expressions and mouthing/speaking the words are very important. These need to be clear and easy for students to read the presenters lips. You have purchased lipstick to keep students focused on Person A's face and lips.

•                 Filming has been conducted at locations away from where the business is ordinarily conducted with costs incurred for travel and accommodation.

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.

Clothing

Taxation Ruling TR 97/12 Income tax and fringe benefits tax: work related expenses: deductibility of expenses on clothing, uniform and footwear (Taxation Ruling TR 97/12), discusses the Commissioner's view on the deductibility of work related clothing, uniform and footwear expenses. This taxation ruling applies to individuals who are employees or in receipt of withholding payments. The taxation ruling also provides guidance for clothing expenses that businesses may or may not be entitled to claim as a deduction.

Taxation Ruling TR 97/12 provides that the cost of buying clothing will in most circumstances, be regarded as an expense of a private nature. Clothing is necessary for protection of the body from the elements and to meet societal norms of modesty, fashion or similar conditions.

For expenditure to be deductible, the expenditure must have the essential character of an outgoing incurred in gaining assessable income. It is not sufficient that the expenditure is a prerequisite to the derivation of assessable income; it must contribute to the derivation of that income

The circumstances where expenditure for clothing is considered to be deductible are where the clothing is:

(a) protective clothing and footwear - refer to Taxation Ruling TR 2003/16 Income tax: deductibility of protective items that specifically addresses the claiming of protective clothing and footwear as a deduction;

(b) occupation specific clothing - refers to clothing that distinctively identifies the wearer as a person associated with a particular profession, trade, vocation, occupation or calling. It is this distinctive nature of the clothing that provides a connection between the expenditure and the income earning activities;

(c) a compulsory uniform/wardrobe and meet the requirements of Taxation Ruling IT 2641;

(d) a non-compulsory uniform/wardrobe - a deduction is only allowable for a non-compulsory uniform/wardrobe where the design of the uniform/wardrobe has been entered on the Register of Approved Occupational Clothing

Conventional clothing

Taxation Ruling TR 97/12 also considers the deductibility of conventional clothing. Conventional clothing is 'everyday' clothing that would ordinarily be worn, or which could reasonably be worn, by a person irrespective of whether that person is working or not, for example, a pair of jeans or a shirt.

While there is no universal rule that conventional clothing can never be deductible, in most cases expenditure on conventional clothing will not be deductible. Taxation Ruling TR 97/12 provides that expenditure on conventional clothing is often not an allowable deduction as there is not usually a sufficient connection between the expenditure and the income earning activities of a taxpayer.

A deduction for conventional clothing was allowed in Federal Commissioner of Taxation v. Edwards 94 ATC 4255; 28 ATR 87 (Edward's case). In this case, the taxpayer worked as the personal secretary to the wife of the Governor of Queensland. She sought a deduction for expenses incurred in purchasing hats, gloves and formal gowns which she was required to purchase to fulfil the duties of her position. The taxpayer was expected to dress in a manner compatible with the Governor's wife. It was determined that the additional clothing purchased was over and above the personal requirements of her normal attire for private use.

In Case 48/94 94 ATC 422; AAT Case 9679 (1994) 29 ATR 1077, a self-employed professional presenter and speaker was denied a deduction for the cost of conventional clothing. The taxpayer gave evidence that she maintained a separate wardrobe to meet her work requirements, and that she used this wardrobe exclusively in relation to her work. Sometimes, a client would request that she dress in a specific manner when performing a presentation. Her image was of vital importance in both securing and performing her duties, and her clothes were an aspect of her image. The taxpayer submitted to the Tribunal that her matter could be paralleled to the facts in Edwards' case.

Senior Member Barbour distinguished this case from Edwards' case on the basis of the emphasis placed by the Tribunal and Court on Ms Edwards' additional changes of clothes throughout a workday - a fact not present in this one - and found the essential character of the expense to be private, saying (ATC at 427; ATR at 1083):

'While the A list clothes [those used exclusively for work] assisted in creating an image compatible with the applicant's perceptions of her clients' and audiences' expectations, her activities productive of income did not turn upon her wearing A list clothes, however important the applicant may have perceived these clothes to be in her presentation activities. There is not the requisite nexus between her income-earning activities and the A list clothing expenses.'

Senior Member Barbour went on to say (ATC at 428; ATR at 1084):

'For it was essential that the applicant wear something to her income-producing activities...the applicant's clothing needed to be suitable for the purpose of wearing to that presentation, but this does not change its character to a business expense, and I find that the nature of the expense is essentially private.'

In Case 72/96 96 ATC 640 a television newsreader claimed a deduction for the cost of clothing purchased for use on camera. The items of clothing in question comprising suits, shirts, shoes, dresses, jackets and jewellery, were selected by the newsreader because they came up well on television, looked appropriate and created the desired image.

The Administrative Appeals Tribunal found that the items of clothing claimed were 'ordinary articles of apparel' that any professional or businesswoman might purchase to wear to work and the fact the clothing would look good on television was not sufficient to make the cost a deductible outgoing. Accordingly, the newsreader was denied a deduction for the clothing expense on the grounds that, as the clothing was not worn as part of a uniform and was 'not of a special nature and to be worn in unusual circumstances', the clothing expense was of a private nature.

We consider your circumstances and deliberate choices of clothing to be similar to that of Case 72/96 and Case 48/94 and therefore the requisite nexus does not exist, and the essential character of the expenditure is private.

Clothing - conclusion

Whilst the additional nature of the clothing is a relevant factor to be taken into account, it will not be sufficient where the income earning activities do not turn upon the wearing of the clothes and where they are not specific and suited only for the income earning activity.

Considering the facts and your circumstances, the choice of clothing may be selected for a specific purpose. However, the clothing is not consistent with being considered occupation specific, a compulsory uniform/wardrobe, a non-compulsory uniform/wardrobe or protective (clothing and footwear). Your choice of clothing has the characteristics of conventional clothing.

When Person A use conventional clothing at work in most cases the conventional clothing is considered private or domestic in nature because the essential character of the expenditure is that of meeting personal requirements of modesty, decency and warmth.

Therefore, consistent with the principals established in TR 97/12, the expenses incurred in purchasing clothing to use in your educating business does not have the essential character of a business expense.

Accordingly, you are not entitled to a deduction for the cost of purchasing clothing under section 8-1 of the ITAA 1997.

Costumes

A costume generally falls within the conventional clothing category. As stated above, conventional clothing (including costumes) in most cases would not be considered as a business deduction.

Often the expense for a costume is associated with a performing artist being entitled to claim the deduction. Taxation Ruling TR 95/20 Income tax: employee performing artists - allowances, reimbursements and work-related expenses states that the expense for a costume for a role in a performance is deductible. Subsection 405-25(2) of the ITAA 1997 defines a performing artist as "...if you exercise intellectual, artistic, musical, physical or other personal skills in the presence if an audience by performing or presenting a) music; or b) a play; or c) dance; or d) an entertainment; or e) an address; or f) a display; or g) a promotional activity; or h) an exhibition; or any similar activity."

In your case, we do not view Person A as a performing artist. We understand Person A is a teacher or educator.

To claim a deduction for the costumes a connection is required to made between the loss and outgoings to the extent to which they are incurred in gaining or producing assessable income. In your case, you have stated that Person A use costumes for special occasions like Easter and Christmas and additional costumes for entertainment purposes. Generally, for these purposes, there would not be a connection between the costume expense and gaining or producing assessable income.

However, it is accepted that in your circumstances the costumes purchased for special occasions are unique and unsuitable to be worn by the general public. It is also accepted that given the unique nature of the costumes for special occasions, the costumes are unsuitable for any other activity other than work. Accordingly, in applying the principles from Case U95 87 ATC 575 it is accepted that a sufficient nexus exists between the expenditure in purchasing the costumes specifically for special occasions and the income earning activities. This nexus is such that the essential character of the expense is work related rather than private in nature.

You are entitled to claim a deduction under section 8-1 of ITAA 1997 for the costumes purchased for special occasions.

You are not however, entitled to a deduction for the purchase of the non-special occasion costumes purchased for entertainment purposes. This is due to these costumes lacking the essential character of a business expense and being categorised as conventional clothing.

Cosmetic expenses

Taxation Ruling TR 96/18 Income tax: cosmetics and other personal grooming expenses (Taxation Ruling TR 96/18), discusses the Commissioner's view on the deductibility of expenses incurred in respect of cosmetics and other personal grooming expenses.

Taxation Ruling TR 96/18 provides that the cost of cosmetics and other personal grooming expenses will in most circumstances, be regarded as an expense of a private nature. For an expense to be deductible in accordance with section 8-1 of ITAA 1997 the expenditure must have the essential character of an outgoing incurred in gaining assessable income. There must be a connection between the outgoing and the assessable income so that the outgoing is incident and relevant to gaining of the assessable income.

Generally, in most cases, a connection would not exist between the expense of cosmetics and personal grooming and gaining assessable income and the expenditure will be considered private in nature. One example where a deduction may be allowed for cosmetics and personal grooming expenditure is if the expense is incurred by a performing artist when performing a role. The cost of maintaining a particular hairstyle or length for a role is an allowable deduction. A deduction is allowable for the cost of stage make-up. For the performing artist there is a connection for the cosmetic or personal grooming expense incurred and gaining their assessable. As stated above, in your case, we understand that Person A is an teacher or educator and would not satisfy the definition of a performing artist.

Therefore, consistent with the principals established in TR 96/18, the expenses incurred in purchasing cosmetics and personal grooming items and services does not have the essential character of a business expense.

In terms of claiming the wig as a deduction, the connection between the outgoing and it being necessarily incurred to gain or produce assessable income requires consideration, in accordance with section 8-1 of ITAA 1997. Examples where the expense of a wig could be claimed as a deduction include wigs worn by lawyers for appearance in court (refer to Taxation Ruling TR 95/9 Income tax: employee lawyers - allowances, reimbursements and work-related deductions) and a performing artist for a role in a play. The expense of the wig in these circumstances has a connection to gaining or producing their assessable income.

In your case, you state that Person A uses a wig to style the educator's hair in a consistent manner when filming the online content. We have formed the view that the use of the wig is for cosmetic purposes. As a result, it is considered to be private or domestic in nature and would not be an allowable deduction.

Accordingly, you are not entitled to a deduction for the cost of cosmetic expenses under section 8-1 of the ITAA 1997.

Travel and accommodation expenses

In accordance with section 8-1 of the ITAA 1997 you can deduct any loss or outgoing to the extent that it is necessarily incurred in carrying on your business for the purpose of gaining or producing your assessable income. If you incur an expense for the business purpose of travel you would be entitled to claim the expense in accordance with section 8-1 of ITAA 1997. Section 8-1 of ITAA 1997 outlines circumstances where you cannot claim an expense such as if the loss or outgoing is of a private or domestic nature.

In your case, if you travel away from your normal place of business, you would be entitled to claim the travel expenses. Travel expenses you would be entitled claim are airfares or expenses associated with other forms of transport, accommodation and meals, if your director or employee is travelling away from their permanent residence for one night or more.

There are travel expenses that you may only be entitled to claim a portion of the travel expense or none of the travel expense especially if the expense is private or domestic in nature. Example of travel expenses that may be considered private or domestic in nature could be combine business and holiday travel, expenses you have paid for the director's or employee's family members to accompany them during the travel, souvenirs, gifts or entertainment.

Our website provides further information concerning business travel expenses, in the search field of our website www.ato.gov.au input "QC 44448". As a company, our website recommends that the people who you are paying for the travel expense that they complete a travel diary. This will assist you identify the extent of business and private expenses.

Accordingly, you are entitled to a deduction for the cost of travel expenses to the extent the expense is incurred for a business purpose under section 8-1 of the ITAA 1997.