Connection between outgoing and production of incomeConnection between outgoing and production of income
Deduction for overseas travel costs
No deduction for accompanying persons
Travel Allowance v Part day travel allowance
Connection between outgoing and production of income
There are many cases in which taxpayers have argued that the words of sec 8-1 are wide enough to allow a deduction for expenses such as overseas travel
The question usually revolves around the connection between the outgoing and the production of income With the trades-man's tools there is a clear and very direct connection. With the expenditures we will be studying here, the connection is not so clear. It is more problematical and remote.
|
Connection between outgoing and production of income |
|||
|
Direct connection used directly in processes |
connection less direct - drawn upon indirectly in process |
remote problematic - some vague connection |
no connection prerequisite |
|
|
|
|
|
|
tools |
books |
newspapers |
Child minding |
Deduction for overseas travel costs
Answer this question....
Mr Finn was employed as an assistant principal architect in a government department. He decided to take extended leave to visit building sites in Europe and America.
He had 2 purposes for this...
Firstly, he wanted to bring himself up to date with current architectural trends and developments first hand
Secondly, as he was the least senior of all the contenders for the principal architect's position on his imminent retirement, Mr Finn wanted to establish his efficiency and general fitness for promotion to that position.
The department treated the trip as being a distinct advantage to his work and so relevant to one of his projects that he was asked to make a visit to a particular site and report back to them on his findings. An allowance was paid for this additional travel to Mr Finn.
Do you think the expenditure on the trip was incurred in gaining income?
Yes No
The Commissioner thought not... But the High Court held that it was. There were 2 equally important reasons
Firstly, the court accepted the view that the trip would enhance Mr Finn's efficiency in the eyes of his employer thereby enhancing his chances for promotion to the soon to be vacated job
Just as importantly, it was held that his income producing profession as an architect (like all skilled professions) placed him under an implicit obligation to maintain a progressive acquaintance and keep abreast with developments in architectural thought and practice. If this obligation was complied with by embarking upon an inspection tour of international sites then the cost of the trip was incidental and relevant, and its occasion could be found in the pursuit of the profession, which gave rise to his income.
The result of this is that if a nexus, (or connection) can be established between expenditure incurred by an employee and his ability to discharge his existing duties or earn his present income, then the occasion of that outgoing will be found in the processes giving rise to his income
But...The more remote or tenuous the connection, the less likely it will be that it was incurred in gaining income
It should be noted that in Mr Finn's case there was a strong connection because:
1. He was a professional
2. There was a possible promotion
A taxpayer who does not practice a profession, or who can not point to a possible increase in income which can be attributed to the expenditure which has been made will be hard pressed to establish the necessary connection.
Refer CCH Master Tax Guide - para 14-270 might give some clues these are the facts of case F16 74 ATC 73 the connection between the expenditure and any possible increase in income in 3 years time was too remote to justify a deduction under sec 8-1
CCH Master Tax Guide para 14-270 contains details of other claims
Are payments to maintain and update knowledge capital in nature?
In Finn's case the Commissioner argued that Mr Finn's store of knowledge and experience was equivalent to a capital asset and that expenditure on updating this asset was capital in nature. The court rejected this view
No deduction for accompanying persons
Section
26-30 denies a deduction for expenses attributable to a relative who accompanies a taxpayer if he/shetravelled in the course of performing duties as an employee,
or in the course of carrying on a *business for the purpose of gaining or producing assessable income; and
was accompanied by a relative while travelling.
So if you bring along a relative, you get no deduction?
That's the general rule, but if…you will still get the deduction!
Employee is defined to include any person in respect of whom Pay As You Earn tax deductions are made'
Any other exceptions to the rule?
Subsection (1) does not stop you deducting expenditure you incur in
*providing a *fringe benefit.The good news!
In practice this means you should provide the Commissioner with an estimate of the total travel expenses applicable to the accompanying person and deduct these from your own deduction.
You can probably argue that travel expenses, other than airline tickets, etc should not be apportioned on a 50/50 basis, but on a marginal basis.
In other words, a double hotel room probably costs only about 25% more than a single hotel room.
You can read more about this in the
topic on specific deductions which are not allowableTravel Allowance v Part day travel allowance
Where a travel allowance is received under an industrial award,
Or, where the Commissioner is of the opinion that is reasonably reflects the added expenses incurred by the taxpayer due to the requirement that he travel to perform the duties of his employment,
a deduction is allowed in full for the amount of the allowance received.
(As you will see shortly, this idea has been encapsulated in the substantiation provisions.)
This rule applied to all such travel allowances, but during the 1997 income year the Commissioner (TR 96/21).
It is the view of the Commissioner that a travel allowance is a travel allowance only if it is paid for a trip on which the employee travels away from his ordinary residence - in other words, sleeps away from home.
Because Part Day Travel Allowances do not compensate the employee for expenses incurred in sleeping in a bed located somewhere other than his ordinary place of residence, they are not travel allowances, and so can not be deducted in full.
The components of part day travel allowance that refer to food, drink, newspapers, private phone calls, etc, resume their usual private nature, and so become merely an increase in the employee's salary payments.
Those parts of the allowance that relate to income producing activities, such as
Business calls,
Fares (eg airport to meeting place),
Parking fees,
Road tolls,
Stationery for work purposes, etc
Would retain their nature as compensation for expenses incurred in gaining income, but it will be up to the taxpayer to demonstrate the connection with full details.
Not any more!
