Private ruling: Work related expenses - travel deductions
Date of advice: 14 June 2017
Published: August 2017
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Are you able to claim a deduction for the travel expenses you incur travelling between the airport and the place where you store the equipment for your activity? | A1: No.

Relevant facts and circumstances: You are employed by a company to work. You own a share of a property where you reside. Your employment type changed to a casual basis from a full time basis. The change in employment type means that you are ‘hired’ at the period and ‘terminated’ at the conclusion of the period. Your employer pays for the cost of flights from work to the airport. You pay for the cost of flights from one airport to another airport, and then for the cost of travel to your home. You had been performing activities for friends and family before your working arrangements changed. Subsequently you began charging for the services you were providing. A detailed explanation of your activities is provided below. A typical representation of your travel from one airport to another airport is as follows: Travel from one airport to another airport ● On the day you travel home from your main employment, you work at the mine site from XX:XX until around XX:XX. ● At or about XX:XX you travel from work to an airport, where you board a plane to travel to one airport. Your employer pays for this travel. ● You arrive in one airport between XX:XX and XX:XX, at which time you remain in the terminal. ● At a time between XX:XX and XX:XX, you board a plane and travel to another airport. ● You land at another airport at some time between XX:XX and XX:XX. ● You have a friend or one of your relatives drive to another airport in your vehicle and travel from another airport to your relative’s house on the where your equipment is stored, usually arriving at some time between XX:XX and XX:XX. ● Upon arrival you organise the equipment you will need for work that day. ● You break from approximately XX:XX to XX:XX. ● After the break, you commence work at your relative’s house, as he/she is always your first client. ● You will then work until approximately lunch time as fatigue sets in and you need to stop. Travel from another airport to one airport ● On the last day of the period that you conduct your activity, you attend a long-standing client’s house. ● You cease activities there at or about XX:XX and travel to the storage shed at your relative’s house. ● Whilst there, you drop off your equipment and trailer, then pick up a passenger and drive to another airport. ● Whilst at another airport, you shower in the members’ lounge prior to boarding the plane. ● At some time between XX:XX and XX:XX you board a plane that travels from another airport to one airport, arriving at a time between XX:XX and XX:XX. ● After arrival at one airport you stay in the terminal until at or about XX:XX when your board a plane to travel to an airport. ● Your employer pays for the cost of the flight from one airport to an airport. ● Upon arrival in an airport you travel to work and commence your main employment. Your Activity You were performing services for friends as a favour to them without charge. Your employment type changed to casual and you began charging for the services you were offering. You began operating the activity just prior to 20XX. You re-instated your ABN in 20XX. You mostly had all the capital that you needed to operate the activity prior to commencing it. You store the equipment, including a trailer at a storage shed on your relative’s property. You do not advertise your services, instead relying upon word of mouth. The business records that you keep regarding your activity are cash receipts. You have averaged the time you spend on your activity and main employment over a period, given the way you are employed. In a period, you spend XX:XX hours on the activity and XX:XX hours travelling. In the same period, you spend XX:XX hours on your main employment and XX:XX hours travelling. You have calculated travel to and from another airport as part of your activity. You do not employ any other people in your activity. You did not conduct any research or seek any professional advice prior to starting your activity. You do not have a business plan drawn up, nor do you know when the venture is likely to become profitable. You do not have any projections or cash budgets/forecasts drawn up. The formula you are using to work out where the income from your activity is going is: $XXXX Charge = $XXXX Tax, $XXXX Consumables, $XXXX Profit. You are apportioning expenses for you mobile telephone on a basis for making appointments, chasing up prices, and organising equipment depending upon the job. The time that you are able to devote to the activity is limited by the time spent in your main employment. In the period just prior to 20XX to 20XX, you completed XXXX jobs. In the period from 20XX to 20XX you completed XXXX jobs. The sales income figure for the period from 20XX to 20XX is approximately $XXXX.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 8-10 | Income Tax Assessment Act 1997 Section 25-100

Reasons for decision: Detailed Reasoning - General deductions: Subsection 8-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you can deduct from your assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income: or (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. Subsection 8-1(2) of the ITAA 1997 provides that you cannot deduct a loss or outgoing to the extent that it is a loss or outgoing of capital, or of a capital nature; or of a private or domestic nature. In considering the deductibility of travel expenses under section 8-1 of the ITAA 1997, 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. A deduction is generally not allowable for the cost of travel by an employee between their home and their normal workplace as it is considered private in nature. The cost of such travel is generally incurred to put the employee in a position to perform their duties of employment, rather than in the performance of those duties (paragraph 77 of Taxation Ruling TR 95/34). Section 8-10 of the ITAA 1997 provides that if two or more provisions of the ITAA 1997 allow you deduction in respect of the same amount, you can deduct only under the provision that is most appropriate. | Detailed Reasoning - Travel between workplaces: Subsection 25-100(1) of the ITAA 1997 provides that an individual may deduct a transport expense that is incurred in travel between workplaces. Subsection 25-100(2) of the ITAA 1997 provides that travel between workplaces is travel directly between 2 places, to the extent that: (a) while you were at the first place, you were: (i) engaged in activities to gain or produce your assessable income; or (ii) engaged in activities in the course of carrying on a business for the purpose of gaining or producing your assessable income; and (b) the purpose of your travel to the second place was to: (i) engage in activities to gain or produce your assessable income; or (ii) engage in activities in the course of carrying on a business for the purpose of gaining or producing your assessable income; and you engaged in those activities whilst you were at the second place. Subsection 25-100(4) of the ITAA 1997 provides that travel between 2 places is not travel between workplaces if, at the time of your travel to the second place: (a) the arrangement under which you gained or produced your assessable income at the first place has ceased; or (b) the business in respect of which you engaged in activities at the first place has ceased. Section 25-100 of the ITAA 1997 was introduced following the High Court of Australia decision in Commissioner of Taxation v Payne [2001] HCA 3 ( Payne’s case ). In Payne’s case , the High Court overturned the long standing interpretation of the law that expenses incurred in travelling directly between two places of unrelated income earning activity were deductible under the general provisions, where the taxpayer did not live at either of the places and the travel was undertaken for the purpose of enabling the taxpayer to engage in income-producing activities. The introduction of section 25-100 of the ITAA 1997 allowed a specific deduction instead for travel directly between two unrelated income producing activities. The Explanatory Memorandum (EM) to the Tax Laws Amendment (2004 Measures No. 1) Bill 2004 shows that the travel must be direct between the two places where income is generated and that any deviation, even to have a meal or do some shopping, will mean that the travel is not direct and a deduction will not be allowed. The examples provided in the EM could be seen to indicate that section 25-100 of the ITAA 1997 was intended to cover relatively short travel distances; for example driving directly from one side of town to the other. Extended, long distance travel requiring multiple legs and multiple modes of transportation was not considered in the EM and we consider that the very nature of this type of travel will ultimately include incidental private or domestic activities such as meals or rest that would result in the travel being not being considered ‘direct’ within the terms of the EM. | Detailed Reasoning - Carrying on a business: The courts have established certain tests for determining whether an activity constitutes the carrying on of a business and the Commissioner’s view of these tests is presented in Taxation Ruling 97/11 (TR 97/11). The Commissioner’s view is that none of the tests is solely determinative on its own, but must be examined in conjunction with one another. The tests are: ● whether the activity has a significant commercial purpose or character ● whether the taxpayer has more than just an intention to engage in business ● whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity ● whether there is regularity and repetition of the activity ● whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business ● whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit ● the size, scale and permanency of the activity, and ● whether the activity is better described as a hobby, a form of recreation or sporting activity. | Detailed Reasoning - Application of the law to your circumstances: In your case, your employer pays for the travel from your place of employment to one airport. From one airport you incur expenses to travel via plane to another airport, then via vehicle to your relative’s residence where you store your equipment used in your activities. Similarly on your return to your employment, you travel via vehicle from your relative’s residence to another airport, then via plane to one airport. From there your employer provided transportation occurs through to your workplace. In determining whether a deduction is available for your travel expenses, we have considered whether your activities constitute the carrying on of a business. After reviewing the facts and comparing to the tests as set out in TR 97/11, we do not consider that you are carrying on a business. Your activity: ● does not have a significant commercial character or purpose ● your intention is to make a profit, but you are unsure when that will happen ● on objective assessment is unlikely to make a profit, given the limited availability that you have to dedicate to it ● has a few repeat clients ● is not carried on in the same manner that is characteristic of the industry ● is not organised in a businesslike manner, given that you only keep cash receipts ● is small in scale, and ● may be compared to a hobby or recreation, in that you were performing the same activity for no cost previously. As your activity does not constitute the carrying on of a business, you are not entitled to a deduction for the cost of travel between your main employment and your activity under section 25-100 of the ITAA 1997. We consider that your travel is travel to work, and is therefore of a private or domestic nature and not deductible under section 8-1 of the ITAA 1997, as the expenses are incurred prior to commencing the activities that will gain or produce your assessable income. Further, even if your activity did constitute the carrying on of a business, we consider that a deduction for your travel under sections 8-1 or 25-100 of the ITAA 1997 would not be allowable. We do not consider that arriving at your storage shed and gathering equipment would be an activity in the course of carrying on a business. This is because it is merely an act preparatory to the commencement of activities and not an activity for the purpose of gaining or producing your assessable income. Your income producing activities would not commence until you started your first activity. When you travel to your relative’s house to access your storage shed, you then break for approximately half an hour, before commencing to perform an activity at his/her house. We do not consider the gathering of equipment would be an activity in the course of carrying on a business and the break is considered to be for a private and domestic purpose, meaning that the travel would not be direct and a deduction would not be allowed. Similarly on your return to your place of employment you have advised that you shower in the members lounge at the airport; this is another private or domestic activity that would sever the directness of the travel. Finally, you are ‘hired’ at the start of each two week period and technically ‘terminated’ at the end. To this end, the arrangement under which you produce your assessable income at the first place has ceased and subsection 25-100(4) of the ITAA 1997 would apply to deny a deduction for travel between workplaces.