Private ruling: Deduction of business expenses
Published: July 2013
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: 1 July 2009

Ruling: Q1: Are you entitled to claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for expenses incurred in running your business, on the basis there is a clear and identifiable nexus between the business expenses and assessable income earned as an employee? | A1: No

Relevant facts and circumstances: · You are employed under a contract. · As a condition of your employment contract, it is a prerequisite that you maintain the following: - Vocational and/or industrial experience · You can maintain your vocational and/or industrial experience in a variety of ways. Including, current employment in the industry, operating a business, undertaking formal study, training, voluntary work in the industry, consultancy work and attending industry functions etc. · The way in which you maintain your industry experience is by operating your own business. · You do not use any of your business expenses in your employment. · For the 200X to 20XX income years you made business losses. · In the 200X to 20ZZ income years you earned assessable income from your business. · In the 20XX and 20VV income year you did not derive any income from your business. However, you had on-going business expenses.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1

Reasons for decision: Summary: Section 8-1 of the ITAA 1997 states: 8-1(1) 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. Note: Division 35 prevents losses from non-commercial business activities that may contribute to a tax loss being offset against other assessable income. 8-1(2) However, you cannot deduct a loss or outgoing under this section to the extent that: c. It is a loss or outgoing of capital, or of a capital nature; or d. It is a loss or outgoing of a private or domestic nature; or e. It is incurred in relation to gaining or producing exempt income; or f. A provision of this Act prevents you from deducting it. You wish to determine whether the expenses incurred in your business in the relevant income years can be deducted under section 8-1, on the basis that it is a prerequisite of your employment to operate a business and therefore a nexus exists between the expenses incurred in the business and the producing of your assessable income. TR 98/9 Income tax: deductibility of self-education expenses incurred by an employee or a person in business specifies the required nexus between the expense and the assessable income and states at paragraph 33 - 34: 33. The High Court of Australia has indicated that the expenditure must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense ( Lunney v. FC of T; Hayley v. FC of T (1958) 100 CLR 478 at 497 498; (1958) 11 ATD 404 at 412). There must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of the assessable income ( Ronpibon Tin NL v. FC of T (1949) 78 CLR 47 at 56; (1949) 8 ATD 431 at 435). 34. Consequently, it is necessary to determine the connection between the particular outgoing and the operations by which the taxpayer more directly gains or produces his or her assessable income ( Charles Moore & Co (WA) Pty Ltd v. FC of T (1956) 95 CLR 344 at 349-350; (1956) 11 ATD 147 at 148; (1956) 6 AITR 379 at 384; FC of T v. Cooper 91 ATC 4396 at 4403; (1991) 21 ATR 1616 at 1624; Roads and Traffic Authority of NSW v. FC of T 93 ATC 4508 at 4521; (1993) 26 ATR 76 at 91). Whether such a connection exists is a question of fact to be determined by reference to all the facts of the particular case. As a condition of your employment contract, it is a prerequisite that you maintain the following; Vocational and/or industrial experience; You can maintain your vocational and/or industry experience in a variety of ways. Including, current employment in the industry, operating a business, undertaking formal study, training, voluntary work in the industry, consultancy work and attending industry functions etc. Based on the different strategies in which you can maintain your vocational and industry experience, we do not consider that it is necessary that you establish your own business in the industry. The establishment of your own business is just one of many ways in which you can meet the prerequisites for employment. The deductibility of expenses for employee teachers is discussed in TR 95/14 Income tax: employee teachers - allowances, reimbursements and work-related deductions. Paragraphs 32-34 state: 32. The fact that an expense is incurred by an employee teacher at the direction of his or her employer does not mean that a deduction is automatically allowable. 33. In Cooper's case a professional footballer was denied the cost of purchasing food and drink. His coach had instructed him to consume additional food, so he would not lose weight during the football season. The character of the expense was private. 34. In Cooper's case, Hill J said (FCR at 200; ATC at 4414; ATR at 1636): '...the fact that the employee is required, as a term of his employment, to incur a particular expenditure does not convert expenditure that is not incurred in the course of the income- producing operations into a deductible outgoing.' The Commissioner's view on the deductibility of expenses in contracts is provided for in Taxation Determination TD 93/22 Income tax: is a professional sportsperson who is required to take out private health insurance entitled to a deduction for related contributions under subsection 51(1)? TD 93/22 provides that a deduction is not allowable whether or not the expense is a condition of employment. An example is provided which states: A professional footballer enters into a playing contract with a first grade rugby league club. A clause of the contract requires the player to take out private health insurance. The player is not allowed a deduction for contributions made to the health insurance fund. Although, the expense relates to a private expense (private health insurance) the contract did not create a nexus between the expense and the producing of employment income. Therefore, no nexus will exist solely for the fact that your employment contact requires you to do something. Therefore, it cannot be said that a nexus arises between the business expenses in your business and your employment income simply because the conditions in your employment contract require you to maintain industry experience. You can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income. There must be a sufficient nexus between your business expenses and the income derived from your employment. From the information provided, no business expenses were incurred to gain or produce the assessable income from your employment. Rather, the expenses were incurred in maintaining your business. Consequently, there is no nexus or connection between the expenses you incur in your business and the earning of your assessable income in your employment. The expenses incurred in your business will not be deductible under section 8-1 of the ITAA 1997.