Private ruling: Fringe benefits tax – travel expenses - otherwise deductible rules
Date of advice: 4 September 2017
Published: December 2017
Ruling period: Year ended 31 March 2017
Date scheme commenced: 1 April 2016

Ruling: Q1: Does the ‘otherwise deductible’ rule under section 52 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) reduce the taxable value of the residual benefit arising from the provision of overseas travel airfares to nil in scenario 1? | A1: Yes. However, a tax-exempt body entertainment benefit will also arise from the provision of the flights. The taxable value of the tax-exempt body entertainment benefit will be 50% of the cost of the airfares. | Q2: Does the ‘otherwise deductible’ rule under section 52 of the FBTAA reduce the taxable value of the residual benefit, being the provision of overseas travel airfares to nil in scenario 2? | A2: Yes. | Q3: Does the ‘otherwise deductible’ rule under section 52 of the FBTAA reduce the taxable value of the residual benefit, being the provision of overseas travel airfares to nil in scenario 3? | A3: Yes. | Q4: Does the ‘otherwise deductible’ rule under section 52 of the FBTAA reduce the taxable value of the residual benefit, being the provision of overseas travel airfares to nil in scenario 4? | A4: Yes. | Q5: Does the ‘otherwise deductible’ rule under section 52 of the FBTAA reduce the taxable value of the residual benefit, being the provision of overseas travel airfares to nil in scenario 5? | A5: Yes. | Q6: Does the ‘otherwise deductible’ rule under section 52 of the FBTAA reduce the taxable value of the residual benefit arising from the provision of overseas travel airfares to nil in scenario 6? | A6: Yes. However, a tax-exempt body entertainment benefit will also arise from the provision of the flights. The taxable value of the tax-exempt body entertainment benefit will be 50% of the cost of the airfares. | Q7: Does the ‘otherwise deductible’ rule under section 52 of the FBTAA reduce the taxable value of the residual benefit, being the provision of overseas travel airfares to nil in scenario 7? | A7: Yes. | Q8: Does the ‘otherwise deductible’ rule under section 52 of the FBTAA reduce the taxable value of the residual benefit, being the provision of overseas travel airfares to nil in scenario 8? | A8: Yes.

Relevant facts and circumstances: 1. The taxpayer is an income tax exempt organisation. 2. The taxpayer’s employees travel to various destinations both domestically and overseas in order to impart their knowledge and provide training related to their job. 3. The taxpayer pays for the airfares of its employees if the expense is incurred for the employee to fulfil their employment obligation. 4. The taxpayer incurs the airfare costs. The taxpayer appoints a travel agent (the Travel Partner) who makes travel arrangements for its staff and the cost of airfares is invoiced to the taxpayer. The travel arrangements have been made on an arm’s length basis. 5. The employee of the taxpayer will generally travel in economy class. 6. The taxpayer’s internal travel policy requires that no additional costs be incurred if the employee decides to take leave entitlements on route. The taxpayer will not bear any airfare and/or accommodation costs incurred by the employee where the employees choose to undertake any additional travel that it considers private in nature. 7. The taxpayer’s internal travel policy allows for the employee to have a recovery day to acclimatise when the employee travels to an overseas location. The policy also provides that where the employee travels on a weekend, the employee receives a day in lieu. 8. The employee pays for all meals, accommodation and other costs while on leave from their after-tax income. 9. The taxpayer insists on the completion of travel diaries in accordance of the FBTAA. In each of the below scenarios, there is a component of private and business travel. However, the taxpayer does not incur any additional airfare cost. Scenario 1 10. An employee travels to an overseas location to attend a business conference. 11. The employee arrived at the destination nine days before the conference began and took annual leave at his/her own expense. 12. The business conference was conducted over three days. 13. At the completion of the conference, the employee returned to his/her home location. Scenario 2 14. The employee travels to an overseas location to attend a business workshop. 15. The employee took annual leave at his/her own expense and arrived three days before the workshop. 16. The business workshop was conducted over three days. 17. At the completion of the workshop, the employee returned to his/her home location. Scenario 3 18. In this scenario, the employee travels to an overseas location to attend a business conference and workshop. 19. The employee arrived 1 day before the conference. 20. The business conference and workshop were conducted over 6 days. 21. At the completion of the conference, the employee returned to his/her home location. Scenario 4 22. In this scenario, the employee travels to an overseas location to attend a business conference. After the recover day, the employee attended the 5 day conference. 23. At the completion of the conference, the employee remained at the overseas location for three days (consisting of the weekend and one day annual leave at their own expense). Scenario 5 24. In this scenario, the employee travels to an interstate location to attend a business conference for 1 ½ days. 25. The employee remains interstate on the weekend immediately following the conference at his/her own expense. Scenario 6 26. In this scenario, the employee travels to Overseas Location A to attend a 4 day business conference. 27. At the completion of the conference, the employee travels on route to Overseas Location B for a holiday for three days (the weekend and an annual leave day). Scenario 7 28. In this scenario, the employee initially travels to Interstate Location A to attend a business conference. 29. At the completion of the business conference, the employee travels to Overseas Location B to attend a business workshop. However, the employee arrives a few days before the workshop began and takes annual leave. 30. At the completion of the workshop, the employee travels to Interstate Location C to attend another business conference and takes one day annual leave prior to the commencement of the conference. At completion of the conference the employee returned home. Scenario 8 31. In this scenario, the employee travels to an overseas location to attend a 2 day business conference. 32. At the completion of the conference, the employees took one day annual leave and remained at the overseas location at his/her own expense before returning home.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 section 20 | Fringe Benefits Tax Assessment Act 1986 section 24 | Fringe Benefits Tax Assessment Act 1986 section 38 | Fringe Benefits Tax Assessment Act 1986 section 39 | Fringe Benefits Tax Assessment Act 1986 section 45 | Fringe Benefit Tax Assessment Act 1986 section 52 | Fringe Benefits Tax Assessment Act 1986 section 136(1) | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 32-5 | Income Tax Assessment Act 1997 section 32-10

Reasons for decision: Detailed Reasoning - Detailed reasoning: 1. The definition of ‘fringe benefit’ is set out in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). In general terms, a fringe benefit will arise if the following conditions are satisfied: (i) there is ‘benefit’; (ii) the ‘benefit’ is provided to an employee or an associate of an employee; (iii) the ‘benefit’ is provided by the employer, an associate of the employer or a third party under an arrangement involving the employer or an associate; (iv) the ‘benefit’ is provided in respect of the employment of the employee; and (v) the ‘benefit’ is not one of the benefits specifically excluded from being a ‘fringe benefit’ by paragraphs (f) to (s) of the ‘fringe benefit’ definition. | Detailed Reasoning - (i) Is the flight a ‘benefit’?: “Benefit’ is defined in subsection 136(1) of the FBTAA to include: any right (including a right in relation to, and an interest in, real or personal property), privilege, service or facility As the provision of transport in an aircraft comes within this definition each of the flights will be a benefit. | Detailed Reasoning - (ii) Is the ‘benefit’ provided to an employee or an associate of an employee?: Each of the flights will be provided to an employee. (iii) Is the ‘benefit’ provided by the employer, an associate of the employer or a third party under an arrangement involving the employer or an associate? The flights will be provided by the employer. | Detailed Reasoning - (iv) Is the ‘benefit’ provided in respect of the employment of the employee?: ‘In respect of’ is defined in subsection 136(1) of the FBTAA to include: by reason of, by virtue of, or for or in relation directly or indirectly to, that employment The reason for the overseas travel being provided is related to the employee’s work. In this case, each employee's primary purpose for travelling was to attend a work related conference/workshop. This provides the necessary connection to the employment of the employee as he/ she is receiving the benefit because he/she is an employee. | Detailed Reasoning - (v) Is the ‘benefit’ specifically excluded from being a ‘fringe benefit’ by paragraphs (f) to (s) of the ‘fringe benefit’ definition?: Paragraphs (f) to (s) of the ‘fringe benefit’ definition do not apply to the flights. 2. To determine the taxable value of the fringe benefit that will arise from the provision of the flights it is necessary to initially consider the type of benefit that is being provided. The FBTAA is divided into 13 types of benefits. Each type has its own valuation rules. 3. For the purpose of this ruling, the relevant types to consider are: ● tax-exempt body entertainment benefits as defined in section 38; and ● residual benefits as defined in section 45. | Detailed Reasoning - Tax-exempt body entertainment benefit: 4. Tax-exempt body entertainment benefits are defined in section 38 of the FBTAA, which states: Where, at a particular time, a person (in this section referred to as the `` provider'') incurs non-deductible exempt entertainment expenditure that is wholly or partly in respect of the provision, in respect of the employment of an employee, of entertainment to a person (in this section referred to as the ` `recipient'') being the employee or an associate of the employee, the incurring of the expenditure shall be taken to constitute a benefit provided by the provider to the recipient at that time in respect of that employment. 5. The term ‘non-deductible exempt entertainment expenditure’ is defined in subsection 136(1) of the FBTAA to mean: non-deductible entertainment expenditure to the extent to which it is not incurred in producing assessable income. 6. Non-deductible entertainment expenditure is also defined in subsection 136(1) of the FBTAA as: a loss or outgoing to the extent to which: (a) section 32-5 of the Income Tax Assessment Act 1997 applies to it, or would apply if it were incurred in producing assessable income; and (b) apart from that section, it would be deductible under section 8-1 of that Act, or would be if it were incurred in producing assessable income; (on the assumption that section 32-20 of the Income Tax Assessment Act 1997 had not been enacted). 7. Section 32-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states: To the extent that you incur a loss or outgoing in respect of providing * entertainment, you cannot deduct it under section 8-1. However, there are exceptions, which are set out in Subdivision 32-B. 8. Therefore, a tax-exempt body entertainment benefit will arise where the following conditions are satisfied: (i) entertainment is provided to an employee (or an associate of an employee), (ii) the expenditure incurred in providing the entertainment was not incurred in producing assessable income, and (iii) section 32-5 of the ITAA 1997 would have prevented the person who incurred the expenditure from claiming an income tax deduction for the expenditure under section 8-1 of the ITAA 1997 if it had been incurred in producing assessable income disregarding section 32-20 of the ITAA 1997. 9. Subsection 136(1) of the FBTAA states that ‘entertainment has the meaning given by section 32-10 of the ITAA 1997. 10. Subsection 32-10(1) of the ITAA 1997 defines ‘entertainment’ as: (a) entertainment by way of food, drink or * recreation; or (b) accommodation or travel to do with providing entertainment by way of food, drink or * recreation. 11. Further section 995-1 of the ITAA 1997 defines recreation to include amusement, sport or similar leisure-time pursuits. 12. In interpreting the entertainment provisions contained in Division 32 of the ITAA 1997, it is also relevant to refer to the previous entertainment provisions that were contained within section 51AE of the Income Tax Assessment Act 1936 (ITAA 1936). 13. The term ‘provision of entertainment’ was defined in subsection 51AE(3) to mean: the provision (whether to the taxpayer or to another person and whether gratuitously, pursuant to an agreement or otherwise) of: (a) entertainment by way of food, drink or recreation; or (b) accommodation or travel in connection with, or for the purpose of facilitating, entertainment to which paragraph (a) applies (whether or not the accommodation or travel is also in connection with something else or for another purpose), whether or not- (c) business discussions or business transactions occur; (d) in connection with the working of overtime or otherwise in connection with the performance of the duties of any office or employment; (e) for the purposes of promotion or advertising; or (f) at or in connection with a seminar. 14. The Explanatory Memorandum to Taxation Laws Amendment Bill (No. 4) 1985, which introduced section 51AE included the following: Clause 9 proposes to insert new section 51AE in the Principal Act to introduce a general prohibition on the deduction of entertainment expenses. … Typical kinds of entertainment that will no longer attract deductibility include business lunches and drinks, dinners, cocktail parties, and staff social functions. Similarly, expenditure incurred in entertainment of staff, business associates, clients, etc., by way of sightseeing tours, access to sporting or theatrical events and hospitality provided to invited guests at such events as product launches or film premieres will not be deductible. … "recreation" is defined to include amusement, sport or similar leisure-time pursuits, and recreation or amusement provided on, or by means of, vehicles, vessels or aircraft, e.g., joy flights or sightseeing tours. … By paragraph (3)(b) accommodation or travel is to be treated as entertainment to the extent to which it is incidental to the provision of entertainment. As such the cost of travel and accommodation associated with, for example, entertaining a client over a weekend at a tourist resort would be subject to the operation of the entertainment expense prohibition. Costs associated with the use of aircraft, boats or vehicles directly in providing entertainment (e.g., by way of joy flights or sightseeing tours) are brought within the meaning of entertainment through the definition of recreation. 15. The Full Federal Court in FC of T v Amway of Australia Ltd FCFCA 273; 2004 ATC 4893, in discussing the meaning of ‘provision of entertainment’ in relation to amounts spent for accommodation, travel and other incidental expenditure incurred in relation to the holding of certain seminars, said at ATC 4909: 60. In modern Australian usage it may be said that the concept of ``to give pleasure'' and ``hospitality'' underlie the meaning of the word ``entertainment'' when used in connection with matters such as food or drink. Whether the provision of food or drink falls within the definition of the ``provision of entertainment'' is not, in our view, to be determined by reference to subjective matters such as the purpose of some person. Rather, it involves a matter of characterisation. What is required is that regard be had to the essential character of what is provided. Regard will need to be had to all the relevant circumstances such as the locale where the food or drink is provided, the quality of the food or drink, the occasion for its provision, its cost and its nature. Clearly expenditure on the gala dinner would be entertainment. Indeed counsel for Amway did not suggest otherwise. By contrast the provision during a working session by an employer of sandwiches or coffee and tea to an employee would not be. Each item of expenditure would need to be considered having regard to all the circumstances. … 61. The question of deductibility of accommodation and travel expenses is perhaps more difficult. 62. Clause (b) of s 51AE(3) has two limbs. The first requires consideration of whether the provision of accommodation or travel is ``in connection with'' the entertainment or perhaps the provision of entertainment by way of food, drink or recreation. Only the second limb requires consideration of purpose. The relevant purpose is the facilitation of such entertainment. 63. The first limb requires, as already noted, a connection. The Commissioner submits that the word ``connection'' requires merely that there be a relationship of some sort between the provision of the accommodation or travel and the relevant entertainment. For Amway, it is submitted that the connection must be one which is substantial and not remote. 64. As the learned Primary Judge pointed out, the meaning of the word ``connection'' will always depend upon the context in which it appears. His Honour referred to Workers Compensation Board of Queensland v Technical Products Pty Ltd (1988) 165 CLR 642 at 653-654, FC of T v Scully 2000 ATC 4111 at 4121; (2000) 201 CLR 148 at 171 and Minister for Immigration and Multicultural Affairs v Singh (2000) 98 FCR 469 at 477. We agree. 65. In its broadest sense connection signifies any relationship between two subject matters no matter how remote. If the word connection is used in a very broad sense there would seem little point in the alternative limb of paragraph (b) as accommodation or travel for the purpose of facilitating the entertainment, could be seen to have at least a remote connection with that entertainment. It may be accepted, as the Commissioner submits, that the connection must be proximate. A remote connection will not suffice. Rather what is required is a substantial connection between the provision of accommodation or travel on the one hand and entertainment on the other. 66. It may be noted here that the legislature has made it clear that the provision of accommodation or travel may fall within the definition whether or not the travel is at or in connection with a seminar. Clearly, however, not all travel or accommodation which is at or in connection with a seminar was intended to be excluded from deductibility. Were it otherwise the subsection would be differently drafted. What is required is that there be a real relationship between the provision of accommodation or travel on the one hand, and the entertainment by way of food, drink or recreation which is provided to the recipient of the accommodation or travel to a seminar on the other hand. It is arguable that that connection exists in the present case. However, as will be seen, we do not find it necessary to decide the question. 67. The second limb is concerned with the purpose of the provision of accommodation or travel. With respect to the learned Primary Judge, we do not see that purpose is relevant to the first limb. It is only relevant to the second limb. We think the better view is that the purpose referred to in paragraph (b) is to be ascribed objectively rather than subjectively, that is to say that the relevant purpose is to be inferred from the objective circumstances. It is not necessary for the Commissioner to reach into the mind of the provider to ascertain purpose. 68. Prima facie, a reading of paragraph (b) suggests that the enquiry is to be directed at ascertaining the sole purpose of the provision of accommodation or travel. However, the fact that the subsection continues to provide that expenditure may fall within the definition whether or not it is ``for the purposes of promotion or advertising'' would suggest that the words ``the purpose'' do not signify sole purpose but rather something less than that, unless paragraph (e) was not intended to apply to a case falling within paragraph (b). 16. Further guidance is provided by paragraphs 2 and 3 of Taxation Determination TD 94/55 Income tax: when does providing an item of property constitute the provision of entertainment within the meaning of subsection 32-10(1) of the Income Tax Assessment Act 1997? (TD 94/55), which state: 2. In determining whether providing an item of property constitutes the provision of entertainment, regard should be had to all the circumstances of the case. In particular, regard should be given to the character of the entertainment to be derived from the item of property provided. This character is distinct from the property itself and relates to the immediate and active use of the property. 3. In practice, the provision of entertainment can be determined by reference to the following characteristics: | Detailed Reasoning - * Timeliness: ● entertainment occurs soon after provision of the item of property; ● the usefulness of the item of property expires after consumption; or ● the item of property is returned at the completion of use. | Detailed Reasoning - * Direct Connection: There should be a direct connection between the item of property and the entertainment: ● the entertainment should arise from the use of the item of property; ● the entertainment is the expected outcome of the provision of the property. 17. In applying these guidelines to the provision of flights, it can be concluded that entertainment will not arise whenever flights are provided. However, the provision of flights will constitute the provision of entertainment where: ● it is something affording diversion, amusement or is a leisure-time pursuit (paragraph 32-10(1)(a) of the ITAA 1997); or ● has the necessary connection with the provision of entertainment (paragraph 32-10(1)(b) of the ITAA 1997). 18. Flights provided to an employee whilst on holidays will come within both of these paragraphs as it is something affording diversion or amusement and it is to do with providing entertainment by way of recreation. By contrast, flights provided solely for work related purposes will not come within either dot point. 19. Part 14.12 of Fringe benefits tax: a guide for employers states: When you give an employee a plane ticket for travel to a holiday destination … this will be entertainment … 20. Flights that are provided by an employer that serve to provide travel for a work related purpose and a private purpose (i.e. a holiday) will involve the provision of entertainment. By contrast, flights provided solely for a work-related purpose will not involve the provision of entertainment. 21. As you are an income tax exempt body, any entertainment expenditure will not be incurred in producing assessable income. 22. The tables in sections 32-30 to 32-50 of the ITAA 1997 set out the situations in which section 32-5 does not prevent a deduction being claimed for entertainment expenses. For example, item 2.1 of the table in section 32-35 enables a deduction to be claimed for providing food, drink, accommodation or travel to an individual that is reasonably incidental to the individual attending a seminar that goes for at least four hours. However, this exception does not apply if: ● the seminar is a business meeting; or ● the main purpose of the seminar is to promote or advertise a business or its goods or services; or ● the seminar’s main purpose is to provide entertainment at, or in connection with the seminar. 23. Although this section would apply in relation to the portion of the flight expenditure that relates to the employee’s attendance at the conference, if it is considered that the flight also provides entertainment, it will not apply to the portion of the flight expenditure that relates to the holiday. 24. From the information provided, none of these exceptions appear to apply to the portion of the flights that relate to private travel. 25. The expenditure can be apportioned with that portion that relates to a private purpose being a tax-exempt body entertainment benefit. Detailed reasoning in relation to this is contained later in these reasons. 26. Therefore, a tax-exempt body entertainment benefit can arise from the payment of the flight expenses. | Detailed Reasoning - Taxable value of the tax-exempt body entertainment fringe benefits: 27. The taxable value of a tax-exempt body entertainment benefit under section 39 of the FBTAA is the amount of the expenditure that is attributable to the provision of entertainment. This value cannot be reduced by the otherwise deductible rule. 28. Further, there is no provision in the FBTAA to allow the tax-exempt body entertainment fringe benefit to be reduced by an employee contribution. | Detailed Reasoning - Residual benefit: 29. Section 45 of the FBTAA provides that a residual benefit will arise if the benefit provided is not a benefit by virtue of a provision of Subdivision A of Division 2 to 11 of the FBTAA. 30. As airfare booking are performed through a travel agency and the taxpayer incurs the costs, a residual benefit will arise as it is not benefit by virtue of a provision of Subdivision A of the Division 2 to 11 of the FBTAA. 31. The taxpayer’s normal activity is not providing travel arrangements to the general public, therefore, the benefit would not be an in-house residual fringe benefit as it does not satisfy the definition an in-house residual fringe benefit in subsection 136(1) of the FBTAA. 32. The flights provided to the employees where the travel is either solely worked related or where the factors indicate that any private purpose was merely incidental to the work related purpose would be a non-period residual fringe benefit (i.e. being residual benefits not provided during a period of time). | Detailed Reasoning - Taxable value of residual fringe benefits: 33. The taxable value of an external non-period residual payment fringe benefit is determined under Section 50 of the FBTAA which states as follows: Subject to this Part, the taxable value of an external non-period residual benefit in relation to an employer in relation a year of tax is: (a) Where the provider was the employer or an associate of the employer and the benefit was purchased by the provider under an arm's length transaction - the amount paid or payable by the provider for the benefit; (b) where the provider was not the employer or an associate of the employer and the employer, or an associate of the employer, incurred expenditure to the provider under an arm's length transaction in respect of the provision of the benefit - the amount of that expenditure; or (c) in any other case - the notional value of the benefit at the comparison time; reduced by the amount the recipients contribution. 34. In simple terms, where the provider purchased the benefit from a third party under an arm’s length transaction, the taxable value of the benefit is the amount paid by the provider. In your case, the taxable value would be amount you paid to the travel agent in relation to the business related portion. | Detailed Reasoning - Otherwise deductible rule: 35. The taxable value of a residual fringe benefit may be reduced in accordance with the otherwise deductible rule (ODR) under section 52 of the FBTAA. 36. Subsection 52(1) of the FBTAA permits a reduction of the taxable value of a residual fringe benefit under the otherwise deductible rule where all the necessary conditions of that section are met. 37. Broadly, this means that the taxable value may be reduced by an amount an employee would hypothetically have been entitled to claim as an income tax deduction if the employee had incurred and paid unreimbursed expenditure in respect of the provision of the benefit. 38. However, the ODR only applies where the employee would have been entitled to a once-only deduction for the expenditure paid or reimbursed by the employer. A once-only deduction is defined, in subsection 136(1) of the FBTAA, to mean one that is wholly or partly allowable under the income tax law in only one year (for example, this would exclude deductions for depreciation expenses). 39. The employee must supply a residual benefit declaration to the employer each year prior to lodgement of the relevant FBT return to substantiate the extent to which the residual fringe benefit would have been otherwise deductible to the employee except where a travel diary is required. 40. Subsection 52(1)(d) provides that where the benefit is an extended travel residual benefit as defined in subsection 136(1) of the FBTAA, the recipient needs to give a travel diary to the employer in relation to the travel undertaken by the employee. The requirement of a travel diary is set out in subsection 136(1) of the FBTAA. | Detailed Reasoning - Deductibility of expenses: 41. Section 8-1 of the ITAA 1997 allows a deduction for a loss or outgoing to the extent that it is incurred in gaining or producing assessable income. 42. However, no deduction is allowed for losses or outgoings to the extent to which they are of a capital, private or domestic nature or are incurred in gaining or producing exempt income non assessable non-exempt income, or are otherwise prevented from being deductible by a specific provision of the tax Acts. 43. For any deduction to be allowable under section 8-1 of the ITAA 1997 there must be a real and direct connection between the outgoing and the gaining of assessable income, so that the outgoing is incidental and relevant to the actual activities that gain assessable income. 44. The Commissioner sets out his view in TR 2017/D6 Income tax and fringe benefits tax: when are deductions allowed for employees’ travel expenses? To be deductible the travel must be undertaken in performing the employee’s work activities. Factors to consider in determining whether travel is undertaken in performing an employee’s work activities include the following: ● whether the work activities require the employee to undertake the travel ● whether the employee is paid, directly or indirectly to undertake the travel ● whether the employee is subject to the direction and control of their employer for the period of the travel and ● whether the above factors have been contrived to give a private journey the appearance of work travel. 45. Paragraph 46 of TR 2017/D6 states that in some cases, it can be concluded that the travel is undertaken in performing the employee’s work activities without referring to the specific terms of employment, and one of these examples is short-term travel to a temporary, alternative work location, which is relevant in your scenarios. | Detailed Reasoning - Apportionment of business and private: 46. Paragraph 17 of TR 2017/D6 provides: Where travel expenses are incurred in performing the employee's work activities and no part of them is of a private, domestic or capital nature, expenses are fully deductible. To the extent that any part of the expenses are of a private or domestic nature, the expenses must be apportioned - unless the private or domestic element is merely incidental to gaining or producing the employee's assessable employment income. 47. Examples 7 and 8 of TR 2017/D6 provide situations where there is private component in the short-term travel to a temporary alternative work location. Those examples illustrate that where the private component is merely incidental to the work related component and is able to be accommodated as part of that travel at no additional cost to the employer, the cost of the flights need not be apportioned. However, apportionment is required where the private component is more than incidental. 48. Taxation Ruling 98/9 Income tax: deductibility of self-education expenses incurred by an employee or a person in business (TR 98/9) paragraph 64 states that if the purpose of a study tour or attendance at a work related conference or seminar is the gaining or producing of assessable income, the existence of an incidental private purpose does not affect the characterisation of the expenses as wholly incurred in gaining assessable income. 49. Further paragraphs 65 and 66 of TR 98/9 explained when apportionment is required: 65. Both Ronpibon Tin NL (78 CLR at 59; 8 ATD at 437) and Fletcher & Ors (173 CLR at 16; 91 ATC at 4957; 22 ATR at 621) recognise there are at least two kinds of expenditure that require apportionment under section 8-1. The first is expenditure in respect of a matter where distinct and severable parts are devoted to gaining income and other parts are devoted to some other end. If a study tour or work-related conference or seminar was mainly devoted to a private purpose, such as having a holiday, and the gaining or producing of income was merely incidental to the private purpose, only those expenses directly attributable to the income-earning purpose would be allowable. 66. The second kind of apportionable expenditure is a single outlay that serves both an income-earning purpose and some other purpose indifferently. While the High Court recognised that there can be no precise arithmetical division in such cases, it said there must be some fair and reasonable division on the facts of each case. For example, if a study tour or work-related conference or seminar is undertaken equally for income-earning purposes and private purposes, it would be appropriate to apportion the expenses equally between the purposes. 50. TR 98/9 provides examples indicating that where overseas travel serves both business and private purposes equally, expenses of a single outlay should be apportioned. The examples in paragraphs 67 to 70 of TR 98/9 are listed below: 67. Example: Glenn, a qualified architect, attends an eight-day work-related conference in Hawaii on trends in modern architecture. One day of the conference involves a sight-seeing tour of the island and a game of golf is held on the final afternoon of the conference. As the main purpose of attending the conference is the gaining or producing of income, the total cost of the conference (air fares, accommodation and meals) is allowable. 68. The existence of private pursuits, such as the island tour and the game of golf, is purely incidental to the main purpose and does not affect the characterisation of the conference expenses as wholly incurred in gaining assessable income. 69. Example: Jenny, a doctor, was holidaying in Cairns when she became aware of a work-related seminar on the current treatment of cancer patients. The cost of the half-day seminar was $200. Jenny is able to claim a deduction for the cost of the seminar because it is directly attributable to an income-earning purpose. However, no part of her air fare to Cairns or her holiday accommodation is an allowable deduction. 70. Example: Francesco, a paediatrician, has 2 equal purposes when he decides to attend a five-day international conference on paediatrics in Singapore to be followed by a seven-day holiday in Thailand. The conference package is $2,500 ($1,000 return air fare, $500 for the cost of the conference and $1,000 for accommodation and meals at the conference venue). Francesco paid another $2,000 for accommodation, meals and car hire for the 7 day holiday in Thailand. Francesco is allowed a deduction of $1,500 for the conference cost and the accommodation and meals expenses at the conference. Only half of the return air fare ($500) is allowed as the expense was incurred for two equal purposes, one income-earning and the other private. The other expenditure of $2,000 relating to the holiday in Thailand is private in nature and not allowable as a deduction. 51. The question of apportionment was discussed in Case R13 84 ATC 168; 27 CTBR (NS) Case 64 (Case R13). In that case, a dentist spent six weeks overseas, five days of which were spent at a Dental Congress in Paris and the rest of the time was spent sightseeing. The trip was undertaken by the taxpayer with two objects in mind - attending the Dental Congress and having a holiday. The airfare served both objects, however only the first object qualified the expense as deduction. The Commissioner apportioned the expenditure on the airfares on a time basis and allowed the taxpayer a deduction of 5/40ths of the airfare which represented the five days spent at the Congress. However, the Administrative Appeals Tribunal held that the proper method of apportioning the expense was to determine the degree of predominance attached to each object. In this case, each object was of equal weight and therefore, one-half of the airfare was allowed as a deduction. | Detailed Reasoning - What type of benefit will be provided if the flight has both business and private purposes?: 52. As discussed above, a tax-exempt body entertainment fringe benefit will arise where the flight is solely for private purposes and a residual fringe benefit will arise where the flight is solely provided for work purposes. 53. The issue raised in your ruling application requires us to determine what type of benefit will be provided where the benefit (e.g. a flight) is provided to enable the employee to undertake their employment duties and have a holiday? 54. Guidance for determining the answer to this question is provided by the valuation rule for tax-exempt body entertainment benefits in section 39 of the FBTAA. Section 39 states: … the taxable value of a tax-exempt body entertainment fringe benefit … is so much of the expenditure referred to in section 38 as is attributable to the provision of the entertainment referred to in that section. 55. This indicates that if the expenditure has a dual purpose the expenditure can be apportioned with the portion that relates to the private travel being a tax-exempt body entertainment benefit and the balance being a residual benefit. 56. Support for this approach is provided by section 32-5 of the ITAA 1997 and the definition of ‘non-deductible entertainment expenditure’ in subsection 136(1) of the FBTAA. 57. Section 32-5 of the ITAA 1997, which restricts deductions that can be claimed for entertainment expenses, begins with the phrase ‘To the extent’. This indicates that the expenditure can be apportioned, and that section 32-5 does not prevent an income tax deduction being claimed for the portion that is not in respect of the provision of entertainment. 58. Similarly, the definition of ‘non-deductible entertainment expenditure’ in subsection 136(1) of the FBTAA refers to a loss or outgoing ‘to the extent’ to which section 32-5 of the ITAA applies to it. 59. In summary: ● a residual fringe benefit will arise from the flight expenditure where the expenses are either solely work related or where the factors indicate that any private purpose was merely incidental to the work related purpose; ● a tax-exempt body entertainment benefit will arise from the flight expenditure where the expenses are either solely private or where the factors indicate that any work related purpose was merely incidental to the private purpose; and ● both a residual benefit and a tax-exempt body entertainment benefit will arise if the flights are provided equally for work related purposes and private purposes. In such a situation, it is appropriate to apportion the expenses equally between the two purposes | Detailed Reasoning - Detailed reasoning: 60. In this scenario, the employee travels to an overseas location to attend a three day business conference. However, the employee arrived nine days early for a private holiday. 61. It is considered that having a nine day holiday prior to attending the conference is more than an incidental private purpose. There is a dual purpose to the trip, one relating to work and the other being private in nature. Consequently, it is necessary to apportion the airfare expenses incurred between the two purposes. 62. Therefore 50% of the cost of the airfare would be a residual fringe benefit and the taxable value of it will be half of the cost of the airfares. The taxable value of the residual benefit can be reduced to nil under the 'otherwise deductible rule’, as the residual benefit only relates to the work related portion of the travel. 63. The remaining 50% of the cost of the airfare would be a tax-exempt body entertainment benefit, and the taxable value is 50% of the cost of the airfares. 64. As discussed, the taxable value of the tax-exempt body entertainment benefit could not be reduced by the otherwise deductible rule. 65. Further, the taxable value of the tax-exempt body entertainment benefit could not be reduced by any employee contribution. As a result, no matter what percentage the employees reimburse the taxpayer in relation to the airfare cost, the taxable value of the tax-exempt body entertainment benefit would remain the same. | Detailed Reasoning - For your information: 66. In a situation where the employee incurs and pays for the airfare cost in advance and the taxpayer subsequently reimburses the work related component of that expenditure to the employee (e.g. 50% of the airfare cost in this scenario), the benefit would be an expense payment fringe benefit under section 20 of the FBTAA. 67. Further, provided that the employer only reimburses the work related portion of the expenditure, the taxable value of the expense payment fringe benefit may be reduced to nil under the otherwise deductible rule under section 24 of the FBTAA provided the requirements in that section are satisfied. Further, in this situation, in relation to the travel expense, the employer does not provide a tax-exempt body entertainment fringe benefit. 68. Please note that you could seek further advice from the Commissioner in relation to your fringe benefits tax obligation should you provide benefits under alternative arrangements. | Detailed Reasoning - Detailed reasoning: 69. In this scenario, the employee travels to an overseas location to attend a three day business conference. However, the employee arrived three days early for a private holiday. 70. In this scenario, the additional time spent in the overseas location is considered incidental to the work related travel component. As the private purpose of travel is incidental, it will not affect the expense from being allowed in full which is confirmed in paragraph 64 of TR 98/9 which states as follows: If the purpose of a study tour or attendance at a work-related conference or seminar is the gaining or producing of income, the existence of an incidental private purpose does not affect the characterisation of the related expenses as wholly incurred in gaining assessable income. 71. It is considered that if the employee incurred the airfare expense the full cost is deductible under section 8-1 of the ITAA 1997. 72. Therefore, the full cost of the airfare expense would be a residual fringe benefit and the taxable value of it will be reduced to nil under the ‘otherwise deductible rule’. | Detailed Reasoning - Detailed reasoning: 73. In this scenario, the employee travels to an overseas location to attend a business conference. The employee arrived one day before the conference to recover from jet lag. 74. In this scenario, the additional time (recover day) spent in the overseas location is incidental to the work related travel component. As the private purpose of travel is incidental, it will not affect the expense from being deducted in full which is confirmed in paragraph 64 of TR 98/9 which states as follows: If the purpose of a study tour or attendance at a work-related conference or seminar is the gaining or producing of income, the existence of an incidental private purpose does not affect the characterisation of the related expenses as wholly incurred in gaining assessable income. 75. It is considered that if the employee incurred the airfare expense the full cost is deductible under section 8-1 of the ITAA 1997. 76. Therefore, the full cost of the airfare expense would be a residual fringe benefit and the taxable value of it will be reduced to nil under the ‘otherwise deductible rule’. | Detailed Reasoning - Detailed reasoning: 77. In this scenario, the employee travels to an overseas location to attend a five day business conference. The employee remained in the location for 3 days (weekend and an annual leave day). 78. In this scenario, the additional time spent in the overseas location is incidental to the work related travel component. As the private purpose of travel is incidental, it will not affect the expense from being allowed in full which is confirmed in paragraph 64 of TR 98/9 which states as follows: If the purpose of a study tour or attendance at a work-related conference or seminar is the gaining or producing of income, the existence of an incidental private purpose does not affect the characterisation of the related expenses as wholly incurred in gaining assessable income. 79. It is considered that if the employee incurred the airfare expense the full cost is deductible under section 8-1 of the ITAA 1997. 80. Therefore, the full cost of the airfare expense would be a residual fringe benefit and the taxable value of it will be reduced to nil under the ‘otherwise deductible rule’. | Detailed Reasoning - Detailed reasoning: 81. In this scenario, the employee travels to an interstate location to attend a business conference. The employee remained in the interstate location for the weekend following the conference. 82. In this scenario, the additional time spent in the interstate location is incidental to the work related travel component. As the private purpose of travel is incidental, it will not affect the expense from being allowed in full which is confirmed in paragraph 64 of TR 98/9 which states as follows: If the purpose of a study tour or attendance at a work-related conference or seminar is the gaining or producing of income, the existence of an incidental private purpose does not affect the characterisation of the related expenses as wholly incurred in gaining assessable income. 83. It is considered that if the employee incurred the airfare expense the full cost is deductible under section 8-1 of the ITAA 1997. 84. Therefore, the full cost of the airfare expense would be a residual fringe benefit and the taxable value of it will be reduced to nil under the ‘otherwise deductible rule’. | Detailed Reasoning - Detailed reasoning: 85. In this scenario, the employee travels to Overseas Location A to attend a business conference. However, after the conference, the employee travelled to Overseas Location B for a private holiday. 86. It is considered that having a holiday after attending a conference at another location is more than an incidental private purpose. There is a dual purpose to the trip, one relating to work and the other being private in nature. Consequently, it is necessary to apportion the airfare expenses incurred between the two purposes. 87. Therefore 50% of the cost of the airfare would be a residual fringe benefit and the taxable value of it will be half of the cost of the airfares. The taxable value can be reduced to nil under the 'otherwise deductible rule’, as the residual benefit only relates to the work related portion of the travel. 88. The remaining 50% of the cost of the airfare would be a tax-exempt body entertainment benefit, and the taxable value is 50% of the cost of the airfares. 89. As discussed, the taxable value of the tax-exempt body entertainment benefit could not be reduced by the otherwise deductible rule. 90. Further, the taxable value of the tax-exempt body entertainment benefit could not be reduced by any employee contribution. As a result, no matter what percentage the employees repay the taxpayer in relation to the airfare cost, the taxable value of the tax-exempt body entertainment benefit would remain the same. | Detailed Reasoning - For your information: 91. In the situation where the employee incurs and pays for the airfare cost in advance and the taxpayer subsequently reimburses the work related component of that expenditure to the employee (i.e. 50% of airfare cost in this scenario), the benefit would be an expense payment fringe benefit under section 20 of the FBTAA. 92. Further, provided that the employer only reimburses the work related portion of the expenditure, the taxable value of the expense payment fringe benefit may be reduced to nil under the otherwise deductible rule under section 24 of the FBTAA provided the requirements in that section are satisfied. Further, in this situation, in relation to the travel expense, the employer does not provide a tax-exempt body entertainment fringe benefit. 93. Please note that you could seek further advice from the Commissioner in relation to your fringe benefits tax obligation should you provide benefits under alternative arrangements. | Detailed Reasoning - Detailed reasoning: 94. In this scenario, the employee travels to different locations to attend business conferences and a workshop within a period of time. The employee took annual leave to fill in the gap between those business activities. 95. From the facts provided the employee's purpose of the trip is to attend the business conferences/ workshops in the different locations. The taxpayer’s costs are minimised as they are not required to incur additional airfares if the employee were to return home between activities. 96. It is considered that the primary purpose for the travel is to attend work activities in different locations and the fact that the employee takes leave in between those activities is incidental to the purpose for the trip. As the private purpose of travel is incidental, it will not affect the expense from being allowed in full which is confirmed in paragraph 64 of TR 98/9 which states as follows: If the purpose of a study tour or attendance at a work-related conference or seminar is the gaining or producing of income, the existence of an incidental private purpose does not affect the characterisation of the related expenses as wholly incurred in gaining assessable income. 97. It is considered that if the employee incurred the airfare expense the full cost is deductible under section 8-1 of the ITAA 1997. 98. Therefore, the full cost of the airfare expense would be a residual fringe benefit and the taxable of it will be reduced to nil under the ‘otherwise deductible rule’. | Detailed Reasoning - Detailed reasoning: 99. In this scenario, the employee travels to an overseas location to attend a business conference. The employee remained there for one day before returning home. 100. It is considered that the primary purpose for the travel is to attend the business conference. As the private purpose of the travel is incidental, it will not affect the expense from being allowed in full which is confirmed in paragraph 64 of TR 98/9 which states as follows: If the purpose of a study tour or attendance at a work-related conference or seminar is the gaining or producing of income, the existence of an incidental private purpose does not affect the characterisation of the related expenses as wholly incurred in gaining assessable income. 101. It is considered that if the employee incurred the airfare expense the full cost is deductible under section 8-1 of the ITAA 1997. 102. Therefore, the full cost of the airfare expense would be a residual fringe benefit and the taxable of it will be reduced to nil under the ‘otherwise deductible rule’.