Below is an extract from this paper that covers this often overlooked issue…
There are obviously circumstances where apportionment of the costs of self-education is required. One of the most common examples of this is the attendance at a work-related conference or seminar where there are both income-earning purposes and for private purposes. But when are we required to do this and how do we do this?
This Ruling (TR 98/9) states that if the income-earning purpose is merely incidental to the main private purpose, only the expenses which relate directly to the income-earning purpose are allowable. However, if the private purpose is merely incidental to the main income-earning purpose, apportionment is not appropriate.
So that begs a lot of questions, especially what is “merely incidental” so we can ensure that any private component of a trip does not mean deductions are lost. The second question arises if the private trip component is not “merely incidental” as we now need to consider how to apportion the costs between private and income producing.
This is an issue when a client wants to claim their airfares to a 3 day work conference, but the return flight occurred two weeks after the conference ended as the taxpayer spent two week holidaying in the same destination. Is a two week holiday following a 3 day educational course “merely incidental” and if it is not how do we apportion the costs of the flight?
On apportionment, this is the best the Ruling offers…
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.
But the answer to both what is “merely incidental” and how to apportion costs where the private component is not merely incidental is fleshed out in three examples in the Ruling.
8 day conference, 1 day sight-seeing: 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.
Half day conference in a longer holiday: 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.
Five day conference and a seven day holiday: 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.
One day private holiday at the end of a week’s work conference/education is merely incidental, and I would say that one weekend at the end of a week would also be merely incidental, so the entire flight costs are deductible.
Half a day’s work conference on a week long holiday means the work is merely incidental and so there is no deduction for the flight costs at all.
Where the holiday is for the same or more time than the conference, means an apportionment of the flight, probably based on days, is required and only part of the flight is deductible.
To be clear, from the example with Francesco above the Commissioner does not accept the argument that, just because I would have had to pay the flight cost to get to the conference even if I did not got on the holiday as well means I should be able to claim the entire cost as a deduction.
But his leads to a horror situation for employers…
An employer wants an employee to attend a week conference overseas and pays for the flights, meals, accommodation and conference fee. The conference is directly related to the employee’s current employment, so under the otherwise deductible rule, it appears there will be no FBT payable by the employer.
However, the employee convinces human resources to delay the return flight for a week to allow for the employee to travel in that area overseas. The employee convinced human resources to allow this as they would take annual leave for the extra week, and “it would not cost the employer anything to just move the $2,000 flight back a week”.
Unfortunately, the employee has provided human resources with incorrect tax advice as it will cost the employer a lot to do this. Now only half the airfare would be deductible if the employee paid for it, so half of the cost of the flight will now be the taxable value of a fringe benefit. This will mean an additional $887 will be payable by the employer in FBT just because the employer agreed to move the flight back a week.
This is just one way these FBT costs can arise where private travel is allowed to be attached to work/education paid for by employees. Another common example is where an employee convinces human resources to not send them to the conference on business class, but rather send their entire family to the conference on economy. They say it is the same cost, but this will create an FBT liability (sending the family to a holiday destination).
The solution is for employers not to allow this to occur, but allow one day (or a weekend) before or after any conference to allow the employee to recover from or prepare for the conference.
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