Such tales make us envious, skeptical, and more than a little confused. Just what is legitimate business travel that can be claimed as a tax deduction, and what is pushing the limit too far?
The golden rule is that purpose determines deductibility. In order for business travel costs –including flights, accommodation, meals and other expenditure – to be tax deductible, the purpose of the trip must be to earn your assessable income.
More specifically, you need to be attending a conference, convention or meeting that is related to how you make your money in order for its costs to be tax deductible.
You can also be undertaking a study tour of your industry or be meeting a series of experts in your field. Travel costs are deductible when incurred to increase or maintain an existing body of knowledge currently used to produce income.
For a doctor for example, this would include visits to medical institutions, clinics, hospitals and universities. For a business owner this could include travel to overseas universities to attend courses in negotiation, or communication, or management.
Purpose is key. It determines deductibility and not time. What this means is that if the purpose, being the dominant purpose, of the trip is to undertake deductible activities, but these activities take up only 50% of the trip, all of the expenses of the trip may still be deductible if the purpose argument can be proven.
This is where records rule. Records prove purpose, and purpose is determined objectively. It is essential to document your business purposes before, during and after travel.
This will include itineraries, emails explaining the nature of your trip and why you are going, trip evaluations and reports, and presentations of learnings when you return. A detailed travel diary and invoices are also essential for substantiation of amounts.
Documentation must be contemporaneous with the trip and third party documentation is valuable.
A question arises where a trip has more than one purpose – to build professional knowledge and to go skiing, just as an example. This is where apportionment is required.
The costs will only be deductible to the extent that they relate to the professional development, and how the costs are apportioned will depend on the facts.
A half day of skiing between meetings may have no impact on deductibility – although claiming lift passes may be a stretch – but attending a meeting at the end of a week long stay in a lodge would infer that the purpose of the trip was not entirely business related and costs should be apportioned into a business and private component.
An accompanying spouse can suggest a private purpose, however this need not compromise deductibility. Again, deductibility depends on purpose and each trip will depend on its facts.
There is no set limit on how much you can spend. The Commissioner of Taxation cannot decide that you have overspent and reduce your claim on that basis. However, consider the impact any seemingly excessive spending may have on the purpose argument you are making.
Each case is different, and if in doubt the best rule is to document as much as possible and present this information to your tax expert at the time of preparing your return.
In summary, the key points to remember are:
• Purpose is king.
• Purpose must be related to your income earning activity.
• Document everything before and after the trip; and
• Apportion where necessary.
Kaylene Hubbard is Tax Director at KPMG GWS.
