Work Related Expense Deductions Denied

The AATG has upheld the denial of approximately $60,000 of work related expense deductions for an employee mechanical engineer, and affirmed of a 25% administrative penalty on the tax shortfall due to the taxpayer’s lack of reasonable care.

The expense included motor vehicle expenses, self-education expenses and other work expenses (such as telecommunication costs and professional membership fees).

Many of the work-related expense deductions were disallowed because of lack of substantiation and./or lack of connection to any current income producing activity.

The 25% administrative penalty was also affirmed, primarily because the Tribunal found the taxpayer to be a very knowledgeable and academic who claimed significant deductions when compared to his income level.

Of interest, however, wee the comments made by the Tribunal with respect to the following two deduction claims.

  1. Motor Vehicle expense claims when carrying ‘confidential and sensitive’ material

The taxpayer claimed a $3,250 deduction for motor vehicle expenses on the basis he was required to transport ‘confidential and sensitive’ documents.

The tribunal disallowed these car expense claims, primarily on the basis that the employer’s evidence made no reference to any requirement to conduct such travel as part of his employment duties.

In addition, the tribunal found the ‘confidential’ nature of the material transported had no connection to the taxpayer’s employment, but rather was in relation to his own invention/patents he was developing (also, even if such a connection were established, no deduction would be allowable on that basis anyway).

Note: No evidence was produced to demonstrate that the material in question complied with the ‘bulky equipment’ travel company.

  1. Self-education costs relating to developing an invention

The taxpayer also claimed over $48,000 of self-education expenses for items (including instrumentation equipment) he used in developing intellectual property and an associated prototype and patient, which he intended to personally license to another company.

When disallowing the relevant expenses relating to the development of the taxpayer’s invention, the tribunal found they had no connection to the taxpayer’s income earning activity (i.e., employment) or his PhD studies.

It also noted that an engineer engaged in developing a device “which, if it could be perfected, would enable a business to be commenced’”, was unlikely to be engaged in a business.

Thus, the taxpayer’s broad interpretation of ‘self-education’ in the context of him being an inventor and being entitled to a broad range of deductions when developing his inventions was rejected- again, there was no direct nexus to the taxpayer’s current income earning capacity.

Finally, the tribunal noted that, even if there were a nexus to assessable income, the expenses of developing a prototype and obtaining a patent would be capital in nature (and therefore non-deductable).

Ref: Vakiloroatya v FCT [2017] AATA 95

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