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Are travel expenses incurred by a taxpayer in taking designs overseas to be manufactured an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. Travel expenses incurred by a taxpayer in taking designs overseas to be manufactured are an allowable deduction under section 8-1 of the ITAA 1997.

The taxpayer is a freelance designer. The taxpayer's manufactured designs are currently sold in gift shops throughout the taxpayer's home city. The designs are currently manufactured in Australia. The taxpayer intends to incur expenses travelling to a foreign country in order to arrange for the designs to be manufactured in that foreign country and brought back to Australia for sale. The taxpayer wishes to claim a deduction for the travel expenses.

Whether or not the expenses the taxpayer incurs in travelling overseas to have designs manufactured is governed by section 8-1 of the ITAA 1997.

To be deductible under subsection 8-1(1), a loss or outgoing must be relevant or incidental to gaining or producing assessable income. Alternatively, it must be part of the cost of carrying on a business in order to produce assessable income. To be deductible under this subsection, a loss or outgoing must have the essential character of a business or income-producing expense.

In this case, the taxpayer currently designs products which are then manufactured in Australia for sale. The taxpayer is planning to send designs overseas to be manufactured and then brought back to Australia for re-sale. The essential character of the expenditure is that of a loss or outgoing incurred in the gaining or production of assessable income. The taxpayer is not looking at opening new markets as there is already an established market, therefore, the expenditure could not be characterised as being capital in nature.

The travel expenses that are incurred in taking the designs overseas to the manufacturer would, therefore, be deductible.