Deductions - work related expenses incurred while employed overseas

Are work related expenses incurred by a taxpayer who was on a work exchange program in the United Kingdom deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) where the income from employment in the United Kingdom is exempt from tax under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

No, work related expenses incurred by the taxpayer while employed in a work exchange program in the United Kingdom relate to exempt income and are not deductible under section 8-1 of the ITAA 1997 unless the expenditure is related to, or provides an enduring benefit to the taxpayer's work in Australia.

The taxpayer was involved in a work exchange program with an organisation in the United Kingdom. The exchange allowed the taxpayer to undertake similar employment duties overseas to those in their current employment in Australia. The exchange was encouraged by the taxpayer's employer, who organised the necessary licences. Although not necessarily leading to an increase in income, the experience was beneficial to the taxpayer's career as a whole.

The taxpayer incurred work related expenses such as reference books, rail travel, parking fees, postage and stationery, professional expenses and dry cleaning.

The salary and wages derived by the taxpayer whilst in the United Kingdom is exempt income under section 23AG of the Income Tax Assessment Act 1936 .

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent that they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature or relate to the earning of exempt income.

The exclusion for expenditure that relates to the earning of exempt income is limited, however, in circumstances where the expenditure is related to, or provides an enduring benefit to work in Australia.

Rail travel, postage, stationary, professional expenses, dry cleaning and parking expenses are considered to be associated with the earning of exempt income and are therefore not allowable deductions under section 8-1 of the ITAA 1997. However, if expenditure is incurred on reference books for use in Australia, a deduction is allowable for that expenditure.