The "Worthless Spouse" - Tax Treatment of Companion Travel Expenses
In its February 2014 Tax Information Bulletin Inland Revenue (“IR”) published a new statement (QB 13/05) on the deductibility of companion travel expenses. Quietly posed as an answer to a question asked of IR, the statement updates and replaces two items published in 1973 and 1995 which apparently no longer reflect the Commissioner of Inland Revenue’s (“Commissioner”) interpretation of the law. The new statement starts from the position that case law supports a conclusion that the earlier statements are incorrect and that the costs of a companion (spouse, partner or other family member) travelling with a taxpayer, or an employee of a taxpayer, “on business” will seldom be deductible at all.
IR’s position is that a companion’s travel expenses can only be deductible if there is sufficient connection between the expenditure incurred and the taxpayer’s business activities. There is no magic in that – it is what the law requires. The problem is that IR has redefined what provides sufficient connection or nexus. Specifically, a companion’s travel expenses will not be deductible if the companion is accompanying the taxpayer simply for companionship and support or to attend social functions in the company of the taxpayer or the taxpayer’s employee. IR does not consider there to be a sufficient nexus with the taxpayer’s business or income earning activity in those instances. In the statement the Commissioner also withdraws her view that a companion’s travel expenses may be deductible if the companion’s presence is required because of the ill-health of their partner.
The Commissioner’s position is based primarily on, and supported by her interpretation of, two New Zealand Taxation Review Authority (“TRA”) cases: Case 16 (1964) 2 NZTBR 119 (a decision of the Taxation Board of Review as was) and Case K75 (1988) 10 NZTC 602. The analysis starts however with an excerpt from the decision of Richardson J in Haenga in which the Court of Appeal distinguished between deductible expenditure outlaid in the course of the income earning process and non deductible expenditure which, although enhancing a person’s ability to conduct business, is more properly characterized as personal consumption. The excerpt referred to the costs of travel to and from work and the costs of child care and went on to note that, unless lines were drawn, an argument could be made that basic items such as food, clothing and shelter could be seen as contributing to the earning of income. The Court noted that such an erosion of the income tax base could not have been contemplated when the nexus test was enacted.
The Haenga distinction is important in understanding the approach taken by IR but it is not clear that the right balance has been struck in this new pronouncement on companion travel expenses. It is pertinent to look first at the cases cited by the Commissioner.
In Case 16, the taxpayer’s wife accompanied him on a business trip to the UK. The husband was a shareholder and managing director of a company that carried on the business of importing and selling wines and spirits. The wife was also a shareholder and director, but not an employee, however, she had a personal standing and business interests in the alcohol industry in the UK. A dispute arose with one of the company’s main whisky distributors and both husband and wife travelled to the UK to meet with the dissatisfied distributor. The wife’s travel expenses were held to be deductible because:
Case K75 concerned the deductibility of travel expenditure incurred by wives accompanying their business executive husbands on a number of business trips, including to conferences. The wives assisted their husbands with networking and information gathering by meeting and assessing the integrity and competence of conference delegates, hosting dinners for business contacts and participating in discussions about the business. Judge Barber held that the expenditure was deductible and noted:
Based on her interpretation of these cases, the Commissioner’s position is now that for a companion to provide support to a “reasonably substantial degree, in undertaking the business of the employer” the companion must have some knowledge of the business or some special skill or expertise to provide this support in a material way. Simply being supportive is not enough; the support must relate to the business being undertaken for a sufficient nexus to exist. In essence the Commissioner seems to say that the costs of having a companion present during avowedly business related travel is personal consumption, in the sense that the support provided by the companion is inherently private unless some other element or activity exists which makes the presence of the spouse or partner more directly supportive of the business activity being undertaken, rather than of the business person undertaking it.
For the reasons referred to later in this note it is arguable that the Commissioner’s conclusion does not seem to be borne out by a close reading of the decisions she relies on, especially that in Case K75. It is doubtful, therefore, that the new statement correctly reflects the law.
Be that as it may, the Commissioner’s position reflects that taken in other jurisdictions:
The findings of fact by the TRA in Case K75 are informative and suggest that the Commissioner is unjustifiably narrowing the decision. In that decision Judge Barber noted a number of conclusions about the involvement of “Mrs G”, the wife of the company’s managing director. These included:
The Judge then went on to identify specifics that set Mrs G apart from what he termed a “mere travelling companion”, namely that she and the wives of her husband’s business colleagues ate, drank and slept the business of newspaper publishing. But those factors do not suggest that the Judge meant such a degree of involvement was required in every case in order to be able to show a “reasonably substantial” contribution which would justify the deduction of companion travel costs. Different businesses and professions will require and allow different degrees of involvement. What is important is to consider the outcomes that Judge Barber considered Mrs G had contributed in Case K75. He summarized again:
Judge Barber certainly noted that he had begun his analysis thinking that a spouse would seldom have sufficient knowledge or interest in the relevant business to warrant deductibility, but that observation is not part of the ratio of his decision or the factual findings he arrived at. The comment is also somewhat of its time and suggests he had in mind the dutiful wife who sees her husband off to his place of work without ever really knowing or caring much of what he does.
With respect, there are very many degrees to which one spouse or partner knows or understands the business objectives of the other. The objectives that Judge Barber identified as being sufficiently connected with business in Case K75 do not require in every case that a companion eat, drink and sleep his or her partner’s business. That was the position as found in that case but, put more generally, the questions or tests that arise from the decision are:
None of these necessarily requires that the companion must have some special skill or knowledge to justify deductibility of his or her travel expenses. Special knowledge certainly existed in the case of the well connected wife in Case 16 and the highly engaged newspaper publishers’ wives in Case K75. However that does not mean such knowledge must exist before a companion can contribute to the outcomes which, when expressed in the form of more general tests, Case K75 suggests warrant deductibility.
A balance will always be necessary. The Judge noted his satisfaction that none of the expenditure related to “a junket or joy-ride or holiday”, although he went on to statethat where a significant holiday or touring content existed there may be insufficient nexus to justify deductibility, or some apportionment may be required. That observation does not suggest that attendance at business-related social functions is necessarily insufficient companion involvement. It begs the question.
In the author’s view, the Commissioner’s position is shortsighted and unrealistic for a nation which relies on successful international connections. Anyone who has travelled alone on business outside New Zealand will have experienced the awkwardness that involves. The prospect of “working a room” alone can be daunting, especially if those whom one is trying to meet are accompanied. Anyone who has asked a spouse or partner whether involvement in such business-related activities is a junket or a joy-ride or a holiday will very probably have been disabused of that suggestion quickly.
Considering the matter on a broader scale, New Zealand has a small economy and outreach is critical to our long term economic prosperity. The tax system should encourage business activity or at least not impose costs where they need not be. Being geographically isolated, it is important that business people from New Zealand are able to travel in a cost effective manner, and with appropriate support. The loss of deductibility for companion travel costs adds unnecessarily to the costs of effective outreach.
Moreover, the Commissioner’s policy is tantamount to her saying that, unless a companion possesses the now required “special knowledge or skill”, his or her travel to be present at a business function in support of the taxpayer (or that person’s employer) is worthless in tax terms. That is because it is not sufficiently connected with the success of the business being represented to warrant tax recognition. Given the gender of the current Commissioner and that (despite progressively more gender balancing in business) most companions are supportive wives, the message as to their worth is more than a little surprising. However, the more pertinent issue is whether in the context of business-related activity it is realistic to regard the involvement of a companion as fundamentally a matter of personal consumption in the Haenga sense. When a person and their companion are away from home, often in a foreign environment, and in circles which require convivial social interaction in pursuit of business outcomes, it is debatable whether the companion’s value is truly personal or whether the business person and their companion take on a team function in the interests of the business. That seems to have been the sense in which Judge Barber considered the role of Mrs G. It is very probably the better view of most such companionship on business travel.
At a policy level there are also some anomalies that emerge from the statement. It is not clear, for instance, how the approach to companion travel expenses fits alongside the deductibility of business related entertainment expenses which of course includes food and drink. Such expenses incurred in New Zealand are subject to a 50% deduction but expenses incurred overseas are not. Is it required now that expenses related to meals consumed by a companion traveling on business should be wholly excluded form deduction, or does the statement deal only with the travel costs and nothing more? If it is the latter, then the deductibility for companion involvement in overseas business entertainment seems to be at odds with the assumptions underpinning the new travel cost rule. Similarly it is unclear how the treatment of companion travel costs equates with the FBT regime? There seems to be an uneasy and inconsistent connection between these different tax rules.
In an effort to prevent taxpayer subsidised junkets, which clearly ought not to be permitted, IR has failed to read and apply the authorities correctly. As a result has set the bar too high. It fundamentally undervalues the companion’s contribution to successful business by assuming that a companion’s social role is wholly related to supporting the business person with whom the companion is travelling, rather than supporting the achievement of business outcomes. IR ought to rethink this matter urgently and, if it does not, it can expect its position to be tested.
© G D Clews 2014
 TIB Vol 26, No1, February 2014
 “Deduction for Wife’s Expenses – Professional People Attending Overseas Conferences” Public Information Bulletin No 74, p 10 (June 1973) and part of the item “Overseas Travel Expenses Claims” Tax Information Bulletin Vol.7, No. 2 (August 1995).
 CIR v Haenga  1 NZLR 119 (CA)
 See generally at p 611
 At p 613
 At p 614