general deductions australian law

7/27/2019 General Deductions Australian Law

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Foundations of Taxation Law

GENERAL DEDUCTIONS

Chapter 16


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Foundations of Taxation Law[16.1](a) Foundations of Taxation Law CCH Australia Limited

Section 8-1 (positive limbs)You can deduct from your assessable income any loss

or outgoing to the extent that:

It is incurred in gaining or producing your assessableincome

It is necessarily incurred in carrying on a businessfor the purpose of gaining or producing yourassessable income


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Foundations of Taxation Law[16.1](b) Foundations of Taxation Law CCH Australia Limited

Section 8-1 (negative limbs)

However, you cannot cannot deduct a loss or outgoingunder this section to the extent that:

It is a loss or outgoing of capital, or of a capitalnature

It is a loss or outgoing of a private or domesticnature

It is incurred in relation to gaining or producing yourexempt income or non-assessable non-exemptincome

A provision of this Act prevents you from deductingit


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Loss or outgoing

Loss arises where taxpayers financial resourcesdiminished

Outgoing involves some form of payment, outlay orexpenditure


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Apportionment

To the extent that indicates a loss or outgoing mayneed to be apportioned

there are at least two kinds of items of expenditurethat require apportionment. One kind consists in

undivided items of expenditure in respect of things orservices of which distinct and severable parts aredevoted to gaining or producing assessable income anddistinct and severable parts to some other cause. The other kind of apportionable items consists in thoseinvolving a single outlay or charge which serves bothobjects indifferently. (Ronpibon Tin)


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Nexus requirement There must be a sufficient nexus between a loss or

outgoing and: the gaining or production of the taxpayers assessable

income, or

the carrying on of the taxpayers business

Particular losses and outgoings are not required to bematched to specific amounts of assessable income

For a loss or outgoing to be deductible in a year, it doesnot necessarily have to produce income in that year it

is sufficient if it is designed to earn income in futureyears


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Nexus requirement (cont) It is not necessary to show a connection between an

outgoing and any particular item of income it issufficient if the outgoing is a step towards theproduction of income (Ash)


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Foundations of Taxation Law[16.3](c) Foundations of Taxation Law CCH Australia Limited

In the course of

The expression in gaining or producing has the forceof in the course of gaining or producing and looksrather to the scope of the operations or activities andthe relevance thereto of the expenditure than topurpose in itself. (Amalgamated Zinc)


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Foundations of Taxation Law[16.3](d) Foundations of Taxation Law CCH Australia Limited

Incidental and relevant

For expenditure to form an allowable deduction as anoutgoing incurred in gaining or producing theassessable income it must be incidental and relevant tothat end. ... [I]t is both sufficient and necessary thatthe occasion of the loss or outgoing should be found in

whatever is productive of the assessable income or, ifnone be produced, would be expected to produceassessable income. (Ronpibon)


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Foundations of Taxation Law[16.3](e) Foundations of Taxation Law CCH Australia Limited

Essential character For an outgoing to satisfy the positive limbs it must

have the essential character of a working orbusiness expense (Lunney)

Courts traditionally characterise outgoings by referenceto legal rights or advantages a taxpayer obtains from

incurring the expenditure (Cecil Bros, Phillips) Courts are prepared to also take subjective criteria into

account to characterise voluntary outgoings where theincome produced is less than the amount of the

outgoings (Ure, Fletcher)


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Foundations of Taxation Law[16.3](f) Foundations of Taxation Law CCH Australia Limited

Necessarily incurred in carrying ona business

An outgoing is necessarily incurred in carrying on abusiness if it is dictated by the business ends to whichit is directed (Snowden & Willson)

The requirement that the claimed outgoing benecessarily incurred in carrying on the relevant businessdoes not, in the context, mean that the outgoing mustbe either unavoidable or essentially necessary. Nordoes the word necessarily import a requisite of logicalnecessity. What is required is that the relevant

expenditure be appropriate and adapted for the ends ofthe business carried on for the purpose of earningassessable income.(Magna Alloys)


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Foundations of Taxation Law[16.3](g) Foundations of Taxation Law CCH Australia Limited

Temporal connection Losses or outgoings that are preliminary to the

commencement of an income-producing or businessactivity are not incurred in the course of such activityso are not deductible (Softwood Pulp, Griffin, GoodmanFielder Wattie)

Provided the occasion of a loss or outgoing can betraced to business operations that were formerly carriedon by the taxpayer for the purpose of gainingassessable income, loss or outgoing is usuallydeductible (Placer, Brown, Jones)


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Firstnegativelimb capital Once and for all test: expenditureincurred once and

for all is usually capital in nature; expenditure incurredregularly is usually revenue in nature (VallambrossaRubber)

Enduring benefit test: expenditure incurred to bring

into existence an asset of a lasting nature is usuallycapital in nature (British Insulated & Helsby Cables)

Business entity test: expenditure that relates to thetaxpayers profit yielding structure is usually capital in

nature; expenditurethat relates to the process ofoperating it is usually revenue in nature (SunNewspapers)


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Other negative limbs

Second limb:Losses or outgoings of a private ordomestic nature

Third limb: Losses or outgoings incurred in gainingexempt income or non-assessable non-exempt income

Fourth limb: Losses or outgoings that are specificallynot deductible under another provision


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Clothing expenses

generally expenditure on ordinary articles of apparelwill not be deductible, notwithstanding that suchexpenditure is necessary to ensure a suitableappearance in a particular job or profession. Anemployed solicitor may be required to dress in an

appropriate way by his or her employer, but that factalone would not bring about the result that theexpenditure was deductible. (Mansfield)


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Clothing expenses (cont)

Cost of clothing may be deductible in special cases: Frequent changes of clothing (Edwards)

Larger shoes for working in aeroplane (Mansfield)

Sun protection items (Morris)


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Travel expenses Cost of travel on (ie in the course of) work is

generally deductible (Taylor) Cost of travelling between home and work ordinarily

not deductible (Lunney & Hayley).

Exceptions apply to taxpayers who are:

Itinerant workers (Wiener) On stand-by duties (Collings)

Involved in transporting bulky goods (Vogt)

Cost of travel to find new employment is ordinarily not

deductible as it comes too soon to income-earningactivities (Maddalena)

T l b t l t d


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Travel between unrelatedplaces of work

Cost of travelling between unrelated places of work isordinarily not deductible under s 8-1 ITAA97 (Payne)

However, s 25-100 ITAA97 provides that the cost oftravelling between two unrelated places of work may bedeductible where:

Taxpayer travels directly between those places

Neither place is the taxpayers home


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Self-education expenses Cost of self-education expenses generally deductible

provided the outgoings relate to an occupation in whichthe taxpayer is currently engaged (Finn, Hatchett,Highfield)

It is not necessary to show that the expenditure will

result in extra income for the taxpayer it is sufficientif the expenditure is incurred with the object ofimproving the taxpayers proficiency in theiroccupation (Studdert)


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Self-education expenses (cont) Self-education expenses that relate to an occupation in

which the taxpayer is not currently engaged or thatrelate to obtaining new employment are generally notdeductible (Roberts)

Exception occurred inAnstiswhere self-education

expenses were linked to other kinds of assessableincome (eg Youth Allowance)

Section 26-19 introduced in response toAnstisdisallows deductions for self-education expenses

relating to government assistance payments from 1 July2011

Other statutory restrictions contained in s 26-20 ITAA97and s 82A ITAA36


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Foundations of Taxation Law[16.8] Foundations of Taxation Law CCH Australia Limited

Home office expensesA home does not ordinarily constitute business

premises and taxpayers are therefore not ordinarilyentitled to deductions for expenses such as rent paid tolease their homes or interest paid on their home loanseven though they maintain a home office (Forsyth,Handley)

Expenses relating to maintenance of a home officemay, nevertheless, be deductible where the taxpayershome is also a place of business (Swinford)

TR 93/30 distinguishes between:

Occupancy expenses (eg rent, interest, rates)

Running expenses (eg heating, cooling, lighting)


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Rent and licence fees

Deductions are generally allowed for the payment ofrent provided the only immediate advantage securedfrom making the payment is the use of an income-producing asset over the term of the lease (SouthAustralian Battery Makers)

Deductions are also generally allowed for licence feespaid for the right to exploit income-producing assetsover a period of time provided the taxpayer does notobtain any permanent ownership rights in relation to

those assets (Citylink)


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Interest expenses

Deductibility of interest usually depends upon theobjective use to which the borrowed funds are appliedand not the security provided for the loan (Munro)

Interest is ordinarily a revenue outgoing (Steele)

However, in rare cases, interest may be capital innature (Macquarie Bank, St George Bank)


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Legal expenses

Whether legal expenses are of a revenue or capitalnature is usually determined according to the businessentity test

Legal expenses incurred for the purposes of protecting,preserving or enlarging the taxpayers businessorganisation will usually be capital in nature (Broken HillTheatres, John Fairfax, PBL Marketing)


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Management expenses

Management expenses incurred by footballers weredeductible under s 8-1 because:

Footballers were engaged in the business ofcommercially exploiting their sporting prowess andcelebrity

Playing contracts were of a revenue nature andmanagement fees were a recurrent expenditure inrespect of those assets (Spriggs & Riddell)

general deductions australian law

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