Post on 14-Apr-2018
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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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Foundations of Taxation Law[16.2](a) Foundations of Taxation Law CCH Australia Limited
Loss or outgoing
Loss arises where taxpayers financial resourcesdiminished
Outgoing involves some form of payment, outlay orexpenditure
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Foundations of Taxation Law[16.2](b) Foundations of Taxation Law CCH Australia Limited
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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Foundations of Taxation Law[16.3](a) Foundations of Taxation Law CCH Australia Limited
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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Foundations of Taxation Law[16.3](b) Foundations of Taxation Law CCH Australia Limited
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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Foundations of Taxation Law[16.4](a) Foundations of Taxation Law CCH Australia Limited
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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Foundations of Taxation Law[16.4](b) Foundations of Taxation Law CCH Australia Limited
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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Foundations of Taxation Law[16.5](a) Foundations of Taxation Law CCH Australia Limited
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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Foundations of Taxation Law[16.5](b) Foundations of Taxation Law CCH Australia Limited
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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Foundations of Taxation Law[16.6](a) Foundations of Taxation Law CCH Australia Limited
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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Foundations of Taxation Law[16.6](b) Foundations of Taxation Law CCH Australia Limited
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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Foundations of Taxation Law[16.7](a) Foundations of Taxation Law CCH Australia Limited
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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Foundations of Taxation Law[16.7](b) Foundations of Taxation Law CCH Australia Limited
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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Foundations of Taxation Law[16.9] Foundations of Taxation Law CCH Australia Limited
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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Foundations of Taxation Law[16.10] Foundations of Taxation Law CCH Australia Limited
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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Foundations of Taxation Law[16.11] Foundations of Taxation Law CCH Australia Limited
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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Foundations of Taxation Law[16.12] Foundations of Taxation Law CCH Australia Limited
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)