GENERAL DEDUCTIONS

Chapter 16
Foundations of Taxation Law

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 assessable income It is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income

[16.1](a)

Foundations of Taxation Law

CCH Australia Limited

Section 8-1 (negative limbs)

However, you cannot cannot deduct a loss or outgoing under this section to the extent that: It is a loss or outgoing of capital, or of a capital nature It is a loss or outgoing of a private or domestic nature It is incurred in relation to gaining or producing your exempt income or non-assessable non-exempt income A provision of this Act prevents you from deducting it

[16.1](b)

Foundations of Taxation Law

CCH Australia Limited

Loss or outgoing

Loss arises where taxpayers financial resources diminished Outgoing involves some form of payment, outlay or expenditure

[16.2](a)

Foundations of Taxation Law

CCH Australia Limited

Apportionment

To the extent that indicates a loss or outgoing may need to be apportioned there are at least two kinds of items of expenditure that require apportionment. One kind consists in undivided items of expenditure in respect of things or services of which distinct and severable parts are devoted to gaining or producing assessable income and distinct and severable parts to some other cause. The other kind of apportionable items consists in those involving a single outlay or charge which serves both objects indifferently. (Ronpibon Tin)

[16.2](b)

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 be matched to specific amounts of assessable income For a loss or outgoing to be deductible in a year, it does not necessarily have to produce income in that year it is sufficient if it is designed to earn income in future years

[16.3](a)

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 is sufficient if the outgoing is a step towards the production of income (Ash)

[16.3](b)

Foundations of Taxation Law

CCH Australia Limited

In the course of

The expression in gaining or producing has the force of in the course of gaining or producing and looks rather to the scope of the operations or activities and the relevance thereto of the expenditure than to purpose in itself. (Amalgamated Zinc)

[16.3](c)

Foundations of Taxation Law

CCH Australia Limited

Incidental and relevant

For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. ... [I]t is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income. (Ronpibon)

[16.3](d)

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 or business expense (Lunney) Courts traditionally characterise outgoings by reference to 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 the income produced is less than the amount of the outgoings (Ure, Fletcher)

[16.3](e)

Foundations of Taxation Law

CCH Australia Limited

Necessarily incurred in carrying on a business

An outgoing is necessarily incurred in carrying on a business if it is dictated by the business ends to which it is directed (Snowden & Willson) The requirement that the claimed outgoing be necessarily incurred in carrying on the relevant business does not, in the context, mean that the outgoing must be either unavoidable or essentially necessary. Nor does the word necessarily import a requisite of logical necessity. What is required is that the relevant expenditure be appropriate and adapted for the ends of the business carried on for the purpose of earning assessable income.(Magna Alloys)
Foundations of Taxation Law
CCH Australia Limited

[16.3](f)

Temporal connection

Losses or outgoings that are preliminary to the commencement of an income-producing or business activity are not incurred in the course of such activity so are not deductible (Softwood Pulp, Griffin, Goodman Fielder Wattie) Provided the occasion of a loss or outgoing can be traced to business operations that were formerly carried on by the taxpayer for the purpose of gaining assessable income, loss or outgoing is usually deductible (Placer, Brown, Jones)

[16.3](g)

Foundations of Taxation Law

CCH Australia Limited

First negative limb capital

Once and for all test: expenditure incurred once and for all is usually capital in nature; expenditure incurred regularly is usually revenue in nature (Vallambrossa Rubber) Enduring benefit test: expenditure incurred to bring into existence an asset of a lasting nature is usually capital in nature (British Insulated & Helsby Cables) Business entity test: expenditure that relates to the taxpayers profit yielding structure is usually capital in nature; expenditure that relates to the process of operating it is usually revenue in nature (Sun Newspapers)
Foundations of Taxation Law
CCH Australia Limited

[16.4](a)

Other negative limbs

Second limb: Losses or outgoings of a private or domestic nature Third limb: Losses or outgoings incurred in gaining exempt income or non-assessable non-exempt income Fourth limb: Losses or outgoings that are specifically not deductible under another provision

[16.4](b)

Foundations of Taxation Law

CCH Australia Limited

Clothing expenses

generally expenditure on ordinary articles of apparel will not be deductible, notwithstanding that such expenditure is necessary to ensure a suitable appearance in a particular job or profession. An employed solicitor may be required to dress in an appropriate way by his or her employer, but that fact alone would not bring about the result that the expenditure was deductible. (Mansfield)

[16.5](a)

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)

[16.5](b)

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-earning activities (Maddalena)

[16.6](a)

Foundations of Taxation Law

CCH Australia Limited

Travel between unrelated places of work

Cost of travelling between unrelated places of work is ordinarily not deductible under s 8-1 ITAA97 (Payne) However, s 25-100 ITAA97 provides that the cost of travelling between two unrelated places of work may be deductible where: Taxpayer travels directly between those places Neither place is the taxpayers home

[16.6](b)

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 which the 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 sufficient if the expenditure is incurred with the object of improving the taxpayers proficiency in their occupation (Studdert)

[16.7](a)

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 that relate to obtaining new employment are generally not deductible (Roberts) Exception occurred in Anstis where self-education expenses were linked to other kinds of assessable income (eg Youth Allowance) Section 26-19 introduced in response to Anstis disallows deductions for self-education expenses relating to government assistance payments from 1 July 2011 Other statutory restrictions contained in s 26-20 ITAA97 and s 82A ITAA36

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

Home office expenses

A home does not ordinarily constitute business premises and taxpayers are therefore not ordinarily entitled to deductions for expenses such as rent paid to lease their homes or interest paid on their home loans even though they maintain a home office (Forsyth, Handley) Expenses relating to maintenance of a home office may, nevertheless, be deductible where the taxpayers home is also a place of business (Swinford) TR 93/30 distinguishes between: Occupancy expenses (eg rent, interest, rates) Running expenses (eg heating, cooling, lighting)
Foundations of Taxation Law
CCH Australia Limited

[16.8]

Rent and licence fees

Deductions are generally allowed for the payment of rent provided the only immediate advantage secured from making the payment is the use of an incomeproducing asset over the term of the lease (South Australian Battery Makers) Deductions are also generally allowed for licence fees paid for the right to exploit income-producing assets over a period of time provided the taxpayer does not obtain any permanent ownership rights in relation to those assets (Citylink)

[16.9]

Foundations of Taxation Law

CCH Australia Limited

Interest expenses
Deductibility of interest usually depends upon the objective use to which the borrowed funds are applied and not the security provided for the loan (Munro) Interest is ordinarily a revenue outgoing (Steele) However, in rare cases, interest may be capital in nature (Macquarie Bank, St George Bank)

[16.10]

Foundations of Taxation Law

CCH Australia Limited

Legal expenses

Whether legal expenses are of a revenue or capital nature is usually determined according to the business entity test Legal expenses incurred for the purposes of protecting, preserving or enlarging the taxpayers business organisation will usually be capital in nature (Broken Hill Theatres, John Fairfax, PBL Marketing)

[16.11]

Foundations of Taxation Law

CCH Australia Limited

Management expenses

Management expenses incurred by footballers were deductible under s 8-1 because: Footballers were engaged in the business of commercially exploiting their sporting prowess and celebrity Playing contracts were of a revenue nature and management fees were a recurrent expenditure in respect of those assets (Spriggs & Riddell)

[16.12]

Foundations of Taxation Law

CCH Australia Limited