1© The Australian College for Microcomputers Pty Ltd Sydney 2020(Provided under License to Taxation Law Students for study purposes only. Selling, copying or any commercial dealings of any kind is strictly prohibited)Lecture SlidesGeneral DeductionsDISCLAIMER• These notes contain a collection of slides for use by lecturers inTaxation Law.• It is not meant to be a complete nor comprehensive coverage of thetopics involved. Rather it is an aid to assist students in note taking.It should be understood that these slides may be modified,discarded or supplemented by lecturers at their absolutediscretion.• Students should not rely on the information contained in the slides,but should use them as a preliminary basis for research only. Thisarea of the law is changing on a daily basis and these slides are notmeant to cover more than some broad themes referred to inlectures and to trigger discussion. At all times, students shouldrefer to primary sources such as the actual legislation, courtreports & current ATO rulings.• Do not rely on the summaries contained in these slides.• For individual and /or personal advice, students should consultqualified advisors in finance, tax, accounting and law.DeductionsTaxable Income – Section 4-15EqualsAssessable Income – Division 6minusDeductions – Division 8Deductions• General Deductions (Section 8-1)• Specific Deductions (Section 8-5)• Restrictions on Deductions“a provision of this Act prevents you from deducting it.” Subsection 8-1 (2)• Section 8-10 No Double DeductionsWhere a loss/outgoing may be deductible under more than oneprovision, use the most appropriate provision1 23 42General DeductionsTo obtain a deduction under section8-1 (General Deduction) YOU mustsatisfyone of the two positive limbsSubsection 8-1(1)and not come within any of thefour negative limbsSubsection 8-1(2)General Deductions -2 Positive TestsSubsection 8-1(1)You can deduct from your ‘assessableincome’ any loss or outgoing to the extentthat:a) it is incurred in gaining or producing yourassessable income; orb) it is necessarily incurred in carrying on abusiness for the purpose of gaining orproducing your assessable income.”General Deductions – 4 Negative TestsSubsection 8-1(2)However, you cannot deduct a loss oroutgoing under this section to the extent that:a) it is a loss or outgoing of capital; orb) it is a loss or outgoing of a private ordomestic nature; orc) it is incurred in relation to gaining orproducing your exempt income; ord) a provision of this Act prevents you fromdeducting it.Loss or OutgoingLoss:Taxpayer’s financial resources have been diminished:• Taxpayer’s money stolen (Charles Moore & Co (WA) Pty Ltd(1956) 95 CLR 344)• Bad debt (AGC (Advances) Ltd v FCT (1975) 132 CLR 175)Outgoing:• Usually involves some form of payment, outlay or expenditure,or the taxpayer is committed to spend money (received invoice)5 67 83Sufficient Connection / Nexus TestIs there a sufficient connection / nexus between the loss/outgoingand either one of the positive limbs?Incidental & Relevant Test•W Neville & Co v FCT (1937)(expenses to pay out managing director)Essential Character Test – Considered to be the Key Test –Looks at the nature of the expense•Charles Moore & Co (WA) P/L v FC of T (1956)(takings stolen on way to the bank)Purpose Test•Magna Alloys & Research P/L v FC of T (1980)(legal costs of defending directors)Condition of Employment•Burton v FCT (1979)(magistrate’s home to work travel)Nexus Test – In Gaining or ProducingHerald & Weekly Times• A newspaper publisher incurred expenses indefending/settling an action brought against it foralleged defamatory articles that it had published in itsnewspaper.• Unavoidable incident of publishing a newspaper.• Deduction allowedW Nevill & Co• A company paid one of its managing directors toresign• The payment was made for the purpose of increasingthe efficiency of the company• Deduction allowedParticular Expensesand theEssential Character TestThe easiest way to determine whether theiris a sufficient connection between theexpense and the positive limbs is to look athow the courts have determined theessential character of different types ofexpenses.FC of T v Cooper• Cooper was a professional football player with WesternSuburbs Rugby League football team.• Under his contract he was required to do all thingsnecessary to be in the best possible condition to play.• Cooper suffered from a weight loss problem. Hisoptimum weight was 16.5 stone.• He was required among other things (e.g. gym work) toincrease his normal food and drink (steaks, potato,bread and beer) intake.• Cooper claimed a deduction for the extra food anddrink expenses. Also the gym expenses• Held: Deduction for cost of food and drink denied. TheGym expenses were allowed9 1011 124Interest Expense – Use TestWhat was the principal (Loan) used for?•Private Purposes – not deductible•Income Producing Purposes – deductible•Income Producing and Private Purposes(apportion)• Ure v FCT (1981)• FC of T v Total Holdings (Aust) Pty Ltd (1979)• TR 95/33Ure v FCT (1981) 11 ATR 484• Taxpayer (an employee solicitor) entered into various loans.• Taxpayer borrowed money at commercial rate of 12.5%.• This money was then on lent to the taxpayer’s wife and familycompany at a rate of 1%.• The borrowed funds were used by the wife and family company todischarge mortgages on residential property beneficially owned bythe taxpayer’s company and to purchase a new family home.• Held: deduction of interest expense equal to interest income of 1%.“There was an air of unreality about the proposition that theborrowed moneys were laid out wholly for the purpose of earning areturn of 1% pa”• Contrast Total Holdings CaseFC of T v Total Holdings• Total Holdings was a wholly owned subsidiary of a Frenchcompany (Parent Co).• Total Holdings owned all of the shares in Total Australia Ltd.• Total Holdings borrowed money from its Parent Co at interest andon lent the money to Total Australia Ltd interest free.• Total Holdings was expecting to receive dividends in the future.• Held: Interest expense fully deductible• Contrast Ure’s caseHome Office ExpensesOccupancy Expenses / Running ExpensesOccupancy ExpensesRelate to the building: Mortgage Interest/Rent, Rates and Taxes,Insurance▪ Taxpayer rents premises – Rent▪ Taxpayer owns premises – Interest, Council rates, Water rates, Land tax, InsuranceRunning Expenses:Telephone, Electricity and Depreciation – desks, bookshelves)• You can claim a Deduction for a percentage of theOccupancy Expenses only where the home is used as aPlace of business13 1415 165 Handley v FCT• Barrister had home study – worked 20 hours per week in home study.• He also maintained his own chambers / office in town.• Court focused on the issue of convenience.• No deduction allowed for interest paid on his home loan, rates andinsurance premiums relating to the premises.FCT v Forsyth• Barrister paid rent to the trustee of his family trust which owned thefamily home• He also maintained his own chambers / office in town.• Court focused on the issue of convenience.• Taxpayer denied deductions for the rent that related to his homestudy.• Contrast Swinford’s case – next slideHome Office Expenses Swinford v FCTSelf-employed scriptwriter dedicated a separate room in her rentedflat for use as her study.She wrote her scripts in this room and did not have separate businesspremises.“This was the only place where she did carry out her writingactivities. This was the base, and the only base,of the taxpayer’s operations”Taxpayer entitled to a deduction for a portion of the rent paid inrelation to her flat.Home Office Expenses 19Home Office / Study ExpensesTwo types of Home Office ExpensesRunning Expenses:Home office is used ‘in connection with taxpayer’s incomeearning activities, but does not have the character of a placeof business’ only a relevant proportion of the runningexpenses (Telephone, Electricity and Depreciation – desks,bookshelves) may be deducted.• This is not the taxpayer’s place of business• Work from Home Study because its convenient• Can claim a percentage of Electricity, Heating etc. as adeduction.Self education expenses may bedeductible under Section 8-1 ITAA 97if there is a connection between thecourse and income productionSelf education deduction is subject toSection 82A,Section 26-20 andSection 26-19Self Education Expenses17 1819 206Examples of self-education expenses:▪ cost of registration, travel to and accommodation atprofessional conferences▪ cost of course fees for undertaking tertiary course▪ cost of study-related materials e.g. calculators,textbooks, stationery (does not include capitalexpenditure such as purchasing a computer)Self Education ExpensesSelf-education expenses are generally deductible where:-• The expenses relate to maintaining/increasing a taxpayer’s skillsin an occupation in which the taxpayer is currently engaged –e.g. taxpayer is already qualified as a lawyer, accountant etc.then expenses to keep up to date are allowable under section 8-1ITAA 1997Self-education expenses are generally not deductible where:-• The expenses relating to an occupation that a taxpayer is notpresently engaged in are generally not deductible e.g. to obtainnew employment or to open up a new income-earning activity –fail Nexus Test.• The Expenses for a first degree is dependent on proving that anexus exists between the course and one of the positive limbs.There must be a strong connection to the income stream.Self Education Expenses23Self Education ExamplesThe following types self education expenses have been held to bedeductible under section 8-1 ITAA97:• Skilled person attending a refresher course directed at maintaininghis/her level of knowledge (Highfield: Dentist studying Masters).• Travel by employee incurred to bring himself up to date withdevelopments in his profession (Finn: Architect travels overseas).• Teacher’s Higher Certificate (Hatchett).• Costs of flying lessons for a flight engineer were deductible becauseflight proficiency would enhance promotion chances (Studdert).• Youth Allowance – (Anstis: studying to get government benefit – s26-19 ITAA 97)• However, a new job with higher income does not necessarily justify adeduction. A mining engineer was retrenched as a mine manager anddecided to go overseas to study for an MBA. The costs were consideredto not be deductible, even though he gained a new job as a minemanager with a much higher salary afterwards (Roberts).• See TR 92/8 and TR 98/9Self education expenses under section 8-1 are subject to:1.Section 26-20 ITAA 1997 – HECS (HELP) never deductible2. Section 82A ITAA 1936 [first $250 not deductible] if it’s aPrescribed Course of Education (e.g. degree, diploma, etc.)3. Section 26-19 ITAA97 denies deductions from 1 July 2011 forself education expenses that relate to gaining ‘rebatablebenefits’ (government assistance payments such as YouthAllowance, Austudy Living Allowance, Newstart Allowance)Self Education Expenses21 2223 247 First ExampleTaxpayer undertakes a University course and satisfies one ofthe positive tests of section 8-1 ITAA 1997.Section 82A requires a reduction by $250.Assuming there are no non-deductible SelfEducation expenses apart from HECS, the deductionis reduced by $250. (250)Deductible 155 Expenses $ $HECS – section 26-20 1,500 NilBooks 300 300Stationary 25 25Photocopying 80 80Total Expenses 1,905 405 Second ExampleTaxpayer undertakes a University course and satisfies one of thepositive tests of section 8-1 ITAA 1997.Section 82A requires Self Education Expenses (eitherdeductible or non-deductible) to be reduced by $250.So the non-deductible $200 above is used first. Only$50 deductible Self Education expenses is reduced (50)Deductible 355 Expenses $ $HECS – section 26-20 1,500 NilBooks 300 300Stationary 25 25Travel from Uni to Home after being at work 200 NilPhotocopying 80 80Total Expenses 2,105 405 Third ExampleTaxpayer undertakes a University course and satisfies one of the positivetests of section 8-1 ITAA 1997.Section 82A requires the reduction of $250.So the non-deductible $270 above is used first.As this amount is >=$250, no deductible SelfEducation expenses need be reduced. (Nil)Deductible 405 Expenses $ $HECS – section 26-20 1,500 NilBooks 300 300Stationary 25 25Travel from Uni to Home after being at work 270 NilPhotocopying 80 80Total Expenses 2,175 405Travel Expenses• Travelling between home and normal place of work is not deductible.▪ Lunney v FCT (1958) & Hayley v FCT (1958)▪ Lunney was an employee and Hayley a dentist, both claimed travelto and from work.▪ Court held this travel was not incurred in gaining or producingassessable income.• Exceptions to above general rule:▪ Outside normal work hours where work at home has started prior toundertaking travel: FCT v Collings (1976).▪ Itinerant workers: FCT v Wiener (1978) & Re Hill v FCT (2016).▪ Taxpayers required to carry bulky items to perform employment duties:FCT v Vogt (1975).▪ To alternative workplaces on a temporary basis: FCT v Ballesty (1977).25 2627 288Travel ExpensesSection 8-1 ITAA 1997• Travelling between related places of employment isdeductible under section 8-1.Commissioner of Taxation v Payne (2001) (farmer and pilot)]Section 25-100 ITAA 1997• Deduction allowed for travel directly between twoworkplaces where the taxpayer is engaged in incomeproducing activities•Not deductible if a workplace is the taxpayer’sresidence.FCT v Wiener• Teacher employed by the Education Department• Required to teach between five different schools during theweek.• Taxpayer’s employment was inherently itinerant and that shewas travelling in the performance of her duties from the momentshe left home to the moment she returned.• Deductions allowed for travel between schools and also travelbetween home and the first and last school she attended eachday.FCT v Payne• Taxpayer claimed a deduction for cost of travelling between hishome (where he operated a deer farm business) and the airport(where he worked as a pilot).• Travelling between two unrelated places of work is generallynot deductible under section 8-1. NB: but section 25-100 ITAA1997 now expressly allows it.Travel Expenses Conventional clothingCosts of acquiring ordinary items of clothing (conventional clothing) e.g., asuit, are generally NOT deductible under s8-1“It can be said that generally expenditure on ordinary articles of apparel will not bedeductible, notwithstanding that such expenditure is necessary to ensure a suitableappearance in a particular job or profession.An employed solicitor may be required to dress in an appropriate way by his or heremployer, but that fact alone would not bring about the result that the expenditure wasdeductible.” Mansfield v FCT:Other:• Protective clothing e.g., construction worker’s hardhat• Occupation-specific clothing e.g., nurse’s uniform[Morris V FCT (2002) 50ATR 104, TR2003/16 and TR97/12]Uniforms: – see later slideClothing and Cleaning expenses Uniforms: Compulsory vs Non-CompulsorySection 34-10 ITAA 97What you can deduct(1) If you are an employee, you can deduct expenditure you incur in respect ofyour * non-compulsory * uniform if:(a) you can deduct the expenditure under another provision of this Act; and(b) the * design of the uniform is registered under this Division when you incurthe expenditure.Note 1:This Division also applies to individuals who are not employees: seeSubdivision 34-A.Note 2:Employers apply to register designs of uniforms: see Subdivision 34-C.(2) You cannot deduct the expenditure under this Act if the * design is notregistered at the time you incur the expenditure.(3) However, this Division does not stop you deducting expenditure you incur inrespect of your * occupation specific clothing or * protective clothing. 29 3031 329 Mansfield v FCTDeductions allowed for a flight attendant:• Cost of her shoes (which were required to be larger than normal, due to cabinpressure) and• Cost of her stockings (which often laddered due to the confined spaces in whichshe worked).FCT v Edwards• Taxpayer was personal secretary to Governor of Queensland’s wife• Required to accompany her on official occasions,• Attended more than 150 public engagements throughout the year• Required to dress appropriately.• Often had to change her clothes several times a day.• Deduction allowed for the cost of additional clothing (hats, gloves, formalevening wear) required for her job.Morris v FCT• Taxpayers engaged in outdoor occupations e.g., surveyor, builder, physicaleducation teacher, professional tennis umpire,• Deductions for the cost of sun protection items (sun hats, sunglasses, sunscreens)allowedClothing expenses Legal Expenses▪ Magna Alloys & Research v FCT – Deductible▪ Police brought various criminal charges against Magna’s Agents andDirectors.▪ Taxpayer paid the legal expenses in defending the charges against theAgents and directors.▪ FCT v Snowden & Wilson Pty Ltd – Deductible▪ Sharp business practices?▪ Lawyers hired to defend taxpayer before Royal Commission enquiry.▪ Legal costs to collect debts – Deductible▪ Non-deductible Legal expenses▪ Legal expenses to draw up a partnership agreement.▪ Many legal expenses are capital or preliminary and therefore are notdeductible under section 8-1 [note section 40-880 – deduction over 5years (20%pa)] Legal Expenses – Specific ProvisionsSome legal expenses may be deductible underspecific provisions:• Section 25-20 Lease document preparation costs• Section 25-25 Borrowing expenses• Section 25-30 Mortgage discharge expenses• Section 40-880 Business related expenses4 Negative Limbs• Just because there is a sufficient nexusbetween the income producing activityand the deduction doesn’t mean thereis an allowable deduction under section8-1.• For a deduction to be allowed undersection 8-1 you must also not comewithin any of the 4 Negative Limbs.33 3435 3610Negative TestsSubsection 8-1(2)1. loss or outgoing of capital; or2. loss or outgoing of a private ordomestic nature; or3. is incurred in relation to gaining orproducing your exempt income; or4. a provision of this Act prevents youfrom deducting it. Private or DomesticA loss/outgoing of a “private or domestic nature” may not bedeductible because it doesn’t satisfy either of the positive limbs, or itis not deductible under the second negative limb – s8-1(2)(b)Lunney v FCTMust look at essential character of the loss/outgoingLoss/outgoing which is an essential prerequisite to the derivation ofassessable income is insufficientLodge v FCTNo deduction to a law clerk for childcare expenses so she couldattend workNot relevant / incidental to the activities by which the taxpayergained her assessable incomeFullerton v FCTTaxpayer incurred expenses in moving with his family to a newhome in another city because his job was relocatedNot deductible – domestic or family arrangement 39Income versus Capital• David buys a building from which he willoperate his business.• The building cost $250,000 to buy(Capital – include in CGT cost base).• During his first year of ownership he paid$30,000 interest(Deductible – not capital as no long termadvantage – cannot include in CGT costbase as it is deductible).40Income versus Capital• Lewis rented an office from which heoperated his business.• His rent was $3,000 per month(Deductible – not capital as no long termadvantage)• He paid electricity of $850 per quarter(Deductible – not capital as no long termadvantage) .37 3839 4011 Once And For All Test• expenditure that is incurred once and for all is usually capital in nature, whereasexpenditure incurred regularly is usually revenue in nature – Vallambrosa RubberCo Ltd v Farmer (1910) 5 TC 529▪ taxpayer owned and operated a rubber estate in Malaya & claimed deductions for its generalexpenditure re estate e.g., weeding, pest control, superintendence.▪ Allowed a deduction for the entire amount of the general expenditure as it was incurred on itemsthat the taxpayer would have to meet every year.Enduring Benefit Test• where expenditure is incurred to bring into existence an asset of a lasting nature, itis usually capital in nature – British Insulated Case▪ Taxpayer established a pension fund for the benefit of its employees.▪ Held that the sum of 31,784 pounds which the taxpayer had spent to set up the fund, was of acapital nature as it brought into existence an asset of ‘enduring benefit’Capital Expenses – Tests – 4 Tests ? ▪ General expenses for whole plantation claimed but only 1/7 of the estate producing rubber allowed.Only one seventh of the trees were producing rubber at the time.Fixed v Circulating Capital TestJohn Smith & Son Case – (payment made to secure inheritance of a business: not allowed)Business Entity TestSun Newspapers Ltd & Assoc Newspapers Ltd v FC of T (Sun Newspapers Case –disallowed payment not to compete▪ Taxpayer owned and published “The Sun”▪ A rival publisher who at that time published “The World” had plans to replace “TheWorld” with “The Star” and sell it at cheaper price than “The Sun”.▪ To prevent this from happening the Taxpayer paid the rival publisher £86,500 to stoppublishing “The World” and not to publish the new newspaper and not to publishingany newspaper for 3 years within 300 miles of Sydney.▪ Taxpayer was denied the £86,500 deduction:-‘The distinction between expenditure and outgoings on revenue account and oncapital account corresponds with the distinction between the business entity,structure, or organization set up or established for the earning of profitand the process by which such an organization operates to obtain regular returnsby means of regular outlay, the difference between the outlay and the returnsrepresenting profit or loss’ Dixon JCapital Expenses – 4 Tests ? The leading authority on the distinction between revenue and capitalexpenditure is Sun Newspapers. Dixon J referred to what are nowconsidered guidelines in determining whether a loss or outgoing is ofa capital or revenue nature:(a) the character of the advantage sought, and in this its lastingqualities may play a part, Long Term / Short Term Nature(b) the manner in which it is used, relied upon or enjoyed, and inthis and under the former head recurrence may play its part,Recurrent(c) the means adopted to obtain it; that is, by providing a periodicalreward or outlay to cover its use or enjoyment for periodscommensurate with the payment or by making a final provisionor payment so as to secure future use or enjoyment. Regular /Lump Sum paymentsBusiness Entity Test Capital CasesJohn Fairfax & Sons Pty Ltd v FCT (1959) – not allowed(legal fees to oppose legal action in takeover bid for target coy)The Herald and Weekly Times v FCT (1932) – allowed(expenses in defamation action)BP Australia Ltd v FCT (1965) – allowed(payments to service stations to agree to deal only with BP)Strick v Regent Oil Ltd (1966) – not allowed(premiums paid for lease of service stations)Broken Hill Theatres Pty Ltd V FCT (1952) – not allowed(expenses in preventing another cinema operator from opening)41 4243 4412BP Australia Ltd v FCT – Facts• A petrol distributor sought to combat competition froma rival by establishing a cooperative arrangement with 3other petrol companies.• Initially, the companies tried to induce service stationowners to deal solely with them by undertaking to painttheir service stations in distinctive colours. Later, thetaxpayer spent £270,569 securing promises from certainpetrol station owners that they would stock and sell onlythe taxpayer’s products.• The trade ‘ties’ were for periods ranging from 3 to 15years. The payments made were in the form of lumpsum ‘developmental allowances’ and were based looselyon the quantity of petrol sold.BP Australia Ltd v FCT – Decision• The Privy Council held that payments made to petrolservice station dealers to sell only one brand of productwere of a revenue, deductible nature.• Their Lordships, distinguished this case from the SunNewspapers case by saying that in the present case BPwas not achieving a monopoly nor buying off competitionnor obtaining any substantial area for its own domain.• Although one retailer was tied to BP the retailer next doorcould still buy some other brand and the passing motoristcould do likewise.• For those reasons the cases where competition had beenstifled for a substantial period or a monopoly had beenacquired had little bearing on this case. Strick v. Regent Oil Ltd  AC 295Facts:•A petrol retailer, in consideration of a lump sumpremium based on the amount of fuel expected to be sold,leased their filling station to Regent Oil for a term ofyears at a nominal rent, and Regent Oil sublet the stationback to the retailer at a nominal rent for the same periodless three days.•The sublease contained covenants binding the retailer totake all of his fuel from Regent Oil and to continue tocarry on the business at the station.Decision:•The court held that the payments were premiums forleases and, because Regent Oil did not trade in land, theywere therefore payments for acquiring an interest in landand so capital.
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