TABL2751 Business Tax

S1 2015
Class 6 General
Deductions

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Taxable income formula

Taxable income =
Assessable income
Allowable Deductions
Up until this point, we have looked at
what is meant by assessable income:
ordinary income + statutory income
(including capital gains)
We will now move on to deductions both
general and specific
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General vs. Specific

deductions
s8-1: General Deductions
s8-1(1): You can deduct Positive limbs
s8-1(2): You cannot deduct Negative
limbs

s8-5: Specific Deductions

Allows deductions if specified in another
section of Act.

s8-10: No Double Deductions

If you can deduct an amount under two
different sections, use the most appropriate.
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General Deductions Positive

limbs

(1) You can deduct from your assessable

income any loss or outgoing to the
extent that:
(a) it is incurred in gaining or
producing your assessable income; or
(b) it is necessarily incurred in
carrying on a business for the purpose
of gaining or producing your
assessable income.
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General Deductions Positive

limbs
First limb: incurred in gaining or
producing your assessable income
Second limb: necessarily incurred in
carrying on a business for the purpose
of gaining or producing assessable
income
The second limb adds little to the
operation of the first limb: Ronpibon
Tin NL v FCT
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General Deductions Positive

Limbs

Loss or outgoing
To the extent
Incurred
Necessarily incurred
Carrying on business to derive
assessable income
In gaining or producing your
assessable income
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Loss or outgoing (1st + 2nd

limb)
Loss:
Accidental losses: Charles Moore & Co (WA)
Pty Ltd v FCT
Commercial sense of loss on transaction:
AGC (Advances) Ltd v FCT (1975) 132 CLR
175

Outgoing:
Examples: Rent, Wages, Fuel, Interest
Implies voluntary payment: AGC
(Advances) Ltd
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To the extent (1st + 2nd

limb)
Implies apportionment
Where the loss or outgoing is not
solely incurred in the gaining or
producing of assessable income,
expenditure will need to be
apportioned.
What was the purpose of the
expenditure?
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To the extent (1 + 2
st

nd

limb)

Ronpibon Tin NL v FCT

Expenses incurred in deriving both
assessable and exempt income.
Only the portion of expenses relating
to the assessable income was
deductible.

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Incurred (1 limb)
st

Payment is not a requirement: FC of T v

Aust. Guarantee Co.
The section does not say there must be an
actual outgoing: W Nevill & Co Ltd v FC of T
The loss or outgoing is incurred if the
taxpayer is totally committed to making
the payment: FC of T v James Flood Pty Ltd.
Commissioner agrees with these
judgements: Taxation Ruling TR 97/7.

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Necessarily incurred (2nd

limb)
Incurred as per previous slide
What does necessarily mean?
It does NOT mean compulsory,
inevitable or unavoidable.
It is for the man who is carrying on the
business to be the judge of what
outgoings are necessarily to be
incurred: Magna Alloys & Research Pty
Ltd v FCT
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Necessarily incurred (2nd

limb)
Is there a limit on amount of expenditure
incurred?
Reasonable v. Actual Expenditure
Ronpibon Tin NL v FCT: The amount of a loss or
outdoing is the actual expenditure incurred,
not the amount that may be considered
reasonable.
Not Commissioners role to say how much
ought to have been spent.
But: luxury car limit is an example when there
is a limit imposed
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In carrying on a business
(2nd limb)
Discussed under ordinary income
Question of fact and degree
Example of relevant factors:
Profit making purpose
Repetition and regularity
Organisation and system
Size and scale

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Nexus to income
1st limb ... In gaining or producing
assessable income
Concerned with expenditure incurred in
the actual course of producing assessable
income
2nd limb ... In carrying on a business for the
purpose of gaining or producing assessable
income
Concerned with expenditure made for the
purpose of business generally
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Nexus to income
Is there a sufficient nexus (i.e.
connection / relationship) between the
expenditure and the income?
Tests have been developed by courts to
determine this (judicial NOT statutory
tests)
Incidental and relevant test
Essential character test
Condition of employment test

No single test is determinative.

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Nexus to income incidental and

relevant test
Is the expenditure incidental and relevant
to the production of assessable income?
Ronpibon Tin NL v FCT (1949) 78 CLR 47
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.
Irrelevant expenditure excluded
Apportionment may be necessary
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Nexus to income incidental and

relevant test
Herald And Weekly Times (1932)
Newspaper publisher
Legal fees for defending and settling an action for
libel
Immediate reason for paying costs and damages
not to produce assessable income
Duffy CJ, Rich, Dixon, McTiernan JJ:
Cant just look to immediate reason and ignore purpose
A regular and almost unavoidable incident of publishing a
newspaper

Dissent: (Evatt J):

liability arose out of court judgment / threatened
judgment not in the course of gaining income.

Also see FCT v Day

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Nexus to income incidental and

relevant test
W Nevill (1937)
Redundancy payment to joint managing
director
Commissioner - did not produce any
income
Latham CJ
No expenditure ever produces income
Look to the object of expense
Object to improve business efficiency
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Nexus to income essential

character test
Lunney v FCT:
Home to work travel expenses
Expenditure being a prerequisite to earning
income does not mean it is incurred in
gaining or producing assessable income
What is essential character of expenditure?
Expenses in this case not deductible: put
employee in position to enable them to
engage in activities that produce
assessable income.
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Nexus to income purpose

test
Magna Alloys & Research Pty Ltd v
FC of T:
Purpose of expenditure irrelevant, but
may help may help determine essential
character of expenses
Objective purpose: refers to all
circumstances and facts.
Subjective purpose: refers to the
taxpayers motives and state of mind
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Nexus to income purpose

test
Courts generally focus on objective
criteria.
However, will sometimes look at
subjective purpose.
Subjective purpose also relevant to
apportionment
Ure v FCT 81 ATC 4100
Fletcher v FCT 91 TC 4950
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Nexus to income condition of

employment test
Is the expenditure a condition of the
taxpayers employment?
May help establish that expenditure
is incidental and relevant
BUT: Not a test in its own right:
rejected by the court in FCT v
Wilkinson too easy to manipulate

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Nexus to income temporal

connection
Does the expense have to be linked to
income to be derived in the current year?
Can a deduction be claimed for amounts
that relate to:
future income: pre-commencement cases
past income: post-cessation cases

Steele: Temporal relationship may be

relevant BUT . Contemporaneity is
not legally essential will depend upon
circumstances of particular case
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Temporal connection - precommencement expenditure

Softwood Pulp And Paper
Feasibility studies - mill never built
No deduction
Expenses entirely preliminary
Directed to whether or not to establish
project
Relevant to whether or not project feasible
not incurred in carrying out project

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Temporal connection - precommencement expenditure

Goodman Fielder Wattie v FCT 91
ATC 4438
Feasibility studies re monoclonal antibodies
Until commitment to project made (project did
proceed) expenses denied deductibility as
preliminary

FCT v Brand 95 ATC 4633

Prawn farming investment
Expense deductible if incurred for purpose of
income production even if no process of income
production ever commenced
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Temporal connection - precommencement expenditure

Steele v FCT
Property purchased for use in business venture
Venture did not go ahead / taxpayer did not
produce assessable income in relation to
property as intended
Issue was whether interest incurred on loan to
purchase property deductible
Was there a sufficient nexus (connection) with
income production?
Contemporaneity just one factor
No other purpose in incurring expense other
than for production of assessable income
Expenses deductible
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Temporal connection post

cessation expenditure
Amalgamated Zinc de Bavays
Mining business had ceased. Taxpayer still liable
to make payments to a workers compensation
fund. Sought deduction for these payments.
Not deductible.
HC: Payments completely dissociated from the
gaining/producing assessable income in the
relevant year (i.e. year expenditure incurred).
Dixon J
Expense must relate to a process which produced the
assessable income of that year
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Temporal connection post

cessation expenditure
AGC Advances
Suspension of business while restructured /
trading recommenced
Deduction allowed for bad debts arising from
previous business activities
Barwick CJ Amalgamated Zinc distinguished
Here suspension not cessation

Mason J depends on meaning of incurred

Sustained in year realised
Occasion of loss at time of earlier transaction giving
rise to debt
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Temporal connection post

cessation expenditure
Placer Pacific
Manufacture of defective conveyor belt
Sale of business but remained liable for
defective product claims
Settlement of claim for damages several years
after business sold
Full Federal Court:
Followed AGC Advances
Deduction allowed
No relevant distinction between losses and outgoings
Was the occasion of loss or outgoing found in operations
directed towards gaining assessable income generally
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Temporal connection
Overall:

Initial test: Amalgamated Zinc

Dixon J: To be deductible expense must relate to a

current process which produces income this year
even though the expense might not produce this
years income
Other judges: To be deductible expense must relate
to a current process devoted to producing assessable
income generally
Amalgamated Zinc no longer considered good
authority.

Current Test: e.g. Placer Pacific, Steele,

Brand

To be deductible expense must relate to a current,

former, or future income or process devoted to
producing assessable income generally
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Negative limbs
Section 8-1(2)
However you cannot deduct a loss or outgoing
under this section to the extent that:
(a) it is a loss or outgoing of capital, or of a
capital nature;
(b) it is a loss or outgoing of a private or
domestic nature
(c) it is incurred in relation to gaining or
producing your exempt income
(d) a provision of this Act prevents you from
deducting it
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Capital or capital nature

Recall discussion on capital in ordinary
income topic
Structure v Process test: Sun
Newspapers case
Taxpayer made a payment to competitor to
prevent them from publishing a rival
newspaper (3 yr restriction)
Commissioner denied deduction for payment
HC determined it was capital
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Capital or capital nature

Sun Newspapers (cont)
Drew distinction between income
earning process (revenue) and income
earning structure (capital)
Dixons criteria:
1. Character of the advantage sought
2. The manner in which the advantage is to
be used, relied upon, enjoyed.
3. Means used to obtain the advantage
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Capital or capital nature

Cases where expenditure held to be capital:
Broken Hill Theatres:
Legal fees to oppose application of a licence to
set up a new theatre by another party
Payment to preserve and protect the companys
assets.
John Fairfax & Sons:
Legal costs incurred in preventing Con Press from
opposing their take over of another newspaper
Payment concerned with enlargement of profit
yielding subject / attempt to acquire a new asset
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Capital or capital nature

Cases where expenditure held to be revenue:
BP Australia:
Exclusive trade tie agreement entered into with
station owners for a period of 3 to 5 years.
Why Revenue?
Part of ordinary process of selling petrol;
Recurrent;
No enduring benefit to profit making
structure.

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Capital or capital nature

Cases where expenditure held to be revenue:
National Australia Bank:
$42M lump sum paid for the exclusive right to act as
the lender under the Cth Def. Force housing loan
assistance scheme for a franchise period of 15 years.
Why revenue?
Just because payment was one-off did not characterise the
payment
Lump sum did not enlarge framework within which taxpayer
carried on ordinary its income
Part of process within with the bank operated to obtain the
regular returns

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Private or domestic
expenditure
Private: loss or outgoing relates to the person
incurring them as an individual member of society.
Domestic: loss or outgoing relates to the house,
home or family organisation of the person
incurring them.
Examples:

Food
Child-minding costs
Travel
Clothing
Home-office expenses
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Private or domestic
expenditure
Food
Generally private & non-deductible: FCT v Cooper
Meals while away overnight for work deductible
(considered work-related travel expenses)

Child-minding costs
Non-deductible as fail to satisfy positive limbs (put the
taxpayer in a position to derive taxable income rather
than incurred in deriving assessable income) OR treated
as private or domestic: Lodge v FCT; Martin v FCT

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Private or domestic
expenditure
Travel
Home to work travel: Not deductible.
Not incurred IN gaining or producing income OR private
expenditure (you choose where you live): Lunney v FCT
Occasional exceptions: FCT v Collings :
computer consultant on call after hours and deal
with queries from home.
If unable to resolve, had to go into office.
Deduction for this travel allowed as taxpayer had
already commenced working at home

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Private or domestic
expenditure
Travel
Travel between two places of work
Under s8-1, not deductible if the two places of work relate to
different income earning activities: Payne v FCT
Post Payne, introduction of s25-100
Home Job 1 Job 2 Home
Can claim the trip between Job 1 and Job 2

A note on car expenses: To be deductible, the car

would have to be used in deductible travel (i.e. you
cannot claim car expenses travelling to and from
work).
Four methods: Cents per kilometre; 12% original value; 1/3 rd
actual expenses; Logbook method
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Private or domestic
expenditure
Clothing
TR 97/12
4 categories of clothing which are allowed as deductions:
Non-compulsory uniform
Compulsory uniform
Occupation-specific clothing
Protective clothing and footwear
In very limited circumstances, conventional clothing may
be deductible:
FCT v Edwards
Mansfield v FCT
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Private or domestic
expenditure
Clothing
TR 97/12
4 categories of clothing which are allowed as deductions:
Non-compulsory uniform
Compulsory uniform
Occupation-specific clothing
Protective clothing and footwear
In very limited circumstances, conventional clothing may
be deductible:
FCT v Edwards
Mansfield v FCT
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Private or domestic
expenditure
Home office expenses

May be deductible if the taxpayer uses a part of the home

as an office in relation to the taxpayers income earning
activities.
Two categories:
1. Running expenses: electricity expenses, cleaning costs,
depreciation etc.
2. Occupancy expenses: rent, interest on mortgage,
insurance etc.
If genuine need for a home office, portion of both running
and occupancy expenses deductible
If matter of convenience, portion of running expenses
deductible: FCT v Faichney; Handley v FCT
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Producing exempt income

If expenditure only relates to
producing exempt income, shouldnt
pass positive limbs
If expenditure partly related to
assessable income and partly to
exempt income, apportionment will
be required.
EG: Ronpibon Tin
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Specifically denied
deduction
A specific provision may specifically deny a
deduction
Generally contained in Division 26
Examples:

Penalties
Leave payments
Payments to related entities
Illegal activities

Will be discussed in topic on specific

deductions
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