BUSN3014 w3

What are deductions? s8-1 (general) and s8-5 (specific). If you buy a computer (lasts for 3/4 years) then it's a capital asset so you can't claim deduction.  you cannot claim deduction in one go but over life of asset.General deductionss8-1 specifies general criteria for losses and outgoing. The old one has the same wording, the tax case is more likely to be before 1997 as they lay down the principle. General deductions are governed by case lawGeneral Deductions s8-1 Positive Criterian (limbs)You need to satisfy at least one s8-1(1)General Deductions s8-1 Negative Criteria (Limbs)Cannot deduct if it's anything in s8-1(2) Capital, private or domestic, incurred in producing exempt or NANE income (it's not assessable income). A provision of the Act may prevent you from deducting it e.g. entertainment

Conditions for a general deductionOutgoing Not defined in tax law, it just has it's ordinary meaning 'The words 'outgoings incurred' should not be limited to expenditure actually made. They include a liability presently incurred and due though not yet discharged" Emu Bay Railway Case (1944)Loss Passive or involuntary connotation, in contrast to outgoing when you have a purpose Charles Moore Case (1956)Charles Moore Case (1956) FCT disallowed deduction on basis that loss didn't have sufficient connection with income-producing activities (taxpayer was robbed taking the day's earnings to the bank) FHC allowed deduction of the loss because they stated that "in gaining o producing assessable income" should be interpreted as "in the course of gaining or producing assessable income". In this case, the taxpayer's normal business operations included banking the daily earnings and as the loss had been incurred as part of the normal business operation, loss was incurred in the production of assessable income and satisfied positive limbs of predecessor to s8-1Incurred Encounter, suffered-> Even if you haven't paid as long as you have definite liability then you're incurredJames Flood Case (1953) The company was awarded with 14 days consecutive leave to employees after twelve months' continuous service. The Commissioner disallowed the sum of an amount that represented holiday and sick pay which had accrued because it was written before the 12 months of service. The time to claim a deduction is when the employee takes his or her holiday leave and the money is paid and that usually occurs in the later financial year. They couldn't do it because sum is only something they anticipate.

What if taxpayer is issuing new shares and raising capital? If that money is lost then even though it's incurred in normal business, it's cap tail raid by company and has capital nature

RACV Insurance Case (1974) The taxpayer set aside amounts to cover unreported third party claims which were estimates of the likely cost of claims arising out of accidents occurring before the end of the income year but not yet reported. The Supreme Court of Victoria held that the estimated cost was deductible, once the event had occurred, the accident out of which absolute liability arose, s8-1(1) applied which was not dependant on a notice of the claim (loss or outgoing must be incurred in gaining or producing assessable income; necessarily incurred in carrying on a business to gain or produce assessable income)

Coles Myer Finance Case (1993)"In gaining or producing the AY" 'In' the course of gaining or producing AY (Amalgamated Zinc Case (1935). You must have some activity to produce assessable income and outgoing loss is incurred in that context (not before)Ronpibon Tin No Liability v FCT (1949) Taxpayer produced income from mines in Thailand which was exempt income in Australia. Taxpayer also produced investment income in Australia which was subject to tax. During WWII taxpayer's Siamese mines were confiscated by Japanese and he didn't receive any income from the mines.Taxpayer incurred expenses relating to production of Australian sourced investment and its Siamese mining operations. Commissioner permitted taxpayer deduction for small portion of taxpayer's expenses prior to confiscation relating to the production of Australian-sourcwd investment income. Taxpayer argued apportionment wasn't required because it was no longer gaining or producing exempt income but this was rejected by the FHC because taxpayer continued to incur expenses related to the confiscated mine (e.g. support payments to families of employees) Court stated "it is not for the court or the Commissioner to say how much a taxpayer ought to spend in obtaining his income but only how much he has spent"

Cases about seeking new employment NOT business (Maddalena Case) Tried to claim deduction for expenses but denied because outgoing had nothing to do with employment 1 (where he was initially) and weren't related to employment 2 assessable income either. But today footballer may be in business situation with manager negotiation contract for him- so if business (seeking new playing contract in business context) then it may be deductible. Expenses were incurred in putting the taxpayer in a position to produce assessable income, rather than in producing assessable income. 

"In gaining or producing the  AY" (cont)As long as outgoing/loss is incidental or relevant- that is sufficient. W Neville Case (1937) where the director's compensation after being terminated was held to be deductible by the Full High Court because it satisfied the positive limbs on the predecessor to s8-1. The Court took an overall approach and found that the compensation payment must be viewed in context with the original agreement with the managing director, which was clearly entered into in the production of assessable income. The compensation payment which resulted from an amendment to the original agreement, must therefore also be for the purpose of gaining or producing assessable income. An expense which improves the taxpayer overall business efficiency and operation would be incurred in gaining or p reducing assessable income. 

"Necessarily…In carrying on a business for the purpose of producing AY"Even though 'necessarily' is added it doesn't mean 'unavoidable' or 'essential' but just needs to be appropriate for business (commercial necessity).Second criteria of positive limb only applies to business situationCosts incurred in preparation for business can't be claimed as deduction because you haven't started your business yet "doesn't satisfy in carrying on" but AFTER 2000/2001 there was a new section introduced s40-990, costs incurred before can be claimed as deduction Softwood Pulp CaseLosses and outgoing may be deductible that are incurred after the business has ceased (if they're incurred in relation to the business). If purpose of outgoings to get deduction then deduction is disallowed Gwynvill Properties Case (company borrowed and a few days after the loan the company paid the bank 50b of interest for next 5 years and then the bank transferred the loan to a subsidiary for 9m meaning in the future Gwynvill should pay the loan to the subsidiary and so the net effect is an empty transaction and they haven't borrowed from the bank"To the extent which"Only proportion of outgoing incurred for purpose of producing AYUre Case (1981) Ure tried to design a scheme to avoid paying tax, he borrowed money at interest rates ranging from 7.5% to 12.5% and then on-lent the borrowed money to his wife and a family trust at an interest rate of 1%, thereby producing assessable income from the funds and making the interest payable on the original loans deductible for tax purposes. Full Federal Court concluded that the only explanation for the 1% interest rate was that it was a privae or domestic arrangement and as a result limited the amount of the taxpayer's deduction for the interest expenditure to the amount of interest income gained or produced under the on-lending arrangement i.e. 1%. Most of interest not deductible as it was a private or domestic outgoing, purpose of which was to pass on benefit to wife of 11500. Purpose 1: produce income of 1000 and purpose 2 is to pass benefit to wife and this is personal and therefore this portion is not deductible.Exclusion 1: Capital Expenditure Positive has connection between outgoing and loss and income producing activityPrecedents from the UK

Precedents from the UKVallambrosa Rubber Co Ltd v Farmer (1910) thing (capital) that is going to be spent once and for allBritish insulated & Heisby Cables v Etherton (1926) not only once and for all but asset for enduring benefit of trade, so this helps explain things like machinery (enduring benefit case)Which expenditure is capital? When we answer exam question we must use 'income producing structure test' where we distinguish between business entity or income producing structures set up for earning profit (capital account) regular returns from which (revenue account)Sun Newspapers case (1938) Determing whether expenditure is revenue or capital Paying for raw material and workers, benefit lasts for short time (less likely to be capital) Manner in which it is to be used (recurrence may play a part e.g. machinery which you use a lot-> capital) If a one off payment (more likely to be capital)

Note Question 5.28Exclusion 2: private & Domestic Expenses In general personal/domestic are not deductibleLunney's Case (1958) The outgoing to travel to work was not incurred in the course of producing AY (positive limb). If you choose to live next to work then there is no travel expense and it's up to the individual to choose where to live (personal)More About Travel Expenses There are a few exceptions e.g. travelling between two places of workHandley's Case (1981)Swinford's Case (1984)Exclusion 3- Expenses related to Exempt & NANE incomeExclusion 4- Denial of Deduction by Specific Provisions Whenever you find section in legislation that denies deduction then no deduction e.g. fines, entertainment, expenseExample- Interest Expense Deduction interest expense under s8-1 depends on the use which has been made of the borrowed funds (deductible if used in current business or to purchase income producing assets) Munro's Case (1926)Specific deductions In exams the more likely deduction questions are about general. These are not in one place s12-5 gives checklist of specific deductions.Examples of Specific DeductionsExpenses for Borrowing s25-25 If you try and get a mortgage loan-fees & legal-long term benefit-> capital but s25-25 authorises deduction if money borrowed used to produce AY. This is spread over the period of the loan or 5 years (shorter one)Legal Expenses Legal expenses that meet s8-1-> incurring legal expenses to buy house that is not deductible because it's about buying capital asset and no deduction. However, there are exceptions s25-25, s25-30, s25-20

Tax related expo

Tax related expenses s25-5 Must have derived AY before liable to pay income tax. Income tax and related expenses not outgoing in course of producing AYBad debts 25-35 Accounting and tax law differ. s25-25 (this section allies to trade debts) authorises deduction of debt that meets criteria, written off as bad in the income year (not just general allowance for), it has been included in your AY (as sales), lent in ordinary course of money-lending business. Recovering amount is AY of income year you recovered it. If not deductible under s25-35 it may be deductible under s8-1 (e.g. loans to employee because nature of loss of outgoing is similar to salary and wages and are deductible because of business connection)

Repairs s25-10distinguish between replacement of subsidiary parts (non-capital) (and you can claim deduction), replacement of the entire asset (i.e. acquiring a new asset, hence capital) distinguish between mere restoration (non capital) and improvement (capital e.g. new engine with more capacity)- whenever you change character it is capital Western Suburbs Cinemas (1952)Capital AllowanceEntertainment Expenses Div32entertainment by drink (wine), accommodation or travel with entertainment, s32-5 denies deduction of outgoings in providing entertainment because difficult to separate income producing component and private component for entertainment, exceptions are in 32-B entertainment treated as fringe benefit, food incidental to a seminar that goes for at least 4 hours.Gifts and contribution div30Gift that lacks connection with AY are outgoing of private neture-> not deductible under s8-1 Encouraging donation to charities, Div 30 allows deductionParent makes donation of last amount in relation to students doing something, if you expect material advantage it's not a giftMcPhail's Case (1968)Substantiation Div900Must prove with written evidentCar expenses Div 26Deduction of Tax LossesNet Exempt incomeDeduction of Tax LossesSometimes set as exam question in accounting profit and loss is on the same number line. In tax law you need to abandon this concept. Taxable income and tax loss are not on the same number line. When taxable income you can't say 'I have tax loss' only 'I have no taxable income' Tax losses only TL=D-AY-NEYRestrictions on Deduction of tax losses

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