Section81(positivelimbs)

GENERALDEDUCTIONS

Youcandeductfromyourassessableincomeanylossor
outgoingtotheextentthat:
Itisincurredingainingorproducingyourassessable
income
Itisnecessarilyincurredincarryingonabusinessfor
thepurposeofgainingorproducingyourassessable
income

Chapter13
Foundations of Taxation Law

Section81(negativelimbs)

However,youcannotdeductalossoroutgoingunderthis
sectiontotheextentthat:
Itisalossoroutgoingofcapital,orofacapitalnature
Itisalossoroutgoingofaprivateordomesticnature
Itisincurredinrelationtogainingorproducingyour
exemptincomeornonassessablenonexemptincome
AprovisionofthisActpreventsyoufromdeductingit

[13.1](b)

Foundations of Taxation Law

Apportionment

'Totheextentthat'indicatesalossoroutgoingmayneed
tobeapportioned
'thereareatleasttwokindsofitemsofexpenditurethat
requireapportionment.Onekindconsistsinundivided
itemsofexpenditureinrespectofthingsorservicesof
whichdistinctandseverablepartsaredevotedtogaining
orproducingassessableincomeanddistinctandseverable
partstosomeothercause.Theotherkindof
apportionableitemsconsistsinthoseinvolvingasingle
outlayorchargewhichservesbothobjectsindifferently.'
(RonpibonTin)

[13.2](b)

Foundations of Taxation Law

[13.1](a)

Foundations of Taxation Law

Lossoroutgoing

'Loss'ariseswheretaxpayersfinancialresources
diminished
'Outgoing'involvessomeformofpayment,outlayor
expenditure

[13.2](a)

Foundations of Taxation Law

Nexusrequirement

Theremustbeasufficientnexusbetweenalossor
outgoingand:
thegainingorproductionofthetaxpayersassessable
income,or
thecarryingonofthetaxpayersbusiness
Particularlossesandoutgoingsarenotrequiredtobe
matchedtospecificamountsofassessableincome
Foralossoroutgoingtobedeductibleinayear,itdoesnot
necessarilyhavetoproduceincomeinthatyear itis
sufficientifitisdesignedtoearnincomeinfutureyears

[13.3](a)

Foundations of Taxation Law

'Inthecourseof'

'Theexpressioningainingorproducinghastheforceof
inthecourseofgainingorproducingandlooksratherto
thescopeoftheoperationsoractivitiesandtherelevance
theretooftheexpenditurethantopurposeinitself.'
(AmalgamatedZinc)

[13.3](c)

Foundations of Taxation Law

Essentialcharacter

Foranoutgoingtosatisfythepositivelimbsitmusthave
theessentialcharacterofa'working'or'business'expense
(Lunney)
Courtstraditionallycharacteriseoutgoingsbyreferenceto
legalrightsoradvantagesataxpayerobtainsfromincurring
theexpenditure(CecilBros,Phillips)
Courtsarepreparedtoalsotakesubjectivecriteriainto
accounttocharacterisevoluntaryoutgoingswherethe
incomeproducedislessthantheamountoftheoutgoings
(Ure,Fletcher)

[13.3](e)

Foundations of Taxation Law

Temporalconnection

Lossesoroutgoingsthatare'preliminary'tothe
commencementofanincomeproducingorbusiness
activityarenotincurred'inthecourseof'suchactivityso
arenotdeductible(SoftwoodPulp,Griffin,Goodman
FielderWattie)
Providedtheoccasionofalossoroutgoingcanbetracedto
businessoperationsthatwereformerlycarriedonbythe
taxpayerforthepurposeofgainingassessableincome,loss
oroutgoingisusuallydeductible(Placer,Brown,Jones)

[13.3](g)

Foundations of Taxation Law

'Incidentalandrelevant'

'Forexpendituretoformanallowabledeductionasan
outgoingincurredingainingorproducingtheassessable
incomeitmustbeincidentalandrelevanttothatend....
[I]tisbothsufficientandnecessarythattheoccasionofthe
lossoroutgoingshouldbefoundinwhateverisproductive
oftheassessableincomeor,ifnonebeproduced,wouldbe
expectedtoproduceassessableincome.'(Ronpibon)

[13.3](d)

Foundations of Taxation Law

Necessarilyincurredincarryingona
business

Anoutgoingisnecessarilyincurredincarryingona
businessifitis'dictatedbythebusinessendstowhichitis
directed'(Snowden&Willson)
'Therequirementthattheclaimedoutgoingbe
necessarilyincurredincarryingontherelevantbusiness
doesnot,inthecontext,meanthattheoutgoingmustbe
eitherunavoidableoressentiallynecessary.Nordoesthe
wordnecessarilyimportarequisiteoflogicalnecessity.
Whatisrequiredisthattherelevantexpenditurebe
appropriateandadaptedfortheendsofthebusiness
carriedonforthepurposeofearningassessableincome.'
(MagnaAlloys)

[13.3](f)

Foundations of Taxation Law

First negative limb capital

Onceandforalltest: expenditure incurred'onceandfor

all'isusuallycapitalinnature;expenditureincurred
'regularly'isusuallyrevenueinnature(Vallambrosa
Rubber)
Enduringbenefittest: expenditureincurredtobringinto
existenceanassetofa'lastingnature'isusuallycapitalin
nature(BritishInsulated&HelsbyCables)
Businessentitytest: expenditurethatrelatestothe
taxpayers'profityieldingstructure'isusuallycapitalin
nature;expenditure thatrelatesto'theprocessof
operatingit'isusuallyrevenueinnature(SunNewspapers)

[13.4](a)

Foundations of Taxation Law

Othernegativelimbs

Secondlimb: Lossesoroutgoingsofa'privateordomestic
nature'
Thirdlimb: Lossesoroutgoingsincurredingainingexempt
incomeornonassessablenonexemptincome
Fourthlimb: Lossesoroutgoingsthatarespecificallynot
deductibleunderanotherprovision

Clothingexpenses

[13.4](b)

Foundations of Taxation Law

Travelexpenses

Costoftravelon(ie'inthecourseof')workisgenerally
deductible(Taylor)
Costoftravellingbetweenhomeandworkordinarilynot
deductible(Lunney&Hayley)
Exceptionsapplytotaxpayerswhoare:
Subjecttospecificemploymentdemands(JohnHolland)
Itinerantworkers(Wiener)
Onstandbyduties(Collings)
Involvedintransportingbulkygoods(Vogt)
Costoftraveltofindnewemploymentisordinarilynot
deductibleasitcomes'toosoon'toincomeearning
activities(Maddalena)

[13.6](a)

Foundations of Taxation Law

Selfeducationexpenses

Costofselfeducationexpensesgenerallydeductible
providedtheoutgoingsrelatetoanoccupationinwhich
thetaxpayeriscurrentlyengaged(Finn,Hatchett,
Highfield)
Itisnotnecessarytoshowthattheexpenditurewillresult
inextraincomeforthetaxpayer itissufficientifthe
expenditureisincurredwiththeobjectofimprovingthe
taxpayers'proficiency'intheiroccupation(Studdert)

[13.7](a)

Foundations of Taxation Law

'generallyexpenditureonordinaryarticlesofapparelwill
notbedeductible,notwithstandingthatsuchexpenditure
isnecessarytoensureasuitableappearanceinaparticular
joborprofession.Anemployedsolicitormayberequiredto
dressinanappropriatewaybyhisorheremployer,but
thatfactalonewouldnotbringabouttheresultthatthe
expenditurewasdeductible.'(Mansfield)
Costofclothingmaybedeductibleinspecialcases:
Frequentchangesofclothing(Edwards)
Largershoesforworkinginaeroplane(Mansfield)
Sunprotectionitems(Morris)

[13.5](a)

Foundations of Taxation Law

Travelbetweenunrelated
placesofwork

Costoftravellingbetweenunrelatedplacesofworkis
ordinarilynotdeductibleunders81ITAA97(Payne)
However,s25100ITAA97providesthatthecostof
travellingbetweentwounrelatedplacesofworkmaybe
deductiblewhere:
Taxpayertravelsdirectlybetweenthoseplaces
Neitherplaceisthetaxpayershome

[13.6](b)

Foundations of Taxation Law

Selfeducationexpenses(cont)

Selfeducationexpensesthatrelatetoanoccupationin
whichthetaxpayerisnotcurrentlyengagedorthatrelate
toobtainingnewemploymentaregenerallynotdeductible
(Roberts)
ExceptionoccurredinAnstis ,whereselfeducation
expenseswerelinkedtootherkindsofassessableincome
(eg YouthAllowance)
Section2619ITAA97introducedinresponsetoAnstis
disallowsdeductionsforselfeducationexpensesrelating
to'rebatable benefits'(ie certaingovernmentassistance
payments)

[13.7](b)

Foundations of Taxation Law

Selfeducationexpenses(cont)

Section2620ITAA97deniesdeductionsforcertainstudy
relatedpayments(eg HELPloanrepayments)
Section82AITAA36deniesdeductionsforthefirst$250of
'expensesofselfeducation'

Homeofficeexpenses

[13.7](c)

Foundations of Taxation Law

Whetherlegalexpensesareofarevenueorcapitalnature
isusuallydeterminedaccordingtothe'businessentitytest'
Legalexpensesincurredforthepurposesofprotecting,
preservingorenlargingthetaxpayersbusiness
organisationwillusuallybecapitalinnature(BrokenHill
Theatres,JohnFairfax,PBLMarketing,Sunraysia)

[13.11](a)

[13.8]

Foundations of Taxation Law

Interestexpenses

Legalexpenses

Ahomedoesnotordinarilyconstitutebusinesspremises
andtaxpayersarethereforenotordinarilyentitledto
deductionsforexpensessuchasrentpaidtoleasetheir
homesorinterestpaidontheirhomeloanseventhough
theymaintainahomeoffice(Forsyth,Handley)
Expensesrelatingtomaintenanceofahomeofficemay,
nevertheless,bedeductiblewherethetaxpayershomeis
alsoaplaceofbusiness(Swinford)
TR93/30distinguishesbetween:
Occupancyexpenses(egrent,interest,rates)
Runningexpenses(egheating,cooling,lighting)

Foundations of Taxation Law

Deductibilityofinterestusuallydependsuponthe
objectiveusetowhichtheborrowedfundsareappliedand
notthesecurityprovidedfortheloan(Munro)
Interestisordinarilyarevenueoutgoing(Steele)
However,inspecialcases,interestmaybeofacapital
nature(MacquarieBank,StGeorgeBank)

[13.10]

Foundations of Taxation Law

Introduction

TAXTIMING

Incometaxispayableonataxpayerstaxableincomeforan
'incomeyear'
Todetermineinwhichincomeyearordinaryincomeand
generaldeductionsarebroughttoaccount,itisnecessary
toexaminetheterms:
'derived'(whichappearsins65ITAA97)
'incurred'(whichappearsins81ITAA97)

Chapter16
Foundations of Taxation Law

[16.1]

Foundations of Taxation Law

Whenisincomederived?
Whenincomeisderivedisdetermined'bytheapplication
ofordinarybusinessandcommercialprinciples'
Methodsofaccountingforincome:
Thecashbasis(whencashorequivalentisreceived):
Employmentincome(egsalaryandwages)
Incomeofsoletraders(Firstenberg,Dunn)
Theaccrualsbasis (whenincomeisearned):
Incomefromprofessionalpartnerships(Henderson,
Barratt)
Incomefromtradingbusiness(JRowe&Son)

[16.2](a)

Foundations of Taxation Law

Whenisalossoroutgoing
deductible?

Whetheralossoroutgoinghasbeen'incurred'depends
ontheexistenceofaliabilityratherthanwhetherornotit
hasbeendischarged
Foralossoroutgoingtohavebeen'incurred':
Thetaxpayermusthavecompletelysubjecteditselfto
thelossoroutgoing(JamesFlood)
Apresentlyexistingliabilitymustexist(Nilsen
DevelopmentLaboratories)
Theremustbemorethatamereimpending,
threatened,orexpectedliability(NewZealandFlax
Investments)

[16.3](a)

Foundations of Taxation Law

Prepaymentregime

Prepaymentregimecontainedins82KZLtos82KZO
ITAA36
Requirestaxpayerstospreaddeductionsforexpenditure
undercertainagreementsoverthe'eligibleserviceperiod'
Doesnotapplytoexcludedexpenditure(eg expenditure
thatislessthan$1,000)
Specialrulesapplyforcertainarrangements

[45.2](a)

Foundations of Taxation Law

Whichmethodofaccounting?
Themethodtobeadoptedbyataxpayeristhatwhich
'iscalculatedtogiveasubstantiallycorrectreflexofthe
taxpayerstrueincome'(Cardens case)
Themethodtobeusedistheonethatmostaccurately
representsthe'truthandrealityofthesituation'(Ballarat
BrewingCo)

[16.2](b)

Foundations of Taxation Law

Undischargedandestimated
liabilities

Aliabilitycanbeincurredinaparticularyear,even
thoughitisnotdischargedinthatyearandeventhough
thetaxpayerdoesnotknowtheprecisedatetheliability
willbesatisfied(Citylink)
Thefactthattheamountofaliabilitycannotbeprecisely
ascertaineddoesnotnecessarilymeanthattheliabilityis
contingentandthereforenotdeductible(RACVInsurance,
CommercialUnionAssurance)

[16.3](c)

Foundations of Taxation Law

Smallbusinessentitiesand
individuals

SBEsandindividualsthatincurnonbusinessexpenditure
aregenerallyabletodeductprepaidexpenditurefullyin
theyearitisincurred,providedtheeligibleserviceperiod:
Isnotmorethan12months
Endsnolaterthanthelastdayoftheincomeyear
followingtheincomeyearinwhichtheexpenditure
wasincurred

[45.2](b)

Foundations of Taxation Law