Blended Learning 7 - discussing Section 8-1 ITAA97 and summary of FCT v James Flood Pty Ltd (1953) PDF

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discussing Section 8-1 ITAA97 and summary of FCT v James Flood Pty Ltd (1953) 88 CLR 492...

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1. State the positive limbs (Section 8-1 ITAA97) and discuss the meaning of “incurred” In regard to the positive limbs under Section 8-1(1), you can deduct and loss or outgoing that: a) Is incurred in gaining or producing your assessable income b) Is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. There is an intertwining connection between the limbs, they are not mutually exclusive. They are alternatives. The first is open for all taxpayers whilst the second limb is catered to business taxpayers. In Ronpibon Tin NL v FCT; Tong Kah Compound NL v FCT (1949) 78 CLR 47, which was a case resolved in the High Court on section 8-1, it saw that both limbs are overlapping in their outreach but the second one extends in its application. In reference to the meaning of “Incurred”, we reach a blockade where the word is not defined in ITAA and the courts have decided against of giving a meaning to it in the cases referenced below: New Zeleand Flax Investments Ltd v FCT (1938) 61 CLR 179 FCT v James Flood Pty Ltd (1953) 10 ATD 240 and there are more examples. The time frame and moment the taxpayer committed to the expense is significant as it impacts the tax year when a tax deduction could be claimed by the taxpayer. Which makes it an important aspect when people are planning their taxes. The timing of which the deduction is governed is when an expense is ‘incurred’ under Section 8(1) ITAA 1997. There is a principle that we can learn from the aforementioned cases and other cases as well where we can start classify them and separating them into 2 types: 

Where a taxpayer makes payment for an outgoing during the income year: When a taxpayer outlays money for any product, service, or any form of supply. The person has already committed, by making the payment, hence the outgoing is incurred.

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Where a taxpayer has not made payment for an outgoing during the income year: A debt is incurred if the taxpayer has committed to the liability. To illustrate this point, we will look at an example. If we fill up our car with petrol worth $100. We have an account at the station and we happen to pay the amount on the 31st July of the following income year. Since we have already committed to it in the form of driving the car with the petrol, we are incurring the liability.

2. Summarize any ONE of the cases listed in your lecture slides for Topic Week 8

Deductions : General We will look into FCT v James Flood Pty Ltd (1953) 88 CLR 492 as the case in question. The taxpayer’s company, which is a business that builds motor-body and general engineering, accrued a lump sum of money as a contingency to facilitate paying their employees holiday pay. It is significant to note that the company is legally compelled by an award they received to grant their employees holiday pay. However, there are variables that may impact an employee’s right for the holiday pay (absenteeism). The company claimed the sum of money as a deductible. The issue of the case is whether the sum is deductible or not as the company hadn’t yet ‘incurred’ a loss or outgoing. The decision was that it was not deductible. Since the firm’s obligation to pay their employees holiday pay was susceptible to be impacted by a plethora of variables, it couldn’t claim to have ‘incurred’ and outgoing. This means that holiday pay is deductible year by year as it is paid. The high court referenced Lord Cooper from the James Spencer & Co. v. Commissioners of Inland Revenue (1950) SLT 266 to provide more reasoning for their ruling. The working rule that acts as a guide to crediting or debiting when computing tax that have succeeding credits or debits is to recognize the accounting period under which the liability was established in and fulfill it in the respective year. Lord Cooper went on to mention that at the time of the decision, he saw that the climate was behaving in conventional commercial and accounting practice rather than a methodical jurisprudence. Under the Australian Law, the expression “losses and outgoings incurred” must be fulfilled. Although they are more precise than “established”, but they do not acknowledge to deduction of charges unless in the process of gaining or producing the assessable income or facilitating the usual business operation....