Week5-6deductible 1 1 - week5-6 PDF

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[Deductions]

Specific deduction rule should go over the general rule General Deductions (s8-1 of ITAA 97) The general deduction rule ins 8-1 has the potential to apply any type of expense. In order to claim a deduction for an expense under s8-1, we have to satisfy the positive limbs of s8-1 and we cannot fall within any of the negative limbs of s8-1.

Positive limbs (s51(1)ITAA 36): A TP can deduct a loss or outgoing from assessable income to the extent that it is: -

Incurred in gaining or producing Assessable Income; or Necessarily incurred in carrying on a business for the purpose of gaining or producing Assessable Income

‘Negative limbs (s 8-1(2)):

-

Capital/ Capital in nature; or Private or domestic in nature; or o Day-to-day living expenses o Living vs Earning assessable income: FCT vCooper 1991） Incurred in gaining/ producing exempt income; or

-

Specifically denied by another provision of the Act.

-

Positive Limbs – Nexus test Required loss and outgoing must be: Incurred in gaining / producing AI; (required connection between Expenses and Production of AI)under s8-1(1)(a) Necessarily incurred in carrying on a business for the purpose of gaining or producing AI(required connection between Expenses and carrying on of a business to produce AI) under s8-1(1)(b). *An expense may be Partially deductible under s8-1 as only satisfies part of the positive limbs determining

•

whether a loss or

outgoing

is

The incidental and relevant test 偶然和相关的 测试

incurred in the course

of

gaining

or

producing AI: The

incidental

and

relevant

test

•

The essential character test; 基本特征测试;

•

The occasion of the expenditure test;为 为何支 出的

Charles Moore & Co Pty Ltd (1956)-deductible The loss was a natural or recognized incident of the operations pursued by the taxpayer to earn its income,

(nexus

or

connection)

it can be interpreted as ‘in the course of gaining or producing assessable income’ . 这 一 笔钱 必 须是 为 了 工作 而花的。 Herald

and

Weekly

Times

Ltd

v

FCT(1932)-

deductible publishing a newspaper inevitably exposes a publisher to the possibility of being sued for libel. Incidental and relevant expense incurred in the course of publishing a newspaper. (paying for liable claims is a common incident of newspaper publishing business which was a regular

and

almost

unavoidable

incident

poof

publishing). Expenses that are regular and almost unavoidable incident of gaining AI  satisfies 2nd Positive Limb The

essential

character test;

Lunney v FCT(1958) non-deductible The expenses for ‘Travel from home to work’ is to put the TP in the position to gain or produce AI rather than in the production of AI(搭车去上班不算 搭车去上班不算 deduction 不在工 作中 作中) so that this is not satisfy 1st Positive Limbs. The essential character of the expense was to put the taxpayer in a position to gain income rather than being incurred in the production of assessable income. Lodge v FCT(1972) non-deductible Nursery fees which are essentially personal or living expenses. Even if the incurring of the nursery fees was a prerequisite for the derivation of income and its purpose was to enable the taxpayer to earn income, the expense did not have the character of a business expense.

The Occasion of the expenditure test

FCT v Day(2008)-deductible In Day’s case the occasion of expenditure was not his misconduct, but is his employment activity as a customer officer. Therefore there is a connection to the positive limb1. The occasion of the expenditure will be sufficiently connected to production of AI where they arise out of TP’s income-producing activity satisfies 1 st Positive Limbs. If he is not in the employment position, he would not incur that expenses 如果与工作无关择不满足第一个 limb

Nexus

is

too

There are some cases exist where it is questionable as

remote, it

not

to whether a nexus can be established.

deductible.

-

Expenses

involving

alleged

or

actual

wrongdoing by the taxpayer -

Expenses to reduce future expenses

-

Involuntary losses or outgoings

Expenses

Nexus satisfied and deductible for expenses arising

involving

from alleged or actual wrongdoing incurred by:

alleged

or

actual wrongdoing the taxpayer

by

Employees defending improper conduct charges which are “quasi-personal”: FCT v Day (2008). Business taxpayers in respect of defending claims (eg, for libel actions) arising out of the ordinary course of business: Herald and Weekly Times v FCT (1932) and FCT v Snowden v Willson Pty Ltd (1958). Company directors incurring costs to defend criminal charges: Magna Alloys & Research Pty Ltd v FCT (1980). Expenses related to illegal drug business: FCT v La Rosa (2003).

Deductibility is available regardless of the TP's guilt or innocence in relation to the allegations. Snowden’s case and Magna Alloys ‘s case(1980)在下面

FCT v Snowden v Willson Pty Ltd (1958)-deduction Defending reputation is clearly a legitimate purpose, being part of or incidental to business itself. Defending reputation allows to continue earning operation of the business to gain or produce AI. Connection between increase income and defending your reputation. Magna Alloys & Research Pty Ltd v FCT (1980)deduction Company pay expense for director’s mis-conduction. The

expense

were

deductible

as

the

TP

was

inextricably involved in the proceeds and company’s reputation and interests were tied to the directors. So that the expenses of defending director’s reputation is not only in director’s own interest but also to protect the TP’s business. (relating to generating income, it was a legitimate business purpose) OR An expense will be ‘necessarily incurred in carrying on a business to gain AI’ where the person who runs the business

consider

the

expense

desirable

and

appropriate in achieving business ends’’ – business judgement rule Necessarily do not mean ‘unavoidable’ or ‘essential’ satisfies 2nd Positive Limb FCT v La Rosa (2003)-non deduction Even the loss incurred in the course of gaining or producing AI, satisfied positive limb of s8-1, but a new act s 26-54 is being created which denies a deduction in drug dealing. Expenses reduce expenses

to

Nexus established between an expense that improves

future

the taxpayer’s business overall and reduces future expenses Termination payment to end a contract of employment for poor performing staff: W Nevill and Co Ltd v FCT (1937). – deduction – the expense reduced future

expenses which increased assessable income. W’s case=>satisfies 2nd Positive Limb Involuntary losses

Nexus established between an involuntary loss where it or

outgoings

arises out of the taxpayer’s income-producing activities Day’s earnings stolen while on way to the bank: Charles Moore & Co (WA) Pty Ltd v FCT (1956). Earnings stolen -deduction

Whether expenses incurred or

future

prior

the

production of AI have

sufficient

nexus? Future

Future : Steele v DCT (2999) Deductible if incurred in order to gain or produce AI/ in the purpose of gaining or producing AI ‘Expenses incurred to gain AI in FUTURE income year MAY satisfy the positive limbs in some circumstances’ The expense is too preliminary for a business that has yet to commence: Softwood Pulp and Paper Ltd v FCT (1976).conducted a feasibility study and did not proceed with the business. – no deduction The expense is to put an employee in a position to gain or produce assessable income: Lunney v FCT; - Travel to and from work – private expense.

Prior

Placer

Pacific

(1995)Warranty

Management

expense

after

sold

Pty

Ltd

business

-

deduction Deduction for expenses relating to PAST business activities is permitted, even

where the business

activities have ceased at the time of incurring the expenses.

Jones(2002) Interest expenses on loan related to PRIOR business activities is deductible, ceased of the activities is irrelevant. 只适用在 Business Necessarily Incurred

Necessarily means “clearly appropriate or adapted for” Match the expenditure to the type of business of taxpayer The outgoing is reasonably capable of being seen as desirable

or

appropriate

for

the

pursuit

of

the

objectives of the business Examples of expenditure necessarily incurred are: - All expenditure that are obligatory or compulsory eg rates , taxes, registration fees - Losses from a business eg damages for libel - Expenditure

incurred voluntarily on grounds of

commercial expediency - As a consequence of some abnormal event the business require the expenditure to be incurred See Magna Alloys v FCT （1980） and FCT v Snowden & Wilson FCT v Snowden and Willson P/L （1958） ） - deductible under second Limb and perhaps first limb The expense was necessarily incurred because the nature of the business demanded that it be incurred. The expression "necessarily" in section 8-1(1)(b) does not

mean

that

an

expense

is

compulsory

or

unavoidable. The word “necessarily” does not require legal or logical necessity. It is sufficient if the expense is appropriate, adapted

for

or

dictated

by

business

ends

or

commercial necessity - that is, the expense is based on reasonable commercial judgment.

A

speculative

possibility of

builder

inevitably

attacks upon

confronts

its trading

the

character.

Therefore, it was commercially necessary to expend such amounts. Ronpibon Tin No Liability v FCT (1949) (PPT 上的一个案子) The taxpayer earned income from overseas which was exempt and also income in Australia which was taxable. It incurred administrative expenses in earning both types of income. The Court held that a part of the administrative expenses were deductible in relation to the Australian taxable income. Not up to Tax office to impose arbitrary 2.5% of income as deduction but to make actual apportionment The Court said “ 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… it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income….”

Negative Limbs An expense is not deductible to the extent that it satisfies any one of the negative limbs. (1)Capital or capital in nature=>no deductible -

A loss or outgoing that is capital or capital in nature will not be deductible under s8-1:

-

Under Tests: Sun Newspapers (1938) To distinguish capital expense or revenue expense

o

Consider 3 factors under this case: (1) Character of the advantage sought: i.

Whether results in a lasting(capital) or temporary(revenue) benefit for TP 利益是暂或持续

Expenditure which gives rise to an enduring benefit may be capital. BUT enduring does not mean everlasting/forever, a few years is sufficient

(2) Manner in which the benefit is to be used(Capital)/enjoyed(revenue): ii.

Whether it is a single, substantial, enduring benefit that relies upon in a CONSTANT way or enjoy for a short-term sense, even though recurrently 它是一种 单一 单一的 的， 实质 实质的 的， 持久 持久的 的 利益 利益， ， 它以 它以一 一种 持 久的方式依赖，或者享受短期的意义，即使是经常性的 Requires a consideration of whether the benefit is used oneoff (capital) or recurrently (revenue)

(3) Means adopted to obtain the benefits: iii.

Whether through recurrent or one-off payment: 无论是经 无论是经常性还是一 常性还是一 次性付款： -

Recurrent  more likely be Revenue Expenses One-off/ Lump sum  Capital expenditure

Looking at the TP’s business entity -

General principles: ‘Capital expenditure is spent once and for all(capital), and income

o

(Revenue) expenditure is going to recur every year’: Vallambrosa Rubber Co Ltd v Farmer (1910) ‘Expenditure which gives rise to an ‘enduring benefit 持久’ may capital/

o

bring into existences an asset’: British Insulated & Helsby Cables v Atherton (1926) i. o

‘Enduring’ does not mean everlasting 不意味着永恒 ‘Capital Expenses is for the acquisition of a means of production while Revenue Expenses is for the use of a means of production: Sun Newspapers v FCT (1938)

-

Substance over form approach: Purely a question of facts. We take a substance over form approach. The court will look behind the legality and paper work to see what is actually the substance of the transaction but not the form of the transaction. 

National Australia Bank(1965) : Lump sum payment, but=> revenue expense(importantly, the payment was not considered to create a monopoly, or add to the structure if the TP’s business)



Colonial Mutual Life(1953) : monthly rent payment, but =>capital expense(the so-called rent payments were in effect for the acquisition of the land)



Star City(2009) : rent payment, but => capital expense(rent was related the benefits that would be enjoyed in operating the casino under exclusive licence).



BP Australia v FCT(1964) (1965) - Revenue – compensation to petrol stations to stock only BP petrol – adapting to new way of marketing to enhance revenue.



John Fairfax v FCT(2002) – Capital – legal costs to gain control of another newspaper



Broken Hill Theatres v FCT (1952)- Capital – legal fees to oppose new theatre licence - protect the business structure

(2)Must not be Private or domestic in nature s 8-1(2)(b) -

Broadly, it is the expense that put the TP to the position in gaining or producing AI.

-

May also be the expenses that would incurred regardless of the incomeproducing activities  even there is a connection with income-producing activities, expense may still be private or domestic in nature: FCT v Cooper(1991)

-

Day-to-Day living expense(food, clothing & shelter), incurred to put TP in a position, but not incurred in gaining or producing assessable income. FCT v Cooper

-

But, if the food expenditure is incurred in the course of gaining AI  deductible  not domestic: o

Food Critic incur expenditure on food for gaining their AI 会 议 餐 是 可 以 deductible.

o

Expenditure on food incurred while TP is required to travel overnight for working purposes is in the course of gaining AI: TR 98/9 过夜 旅行 的餐点是可以 deductible.

2 future 附加的： Self-education: FCT v Finn(1961) (employer support, collect info for income-producing 与职业相关可以 dud). Activities: improved opportunity for promotion/more income 或者为了升职可以 dud. Relocation expense: Fullerton v FCT. No deduction. Travel: Home and work: Lunney v FCT; it is incurred to position the TP to produce assessable income, not incurred in the course of

gaining/producing AI(Lunney; Hayley)=>not satisfy the positive limbs in s8-1(1). On-call: FCT v Collings; -deduction. Travel between Jobs: Itinerant Worker: FCT v Wiener(1978) 一个工作两个 location 可以 dud, Unrelated jobs under FCT v Payne 是不可以 dud BUT 新出台的 s25-ITAA1997 可以 ded (但是一个工作地点也不可以是 main residence) Child care ： Lodge v FCT ; Nursery fees which are essentially personal or living expenses. Even if the incurring of the nursery fees was a prerequisite for the derivation of income and its purpose was to enable the taxpayer to earn income, the expense did not have the character of a business expense. Colthing: caused by work condition Morris v FCT, industry specific, protective clothing. 公司规定正式衣服干洗费不可以 ded, 但是那种只能在工作 传的例如工地服装，是可以 deduction,如果有公司的 logo 也可以 deductible. Home office expense: Occupancy expense vs Running expense(genuine home office/ for convenience). In gaining employment 找 工 作 的 花 费 猎 头 费 不 可 以 做 deduction; FCT v Maddalena(1971) ; Riddell vFCT;(2009) Legal expenses : 在 specific deduction 中也有提及

(3)Incurred in gaining/ producing exempt or non-assessable income s8-1. Incurred in gaining or producing non-assessable income, cannot

deduct it, including Exempt income or Non-assessable

non exempt income. ， 自己家如果没有出租就不可以 如果没有产生 income 就不可以 deduction， deduction。 。 如果收入本身就是免税的就不可以 deduction, eg: 军人。 (4)Denied by another provision Denied deduction: mainly in Div 26 First group - Always not deductible.

-

All forms of government penalties, whether or not described as penalties, imposed under AU or foreign law: s26-5(a)

Government Penalties 罚金 s 26-5

-

Any court-ordered amounts payable in respect of conviction: s 26-5(b)

≠ Damages

-

Penalties

-

A penalties on private context, like library fine, or sporting club penalty cannot deductible because of s26-5 does not apply.

Related to illegal

-

activities: s 26-54

income is assessable, but expenses is not deductible. -

s 26-

19

Government

introduced

s26-19

after

Anstis’s

case

AnstisvFCT(2010) which denies TP’s deduction for expenses

Relatable Benefits 可 持续的好处

Result of La Rosa and positive limb case 5. So that the

related to youth allowance & austudy -

But if is from a private source and has a condition that you can get the income is to have satisfactory progress in your degree, Anstis case still applies.

Reimbursed Expense

-

Any expenses that has been reimbursed cannot be deducted.

可报销 s 51AH ITAA36 Second group is GENERALLY NOT deductible UNLESS provided as a FB by a employer. If an individual pays the expense=> not deductible But if it is provided by employer as FB=> it is deductible as an expense for FB

Relative’s travel

-

Expenses incurred by TP attributable to a relative’s travel to accompanies TP on a Work-related trip  Not deductible

-

HOWEVER, it’s only deductible where the relative accompanies the TP in his/her own capacity as an employee and would have

expenses: s 26-30

done do regardless of the personal relationship(s26-30(2)) OR If provided as FB  will be deductible: s 26-30(3) Payments to related

-

entities: s 26-35 不合理的工资不可以

reasonable. -

expenses: s 26-45

The ex...