Deductions
you can't claim - capital, private and domestic
Capital outgoings - what are
they and why can't you claim them?
Deductions not allowed if
outgoings are private & domestic in nature
Can a private
expenditure ever be incurred in gaining income?
The purpose of the
expenditure - apportionment of deductions
There are 2 classes of tests applied by
sec 8-1 to losses & outgoings. The first determine whether the expenditure
was 'incurred in' gaining assessable income - we studied those in the previous topic.
These are referred to as the positive tests.
There are also certain negative tests.
The expenditure must not be capital, domestic or private in nature..... We will
study these negative tests in this topic. We will also consider the relevance
of the taxpayer's purpose in incurring the outgoings.
Capital outgoings -
what are they, and why can't you claim them?
Let's go back over sec 8-1
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Was there a loss or outgoing? |
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We refer to these tests as the positive limb of section 8-1 |
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Was it incurred in gaining or producing assessable income? |
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We refer to these tests as the negative limb of section 8-1 |
Did it have a capital nature? |
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Did it have a private or domestic nature? |
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We turn now to the negative part of sec
8-1
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Did it have a capital nature? |
Even if an outgoing is incurred in
gaining assessable income it will not qualify for deduction if it was capital,
private or domestic in nature.
You will recall that we considered the concept of capital when we distinguished it from
income receipts. We likened capital to
the tree and income to the fruit it produced.
Remember that most important attribute of
capital?
It tended to be received less frequently
than income. The more regular the receipt the more likely it was to be income
So it is with expenditure. Payments made
frequently are referred to as expenditure of a revenue nature. Outgoings
incurred with a view to bringing into existence an asset or advantage for the
enduring benefit of a trade or business are said to be in the nature of capital
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Did it have a capital nature? |
This would be an outgoing of capital
These were the facts in the Sun
Newspapers case which is discussed at para 14-060, 31-160 of the CCH Master Tax
Guide.
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Did it have a capital nature? |
Capital and revenue expenditure can be
distinguished in terms of the concept of the 'profit yielding subject'. This
could be as tangible as ... a great aggregate of buildings or as intangible as ... the widespread or general
reputation of a tradesman and the habitual patronage of his clients or
customers ... Or an organised method of serving their needs
Expenditure on
establishing,
replacing
or enlarging
the 'profit yielding subject' will have
the nature of capital
Expenditure on the processes of operating
the profit-yielding subject will have a revenue nature
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Did it have a capital nature? |
Three questions can be asked to help
arrive at an answer to this question.
1. What
advantage was sought?
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Capital Think of it as the tree which produces the fruit |
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Revenue Think of it as the fruit which comes from the tree |
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Enduring advantage = capital |
short term advantage = revenue |
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2. How
will the advantage be used?
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Capital Think of it as the tree which produces the fruit |
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Revenue Think of it as the fruit which comes from the tree |
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Over the long term = capital |
In the short term = revenue |
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3 What
means was adopted to acquire it?
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Capital Think of it as the tree which produces the fruit |
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Revenue Think of it as the fruit which comes from the tree |
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One off payment = capital |
periodic payments = revenue |
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Deductions not allowed
if outgoings are private & domestic in nature
Private and domestic outgoings the
concept of private expenditure is fairly easy to understand. Expenditure on
such items as food, clothing, shelter, general health are private or domestic
outgoings
The essential character of these
outgoings is such that they would not usually be 'incurred in gaining income'
even though they might be incidental and relevant - child minding expenses,
travel to and from work
Can a private
expenditure ever be incurred in gaining income?
There can be cases in which they are so
closely associated with the income producing processes as to take on the
essential character of outgoings incurred in gaining income. Such cases are
rare and clearly defined eg the cost of food consumed in entertaining clients
by a salesman. In this case we would consider the private nature of the
outgoing to be inconsequential compared to its essential character of an
outgoing incurred in gaining income
It is safe to say that if an expense has
a private or domestic nature no deduction will be allowed
The purpose of the
expenditure - apportionment of deductions
If you refer to sec 8-1 in the Act you
will notice that losses a outgoings are allowable deductions to the extent to
which they are incurred in gaining or producing assessable income
Want to check it? Go ahead - section 8-1
Hang on, we'll save you the trouble….
(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.
(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; or
(b) it is a loss or outgoing of a private or domestic nature; or
(c) it is incurred in relation to gaining or producing your *exempt income; or
(d) a provision of this Act prevents you from deducting it.
Deductions are allowed for losses and
outgoings 'to the extent' to which they are incurred in gaining assessable
income and 'to the extent' to which they are not capital or private and
domestic in nature
So ... If an outgoing is incurred only
partly in gaining income then only that part of the expenditure will be allowed
as a deduction
These are the facts of Ure's case which
is discussed at para 14-070 & 14-740 of the CCH Master Tax Guide
These are the facts of Phillip's case,
which is discussed at para 14-070 of the CCH Master Tax Guide
What was the difference between the 2
cases. To discuss this we must first see what they had in common
In both cases the expenditures were
different from the usual outgoings deducted under sec 8-1. In the usual case
business outgoings are involuntary - the taxpayer has no choice but to pay the
money.
But in these cases the expenditures were
voluntary ... There was no external requirement that they be incurred
In such cases of voluntary expenditure
the courts take into account a wider range of considerations in determining the
essential character of the outgoing
One such consideration is the purpose of
the taxpayer in spending the money. If the objects and advantages which the
taxpayer sought in incurring the expenditure were not merely those of gaining
income, but included other objectives, such as benefiting a family trust, then
only so much of the expenditure as relates to the gaining of income will be
allowed as a deduction
In Ure's case, the court allowed a
deduction up to the amount of income derived ($660) ... It was clear that at
least $660 of the interest paid was incurred for the purpose of producing
income.
In Phillip's case, the deduction was
allowed in full. The clerical back up services had to be obtained and the
commercially realistic rate raised the presumption that the outgoings were
incurred for the purpose of producing assessable income.
It would seem that the purpose of the
taxpayer in making the expenditure will only be relevant to its essential
character where it is made voluntarily. Voluntary expenditures are less common
than involuntary business expenses
A taxpayer purchases a house and rents it
out. Because of the high interest rate he must pay, the rental income does not
recoup him for the amounts he pays in interest. Would a deduction be allowed?
This problem was addressed in the
negative gearing provisions, which allowed a deduction only up to the amount of
rental income received.
This legislation had only a short life -
before the government which had introduced them bowed to the housing lobby
which claimed they were responsible for a dramatic down-turn in the building of
rental accommodation.
A factory would be a capital item
This would be capital
This would be a recurring expense against
revenue
If the payment was desirable or
appropriate from the point of view of business ends, then it would be allowed.
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