ap_ddn01

Some deductions you can claim: division 25

25-5 Tax-related expenses

25-10 Repairs

25-15 Amount paid for lease obligation to repair

25-20 Lease document expenses

25-25 Borrowing expenses

25-30 Expenses of discharging a mortgage

25-35 Bad debts

25-40 Loss from profit-making undertaking or plan

25-45 Loss by theft etc.

25-50 Payments of pensions, gratuities or retiring allowances

25-55 Payments to associations

25-60 Parliament election expenses

25-75 Rates and land taxes on premises used to produce mutual receipts

25-5 Tax-related expenses

section 25-5 allows you to deduct an expense to the extent that it is for

(a) managing your income tax affairs

(b) dobbing in your mates to the Tax Office, or to put it more correctly, complying with an obligation imposed on you by a Commonwealth law, insofar as that obligation relates to the income tax affairs of another person

Answer this question….

Does section 25-5 allow a deduction for payment of income tax?

Yes No

Refer section 25-5 (2) (a) & (b)

Answer this question….

Does section 25-5 allow a deduction for interest on loans taken out to get the money to pay your income tax bill?

Yes No

Refer section 25-5 (2) (c)

Answer this question….

Does section 25-5 allow a deduction for advice you need to help you evade tax by committing an offence against an Australian or foreign law?

Yes No

Refer section 25-5 (2) (d)

So you get a deduction for the cost of advice about Commonwealth tax law?

That depends upon who is giving the advice

Section 25-5 (2) (e) confines the 'tax deductible' advice givers to

a registered tax agent or someone exempted from the Tax Agent registration provisions

a legal practitioner

No deduction for capital expenses

Answer this question….

Can you claim a deduction for the purchase price of a computer used to prepare your tax returns under section 25-5?

Yes No

Refer section 25-5 (3), (4) & (5)

The cost of a computer would be a capital expenditure and thus disallowed by section 25-5 (3). You will be able to claim depreciation on the computer to the extent you use it to prepare your tax return - this is deemed by section 25-5 (5) to be a use of the property for an income producing purpose.

25-20 Lease document expenses

Section 25-20 (1) allows you to deduct expenditure you incur for preparing, registering or stamping:

(a) a lease of property; or

(b) an assignment or surrender of a lease of property;

if you have used or will use the property solely for the purpose of producing assessable income.

Section 25-20 (2) allows a partial deduction if you have used, or will use, the leased property only partly for that purpose.

Answer this question….

which of the following would not be a deduction under section 25-20

1. Cost of preparation, registration and stamping of a lease on a factory

2. Costs for preparing lease assignment of a car used partially for business

3. Cost of preparing lease surrender of a speedboat used by an amateur boatman

enter 1,2 or 3?

A partial deduction would be allowed would be allowed for 2, nothing for 3

In those states and territories where properties are held under a leasehold type arrangement, this deduction would extend to properties purchased for rental and other income producing purposes.

25-25 Borrowing expenses

Interest is clearly a revenue expense but expenses in arranging a loan would be capital in nature and so not qualify for deduction under section 8-1

Section 25-25 (1) says you can deduct expenditure you incur for borrowing money, to the extent that you use the money for the purpose of producing assessable income. In most cases the deduction is spread over the period of the loan.

For the cases where the deduction is not spread, see subsection (6).

What kind of borrowing expenses qualify?

Procuration fees

Legal expenses and stamp duty

Valuation & survey fees

Brokers commission, underwriters fees, prospectus, advertising, ing

and other expenses relating to issue of debentures

Cost of arranging bank overdraft

Mortgage loan guarantee insurance

Refer assessing handbook - para 2.6.34-35

Is there a maximum deduction?

The answer is 'yes' and 'no' - refer section 25-25 (5)

The expenses can be claimed in instalments over

the term of the loan or

5 years -

whichever is less.

So just divide the borrowing expenses by the term of the loan and deduct that amount each year.

Section 25-25 (6) allows you to deduct the whole amount is if it $100 or less.

Example:

In 1997-98 you borrow $100,000 and incur expenditure of $1,500 for the borrowing.

You use the money to buy a house.

Throughout 1998-99 you rent the house to a tenant.

The original period of the loan is 4 years starting on 1 September 1997.

What is the maximum amount you can deduct for the expenditure for 1997-98?

We will Apply the method statement found in section 25-25 (4):

Step 1.

Work out the remaining expenditure as follows:

For the income year in which the period of the loan begins, it is the amount of the expenditure.

For a later income year, it is the amount of the expenditure reduced by the the maximum amount that you can deduct for the expenditure for each earlier income year.

The remaining expenditure is $1,500 (the amount of the expenditure).

Step 2.

Work out the remaining loan period as follows:

For the income year in which the *period of the loan begins, it is the period of the loan (as determined at the end of the income year).

For a later income year, it is the period from the start of the income year until the end of the period of the loan (as determined at the end of the income year).

The remaining loan period is 4 years from 1 September 1997 (1,461 days).

Step 3.

Divide the remaining expenditure by the number of days in the remaining loan period.

The result is $1,500 divided by 1,461 = $1.03.

Step 4.

Multiply the result from Step 3 by the number of days in the remaining loan period that are in the income year.

The result is $1.03 multiplied by 302 days = $310.06.

Answer this question….

Loan granted on 1^st of July for rental property.

Life of loan = 2 years

Borrowing expenses = $200

What deduction will be allowed each year?

Deduction of $100 allowed each year.

Refer para 14-800 - CCH Master Tax Guide for another example.

Section 25-25 (3) allows a partial deduction if the property is used only partly for producing assessable income

Mortgage discharge expenses

As you will be aware, a mortgage is a charge over property, given by a borrower to a lender as security for a loan. By executing a mortgage, the borrower is prevented from disposing of the property or using it as security for another loan of equal priority until the loan obligation is fully met and the mortgage discharged.

A mortgage is registered at a public titles office against the title of the property and registration fees are charged when the mortgage is first registered (these would be borrowing expenses) and when the mortgage is discharged.

Section 25-30 allows a deduction for expenditure incurred in connection with the discharge of a mortgage given as security for

the repayment of money borrowed .. Or ..

Payment, in whole or part, of the purchase price of a property

for the purpose of producing assessable income.

What 2 types of payment are excluded from deduction under section 25-30?

Section 25-30 (4) disallows payments of

principle and

interest

Section 25-30 (3) allows a partial deduction is allowed if the property is used only partly for producing income.

What does Expenditure in connection with the discharge of a mortgage mean?

In case Q23 (83 ATC 84) it was claimed that a payment to a company to guarantee the repayment of a loan was a payment in connection with the discharge of a mortgage, and the board did not seem to deny this proposition

Bad debts

Section 25-35 allows a deduction for a bad debit if

There must be a debt

It must be bad (not just doubtful)

It must have been written off during the year of income - the Commissioner requires written evidence of this.

The debt must have been brought to account as income.

Note that if the taxpayer is carrying on a business of money lending we substitute a new condition 4 for the one shown above - what is it?

as long as the money was lent in the ordinary course of business, and the debt is written off as bad, the deduction will be allowed.

The Commissioner must be satisfied that a business of money lending is really being carried on. If the taxpayer merely suffered a loss on investment or other loans then the sum must have been included in income if a deduction is to be allowed. (Refer para 2.6.26 - Assessing handbook see also para 14-582 - CCH Master Tax Guide)

The virtues of double entry accounts

The Tax Office staff is directed to pay special attention to returns where the 'particulars relating to sources of information' block on page 1, does not indicate that a complete set of double entry books has been kept.

Can you see why? Refer para 2.6.24 - Assessing handbook if you can't.

Take the case of a trader with cash and some credit sales - assume he adds closing debtors to cash sales then reduces this sales figure to take into account debtors at the start of the year

It is probable that such a method will fail to bring to account debts created and written off in the same year. This situation comes about like this. The trader writes off the bad debts and so does not include them in the closing debtors he adds to cash sales to get his 'income' figure.

The debt will not have been included in income, so the requirement under section 25-35 that the bad debt must have been brought to account as assessable income of any year, will not have been satisfied.

Accordingly, it is important that the person preparing the tax return be satisfied that debts created and written off as bad during the same year actually end up in closing debtors.

Similarly, the opening debtors for the next year must be reduced by the amount of bad debts written off at the previous balance date.

To do this an assurance will be sought that the total sales figure includes cash and all credit sales and that the sales figure is not obtained by adjusting debtors at the beginning and end of the year.

Refer assessing handbook - para 2.6.25.

Refer CCH Master Tax Guide - para 14-580

Refer CCH Master Tax Guide para 14-580

This amount has not been written off

Refer section 25-35(2)

Remember, a deduction may be allowed for bad debts under section 8-1 even if

it does not qualify under section 25-35.

Tax Avoidance schemes trafficking in bad debts

This was a boom area for tax avoidance specialists, especially in the 1970's so you will see references to bad debts, which have been, purchased in section 25-35 (2), (3) and (4). The deductions for such debts are confined to moneylenders.

Section 25-35 (5) contains a table for the circumstances under which companies can write off bad debts.

Loss from profit-making undertaking or plan

Before the advent of the capital gains provisions, there was a provision (section 26(a) of the 1936 Income Tax Assessment Act) which included in income

the gain on property acquired with the intention of resale at a profit and

the gain from the carrying on or carrying out of a profit-making undertaking or plan

The provision was interpreted so narrowly by the courts that it was finally pronounced moribund and the capital gains provisions were inserted into the Assessment Act.

However, section 15-15 still includes in assessable income the profit from such profit-making undertakings and plans that were instituted before or after 20 September 1985.

So, if

You have notified the Commissioner of such an undertaking or plan, and

he believes you, and

you make a loss,

section 25-40 will allow you to deduct that loss.

Loss by theft etc

You can' say a loss of money is an expenditure incurred in gaining assessable income, so this provision allows a deduction for income you have included in your accounts, but which you will never get your hands on because one of you employees has run off with it. Section 25-45 allows a deduction if you discover the loss in the income year; and

the loss was caused by

theft,

stealing,

embezzlement,

larceny,

defalcation or

misappropriation

by your

employee or

agent (other than an individual you employ solely for private purposes);

if the money was included in your assessable income for the income year, or for an earlier income year.

Payments of pensions, gratuities or retiring allowances

If you close down your business, you can hardly say amounts paid to the employees who will no longer be working for you to produce assessable income are expenses incurred in gaining income

Section 25-50 allows a deduction for a payment of

pension,

gratuity or

retiring allowance

that you make to:

an employee; or

a former employee; or

a dependant of an employee or a former employee.

So any payment to an ex employee or dependant will qualify?

Not quite

The payment must be made

In good faith

in consideration of the past services of the employee, or former employee,

in any business that you carried on for the purpose of gaining or producing assessable income.

The Commissioner has ruled on the types of payment which qualify in IT 2621

Remember, this is just a safety net provision. If you can deduct a payment under any other provision you would not get a deduction under section 25-50.

Payments to associations

There are two provisions that authorise deductions for union dues and fees paid to professional organisations. These are section 8-1 and section 25-55 of the Assessment Act.

Section 25-55 imposes a $42 limit on such expenditure, so they will usually be claimed and allowed under section 8-1. If you deduct a payment under section 8-1 instead of this section:

the payment does not count towards the $42 limit; and

the amount that you can deduct for the payment is not limited to $42.

Periodical subscriptions to an association primarily engaged in protecting it's members interests, improving their working conditions and remuneration, or in disseminating information designed to keep members abreast of current developments in their employment field are accepted by the Commissioner as allowable deductions under section 8-1

Payments to the industrial registrar in lieu of payments to a union by persons whose conscientious beliefs prevent them from joining a union would also be allowable

Special levies may also be deductible, but they must be clearly incidental and relevant to the derivation of income by the person claiming the deduction.

For example, a levy paid by members of the association of professional engineers to defray costs of arbitration proceedings. A levy to provide funds to acquire or construct premises, etc by a trade union or professional association would also be allowable - ITR 2416.

However, a levy to support a political party in an election would be too remote from the income producing process to qualify for deduction. A levy to provide financial relief for union members or families during a strike or lay-off would not be allowed

Parliament election expenses

Section 25-60 allows a deduction for expenditure you incur in contesting an election for membership of:

the Parliament of the Commonwealth; or

the Parliament of a State; or

the Legislative Assembly for the Australian Capital Territory; or

the Legislative Assembly of the Northern Territory of Australia.

However, section 25-70 stops you deducting expenditure in respect of providing entertainment unless

The entertainment that is available to the public generally; or

The expense is for providing food or drink to yourself, and no-one else

Rates and land taxes on premises used to produce mutual receipts

What are mutual receipts?

The mutuality principal says you can not derive income by trading with yourself.

If you have ever walked into a club, which has poker machines, and been required to sign in as a non-member, you will have had a brush with the mutuality principal. A poker machine club can not derive income from the gambling conducted by its own members. That would breech the mutuality principal. Only the income from gambling by non-members is deemed to be income derived by the club, so the non-members visitors records are used to calculate the proportion of the total gambling receipts, which the Tax Office can treat as taxable income.

So why a separate provision allowing for deduction of rates and land taxes on premises used to produce mutual receipts

Because section 8-1 would only allow a deduction for rates and taxes on properties that were used in the production of assessable income, which does not include mutual income.

Section 25-75 allows a deduction for rates and taxes for:

rates which are annually assessed;

land tax imposed under a State law or Territory law.

if the premises are used

for the purpose of producing mutual receipts; or

in carrying on a business for the purpose of producing mutual receipts.

So a club or other mutual organisation carrying on a business can claim all the rates and taxes they pay either under

section 25-75 for the mutual income arising from trading by its members among themselves

section 8-1 for the non mutual income derived from non-members