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The objective of this paper is to focus on allowable deductions and exceptions to the same.

Specifically, the following points are examined with help of the case study;

Whether or not an expense is deductable;


When the question of deductable or non-deductable arises;
General deduction provisions under section 8-1 of ITAA1997;
Certain expenditure that is not allowed as deductable in the act.

As per S 8-1 ITAA97, taxpayers can subtract their deductions from the assessable income to get
the taxable income of the year. Most of the deductions fall under the category of General
Deductions. Certain amounts are not allowed as deductions under section 8-1(2) and 8-5(2),
though they fall under allowable deductions.
TAX CONSEQUENCES FOR JAMES
-

Salary costs of $100,000


EXPENSE
$100,000

DEDUCTABLE

NON-DEDUCTABLE

An employer is liable to pay his employees as per part III of the Employment Act. An employer
can generally deduct the amount paid to employees for the services performed by them. The pay
can be in form of cash, services or property. 1 It may include;

Wages
Salaries
Bonuses
Commissions
Non cash compensations such as vacation allowances
Fringe benefits

Employees pay must be a necessary business expenses and ordinary in nature to be deductible.
In addition the pay must meet the following tests;
TEST 1: It must be reasonable.

TEST 2: It must be for services performed.

1 Publication 535 (2014), Business expenses, IRS Publications, retrieved from;


http://www.irs.gov/publications/p535/ch02.html

The duties performed by the employee


The volume of business handled

Kind of pay: regular wages or salary


Achievement awards: to be given to employee

The character and amount of responsibility


The history of pay of employee

for length of service or safety achievement.


Bonuses paid to employees
Fringe benefits are generally deducted.

From above tests, it can be implied that whole amount of outgoing (in form of salary) constitutes
grossly excessive expenditure. Such type of outgoing is out of all the proportion to the secured
benefit.
Leading case on this point is: Robert G Nall Ltd. v FC of T2
Facts of the case are: A director is entitled to a salary of $5,000 p.a. under the taxpayer
companys Articles of Association to Salary. Even after the directors duties had shrunk to merely
collecting rents and debts due, the company continued to pay him.
Held: it was held that there is great disproportion between the services rendered and expenditure
in the business of the company. Accordingly the payment was not deductable.
In case of James, it can be assumed that salaries are paid in proportion to services rendered and
benefits derived. Hence the amount is a deductable expense.
-

Salary paid to Ann, daughter of James, who works once a week and being paid
$40,000 p.a.
EXPENSE
$40,000

DEDUCTABLE

NON-DEDUCTABLE

Tax law allows deduction of any expenses that is incurred for the purpose of earning income
from a business. The condition is expense must be reasonable. Since the amount paid to Ann, is
for the services rendered by her is considered to be reasonable can be claimed for.

2 Robert G Nall Ltd. v Federal Commission of Taxation, retrieved from


http://law.ato.gov.au/atolaw/view.htm?docid=DXT/TD2008D16/NAT/ATO/00001

Leading case on this point is: Gabco Ltd. V. Minister of National Revenue3
Facts of the case are: there held a dispute over the quantum of wages paid to a family member.
Held: it was held that business man would have been contracted to pay such an amount having
only business consideration in mind.
Sometimes, a family member is employed as an intention to reduce the taxable amount for a
business. It was held in case Hammill v R4. the purpose of reasonable rule is to prevent tax
payers from reducing the income artificially by deducting high expenses in the form of salary
paid to family member employed. Though this is an income splitting strategy, providing tax
savings but require reasonable descriptions for the same.
Therefore job description of family member is very much important as well as time sheets
showing hours worked. In this case ANN is described as working for one day a week and having
a degree of accountant. She maintains the accounts of James and files his GST.
-

Travel expense of $1,600 for travel between home and work.


EXPENSE
$1,600

DEDUCTABLE

NON-DEDUCTABLE

The expenses incurred to travel between home and work is generally not deductible.
Leading case on this point is: Lunney and Hayley v Federal commissioner of Taxation
(1958)100 CLR 478.5
3 Gabco Ltd. V. Minister of National Revenue( 68 DTC 5210), Cestnick, T. (2013), For the selfemployed, hiring family can pay off in deductions, The Globe and Mail
retrieved from http://www.theglobeandmail.com/globe-investor/personal-finance/taxes/forthe-self-employed-hiring-family-can-pay-off-in-deductions/article10095413/

4 Hammil v R. (2005) 4 C.T.C. 29, retrieved from ;http://decision.tcc-cci.gc.ca/tcccci/decisions/en/66957/1/document.do

5Lunney and Hayley v Federal commissioner of Taxation (1958)100 CLR 47,


http://www.buseco.monash.edu.au/blt/jat/1999-issue5-barkoczy.pdf

retrieved from;

Held: In this case court treated the expenditure as cost of getting to work or business rather
than a Working or business expense.
Another leading case on this point is: FC of T v Wiener6
Facts of the case are: A teacher was employed by education department was required to teach
between five different schools during a week.
Held: it was held that deduction is allowed for car expenses incurred in travelling between
schools but not for the travel expense incurred in travelling from home to first school and from
last school to home.
-

Travel expense of $2,500 for travel from a clients premises to his home.
EXPENSE
$2,500

DEDUCTABLE

NON-DEDUCTABLE

Cost of Travelling is usually deductable.


Leading case on this point is: Taylor v Provan (1975) AC 194.7
Held: It was held by Lordship that travelling to work is distinguished from travelling for work as
expenses of travelling to work cannot be deducted against income from employment as
explained in case above FC of T v Wiener and ultimately James travel expenses of $1600 are

6 Federal commissioner of Taxation v Wiener 78 ATC 4006, retrieved


from;http://www.buseco.monash.edu.au/blt/jat/1999-issue5-barkoczy.pdf

7Taylor v Provan (1975) AC 194, retrieved from; http://law.ato.gov.au/atolaw/view.htm?


rank=find&criteria=AND~residence~basic~exact&target=E
%20EA&style=html&sdocid=ITR/IT2481/NAT/ATO/00001&recStart=4021&PiT=99991231235
958&recnum=4043&tot=4059&pn=ALL:::ALL

non- deductable, where as if an employee has to travel as per job requirements such as there is
concept of two places of work, such work expenses can be deducted. Therefore James travel
expenses of $2,500 are deductable.
-

Clothing Expenses of $1,000


EXPENSE
$1,000

DEDUCTABLE

NON-DEDUCTABLE

Generally, as per Division 34 ITAA 97, expenses incurred in respect of clothing are not
deductable. Moreover, as per s 1-8 ITAA97, the cost of acquiring conventional items of
clothing for example suit, is not deductable.
Leading case on this point is: Mansfield V FCT8
Facts of the case are: General expenditure on ordinary articles of clothing will not be deductible,
unless that expenditure is made to ensure a suitable appearance in particular profession or job.
Held: it was held by Lordship that deduction of cost of clothing is based on special
circumstances. An employer may be required to dress in an appropriate manner, but only one fact
alone cannot bring the expense to be deductible
Another leading case on this point is: FCT v Edwards9
Facts of the case are: the taxpayer was employed as personal secretary to the Governor of
Queenslands wife. He was required to accompany her on special occasions. The taxpayer has
attended more than 150 public engagements and was required to dress professionally for each
event. For some of the events, he has to change his attire more than one time a day.

8 Mansfield v FC of T 96 ATC 4001 retrieved from Barkoczy,S. (2014), Foundations of


Taxation Law, Edition 6th, Sydney, chapter 13, page 326

9 FC of T v Edwards 94 ATC 4255 retrieved from Barkoczy,S. (2014), Foundations of Taxation


Law, Edition 6th, Sydney, chapter 13, page 326

Held: It was held that the additional clothing expenses were not for private use. A taxpayer is
allowed deduction for the cost of clothing as well as additional clothing such as gloves, hat
formal evening wear required for the job.
Therefore, clothing expenses of $1,000 incurred by James are deductible, as he incurred those
expenses to dress up appropriately and to fulfill the needs of his profession. Moreover James run
a small photography studio and it is a profession, so there is a clear nexus with the taxpayers
income producing activities.
-

$1,500 spent on membership for entertainment of clients in a local club.


EXPENSE
$1,500

DEDUCTABLE

NON-DEDUCTABLE

Entertainment expenses to be deductable are required to be expenses directly related to


business or associated with the active conduct of business. Entertainment as per s 32-10(1) is
defined as a mean of entertainment by way of food, drink or recreation or accommodation or
travel to do with providing entertainment by way of food, drink or recreation.
-

Meal expenses of $2,000 to entertain clients


EXPENSE
$2,000

DEDUCTABLE

NON-DEDUCTABLE

As per division 9A FBTAA, S 37AC meal entertainment fringe benefit arises where the provider
provide meal entertainment to recipient.
EMPLOYER EXPENSES
Deduction allowed
Deduction not allowed
When food or drink to the taxpayers
When food or drinks are provided at a party,
employees or clients are provided in an in-

social function or any reception party.

house dining facility


When food or drink are provided to individuals

When taxpayer choose not to include meals up

other than taxpayers employees or clients in

to the value of $30 in assessable income.

an in-house dining facility


Providing food or drink which would be a

Where the facility is provided for

fringe benefit apart from s54, 58,58N, 58s,

accommodation or dining or drinking.

and 58T of Fringe Benefit Tax Assessment


Act 1986.

Meal entertainment consists of provision of;


1. Entertainment by way of food or drink,
2. Accommodation or travel in connection with or for the purpose of facilitating such
entertainment,
3. The payment or reimbursement of such expenses.
A meal entertainment is a meal entertainment fringe benefit and to avoid duplication, no
other similar meal entertainment expense arises in respect of same taxpayer.
Taxable value of meal fringe benefit= Total meal entertainment expenditure X register
percentage
In case of James, no such percentage is provided, so the amount of $2,000 is a meal
entertainment fringe benefit and non deductible for taxation purpose.

TAX CONSEQUENCES FOR ANN


Ann is being paid a salary of $40,000 p.a. which is taxable under s 6-5 ITAA 97. Anns salary is
taxable because of following reasons;
1. It is an ordinary income: As per section s 6-5 ITAA 97, Ordinary income is included in
a taxpayers assessable income. Ordinary income has a meaning in common law, though
ordinary income is not defined in the legislation. An ordinary income include;
Salary and wages;
Interest received on bank deposits;
Ordinary business receipts, and
Rent derived from an investment property.

Leading case on this point is: Dean & Anor v Federal commissioner of Taxation.10
Facts of the case are: Two employees in a company are being paid off retention to stay in the
company. The contract was signed and Employees agreed to remain in the company for 12
months following a takeover of the company.
Held: It was held by Lordship that payments are made in consideration to keep employees to be
with company for a period of 12 months. If payments were made payments were made with
consideration to employees agreeing to remain with company, the payments were considered as
salary or wages and is clearly of income nature as they were paid by employer to employees for
the services rendered.
2. It is an assessable income: Assessable income includes payments categorized as salary,
wages, allowances, bonuses and any retention payments for continuance of services.
Leading case on this point is: Reuter v Federal commissioner of Taxation (1993).11
Facts of the case: the taxpayer entered into a contract with government for a piece of land on
which some conservation work is carried on. The contract is signed after submitting tenders for
the same. Tenders are filled on the basis on work done on that piece of land for last few years.
The contract was signed stating first payment to be made to taxpayer. The land was sold after
three years but contract was for ten years. It was mentioned in the contract if land was sold
before ten years, it will lead to termination of contract.
Held: The high court considered two factors determining the amount is a product of taxpayers
services. 1) The motive of payer in paying the amount. 2) There is an expectation to receive the

10Dean & Anor v Federal commissioner of Taxation 97ATC 4762, retrieved from Barkoczy,S.
(2014), Foundations of Taxation Law, Edition 6th, Sydney, chapter 12, page 261.

Reuter v Federal commissioner of Taxation (1993)111 ALR 716;93 ATC 4037.retrieved


from;http://law.ato.gov.au/atolaw/view.htm?docid=CLR/CR200792/NAT/ATO/00001
11

amount by taxpayer. If there is expectation to receive the amount in return for providing services
and the motive of government is to reward the taxpayer for providing services, the amount is
ordinary income as it is a product of taxpayers services. The amount is held to be an income if it
paid in consideration for performance of services.
3. It is an income from personal exertion: As per section 393-10 of ITAA97, any amount
that is included in the assessable income of the tax payer is income derived from
personal exertion.
Leading case on this point is: Brent v Federal commissioner of Taxation.12
Facts of the case are: The taxpayer in this case is wife of convicted Great Train Robbery. She
entered into a contract with General Television Corporations Pty. Ltd. for giving interviews to
journalists. In return she will receive payments. The payments were being made because she
agreed to publish an account of his life.
Held: It was held by Lordship that it is an income from personal exertion as that payments
received are consideration for making herself available for interviews to General Television
Corporations Ltd. though she has not disposed off any of her capital assets nor she assigned any
copyright. She is being rewarded for the services provided by her and assessed accordingly.
CALCULATION OF ANNs TAXABLE INCOME
Step 1
Calculate assessable income
Salary: s 6-5 ITAA97
TOTAL ASSESSABLE INCOME
Step 2
Calculate deductions
TOTAL DEDUCTIONS
Step 3
Calculate taxable income (Step 1- Step 2)
Step 4
Calculate basic income tax liability by

$ 40,000
$40,000
NIL
$40,000

multiplying taxable income by 2014-15


individual tax rates
$3,572 plus 35.5c for each $1 over $37,000
Step 5
Calculate Tax offsets

$4637
NIL

12Brent v Federal commissioner of Taxation 71ATC 1952, retrieved from Barkoczy,S. (2014),
Foundations of Taxation Law, Edition 6th, Sydney, chapter 12, page 261.

Step 6

Calculate Income Tax liability (Step 4-

$4637

Step 7

step 5)
Calculate Medicare Levy* by multiplying 600

Step 8

Taxable income (Step 3) by 1.5%


Calculate total Income tax and Medical

$5237

Levy Liability

*Currently Medical Levy is imposed at the rate of 1.5%. No medical levy is applicable if taxable
income is less than $20,542 (2013-14). Here Taxable income is $40,000; Medicare Levy is
applicable @ 1.5%.

TAX CONSEQUENCES FOR PETER


-

Airfare and hotel cost incurred by Peter


EXPENSE
AIRFARE= $3,000

DEDUCTABLE

NON-DEDUCTABLE

HOTEL COST= $1,500

The cost of travelling on work or in course of work is usually deductable. It is considered that
such outgoings have a connection with taxpayers business activities or income producing
activities. Accommodation and meals on business trip may also be deductable.
Travelling expense incurred by Peter is a business travel expense, which is related to production
of assessable income, other than wages or salary, and it involves travelling away from home for
at least one night.
Leading case on this point is: Garrett v FC of T13

13 Garrett v Federal Commissioner of Taxation, 82 ATC 4060, retrieved


from;http://www.buseco.monash.edu.au/blt/jat/vol10-issue2-07-boccabella.pdf

Facts of the case are: The taxpayer is a doctor and he used to carry on his medical practice at
various locations. These medical practices generate 35 percent of his income. It appears that
most of the aircraft travel was involved.
Held: it was held that taxpayer incurred expenses associated with travelling and he is allowed for
general deductions.
Therefore, it can be said that though Peter is not reimbursed for his plane tickets and Hotel cost,
he can claim a deduction for the same.
-

Allowance for meals and transportation costs


EXPENSE
$200 X 3 days= $600

DEDUCTABLE

NON-DEDUCTABLE

It is a work expense as per S 900-30(1) of subdivision 900-B ITAA97. Such expenses are
incurred by individuals who are employees at common law. A work expense specifically
includes;
1.
2.
3.
4.

A travel allowance expense


A meal allowance expense
An election expense
Decline in value of depreciating asset held to produce salary or wages.

The allowance provided for meal and transportation cost to Peter is a Per Diem allowance.
Per Diem allowance is an allowance provided to employees on an overseas trip for business
purposes. The allowance is meant to cover;
1.
2.
3.
4.
5.
6.

Overseas accommodation
Overseas airport transfer
Cost of meals
Entertainment expenses for business purpose
Travelling expenses between cities for business purpose
Other incidental items like laundry

The reimbursement portion of such an allowance is not taxable. Peter is paid such allowance
related to his business travel expenses. He is not required to keep any written evidence for the

expenditure provided the claim does not exceed the reasonable allowance amount. Therefore,
expenses claimed must have been incurred and be an allowable deduction.
Peter is travelling to Indonesia in this case. As per ITAA97, transport and meal allowance are
deductible to a certain limit.
Salary $108,810 and below
Meals Incidentals
Total

Salary $108,810 to $193,520


Meals Incidentals
Total

Salary $193,520 and above


Meals Incidental Total

$110

$135

$170

$35

$145

$40

$175

s
$45

$215

There is no information provided regarding salary of Peter, it can be assumed that his salary falls
in the category of $193,521 and above and therefore he can claim deduction for $600 for three
days.
CONCLUSION
It can be concluded that allowable deductions are a critical part of the income tax equation.
Though the section related to deductions is self explanatory, there is need to consult some
external references for further clarifications. This problem solving question is an attempt to
explain all issues related to Income tax, general deductions, Fringe Benefit tax, travelling
expenses, entertainment expenses. It is not the verdict of court of commissioner to decide the
amount a taxpayer has to spend, it is actually how much he has spent and deciding whether an
amount is allowable as deduction under s 8-1 ITAA97.

BIBLIOGRAPHY

Brent v Federal commissioner of Taxation 71ATC 1952, retrieved from


Barkoczy,S. (2014), Foundations of Taxation Law, Edition 6th, Sydney, chapter 12, page 261.
Dean & Anor v Federal commissioner of Taxation 97ATC 4762, retrieved from
Barkoczy,S. (2014), Foundations of Taxation Law, Edition 6th, Sydney, chapter 12, page 261.
FC of T v Edwards 94 ATC 4255 retrieved from
Barkoczy,S. (2014), Foundations of Taxation Law, Edition 6th, Sydney, chapter 13, page 326
Federal commissioner of Taxation v Wiener 78 ATC 4006, retrieved from;
http://www.buseco.monash.edu.au/blt/jat/1999-issue5-barkoczy.pdf
Gabco Ltd. V. Minister of National Revenue( 68 DTC 5210),
Cestnick, T. (2013), For the self-employed, hiring family can pay off in deductions, The Globe
and Mail
retrieved from http://www.theglobeandmail.com/globe-investor/personal-finance/taxes/for-theself-employed-hiring-family-can-pay-off-in-deductions/article10095413/
Garrett v Federal Commissioner of Taxation, 82 ATC 4060, retrieved from;
http://www.buseco.monash.edu.au/blt/jat/vol10-issue2-07-boccabella.pdf

Hammil v R. (2005) 4 C.T.C. 29, retrieved from ;


http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/66957/1/document.do

Lunney and Hayley v Federal commissioner of Taxation (1958)100 CLR 47, retrieved from;
http://www.buseco.monash.edu.au/blt/jat/1999-issue5-barkoczy.pdf
Mansfield v FC of T 96 ATC 4001 retrieved from
Barkoczy,S. (2014), Foundations of Taxation Law, Edition 6th, Sydney, chapter 13, page 326
Publication 535 (2014), Business expenses, IRS Publications, retrieved from;
http://www.irs.gov/publications/p535/ch02.html
Reuter v Federal commissioner of Taxation (1993)111 ALR 716;93 ATC 4037.retrieved from;
http://law.ato.gov.au/atolaw/view.htm?docid=CLR/CR200792/NAT/ATO/00001
Robert G Nall Ltd. v Federal Commission of Taxation, retrieved from
http://law.ato.gov.au/atolaw/view.htm?docid=DXT/TD2008D16/NAT/ATO/00001
Taylor v Provan (1975) AC 194, retrieved from; http://law.ato.gov.au/atolaw/view.htm?
rank=find&criteria=AND~residence~basic~exact&target=E
%20EA&style=html&sdocid=ITR/IT2481/NAT/ATO/00001&recStart=4021&PiT=99991231235
958&recnum=4043&tot=4059&pn=ALL:::ALL