LECTURE 8

General Deductions 2
Dr Rex Marshall

Lecture Outline
Distinguish between different types of expenditure
excluded from deductibility under the negative
limbs of s 8-1(2):

Know the tests applied when considering the

deductibility of interest

Understand the concept of negative gearing

Negative Limbs
Losses and outgoings are not deductible if:
Private or domestic
Relate to exempt income
Capital expenditure
Specifically denied a deduction

Private/Domestic Expenses?
Incidental and relevant and essential character
tests - no expense is always private.
Trivial matters e.g., newspapers, teaching aids, food
Clothing (uniforms, protective clothing)
Self-education
Travel to and from work
Overseas travel
Child minding
Home office/study

The but for Test a

Legitimate Test?
But for the outlays I would not be able to earn
assessable income.
Problem: Chain of causation therefore not a
useful test.
*No deduction if the expenses merely puts the
taxpayer in a position to produce assessable
income.

FCT V Cooper
(T31 86 ATC 290; 90 ATC
4580; 91 ATC 4396)
Arguments for:
Expenses claimed were for food in addition to his normal intake.
Prescribed by his coach
More likely selection in first team and therefore increased income
Arguments against:
Food was for sustenance and therefore a personal and domestic
expense
The income producing activity was training and playing football-food
not connected with income earning activity

Essential Character Test

For an outgoing to satisfy the requirements of the
positive limbs it must have the essential character
of an income-producing expense or of a business
expense.
Morris v FCT 2002 ATC 4404 (Sunscreen products):
The circumstances in which the items were used
enabled the taxpayers to perform their
employment duties and increased productivity
and provided protection from the sun not of a
private nature.

Clothing expenses

Cost of conventional clothing (e.g. a suit) is

ordinarily not deductible
Exceptions apply in special cases (e.g. FCT v
Edwards (1994), Mansfield, Morris) abnormal
expense on clothes or expense due to the work
environment.
Note: Occupation-specific clothing, protective
clothing, uniforms generally deductible.

Travel Expenses

The cost of travel between home and work is generally not deductible
as it fails the essential character and timing tests. (Lunney;
Hayley)

Exceptions:
Income earning activity commences before the trip (FCT v Collings
(1976)
Taxpayers who transport bulky goods and equipment (Vogt (1975)
To alternative workplaces on a temporary basis (Ballesty (1977)

The cost of travel on (i.e. in the course of) work is generally

deductible (Taylor)

The cost of travelling directly between 2 unrelated workplaces is

deductible under s 25-100 provided neither of those places is the
taxpayers home.

Child-minding expenses

Cost of having children minded so that

taxpayers can engage in work is usually
characterised as a private or domestic outgoing
and therefore not deductible (Lodge v FCT (1972),
Martin, Hyde, Jayatilake) ; and puts the taxpayer
in a position to produce assessable income rather
than incurred in the gaining or producing of
assessable income.

Self -Education Expenses (TR

98/9)
Fundamental Test: Do the expenses have a relevant connection to
taxpayers current profession/career (Finn; Hatchett; Highfield; Anstis)?
1. Likely to lead to promotion and higher income
AND/OR
2.

Upgrade existing skills and improve efficiency in carrying out

current income earning activities i.e. the taxpayer will be more
proficient in his or her occupation (FCT v Studdert (1991)).
Note: $250 reduction applies to all prescribed courses of
education (s 82Aof ITAA1936)
Self-education expenses that relate to an occupation in which the
taxpayer is not currently engaged or that relate to obtaining new
employment are not generally deductible (Roberts)

Home office expenses

A home does not ordinarily constitute business premises and

taxpayers are therefore not ordinarily entitled to deductions for
expenses such as rent paid to lease their homes or interest paid on
their home loans even though they maintain a home office
(Forsyth, Handley)

Expenses relating to the maintenance of a genuine home office

may be deductible where the taxpayers home is also his or her
place of business and is not used merely for convenience (Swinford)

TR 93/30 distinguishes between:

occupancy expenses (e.g. rent, interest, rates, insurance)
running expenses (e.g. heating, cooling, lighting, depreciation)
Apportionment of expenses e.g. by floor area, time basis

First Negative Limb: Capital

Expenses
Payments are more likely to be capital if:

made once and for all, whereas expenditure that is

incurred regularly will usually be revenue in nature;
bring into existence an asset or advantage of an
enduring nature; or
relate to the structure of the business or profit yielding
structure rather than to the day-to-day business activities
[Business Entity test Sun Newspapers)].
Sun Newspapers Ltd
Note: Black hole expenditure (s 40-880) e.g., costs of establishing a
business structure; cost of defending against takeovers.

Sun Newspapers Ltd V FCT

(1938) 61 CLR 337
FACTS: An amount paid to a rival publisher to stop it
commencing publication of a new daily
newspaper.
As a result of the agreement the company was saved
from losing circulation and being forced to reduce its
price.
ISSUE: Was the payment made by the taxpayer to its
rival company capital or revenue in nature?
Decision: The payment strengthened an preserved the
business organization or entity of the taxpayer =
CAPITAL

Revenue versus Capital

*
The difference between expenses incurred in relation
to the business entity or instrument/property
that is used to earn profits/assessable income
[CAPITAL], and those that relate to the day-today activities of operating the business or using
the property for income producing purposes
[REVENUE].

Legal expenses
Whether legal expenses are of a revenue or capital
nature is usually determined according to the
business entity test
Legal expenses incurred for the purposes of
protecting, preserving or enlarging the taxpayers
business organisation will usually be capital in
nature (Broken Hill Theatres, John Fairfax, PBL
Marketing)

Otherwise Non-Deductible
Business Related Costs[s 40880]

20% a year deduction for business capital expenditure : pre, post and current
business expenditure, which would otherwise be non-deductible.

Residual measure (deduction of last resort)

Relate to a business that the taxpayer carries on, or for a proposed business it is
reasonable to conclude will be carried on within a reasonable time, for a taxable
purpose

Not fall within the exclusions in s 40-880(5)

Examples of expenditure which should now be covered:

Feasibility studies;
Tenders;
Market research;
Costs of establishing a business;
Changing business structures;
Raising equity;
Takeovers.

Deductibility of Interest
The objective use test or tracing through
test (non-business):
Were the borrowed funds used directly in the
process of deriving assessable income?

The function test (business):

Is a business being carried on for the sole
purpose of producing assessable income?

Summary
Interest is deductible where:
to purchase property from which assessable
income will be derived
to purchase an asset of an income-producing
business
to be used as working capital within a business

Negative Gearing
The ratio of outgoings to income directly earned as
a result of such outgoings (for the financial year) is
NEGATIVE.
DEDUCTIBLE OUTGOINGS
EXCEED
ASSESSABLE INCOME

Negative Gearing Example

A taxpayer who derives an annual $210,000 salary
income, purchases a rental property on 1 July
2013 for $200,000. The rental return (ignoring
allowable deductions) is $8,000. He borrows the
whole of the purchase price at an interest rate of
7% per annum, paying interest of $14,000 for the
year ended 30 June 2014.
What will be the tax benefit?

Negative Gearing Solution

Taxable Income: $218,000 14,000
= $204,000
Tax Effect:
1. Rental income is tax free ($8,000 is absorbed by
$8,000 of the interest expense); and
2. Tax saving of $2,790 [$6,000 x 46.5% (including M/L]
deductions are at the highest marginal tax rate.
Overall, the taxpayer outlays $14,000 and receives
$10,790 i.e., out of pocket by $3,210 has the value of
the property increased by at least this amount during the
year (1.6%)