BTC3150 Lecture Notes - Lecture 8: Capital Expenditure, General Electric J47, Kurt Nilsen
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Week!8:!General!Deductions!(part!2)!&!Specific!Deductions!
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Timing&–&deductions&and&deductibility&&
Expenses:&s&8-1&general&deductions&
• A!key!requirement!for!a!taxpayer!to!deduct!a!loss!or!outgoing!under!s!8-1!is!that!it!
i) Loss!or!outgoing!has!been!“incurred”.!
ii) Loss!or!outgoing!must!be!incurred!in!gaining!or!producing!the!taxpayer’s!assessable!
income!(nexus)!
• Term!“incurred”!is!not!defined!in!statute.!
• Guidance!from!the!Commissioner!in!TR!97/7,!suggests!that!“incurred”!means,!among!other!
things:!
– As!a!broad!guide,!“you!owe!a!present!money!debt!that!you!cannot!escape”!
– “the!taxpayer!is!definitively!committed!in!the!year!of!income”!
– “is!‘completely!subjected’!to!the!loss!or!outgoing”!
– “not!sufficient!if!the!liability!is!merely!contingent!or!no!more!than!pending,!threatened!
or!expected”.!
• If!the!taxpayer!is!on!a!cash!basis,!a!deduction!can!still!be!“incurred”!if!it!is!not!yet!paid.!
• Another!key!requirement!under!s!8-1!is!that:!
– A!loss!or!outgoing!must!be!incurred!in!gaining!or!producing!the!taxpayer’s!assessable!
income!(nexus!requirement).!
• Not!necessary!to!“match”!the!expense!with!income!earned!in!the!same!year,!unlike!the!case!
with!financial!accounting.!Issues:!
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1) Expense!of!an!earlier!income!year!
• An!expense!is!deductible!in!a!later!year!when!the!event!that!gave!rise!to!the!expense!
occurred!in!an!earlier!year.!
– Placer'Pacific'Management'Pty'Ltd'v'FCT'(1995)!where!the!taxpayer!successfully!claimed!
a!deduction!for!settlement!of!a!claim!in!a!later!year!(1989)!that!related!to!the!sale!of!a!
defective!product!sold!in!an!earlier!year!(1981).!
2) Incurred!after!business!ceases!to!operate!
• Likely!to!be!deductible!providing!the!expense!relates!to!the!time!when!the!business!was!
operating.!
– FCT'v'Jones'(2002)!where!interest!on!a!business!loan!was!deductible!even!after!the!
business!was!sold.!!At!the!time!the!loan!was!drawn!down,!it!was!for!gaining!or!producing!
assessable!income.!
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3) Relevant!to!reduction!of!future!expenses!
• Expense!is!deductible!in!the!current!financial!year!even!though!it!relates!to!a!reduction!of!
future!expenses.!
–No!matching!of!the!expense!to!the!benefit!is!required.!
–'W'Nevill'and'Co'Ltd'v'FCT!(1937)!–!non!performing!D;paid!out,!Revenue!increased!after!he!
left!
4) When!no!income!is!being!generated!
• Expenses!may!be!deductible!even!though!no!income!is!derived!at!the!time!the!expense!is!
incurred!but!where,!as!a!result!of!the!expense,!the!taxpayer!may!generate!income!in!the!
future.!
• CL:Steele'v'DCT'(1999)!–!bought!all!land!&!want!to!build!hotels.however,!no!permission!
yet,paying!interest!on!loan,!no!income!but!‘commitment”!for!building.!Hence,!interest!on!
loans!deductable!
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Prepaid&expenses&
• Apportionment!of!a!deductible!outgoing!is!generally!required!when!it!relates!to!advance!
expenditure!greater!than!one!tax!year!(ss!82KZL!to!82KZMG!ITAA36):!
!!!!!!! !
• Aim!is!to!spread!the!deduction!to!the!tax!year!in!which!the!expense!relates!to.!
• Exceptions:!
–Amounts!specifically!excluded!
–Certain!payments!made!by!small!business!entities!and!non-business!taxpayers.!
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Amounts!specifically!excluded&
• Certain!expenditure!are!excluded!from!the!12-month!rule,!for!example:!
– Amounts!of!less!than!$1,000!
– Payments!of!salary!or!wages!(under!a!contract!of!service)!
– Amounts!incurred!by!a!general!insurance!company!relating!to!the!issue!of!policies!or!
payment!of!reinsurance!premiums!
Example'
Registration'fee'$1200.although'>$1000,'has'to'be'incurred.'DEDUCTION'in'the'yar'incurred.'
SBE!&!non-business!taxpayers(not!for!MST2)&
•Immediate!deduction!available!where!expense!relates!to!a!service!up!to!12!months.!
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Provisions&
Long!service!leave!and!annual!leave!
• Leave!(and!expense)!provisions¬&deductible!as!there!is!no!actual!liability!until!the!
employee!takes!his!or!her!leave.!
• Common!law!position:!
– The!provision!is!not!“incurred”.!!“Incurred”!does!not!require!payment!but!does!require!a!
fixed!liability!not!subject!to!contingencies!9how!likely!it!is!going!to!be!incurred):!!
– CL:Nilsen'Development'Laboratories'Pty'Ltd'v'FCT'(1981);'-'not!deduction,cant!tell!how!
many!days!ppl!will!take!leave!
– CL:!FCT'v'James'Flood'Pty'Ltd'(1953)'–!provision!for!leave!not!D!until!actually!paid!in!a!
particular!fin!year.!
• Statutory!position:!
– Section!26-10!provides!that!leave!can!only!be!deducted!in!the!year!that!it!is!paid!
– Presently!existing!L:shld!be!entitled!deduction,hv!a!present!commitment!
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Bad!debts!
• Provisions!for!bad!debts!are!not!allowable!deductions!as!no!loss!or!outgoing!has!been!
“incurred”.!
• Statutory!position:!
– See!specific!deduction!provision!s!25-35!(discussed!in!PoTL!2017,!paragraph!13.80).!
• Must!satisfy!all!4!conditions!-!DEDUCTABLE;!
i.Debt!must!hv!truly!gone!bad!(no!chance!of!recovery)!
ii.Debt!must!be!in!existence!(must!be!in!books)!
iii.Debt!must!be!assessable!income(made!sale!to!somebody,that!person!hasn’t!paid!
you,income!from!sales!must!have!been!recorded)!
iv.Debt!must!be!written!off!(must!be!written!off)!
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Insurance!companies!–!can!predict!their!settlements!
• Deduction!based!on!an!estimate!of!an!expected!future!liability.!
– Absolute!liability!to!pay!claims!under!insurance!policies!is!when!an!accident!occurs!and!
hence!“incurred”!for!s!8-1!–!able!to!estimate!future!L.!
– Quantum!calculated!usually!by!reference!to!historical!experience!or!educated!estimates.!
– CL:RACV'Insurance'Pty'Ltd'v'FCT'(1974);!and!Commercial'Union'Assurance'v'FCT'(1977)!–!
coy!estimated!the!cost!of!the!likely!claims!that!will!come!through!for!a!particular!year!
based!on!historical!evidence.Based!on!data!that!was!fairly!reliable.Deduction!allowed!as!
it!is!reasonably!accurate!even!though!actually!haven’t!paid!them!out.!
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Specific&Deductions&
• Specific!deductions!arise!when!a!specific!provision!in!the!income!tax!legislation!provides!the!
taxpayer!with!a!deduction!
Deductions!=!General!Deductions!(s8-1)!+!Specific!Deductions!(s8-5)!
• A!loss!or!outgoing!(ie!an!expense)!may:!
– Be!deductible!under!s!8-1!and!a!specific!provision.!In!these!cases,!use!the!“most!
appropriate”!provision:!s!8-10.!
– Not!qualify!for!a!deduction!under!a!specific!provision.!!In!these!cases,!consider!
deductibility!under!s!8-1.!
• Summary!list!of!specific!provisions!in!s!12-5!
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Document Summary
Week 8: general deductions (part 2) & specific deductions. Expenses: s 8-1 general deductions: a key requirement for a taxpayer to deduct a loss or outgoing under s 8-1 is that it. Loss or outgoing must be incurred in gaining or producing the taxpayer"s assessable income (nexus: term incurred is not defined in statute, guidance from the commissioner in tr 97/7, suggests that incurred means, among other things: As a broad guide, you owe a present money debt that you cannot escape . The taxpayer is definitively committed in the year of income . Is completely subjected" to the loss or outgoing . Not sufficient if the liability is merely contingent or no more than pending, threatened or expected . If the taxpayer is on a cash basis, a deduction can still be incurred if it is not yet paid: another key requirement under s 8-1 is that:
