Part 3

Part
3
Deductions and Offsets
Taxpayers can reduce their income tax payable by taking into account
certain deductions and offsets. Once assessable income is determined,
as discussed in Part 2, deductions are subtracted to determine taxable
income. Deductions consist of what are commonly referred to as general
deductions and specific deductions. Not all expenses incurred by a
taxpayer are deductible and it is necessary to comply with a provision of
the legislation before deducting an expense.
Chapter 12 begins by explaining how all of the deductions available to

a taxpayer fit within the legislative regime. It then concentrates on the
general deduction provision, s 8-1 of the Income Tax Assessment Act 1997
Copyright © 2020. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
(Cth) (ITAA 1997). The chapter explains that s 8-1 provides taxpayers with
a deduction for expenses incurred in gaining or producing assessable
income or necessarily incurred in carrying on a business. However,
s 8-1 also provides that expenses are not deductible under that section
where they are capital or capital in nature, private or domestic, incurred
in gaining exempt or non-assessable non-exempt income, or prevented
from being deducted by a specific provision of the legislation. Finally,
Chapter 12 discusses the deductibility of some commonly incurred
expenses, such as expenses incurred in gaining employment, relocation
expenses, child care, travel, self-education, home office, clothing, interest
and legal expenses.
Some expenses, which may or may not be deductible under the general
deduction provision, may fall within a specific deduction provision. There
are two categories of specific deductions: those which are immediately
deductible and those which can be deducted over a number of years.
Chapter 13 examines deductions which are immediately deductible and

allowed because the legislation specifically provides a deduction for a
Sadiq, E. A. (2020). Principles of taxation law 2021. ProQuest Ebook Central <a
onclick=window.open('http://ebookcentral.proquest.com','_blank') href='http://ebookcentral.proquest.com' target='_blank' style='cursor: pointer;'>http://ebookcentral.pro
Created from unimelb on 2021-07-20 01:05:58.
382 PRINCIPLES OF TAXATION LAW 2021
specific type of expense. Examples of specific deductions discussed are

the cost of managing tax affairs, gifts and donations, repairs, bad debts,
memberships, travel and tax losses from previous years.
Chapter 14 examines deductions available for capital expenditure.

While not immediately deductible, these expenses are deductible over a
number of years under the capital allowances regime. The most common
deductible capital expenditure is the cost of acquiring a depreciating asset
which is used for income-producing purposes. Other business expenses
which are not normally deductible may also be allowed over a period
of time.
In addition to being able to deduct certain expenses, a taxpayer may

also reduce his or her income tax payable through various tax offsets
(often known as rebates and credits). Tax offsets are more limited
than deductions as a taxpayer needs to meet certain criteria to qualify.
However, where a taxpayer does qualify for a tax offset, it is substantially
more valuable than a deduction. This is because a deduction reduces
taxable income, whereas a tax offset is deducted directly from income tax
payable. Chapter 15 explains how tax offsets work and then explains the
concepts relating to the largest group of offsets, known as concessional
offsets.
12
General deductions
Key points.................................................................................................... [12.00]
Introduction................................................................................................ [12.10]
General deduction rule............................................................................... [12.20]
Loss or outgoing......................................................................................... [12.30]
The nexus test –positive limbs of section 8-1......................................... [12.40]
Judicial tests......................................................................................... [12.50]
Is the nexus sufficiently direct or too remote to satisfy the positive
limbs of s 8-1?............................................................................... [12.70]
Expenses involving alleged or actual wrongdoing by taxpayer............ [12.80]
Expenses to reduce future expenditure................................................ [12.100]
Involuntary losses or outgoings............................................................ [12.110]
Is there a sufficient temporal nexus or connection to satisfy the
positive limbs of s 8-1?............................................................... [12.120]

Expenses related to the production of assessable income in
future years.................................................................................... [12.130]
Expenses related to the production of assessable income in
prior years...................................................................................... [12.140]
Summary............................................................................................ [12.150]
Non-deductible expenses –the negative limbs of section 8-1............. [12.160]
Capital or capital in nature................................................................. [12.170]
Judicial tests........................................................................................... [12.180]
Form and substance.............................................................................. [12.200]
Summary................................................................................................ [12.210]
Private or domestic............................................................................ [12.220]
Incurred in gaining or producing exempt or non-assessable
non-exempt income.................................................................... [12.230]
Denied deductions............................................................................. [12.240]
Entertainment expenses........................................................................ [12.250]
Reimbursed expenditure....................................................................... [12.260]
Apportionment –deductibility of dual purpose expenses.................... [12.270]
Amount of deduction............................................................................... [12.290]
Reasonable vs actual expense.......................................................... [12.300]
Tax minimisation situations –purpose............................................. [12.310]
384 PRINCIPLES OF TAXATION LAW 2021
Substantiation of deductions.................................................................. [12.320]

Application of section 8-1 to commonly incurred expenses................. [12.330]
Expenses incurred in gaining employment............................................ [12.340]
Business taxpayers............................................................................ [12.350]
Relocation expenses................................................................................. [12.360]
Child care expenses.................................................................................. [12.370]
Travel expenses........................................................................................ [12.380]
Travel between home and work........................................................ [12.390]
Itinerant workers.................................................................................... [12.410]
Transportation of bulky items................................................................ [12.420]
Alternative workplace............................................................................ [12.430]
Travel between two places of work.................................................. [12.440]
Car expenses...................................................................................... [12.450]
“Cents per kilometre” method............................................................... [12.460]
“Logbook” method................................................................................. [12.550]
Self-education expenses.......................................................................... [12.580]
Positive limbs of s 8-1........................................................................ [12.590]
Self-education expenses relate to taxpayer’s current career.............. [12.600]
Current career requires taxpayer to stay up to date............................ [12.630]
Self-education expenses not related to employment income............. [12.640]
Negative limbs of s 8-1...................................................................... [12.650]
Capital expenses.................................................................................... [12.660]
Private or domestic expenses............................................................... [12.670]
Non-deductible self-education expenses.............................................. [12.680]
Apportionment................................................................................... [12.690]
Home office expenses.............................................................................. [12.700]
Genuine home office.......................................................................... [12.710]
Home office for convenience only.................................................... [12.720]
Apportionment and capital expenses............................................... [12.730]

Clothing and dry-cleaning expenses....................................................... [12.740]
Conventional clothing and related items.......................................... [12.750]
Abnormal expenditure on conventional clothing................................. [12.760]
Expenditure caused by taxpayer’s work conditions............................. [12.780]
Occupation-specific clothing, protective clothing and uniforms..... [12.790]
Capital expenses................................................................................ [12.800]
Interest expenses...................................................................................... [12.810]
Gearing............................................................................................... [12.820]
Capital expenses................................................................................ [12.830]
Legal expenses.......................................................................................... [12.840]
Questions................................................................................................... [12.860]

12: General deductions [12.00] 385
Key points
[12.00]
• Expenses incurred by taxpayers in gaining or producing assessable
income may be deducted against that income to reduce the taxpayer’s
final tax liability.
• Expenses may be immediately deductible under the general deduction
provision in s 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA
1997) or under a specific deduction provision.
• Expenses that are deductible under a specific deduction provision
should be deducted under that provision as it is the most appropriate
provision.
• Expenses must be incurred by the taxpayer in gaining or producing
assessable income or necessarily incurred in carrying on a business to
gain or produce assessable income to be deductible under s 8-1 of the
ITAA 1997.
• An expense that is capital or capital in nature, private or domestic,
incurred in gaining or producing exempt or non-assessable non-exempt
income, or specifically denied by another provision in the income tax
legislation, cannot be deducted under s 8-1 of the ITAA 1997.
• Capital expenses that are not immediately deductible may be deductible
over a period of years.
• Taxpayers may claim a deduction for a part of an expense where only a
part of the expense satisfies the requirements of s 8-1 of the ITAA 1997,
for example, an expense partly incurred to gain or produce assessable
income and partly incurred for private purposes.
• Taxpayers are required to maintain adequate records when claiming a

deduction for an expense.
• Common expenses that may or may not be deductible under s 8-1 of
the ITAA 1997 include:
– expenses incurred in gaining employment;
– relocation expenses;
– child care expenses;
– travel expenses;
– self-education expenses;
– home office expenses;
– clothing expenses;
– interest expenses; and
– legal expenses.
386 [12.10] PRINCIPLES OF TAXATION LAW 2021
Introduction
[12.10] Recall from Chapter 3 that the basic formula in s 4-10 of the Income
Tax Assessment Act 1997 (Cth) (ITAA 1997) which determines the amount of
tax that a taxpayer has to pay for a particular year is:
Tax payable = (Taxable income × Tax rate) − Tax offsets
Section 4-15 provides that:

Taxable income = Assessable income − Deductions
Part 2 considered when an amount will be assessable income of the taxpayer.

In this and subsequent chapters, we consider when an amount will be a
deduction to the taxpayer. Broadly, a deduction is an expense of the taxpayer
which is deductible for tax purposes as it is incurred in gaining or producing
income that is assessable for tax purposes. The deduction is applied against
the taxpayer’s assessable income to determine “taxable income” upon which
the taxpayer’s tax liability is calculated. “Taxable income” is considered a better
reflection of the taxpayer’s taxable capacity or ability to pay.
Deductions are set out in Div 8 of the ITAA 1997 and are divided into two
categories:
• general deductions: s 8-1; and
• specific deductions: s 8-5.
General deductions are discussed in this chapter, while specific deductions are
discussed in Chapter 13.
Expenses may be deductible under both the general deduction provision and
a specific deduction provision. In this case, s 8-10 provides that the expense
should be deducted under the “most appropriate” section. As a general rule
of statutory construction, the specific rule (the specific deduction provision)
should apply over the general rule (the general deduction provision). In any
case, s 8-10 makes it clear that an expense can only be deducted once.
There are also some expenses that may not be immediately deductible under
either a specific deduction provision or the general deduction provision but
which may nonetheless be deductible over a period of years. These expenses
are discussed in Chapter 14.
Figure 12.1 illustrates the approach to determining when an expense is

deductible for tax purposes.
General deduction rule
[12.20] The main provision that gives taxpayers a deduction for an expense is
s 8-1 of the ITAA 1997, which is known as the general deduction provision. It is
a “general” deduction provision as it has the potential to apply to any expense
of the taxpayer. Section 8-1(3) states that a loss or outgoing that is deductible
under s 8-1 is called a “general deduction”.
Note that s 8-1 of the ITAA 1997 was formerly s 51(1) of the Income Tax
Assessment Act 1936 (Cth) (ITAA 1936). Case law or rulings which refer to
s 51(1) are equally applicable to s 8-1.
Section 8-1(1) of the ITAA 1997 provides that a taxpayer can deduct from his or
her assessable income a loss or outgoing to the extent that it is:
• incurred in gaining or producing assessable income; or
• necessarily incurred in carrying on a business for the purpose of gaining
or producing assessable income.
These two elements of s 8-1 are commonly known as the “positive limbs” of
s 8-1 as an expense must satisfy one of these elements to be deductible.
However, s 8-1(2) stipulates that an expense that satisfies the positive limbs
of s 8-1 may nonetheless not be deductible under s 8-1 to the extent that it is:
• capital or capital in nature: see [12.170];
• private or domestic: see [12.220];
• incurred in gaining exempt or non-assessable non-exempt income: see

[12.230]; or
• prevented from being deducted by a specific provision of the income
tax legislation: see [12.240].
These four elements are commonly known as the “negative limbs” of s 8-1 as
an expense which satisfies any one of these elements will not be deductible.
Note that the deductibility of an expense is determined from the taxpayer’s

perspective in accordance with the requirements of s 8-1 and the treatment
of the amount in the recipient’s hands (ie, whether or not it is assessable) is
generally not relevant.
Figure 12.2 provides a guide to determining when an expense would be

deductible under the general deduction rule.
Ltd v FCT (1956) 95 CLR 344 (see Case Study [12.1]), which considered the
predecessor to s 8-1.
Example 12.1: Outgoings
Sarah paid her office phone bill of $220. The payment of $220 is an
outgoing which is deductible under s 8-1 if all of the other requirements
of the section are satisfied.

Example 12.2: Losses
Sarah undertook a profit-making land development scheme as in FCT
v Whitfords Beach Pty Ltd (1982) 150 CLR 355 (see Chapter 8). She
purchased the land for $1 million, spent $1 million on development of the
land and sold the land for $1.5 million.
Sarah has a net loss of $500,000 from the scheme, which is deductible
under s 8-1 if all of the other requirements of the section are satisfied: see
Ruling TR 92/4.

The existence of a “loss or outgoing” is generally not an issue in claiming a

deduction under s 8-1, and it is the positive and negative limbs of s 8-1 which
require detailed consideration when determining the deductibility of a loss or
outgoing.
The nexus test –positive limbs of section 8-1

[12.40] The first hurdle for a loss or outgoing to be deductible under s 8-1 of
the ITAA 1997 is the nexus requirement. Under s 8-1(1), the loss or outgoing
must be:
• incurred in gaining or producing assessable income; or
• necessarily incurred in carrying on a business to gain or produce
assessable income.
There is some uncertainty as to whether the second positive limb (“necessarily
incurred in carrying on a business to gain or produce assessable income”) adds
in any way to the first positive limb since a loss or outgoing which satisfies
the second positive limb is likely to also satisfy the first. There is potentially
an argument that the first positive limb requires a direct connection between
the expense and the production of assessable income, whereas the second
positive limb ensures that expenses that are necessary for the operation of
a business that produces assessable income are deductible even though the
expenses may not have a direct connection to the production of assessable
income. This distinction is rarely focused on in practice.
In essence, the first positive limb requires a connection between the expense
and the production of assessable income, while the second positive limb
requires a connection between the expense and the carrying on of a business
to produce assessable income. Note that s 8-1(1) provides that an expense
is deductible “to the extent that” it satisfies one of the positive limbs. This
means that an expense may be partially deductible under s 8-1 where the
expense only partially satisfies the positive limbs of s 8-1. Apportionment
and the deductibility of dual purpose expenses are considered further at
[12.270].
The courts have long accepted that when looking at the positive limbs of s 8-1,
the phrase “in gaining or producing assessable income” is to be interpreted
as “in the course of gaining or producing assessable income”: Amalgamated
Zinc (De Bavay’s) Ltd v FCT (1935) 54 CLR 295; Charles Moore & Co (WA) Pty
Ltd v FCT (1956) 95 CLR 344; FCT v Day (2008) 70 ATR 14. In Ronpibon Tin No
Liability v FCT (1949) 78 CLR 47 at 57, the High Court stated that:
to come within the initial part of [s 8-1] it is both sufficient and necessary that the
occasion of the loss or outgoing should be found in whatever is productive of
the assessable income or, if none be produced, would be expected to produce
assessable income.
In other words, the connection between the expense and the production
of assessable income is determined in the context of the taxpayer’s overall
activities and not by narrowly looking at the direct impact of the expense on
the taxpayer’s production of assessable income.
Case study 12.1: Losses incurred in the course of gaining or producing

assessable income
In Charles Moore & Co (WA) Pty Ltd v FCT (1956) 95 CLR 344, the taxpayer
was a retail company, the normal operations of which included an
employee taking the day’s earnings to the bank daily. The employee was
robbed while on the way to the bank.
The taxpayer’s claim for a deduction for the loss was denied by the
Commissioner, who argued that the loss was not sufficiently connected
to the production of assessable income by the taxpayer.
In concluding that the loss was deductible, the Full High Court stated
that “in gaining or producing assessable income” should be interpreted
as “in the course of gaining or producing assessable income”. In this
case, the taxpayer’s normal business operations included banking
the daily earnings and, as the loss had been incurred as part of that
normal business operation, the loss was incurred in the production of
assessable income and satisfied the positive limbs of the predecessor
to s 8-
1.
Judicial tests
[12.50] The determination as to whether an expense is incurred in the course
of gaining or producing a taxpayer’s assessable income is not straightforward,
and the courts have adopted a number of approaches in addressing this issue.
The key tests that have been utilised by the courts are:
• the incidental and relevant test;
• the essential character test; and
• the occasion of the expenditure test.
There was also an attempt to develop a “condition of employment test” under
which expenses would satisfy the positive limbs of s 8-1 where the expense
arose as a result of the taxpayer’s conditions of employment. This test was
specifically rejected by the court in FCT v Wilkinson (1983) 14 ATR 218 as it
could be easily manipulated –taxpayers would simply need to include the
expenses in their employment contracts and the expenses would be deductible
under such a test.
In applying the tests listed above, the courts have consistently stated that no
single test can be applied to the positive limbs of s 8-1 and a case-by-case
approach is appropriate. This point was reiterated by the High Court in FCT v
Day (2008) 70 ATR 14 (see Case Study [12.2]) where the High Court stated (at
[30]) that:
Section 8-1(1)(a) is couched in terms intended to cover any number of factual and
legal situations in which expenditure is incurred by a taxpayer. Its language and
breadth of application do not make possible a formula capable of application to the
circumstances of each case.
Earlier cases, such as W Nevill & Co Ltd v FCT (see Case Study [12.7]), Ronpibon
Tin No Liability v FCT (1949) 78 CLR 47 (see Case Study [12.18]) and Charles
Moore & Co (WA) Pty Ltd v FCT (1956) 95 CLR 344 (see Case Study [12.1]) adopted
the incidental and relevant test in determining whether a loss or outgoing had the
necessary connection to the production of assessable income. As stated by Dixon J
in W Nevill, a loss or outgoing would be sufficiently connected to the production
of assessable income where “the expenditure … is incidental and relevant to the
operations or activities regularly carried on for the production of income” (at 305).
In Charles Moore, the High Court stated (at 351) that phrases such as:
“incidental and relevant” when used in relation to the allowability of losses as
deductions do not refer to the frequency, expectedness or likelihood of their
occurrence or the antecedent risk of their being incurred, but to their nature or
character. What matters is their connection with the operations which more directly
gain or produce the assessable income.
[12.60] In later cases, such as Lunney v FCT; Hayley v FCT (1958) 100 CLR
478, the courts looked at the essential character of an expense in determining
whether the expense was sufficiently connected to the production of assessable
income. In Lunney v FCT; Hayley v FCT, the High Court denied the taxpayers a
deduction for expenses incurred in travelling from home to work on the basis
that the “essential character” of the expenses was to put the taxpayers in a
position to gain or produce assessable income rather than being incurred in
the production of assessable income.
More recently, the High Court in FCT v Payne (2001) 202 CLR 93 and FCT v
Day (2008) 70 ATR 14 suggested that, in determining whether an expense
is incurred in the course of gaining or producing assessable income, it is
necessary to consider whether the occasion of the expenditure arises out
of the taxpayer’s income-producing activities. Expenses will be sufficiently
connected to the production of assessable income where they arise out of
the taxpayer’s income-producing activities. Utilising this approach therefore
requires an assessment as to what is productive of the taxpayer’s assessable
income, which is determined in accordance with the taxpayer’s individual
circumstances.
On the application of the “relevant and incidental test” and the “essential
character test”, the High Court in FCT v Day (2008) 70 ATR 14 at 26 stated:
Expressions used in the cases, such as “incidental and relevant”, as referable to a
business, should not be thought to add more to the meaning of provisions such as
s 8-1(1)(a) of the ITAA, or to narrow its operation. They should be taken to describe
an attribute of an expenditure in a particular case, rather than being an exhaustive
test for ascertaining the limits of the operation of the provision. Reference in some
cases to the expenditure having an “essential characteristic” must likewise be
treated with some care. As Gaudron and Gummow JJ observed in Payne, the use
of the term may avoid the evaluation which the section requires. It is perhaps better
understood as a statement of conclusion than of reasoning.
Following the High Court’s comments in FCT v Payne and FCT v Day, it would
appear that the “incidental and relevant” and “essential character” tests are
not as relevant in determining whether the positive limbs of s 8-1 are satisfied,
and it is necessary to focus on whether the loss or outgoing arises out of the
taxpayer’s income-producing activities. However, as cautioned by the High
Court, this should not be considered the determinative test as to whether an
expense satisfies the positive limbs of s 8-1, and a case-by-case approach is to
be adopted.
Note that the courts have consistently rejected any consideration of the
taxpayer’s subjective purpose or intention in incurring an expense in
determining whether the positive limbs of s 8-1 are satisfied. This was reiterated
by the High Court in FCT v Anstis (2010) 76 ATR 735 (see Case Study [12.34]).
However, a taxpayer’s subjective purpose may be relevant in certain limited
situations: see [12.310].
We will now look at some of the key cases that considered whether the positive
limbs of s 8-1 (or its predecessors) were satisfied.
Is the nexus sufficiently direct or too remote to satisfy

the positive limbs of s 8-1?
[12.70] There are two aspects to the nexus or connection issue as to whether
a loss or outgoing is incurred in the course of gaining or producing assessable
income. The first is the question of direct or remote connection. If the link
between an expense and the production of assessable income is too remote, it
will not be deductible. The second is the question of a link in time or temporal
nexus. The necessary connection between the expense and the production
of assessable income may be broken where the expense is incurred too far
in advance of, or too long after, the production of assessable income. Cases
related to the temporal connection will be examined at [12.120].
In the vast majority of cases, it is generally simple to see whether an expense is

directly related to the production of assessable income or so remote from the
production of income that it would not satisfy the positive limbs of s 8-1. For
example, the cost of a taxi trip to visit a client’s premises would generally be
related to the production of assessable income, whereas the cost of a taxi trip to
visit a friend would not be connected to the production of assessable income.
There are, however, a number of cases where there was some question as to
whether the expenses were sufficiently connected to the taxpayer’s income-
producing activities. These cases are considered in the following paragraphs.
Expenses involving alleged or actual wrongdoing by

taxpayer
[12.80] A number of cases have considered whether expenses arising due to

alleged or actual wrongdoing by the taxpayer can satisfy the positive limbs of
s 8-1. As the expenses related to the taxpayer’s conduct, they were arguably
“quasi-personal” (ie, incurred in a personal rather than professional or business
capacity) and the question arose as to whether the expenses were incurred in
the production of the taxpayer’s assessable income or necessarily incurred in
carrying on a business for the production of assessable income. In each of the
cases, the Court took a broad approach and found that the positive limbs of
s 8-1 (or its predecessors) were satisfied.
Case study 12.2: Legal expenses incurred in defending improper

conduct charges
In FCT v Day (2008) 70 ATR 14, the taxpayer was a customs officer who
was charged with failing to fulfil his duties as an officer under the Public
Service Act 1922 (Cth). The taxpayer incurred legal expenses in defending
the charges, which involved a variety of allegations, including improper
use of his position, assisting with an improper diesel fuel rebate claim,
improper use of a work vehicle and improper attempts to conceal his
absences from work. The taxpayer successfully defended himself against
some of the charges, but not others.
The Commissioner denied the taxpayer’s deduction for the legal expenses
on the basis that the expenses related to conduct unconnected to the
performance of the taxpayer’s income-producing activities and, therefore,
the nexus requirement in s 8-1 was not satisfied as the expenses were not
“incurred in gaining or producing … assessable income”.
The Full High Court found that the legal expenses were incurred by the
taxpayer in gaining or producing assessable income as the occasion
of the expenditure arose out of his income-producing activities. The
taxpayer was subject to the Public Service Act 1922 (Cth) because of
his employment as a customs officer and the legal expenses related
to defending himself against charges under that Act. In reaching its
conclusion, the Court distinguished the legal expenses in this case
to expenses which may be incurred by a taxpayer in general civil or
criminal proceedings. The key factor here was that it was the taxpayer’s
employment that exposed him to the charges that resulted in the legal
expenses
being incurred.
The courts have also accepted that expenses resulting from the taxpayer’s
alleged or actual wrongdoing can satisfy the second positive limb despite the
requirement that the expense be “necessarily incurred” in the carrying on of

the taxpayer’s business.
Case study 12.3: Necessarily incurred in carrying on a business

In Herald and Weekly Times Ltd v FCT (1932) 48 CLR 113, the taxpayer was
a newspaper publisher that incurred expenses in the form of damages
with respect to libel claims made against it.
The Full High Court considered the deductibility of the compensatory
damages. The majority of the Court accepted that the libel or alleged libel
was published with the sole purpose of selling newspapers. Therefore,
the liability to damages was incurred because of the publishing of
the newspaper, which was “the thing which produced assessable
income”. In reaching its conclusion that the damages were deductible,
the Court noted that the potential for libel claims was a regular and
almost unavoidable incident of publishing, which meant that there
was sufficient connection between the cause of the expense and the
taxpayer’s
business.

In FCT v Snowden & Willson Pty Ltd (1958) 99 CLR 431, the taxpayer was
a building company that was the subject of a number of complaints and
at the centre of investigations. The complaints and investigations were
public knowledge, and the taxpayer incurred expenses on advertising
and legal fees in defending its reputation.
The taxpayer sought to deduct these expenses on the basis that they
were ordinary business expenses, while the Commissioner sought to
deny a deduction on the basis that the expenses were not necessarily
incurred by the taxpayer in the carrying on of its business.
In concluding that the expenses were deductible, the Full High Court
found that an expense is necessarily incurred where the expenditure
is dictated by business purposes, those purposes being part of or
incidental to the business itself. In this case, the expenses were incurred
in defending the taxpayer’s reputation and in enabling the continued
operation of the business to gain or produce assessable income, which
was clearly a legitimate business purpose. In reaching its conclusion, the
Court appears to suggest that allegations of wrongdoing are an ordinary
incident of business and expenses incurred in defending the taxpayer
against such allegations are necessary for the continued operation of the
business and therefore appropriate (and deductible). The taxpayer’s guilt
or
innocence in relation to the allegations is irrelevant.
[12.90] In the cases of Herald and Weekly Times Ltd v FCT (1932) 48 CLR
113 (see Case Study [12.3]) and FCT v Snowden & Willson Pty Ltd (1958) 99
CLR 431 (see Case Study [12.4]), the taxpayers’ alleged or actual wrongdoing
was related to their business activities and the allegations of wrongdoing were
considered by the courts to be an ordinary incident of the particular business.
In FCT v Day, the charges against the taxpayer arose under the Public Service
Act 1922 (Cth), to which the taxpayer was only subject due to the nature of
his employment. As such, the connection between the expenses and the
production of assessable income may seem more apparent. The following cases
considered the deductibility of expenses related to criminal or illegal behaviour,
which potentially suggests a personal element. Both cases considered whether
expenses related to criminal or illegal behaviour were “necessarily incurred” in
carrying on a business, thereby satisfying the second positive limb.
Case study 12.5: Legal expenses incurred in defending criminal

charges
In Magna Alloys & Research Pty Ltd v FCT (1980) 11 ATR 276, the
taxpayer incurred legal expenses in defending itself and its directors in
criminal proceedings. The taxpayer was accused of paying illegal secret

commissions to boost sales of its products. The proceedings against the
taxpayer were subsequently dropped and the legal expenses primarily
related to the directors’ defence. The Commissioner denied the deduction
on the basis that the legal expenses were primarily for the directors’
personal benefit.
The Full Federal Court found that the legal expenses were necessarily
incurred in carrying on a business to gain or produce assessable income.
The Court noted that “necessary” does not mean that the expense has to
be unavoidable or essential. The Court also stated (at 293) that “it is no
part of the function of the Act or of those who administer it to dictate to
taxpayers in what business they shall engage or how to run their business
profitably or economically”.
The Court concluded that the expenses were deductible as the taxpayer
was inextricably involved in the proceedings and its reputation and
interests were tied to the directors. It was therefore in the taxpayer’s
interests to pay for the legal expenses to defend the directors. The Court
suggested that the directors knew that the legal expenses were incurred
not only in their own interests but also to protect the taxpayer’s business.
The Court articulated what has become known as the “business judgment
rule” –that is, an expense will be necessarily incurred in carrying on a
business to gain or produce assessable income where the persons who
run the business consider the expense desirable and appropriate in
achieving
business ends.
Case study 12.6: Expenses related to illegal business

In FCT v La Rosa (2003) 53 ATR 1, the taxpayer was a convicted drug
dealer who was robbed of cash during an intended drug purchase. The
Commissioner sought to assess the taxpayer on the income he had earned
from drug dealing. The taxpayer claimed a deduction for the loss incurred
in the robbery per Charles Moore & Co (WA) Pty Ltd v FCT (1956) 95 CLR
344: see Case Study [12.1]. The Commissioner argued that the taxpayer
should be denied a deduction for the loss on public policy grounds, while
including the gross proceeds from the sale as assessable income.
The Full Federal Court confirmed that proceeds from an illegal business
or activity may be assessable and corresponding expenses or losses
deductible. The Court did not accept the Commissioner’s public policy
argument for denying the deductions as there was no legal basis for doing
so. The loss was deductible as it was necessarily incurred in carrying on
the taxpayer’s business to gain or produce assessable income.
Not surprisingly, the case attracted widespread publicity and the
government responded by introducing s 26-54, which denies a deduction
for “a loss or outgoing to the extent that it was incurred in the furtherance
of, or directly in relation to, a physical element of an offence against an
Australian law of which you have been convicted if the offence was, or
could
have been, prosecuted on indictment”: see [12.240].
The decisions in Magna Alloys & Research Pty Ltd v FCT and FCT v La Rosa
further support a broad approach in determining the connection between a
loss or outgoing and the production of assessable income. It should be noted
that a deduction is available in these situations regardless of the taxpayer’s
guilt or innocence in relation to the allegations: FCT v Snowden & Willson Pty
Ltd and Magna Alloys & Research Pty Ltd v FCT.
Expenses to reduce future expenditure

[12.100] The deductibility of expenses incurred in improving business
efficiency which will result in a reduction of future expenditure is an interesting
issue. Strictly speaking, such expenses increase “taxable income” (by reducing
deductions) and not assessable income as required by s 8-1. The Full High Court
considered whether such expenses were “necessarily incurred” in carrying on
a business and satisfied the second positive limb of the predecessor to s 8-1
in W Nevill & Co Ltd v FCT (1937) 56 CLR 290. The Court held that an expense
that improves the taxpayer’s business overall and reduces future expenses,
although not directly incurred in gaining or producing assessable income,
is not too remote and satisfies the second positive limb of the predecessor
to s 8-1.

In W Nevill & Co Ltd v FCT (1937) 56 CLR 290, the taxpayer was a company
that had two managing directors. The joint management system was
found not to be working and therefore it was decided that the contract of
one of the managing directors would be terminated and a compensation
payment made.
Among other things, the Commissioner argued that the compensation
payment was not deductible as it was not incurred in gaining or producing
assessable income. The taxpayer argued that the amount was deductible
as it was saving on future salary costs, which would have been deductible,
and that terminating the managing director would improve the efficiency
of the business, which would increase assessable income.
The Full High Court found that the payment satisfied the positive limbs
of the predecessor to s 8-1 and was therefore deductible. In reaching this
conclusion, the Court noted that no expense directly increases a taxpayer’s

assessable income and therefore an overall approach is appropriate.
Here, the Commissioner erred in looking at the compensation payment in
isolation. The Court held that the compensation payment must be viewed
in context with the original agreement with the managing director,
which was clearly entered into in the production of assessable income.
The compensation payment, which resulted from an amendment to the
original agreement, must therefore also be for the purpose of gaining or
producing assessable income.
Therefore, an expense which improves the taxpayer’s overall business
efficiency and operation would be incurred in gaining or producing
assessable income. Further, the Court also found that an expense that
reduces a taxpayer’s future deductible expenditure is incurred in gaining
or producing assessable income.
Involuntary losses or outgoings

[12.110] As discussed at [12.30], s 8-1 of the ITAA 1997 contemplates that
a “loss” may be deductible. However, the question arises as to whether a
loss or outgoing is sufficiently connected to the production of assessable
income where the taxpayer has not chosen to incur the loss or outgoing and
it is involuntary or unforeseen, or unavoidable. In these situations, the loss
or outgoing may be too remote to the production of assessable income. The

issue was considered by the High Court in Charles Moore & Co (WA) Pty Ltd v
FCT (1956) 95 CLR 344 (see Case Study [12.1]) where the taxpayer suffered a
loss due to theft. The Full High Court found that an involuntary loss or outgoing
may be sufficiently connected to the production of assessable income where it
arises out of the taxpayer’s income-producing activities.
Is there a sufficient temporal nexus or connection to

satisfy the positive limbs of s 8-1?
[12.120] In the cases considered so far, the loss or outgoing was incurred in
the same income year as the production of assessable income. The question
in those cases was whether the loss or outgoing was sufficiently connected to
or too remote from the production of assessable income. A separate question
arises as to whether expenses incurred prior to or after the production of
assessable income are sufficiently connected to the production of assessable
income.
Expenses related to the production of assessable income

in future years
[12.130] The courts (eg, in Steele v DCT (1999) 41 ATR 139) have accepted
that an expense incurred to gain or produce assessable income in future
income years may satisfy the positive limbs of s 8-1 of the ITAA 1997 in certain
circumstances.
Case study 12.8: Expenses related to income gained or produced in

future years
In Steele v DCT (1999) 41 ATR 139, the taxpayer was an individual who
had obtained a loan to purchase property for use in a business venture.
For various reasons, the venture did not go ahead and the taxpayer did
not gain or produce assessable income in relation to the property as
intended.
The taxpayer sought a deduction for the interest expenses incurred on the
loan to purchase the property on the basis that the expenses were incurred
to gain or produce future assessable income. The Commissioner sought
to deny the taxpayer’s claim on the basis that there was no connection
between the interest expenses and the production of assessable income –
that is, the positive limbs of the predecessor to s 8-1 were not satisfied.
The Full High Court held that such expenses would be deductible if the
taxpayer could demonstrate that the expenses were incurred in order to
gain or produce assessable income. The factual question was remitted
back to the AAT, which found that the evidence showed that the taxpayer
had no other purpose in incurring the interest expense other than for
the production of assessable income. The expenses were thus deductible
under
the predecessor to s 8-1.
Despite the High Court’s decision in Steele v DCT, the deductibility of expenses
related to the production of future assessable income can be a tricky issue
and should be decided on a case-by-case basis. It is important to note that
Steele v DCT considered a deduction for interest expenses associated with the
acquisition of an income-producing asset. A deduction for such expenses may
be considered desirable from a policy perspective as it promotes investment
in income-producing assets, such as shares and property.
In a business context, expenses incurred in anticipation of future assessable

income may not be deductible on the basis that the business has not actually
commenced at that time: see [8.110]–[8.120].
In an employment context, the courts may find that the expenses are incurred
to put the taxpayer in a position to gain or produce assessable income, rather
than being incurred in the production of assessable income: see [12.340],
[12.360]–[12.370], [12.390].
While the Full High Court’s decision in Steele v DCT stands for the proposition
that expenses incurred in anticipation of future income may be deductible, this
is more likely to be the case where the expenses relate to the acquisition of an
income-producing asset, and such expenses may still be considered to be “too
soon” in an employment or business context.
Expenses related to the production of assessable income

in prior years
[12.140] A question also arises as to whether an expense is incurred “in
gaining or producing assessable income”, where the expense relates to the
production of income in previous years. In particular, there is an issue as to
whether a sufficient connection continues to exist between the expense and
the income where the taxpayer has ceased to carry on its previous income-
producing activities.
In Amalgamated Zinc (De Bavay’s) Ltd v FCT (1935) 54 CLR 295, the Full High
Court denied the taxpayer deductions for expenses that related to its past
business activities, which it no longer carried on at the time the expenses were
incurred. Although this case has not been expressly overturned by subsequent
cases, it is no longer considered good authority on the issue. A number of
subsequent cases have permitted the taxpayer a deduction for expenses

relating to past business activities provided that the expense was caused by
the past income-producing activities of the taxpayer.
In AGC (Advances) Ltd v FCT (1975) 132 CLR 175, the Full High Court allowed
the taxpayer a deduction for expenses that related to past business activities.
However, the difference between this case and Amalgamated Zinc v FCT was
that, in AGC (Advances) Ltd v FCT, the taxpayer had restarted its business at
the time of claiming the deduction.
The Full Federal Court subsequently applied AGC (Advances) Ltd v FCT to
permit taxpayers a deduction for expenses relating to past business activities,
even where the business activities have ceased at the time of incurring the
expense: see, for example, FCT v EA Marr and Sons (Sales) Ltd (1984) 15 ATR
879; Placer Pacific Management Pty Ltd v FCT (1995) 31 ATR 253.
Case study 12.9: Expenses related to the production of assessable

income in prior years
In Placer Pacific Management Pty Ltd v FCT (1995) 31 ATR 253, the taxpayer
incurred expenses in satisfying obligations arising out of its previous
business of manufacturing conveyor belts. At the time of incurring the
expenses, the taxpayer was only involved with the investment and
management of related companies.
The taxpayer sought a deduction for the expenses on the basis that they
were incurred in producing assessable income. The Commissioner argued
that the nexus between the taxpayer’s income-producing activities and
the expense was broken by the fact that the taxpayer had ceased carrying
on the business of manufacturing conveyor belts.
The Full Federal Court allowed the taxpayer a deduction for the expenses
on the basis that they arose out of or were caused by the taxpayer’s
past activities of manufacturing conveyor belts, from which it produced
assessable income. The fact that the business had since ceased was
therefore irrelevant.
The Commissioner’s application for special leave to appeal was refused
by
the High Court.
More recent cases, such as FCT v Brown (1999) 43 ATR 1 and FCT v Jones
(2002) 49 ATR 188, have also permitted taxpayers a deduction for interest
expenses on loans related to prior business activities which have since
ceased.
The key to determining whether an expense incurred in producing assessable

income in prior years satisfies the positive limbs of s 8-1 of the ITAA 1997 is
to establish whether the expense was caused by the taxpayer’s prior income-
producing activities. If the expenses have been caused by the taxpayer’s
previous income-producing activities, then they will be deductible.
Summary
[12.150] The above discussion and case studies indicate that a broad
approach is to be adopted when determining whether an expense is incurred
in the production of assessable income, or is necessarily incurred in carrying
on a business for the production of assessable income. This broad approach is
supported by the fact that courts have accepted that the phrase “in gaining or
producing assessable income” is to be interpreted as “in the course of gaining
or producing assessable income”: FCT v Day (2008) 70 ATR 14; Charles Moore
& Co (WA) Pty Ltd v FCT (1956) 95 CLR 344.
In the context of an individual, it is necessary to consider whether the

expenditure arises out of the taxpayer’s income-producing activities (ie, the
“occasion of the expenditure”): see FCT v Payne (2001) 202 CLR 93; FCT v Day
(2008) 70 ATR 14.
In a business context, the courts have not applied a narrow interpretation

to “necessarily incurred” and have concluded that involuntary, unavoidable,
unforeseen or even apparently illogical outgoings may be incurred in gaining
or producing assessable income: Charles Moore & Co (WA) Pty Ltd v FCT
(1956) 95 CLR 344; Magna Alloys & Research Pty Ltd v FCT (1980) 11 ATR
276. The determination as to whether an expense is desirable and appropriate
towards business ends is a decision for the directors or persons responsible
for carrying on the business: Magna Alloys & Research Pty Ltd v FCT (1980)
11 ATR 276. Further, the connection between an expense and the production
of assessable income cannot be made in isolation and an overall approach
should be adopted: W Nevill & Co Ltd v FCT (1937) 56 CLR 290.
Finally, the courts have accepted that expenses may be deductible even where
they relate to assessable income gained or produced in future or prior years.
Expenses in anticipation of future assessable income will be deductible if it
can be shown that the expenses were incurred in order to gain or produce
assessable income. However, it may be necessary to consider whether the
expenses were incurred to put the taxpayer in a position to gain or produce
assessable income, or prior to the commencement of a business. Expenses
related to the production of prior year assessable income will be deductible
where the expenses were caused by the taxpayer’s prior income-producing
activities.
Non-deductible expenses –the negative limbs

of section 8-1
[12.160] An expense that satisfies the positive limbs of s 8-1 of the ITAA
1997 may nevertheless not be deductible under s 8-1 if it satisfies any one
of the elements of s 8-1(2). Note that s 8-1(2) provides that an expense is
not deductible “to the extent that” it satisfies any one of the negative limbs.
This means that an expense may be partially deductible under s 8-1 where it
only partially satisfies one of the negative limbs of s 8-1. Apportionment and
deductibility of dual purpose expenses are considered further at [12.270].
Capital or capital in nature

[12.170] The first of the negative limbs in s 8-1 of the ITAA 1997 is often
the main issue in determining whether an expense is deductible under s 8-1,
particularly in a business context. Under s 8-1(2)(a), a loss or outgoing that is

capital or capital in nature will not be deductible under s 8-1. Expenses that are
not capital or capital in nature are often termed “revenue expenses”, although
this expression does not appear in the legislation.
Unfortunately, there is no clear test in the legislation as to when an expense will

be a capital expense or a revenue expense. Broadly, an expense that relates
to the taxpayer’s income-producing process will be a revenue expense, while
an expense that relates to the taxpayer’s income-producing structure will be a
capital expense (this distinction is sometimes known as the “business entity”
test or “business structure or process” test or “profit-yielding structure” test).
Revenue expenses generally provide the taxpayer with benefits in the current
year, while capital expenses generally provide the taxpayer with benefits over
a period of years.
Although capital expenses are not immediately deductible under s 8-1, the
taxpayer may be entitled to deduct a portion of the expenses over a number
of years to correspond with the expected benefits from the expense: see
Chapter 14. In other cases, the taxpayer may be able to recognise the
expense upon disposal of the asset or some other event under the provisions
regarding the taxation of capital gains: see Chapter 11.
Judicial tests
[12.180] One of the earliest attempts to distinguish between capital and
revenue expenses occurred in Vallambrosa Rubber Co Ltd v Farmer (1910)
5 TC 529. In that case, Lord Dunedin stated that “capital expenditure is a

thing that is going to be spent once and for all, and income expenditure is a
thing that is going to recur every year” (at 536). The test merely required an
examination of the form of the expense. While such a test had the advantage
of simplicity, in practice, it soon proved to be inadequate. In British Insulated
and Helsby Cables Ltd v Atherton [1926] AC 205 at 213–214, Viscount Cave LC
suggested that “where an expenditure is made, not only once and for all, but
with a view to bringing into existence an asset or an advantage for the enduring
benefit of a trade, I think that there is a very good reason … for treating such
an expenditure as properly attributable not to revenue but to capital”. This
became known as the “enduring benefit test” and focused on the effect of the
expense in determining its character. This test is often still referred to, and
while it can be useful in distinguishing between revenue and capital expenses,
it is sometimes difficult in practice to determine the expected benefit from an
expense when it is incurred.
The courts continued to apply various tests in characterising expenses with

no definitive guidance emerging from the cases until Sun Newspapers Ltd
and Associated Newspapers Ltd v FCT (1938) 61 CLR 337, one of the most
important cases in income tax. In Sun Newspapers, Dixon J (as he then was) set
out the distinction between expenses related to business processes (revenue
expenses) and expenses related to business structure (capital expenses),
mentioned above. This distinction was not new and had been variously argued
and applied in previous cases, but Dixon J’s clear articulation of the test has
resulted in the case being the leading precedent for distinguishing between
capital and revenue expenses.
Case study 12.10: Capital expenses

In Sun Newspapers Ltd and Associated Newspapers Ltd v FCT (1938)
61 CLR 337, the taxpayer was a newspaper publisher. The taxpayer’s
principal competitor was the World published by Sydney Newspapers
Ltd. Sydney Newspapers proposed to introduce a rival paper, the Star,
which would sell for two-thirds of the price of the Sun, published by the
taxpayer. The taxpayer made a payment to Sydney Newspapers for the
right to use its plant and equipment for a period of three years and for
an agreement that it would not establish a new newspaper, the Star, for
the same period. The taxpayer immediately ceased publication of the
World once it took over the plant and equipment. In effect, the payment
resulted in Sun Newspapers shutting down an existing rival newspaper
(the World) and preventing the publication of a new rival (the Star) for a
period of three years.
The taxpayer tried to claim a deduction for the payment over a period
of three years, but there was no provision in the income tax legislation
which would allow it to do so. The taxpayer then claimed an immediate

deduction for the payment on the basis that the expenses would safeguard
and increase the taxpayer’s revenue (ie, its assessable income). The
Commissioner argued that as the payment resulted in an addition to the
goodwill of the business, benefited the business as a whole and was a
monopoly for a capital asset, the payment was therefore capital in nature.
A majority of the High Court concluded that the payment was a non-
deductible capital expense as the taxpayer had acquired a non-wasting
capital benefit (ie, an “enduring benefit”) by effectively shutting down
its competitor. Dixon J reached the same conclusion by distinguishing
between expenses related to the taxpayer’s income-producing process
and expenses related to the taxpayer’s income-producing structure. The
payment strengthened or preserved the taxpayer’s business structure
and,
as such, was capital in nature.
In applying the distinction between business structure and business process,

Dixon J suggested that the following three factors should be considered:
• Character of the advantage sought. This requires a consideration as to

whether the expense results in a lasting or a temporary benefit for the
taxpayer. An expense that results in the taxpayer receiving a lasting
benefit is more likely to be a capital expense, whereas an expense that
results in the taxpayer receiving a temporary benefit is less likely to be
a capital expense.
• Manner in which the benefit is to be used, relied upon or enjoyed. This
is similar to the first factor and requires a consideration as to whether
the benefit received by the taxpayer is a single, substantial, enduring
benefit upon which the taxpayer relies in a constant way, or rather a
benefit that is relied upon, or enjoyed, in a short-term sense, though
recurrently. A benefit received once and for all is more likely to be
a capital expense, whereas a benefit that is received recurrently, for
short-term periods, is more likely to be a revenue expense.
• Means adopted to obtain the benefit. This looks at whether the taxpayer
acquired the benefit through recurrent payments or a one-off payment.
A recurrent payment is less likely to be capital expense, while a lump
sum payment is more likely to be a capital expense.
In discussing these three factors, Dixon J clearly stated that none of the factors
is definitive and all three factors are to be considered together in reaching
a conclusion as to whether an expense is a capital expense. With modern
financing practices, the third factor has become much less useful as it is possible
for taxpayers to purchase capital assets through instalment payments, rather
than lump sum amounts.
Since Sun Newspapers, courts generally conclude that a capital expense is

the acquisition of a means of production (related to the income-producing
structure), whereas a revenue or non-capital expense would be for the use of
the means of production (related to the income-producing process).
Example 12.3: Capital expenses
Dominic owns a pizza-making business. He incurs an expense of $3,000
to purchase an oven which he uses to make pizzas and approximately
$100 in monthly electricity expenses.
Applying Dixon J’s three factors to the two expenses:
Character of the advantage sought
• The pizza oven will provide Dominic with a long-lasting benefit
and is therefore more likely to be a capital expense.
• The monthly electricity expenditure is for a short-term, one-month
benefit (albeit a benefit that could continue, provided Dominic
pays the next monthly bill) and is therefore more likely to be a
revenue expense.
Manner in which the benefit is to be used or enjoyed

• The pizza oven will provide Dominic with a benefit that he can
rely on once and for all and is therefore more likely to be a capital
expense.
• The electricity is a recurring benefit (in that he uses it by the
month, on a recurring basis) and is therefore more likely to be a
revenue expense.
Means adopted to obtain the benefit
• Dominic paid for the pizza oven in one lump sum payment of
$3,000, which indicates that the expense is more likely to be capital.
• The electricity bills are recurrent monthly expenses, which are
more likely not to be capital.
Looking at the three factors overall, it is likely that the payment for the
pizza oven would be a capital expense, whereas the electricity payments
would not be. Further, the acquisition of the pizza oven is the acquisition
of a means of production (to make pizzas), which relates to Dominic’s
income- producing structure, whereas the electricity payments are for
the use of that means of production, which relates to Dominic’s income-
producing activities or process.

[12.190] Although there is a clear articulation of the distinction between

capital and revenue expenses and three factors which can be looked at to make
that determination, the characterisation of capital and revenue expenses is not
quite so straightforward in practice. In fact, the Commissioner and the taxpayer

often apply these same tests in reaching opposite conclusions. As observed by
Green MR in IRC v British Salmson Aero Engines Ltd [1938] 2 KB 482 at 488,
“in many cases it is almost true to say that a spin of the coin would decide the
matter almost as satisfactorily as an attempt to find reasons”. The following
cases illustrate the difficulty in characterising expenses as revenue or capital,
even when applying Dixon J’s test and factors to the same or similar facts.
Case study 12.11: Exclusivity payments not capital in nature

In BP Australia Ltd v FCT (1965) 112 CLR 386, the taxpayer was a petrol
wholesaler. The taxpayer entered into “tied house” agreements with
several service stations. Under the agreements, the service stations agreed
to sell the taxpayer’s petrol exclusively for an average period of just under
five years in return for a lump sum payment. Prior to the agreement, the
service stations sold petrol from several different wholesalers.
The Privy Council considered the application of Dixon J’s test and factors
in characterising the payments. As to the first factor, the character of
the advantage sought, the Privy Council suggested that it is necessary

to consider the lasting qualities of the benefits, the recurrence of the
benefits and the reasons for the expenditure. Looking at the facts that
the expenses came about because of a change in marketing practices in
1951, the relatively short exclusivity period and the lack of a permanent
solution, their Lordships suggested that the payments were a revenue
expense. As to the second factor, their Lordships concluded that “the
benefit was to be used in the continuous and recurrent struggle to get
orders and sell petrol” and were part of the ordinary process of selling,
which made them revenue in nature. Their Lordships did not find the third
factor particularly useful as it did not point clearly in either direction. Their
Lordships stated that “the case is not easy to decide” but “an allocation to
revenue is slightly preferable”.
In concluding that the payments were revenue expenses, the Privy
Council reversed the decision of the High Court of Australia in BP
Australia Ltd v FCT (1964) 110 CLR 387. The majority of the High Court
(Dixon CJ dissenting) applied the same test and factors to conclude that
the payments were capital in nature.
Case study 12.12: Exclusivity payments capital in nature

In Strick v Regent Oil Co Ltd [1966] AC 295, the taxpayer secured exclusive
sales ties through a lease premium arrangement. Under the arrangement,
the retailers leased their stations to the taxpayer for between 10 and
20 years in exchange for a lump sum lease premium. The taxpayer then
sublet the stations back to the retailers at nominal rent on condition that
the retailer sold the taxpayer’s oil exclusively.
The House of Lords found that the lease premium payments were capital
in nature. An important element in this case was the fact that the lease
premium arrangements provided the taxpayer with a substantially longer
benefit than the taxpayer in BP Australia. Lord Reid stated: “I would have
great difficulty in regarding a payment to cover 20 years as anything other
than
a capital outlay.”
Form and substance

[12.200] BP Australia Ltd v FCT (1965) 112 CLR 386 (see Case Study [12.11])
and Strick v Regent Oil Co Ltd [1966] AC 295 (see Case Study [12.12]) suggest
that the frequency of payments may be relevant in characterising an expense
as capital or revenue. Other cases indicate that the courts will examine the
substance of a payment and not just its form in determining whether an

expense is capital or revenue in nature.
Case study 12.13: Lump sum payment held to be revenue expense

In National Australia Bank Ltd v FCT (1997) 37 ATR 378, the taxpayer
made a large lump sum payment to the Commonwealth Government. In
return, the taxpayer became the exclusive lender under a Commonwealth
subsidised home loan scheme for members of the defence force for a
period of 15 years. The taxpayer sought a deduction for the lump sum
payment on the basis that it was akin to a marketing expense or minimum
royalty payment. The Commissioner argued that the payment was a
capital expense as it resulted in the taxpayer having a monopoly over a
particular class of taxpayers and therefore provided the taxpayer with an
enduring benefit.
The Full Federal Court concluded that the lump sum payment was a
deductible revenue expense. In applying Dixon J’s test and factors, the
Court held that the character of the advantage sought was the expansion
of its customer base and the potential increase in its income from loan
activities. Importantly, the payment was not considered to create a
monopoly or add to the structure of the taxpayer’s business as defence
force members were not required to obtain their home loan from the
taxpayer
and could go to other banks.
Case study 12.14: Monthly “rental” payments held to be capital

expense
In Colonial Mutual Life Assurance Society Ltd v FCT (1953) 89 CLR 428,
the taxpayer purchased a block of land. The consideration for the transfer
was a “rent charge” to be paid monthly for a period of 50 years. The
“rent charge” was equal to 90% of the annual rents on three shops and
a basement on the transferred land. Payment of the “rent charge” was
conditional on the rents being received.
The Full High Court concluded that the “rent charge” was a capital
expense. The so-called rental payments were in effect consideration for
the acquisition of the land. Fullager J stated that “the documents make
it quite clear that these payments constitute the price payable on the
purchase of land, and that appears to me to be the end of the matter.
It does not matter how they are calculated, or how they are payable, or
when they are payable, or whether they may for a period cease to be
payable. If they are paid as parts of the purchase price of an asset forming
part of the fixed capital of the company, they are outgoings of capital or
of
a capital nature”.
The examination of the substance of an expense is not limited to the frequency

of the payments. In FCT v Star City Pty Ltd (2009) 72 ATR 431, the Full Federal
Court looked beyond the contract documents to additional background
information in concluding that the substance of a payment was capital in nature
although the form of the payment suggested otherwise.
Case study 12.15: Payment held to be capital based on substance

rather than form
In FCT v Star City Pty Ltd (2009) 72 ATR 431, the taxpayer had an exclusive
licence to operate a casino in Sydney. Under the terms of its agreement
with the NSW Government, the taxpayer was granted a 99-year lease
over the land where the casino was located and a 12-year exclusive
licence to operate the casino. The taxpayer was required to make an
upfront payment for the licence plus a payment of $120 million, which
was described as prepaid “rent” for the first 12 years of land rental.
The Full Federal Court examined the background documentation, which
clearly indicated that the value of the rent was related to the benefits
that would be enjoyed by the taxpayer in operating the casino under an
exclusive licence, and held that the “rent” was a capital expense. The
High Court refused the taxpayer special leave to appeal from the decision
of
the Full Federal Court.
A similar conclusion was reached by the Full Federal Court in Jupiters Ltd
v DCT (2002) 50 ATR 236. The taxpayer entered into an agreement with the
Queensland Government under which, in return for “special rent” payments,
the Government would not permit the operation of another casino within 60
km of the taxpayer’s casino. The “rent” payments were frequent and regular,
but the Court concluded that they were capital in nature as the benefit acquired
was “to secure the advantage of exclusivity and freedom from competition”,
which relates to the taxpayer’s income-producing structure.
Summary
[12.210] As illustrated by the cases discussed here, the characterisation of
an expense as capital or revenue is not an easy issue. It is necessary to apply
the three factors from Sun Newspapers Ltd and Associated Newspapers Ltd v
FCT (1938) 61 CLR 337 (see Case Study [12.10]) to the expense and consider
whether the expense relates to the taxpayer’s income- producing process
(revenue expense) or income-producing structure (capital expense). In some
cases, it may be necessary to look beyond the form of the transaction or
payment and examine its substance to determine its character. Remember
that although capital expenses are not immediately deductible under s 8-1,
the expenses may be deductible over a period of years (see Chapter 14) or
taken into account when an event, such as a disposal, happens to the relevant
asset: see Chapter 11.
The distinction between capital and revenue expenses will be considered

further when we look at some commonly incurred expenses: see [12.330]. The
distinction can be particularly difficult to apply in the case of legal expenses: see
[12.840].
Private or domestic
[12.220] Under s 8-1(2)(b) of the ITAA 1997, losses or outgoings of a private
or domestic nature will not be deductible under s 8-1. There is some question
as to whether the second negative limb is strictly necessary, as expenses
which are private or domestic in nature are unlikely to be incurred in gaining
or producing assessable income and therefore would not satisfy either of the
positive limbs of s 8-1. Nonetheless, the second negative limb ensures that
such expenses would not be deductible under s 8-1.
There is no clear test as to whether an expense is private or domestic in nature.

In broad terms, private or domestic expenses are those which are incurred to
put the taxpayer in a position to gain or produce assessable income, as opposed
to expenses incurred in gaining or producing assessable income. Another way
of looking at it is that private or domestic expenses are incurred regardless of
the taxpayer’s income-producing activities (eg, food and shelter). But it does
not necessarily follow that an expense will not be private or domestic in nature
simply because it has some connection to the taxpayer’s income-producing
activities. This was made clear by the Full Federal Court in FCT v Cooper (1991)
21 ATR 1616.
Case study 12.16: Private or domestic expenses

In FCT v Cooper (1991) 21 ATR 1616, the taxpayer was a professional
rugby player who received instructions from his coach requiring him
to eat more meat and potatoes and drink more beer, in addition to his
normal meals, to improve his fitness for the following season.
The taxpayer sought a deduction for the additional food and alcohol costs
on the basis that the expenses were incurred in gaining or producing his
assessable income. The Commissioner denied the taxpayer a deduction
on the basis that the expenses were private or domestic in nature.
The Full Federal Court agreed with the Commissioner’s argument, finding
that the expenses were incurred in putting the taxpayer in a position to
carry out his income-producing activities, rather than being incurred in the
carrying on of those activities. Therefore, the expenses did not satisfy the
positive limbs of the predecessor to s 8-1 and were specifically excluded
from being deductible as they were private or domestic in nature. The fact
that the taxpayer was instructed by his coach to consume the additional
food and drink, and therefore incur the additional expenditure, did not
change the character of the expenditure, which was for food and drink to
sustain life.

In FCT v Cooper, the Full Federal Court also stated that the taxpayer’s income-
producing activities did not include the consumption of food and drink and, as
such, the expenditure on food and drink was not related to the production of
the taxpayer’s assessable income. Where the consumption of food and drink
is incurred in the course of gaining or producing the taxpayer’s assessable
income, expenditure on food or drink will be sufficiently connected to the
production of assessable income and not constitute a private or domestic
expense. For example, a food critic incurs expenditure on food or drink in the
course of gaining or producing their assessable income. Similarly, expenditure
on food or drink incurred while a taxpayer is required to travel overnight for
work purposes is incurred in the course of gaining or producing assessable
income: see Ruling TR 98/9.
Case study 12.17: Expenses not private or domestic

In FCT v Day (2008) 70 ATR 14 (see Case Study [12.2]), the Commissioner
also argued that the legal expenses were not deductible as they were a
private or domestic expense. The High Court rejected this argument and
found that the legal expenses were not private or domestic in nature.
Crucial to the taxpayer’s success on this issue were the facts that the
taxpayer was exposed to the action because of his employment and the
charges
were brought against him by his employer.
Several other cases regarding private or domestic expenses will be considered

later in the chapter when we consider the application of s 8-1 to some commonly
incurred expenses: see [12.330].
Incurred in gaining or producing exempt or non-

assessable non-exempt income
[12.230] As with the second negative limb, there is some question as to
whether the third negative limb is strictly necessary, as expenses that are
incurred in gaining or producing exempt or non-assessable non-exempt

income would not satisfy either of the positive limbs of s 8-1 of the ITAA
1997 as they would not be incurred in gaining or producing assessable
income. Nevertheless, s 8-1(2)(c) ensures that such expenses would not be
deductible under s 8-1 since the income to which the expense relates is not
subject to tax in Australia. To allow a deduction for such expenses would
inappropriately reduce the taxpayer’s tax payable on any other unrelated
income.
Example 12.4: Expenses incurred in gaining or producing

exempt income
Leela is a primary school teacher who is a resident of Australia for income
tax purposes. She has taken a five-year leave of absence from her job and
is currently teaching English in Africa. She is employed by a charitable
institution that is exempt from income tax under s 50-50(1)(c) of the ITAA
1997. Leela incurred annual membership fees of $200 for the Teaching
Institute of Australia. She is required to be a member of the Institute to be
employed by the charity.
Leela’s salary for teaching in Africa is exempt from tax in Australia under
s 23AG of the ITAA 1936. Leela will not be able to claim a deduction for
her membership fees as they relate to the production of exempt income.

Denied deductions
[12.240] The last of the negative limbs in s 8-1 of the ITAA 1997 provides that
an expense will not be deductible under s 8-1 where another section in the
income tax legislation states that the expense is not deductible for tax purposes.
The provisions that operate to deny a deduction are mainly contained in Div 26,
but there are also a number of other provisions scattered throughout both the
ITAA 1936 and the ITAA 1997. The provisions may operate to deny a deduction
for an expense either in whole or in part.
The expenses that are denied deductions are generally not deductible for
policy reasons, such as where the government does not want to reward or
promote certain types of behaviour. Some examples of expenses that are not
deductible for tax purposes are:
• Penalties
– All forms of penalties, whether or not they are described as

penalties, imposed under Australian or foreign laws are not
deductible under s 26-5(a). Any court-ordered amounts payable in
respect of a conviction under an Australian or foreign law are also

not deductible: s 26-5(b).
– Disallowing a tax deduction for penalties preserves the policy intent
of the penalty, which is generally to discourage taxpayers from
undertaking certain behaviour.
– Note that the penalty must be imposed under a government law
and therefore s 26-5 only applies to government penalties and not
to penalties arising in a private context (eg, penalties imposed by
sporting clubs or libraries).
– Note also that penalties are different to damages. Penalties

are “imposed as a punishment of the offender considered as a
responsible person owing obedience to the law”: Gavin Duffy CJ
and Dixon J in Herald and Weekly Times Ltd v FCT (1932) 48 CLR 113
at 120. Damages, on the other hand, are an attempt to compensate
a plaintiff (the victim) in financial terms for harm suffered due to the
actions of the defendant (the alleged wrongdoer). As we have seen
in cases such as Herald and Weekly Times (see Case Study [12.3]),
payments for damages may be deductible where the requirements
of s 8-1 are satisfied.
• Expenditure related to rebatable benefits
– In response to FCT v Anstis (2010) 76 ATR 735 (see Case Study
[12.34]), the government introduced s 26-19 which denies taxpayers
a deduction for losses or outgoings incurred in gaining or producing
a rebatable benefit (eg, Youth Allowance, Austudy).
• Assistance to students
– As discussed in Chapter 3, the government provides financial

assistance in the form of loans to people undertaking higher
education, trade apprenticeships and other training programs.
Repayments of some of these debts or student contributions under
the Higher Education Support Act 2003 (Cth) are not deductible due
to s 26-20.
– The non-deductibility of such expenses ensures that taxpayers do
not get an additional benefit in relation to their higher education
fees in the form of a reduction to their tax payable as the system
already provides for financial assistance and/or subsidised higher
education.
– However, such expenditure is deductible when provided as a fringe
benefit: s 26-20(2).
– Note that s 26-20 does not prevent a deduction for full course fees
where the requirements of s 8-1 are satisfied. This is the case even
where the fees have been funded by the Higher Education Loan
Programme (FEE-HELP): see, for example, ATO ID 2005/26.
• Gifts or donations
– Section 26-22 denies business taxpayers a deduction for political
gifts and donations: see [13.150]. Individuals can claim a maximum
deduction of $1,500 for political gifts or donations but not if the
gift or donation is made in the course of carrying on a business:
ss 30-242 and 30-243. Where an individual makes a political gift or
contribution in the course of carrying on a business, the amount is
not deductible due to s 26-22.
– Section 26-55 stipulates that a taxpayer is not entitled to a deduction
for a gift or donation where the deduction would result in the
taxpayer incurring or increasing a tax loss for the year: see [13.140].
– A deduction for a gift or donation may also be denied due to s 78A
of the ITAA 1936: see [13.140].
• Relative’s travel expenses
– Under s 26-30, expenses incurred by a taxpayer attributable to a
relative’s travel, so that the relative can accompany the taxpayer on
a work-related trip, are not deductible. “Relative” is defined in s 995-1
as (a) the person’s spouse; or (b) parent, grandparent, brother,
sister, uncle, aunt, nephew, niece, lineal descendant or adopted
child of that person or of that person’s spouse; or (c) the spouse of
a person referred to in paragraph (b). “Spouse” is defined in s 995-1
to include a person in a de facto relationship with the taxpayer,
including same-sex relationships.

– In Re WTPG v FCT [2016] AATA 971, the Administrative Appeals
Tribunal denied a deduction for a disabled taxpayer’s wife’s travel
costs where she accompanied him to overseas conferences because
he required a carer. The deduction was denied on the basis that
the expenditure was private or domestic in nature and because of
s 26-30. The AAT held that it was not possible to read into s 26-30
an exception for a relative accompanying a taxpayer as a carer.
– The relative’s travel expenses will be deductible where the relative
accompanies the taxpayer in his or her own capacity as an employee
and would have done so regardless of the personal relationship
(s 26-30(2)) or where the travel expenditure is provided as a fringe
benefit: s 26-30(3).
• Amounts paid to related entities
– Section 26-35 provides that taxpayers can only deduct so much of
an expense paid to a related entity as the Commissioner considers
reasonable.
– “Related entities” are defined in s 26-35(2) as the taxpayer’s relative

or a partnership in which the taxpayer’s relative is a partner.
– Note that under s 26-35(4), any excess payment that is not deductible
is treated as non-assessable non-exempt income of the recipient.
Therefore, any amount in excess of what the Commissioner
considers to be reasonable is effectively treated as a gift from the
taxpayer to the related entity. This is an unusual situation where
the assessability of an amount for one taxpayer is determined by
the deductibility of the amount for another taxpayer.
Example 12.5: Payments to related entities

Linda is a lawyer with her own successful legal practice. She recently
employed her son Scott, a university student, to work in her practice three
days a week as a receptionist. The market rate for receptionists is $20 per
hour, but Linda decided to pay Scott $40 an hour so that he does not need
to get a second job and can concentrate on his university studies.
Generally, salary and wages are fully deductible under s 8-1 as an ordinary
business expense. In this case, however, Linda’s deduction in relation
to the salary and wages paid to Scott is likely to be limited to $20 per
hour (or some other amount the Commissioner considers reasonable)
as Scott is Linda’s son and is therefore a “related entity”: s 26-35. Under
s 26-35(4), Scott is only required to include the amount that is deductible
to Linda in his assessable income and not the $40 per hour which he
actually receives.

• Recreational club expenses

– Membership fees or other related payments for a recreational club
are not deductible under s 26-45.
– “Recreational clubs” are defined in s 26-
45(2) as companies
providing their members with facilities for drinking, dining,
recreation or entertainment.
– However, under s 26-45(3), such expenses would be deductible
where provided as a fringe benefit.
• Bribes to foreign public officials and public officials
– Sections 26-
52 and 26- 53 prevent taxpayers from claiming a
deduction for bribes to foreign public officials and public officials,
respectively. Such expenses are not deductible for policy reasons
as the government seeks to discourage such behaviour.
• Expenditure relating to illegal activities

– Under s 26-54, taxpayers cannot claim a deduction for a loss or
outgoing incurred in the furtherance of, or directly in relation to, a
physical element of an offence against an Australian law of which
the taxpayer has been convicted if the offence was, or could have
been, prosecuted on indictment. The section was introduced in
direct response to FCT v La Rosa (2003) 53 ATR 1 (see Case Study
[12.6]), where the Full Federal Court permitted the taxpayer, a
convicted drug dealer, a deduction under s 8-1 for losses related to
his drug-dealing operations.
• Travel expenses related to earning assessable income from residential
premises
– Under s 26-31, taxpayers are denied a deduction for travel expenses
incurred in earning assessable income from residential premises.
Examples of such expenses include travel expenses to collect rent
or to inspect or maintain the property. The relevant travel expenses
could relate to motor vehicle expenses, taxi or hire car costs, airfares,
public transport costs, and any meals or accommodation related
to the travel. The deductibility of expenses incurred in engaging
third parties, such as a real estate agent, to manage investment
properties is not affected by the provision.
– The restriction on deducting travel expenditure does not apply if the
expenditure is:
a) necessarily incurred in carrying on a business;
b) incurred by a corporate tax entity;

c) incurred by a superannuation fund that is not a self-managed
fund, a managed investment trust or a public unit trust; or
d) incurred by a unit trust or partnership, provided each member
of the trust or partnership is one of the entities described in
(b) or (c).
– Law Companion Ruling LCR 2018/
7 provides guidance on the
meaning of “residential premises” and the meaning of “carrying on
a business” for the purposes of s 26-31. The Ruling also addresses
the application of s 26-31 to travel expenditure that serves more
than one purpose.
• Non-compliant payments for work and services
– From 1 July 2019, non-compliant payments for work and services
are not deductible under s 26-105. A non-compliant payment arises
where the payment is subject to the withholding provisions in Sch 1
of the Taxation Administration Act 1953 (Cth) (eg, payments to
employees or payments to contractors where a valid ABN is not

provided) and the payer does not comply with those provisions.
Entertainment expenses
[12.250] One of the main types of expenses that is not deductible is
entertainment expenses: Div 32 of the ITAA 1997. Section 32-5 is the key
provision and states that entertainment expenses are not deductible under
s 8-1. “Entertainment” is defined in s 32-10(1) as entertainment by way of
food, drink or recreation, or accommodation or travel related to the provision
of entertainment by way of food, drink or recreation. The expenses are
considered to be “entertainment” even if business discussions or transactions
take place: s 32-10(2). The note to s 32-10(2) suggests that business lunches
and social lunches will constitute entertainment, but meals on business travel
overnight, theatre attendance by a critic or a restaurant meal consumed by a
food writer are not considered to be entertainment.
The legislation thus takes a broad-brush approach to the denial of deductions

for entertainment expenses through ss 32-5 and 32-10. A number of exceptions
are then created in subdiv 32-B.
The main exception to the non-deductibility of entertainment expenses is for

entertainment provided by way of a fringe benefit: s 32-20. The amount of
the deduction in this case will depend on how the taxpayer has treated the
expenditure for fringe benefits tax purposes: see Chapter 7.
Example 12.6: Entertainment expenses provided as fringe benefit

Michael is a senior manager at a large accounting firm. He recently took
one of his key clients to lunch to discuss the upcoming audit process. The
lunch cost $200.
Prima facie, the firm cannot claim a deduction for the $200 as it constitutes
an entertainment expense. This is despite the fact that the purpose of
the lunch was to discuss the upcoming audit and therefore relates to the
production of assessable income by the firm.
However, as Michael is an employee, the firm may be entitled to a deduction
for a portion of the lunch cost as the cost of providing a fringe benefit.
The amount of the deduction will depend on how the firm treats meal
entertainment expenses for fringe benefits tax purposes. For example, if
the firm elects to apply Div 9A of the Fringe Benefits Tax Assessment Act
1986 (Cth) to meal entertainment expenses and uses the 50/50 method to
calculate taxable value, the taxable value in this example would be $100
(50% of total meal entertainment expenses). The firm would be entitled to
a deduction of $100 in relation to the meal expense: s 51AEA of the ITAA

1936. In this situation, the $100 is treated as the cost of providing a fringe
benefit (a deductible expense), rather than as an entertainment expense.

Subject to the prescribed conditions being satisfied, some other expenses that
are excepted from the operation of s 32-5 and may be deductible under s 8-1
include:
• expenses incurred in providing food or drink in an in-house dining
facility: s 32-30, items 1.1–1.3;
• provision of food or drink to an employee under industrial arrangements
relating to overtime: s 32-30, item 1.4;
• an allowance to an employee that is included in the employee’s
assessable income: s 32-30, item 1.8;
• expenses on food, drink, accommodation or travel that are incidental
to the attendance at a seminar that lasts for at least four hours: s 32-35,
item 2.1;
• the ordinary course of the taxpayer’s business or duties that include
the provision of entertainment (eg, a restaurant providing meals to
customers): s 32-40; and
• promotion and advertising expenses: s 32-45.
Reimbursed expenditure
[12.260] Finally, s 51AH of the ITAA 1936 prevents taxpayers from claiming a
deduction for reimbursed expenditure. The denial of a deduction for reimbursed
expenditure is logical as the taxpayer is not actually out-of-pocket as a result of
the expense. In other words, they are in the same economic position despite
the expense. Further, a double deduction could result if the entity making the
reimbursement is entitled to a deduction (eg, the employer) as well as the
taxpayer who incurred the original expense which has been reimbursed (eg,
the employee).
Example 12.7: Reimbursed expenditure
Sarah is a tax accountant. She paid a fee of $440 for her membership
of the Taxation Institute of Australia. Her employer subsequently repaid
Sarah for the expense.
Sarah cannot claim a deduction for the $440 membership fee as she has
been
reimbursed for the expense by her employer.
Apportionment –deductibility of dual purpose

expenses
[12.270] The phrase “to the extent that” appears twice in s 8-1 of the ITAA
1997 and has important consequences. The phrase ensures that a loss or
outgoing may still be partially deductible even though:
• some portion of the loss or outgoing does not satisfy either of the
positive limbs of s 8-1; or
• some portion of the loss or outgoing does satisfy one of the negative
limbs of s 8-1.
The fact that a loss or outgoing may be partially deductible where the taxpayer
has a dual purpose in relation to the expense has long been accepted: see,
for example, Ronpibon Tin No Liability v FCT (1949) 78 CLR 47. The difficulty
with regard to dual purpose expenses is in determining the extent to which
the expense may be deductible. The High Court in Ronpibon Tin considered
the appropriate apportionment formula for a partially deductible expense and
found that there can be no precise formula and the apportionment is to be
done on a case-by-case basis depending on individual circumstances.
Case study 12.18: Dual purpose expenses

In Ronpibon Tin No Liability v FCT (1949) 78 CLR 47, the taxpayer produced
income from mines in Thailand (then Siam) which was exempt income in
Australia. The taxpayer also produced investment income in Australia,

which was subject to tax. During World War II, the taxpayer’s Siamese
mines were confiscated by the Japanese and the taxpayer did not receive
any income from the mines.
The taxpayer incurred administrative and management expenses which
related to its production of Australian-sourced investment income and
its Siamese mining operations. The investment income was only a small
percentage of the taxpayer’s total income. Prior to the confiscation of the
Siamese mines, the Commissioner permitted the taxpayer a deduction for
only a small portion of the taxpayer’s expenses relating to the production
of Australian-sourced investment income.
Following the confiscation of the mines, the Commissioner continued to
only permit a deduction for a small percentage of the taxpayer’s expenses.
The taxpayer argued that apportionment was not required as it was no
longer gaining or producing exempt income from the overseas mines.
Its only income was the investment income, which was fully assessable.
This argument was rejected by the Full High Court. The expenses were
not incurred solely in relation to the investment income and continued
to relate to the halted overseas operations (eg, the taxpayer made some
support payments to the families of employees who had been in Siam

at the time of the invasion). As such, apportionment was required and
allowed for by the predecessor to s 8-1 of the ITAA 1997.
As to how much of the expenses should be apportioned to the taxpayer’s
overseas activities and the investment income, the High Court concluded
that this was a question of fact that must be based on the taxpayer’s
actual expenditure and activities. The Court stated that “it is not for the
court or the Commissioner to say how much a taxpayer ought to spend
in obtaining his income, but only how much he has spent”. This is similar
to the “business judgment rule” later espoused by the Court in Magna
Alloys
& Research Pty Ltd v FCT (1980) 11 ATR 276: see Case Study [12.5].
[12.280] Where the portion of the expense that relates to the production of
income is distinct and severable from the portion that is not related to the
production of income, the expense is apportioned between the two activities
accordingly. However, where the expense serves both an income-producing
purpose and some other purpose indifferently, it may be necessary to
examine the taxpayer’s purpose in incurring the expenditure to determine
the appropriate amount that is deductible. The High Court in Ronpibon Tin No
Liability v FCT (1949) 78 CLR 47 recognised that there can be no precise formula
for apportionment in such cases and it will be necessary to determine a fair and
reasonable division based on the taxpayer’s particular circumstances.
Example 12.8: Dual purpose expenses

Hoong is a lawyer at a large firm. His mobile phone expenses for the
previous income year totalled $2,200. Hoong estimates that 70% of his
mobile phone use is for work purposes.
Hoong is entitled to a deduction for a portion of his mobile phone expenses
as he uses his phone for income-producing activities and therefore the
expense is incurred in gaining or producing Hoong’s assessable income.
The amount of the deduction should be a fair and reasonable estimate
which, in this case, is likely to be $2,200 × 70% based on Hoong’s
estimated use of his mobile phone.

Example 12.9: Dual purpose expenses

Leela is a primary school teacher who is a resident of Australia for
income tax purposes. She recently taught English in Africa for six
months. She was employed to teach in Africa by a charitable institution,
which is exempt from income tax under s 50-50(1)(c) of the ITAA 1997.
Leela incurred expenses of $200 for her annual membership fees of the
Teaching Institute of Australia. Leela is required to be a member of the
Institute in order to teach in Australia and with the charitable institution.
Leela’s salary for teaching in Africa is exempt from tax in Australia under
s 23AG of the ITAA 1936.
The $200 membership fees are deductible under s 8- 1 as they are
incurred in the production of Leela’s assessable income. However, some
portion of the $200 may not be deductible if it relates to Leela’s overseas
income, which is not assessable in Australia. Leela will need to make a
fair and reasonable estimate of the portion of the expense that relates to
her Australian assessable income. This may be done, for example, on the
basis of the percentage of assessable teaching income over total teaching
income.

The apportionment of expenses incurred for income-producing and private

purposes is discussed in more detail later in this chapter when we consider the
application of s 8-1 to some commonly incurred expenses: see, in particular,
[12.690].
Amount of deduction
[12.290] As a general rule, taxpayers are entitled to deduct the full amount
of an expense or loss once it is determined that the requirements of s 8-1

of the ITAA 1997 are satisfied. However, the question has arisen in some
situations as to whether the full amount or some lesser amount is deductible.
In particular, the courts have considered whether a taxpayer’s expense needs
to be “reasonable” to be deductible and whether consideration should be given
to the taxpayer’s subjective purpose in incurring an expense.
Reasonable vs actual expense

[12.300] The courts have consistently stated that the deductibility of a
loss or outgoing does not depend on whether it is commercially realistic or
reasonable but that it is a question of judgment to be made by the taxpayer
based on their individual circumstances. As stated by Ferguson J in Tooheys
Ltd v Commissioner of Taxation for NSW (1922) 22 SR (NSW) 432 at 440–441:
A taxpayer is liable to be taxed on the income he has made, not on what he might
have made. It is nothing to the point that if he had been more capable, more
experienced or more prudent, he might have cut down his expenses. The question
is what he did in fact spend on his business. If he chooses to employ a hundred
men where twenty would have been ample, that is his own affair. Of course, it
may still be a matter for enquiry whether these men were really employed in the
business, or were merely put on the pay-roll as a device to swell the apparent
expenses of the business; but that is another matter.
In Tweedle v FCT (1942) 7 ATD 186 at 190, Williams J stated:
It is not suggested that it is the function of income tax Acts or those who administer
them to dictate to taxpayers in what business they shall engage or how to run
their business profitably or economically. The Act must operate upon the results
of a taxpayer’s activities as it finds them. If a taxpayer is in fact engaged in two
businesses, one profitable and the other showing a loss, the Commissioner is not
entitled to say he must close down the unprofitable business and cut his losses
even if it might be better in his own interest and although it certainly would be
better in the interests of the Commissioner if he did so.
Similar comments were made by the Full High Court in Ronpibon Tin No
Liability v FCT (1949) 78 CLR 47 at 60 (see Case Study [12.18]), where it was
stated that “it is not for the Court or the commissioner to say how much a
taxpayer ought to spend in obtaining his income, but only how much he has
spent”. In Magna Alloys & Research Pty Ltd v FCT (1980) 11 ATR 276 (see Case
Study [12.5]), Deane and Fischer JJ articulated the “business judgment rule” –
that it is for the people who run the business to determine what is desirable
and appropriate for that business.
The courts’ comments in these and other cases are generally well accepted
and, as a result, taxpayers are entitled to deduct the full amount of any
expenses incurred if the requirements of s 8-1 are satisfied. For example, a
first-class airfare or the cost of designer (eg, Prada) sunglasses incurred in
gaining or producing assessable income will be deductible under s 8-1, as long
as the requirements of the section are met. The amount of the expense cannot
be limited to an economy-class airfare or a non-designer pair of sunglasses.
However, note that a statutory provision may apply in certain circumstances to
limit the amount of a deduction to a reasonable amount. As we have seen at
[12.240], s 26-35 operates to limit the amount of a deduction for a payment made
to a related entity to what is considered reasonable by the Commissioner. In
other situations, the Commissioner could potentially seek to apply the general
anti-avoidance provision in Pt IVA of the ITAA 1936 (see Chapter 23) to deny
a deduction. In an international context, Div 815 of the ITAA 1997 permits the
Commissioner to substitute the “transfer price” (ie, the price at which related
parties transact) with an arm’s length amount (see Chapter 22).
Tax minimisation situations –purpose

[12.310] As mentioned at [12.60], a taxpayer’s subjective purpose or
intention in incurring an expense is generally not relevant in determining
deductibility. Traditionally, the courts have adopted a legal rights approach in
determining whether the elements of s 8-1 are satisfied. Under this approach,
courts have only considered the objective circumstances of a loss or outgoing

in determining its deductibility under s 8-1 and not the taxpayer’s subjective
purpose or intention in incurring the expense. The leading case on the legal
rights doctrine is Europa Oil (NZ) Ltd v CIR (NZ) (No 2) (1976) 5 ATR 744, where
the Privy Council only looked at the actual legal rights acquired as a result of an
expense without considering any related benefits or arrangements which were
not set out in the contract itself.
The Privy Council’s precedent was followed in several Australian cases in the
1970s. For example, in FCT v South Australian Battery Makers Pty Ltd (1978)
14 CLR 645, a majority of the High Court permitted the taxpayer a deduction
for the full amount of rental payments on a property even though the rental
payments in effect reduced the purchase price of the property for a related
company. The Commissioner had sought to argue that a portion of the rental
payments should be attributable to the purchase price of the property and thus
a capital expense, but this argument was not accepted by the Court. Applying
the legal rights approach, the majority concluded that the only benefit acquired
from the rental payments was the rental of the property and the entire payment
was therefore deductible as an ordinary business expense.
By the 1980s, however, Australian courts sought to move away from the
traditional legal rights approach and considered the taxpayer’s purpose
or intention in incurring an expense in certain circumstances. Broadly, the
taxpayer’s subjective purpose or intention in incurring an expense may be
relevant where the taxpayer is in a loss position for tax purposes (ie, deductions
exceed assessable income) and the taxpayer’s purpose in incurring a particular
expense appears to be one of tax minimisation: Ure v FCT (1981) 11 ATR 484;

Fletcher v FCT (1991) 173 CLR 1. In such cases, the amount of the deduction
may be limited to the amount of income produced by the expense, even though
the elements of s 8-1 are satisfied.
Case study 12.19: Expenses incurred with a tax minimisation purpose

In Ure v FCT (1981) 11 ATR 484, the taxpayer borrowed money at interest
rates ranging from 7.5% to 12.5%. He then on-lent the borrowed money
to his wife and a family trust at an interest rate of 1%, thereby producing
assessable income from the funds and making the interest payable on
the original loans deductible for tax purposes. The wife and the family
trust directly and indirectly invested the funds in debt instruments paying
competitive market rates.
Although the Full Federal Court did not expressly rest its decision on the
taxpayer’s purpose in incurring the expenditure, that is essentially what
it did in finding that most of the interest expense was not deductible as
it was a private or domestic outgoing. The Court concluded that the only
explanation for the 1% interest rate was that it was a private or domestic
arrangement. As a result, the Court limited the amount of the taxpayer’s

deduction for the interest expenditure to the amount of interest income
gained
or produced under the on-lending arrangement, that is, 1%.
Case study 12.20: Expenses incurred with a tax minimisation purpose

Fletcher v FCT (1991) 173 CLR 1 involved a complex arrangement whereby
the taxpayer effectively incurred substantial interest expenses with little
or no actual outlay. The interest expenses related to the purchase of an
annuity. Under the applicable tax accounting rules, the interest payments
substantially exceeded the assessable annuity amounts in the early years
of the arrangement. This resulted in a tax loss that could be applied to
reduce the taxpayer’s overall tax liability. The annuity amounts would in
later years exceed the interest payments, but the taxpayer had the option
of ending the arrangement prior to that time.
The Commissioner argued that the taxpayer did not intend to continue the
arrangement until it generated assessable income in excess of the interest
deductions. Therefore, the interest expenses should not be deductible
under s 8-1 taking into account the taxpayer’s subjective purpose or
intention in incurring the expense since the taxpayer’s purpose was not
to gain or produce assessable income.
The High Court found that the taxpayer’s subjective purpose or intention
was relevant in these circumstances. If it could be shown that, at the outset,
the taxpayer intended to end the arrangement prior to it being profitable,

the interest expenses would not be deductible under s 8-1. The High
Court remitted the matter back to the AAT for a factual determination of
purpose. In AAT Case 5489A (1992) 23 ATR 1068, the AAT found that the
taxpayer’s dominant purpose in incurring the expense was to minimise
tax and not to gain assessable income. The taxpayer’s appeal to the Full
Federal Court from the AAT’s decision was dismissed in Fletcher v FCT
(1992)
92 ATC 4611.
The decisions in Ure and Fletcher endorse the view that a taxpayer’s subjective
purpose or intention may be relevant where the taxpayer incurs the expenses
in such a way as to only generate a small amount of assessable income which
results in a tax loss. The expenses that are deductible under s 8-1 may be
limited in these circumstances. Note that these situations are different to
negative gearing, which is discussed at [12.820]. Here, the taxpayers never
intended for the arrangements to be profitable, whereas in a negative gearing
arrangement, the taxpayer generally intends that the arrangement will be
profitable overall. The Commissioner’s guidance on the relevance of subjective
purpose, motive or intention in determining the deductibility of losses and

outgoings is contained in Ruling TR 95/33.
Note also that in these situations, the Commissioner could apply the general
anti-avoidance provision in Pt IVA of the ITAA 1936 (see Chapter 23) to deny
the deduction.
Substantiation of deductions
[12.320] In order to claim a deduction for tax purposes, taxpayers must
be able to substantiate the deduction by maintaining proper records and
documentation. The substantiation requirements are outlined in Div 900 of the
ITAA 1997 and taxpayers are generally expected to keep evidence and records
relating to the expense for a period of five years under s 900-165.
For most expenses, taxpayers should obtain a document from the supplier
containing the following information (s 900-115):
• name or business of the supplier;
• amount of the expense;
• nature of the goods and services;
• date expense incurred; and
• date of document.
Specific substantiation rules may apply in relation to certain expenses, such
as car expenses: see [12.450]–[12.570]. To reduce the compliance burden,
taxpayers may deduct up to $300 of work expenses and $150 of laundry

expenses without written evidence: ss 900-35 and 900-40.
Where a taxpayer receives a travel or overtime meal allowance, the taxpayer

is exempted from the substantiation rules where the amounts claimed in
relation to the allowance do not exceed the Commissioner’s reasonable limits:
ss 900-50, 900-55, 900-60. The Commissioner’s reasonable limits are set out in
Determination TD 2020/5 for the 2020–2021 income year. The Determination
should be read in conjunction with Ruling TR 2004/6, which discusses the
substantiation exception for reasonable travel and overtime meal allowance
expenses.
Application of section 8-1 to commonly

incurred expenses
[12.330] We have now examined the key issues in relation to deducting an
expense under s 8-1 of the ITAA 1997. In the rest of this chapter, we will apply
these rules to consider the deductibility under s 8-1 of the following commonly
incurred expenses:
• expenses incurred in gaining employment: see [12.340];
• relocation expenses: see [12.360];
• child care expenses: see [12.370];
• travel expenses: see [12.380];
• self-education expenses: see [12.580];
• home office expenses: see [12.700];
• clothing expenses: see [12.740];
• interest expenses: see [12.810]; and
• legal expenses: see [12.840].
Many of these expenses may be considered quasi-personal, and the courts
have had to consider whether the expenses are sufficiently connected to
the production of assessable income or whether they could be considered
private or domestic. In other situations, such as with legal expenses, the
issue is generally whether the expenses are capital or revenue in nature. The
Commissioner’s guidance on the deductibility of employee work expenses
under s 8-1 is contained in Taxation Ruling TR 2020/1.
Expenses incurred in gaining employment

[12.340] As discussed at [12.130], expenses related to gaining or producing
future assessable income can sometimes satisfy the positive limbs of s 8-1.
However, in the case of expenses incurred in gaining employment (eg, travel
expenses to attend an interview or legal expenses to review an employment
contract), the expenses are generally considered to be too early for the
production of assessable income. The expenses are considered to have been
incurred to put the taxpayer in a position to gain or produce assessable income,
not in gaining or producing assessable income: FCT v Maddalena (1971) 2
ATR 541.
Case study 12.21: Expenses incurred in gaining employment not

deductible
In FCT v Maddalena (1971) 2 ATR 541, the taxpayer was an electrician who
was also a rugby player. The taxpayer incurred travel and legal expenses
in considering whether to change rugby clubs, which he sought to deduct
under the predecessor to s 8-1.
The Full High Court agreed with the Commissioner in concluding that
the expenses were not deductible under the predecessor to s 8-1 as
they were not sufficiently connected to the taxpayer’s production of
assessable income. The expenses were incurred in putting the taxpayer

in a position to produce assessable income, rather than in producing
assessable income. As such, the positive limbs of the predecessor to
s 8-1 were not satisfied.
Business taxpayers
[12.350] In Spriggs v FCT; Riddell v FCT (2009) 72 ATR 148, with regard to
expenses incurred in gaining employment, the High Court drew a distinction
between taxpayers who are carrying on a business and those who are not.
Case study 12.22: Expenses incurred in gaining employment –

business taxpayers
In Spriggs v FCT; Riddell v FCT (2009) 72 ATR 148 (see Case Study [8.9]),
the taxpayers were a professional football player and a professional
rugby player, respectively. The taxpayers incurred management fees,
and the deductibility of these fees was in dispute. It was accepted by all
parties that the management fees were in fact incurred in the negotiation
of employment contracts.
Following FCT v Maddalena (1971) 2 ATR 541 (see Case Study [12.21]), the
Full Federal Court denied the taxpayers a deduction for the management
fees on the basis that they were incurred in negotiating employment

contracts and were therefore incurred in putting the taxpayers in a
position to gain or produce assessable income, rather than in the course
of gaining or producing assessable income.
It was not in dispute that the non- playing activities of the taxpayers
constituted a business for tax purposes. The Full High Court found that
the negotiated contracts were employment contracts, but that they were
not solely employment contracts as they included terms and conditions
regarding promotional activities to be carried on independently of the
players’ clubs. This meant that the employment contracts also related to
the production of the taxpayers’ business income. As such, the Court found
that all of the taxpayers’ activities (playing and non-playing) constituted
a business for tax purposes. The Court rejected the Commissioner’s
argument that it was necessary to separate the taxpayers’ playing
activities (employment) from their non-playing activities (business). The
Court noted that taxpayers can have different income-producing activities
and even different businesses, but that was not the case here. Looking
at the relevant indicia for a business, the Court found that the taxpayers
were engaged in the business of commercially exploiting their sporting

prowess and associated celebrity for a limited period.
Following the conclusion that all of the taxpayers’ activities amounted
to a business, the Court found that the management fees were incurred
in gaining or producing assessable income as there was sufficient
connection between the management fees and the production of business
income. The Court held that FCT v Maddalena was distinguishable from
the present case as there was no evidence as to any of the indicia for
business in that case. It could not be said that the taxpayer in FCT v
Maddalena was carrying on a business, a part of which included the
taxpayer’s employment as a rugby player.
Following the High Court’s decision in Spriggs v FCT; Riddell v FCT, it would
appear that expenses incurred in gaining employment may be deductible
where the taxpayer is carrying on a business and the employment contract
contributes towards the production of business income (ie, the employment
contract is not solely an employment contract). This is likely to be the case
for elite sportspeople and celebrities, such as television or radio personalities.
In such cases, it will be necessary to examine the contractual framework and
connection between the taxpayer’s various activities. In all other cases, the
precedent set by FCT v Maddalena remains unchanged and expenses incurred
in gaining employment are unlikely to be deductible as they are incurred in
putting the taxpayer in a position to produce assessable income, rather than in
gaining or producing assessable income.
Relocation expenses
[12.360] Expenses incurred by a taxpayer in relocating his or her home have
similarly been held to be non-deductible under s 8-1 of the ITAA 1997 as they
are incurred in putting the taxpayer in a position to produce assessable income,
rather than being incurred in gaining or producing assessable income: Fullerton v
FCT (1991) 22 ATR 757. As a result, such expenses would not satisfy the positive
limbs of s 8-1. In addition, the expenses are likely to fall foul of the second negative
limb of s 8-1 in that they are private or domestic expenses. This would be the case
even where the taxpayer is required to relocate by the employer.
Case study 12.23: Relocation expenses not deductible

In Fullerton v FCT (1991) 22 ATR 757, the taxpayer was a professional
forester who had to accept a transfer or be retrenched. His employer
reimbursed him for a portion of his relocation costs and the taxpayer
sought a deduction for the expenses incurred by him which were not
reimbursed.
The Federal Court held that the expenses were not deductible as they
were incurred in putting the taxpayer in a position to produce assessable
income, rather than incurred in gaining or producing assessable income
(ie, the positive limbs of the predecessor to s 8-1 were not satisfied).
Further, the expenses were a private or domestic outgoing, which meant
that the expenses were also not deductible under the second negative
limb
of the predecessor to s 8-1.
Child care expenses

[12.370] Child care expenses have long been held to be non-deductible
under s 8-1 of the ITAA 1997 (and its predecessors) as they are incurred
in putting the taxpayer in a position to gain or produce assessable income
and are not incurred in the production of assessable income: Lodge v FCT
(1972) 3 ATR 254; Martin v FCT (1984) 15 ATR 808. Again, the expenses do
not satisfy the positive limbs of s 8-1 and are also likely to not be deductible
due to the second negative limb as they are private or domestic expenses.
This is the case regardless of whether the taxpayer is self-employed or an
employee.
However, the Federal Government does provide some assistance in relation

to child care expenses through rebates for taxpayers and exemptions for
employers from fringe benefits tax on qualifying child care facilities.
Travel expenses
[12.380] The deductibility of travel expenses will depend on the type of travel
undertaken, which could be:
• travel between home and work: see [12.390]–[12.430]; and
• travel between two workplaces: see [12.440].
Where the travel expenses are car expenses (ie, the taxpayer owns or leases a
car during the year and the car is used in gaining or producing the taxpayer’s
assessable income), Div 28 of the ITAA 1997 sets out the rules for calculating
the amount of the deduction: see [12.450]–[12.570].
Travel expenses that relate to recreation and income-producing activities are a

tricky issue and are discussed at [12.620] in the context of self-education travel
expenses.
Travel between home and work

[12.390] As a general rule, expenses incurred in travelling between a taxpayer’s
ordinary home and his or her regular work location are not deductible under
s 8-1 of the ITAA 1997: Lunney v FCT; Hayley v FCT (1958) 100 CLR 478; Draft
Ruling TR 2019/D7. As with the other expenses discussed so far, expenses
on travel between a taxpayer’s ordinary home and regular work location are
considered to be incurred in putting the taxpayer in a position to gain or produce
assessable income, rather than in the production of assessable income. As
such, these expenses do not satisfy the positive limbs of s 8-1 and are further
prevented from being deductible under the second negative limb as private or
domestic expenses. This travel is required for an employee to commence work
or to depart after work is completed.
In some situations, the determination as to whether the travel between home

and work relates to private travel or work travel may not be straightforward and
it is necessary to examine all relevant factors.
Case study 12.24: Travel to work site on “fly in-fly out” basis

In John Holland Group Pty Ltd v FCT (2015) FCAFC 82, the Full Federal
Court considered the deductibility of airfares paid by an employer of “fly
in-fly out” employees for travel from Perth airport to Geraldton, Western
Australia, where the employees worked. The Commissioner argued that
the expenses were not deductible as they were incurred in putting the
taxpayers in a position to gain or produce assessable income rather than

being incurred in gaining or producing assessable income.
The Full Federal Court found that the expenses were deductible on the
basis that under their employment contracts, the employees commenced
their employment duties from the time they arrived at Perth airport (ie,
they were paid for their travel time from Perth airport to Geraldton); all
travel between Perth airport and Geraldton was controlled, arranged
and paid for by the employer; and the employer paid for the employees’
transportation from Geraldton airport to their accommodation in
Geraldton, which was also paid for and funded by the employer. Given
these factual circumstances, the employees could not be said to be
travelling to work when flying from Perth to Geraldton but rather were
travelling on work.
Note that this case concerned the fringe benefits tax implications of the
airfares paid by the employer and the deductibility of the airfares was
considered by the Court in the context of the “otherwise deductible rule”
(see
Chapter 7).
Case study 12.25: After-hours travel from home to work

In FCT v Collings (1976) 6 ATR 476, the taxpayer was a computer consultant
who generally worked in her employer’s offices. She was required to
be “on call” after work hours and deal with any queries from her home.
However, when she was unable to resolve the queries from home, she
was required to go into the office to deal with them.
The Court permitted the taxpayer a deduction for the travel expenses on
the basis that the taxpayer commenced working at home and therefore
the travel expenses were incurred in the course of gaining or producing
assessable income, rather than in putting the taxpayer in a position to
gain or produce assessable income. The positive limbs of the predecessor
to s 8-1 were satisfied and the expenses did not fall within any of the
negative limbs.
The case does not create a general exception for all after-hours travel,
but is limited to taxpayers in similar situations. The key factor here was
that the taxpayer had commenced working at home prior to undertaking
the travel and was not simply “on call”, but rather was required to work
wherever
she was located.
In Draft Ruling TR 2019/D7, the Commissioner notes that in determining whether

the relevant travel expenses are incurred in gaining or producing assessable
income, it is important not to look at the employment contract only, but to also
look at the nature of the work as a matter of substance. The Commissioner
suggests that the following factors may support a finding that the expenses are
incurred in gaining or producing assessable income:
• the travel occurs during work hours;
• the travel occurs when the employee is under the direction of the
employer;
• the travel fits within the duties of employment;
• the travel is relevant to the practical demands of carrying out the work
duties; and
• the employer asks the employee to undertake the travel.
[12.400] A number of exceptions to the general rule that travel from home to
work is not deductible have arisen through case law, as follows.
Itinerant workers
[12.410] Taxpayers who do not have a fixed place of work, such as travelling
salespeople, are known as itinerant workers. In their case, travel between home
and work is deductible under s 8-1 as they are considered to have commenced
work from the time they leave home and, as such, the travel expenses are
incurred in the course of gaining or producing assessable income: FCT v
Wiener (1978) 8 ATR 335; Ruling TR 95/34. The key factor is that the travel
must be a fundamental part of the taxpayer’s employment. In Hill v FCT
[2016] AATA 514, the Tribunal held that a taxpayer with multiple unrelated
jobs was not an itinerant worker as he was not required to travel to different
locations in the course of his employment.
Case study 12.26: Travel expenses of itinerant workers

In FCT v Wiener (1978) 8 ATR 335, the taxpayer was a teacher who was
required to teach at a minimum of four schools each day.
The Court permitted the taxpayer a deduction for expenses incurred
on travel from home to work on the basis that the travel was a
fundamental part of the taxpayer’s employment and therefore the
taxpayer commenced working from the time she left home. As a
result, the travel expenses were incurred in the course of gaining or
producing assessable income, rather than in putting the taxpayer in a
position to gain or produce assessable income. The positive limbs of the
predecessor to s 8-1 were satisfied and the expenses did not fall within
any
of the negative limbs.
Transportation of bulky items
[12.420] Taxpayers who are required to carry bulky items to perform their
employment duties are permitted a deduction under s 8- 1 for expenses
incurred in travelling between home and work: FCT v Vogt (1975) 5 ATR 274. In
this case, the taxpayer was a professional musician who was required to carry
a large musical instrument between home and work.
In this situation, the travel expenses are attributable to transportation of the

equipment and not the taxpayer’s travel between home and work. As such,
they are considered to be incurred in the course of gaining or producing
assessable income. The expenses are sufficiently connected to the production
of the taxpayer’s assessable income and the positive limbs of s 8-1 are satisfied.
Further, the expenses are not considered a private or domestic outgoing and
therefore do not fall within any of the negative limbs of s 8-1.
However, the expenses would not be deductible where the taxpayer carries
the items between home and work as a matter of convenience only. In this
situation, the travel expenses are not attributable to the transportation of the
items and, as such, are not incurred in the course of gaining or producing
assessable income. The positive limbs of s 8-1 are not satisfied. Further, the
expenses are considered a private or domestic outgoing and are not deductible
due to the second negative limb of s 8-1.
Case study 12.27: Travel expenses not deductible where bulky item

transported for convenience only
In Brandon v FCT (2010) 2010 ATC 10-143, the AAT denied the taxpayer
a deduction for travel expenses from home to work as the transportation
of the bulky item was for the taxpayer’s convenience only. The taxpayer
was a soldier in the Australian Defence Force who took his deployment kit
home. While it was accepted that the deployment kit was a bulky item, the
AAT found that the taxpayer only took it home as a matter of convenience
as the kit could be stored securely at the taxpayer’s barracks. As such,
the “essential character” of the taxpayer’s expenses was a private or
domestic outgoing and the travel expenses were not attributable to the
transportation of the deployment kit. The expenses were not sufficiently
connected to the production of the taxpayer’s assessable income, so the
positive limbs of s 8-1 were not satisfied. Further, the expenses were
not deductible due to the second negative limb of s 8-1 as they were
considered a private or domestic expense.
In Ford v FCT (2014) AATA 361, the AAT denied the taxpayer a deduction
for work-related car expenses to transport essential equipment from his
home to work on the basis that the equipment could be stored in a locker
provided by the employer and the taxpayer took the equipment home
as a matter of personal choice. See also Reany v FCT (2016) AATA 672;
Rafferty
v FCT (2017) AATA 636.
Alternative workplace
[12.430] Taxpayers are permitted a deduction under s 8- 1 for expenses
incurred on travel between home and an alternative workplace as the travel
is considered to be incurred in gaining or producing assessable income: FCT
v Ballesty (1977) 7 ATR 411; Draft Ruling TR 2019/ D7. Here, the travel is
attributable to the employee having to work in more than one place, rather
than their choice about where to live. However, a deduction would not be
permitted for such expenses where the taxpayer is employed to work at
different workplaces on a fixed or regular basis.
Example 12.10: Travel between alternative workplace and home

deductible
Sarah is an accountant with a large accounting firm. She is occasionally
required to attend client premises as part of her employment duties and
travels directly home from the client’s offices.
Any expenses incurred by Sarah in travelling from the client’s premises to
her home will be deductible under s 8-1 of the ITAA 1997 as the expenses
are
incurred in the course of gaining or producing assessable income.
Example 12.11: Travel between alternative workplace and home not

deductible
Sarah is an accountant with a large accounting firm. Under the terms of
her employment contract, she works in the firm’s city office on Mondays,
Tuesdays and Thursdays and at a suburban branch office on Wednesdays
and Fridays. Sarah is not under her employer’s direction and control for
the period when she is travelling to either workplace and she does not
receive any extra compensation for having two workplaces.
Any expenses incurred by Sarah in travelling between her home and
either of her employer’s offices are not deductible under s 8-1 of the ITAA
1997. The offices are not an alternative workplace and Sarah simply has
two different workplaces.

Travel between two places of work

[12.440] The deductibility of expenses incurred in travelling between two
places of work will depend on whether the two places relate to the same
income-producing activity.
Where the two places of work relate to the same income-producing activity, any
expenses incurred in travelling between the two places of work are deductible
under s 8-1 of the ITAA 1997 as the travel is undertaken in gaining or producing
assessable income.
Example 12.12: Travel between two workplaces deductible

Sarah is an accountant with a large accounting firm. Under the terms of
her employment contract, she works in the firm’s city office on Mondays,
Tuesdays and Thursdays and at a suburban branch office on Wednesdays
and Fridays. On occasion, Sarah is required to travel between the two

offices.
Any expenses incurred by Sarah in travelling between the two offices
would be deductible under s 8-1 of the ITAA 1997 as they relate to the
same income-producing activity and are therefore incurred in the course

However, where the two places of work relate to different income-producing

activities, the High Court in FCT v Payne (2001) 202 CLR 93 held that expenses
incurred on such travel are not deductible under s 8-1 as the expenses are
incurred in putting the taxpayer in a position to produce assessable income,
rather than in gaining or producing assessable income. As such, the positive
limbs of s 8-1 are not satisfied.
Case study 12.28: Travel between two workplaces not deductible

In FCT v Payne (2001) 202 CLR 93, the taxpayer was a Qantas pilot who
also owned a deer-farming property. The taxpayer sought a deduction for
expenses incurred in travelling between the airport and the deer-farming
property.
The Full High Court found that the expenses were not deductible under
the predecessor to s 8-1 of the ITAA 1997 as the positive limbs of the
predecessor to s 8- 1 were not satisfied and the expenses were not
sufficiently connected to the production of the taxpayer’s assessable

income. The taxpayer’s travel between the airport and the deer farm was
not related to the production of income from his deer-farming activities
or his occupation as a pilot. As such, the expenses were not incurred in
the course of his income-producing activities and were instead incurred
in
putting him in a position to gain or produce assessable income.
Following FCT v Payne, the government inserted s 25-100 into the ITAA 1997,
which provides taxpayers with a deduction for expenses incurred in travelling
between two unrelated workplaces: see [13.110]. Therefore, travel expenses
incurred in travelling between two unrelated workplaces will not be a general
deduction (per FCT v Payne) but may be a specific deduction if the requirements
of s 25-100 are satisfied.
Car expenses
[12.450] Where the travel expenses relate to a car, special rules govern the
amount of the car expenses that are deductible under s 8-1. Division 28 of the
ITAA 1997 sets out the rules for calculating the amount of a deduction for car
expenses where a taxpayer owns or leases a car during the year and the car is
used in the production of the taxpayer’s assessable income. It is important to
note that Div 28 does not provide a specific deduction for car expenses. Rather,
it provides two methods for determining the amount of the deduction under
another section. Consequently, the deductibility of car expenses is generally
determined under s 8-1, with the amount of the deduction determined by
reference to Div 28.
Example 12.13: Deductibility of car expenses

Rebecca is a florist’s assistant. As part of her employment duties, she
is required to deliver flowers to clients. Rebecca uses her own car for
this purpose. The car was purchased with a bank loan of $50,000. Each
month, Rebecca makes repayments of principal and payments of interest.
The repayments of principal are not deductible under s 8-1 as they are
capital expenses. The interest payments are deductible under s 8-1, but
the amount of the deduction will depend on Rebecca’s choice of method
for car expenses under Div 28.
Source: Adapted from the Example in s 28-90(2) of the ITAA 1997.

It is also important to note that Div 28 only applies to individuals and partnerships
that include at least one individual: s 28-10. The Division provides taxpayers
with the following two methods for calculating car expense deductions:
• “cents per kilometre” method: see [12.460]; or
• “logbook” method: see [12.550].

Taxpayers may choose which method to use in a particular income year,
but the choice of one method precludes the use of the other method:
s 28-20(1). However, taxpayers are entitled to change their choice of method
for a particular income year: s 28-20(2). Further, taxpayers may use different
methods for different cars in one income year and different methods for the
same car in different income years: s 28-20(3). A taxpayer’s choice of method
will depend on their individual circumstances as the two methods involve
different substantiation requirements.
Example 12.14: Choice of method
Ivana claimed a deduction of $3,000 for car expenses using the “logbook”
method. However, on audit, the Commissioner determines that her
deduction should be reduced to $500. She would be entitled to a
deduction of $1,000 under the “cents per kilometre” method. Ivana can
change her choice and deduct $1,000.
Source: Adapted from the Example in s 28-20(2) of the ITAA 1997.

in calculating the taxpayer’s deduction for car expenses under this method:
s 28-25(2).
Example 12.15: Cents per kilometre method

Gregor and Barkly are partners in their own suburban medical practice.
They sometimes make house calls to visit patients who are unable to visit
the practice. They use their own cars when travelling to see patients. For
the year ended 30 June 2021, Gregor travelled a total of 6,000 km to see
patients and Barkly travelled 4,000 km.
Using the “cents per kilometre” method, they would each claim a
deduction for car expenses as follows:
• Gregor: 5,000 × 0.72 = $3,600 (the excess 1,000 km is disregarded);
• Barkly: 4,000 × 0.72 = $2,880.

“Logbook” method
[12.550] Under the “logbook” method, the amount of the deduction for car
expenses is calculated as follows under s 28-90 of the ITAA 1997:
Amount of each car expense × Business use percentage
A “car expense” is defined in s 28-13 as a loss or outgoing to do with a car,

including a loss or outgoing to do with operating a car and the decline in value
of a car. Examples of car expenses include petrol costs, repairs, registration,
insurance and depreciation or leasing costs.
The business use percentage is calculated as follows:
Number of business kms the car travelled in the period when the taxpayer held the car
× 100%
Total number of kms travelled by th
he car in that period
The taxpayer is taken to hold the car while he or she owned or leased it and
the car was used in gaining or producing assessable income, regardless of any
other use of the car during the period: s 28-90(6).
The number of business kilometres is the number of kilometres the car travelled
in the course of the taxpayer’s production of assessable income or in travelling
between workplaces: s 28-90(4). Although the number of business kilometres
is calculated by making a reasonable estimate, the estimate must take into
account all relevant matters, including (s 28-90(5)):
• any logbooks, odometer records or other records maintained by the

taxpayer;
• any variations in the pattern of use of the car; and
• any changes in the number of cars used by the taxpayer in the course
Section 28- 90(2) makes it clear that the car expenses must qualify for a
deduction under some other provision of the income tax legislation (eg, s 8-1)
in order to be deductible.
[12.560] Advantages. With the “logbook” method, the deduction for car
expenses takes into account the taxpayer’s actual expenditure and the extent
to which the car is used in gaining or producing assessable income.
[12.570] Limitations. The “logbook” method is only available where the

taxpayer “held” a car during the income year; that is, the taxpayer owned or
leased a car that was used in gaining or producing the taxpayer’s assessable
income.
The taxpayer is required to substantiate all car expenses in accordance with

the requirements in subdiv 900-C of the ITAA 1997: see [12.320]. This generally
requires the taxpayer to maintain written records of all expenses. In addition,
the taxpayer must maintain a logbook. Subdivision 28-G explains how and how
often the taxpayer needs to keep a logbook. Broadly, the taxpayer is required
to maintain a logbook for a period of 12 continuous weeks. The taxpayer can
choose the relevant period subject to certain legislative requirements, but must
record the following information in the logbook:
• when the logbook period begins and ends;

• the car’s odometer readings at the start and end of the period;
• the total number of kilometres the car travelled during the period; and
• the number of kilometres the car travelled, in the course of gaining or
producing the taxpayer’s assessable income, on journeys recorded in
the logbook.
In order to record a journey undertaken by the taxpayer in gaining or producing
his or her assessable income, the taxpayer must specify:
• the day the journey began and the day it ended;
• the car’s odometer readings at the start and end of the journey;
• how many kilometres the car travelled on the journey; and
• the reason for the journey.
Example 12.16: Logbook method
Malik is a health and safety inspector for the local government. He is
required to travel to at least three sites per day to conduct inspections.
He leases a car for $2,000 per month. He has had the car for the whole
income year. Malik has maintained written records of all expenses, and
his car expenses for the year were:
• Oil and fuel costs = $3,000;
• Registration = $2,000;
• Insurance = $700.
Malik maintained a logbook for a 12-week period and determined his
business use percentage to be 95%.
Under the “logbook” method, Malik’s deduction for car expenses
would be:
($24,000 + $3,000 + $2,000 + $700) × 95% = $28,215
Note that the car expenses would be deductible under s 8-1 as they are
incurred in gaining or producing assessable income and are not capital
in nature.

Self-education expenses
[12.580] Expenses incurred by a taxpayer on self- education are another

example of a potentially quasi- personal expense. While the expense may
relate to the taxpayer’s income-producing activities, they may also relate to
the personal development of the taxpayer and thus be considered private
or domestic. Self-education includes undertaking a course at an education
institution, attending a work-related conference or seminar, completing a self-
study course or going on a study tour in Australia or overseas. Examples of
self-education expenses that may be deductible under s 8-1 include course
fees, books, stationery and travel to attend conferences or seminars. Meals
and accommodation expenses may be deductible where the taxpayer is away
from home overnight.
As with all other expenses, self-education expenses must satisfy the positive
limbs of s 8-1 and not fall within any of the negative limbs of s 8-1 to be
deductible.
Positive limbs of s 8-1

[12.590] Generally, self-education expenses will be sufficiently connected to
the taxpayer’s production of assessable income where:
• the education will improve the taxpayer’s prospects of promotion
or earning a higher income in the taxpayer’s current career: FCT v
Hatchett (1971) 2 ATR 557; FCT v Studdert (1991) 22 ATR 762; Ruling
TR 98/9 (see [12.600]); or
• the taxpayer works in an occupation which requires them to be
constantly up to date: Ruling TR 98/9 (see [12.630]).
However, this general rule has been called into question where the expenses
relate to non-employment income: see [12.640].
Self-education expenses relate to taxpayer’s current career

[12.600] Self-education expenses related to the taxpayer’s current career will
be sufficiently connected to the production of the taxpayer’s assessable income
where the expenses will improve the taxpayer’s prospects of promotion or
earning a higher income in their existing career.
Case study 12.29: Deductibility of self-education expenses

In FCT v Hatchett (1971) 2 ATR 557, the taxpayer was a primary school
teacher who incurred expenses in obtaining a Teacher’s Higher Certificate
and in completing an Arts degree at university. The Teacher’s Higher

Certificate would enable the taxpayer to be promoted and was required
for certain teaching positions. The Arts degree, while recommended by
the Education Department, would not lead directly to a promotion or
higher income for the taxpayer in his current job.
The High Court permitted the taxpayer a deduction for the expenses
incurred in relation to the Teacher’s Higher Certificate as it had a sufficient
nexus to his income-producing activities (ie, the positive limbs of the
predecessor to s 8-1 were satisfied and the expenses did not fall within
the negative limbs of the predecessor to s 8-1). However, the expenses
in relation to the Arts degree were not deductible as the positive limbs
of the predecessor to s 8-1 were not satisfied. There was an insufficient
connection between the expenses and the taxpayer’s current income-
producing
activities.
Case study 12.30: Deductibility of self-education expenses

In FCT v Studdert (1991) 22 ATR 762, the taxpayer was a flight engineer
who incurred expenses in undertaking flying lessons. The taxpayer argued
that the expenses were deductible as the flying lessons would improve
his skills as a flight engineer and lead to a promotion and higher income.
The Commissioner argued that the flying lessons were not deductible
as they related to a new career as a pilot and not the taxpayer’s current
income-producing activities as a flight engineer.
In the Federal Court, Hill J allowed the taxpayer a deduction for the flying
lessons on the basis of the evidence presented that the flying lessons
would improve the taxpayer’s skills as a flight engineer and lead to a
promotion and higher income in his current career. As such, the expenses
were sufficiently connected to the taxpayer’s current income-producing
activities and satisfied the positive limbs of the predecessor to s 8-1. The
expenses were not private or domestic in nature and did not satisfy any
of the other negative limbs of the predecessor to s 8-1.
The Court noted that self-education expenses relating to a new career
are not deductible under the predecessor to s 8-1 as they are incurred in
putting the taxpayer in a position to gain or produce assessable income.
However, although the flying lessons may lead to the taxpayer obtaining
a new career as a pilot, the expenses remained deductible as they were
sufficiently connected to the taxpayer’s current income- producing
activities as a flight engineer. The taxpayer’s ulterior purpose in incurring
the expenses on flying lessons (to retrain as a pilot) was not considered
relevant as it was a subsidiary purpose and there was sufficient connection
to the production of the taxpayer’s current assessable income. As
discussed at [12.310], a taxpayer’s purpose in incurring an expense is not
generally relevant in determining its deductibility.
As noted by the Court in FCT v Studdert, self-education expenses relating to a

new career are not deductible. In this situation, the expenses are not incurred in
gaining or producing assessable income, but rather in putting the taxpayer in a
position to gain or produce assessable income. Such expenses are considered
to have been incurred too early and do not satisfy the positive limbs of s 8-1.
Example 12.17: Self-education expenses relate to new career

Jenna works as a receptionist at an accounting firm. Her employer
encouraged her to study accounting and suggested that she would be
able to get an accounting position with the firm at the end of her studies.
Jenna undertakes a course in accounting while continuing to work as a
receptionist at the firm.
The cost of the accounting course is not deductible as it relates to a new
career and is incurred at a point too soon to be regarded as incurred in
gaining or producing Jenna’s assessable income. The positive limbs of
s 8-1 are therefore not satisfied.

[12.610] Establishing the nexus. Where self- education expenses directly

relate to the taxpayer’s income-producing activities (eg, a particular skill or
specific knowledge), the connection between the expenses and the taxpayer’s
income-producing activities may be easy to identify. However, where the self-
education expenses are general in nature, it will be necessary to examine
the taxpayer’s particular circumstances to determine whether a sufficient
connection exists.
Example 12.18: Self-education expenses directly related to taxpayer’s

income-producing activities
Ricco is working as a trainee bookkeeper. He undertakes a course at a local
educational institution related to bookkeeping. The course will improve
his skills and knowledge and increase his income-producing prospects in
his current career.
The cost of the bookkeeping course will be deductible under s 8-1 as it is
sufficiently connected to his income-producing activities and will increase
his prospects in his current occupation. The positive limbs of s 8-1 are
satisfied.

Example 12.19: Self-education expenses indirectly related to

taxpayer’s income-producing activity
Maxine is a journalist. Her employment duties include conducting
interviews and making presentations. Maxine incurs expenses on a

speech course to improve her ability to conduct interviews and make
presentations.
Although the speech course is not directly related to Maxine’s income-
producing activities as a journalist, the course will improve her skills in her
current occupation and the expenses are thus deductible under s 8-1. The
positive limbs of s 8-1 are satisfied and the expenses are not considered
private or domestic in nature so the negative limbs of s 8-1 are not met.
Source: Adapted from Case Z42 (1992) 24 ATR 1183.

Example 12.20: Self-education expenses not related to taxpayer’s

income-producing activity
Hasmin is a company director. She is struggling to cope with work due to
stress caused by a family situation. She attended a stress-management
course after hours, which she paid for herself.
The cost of the course is not deductible as it is not related to her income-
producing activities or skills or knowledge and is private or domestic in
nature. The positive limbs of s 8-1 are not satisfied and the expense falls
within the scope of the second negative limb of s 8-1.
Source: Adapted from the example in Ruling TR 98/9.

[12.620] Travel expenses. The deductibility of travel expenses related to self-

education is often a tricky issue, particularly where the travel has a recreational
element. For the expenses to be deductible, it is necessary to show that the
travel relates to the taxpayer’s income-producing activities and that the travel
would increase the taxpayer’s income-producing prospects in their current
career. The High Court in FCT v Finn (1961) 106 CLR 60 (see Case Study
[12.31]) suggested that the following factors may be relevant in determining
the deductibility of travel expenses related to self-education:
• whether the employer supports the taxpayer’s travel (although this will
depend on the exact circumstances of a particular situation);
• whether the taxpayer is able to show clear evidence that the travel was
devoted to the collation of information that is related to their income-
producing activities; and
• whether the application of such information to the taxpayer’s income-
producing activities will improve their opportunities for promotion and/
or more income.
Courts will look at these factors in determining whether self-education travel
expenses are deductible, but, to be deductible, it is not necessarily the case that
the expenses must satisfy each of these factors or that expenses that do satisfy
all of these factors will automatically be deductible. The ultimate determination
will depend on the taxpayer’s individual circumstances.
Case study 12.31: Recreational travel expenses including a work

purpose deductible
In FCT v Finn (1961) 106 CLR 60, the taxpayer was an architect with the
West Australian Government who had accumulated both annual and
long service leave. The taxpayer planned to use the leave to travel to
the UK and Europe to study current architectural trends. The taxpayer’s
employer asked him to extend his trip to include South America and the
employer agreed to cover the taxpayer’s costs of the additional travel.
The taxpayer sought a deduction for his non-reimbursed travel expenses
on the basis that all of his time while travelling was devoted to the study of
architecture. The evidence showed, and the Commissioner accepted, that
all of the taxpayer’s activities while overseas were devoted to the study of
architecture. The Commissioner’s contention was that the expenses were

not incurred in gaining or producing assessable income as it was not
certain that the taxpayer’s improved knowledge would result in increased
pay or chances of a promotion.
The Full High Court permitted the taxpayer a deduction for the travel
expenses on the basis of the factors discussed above: the employer had
endorsed the taxpayer’s travel; the taxpayer had extensive evidence of
the information collated while travelling and the fact that the information
would improve the taxpayer’s income-producing capacity in his current
career. As such, the expenses were incurred in gaining or producing
assessable income and satisfied the positive limbs of the predecessor
to s 8-
1.

purpose partially deductible
In Peter Lenten v FCT (2008) 71 ATR 862, the taxpayer was a secondary
school teacher who incurred expenses in travelling throughout Asia, the
UK and Europe with his wife while on long service leave. The taxpayer
described his trip as a “self-guided educational discovery tour” which
consisted primarily of general package tours and self-guided expeditions
to places of historical interest and significance. He did not attend any
professional conferences or lectures or visit any educational institutions
during the trip, but he did attend lectures at museums.
The taxpayer claimed a portion of his travel expenses as a deduction

on the basis that it was incurred in gaining or producing his assessable
income. The taxpayer pointed to the fact that he had been promoted to
head of faculty after the trip as evidence of the impact of the trip on his
production of assessable income. While the trip was not a condition of
the promotion, the taxpayer argued that it had certainly been a factor and
that it was important for him to demonstrate initiative as he felt that his
age may have hampered his chances of being promoted.
Noting that the deductibility of travel expenses in these circumstances
depends on the individual facts of the case, the AAT found that the taxpayer
was entitled to a deduction for 75% of the travel expenses incurred.
The remaining 25% was attributable to inevitable recreational portions
of the trip and thus not deductible as a private or domestic expense under
the second negative limb of s 8-1. In this case, the AAT was satisfied that
the taxpayer’s dominant purpose in undertaking the overseas travel was
to improve his knowledge and skill levels as a teacher, which would (and,
in fact, did) enhance his promotional opportunities. As such, the expenses
were sufficiently connected to the taxpayer’s income-producing activities
and
the positive limbs of s 8-1 were therefore satisfied.

purpose partially deductible
In Carlos Sanchez v FCT (2008) 73 ATR 650, the taxpayer was a travel
agent employed by STA Travel. The taxpayer undertook a number of
overseas holidays while on annual leave and claimed a portion of the
expenses incurred on the trips as a deduction.
The taxpayer argued that it was necessary for him to travel as the motto
of STA is “we know because we go”. The taxpayer also presented
evidence showing the importance of travel by sales consultants to the
STA business model and the taxpayer’s success as a travel consultant as
a result of his trips.
The AAT allowed the taxpayer a deduction for a portion of his overseas
travel expenses. On the basis of the evidence presented, the AAT
found that the trips were not just holidays and were clearly related to
the taxpayer’s production of assessable income as a sales consultant
employed to sell holiday- related travel products. In fact, there was
evidence that his sales increased following the trips and therefore the
positive limbs of s 8-1 were satisfied. The expenses were not considered
private or domestic outgoings and therefore did not fall foul of the second
negative limb of s 8-1.
The AAT rejected the Commissioner’s argument that a sufficient nexus
was not established because the taxpayer did not visit a single travel
agency during his trips. The AAT concluded that this was not relevant
as the taxpayer did not run a travel agency business and therefore it was
unnecessary
for him to see how they were run overseas.
In order to claim a deduction for travel expenses related to self-education,

taxpayers should maintain complete records of the trips (such as a travel
diary detailing the taxpayer’s activities each day of the trip) which evidence a
connection between the trips and the taxpayer’s income-producing activities.
It is also important for a taxpayer to show that the trips have or could have
increased the taxpayer’s assessable income or promotional opportunities in
the taxpayer’s existing career.
Current career requires taxpayer to stay up to date

[12.630] Self-education expenses will also be deductible where the taxpayer
works in an occupation that requires the taxpayer to be constantly up to date,
and the expenses are incurred for that purpose: Ruling TR 98/9.
Example 12.21: Self-education expenses deductible

Sarah is an accountant with a large accounting firm. Due to the nature of
her work, Sarah is required to stay up to date with the latest changes in
accounting standards. Sarah pays $700 a year to attend weekly update
seminars held by a professional accounting organisation.
The $700 paid by Sarah would be deductible self-education expenses
under s 8-1 of the ITAA 1997 as Sarah works in an occupation which
requires her to stay up to date and, as such, the expenses are incurred in
gaining
or producing her assessable income.
Self-education expenses not related to

employment income
[12.640] The general rule that self-education expenses will only be sufficiently
connected to the taxpayer’s production of assessable income where the
expenses will increase the taxpayer’s prospects of promotion and/or earning
a higher income in their current career, or the taxpayer is in a career which
requires them to stay up to date, has been found not to apply where the self-
education expenses do not relate to employment income: FCT v Anstis (2010)
76 ATR 735 (see Case Study [12.34]).
Case study 12.34: Self-education expenses related to

non-employment  income
In FCT v Anstis (2010) 76 ATR 735, the taxpayer was enrolled as a full-
time student in a teaching degree at the Australian Catholic University.
The taxpayer included in her assessable income wages earned as a part-
time sales assistant in a clothing store and Youth Allowance of $3,622.
The taxpayer claimed a deduction of $920 for self-education expenses
related to her teaching degree, although she did not declare any income
from teaching. The expenses primarily related to computer depreciation,
textbooks and stationery.
The taxpayer claimed a deduction for the expenses on the basis that
a condition of receiving Youth Allowance is that the recipient must be
enrolled in and make satisfactory progress in an acceptable course of
study and the expenses were incurred by the taxpayer in meeting those
requirements. The Commissioner denied the taxpayer’s deductions on the
basis that self-education expenses are only deductible if they would lead
to an increase in income from the taxpayer’s current income-producing
activities. Here, the amount of Youth Allowance received by the taxpayer
was constant. The taxpayer sought to distinguish existing case law on the
basis that the cases related to the production of income through labour or
employment, not from study.
In the Federal Court, Ryan J held that the expenses were deductible as
the expenditure was incurred because of the requirements of the Youth
Allowance, which is assessable income. His Honour noted that the
expenses were not incurred in putting the taxpayer in a position to receive
Youth Allowance, but rather were incurred in satisfactorily completing her
course of study. Therefore, they were incurred in gaining or producing
assessable income. The fact that the amount of the Youth Allowance did
not vary based upon the course of study or the expenses incurred by the
taxpayer was held to be irrelevant. As in FCT v Studdert (1991) 22 ATR
762 (see Case Study [12.30]), the Court found that the taxpayer’s purpose
in undertaking the course (to become a teacher) was irrelevant.
The Full Federal Court rejected the Commissioner’s arguments that the
primary judge had erred in his reasoning. As to the Commissioner’s
argument that the self-education expenses were incurred “too soon”, the
Full Federal Court held that that would be correct if the expenses were
only referable to the production of income in future when the taxpayer
was a teacher. However, that was not the case here as the expenses
were referable to the production of Youth Allowance, which is assessable
income.
The Full High Court confirmed that Youth Allowance is assessable as
ordinary income. The Court found that the taxpayer’s expenses were
deductible against that income as they were “productive of the assessable
income”. The taxpayer’s reasons or motives in incurring those expenses

were found not to be relevant. The High Court also held that the expenses
were not private or domestic in nature.
The fact that the taxpayer may have been studying for reasons other
than to maintain her entitlement to Youth Allowance did not sever the
necessary connection between the expenses and her assessable Youth
Allowance
income.
As discussed at [12.240], the Government has introduced s 26-19 to deny a

deduction for expenses related to rebatable benefits. Self-education expenses
related to the production of Youth Allowance income (and similar Government
payments) are therefore not deductible from 1 July 2011. However, the principle
in FCT v Anstis is potentially relevant in determining the deductibility of self-
education expenses related to the production of assessable study income
received in a private context. The deductibility of such expenses will depend
on the particular circumstances such as whether a condition of the receipt
of such income is that the recipient must make satisfactory progress in their
educational pursuits.
Negative limbs of s 8-1

[12.650] Self-education expenses that are sufficiently connected to the
taxpayer’s production of assessable income may nonetheless not be deductible
if any one of the negative limbs of s 8-1 is satisfied.
Capital expenses
[12.660] A self-education expense may not be deductible under s 8-1 if it is a
capital expense: see [12.170]–[12.210]. Examples of self-education expenses
that may be capital include the cost of personal computers, laptops, calculators,
professional libraries, furniture such as desks and filing cabinets, technical
instruments and equipment. These expenses result in the acquisition of assets
which provide the taxpayer with a lasting benefit and are generally considered
capital expenses. While such expenses may not be immediately deductible
under s 8-1, they may be deductible over a period of years under the capital
allowances regime: see Chapter 14.
Note that the courts in FCT v Finn (1961) 106 CLR 60 and FCT v Hatchett (1971)
2 ATR 557 expressly rejected any argument that self-education expenses are
generally capital in nature because the improvement to the taxpayer’s skills or
knowledge provides an enduring benefit.
Private or domestic expenses

[12.670] Self-education expenses will not be deductible where they are private
or domestic in nature. For example, self-education travel expenses may relate
to a conference, but the taxpayer may also at the same time have a holiday or
visit family, which are private pursuits. In this situation, the taxpayer may be
entitled to a partial deduction for the self-education expenses. Apportionment
of self-education expenses is discussed at [12.690].
Non-deductible self-education expenses

[12.680] Any payments made under the government assistance schemes such
as under the Higher Education Support Act 2003 (Cth) that are not deductible
under s 26-20 (see [12.240]) remain non-deductible even where they qualify as
self-education expenses. However, the prohibition on deductibility does not
apply where the payments are incurred in the provision of a fringe benefit:
s 26-20(2) of the ITAA 1997. As discussed at [12.240] and [12.640], expenses
related to rebatable benefits are not deductible under s 26-19.
Further, s 82A of the ITAA 1936 prevents the first $250 of self-education expenses
incurred by a taxpayer from being deductible. In this context, self-education
expenses are defined as expenses necessarily incurred by the taxpayer for

or in connection with a course of education provided by a school, college,
university or other place of education and undertaken by the taxpayer for the
purpose of gaining qualifications for use in the carrying on of a profession,
business or trade or in the course of employment: s 82A(2). The section was
introduced due to the availability of a tax offset for self-education expenses,
which has since been abolished. Although s 82A continues to operate, the
impact of the provision has been diminished by the fact that the $250 threshold
may be applied to any non-deductible expenses incurred by the taxpayer
which are necessarily incurred in relation to the education course: Ruling TR
98/9. In addition, taxpayers are not required to substantiate any self-education
expenses disallowed under s 82A: Determination TD 93/97.
Example 12.22: Application of s 82A to self-education expenses

Sarah is tax consultant with a large accounting firm. She is currently
enrolled in a Masters of Tax degree at the local university. Sarah paid
$3,000 to enrol in a subject to complete her degree. The classes are held
after hours. Sarah had to employ a babysitter so that she could attend the
course, which cost her $100.
The $3,000 course fees incurred by Sarah are deductible under s 8-1 of
the ITAA 1997 as they are sufficiently connected to her income-producing
activities because Sarah works in an occupation which requires her to be
up to date. However, the first $250 of self-education expenses would not
be deductible under s 82A of the ITAA 1936.
However, Sarah can apply the $250 exemption towards her child care
costs as the expenses are necessarily incurred by her to enable her to
attend the course. It does not matter that child care expenses are a non-
deductible expense (see [12.370]): Ruling TR 98/9.
Therefore, Sarah can claim a deduction of $2,850 for self- education
expenses under s 8-1. The $250 s 82A exemption is first applied towards
her child care costs, thereby reducing the exemption amount to $150.
The remaining $150 s 82A exemption is applied towards the course fees
of $3,000.

Apportionment
[12.690] As discussed at [12.270], dual purpose expenses are partially
deductible under s 8-1. Where self-education expenses relate to both income-
producing and private purposes, the taxpayer may be required to apportion
the expenses and only a partial deduction will be allowed under s 8-1. In Ruling
TR 98/9, the Commissioner suggests that, if the income-producing purpose is

merely incidental to the main private purpose, only the expenses that relate
directly to the income-producing purpose will be deductible. However, where
the private purpose is merely incidental to the main income-producing purpose,
apportionment is not required and the expenses will be fully deductible
under s 8-1.
Example 12.23: Apportionment not required for incidental private

pursuits
Roger, a dermatologist, attends an eight-day work-related conference in
Aruba. One day of the conference involves sightseeing.
As Roger’s main purpose in attending the conference was related to his
income-producing activities, the total cost of the conference (airfares,
accommodation and meals) will be deductible under s 8-1. The day of
sightseeing is incidental to the main purpose and does not affect the
characterisation of the self-education expenses.
Source: Adapted from the Example in Ruling TR 98/9.

Example 12.24: Direct self-education expenses deductible where

primary purpose is private
Stacey, a lawyer, was holidaying in Cairns when she became aware of a
work-related seminar on mediation. The cost of the seminar was $300.
Stacey can claim a deduction for the cost of attending the seminar as
a self-
education expense. However, her airfare to Cairns and holiday
accommodation are not deductible as her primary purpose in going to
Cairns was private.

Example 12.25: Apportionment of self-education expenses required

where dual purpose
Luthor, a scientist, has two equal purposes when he decides to attend a
five-day international conference in France to be followed by a five-day
holiday in London.
Luthor is entitled to a deduction for the conference fees, meals and
accommodation costs in France. He is required to apportion his airfare
as he has two equal purposes in incurring the expense. Any expenses
incurred in London are not deductible as they are private or domestic in
nature.

In Determination TD 93/195, the Commissioner provides some guidance as to

the deductibility of registration fees for continuing professional development
seminars where the fee includes the cost of food and drink to be provided at
the seminar. The deductibility of the registration fee will depend on whether
the food and drink is considered “entertainment”. See [7.230] as to when food
and drink will be considered “entertainment”.
Home office expenses

[12.700] Generally, expenses incurred by a taxpayer in relation to his or her
home are not deductible under s 8-1 of the ITAA 1997 as they constitute private
or domestic outgoings. However, such expenses may be deductible where
the taxpayer uses a part of the home as an office in relation to the taxpayer’s
income-producing activities.
Expenses incurred by a taxpayer in running a home office generally fall into

two categories:
• running expenses, which relate to the use of facilities within the home
and are affected by the use of the home for income-producing activities
(eg, electricity, cleaning costs, depreciation); and
• occupancy expenses, which relate to ownership or use of the home
and are not affected by the taxpayer’s income-producing activities (eg,
rent, interest on a mortgage, insurance, rates).
The deductibility of expenses falling into each category depends on whether
the taxpayer uses the home office as a genuine home office or as a matter of
convenience only.
Genuine home office
[12.710] Where the taxpayer’s home office is a genuine home office, that is,
a part of the home is set aside for use in the taxpayer’s income-producing
activities only, a portion of both running and occupancy expenses incurred by
the taxpayer will be deductible under s 8-1 of the ITAA 1997. In Ruling TR 93/
30, the Commissioner suggests that the following factors will be relevant when
determining whether the home office is a “genuine home office” or “place of
business”:
• the area is clearly identifiable as a place of business;
• the area is not readily suitable or adaptable for use for private or
domestic purposes in association with the home generally;
• the area is used exclusively or almost exclusively for carrying on a
business; or
• the area is used regularly for visits from clients or customers.
The absence of an alternative place for conducting income-producing activities

may also be relevant in determining whether an area is a genuine home office.
In Swinford v FCT (1984) 15 ATR 1154, the Court was influenced by this fact in
concluding that a self-employed scriptwriter who used one room of a flat for
writing purposes and for meeting with television station staff had a “place of
business” at her home.
Example 12.26: Running and occupancy expenses deductible for

genuine home office
Lara has her own accounting practice, which she runs out of her own
home. She has set aside one room in her house, which she uses
exclusively as an office for her business.
Lara’s use of one room in her house as an office is a genuine home office
rather than being for convenience only. As such, Lara will be entitled
to deduct a portion of her running and occupancy costs under s 8-1 of
the ITAA 1997 as the expenses are incurred in gaining or producing her
assessable income. The expenses satisfy the positive limbs of s 8-1 and
are not considered private or domestic outgoings and therefore do not
satisfy any of the negative limbs of s 8-1.

Home office for convenience only

[12.720] Where the taxpayer uses an area of the home for income-producing
activities but the area does not constitute a “genuine home office” or “place of
business”, the home office is considered to be for the taxpayer’s convenience
only. In such situations, the courts have suggested that some portion of the
taxpayer’s running expenses will be deductible as they relate to the taxpayer’s
production of assessable income, but any occupancy-related expenses will not
be deductible as they remain a private or domestic expense: FCT v Faichney
(1972) 3 ATR 435; Handley v FCT (1981) 11 ATR 644; FCT v Forsyth (1981) 11
ATR 657.
Case study 12.35: No deduction for occupancy expenses related to

home office used for convenience only
In FCT v Faichney (1972) 3 ATR 435, the taxpayer was a scientist who
used his study at home for work-related activities, such as reading, writing
reports and so on.
The High Court permitted the taxpayer a deduction for a portion of his
running expenses, but not for any occupancy expenses, as the taxpayer
used
the study for work purposes as a matter of convenience only.
Case study 12.36: No deduction for occupancy expenses related to

home office used for convenience only
In Handley v FCT (1981) 11 ATR 644, the taxpayer was a barrister who
used his study at home for work-related activities. The Commissioner had
allowed the taxpayer deductions for a portion of electricity and cleaning
expenses, but not for a portion of the occupancy expenses (interest on a
mortgage, rates and insurance premiums).
The High Court agreed with the Commissioner and did not permit a
deduction for the occupancy expenses as the taxpayer used his study for
work purposes as a matter of convenience only. As stated by Murphy J
(at 198):
Acceptance of the taxpayer’s claim could lead to curious or even absurd
results. Many lawyers, to the annoyance of their domestic partners, do a lot
of legal reading in the bedroom. Also there is much scientific and anecdotal
evidence in favour of the view that intellectual work goes on subconsciously
as well as consciously, even during sleep. Perhaps the next claim would be
for deducting part of the upkeep of the bedroom, or even a claim for part of
the upkeep of the garden in which a barrister thinks about the conduct of
cases whilst resting or strolling.
In FCT v Forsyth (1981) 11 ATR 657, the High Court denied the taxpayer
a deduction for rental payments on his home as the taxpayer, a barrister,
used
his home study for work purposes for convenience only.
The key element in all three of these cases was that the taxpayers had an
alternative workplace (ie, an office or barristers’ chambers) and the use of the
home as an office was for convenience only.
Apportionment and capital expenses

[12.730] The quantum of home office expenses that is deductible under
s 8-1 will depend on the taxpayer’s individual circumstances. In Ruling TR 93/
30, the Commissioner suggests that, in the case of occupancy expenses, it may
be appropriate to apportion the expenses in accordance with floor area. The
expenses may also need to be apportioned on a time basis where the taxpayer
did not use the area as a home office for the entire year. In the case of running
expenses, one possible method is to apportion the expenses based on hours
of usage. Practice Statement PS LA 2001/6 provides guidance on calculating
and substantiating home office running expenses.
Home office expenses that are capital in nature (see [12.170]–[12.210]) will
not be deductible under s 8-1, but the taxpayer may be entitled to deduct the
expenses over a period of time: see Chapter 14. Examples of home office
expenses which are capital in nature include furniture, such as a desk or filing
cabinet, a home library, a computer or a printer.
Clothing and dry-cleaning expenses

[12.740] The deductibility of expenses on clothing depends on the type
of clothing worn by the taxpayer in relation to his or her income-producing
activities: Ruling TR 97/12. The deductibility of dry- cleaning expenses
is determined in accordance with the same tests as for the deductibility of
clothing expenses.
Conventional clothing and related items

[12.750] Conventional clothing refers to ordinary clothing that is not a uniform
or specific to the taxpayer’s occupation. Such clothing can be worn in day-to-
day living and is considered a natural part of living in society and is private or
domestic in nature. As such, expenses incurred by a taxpayer on conventional
clothing are not deductible under s 8-1 of the ITAA 1997 as they are not
incurred in gaining or producing assessable income. The positive limbs of
s 8-1 are not satisfied, and, further, the second negative limb will operate to
deny a deduction as the expenses are private or domestic in nature. This would
be the case even where the clothing is required by the taxpayer’s income-
producing activities.
Case study 12.37: Expenses on conventional clothing not deductible

In Case U80 (1987) 87 ATC 470, the taxpayer was a shop assistant at the
retailer David Jones. She was required to wear “all black” clothing when
performing her employment duties. The clothing was not distinctive or
unusual and could be worn outside the taxpayer’s employment. The
taxpayer tried to argue that the clothing was not suitable for private use
as the colour did not suit her and she would not ordinarily wear black
clothing.
The AAT found that, as the garments were conventional attire, the clothing
expenses were a private or domestic expense. As such, the expenses
were not deductible due to the second negative limb of the predecessor
to s 8-
1.
A similar outcome was reached by the AAT in Westcott v FCT (1997) 37 ATR
1017, which denied the taxpayer, a manager and head waiter at a restaurant,
a deduction for the cost of black trousers purchased in order to perform his
employment duties. The taxpayer was required by his employer to wear black
trousers and did not wear the black trousers on any other occasions apart from
work. Nonetheless, the fact that the taxpayer could wear the black trousers
outside of work meant that they were a private or domestic expense and not
deductible due to the second negative limb of the predecessor to s 8-1.
However, two main exceptions to the general rule regarding the non-
deductibility of expenses on conventional clothing have developed from
case law.
Abnormal expenditure on conventional clothing

[12.760] In FCT v Edwards (1994) 28 ATR 87, the Full Federal Court permitted
the taxpayer a deduction for expenses incurred on conventional clothing as
the expenses incurred were clearly an abnormal cost unique to the taxpayer’s
employment and the expenses were therefore incurred in gaining or producing
assessable income, rather than being a private expense.
Case study 12.38: Expenses on conventional clothing an abnormal cost

In FCT v Edwards (1994) 28 ATR 87, the taxpayer was the personal
secretary to the wife of the Governor of Queensland. As part of her job, the
taxpayer incurred expenditure on formal daytime clothing and evening
wear. The amount of the expenditure was fairly significant as the taxpayer
was required to change outfits many times during the day for her job.
She was also required to travel interstate where laundry facilities were
not readily available, and the taxpayer was required to have a number of
outfits so that she had immediately wearable fresh clothing. The taxpayer
had previously been an executive secretary for a large international

hotel chain where she was required to wear high-quality clothing but her
wardrobe was not as extensive (and not required to be).
The taxpayer sought a deduction for a portion of her clothing expenditure
on the basis that the additional expenditure was clearly incurred in gaining
or producing her assessable income. The additional expenditure was
incurred in purchasing the additional outfits that the taxpayer required to
fulfil her duties in her new role. During the period August to November
1990, the taxpayer purchased 51 new items of clothing. The taxpayer also
argued that, as she was required to live in Government House and her
employment was seven days a week, she had very little personal time
and very seldom had the opportunity to wear her official wardrobe in her
private time.
The Commissioner denied the deductions on the basis that the expenditure
related to conventional clothing and was therefore a private or domestic
outgoing.
The Full Federal Court permitted the taxpayer a deduction for the
additional clothing expenses as it was clear that the taxpayer incurred
an abnormal cost in relation to her clothing due to her job and that she
would not otherwise wear such clothes, especially the formal evening
wear. The Court referred to the AAT’s factual findings that while one set
of clothes for the day may be attributable to her private purposes, the
only explanation for the additional clothing was to satisfy her employment
duties. Therefore, the expenses were incurred in the course of gaining or
producing the taxpayer’s assessable income (satisfying the positive limbs
of the predecessor to s 8-1) and were not a private or domestic expense
(thereby not attracting the second negative limb of the predecessor to
s  8-1).
[12.770] Although expenses on conventional clothing may therefore be

deductible under s 8-1 of the ITAA 1997, it should be noted that FCT v Edwards
(1994) 28 ATR 87 involved unique circumstances and taxpayers will need to be
able to similarly demonstrate that their expenditure on conventional clothing
is an abnormal cost that is related to their income-producing activities. The
Commissioner’s guidance as to when a taxpayer may be able to deduct
abnormal expenditure incurred on conventional clothing is contained in Ruling
TR 94/22. In that Ruling, the Commissioner suggests that a sufficient connection
will not be established in most cases.
For example, in Case M28 (1980) 80 ATC 187, the Board of Review did not permit
the taxpayer a deduction for the dry-cleaning costs of suits. The taxpayer was a
lecturer who argued that the dry-cleaning costs were an abnormal expense due
to the taxpayer’s work environment of chalk dust. The Board of Review found
that the expenses, while coming close to deductibility, were not sufficiently
abnormal as chalk dust is readily brushed out of suits and would not require
the suits to be dry-cleaned any more often than they would otherwise need.
On the other hand, in Westcott v FCT (1997) 37 ATR 1017, where the taxpayer
was a manager and head waiter at a restaurant and was denied a deduction
for the cost of black trousers purchased in order to perform his employment
duties, the taxpayer was permitted a deduction for his dry-cleaning costs as
this was an “abnormal cost” related to his income-producing activities. As a
result of his employment as a manager and head waiter of a restaurant, the
taxpayer was required to handle food and wine, which frequently spilled on
his clothing. The spills had to be removed by dry-cleaning and the clothes
sometimes needed to be dry-cleaned as often as every second day. The AAT
accepted that this was an abnormal cost which was caused by the taxpayer’s
income- producing activities and therefore the dry- cleaning expenses were
sufficiently connected to the production of the taxpayer’s assessable income
(satisfying the positive limbs of the predecessor to s 8-1) and were not a private
or domestic expense (thereby not attracting the second negative limb of the
predecessor to s 8-1).
In FCT v Edwards (1994) 28 ATR 87, it was accepted by the Commissioner

and the taxpayer that, if the expenses were found to be deductible, only a
portion of those expenses would be deductible. In other words, some portion
of the taxpayer’s clothing expenditure would be attributable to private
purposes, and therefore not deductible, while the portion that constituted
the “additional expenditure” would be for income-producing purposes, and
therefore deductible. As discussed at [12.270], there is no precise formula for
apportionment which should be done on a case-by-case basis depending on
the taxpayer’s particular circumstances. In FCT v Edwards, it was accepted
that a comparison between the taxpayer’s current year expenditure and her
average expenditure in the previous two years was an accurate basis for
determining the proportion of the taxpayer’s expenditure that constituted
“additional expenditure”.
Expenditure caused by taxpayer’s work conditions

[12.780] Expenses incurred by a taxpayer on conventional clothing or related
items may also be deductible where the need for the items is created by the
taxpayer’s working conditions or environment: Mansfield v FCT (1995) 31 ATR
367; Morris v FCT (2002) 50 ATR 104; Ruling TR 2003/16.
Case study 12.39: Expenses on conventional clothing deductible

In Mansfield v FCT (1995) 31 ATR 367, the taxpayer was a flight attendant
who incurred expenditure on stockings, shoes, moisturiser, cosmetics
and hairdressing. The taxpayer argued that the expenses were incurred
in gaining or producing assessable income since she was required to be
well groomed as part of her job. Further, the taxpayer showed that her
shoes were a half-size bigger than her ordinary shoes due to the swelling
caused by cabin pressure and the moisturiser was required due to the
dry cabin air. The Commissioner denied the taxpayer’s deductions on
the basis that the expenses related to conventional clothing items, which
could be used outside of work.
The Federal Court permitted the taxpayer a deduction for the expenses
relating to the shoes and moisturiser as the need for them was created
by the taxpayer’s working conditions, that is, the cabin pressure and dry
air of an aeroplane. The Court also permitted the taxpayer a deduction
for the stockings on the basis that this was part of the taxpayer’s uniform.
However, the Court did not permit the taxpayer a deduction for the
cosmetics and hairdressing costs as this was considered to be a private
expense as a result of the taxpayer’s personal choice and not due to the
taxpayer’s
working environment.
Case study 12.40: Expenses on conventional clothing deductible

Morris v FCT (2002) 50 ATR 104 involved 10 different taxpayers, all of
whom worked in occupations which required them to work outdoors in
the sun. The taxpayers incurred expenditure on sun protection items,
such as sunscreen, hats and sunglasses.
The taxpayers claimed a deduction for expenses relating to the sun-
protection items on the basis that the expenses were incurred in
gaining or producing assessable income. The Commissioner denied the
deductions on the basis that the items were conventional and could be
used outside work and that the costs of obtaining them were therefore
private or domestic outgoings.
The Federal Court allowed all of the taxpayers a deduction for the sun-
protection items as the expenses clearly arose out of their working
conditions (in the sun) and were therefore incurred in the course of gaining
or producing the taxpayers’ assessable income. The Court rejected the
Commissioner’s argument that, to be deductible, the expenses must
relate to artificial work conditions. The expenses satisfied the first positive
limb of s 8-1 and did not fall within the second negative limb of s 8-1 as
they
were not private or domestic expenses.
In these situations, the expenses arise due to the taxpayer’s work conditions
and are incurred in the course of gaining or producing the taxpayer’s assessable
income. As such, the expenses are sufficiently connected to the taxpayer’s
production of assessable income and satisfy the positive limbs of s 8-1. The
expenses are not considered private or domestic in nature and the negative
limbs of s 8-1 do not apply to deny a deduction.
Occupation-specific clothing, protective clothing and

uniforms
[12.790] Occupation-specific clothing and protective clothing are generally
deductible under s 8-1 of the ITAA 1997 as they are incurred in the course of
gaining or producing assessable income and are not a private or domestic
outgoing: Morris v FCT (2002) 50 ATR 104; Rulings TR 2003/16 and TR 97/12.
There is sufficient connection to the taxpayer’s income-producing activities
and the positive limbs of s 8-1 are satisfied. The expenses are not private or
domestic and none of the negative limbs of s 8-1 apply to deny a deduction.
Occupation-specific clothing identifies the wearer as a person associated

with a particular profession, trade, vocation, occupation or calling: s 34-20(1).
Examples of occupation-specific clothing include barrister’s robes, a white

dress worn by nurses and black-and-white chequered trousers worn by chefs.
Protective clothing will be sufficiently connected to the taxpayer’s production

of assessable income where, for instance, there is a real risk of their being
exposed to illness or injury in the course of carrying out their income-producing
activities: s 34-20(2). Examples of protective clothing items include sun-and
rain-protection items for taxpayers required to work outdoors (eg, sunglasses,
hat, raincoat, umbrella), white coat and goggles for laboratory technicians or
assistants, hard hat for construction workers, and gloves for mechanics or
gardeners. Ruling TR 2003/16 contains further guidance as to when a deduction
will be allowed for protective clothing.
The deductibility of uniforms will depend on the taxpayer’s specific

circumstances. As we have seen at [12.750], expenses on conventional clothing
are generally not deductible even though the taxpayer may be required to wear
specific items of clothing for work purposes. As stated by Hill J in Mansfield
v FCT (1995) 31 ATR 367 at 375, “a uniform is not merely a set of clothes
reserved for the occasion of work”. A uniform is usually sufficiently distinctive
so that the casual observer can clearly identify the employee as working for the
particular employer: s 34-15.
Where the taxpayer is required to wear a uniform to perform their duties, the
uniform will be deductible under s 8-1 as the expense is incurred in the course
of gaining or producing the taxpayer’s assessable income and the positive
limbs of s 8-1 are satisfied. The expenses are not considered a private or
domestic outgoing and, as such, the negative limbs of s 8-1 do not operate
to deny deductibility. Note that for the expenses to be deductible, the whole
uniform must be worn: Ruling TR 97/12.
Expenditure on non-compulsory uniforms is not deductible under s 8-1 unless

the employer has registered the design of the uniform in accordance with
the provisions of Div 34: s 34-10. However, this limitation does not apply to
occupation-specific or protective clothing: s 34-10(3).
Capital expenses
[12.800] Although certain clothing expenses may not be treated as a private or
domestic outgoing, the expenses may still not be deductible under s 8-1 of the
ITAA 1997 if they are capital in nature: see [12.170]–[12.210]. For example, this
would be the case where the clothing items are expected to last the taxpayer
for a number of years. However, the taxpayer may be entitled to deduct the
expense over a number of years under Div 40: see Chapter 14.
Example 12.27: Clothing expenses that are capital in nature

Chris is a barrister. He had to purchase a wig to wear when he appears in
court. Chris does not go to court very often and looks after his wig very
well. He expects that the wig will last him for at least five years.
The wig is occupation-specific clothing and is therefore not a private or
domestic expense. However, it is not deductible under s 8-1 of the ITAA
1997 as Chris expects it to last for at least five years and therefore it is
capital in nature. The cost of the wig may be deductible over a number of
years, as discussed in Chapter 14.

Interest expenses
[12.810] Interest expenses are one of the most common types of expenses
incurred by taxpayers. Interest expenditure may be deductible under s 8-1 of the
ITAA 1997 where there is sufficient connection to the production of assessable
income and none of the negative limbs of s 8-1 are satisfied. “Interest” has been
defined as “compensation paid by the borrower to the lender for deprivation of
use of his money”: Riches v Westminster Bank Ltd [1947] 1 All ER 469 at 472.
In essence, “interest” is the cost of borrowing money and can include interest
on interest (ie, compound interest).
As a general rule, the deductibility of interest expenses will depend on the

taxpayer’s use of the borrowed funds: FCT v Munro (1926) 38 CLR 153.

Where the taxpayer uses the borrowed funds to gain or produce assessable
income (eg, by purchasing an income-producing asset or in a business), any
interest arising in relation to the borrowing may be deductible under s 8-1. For
example, interest incurred on a home loan may be deductible where the loan
is used to purchase an investment property that produces rental income. On
the other hand, the interest would not be deductible where the loan is used to
purchase a property that is the taxpayer’s residence and is not used to produce
any assessable income. As we have seen in Steele v DCT (1999) 41 ATR 139
(see Case Study [12.8]), interest expenses can be sufficiently connected to
the production of assessable income even where the income is only gained
or produced in a future income year. The Commissioner’s guidance on the
deductibility of interest incurred prior to or after the production of assessable
income is contained in Ruling TR 2004/4.
The deductibility of “penalty interest payments” (ie, an amount payable by a

borrower in consideration for the lender agreeing to an early repayment of a
loan) will also depend on the taxpayer’s use of the borrowed funds (for gaining
or producing assessable income or in a business carried on for that purpose)

and whether the recurring interest liability on the terminated loan would have
been deductible if incurred: see Taxation Ruling TR 2019/2.
Gearing
[12.820] Gearing refers to the borrowing of money in order to invest,
commonly in the property or share markets.
Positive gearing refers to the situation where the income from the investment
exceeds the costs, both interest and other deductions, of the investment.
Negative gearing refers to the borrowing of money to make an investment

where the interest on those borrowings, along with other deductions, exceeds
the income from the investment. Provided the investments are genuine, the
excess can then be claimed as a deduction against a taxpayer’s other income.
Negative gearing is a strategy often used by high-income taxpayers to reduce
their annual income tax payable –they hope that obtaining long-term capital
gains will at least compensate for the annual loss from negative gearing.
In relation to the general deductibility of interest under s 8-1 of the ITAA

1997, the courts will consider whether an expense is appropriate and adapted
towards the production of assessable income, rather than whether the expense
is warranted from a commercial perspective. In other words, interest will be
deductible if it satisfies one of the two positive limbs of s 8-1 regardless of
whether the total deductible costs (including interest) exceed the assessable
income from the investment.
Example 12.28: Negative gearing and tax

Natasha has been closely watching the property market over the last few
months and she is of the view that it is likely to rise significantly over
the next three years. Even though Natasha has a very secure and highly
paid job, she does not have any spare cash, so she decides to borrow
$200,000 to invest in a rental property. Natasha is able to borrow the
money at a rate of 10% pa on an interest-only basis and purchases a
suitable property. During the current tax period, Natasha incurred interest
and other running costs of $25,000 but only received assessable income
in the form of rent of $15,000.
The interest and other running costs are incidental and relevant to
the production of assessable income (rent) and therefore will be fully
deductible under s 8-1 of the ITAA 1997. The rental income of $15,000 is
assessable under s 6-5, which results in a net tax loss of $10,000 from the
investment.
If Natasha is on the top marginal tax rate of 47% (including the Medicare
levy of 2%), the $10,000 tax loss will reduce her total taxable income from
her salary and save her $4,700 ($10,000 × 47%) in tax. However, the tax
saving has not made this investment profitable; it has only reduced the
loss from $10,000 to $5,300 ($10,000 − $4,700). To justify this investment,
there would still need to be an expectation that either rents will rise and
the investment will become positively geared or the after-tax capital gain
on disposal of the property would be sufficient to cover the annual loss
and warrant the risk associated with the investment.

Capital expenses
[12.830] Although interest expenses are generally treated as revenue
expenses, they may be considered a capital expense in certain circumstances.
In St George Bank Ltd v FCT (2009) 73 ATR 148, the Full Federal Court held
that interest expenses incurred by the taxpayer were capital in nature. The
case involved a complex financing arrangement which came about because
the taxpayer was required by the Reserve Bank of Australia to increase its
capital. The Court found that the arrangement related to the acquisition of
permanent capital for the business and thus the interest expenses were
for a structural advantage of a lasting character, which is a capital expense
according to Sun Newspapers Ltd and Associated Newspapers Ltd v FCT
(1938) 61 CLR 337 (see Case Study [12.10]). The taxpayer tried to argue that
the interest expenses were a revenue expense because they were recurrent,
but this argument was specifically rejected by the Court. The Court stated
that the recurrence of a payment may be a relevant factor but is certainly not
decisive. The High Court refused the taxpayer special leave to appeal from
the decision of the Full Federal Court. Whether or not interest expenses are
capital in nature will depend on whether the expenses relate to the taxpayer’s
income- producing structure (capital) or their income- producing process
(revenue): see [12.170]–[12.210].
Legal expenses
[12.840] As discussed at [12.170]–[12.210], distinguishing between capital
and revenue expenses is often a difficult issue in practice. Legal expenses are
a prime example of the difficulty in characterising an expense as either capital
or revenue.
Case study 12.41: Legal expenses not capital in nature

In Hallstroms Pty Ltd v FCT (1946) 72 CLR 634, the taxpayer was a
manufacturer of fridges which incurred legal expenses in successfully
blocking a competitor’s application to extend a patent.
Utilising the “enduring benefit” test discussed at [12.180], a majority
of the High Court found that the expenses were deductible under the
predecessor to s 8-1 of the ITAA 1997 as they were not capital in nature.
In reaching this conclusion, the majority found that the expenses were
incidental to the taxpayer’s production of assessable income. This was
because the legal expenses were incurred to protect the taxpayer’s
existing rights (to manufacture its refrigerators in the way it wished) and
did not result in the acquisition of any new rights or benefits.
Dixon J (dissenting), who set out the test and factors in Sun Newspapers
Ltd and Associated Newspapers Ltd v FCT (1938) 61 CLR 337 (see Case
Study [12.10]), concluded that the legal expenses were capital in nature
as they related to the taxpayer’s income-producing structure and not to its
income-producing processes. This opinion was referred to by the Court
in Broken Hill Theatres Pty Ltd v FCT (1952) 85 CLR 423 (see Case Study
[12.42]). Following the importance of the income- producing structure
versus the income-producing process distinction adopted in Broken Hill
Theatres and subsequent cases, Hallstroms is now mainly relevant for
Dixon J’s dissenting opinion.
Case study 12.42: Legal expenses of a capital nature

In Broken Hill Theatres Pty Ltd v FCT (1952) 85 CLR 423, the taxpayer
was the sole cinema operator in Broken Hill. The taxpayer incurred legal
expenses in successfully blocking a competitor’s application to operate
a cinema. Such applications were conducted annually and therefore the
taxpayer argued that the expenses were not capital in nature as they did
not provide the taxpayer with a lasting benefit. The taxpayer also argued
that as it had already successfully blocked five such applications, the
expenses were recurrent.
The Full High Court (now under the leadership of Dixon CJ) found that
the expenses were not deductible under the predecessor to s 8-1 of the
ITAA 1997 because the advantage of being free from competition, even
if only for 12 months, was regarded as “just the very kind of thing which
has been held in many cases to give to moneys expended in obtaining
it the character of capital outlay” (at 434). The Court did not accept the
argument that, where no new right or tangible asset was acquired by the
expenditure, it must be on revenue account. In relation to the argument

that the expenditure was recurrent, the Court stated that it was not
recurrent in the relevant sense because it was made on a particular and
isolated occasion and it could not be known for certain whether another
application would be made by a competitor in future. The Court focused
on the distinction between expenses related to the taxpayer’s income-
producing structure (ie, the preservation and protection of that structure),
as
opposed to its income-producing activities or processes.
Case study 12.43: Legal expenses of a capital nature

In John Fairfax & Sons Pty Ltd v FCT (1959) 101 CLR 30, the taxpayer, a
newspaper publisher, acquired control of another newspaper company,
Associated, through a share allotment. An existing shareholder of
Associated brought an action in the Supreme Court of NSW arguing
that the share allotment was improper and seeking a declaration that the
issuance was void and the taxpayer should be removed from Associate’s
share register. The taxpayer incurred legal expenses in relation to the
court action (which was dismissed after several court hearings).
The Full High Court rejected the taxpayer’s argument that the expenses
were revenue in nature as they were incurred in protecting its existing
rights and that no new rights or benefits were acquired. However, their
Honours adopted different reasons in reaching their conclusion that
the expenses were capital in nature. Dixon CJ, continuing his approach
established in Sun Newspapers Ltd and Associated Newspapers Ltd v

FCT (1938) 61 CLR 337, found that the expenses related to the taxpayer’s
income-producing structure and were thus capital expenses. Menzies J
similarly held that the expenses “were affairs of capital, relating as they
did to the profit making subject rather than its operation”. Fullager J, on
the other hand, found that the expenses were capital in nature because
they were part of the acquisition cost. Kitto J agreed with all three, while
Taylor
J concurred with Fullager and Menzies JJ.
Case study 12.44: Legal expenses held to be revenue in nature

In FCT v Consolidated Fertilizers Ltd (1991) 22 ATR 281, the taxpayer was
a manufacturer of pesticides and fertilisers. The taxpayer had obtained
a licence from a US company to sell particular products, incorporating
specific technology, in Australia. The developer of the technology
commenced an action against the US company which could potentially
affect the taxpayer’s rights under the licensing agreement. The taxpayer
incurred legal expenses in joining the defence of the US company.
The Full Federal Court held that the legal expenses were not capital in
nature. The taxpayer was already the possessor of a “profit- yielding
subject” and the legal expenses were incurred to protect that source of
income. The Court drew a distinction between this case and Broken Hill
Theatres Pty Ltd v FCT (1952) 85 CLR 423 (see Case Study [12.42]) and
John Fairfax & Sons Pty Ltd v FCT (1959) 101 CLR 30 (see Case Study
[12.43]). The Court suggested that expenses to protect a business will
be capital in nature where they are incurred on an isolated occasion
for that purpose, while such expenditure incurred in the course of the
prudent management of the business would be a revenue expense. Here,
the taxpayer’s licensed technology could be threatened by a number of
parties and the protection of the technology was a regular incident of the
taxpayer’s business. Thus, the legal expenses were a revenue expense.
[12.850] Following Broken Hill Theatres Pty Ltd v FCT (1952) 85 CLR 423
(see Case Study [12.42]) and John Fairfax & Sons Pty Ltd v FCT (1959) 101
CLR 30 (see Case Study [12.43]) and similar cases, it is generally accepted
that legal expenses incurred to protect the taxpayer’s title in an asset or to
protect its existing business structure will be classified as a capital expense.
This will be the case even where the taxpayer has not acquired any new rights
or benefits and is merely protecting its existing position. The key distinction
is that expenses incurred to protect the taxpayer’s business structure will be
capital, while expenses incurred to protect the taxpayer’s business processes
will be revenue. FCT v Consolidated Fertilizers Ltd (1991) 22 ATR 281 (see Case
Study [12.44]) suggests that legal expenses to protect the taxpayer’s business
will be for the protection of the taxpayer’s income-producing processes (and
therefore a revenue expense) where it is a regular incident of the taxpayer’s
business.
Where the legal expenses relate to defending charges and allegations made
against a business taxpayer, Dixon CJ in FCT v Snowden & Willson Pty Ltd
(1958) 99 CLR 431 (see Case Study [12.4]) suggested that the expenses would
not be of a capital nature if the taxpayer’s business structure or capital assets
were not imperilled or the investigating authority did not have the authority to
put the taxpayer out of business. Where the investigations are conducted by
an authority with the power to put the taxpayer out of business (eg, deregister
a company), expenses incurred in defending the investigations may be capital
in nature.
Note that the success or failure of the legal proceedings has no impact on the
deductibility of legal expenses related to those proceedings.
Where the expenses are capital in nature, the taxpayer may be entitled to take
the expense into account for tax purposes through the capital allowances
provisions (see Chapter 14), the capital gains provisions (see Chapter 11)
or the “black hole expenditure” provisions: see Chapter 14. Note that some
legal expenses, such as costs related to obtaining tax advice, preparing leases
and discharging mortgages, may be deductible under a specific deduction
provision: see Chapter 13.
Questions
[12.860]
12.1 Melissa is a mechanic. She runs her own business specialising in
repairing electric cars. During the year, Melissa incurred the following
expenses:
(a) salary costs to her two regular employees of $100,00 (paid
electronically through the business’s payroll system which
automatically applies the relevant tax withholding and pays the
amount to the ATO);
(b) salary costs to casual employees of $10,000 (these employees are
only required during busy periods and are paid in cash “of the
books”);
(c) salary costs of $2,000 to her brother who is a university student
(paid electronically through the business’s payroll system; Melissa
knows the amount is excessive, but she wants to support him in
his studies);
(d) travel costs of $3,000 for travel from her home to her repair shop;
(e) $5,000 on special overalls and eye goggles for Melissa and her
employees to use when they are repairing cars;
(f) childcare costs of $22,000 so that Melissa is able to go to work
every day;
(g) $1,000 on a one-day course on a new accounting software program
that Melissa wants to use in the business to better comply with
new tax reporting requirements.
Advise Melissa as to whether the above expenses would be
deductible for income tax purposes.
12.2 Jurgen is a teacher at a German-language school in Australia. As part
of a competitive process, he was selected to participate in a prestigious
two-week education conference in Germany. His employer supported
Jurgen’s participation by allowing him to travel to the conference
without leave but did not pay for the travel expenses. Jurgen incurred
expenses of $2,000 on a return plane ticket between Germany and
Australia and $300 on travel insurance. His hotel costs during the
conference were covered by the conference organiser, but Jurgen
stayed an additional five days at the hotel so that he could do some

sightseeing. The extra nights at the hotel cost him $1,000.
Advise Jurgen as to whether the above expenses would be deductible
for income tax purposes.
12.3 Sanjay was employed at a large telecommunications firm. He was
terminated from his job and was not paid his entitlements (annual leave
and long service leave) at this time. He incurred legal expenses in taking
his employer to the Fair Work Commission to claim his entitlements.
He also sued his employer for loss of future earnings.
Advise Sanjay as to the deductibility of the legal expenses.
12.4 Michael is a scientist. He uses his own car to travel to various locations
to conduct experiments. He acquired the car on 1 October 2020 for
$60,000. The acquisition cost was funded entirely by a loan at an interest
rate of 15%. He has determined that the depreciation deduction on
the car would be $2,300 for the year. In addition, Michael incurred the
following expenses during the year:
• Registration and insurance = $2,000;
• Repairs and maintenance = $1,000; and
• Oil and fuel costs = $1,500.
For the period 1 October 2020 to 30 June 2021, Michael estimates that
the car travelled a total of 15,000 kilometres, 12,000 of which were for
business purposes. You may assume that Michael has maintained all
necessary records and a logbook.
Calculate Michael’s deduction for car expenses under the two methods
in Div 28 of the ITAA 1997. Assume that depreciation has been adjusted
for part year use and the impact of the car limit.
12.5 Alison is an interior designer with her own business. She does not
have an office as she thinks it would just be a waste of money as her
clients do not come to her, but she goes to the clients. It is crucial
to her business that she be able to visit her client’s premises to view
their homes before providing her services. Alison has set aside one
room in her home as her office and uses it exclusively for her interior
designing work. During the year, Alison incurred expenses in travelling
to meet her clients at their home and sustained increased expenditure
on electricity, gas and cleaning in relation to her office. Alison owns her
home and pays interest on her mortgage monthly. Last month, Alison
was late in paying her monthly interest charge and had to pay a penalty
of $150.
Advise Alison as to the deductibility of the abovementioned expenses.
12.6 Olivia is an investment banker. She owns her own home and has
decided to invest in the property market. As this would be her first
property investment in a personal capacity, she hired a property broker
to assist her in finding a suitable investment property. The broker

charged her a fixed fee of $11,000 upfront for his assistance. Olivia also
attended a two-day course on successful property investment. The
course cost $3,300.
The broker has found a suitable investment property and Olivia
borrowed the funds from her bank to purchase the property. She used
her own home as security for the loan. The purchase is for a vacant
block of land and Olivia will build two homes on the land and sell them
for a profit (hopefully) in two years.
Advise Olivia as to the deductibility of the fee to the property broker,
course fees and the interest charges to the bank.
13
Specific deductions
Key points.................................................................................................... [13.00]
Introduction................................................................................................ [13.10]
Tax-related expenses................................................................................. [13.20]
Repairs�� [13.30]
Meaning of repair................................................................................. [13.33]
Income-producing purpose................................................................. [13.35]
Capital expenses.................................................................................. [13.37]
Initial repairs............................................................................................. [13.40]
Improvements.......................................................................................... [13.50]
Replacements........................................................................................... [13.60]
Notional repairs not deductible............................................................... [13.70]
Bad debts.................................................................................................... [13.80]
Determining that a debt is “bad”......................................................... [13.83]

Money-lending business...................................................................... [13.85]
Corporate taxpayers............................................................................ [13.90]
Payments to associations........................................................................ [13.100]
Travel between workplaces..................................................................... [13.110]
Gifts�� [13.130]
Limitations on deductions for gifts or donations.............................. [13.140]
Political contributions and gifts............................................................. [13.150]
Deductibility of gifts or donations under s 8-1................................. [13.160]
Prior year losses........................................................................................ [13.180]
Corporate taxpayers.......................................................................... [13.190]
Limitations on losses......................................................................... [13.200]
Other specific deduction provisions....................................................... [13.210]
Questions................................................................................................... [13.220]

Key points
[13.00]
• In addition to the general deduction rule, discussed in Chapter 12,
taxpayers may claim a deduction for various expenses under a specific
deduction provision.
• A specific deduction provision provides taxpayers with a deduction for
a specific type of expense.
• Where a taxpayer is entitled to deduct an expense under both the
general deduction provision (s 8-1 of the Income Tax Assessment Act
1997 (Cth) (ITAA 1997)) and a specific deduction provision, the taxpayer
should deduct the expense under the specific deduction provision as it
is the most appropriate provision.
• Most specific deduction provisions are contained in Div 25 of the ITAA
1997, but a number of specific deduction provisions are contained in
other Divisions of the legislation, such as Div 30 and Div 36.
• Examples of expenses which may be deducted under a specific
deduction provision include:
– the cost of managing one’s tax affairs;
– non- capital expenses incurred in repairing property used for
income-producing purposes;
– bad debt write-offs where certain conditions are satisfied;
– payments for membership of a trade, business or professional
association;
– expenditure incurred by a taxpayer in travelling directly between
two workplaces;
– gifts or donations to qualifying recipients; and
– tax losses incurred in prior income years.
Introduction
[13.10] As discussed in Chapter 12, there are two categories of
deductions: general deductions and specific deductions. The general deduction
rule is in s 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).
Specific deductions arise where a specific provision in the legislation, outside
Div 8, provides the taxpayer with a deduction for an expense: s 8-5.
A specific deduction provision may relate to an expense that is otherwise

deductible under s 8-1 or it may apply to an expense that is not deductible
under s 8-1 either because it does not satisfy the positive limbs of s 8-1 or
because it is denied by one of the negative limbs of s 8-1. An expense that is
deductible under both a specific deduction provision and the general deduction
provision should be deducted under the “most appropriate” provision: s 8-10.
The payment of income tax, amounts withheld or payable under the Pay As
You Go (PAYG) system, interest incurred in borrowing money to pay income
tax or PAYG amounts and expenditure related to the commission or possible
commission of an offence under Australian or foreign law are not deductible
under s 25-5: s 25-5(2). Note that fees or commissions paid in obtaining advice
in relation to the operation of a Commonwealth law relating to taxation are only
deductible when the advice is provided by a “recognised tax adviser”: s 25-5(2)
(e). “Recognised tax adviser” is defined in s 995-1 as a registered tax or GST
agent or a legal practitioner. Any expenses that are not deductible under s 8-1
due to the operation of a specific provision that denies the deduction are also
not deductible under s 25-5: s 25-5(3).
Tax-related expenses are also not deductible if the expenses are capital
expenditure: s 25-5(4). For example, the cost of acquiring a computer used
solely in completing tax returns is not deductible under s 25-5 as it is capital
expenditure. However, the cost of the computer may be deducted over a
number of years in accordance with the capital allowances provisions discussed
in Chapter 14. As we will see, the capital allowances provisions only provide
a deduction for property used for an income-producing purpose. The use of
property in complying with tax affairs is taken to be for income-producing
purposes under s 25-5(5). Note that the subsection specifies that an expense
will not be a capital expense simply because the tax affairs concerned relate to
matters of a capital nature.
Example 13.1: Cost of managing tax affairs

Robin uses a tax agent to complete his income tax return every year. This
year, Robin paid his tax agent $110 to complete his tax return. He also
paid his tax agent $300 for advice in relation to the disposal of property
which was subject to the capital gains provisions.
Robin is entitled to a deduction of $410 under s 25-5 as the fees are a
cost of managing his tax affairs. The $300 is deductible even though the
advice relates to a capital transaction.

In Determination TD 2017/ 8, the Commissioner confirms that the cost of

travelling to have a tax return prepared by a “recognised tax adviser” is
deductible under s 25-5.
Repairs
[13.30] Under s 25-10 of the ITAA 1997, taxpayers are permitted a deduction
for expenditure incurred on repairs to premises or depreciating assets used
for income-producing purposes. The term “property” is used in this chapter to
refer to both premises and depreciating assets.
13: Specific deductions [13.33] 475
There is some question as to the necessity for s 25-10 as a specific deduction

provision as any expenses that are deductible under this section are likely
to be deductible under s 8-1. Regardless, if applicable, repairs should be
deducted under s 25-10, rather than s 8-1, as it is the most appropriate
provision: s 8-10.
To claim a deduction for repairs under s 25-10(1), it is necessary to show that:

• the expenditure relates to a repair;
• the property is used for income-producing purposes; and
• the expense is not a capital expense.
Meaning of repair
[13.33] The word “repair” is not defined in the income tax legislation and
takes on its ordinary meaning. “Repair” generally refers to the remedying
of a defect in a property. In Lurcott v Wakely and Wheeler [1911] 1 KB 905,
Buckley LJ provided the following examples of “repair”:
A skylight leaks; repair is effected by hacking out the putties, putting in new ones,
and renewing the paint. A roof falls out of repair; the necessary work is to replace
the decayed timbers by sound wood; to substitute sound tiles or slates for those
which are cracked, broken, or missing; to make good the flashings, and the like.
Part of a garden wall tumbles down; repair is effected by building it up again with
new mortar, and, so far as necessary, new bricks or stone.
The property must be in need of restoration for the work to constitute a
“repair” (Case J47 (1958) 9 TBRD 244) and pure maintenance work will
generally not be considered a repair. For example, painting a wall which
has deteriorated would be considered a repair, whereas oiling a part which
is in perfect working condition would constitute maintenance, and not a
repair. Expenses for maintenance work which are not deductible under
s 25-10 of the ITAA 1997 may be deductible under the general deduction
provision, s 8-1.
Example 13.2: Expenses not for repairs

A shopkeeper, Sam, decides to replace his shop’s awning with a more
modern and aesthetically pleasing equivalent. The old awning is in good
condition before the work is done –there is nothing to be restored, there
are no decayed or worn-out parts to be replaced and nothing loose or
detached that needs to be fixed.
The expenditure involved is not for repairs because the awning was in
good repair before the work was done, so the expenses are not deductible
under s 25-10.
Source: Adapted from Example 1, Ruling TR 97/23.

In Ruling TR 97/23, the Commissioner suggests that work done solely to

meet the requirements of regulatory bodies will not be a repair unless the
work remedies defects in the property. For example, the cost of removing
asbestos insulation from factory walls and replacing it with modern insulation
material would not be considered a repair if the insulation is not in need of
repair.
Income-producing purpose
[13.35] The property must be used for an income-producing purpose for
repairs to be deductible under s 25-10 of the ITAA 1997. Examples of the use of
property for income-producing purposes include property used to earn rental
income or to carry on a business.
Section 25- 10(2) ensures that a partial deduction is available, where the
taxpayer only partly held or used the property for income-producing purposes
during the income year. In this case, the taxpayer is entitled to a deduction for
the amount of the expense that is considered “reasonable”. In Ruling TR 97/23,
the Commissioner suggests that “reasonable” would be in proportion to the
part of the property or period used for income-producing purposes.
Example 13.3: Repairs on premises partly used for income-producing

purposes
Emma owns a two-bedroom house. She lives in one bedroom and she
rents out the other bedroom. Emma incurred $100 of expenses on repairs
to the house.
Emma is entitled to a deduction of $50 under s 25-10(2) as 50% of the
house is used for income-producing purposes.

Where the repairs are undertaken after the property ceases to be held,
occupied or used for income- producing purposes, the cost of the repairs
will be deductible if the necessity for the repairs can be related to the use of
the property for income-producing purposes and the property did produce
assessable income during the year when the expenses were incurred: Ruling
IT 180.
Capital expenses
[13.37] Once it is determined that the property is used for income-producing
purposes, the main issue in claiming a deduction for repairs is to determine
whether the expenditure constitutes a capital expense. As with s 8-1 of the
ITAA 1997, s 25-10(3) denies taxpayers a deduction for repairs that constitute
capital expenditure.
Whether or not a repair constitutes a capital expense is determined in

accordance with the test and factors outlined in Sun Newspapers Ltd and
Associated Newspapers Ltd v FCT (1938) 61 CLR 337: see [12.180]. A repair
that relates to the business structure is likely to constitute a capital expense,
whereas a repair that is a working or operating expense will be deductible
under s 25-10.
Broadly, case law has developed three categories of expenditure on repairs

which may be classified as capital expenditure:
• initial repairs: see [13.40];
• improvements: see [13.50]; and
• replacements: see [13.60].
Initial repairs
[13.40] Initial repairs are repairs undertaken to remedy defects which exist
at the time the property is acquired. The courts have held that such repairs
are not deductible as they are capital expenses: Law Shipping Co Ltd v Inland
Revenue Commissioners (1923) 12 TC 621; W Thomas & Co Pty Ltd v FCT
(1965) 115 CLR 58. It is considered likely that the taxpayer would have received
a reduction in the purchase price of the property to take into account the cost
of the repairs and it is therefore appropriate to treat the expenditure as a part
of the cost of acquisition. However, even where the taxpayer may not have
been aware of the defects at the time of acquisition, initial repairs are still not
deductible: W Thomas & Co Pty Ltd v FCT (1965) 115 CLR 58.
Note that the test is that the defects must have existed at acquisition time and
not that the repairs have to be undertaken at that time. Repairs undertaken at
a later point in time may still be treated as initial repairs if the defects existed
at the time of acquisition. Similarly, repairs made soon after the property is
acquired may not necessarily be initial repairs and it would depend on whether
the defects existed at the time of the acquisition.
Example 13.4: Initial repairs –possible partial deduction

Micah purchased a house close to the local university with the intention
of renting the house out to students. At the time of the acquisition, the
house desperately required repainting but Micah did not have sufficient
money to do so. He managed to rent it out to some students for a year at
lower rent and then repainted the house once they left, 12 months later.
The repainting cost Micah $2,000.
The $2,000 would generally be deductible under s 25-10 as it relates to

the repair of premises used for an income-producing purpose (to gain
or produce rental income). However, in this case, the $2,000 may not
be fully deductible under s 25-10 as the repainting is to remedy a defect
which existed at the time of acquisition and is therefore an “initial repair”
which constitutes a capital expense.
Micah may be able to claim a deduction for some portion of the $2,000 if
it could be argued that the expense is attributable to the one year when
the house was rented out to the students.

Example 13.5: Initial repairs capital in nature and not deductible

William purchased a house that was in good repair, but to make it
more attractive to prospective tenants he undertook minor repairs and
renovations. The minor repairs and renovations were initial repairs and
their cost is of a capital nature and is not deductible under s 25-10. During
the course of the repairs and renovations, William discovered that the
woodwork was seriously affected by white ants. He incurred substantial
expenditure to remedy the white-ant-related problems in order to restore
the house to a state suitable for occupation by tenants.
The white-ant-related problems existed at the date of purchase and the
expenditure incurred to fix those problems constitutes initial repairs
which are capital in nature and not deductible under s 25-10. The facts
that William was unaware of the problem when he purchased the house
and would have paid a lower purchase price if he had known of the need
for repairs do not alter the capital nature of the expense: Case 64 (1944)
11 TBRD (OS) 202; W Thomas & Co Pty Ltd v FCT (1965) 115 CLR 58.

Improvements
[13.50] As stated by Windeyer J in W Thomas & Co Pty Ltd v FCT (1965) 115
CLR 58 at 72, “repair involves restoration of a thing to a condition it formerly
had without changing its character”. In some cases, the work done to property
may surpass being a repair and constitute an improvement, in which case the
expenditure will be capital in nature. Generally, repairs remedy a defect due to
wear and tear, whereas an improvement enhances the efficiency or character
of the property.
Distinguishing between a repair and an improvement is a question of fact and

will depend on the exact work done. A repair may constitute an improvement
if the materials used to repair the property are different to the original materials
or where the work done to the property involves technological advancements.
Generally, a repair should only restore the property to its previous condition
(ie, before wear and tear due to the taxpayer’s income-producing activities,
which will generally be its condition when acquired by the taxpayer) and not
change the character or efficiency of the property.
Case study 13.1: Improvements not deductible due to change of

character of property
In FCT v Western Suburbs Cinemas Ltd (1952) 86 CLR 102, the taxpayer
wanted to repair a damaged ceiling at its cinema but the existing materials
were no longer available and therefore the taxpayer “repaired” the ceiling
with newer, better material. The new material, fibrous plaster, had a
much longer life than the old material, was harder and was also better
decorative material as it could be moulded.
The High Court denied the taxpayer a deduction for the cost of repairing the
ceiling with the new material on the basis that the use of the new material
was an improvement and the purported repair changed the character of
the property and did not merely restore it to its previous condition. This
is despite the fact that the existing material was no longer available and
the taxpayer did not have a choice in using the new material. The Court
stated that the test was whether the actual expenditure incurred by the
taxpayer
constituted a repair.
Example 13.6: Repair constitutes improvement –not deductible

Elle uses her truck for income-producing purposes. She replaces the
truck’s worn- out petrol engine with a diesel engine, which improves
the economy of operation of the truck. Due to the significantly greater
efficiency in the truck’s function, the costs relate to improvement of the
truck and not just a repair. The engine, being a major and important part
of the truck, is a new and better engine with considerable advantages
over the old one, including reducing the likelihood of future repair bills.
The costs are capital in nature and are not deductible under s 25-10.
Source: Adapted from Example 3, Ruling TR 97/23. See also Case 82
(1953) 3 CTBR (NS).

Example 13.7: Repair not an improvement –deductible

Mary owns a factory and she needs to repair its floor, which is made of
bitumen laid on a gravel base. She replaces it with a new floor consisting
of an underlay of concrete topped with a paving stone made of crushed
granite and cement. The new floor, from a functional efficiency (rather
than aesthetic) point of view, is not superior in quality to the old floor and
it performs exactly the same function as the old floor. In fact, the new
floor will be more expensive to repair than the old floor. Because the
new floor is not a substantial improvement, it is a repair and its cost is
deductible under s 25-10.
Source: Adapted from Example 8, Ruling TR 97/23. See also Case T75
(1968)
18 TBRD 377; Case 40 (1968) 14 CTBR (NS).
Where repairs and improvements are done concurrently, the taxpayer may
be entitled to a deduction for the expenses which constitute a repair if the
expenses can be separately identified and quantified.
Example 13.8: Repairs and improvements done concurrently –partial

deduction
Tracy owns a factory, for which the council has advised her to repair
faulty wiring, reposition existing electrical outlets and install new power
points, mains and switchboards.
The cost of the work relating to repairing the faulty wiring only is deductible
under s 25-10 provided Tracy can separate the costs of repairing the wiring
from the (capital) costs of the electrical improvements. Tracy should seek
separate quotes and maintain separate accounts in relation to the costs of
repairing the wiring and the cost of the electrical improvements.


Replacements
[13.60] Finally, where the repair to property involves a replacement, it is
necessary to ascertain whether the replacement is of part of an asset (which
is a repair and therefore deductible) or the whole of an asset (which is a
replacement and therefore capital): Lindsay v FCT (1960) 106 CLR 377.
Distinguishing between replacements of a part of an asset, as opposed to the

whole of an asset, can be a difficult issue and depends on the individual facts
of a case. Essentially, an asset will be an asset in itself, where it is separately
identifiable from the entire asset and is capable of independent use.
For example, in Samuel Jones & Co (Devondale) Ltd v IRC (1951) 32 TC 513, the
Court accepted that the replacement of a chimney in need of repair with a new
chimney of similar dimensions and quality was a repair and not a replacement
as the chimney was an inseparable part of the entire asset, being the factory. In
FCT v Western Suburbs Cinemas Ltd (1952) 86 CLR 102, although the taxpayer
changed the entire roof of the cinema, the replacement of the roof was the
replacement of part of an asset only and not the whole of the asset, being the
cinema. The roof was not a separately identifiable asset in itself and had no
independent use. Similarly, in W Thomas & Co Pty Ltd v FCT (1965) 115 CLR 58,
a building was held to be the entire asset with the floor and walls being parts
of the asset.
Example 13.9: Replacement of part of asset –deductible

Micah owns an investment property which is rented out to students. He
recently had an electrician attend the premises to fix the air conditioner in
the property as the tenants complained that it was leaking. The electrician
changed the compressor in the air conditioning unit, which solved the
problem.
The changing of the compressor is a repair as the compressor is part of
the asset (the air conditioner) and does not have any independent use. As
such, the costs incurred in changing the compressor are deductible under
s 25-10 of the ITAA 1997 as a repair.
On the other hand, if the electrician had changed the air conditioning unit,
installing a new, identical unit, that would have been the replacement
of an entire asset and the costs incurred would not be deductible under
s 25-10, as they would be a capital expense.

Example 13.10: Replacement of part of an asset and whole asset –

partial deduction
Stuart and Jeff are neighbouring farmers affected by a severe bushfire.
Stuart restores his existing fencing to good condition by mending it and
replacing damaged sections, for example, the fence on the northern
boundary. Jeff replaces the entire fence surrounding his property.
Stuart is entitled to claim a deduction for the cost of repairing his fence
under s 25-10. The entirety is the total fencing, so replacing the fences on
the northern boundary is a replacement of a subsidiary part of the whole
fencing.
However, Jeff’s expenditure is not deductible under s 25-10 because the
whole fence was replaced, making it a reconstruction of the entirety. The
total fence is not a subsidiary part of the rural property or of anything else.
To replace entire fencing with new fencing is to replace one capital asset
with another capital asset. The cost is therefore of a capital nature.
(1962)
10 CTBR (NS); Case 44 (1963) 11 CTBR (NS).
Example 13.11: Replacement of separately identifiable asset not

deductible
Mr Bowser owns a service station that is not connected to the mains
power supply. He has meters and a pumping plant to supply power to
the service station, both of which he needs to replace due to old age. The
meters and the pumping plant are entireties in their own right, separate
and distinct from the service station. Their replacement is not a repair and
the cost is not deductible under s 25-10.
(1949) 15 TBRD (OS) 287.

Expenditure incurred in repairing an asset which is not deductible because it

constitutes the replacement of the entire asset may be deductible under the
capital allowances provisions if the asset is a depreciating asset (see Chapter 14)
or it may be added to cost base if the asset is a CGT asset (see Chapter 11).
Notional repairs not deductible

[13.70] Consistent with the provisions of the tax legislation generally, taxpayers
are only entitled to a deduction under s 25- 10 for the actual expenditure
incurred by the taxpayer on repairs and not some notional (ie, theoretical or
estimated) amount. For example, where the taxpayer’s expenditure on repairs
is not deductible because the expenditure is capital in nature, the taxpayer is
not entitled to claim a deduction for “notional repairs”: FCT v Western Suburbs

Cinemas Ltd (1952) 86 CLR 102. “Notional repairs” refers to the cost that would
have been incurred by a taxpayer had he or she merely repaired the property,
rather than improved it or replaced the entirety. The taxpayer also cannot argue
that expenses should be deductible as the improvement or replacement would
save on future expenditure for repairs which would be deductible.
Case study 13.2: Notional repairs not deductible

As discussed in Case Study [13.1], the High Court in FCT v Western Suburbs
denied the taxpayer a deduction for expenditure on repairs to a ceiling on
the basis that the repairs undertaken constituted an improvement due to
the use of new material. In the alternative, the taxpayer sought to claim a
deduction for £603, being the architect’s estimate of the cost that would
have been incurred by the taxpayer had the ceiling been repaired using
the old material instead of the new material.
The Court denied the taxpayer a deduction for the £603 as well on the
basis that the deduction was for “notional repairs” and there was no basis
in law for a deduction for repairs that could have been undertaken by
the taxpayer. Again, the test of deductibility depends on the actual cost
incurred by the taxpayer.
Example 13.12: Notional repairs not deductible

Ken runs a factory in a building, where the wooden floor needs repairing.
He has two options. He can either repair the old floor or replace it with an
entirely new one made of steel and concrete.
Ken chooses the second option because it will save on future expenditure
on repairs and because it has distinct advantages over the old wooden
floor. Ken cannot claim a deduction for the costs incurred in replacing
the floor or the costs he would have incurred if he had simply repaired
the wooden floor. The replacement of the floor with the new material
constitutes an improvement and his actual expenditure is capital, so none
of it is deductible as a repair under s 25-10.

Bad debts
[13.80] Taxpayers who account for their income on an accruals basis rather
than on a cash basis (see Chapter 16) include their business income in their
assessable income at the time it is derived, rather than when it is received.
However, in some cases, the taxpayer may find that it is unable to recover
moneys owed and has a bad debt. In this situation, s 25-35(1)(a) of the ITAA
1997 provides taxpayers with a deduction for the write-off of a bad debt, where
the debt was previously included in the taxpayer’s assessable income. Where
the taxpayer is carrying on a money-lending business, s 25-35(1)(b) provides
the taxpayer with a deduction for the write-off of a bad debt.
In order for a taxpayer to claim a deduction under s 25-35, it is important that

in the income year when the taxpayer claims the deduction:
• there is an existing debt (ie, the taxpayer is legally or equitably entitled
to receive an amount from another entity);
• the debt is bad; and
• the debt was actually written off –merely creating a provision for
bad debts will not constitute a write-off; there must be some written
record, for example, board minutes, memo from financial controller
or accounting entries, to evidence the taxpayer’s decision to write off

the debt.
The taxpayer will not be entitled to a deduction for a bad debt under s 25-35,
where all of these elements are not satisfied: Point v FCT (1970) 119 CLR 453.
Case study 13.3: Bad debt deductions denied –write-off in wrong year

In Point v FCT (1970) 119 CLR 453, the taxpayer entered into an agreement
to release a debtor from its obligations to the taxpayer in one income year
and the debt was written off in the taxpayer’s accounts in the following
income year.
The High Court found that the taxpayer was not entitled to a bad debt
deduction under the former equivalent provision of s 25- 35 in either
income year. In the first year, the taxpayer was not entitled to a deduction
as the debt had not actually been written off, while a deduction was not
available in the following year, as there was no debt in existence at that
time. This was because the debtor had been released from its obligations
in
the previous income year.
Example 13.13: Bad debt deductions

Company R sells goods on credit. It includes the amount of a sale in its
assessable income at the time of sale. As of 30 June, Company R had
$10,000 in debts relating to past sales. The company created a provision
for bad debts of $2,000 for debts that remained unpaid after three months
and also wrote off debts of $1,000, which were still unpaid after six
months.
Company R is entitled to a deduction of $1,000 under s 25-35 of the ITAA
1997 in respect of the write-off as the $1,000 had previously been included
in Company R’s assessable income at the time of sale, and all of the other
conditions in s 25-35 are satisfied. The provision for bad debts of $2,000
is not deductible as it does not constitute a “write-off”.

Determining that a debt is “bad”

[13.83] Taxpayers are only entitled to a deduction for a debt that is “bad”
under s 25-35 of the ITAA 1997. In Ruling TR 92/18, the Commissioner suggests
that it is not necessary that the taxpayer take all available legal steps to recover
a debt before it can be classified as “bad”. It is sufficient that the taxpayer make
a bona fide assessment based on sound commercial considerations that the

debt is bad. In Ruling TR 92/18, the Commissioner states:
31. A debt may be considered to have become bad in any of the following
circumstances:
(a) the debtor has died leaving no, or insufficient, assets out of which the
debt may be satisfied;
(b) the debtor cannot be traced and the creditor has been unable to

ascertain the existence of, or whereabouts of, any assets against
which action could be taken;
(c) where the debt has become statute barred and the debtor is relying on
this defence (or it is reasonable to assume that the debtor will do so)
for non-payment;
(d) if the debtor is a company, it is in liquidation or receivership and there
are insufficient funds to pay the whole debt, or the part claimed as a
bad debt;
(e) where, on an objective view of all the facts or on the probabilities
existing at the time the debt, or a part of the debt, is alleged to have
become bad, there is little or no likelihood of the debt, or the part of
the debt, being recovered.
32. While individual cases may vary, as a practical guide a debt will be accepted
as bad under category (e) above where, depending on the particular facts
of the case, a taxpayer has taken the appropriate steps in an attempt to
recover the debt and not simply written it off as bad. Generally speaking
such steps would include some or all of the following, although the steps
undertaken will vary depending upon the size of the debt and the resources
available to the creditor to pursue the debt:
(i) reminder notices issued and telephone/mail contact is attempted;

(ii) a reasonable period of time has elapsed since the original due date for
payment of the debt. This will of necessity vary depending upon the
amount of the debt outstanding and the taxpayers’ credit arrangements
(eg 90, 120 or 150 days overdue);
(iii) formal demand notice is served;
(iv) issue of, and service of, a summons;
(v) judgment entered against the delinquent debtor;
(vi) execution proceedings to enforce judgment;
(vii) the calculation and charging of interest is ceased and the account is
closed (a tracing file may be kept open; also, in the case of a partial
debt write-off, the account may remain open);
(viii) valuation of any security held against the debt;
(ix) sale of any seized or repossessed assets.
While the above factors are indicative of the circumstances in which a debt may be
considered bad, ultimately the question is one of fact and will depend on all the facts
and circumstances surrounding the transactions. All pertinent evidence including
the value of collateral securing the debt and the financial condition of the debtor
should be considered. Ultimately, the taxpayer is responsible for establishing that
a debt is bad and bears the onus of proof in this regard.
Money-lending business
[13.85] The determination as to whether a taxpayer is carrying on a business
of money-lending is a factual one to be made on a case-by-case basis in
accordance with the principles discussed in Chapter 8. In the case of banks and
finance companies, it will generally be clear that they are carrying on a business
of money-lending. One issue that sometimes arises in practice is whether
an in-house finance company is in the business of money lending: see, for
example, FCT v BHP Billiton Finance Ltd [2010] FCAFC 25 (note that the case
was appealed to the High Court but on a different issue: FCT v BHP Billiton
Ltd [2011] HCA 17). This is a factual question to be determined based on the
taxpayer’s circumstances and it has been accepted that a taxpayer can be
in the business of money-lending, even if it only lends to a particular class
of borrowers, as long as it does so in a business-like manner with a view to
making a profit: Fairway Estates Pty Ltd v FCT (1970) 1 ATR 726.
In FCT v National Commercial Banking Corp of Australia Ltd (1983) 15 ATR 21,
the Full Federal Court confirmed that a taxpayer that is in the business of money-
lending is entitled to a bad debt deduction even where an amount has not been
previously included in the taxpayer’s assessable income in relation to the debt.
The deduction is not only limited to the unpaid loan principal but also includes
any capitalised interest and associated costs, such as fees and charges.
Corporate taxpayers
[13.90] Companies are only entitled to a deduction for bad debts, where
the company satisfies the loss recoupment tests discussed in Chapter 21.
Essentially, a company must have the same owners or the same or similar
business from the time the debt was incurred to the time when a bad debt
deduction is claimed for the debt.
Payments to associations
[13.100] Section 25-
55 of the ITAA 1997 provides taxpayers with a
deduction for payments for membership of a trade, business or professional
association. However, the maximum amount deductible under this section is

$42. Therefore, as the note to s 25-55 points out, a taxpayer would be better
advised to claim a deduction for payments to associations under s 8-1 if the
taxpayer satisfies the requirements of that section. The difference between
the two sections is that s 8-1 requires a connection between the expense and
the production of income, whereas there is no such nexus requirement in
s  25-55.
Example 13.14: Payments to associations deductible under ss 8-1

and  25-55
Talil is an accountant and is a member of the Accounting Institute of
Australia. His membership fees for the year were $700.
Talil would claim a deduction of $42 under s 25-55 of the ITAA 1997 and a
deduction of $658 under s 8-1 as the expense was incurred in gaining or
producing his assessable income.

Example 13.15: Payments to associations deductible under s

25-55  only
Following on from Example 13.14, assume that Talil has decided to
pursue his true passion for cooking and works as a chef instead of as an
accountant.
Talil would claim a deduction for $42 under s 25-55 for his accounting
membership fees but would not be entitled to a deduction under s 8-1 for
the remaining $658 as the membership fees are not incurred in gaining or
producing his assessable income.

Travel between workplaces

[13.110] As discussed in Chapter 12, in FCT v Payne (2001) 202 CLR 93,
the Full High Court found that expenses incurred by a taxpayer in travelling
between two unrelated places of work are not deductible under s 8- 1 of
the ITAA 1997 as the expenses are not incurred in the course of gaining or
producing assessable income but rather in putting the taxpayer in a position to
gain or produce assessable income. As such, the expenses do not satisfy the
positive limbs of s 8-1. A workplace is a place where the taxpayer is engaged in
activities which gain or produce assessable income (eg, place of employment
or place of business).
The Government subsequently introduced s 25-100, which provides taxpayers

with a deduction for travel directly between two workplaces, where the taxpayer
is engaged in income-producing activities at each workplace (eg, employment
or business). However, the expenses are not deductible under s 25-100, where
one of the workplaces is also the taxpayer’s residence. The taxpayer in FCT v
Payne, for example, would not be assisted by s 25-100 as the location of his
deer-farming business activity was also his residence.
Example 13.16: Travel between workplaces

Nash works as an accountant at a large accounting firm. He also works in
his family business. Under an arrangement with the accounting firm, he
leaves the accounting firm at 3 pm each day to go and work in the family
business (where he receives salary income). Nash takes a train from the
accounting firm to the family business.
Nash would be entitled to a deduction for the cost of his train ticket for the
travel between the accounting firm and his family business under s 25-100
of the ITAA 1997. The travel is directly between two workplaces, where
he gains or produces assessable income and neither is his residence.

Gifts
[13.130] Division 30 of the ITAA 1997 provides taxpayers with a deduction for
gifts or contributions made to particular recipients. The gift or contribution can
be of money or property. Note that the amount of the deduction is generally
limited to the amount “paid” or “contributed” and does not include the incurring
of a liability: s 30-15; Arnold v FCT [2017] AATA 1318.
Broadly, a gift or contribution must be made to a “deductible gift recipient”

(DGR) to qualify for a deduction under Div 30. A “deductible gift recipient”
is an entity which meets the requirements to be registered as such by the
relevant body, for example, public universities, public hospitals, charities (such
as World Vision) or research organisations (such as Cancer Council Australia).
Most organisations would generally publicise the fact that they are a registered
DGR so that potential donors are aware that any gifts or contributions to the
organisation would be deductible for tax purposes.
The issue in relation to the deductibility of gifts or contributions is that the

payment must be a “true” gift and made with no expectation of material
advantage in return: FCT v McPhail (1968) 117 CLR 111. In Ruling TR 2005/13,
the Commissioner suggests that a deductible gift must be one that is voluntary,
transfers the taxpayer’s beneficial interests in the property to the recipient and
is made without the expectation of a material advantage in return.
Case study 13.4: Gift not deductible due to receipt of material

advantage in return
In FCT v McPhail (1968) 117 CLR 111, the taxpayer made a contribution
to a building fund for the school attended by his son. The school charged
different fees depending on whether a contribution was made to the
building fund. As such, the taxpayer was charged lower school fees for
his son than he would have otherwise paid.
The High Court denied the taxpayer a deduction for the contribution to
the building fund on the basis that it was not a true gift as the taxpayer
received a material advantage in return, being the lower school fees for
his
son’s education.
Example 13.17: Deductibility of charitable donations

Sam is a strong supporter of Cancer Council Australia. He makes a
monthly donation of $10 to the organisation. In addition, he purchased 20
raffle tickets which cost him $2 each. The raffle prize was the latest model
BMW car which was Sam’s dream to own. Cancer Council Australia is a
registered DGR.
Sam would be entitled to a deduction for the $10 monthly donation to
Cancer Council Australia under Div 30 of the ITAA 1997 as it is a donation

to a DGR. However, Sam would not be entitled to a deduction for the
purchase of the raffle tickets ($40) as it is not a “true” gift. Sam has
received a material advantage in return for the $40, being his entry into
the raffle competition and the opportunity to win the BMW car. Further,
the payment is not “voluntary” as it is in effect a payment for the right to
enter a competition.

Whether or not the taxpayer has received a material advantage from the gift
or donation is a question of fact, and the Commissioner provides a number of
examples in Ruling TR 2005/13 on this issue. For example, where the taxpayer
receives items such as chocolates, calendars, pens or mugs in return for a
gift or donation, the Commissioner considers it likely that the taxpayer has
received a material advantage in return for the gift or donation as these are
utility items which benefit the taxpayer. On the other hand, where the taxpayer
receives token items, such as a lapel badge, bumper sticker, red nose or
daffodils, the items are not considered to provide the taxpayer with a material
advantage as they are not utility items and primarily serve as promotional or
advertising material for the recipient. Public recognition of a gift or donation
(eg, on a telethon or in a publication) generally does not constitute a material
advantage. However, public recognition that is used in the donor’s advertising
or marketing may constitute a material advantage.
Limitations on deductions for gifts or donations

[13.140] A taxpayer’s deduction for a gift or donation may be limited or
disallowed in certain circumstances.
Under s 26-55(1) of the ITAA 1997, a taxpayer is not entitled to a deduction for
a gift or contribution under Div 30 if the deduction would result in the taxpayer
incurring or increasing a tax loss for the year.
Example 13.18: Charitable donations and losses

Jasper has assessable income of $100,000 and deductions of $120,000.
His deductions of $120,000 include donations of $30,000, which satisfy
the requirements in Div 30 of the ITAA 1997.
Jasper is only entitled to a deduction of $10,000 in respect of his donations,
which would result in his taxable income for the year being nil.
Jasper is not entitled to a deduction for the remaining $20,000 of donations
under Div 30 as that would result in him incurring a loss in the current
year: s 26-55(1). However, s 26-55 does not limit deductions for gifts or
donations that satisfy the general deduction rule in s 8-1 and Jasper may
be able to deduct the remaining $20,000 of donations under s 8-1 if the
requirements of that provision are satisfied (see [13.160]).

In addition, an anti-avoidance rule in s 78A of the Income Tax Assessment Act

1936 (Cth) does not permit a deduction for gifts or donations under Div 30 in
certain circumstances. A gift or deduction may not be deductible, where:
• the amount or value of the benefit derived by the DGR as a consequence
of the gift is, or will be, or may reasonably be expected to be, diminished
subsequent to the receipt of the gift: s 78A(2)(a);
• another fund, authority or institution, other than the recipient DGR
makes, or becomes liable to make, or may reasonably be expected to
make a payment, or transfer property to any person or incur any other
detriment, disadvantage, liability or obligation: s 78A(2)(b);
• the giver or the giver’s associate obtains, or will obtain, or may
reasonably be expected to obtain any benefit, advantage, right or
privilege apart from the benefit of a tax saving associated with the gift
deduction: s 78A(2)(c); or
• the recipient DGR or another fund, authority or institution acquires
property, directly or indirectly, from the giver or the giver’s associate:
s 78A(2)(d).
Under s 78A(3), a donation of property may not be deductible, where the donor
retains the right to use the donated property. In essence, s 78A addresses
situations, where the gift or donation is not in fact a “true” gift or donation.
Political contributions and gifts

[13.150] Section 26-22 denies business taxpayers a deduction for political gifts
or donations. A political gift or donation can be a contribution to a registered
political party or an individual who is a candidate in a government election
(federal, state or local) or a current member of government. Individuals can
claim a maximum deduction of $1,500 for political gifts or donations but not if
the gift or donation is made in the course of carrying on a business: ss 30-242
and 30-243. Where an individual makes a political gift or contribution in the
course of carrying on a business, the amount is not deductible under s 26-22.
Deductibility of gifts or donations under s 8-1

[13.160] Where a gift or donation, other than a political gift or donation, is not
deductible under Div 30 of the ITAA 1997, the gift or donation may nonetheless
be deductible under the general deduction provision, s 8-1: see Chapter 12.

The key issue is that the gift or donation must be sufficiently connected to
the production of the taxpayer’s assessable income. The limitation on the
deductibility of political gifts and donations in s 26-22 also applies to deductions
under s 8-1. However, the limitations in s 26-55 and s 78A apply to deductions
for gifts or donations under Div 30 only.
The following examples illustrate when gifts or donations that are not deductible
under Div 30 may be deductible under s 8-1.
Example 13.19: Gift or donation incurred in gaining or producing

assessable income
Lucas runs his own advertising agency. During the month of July, he
agrees to donate a percentage of his fees from any new clients to a DGR
nominated by the client.
The donation to the DGR by Lucas is unlikely to be deductible under
Div 30 as Lucas has received a material advantage in return –that is, the
custom of the new client. However, Lucas is likely to be able to claim

a deduction for the donation under s 8-1 as the donation is incurred in
the course of gaining or producing Lucas’ assessable income, thereby
satisfying the positive limbs of s 8-1. None of the negative limbs of s 8-1
apply to deny a deduction.


assessable income
Robert owns a costume shop. He makes a payment of $20,000 to a cultural
DGR on the basis that it will place a prominent sign at the entrance to
its complex thanking Robert’s Costume Shop for its generous support.
The $20,000 payment is not a gift, as Robert receives a material benefit,
namely advertising for his shop, in return for it. In addition, the payment
would not be deductible because of s 78A(2)(c). However, Robert may
be entitled to a deduction under s 8-1 for the contribution as a business
expense.
Source: Adapted from Example 66 in Ruling TR 2005/13.


assessable income
As part of its “corporate philanthropy” program, a large retailer sponsors

a local symphony orchestra (a DGR). The retailer’s business name is to
be included in the name of all concerts, all advertising and displays at
concerts are to feature the retailer’s logo and name in the dimensions it
specifies, and such advertising and displays are to emphasise the retailer’s
support and commitment to the symphony orchestra. The retailer will
give the orchestra $400,000 for the year. The payment will not be a gift.
The retailer receives material benefits from the advertising. However, the
retailer may be entitled to a deduction under s 8-1 for the payment as a
business expense.

In Ruling TR 1999/10, the Commissioner suggests that donations of trophies,

books and sporting equipment or gifts such as flowers and cards for birthdays
and other occasions by a parliamentarian to their constituents may be deductible
under s 8-1, even though the recipients are not DGRs. In Determination TD
2016/14, the Commissioner suggests that gifts to former or current clients may
be deductible under s 8-1 if the gift is made for the purpose of producing future
assessable income.
Prior year losses
[13.180] A taxpayer incurs a tax loss in an income year, where the taxpayer’s
deductions exceed his or her assessable income. As a result, the taxpayer
does not pay any income tax in that income year. In addition, the taxpayer is
entitled to carry forward the loss and utilise it as a deduction against assessable
income in subsequent income years under Div 36 of the ITAA 1997. Unutilised
losses can be carried forward indefinitely until death in the case of an individual
taxpayer or for as long as the loss recoupment tests (see [13.190]) are satisfied
in the case of a corporate taxpayer. Note that these rules are in relation to
a taxpayer’s non-capital losses, whereas the application of prior year capital
losses is governed by the capital gains provisions discussed in Chapter 11.
The amount of a taxpayer’s tax loss in a particular income tax year is calculated
by reference to s 36-10 as follows:
Deductions (excluding prior year tax losses) − Assessable income − Net exempt income
where
Net exempt income = Exempt income − Losses or outgoings incurred in producing exempt income − Any foreign tax paid
Example 13.22: Current year loss amount

Ambrose determined that his assessable income for Year 1 was $100,000,
while his total deductions for the year were $150,000. Ambrose also had
$20,000 of exempt income in that year.
Ambrose has incurred a tax loss of $30,000 for the income year ($150,000
− $100,000 − $20,000). He is entitled to carry forward the tax loss of
$30,000 and utilise it as a deduction against future assessable income.

The relevant provisions regarding the deductibility of prior year losses are
ss 36-15 (for entities other than corporate entities, ie, individuals, partnerships
and trusts) and 36-17 (for companies). The sections provide that the taxpayer
is entitled to a deduction against assessable income for prior year losses.
However, where the taxpayer has any exempt income, any prior year losses
must be applied against the taxpayer’s exempt income first and any remaining
amount then applied to the taxpayer’s assessable income. Where the taxpayer
has losses from more than one year, the losses are deducted in the order
in which the taxpayer incurred them, that is, on a first- in-
first-
out basis:
ss 36-15(5) and 36-17(7).
Example 13.23: Losses in consecutive years
Following on from Example 13.22, Ambrose has carried-forward losses
of $30,000 from Year 1. In Year 2, Ambrose again makes a tax loss of
$30,000.
Ambrose does not have any excess assessable income in Year 2 and
therefore he cannot claim a deduction for the prior year loss. His Year 2
loss is added to the Year 1 loss and carried forward for deduction against
future assessable income.

Example 13.24: Utilisation of prior year losses

Following on from Examples 13.22 and 13.23, Ambrose has carried-
forward losses of $30,000 from Year 1 and $30,000 from Year 2. In Year 3,
Ambrose has assessable income of $200,000, exempt income of $10,000
and deductions of $160,000.
In working out his tax liability for Year 3, Ambrose must first deduct his
carried-forward losses of $60,000 against his exempt income (if any). In
this case, Ambrose has exempt income of $10,000, which leaves him with
carried-forward losses of $50,000.
The $50,000 of carried-forward losses is then deducted against the excess
of Ambrose’s assessable income over his deductions, which in this case
is $40,000, and leaves Ambrose with carried-forward losses of $10,000,
which can be applied against his future assessable income.
Note that the losses are assumed to be utilised on a first-in-first-out basis

and therefore the remaining $10,000 carried-forward loss is assumed to
have been incurred in Year 2.

Corporate taxpayers
[13.190] The key difference between s 36- 15 of the ITAA 1997 for non-
corporate entities and s 36-17 for companies is that companies can choose
how much of their carried-forward losses they want to apply against their
current year assessable income after applying the losses against any exempt
income. Individuals, on the other hand, are not entitled to choose the amount
of a prior year loss that they wish to deduct and instead must apply as much of
the loss as is available to reduce their taxable income.
Companies can choose how much of their carried-forward losses to deduct

in the current year due to the operation of the imputation system, which is
discussed in Chapter 21. In some cases, a company may want to pay tax in
order to receive a credit to its franking account so that it can distribute franking
credits to shareholders upon payment of a dividend.
Example 13.25: Prior year losses –company

Assume that in Examples 13.22, 13.23 and 13.24 the taxpayer was not
Ambrose but Company R.
In working out its tax liability for Year 3, Company R must still deduct its
carried-forward losses of $60,000 against its exempt income first. In this
case, Company R has exempt income of $10,000, which leaves it with
carried-forward losses of $50,000.
Instead of deducting $40,000 of carried-forward losses against its excess
of assessable income over deductions of $40,000 in the current year,
Company R can choose to deduct any amount (or none) of its carried-
forward losses in the current year.
For example, if Company R chose to deduct $10,000 of prior year losses,
it would have taxable income of $30,000 in Year 3 on which it must pay
tax and $40,000 of losses to be carried forward and utilised in future
income years.

Limitations on losses
[13.200] All taxpayers are entitled to carry forward prior year losses indefinitely
for use against future assessable income. However, a taxpayer’s entitlement to
utilise prior year losses in future years may be restricted by the following rules
in relation to:
• companies: the continuity of ownership and same or similar business
loss recoupment tests (discussed in Chapter 21); and
• individuals: the non-commercial losses rules in Div 35 of the ITAA 1997
(discussed in Chapter 23).
Other specific deduction provisions

[13.210] There are many specific deduction provisions in Div 25 of the ITAA
1997 and it is beyond the scope of this book to discuss all of them here. As
a specific deduction provision takes precedence over the general deduction
provision (s 8-10), it is necessary to first check whether there is an applicable
specific deduction provision before considering the deductibility of an expense
under s 8-1. The following specific deduction provisions are worth noting but
are not discussed in detail:
• Expenditure incurred in preparing, registering or stamping a lease of
property or an assignment or surrender of a lease of property, where
the property is used for an income-producing purpose: s 25-20.
• Any expenses incurred by a taxpayer in borrowing money are
deductible, where the loan amount is used for an income-producing
purpose: s 25-25. This provision captures borrowing costs such as
loan establishment fees, valuation fees or loan guarantee insurance
which would not be deductible under s 8-1 as they constitute capital
expenses. The expenses are generally deductible over the term of the
loan or five years. Interest expenses, which are deductible under s 8-1,
are not considered borrowing expenses.
• A loss from a profit-making undertaking or plan is deductible under
s 25-40 if any profit from that plan would have been assessable under
s 15-15. However, this provision does not apply to property acquired
on or after 20 September 1985.
• A deduction is available for a loss of money caused by theft, stealing,
embezzlement, larceny, defalcation or misappropriation by the
taxpayer’s employee or agent (but not an individual employed solely
for private purposes) where the money was included in the taxpayer’s
assessable income in the current year or an earlier income year:
s 25-45. The deduction is available in the year when the taxpayer
discovers the loss. Any amount received by the taxpayer in relation
to the loss may be included in the taxpayer’s assessable income
under subdiv 20-A. A deduction is also available, where a balancing

adjustment event (eg, a disposal) happens to a depreciating asset and
the loss relates to an amount that was included in the termination
value of the asset: s 25-47.
• Payments of a pension, gratuity or retiring allowance to an employee,
former employee or dependant of an employee or former employee
are deductible under s 25-50, where the payments are made in good
faith in relation to the past services provided by the employee or
former employee in relation to the taxpayer’s business. However, the
payments are only deductible under s 25-50 if they are not deductible
under another provision (eg, s 8-1): s 25-50(3).
Questions
[13.220]
13.1 Beatrice owns a lavender farm in regional Victoria. She is concerned
about “dodgy” tax advisers and so she uses a tax adviser in the
Melbourne CBD who is highly recommended and registered with the

Tax Practitioners Board. She recently received an invoice for $3,300
from her tax adviser. The invoice related to assistance with her current
year income tax return ($1,100) and upcoming sale of her lavender
farm ($2,200). Beatrice was a little late in paying her tax liability last year
and had to pay a general interest charge of $500. She also incurred $70
in travelling expenses to see her tax adviser.
Advise Beatrice as to the tax deductibility of the abovementioned
expenses.
13.2 Ronald owns a cronut shop. He undertakes the following activities:
(a) Repainting the ceiling which was turning yellow due to the baking
in the shop.
(b) Redoing the floor of the shop with tiles. The floor needed to be
redone as it was timber and had been so well used that it was very
slippery. Ronald decided to use tiles this time so the floor could
have a non-slip surface.
(c) Repainting the sales counter to make it more appealing to
customers. There was nothing wrong with the existing counter,
but Ronald felt that the new colour would be more attractive.
(d) Replastering and repainting a wall in the kitchen. The wall required
work when Ronald bought the shop, but as it was in the kitchen
and could not be seen by customers, Ronald did not bother getting
the work done until now.
Advise Ronald as to his income tax consequences in relation to
the above information.

13.3 Penelope is a surgeon at the local hospital. However, the long hours
have been very draining, and she has decided to take a leave of absence
from the hospital and pursue her interest in blending coffee beans to
find the perfect taste. She has incurred the following expenses:
(a) payment of $5,000 to the Australian Society of Plastic Surgeons
(Penelope has decided to maintain her membership during her
leave of absence in case she decides to go back to work as a
surgeon);
(b) donation of $500 to Médecins Sans Frontières (a registered
DGR); and
(c) donation of $1,000 to her local neighbourhood community house
(a registered DGR). All donors are permitted to book the function
room in the house for free up to three times per year. The normal
booking fee would be $250.
Advise Penelope as to her income tax consequences arising out of
the above information.
13.4 Chantal has provided you with the following information:

Year 1:
Assessable income = $100,000; Deductions = $500,000
Year 2:
Assessable income = $500,000; Exempt income = $100,000;
Deductions = $300,000
Year 3:
Assessable income = $100,000; Exempt income = $200,000;
Deductions = $100,000
Advise Chantal as to her taxable income/loss each year. Would your
advice be any different if the taxpayer was Chantal Pty Ltd?
13.5 Big Shoes Pty Ltd sells shoes exclusively online. Customers are invoiced
for the shoes when they are shipped and are only required to pay for
the shoes once they have been received and deemed satisfactory.
Big Shoes includes the invoice amount in its assessable income
when the invoice is issued. As of 30 June, Big Shoes determined that
it had $10,000 in unpaid invoices. Its records indicated that 70% of
the invoices related to shoes sold within the last month, which was
considered acceptable. However, of the remaining $3,000, $1,000
related to invoices which were more than three months overdue. In
accordance with its customary practice, Big Shoes wrote off the $1,000
of outstanding invoices. Its standard practice is to issue payment
reminders before writing off the debt and turning it over to a debt
collector. Big Shoes also created a provision for bad debts of $2,000 at
this time.
Advise Big Shoes as to what amount (if any) it can deduct in relation to
the unpaid invoices.
13.6 Jeremy is a personal trainer. He works at a local gym providing personal
training services to members of the gym. Jeremy works at the gym
until 3 pm each day. He then takes the train home. He has to be home
by 4 pm as he trains clients at his home gym from 4 pm to 7 pm.
Advise Jeremy as to the tax deductibility of his train fare. Would your
answer be any different if Jeremy took the train to another gym, where
he trained clients from 4 pm to 7 pm?
14
Capital allowances
Key points.................................................................................................... [14.00]
Introduction................................................................................................ [14.10]
Depreciation deductions............................................................................ [14.20]
Depreciating asset................................................................................ [14.30]
Composite items...................................................................................... [14.35]
Claiming a deduction........................................................................... [14.40]
Held .......................................................................................................... [14.50]
Decline in value........................................................................................ [14.70]
Taxable purpose..................................................................................... [14.100]
Balancing adjustments....................................................................... [14.110]
Depreciating asset used for non-taxable purpose............................... [14.115]
Interaction with capital gains provisions.............................................. [14.118]
Roll-over relief........................................................................................ [14.120]

Cars..................................................................................................... [14.125]
Pooling of assets................................................................................ [14.130]
Low-value pool....................................................................................... [14.140]
Software development pool.................................................................. [14.160]
Small business entity concessions................................................... [14.165]
Capital works deductions........................................................................ [14.170]
Black hole expenses................................................................................. [14.180]
Project pools...................................................................................... [14.190]
Business-related costs....................................................................... [14.200]
Start-up expenses.................................................................................. [14.215]
Questions................................................................................................... [14.220]

Key points
[14.00]
• Expenses that are not immediately deductible under the general
deduction provision or a specific deduction provision because they are
capital or capital in nature may be deductible over a number of years
under the capital allowances regime.
• The cost of acquiring a depreciating asset used for income-producing
purposes is one of the main categories of capital expenditure which is
deductible under the capital allowances regime: Div 40 of the Income
Tax Assessment Act 1997 (Cth) (ITAA 1997).
• The holder of a depreciating asset used for income-producing purposes
is entitled to a deduction in an income year for the decline in value of
the depreciating asset for that year.
• The decline in value of a depreciating asset is calculated in accordance
with either the diminishing value method or the prime cost method.
• The disposal of a depreciating asset may give rise to an assessable
income or deduction amount.
• Taxpayers may choose to calculate the depreciation deduction for
certain depreciating assets on a pooled basis.
• Capital expenses incurred in constructing a building used for income-
producing purposes may be deductible under the capital works
provisions in Div 43 of the ITAA 1997.
• Business taxpayers may be entitled to deduct certain capital expenses
which are not otherwise taken into account under the income tax
legislation over a period of five years under s 40-880 of the ITAA 1997.
• Small business taxpayers may be entitled to accelerated deductions in

certain situations.
Introduction
[14.10] As discussed in Chapters 12 and 13, most expenses are not
immediately deductible under s 8- 1 of the Income Tax Assessment Act
1997 (Cth) (ITAA 1997) or a specific deduction provision, such as s 25-10 for
repairs, where the expense is a capital expense. However, taxpayers may still
be entitled to a deduction for capital expenses under the capital allowances
regime. Essentially, the capital allowances regime provides taxpayers with a
deduction for the expense over the period of time that the expense is expected
to benefit the taxpayer. This approach aligns the timing of the deductions with
the corresponding income expected to be generated by the expense.
Note that, in the 2020 Federal Budget, it was announced that businesses with
aggregated annual turnover of less than $5 billion will be able to deduct the
full cost of eligible assets acquired from 7:30 pm AEDT on 6 October 2020
Depreciation deductions
[14.20] One of the most common categories of capital expenditure that is
effectively deductible for tax purposes is capital expenditure which relates
to a depreciating asset used for income-producing purposes. Division 40 of
the ITAA 1997 provides taxpayers with a deduction over a period of years for
capital expenses related to such depreciating assets (eg, acquisition cost). The
deduction is only available for the time the taxpayer held the depreciating asset
and to the extent that the asset was used for the purpose of gaining or producing
assessable income. The legislation does not use the term “depreciation” but
that is essentially what Div 40 addresses by providing a deduction for the
decline in value of the asset over its estimated useful life.
The general depreciation rules do not apply in the following circumstances:

• The asset is an eligible work-related item for the purposes of s 58X
of the Fringe Benefits Tax Assessment Act 1986 (Cth) (FBTAA) and
is provided as an expense payment fringe benefit or property fringe
benefit: s 40-45(1). The measure was introduced as it was considered
inappropriate that employees could claim depreciation deductions for
such assets, while employers could claim a deduction in respect of the
provision of the fringe benefit and, under s 58X, avoid paying fringe
benefits tax. Following the amendment, employees are not entitled to
claim depreciation deductions in relation to such items as employees
have effectively not borne the cost of the asset where it is provided as
a fringe benefit.
• Expenditure on capital works (ie, on buildings): s 40- 45(2). Capital

works expenditure is deductible under Div 43: see [14.170].
• Expenditure on assets related to investments in Australian films: s 40-
45(5). Such expenditure is generally dealt with under Divs 10BA and
10B of Pt III of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936).
• Expenditure which is deductible under another subdivision, such as
expenditure on primary production assets (subdiv 40-F); expenditure of
primary producers or other landlords (subdiv 40-G); capital expenditure
for the establishment of trees in carbon sink forests (subdiv 40- J)
and expenditure allocated to a software development pool (subdiv
40-E): s  40-50.
• Expenditure on a car where the deduction for car expenses has been
calculated in accordance with the cents per kilometre method (see
Chapter 12) in that year: s 40-55.
• Second-hand depreciating assets used or installed in residential rental
premises: s 40-27. Deduction is not available for the decline in value
of such depreciating assets unless the asset is used in carrying on a
14: Capital allowances [14.35] 503
business or, the taxpayer is a corporate tax entity, superannuation

fund that is not a self-managed super fund, managed investment trust,
public unit trust, or, a unit trust or partnership if each member of the
trust or partnership is one of these entities.
Note that “small business entities” can choose not to apply the general
depreciation rules and use the simpler depreciation rules in subdiv 328-D (see
[14.165]) instead.
Depreciating asset
[14.30] The first key issue is to determine whether the expense relates to a
depreciating asset. “Depreciating asset” is defined in s 40-30(1) of the ITAA
1997 as an asset which has a limited effective life (ie, limited usefulness) and
can reasonably be expected to decline in value over the time that it is used.
Common examples of depreciating assets include computers, furniture, cars,
machinery, telephones, etc.
Land is specifically excluded from the definition of “depreciating asset” as it is

generally not expected to decline in value. Intangible assets are also excluded
from being depreciating assets unless they are specifically listed in s 40-30(2).
Examples of intangible assets that are treated as depreciating assets include
mining, quarrying or prospecting rights or information, items of intellectual
property (copyright, patents and registered designs) and in-house software.
Buildings are effectively treated as not being depreciating assets as expenditure
relating to buildings is considered capital works and is dealt with under Div
43: s 40-45(2).
Note that:
• the trading stock rules (discussed in Chapter 17) take precedence over
the depreciating asset rules as items of trading stock are excluded from
the definition of “depreciating asset”: s 40-30(1); and
• the depreciating asset rules take precedence over the capital gains tax
(CGT) rules (discussed in Chapter 11) as s 118-24 states that any capital
gains or losses on depreciating assets are disregarded.
Composite items
[14.35] Where a depreciating asset is made up of a number of individual
items, it may be necessary to determine whether each component is a separate
depreciating asset or whether the item as a whole is the depreciating asset.
This is a question of fact and degree which can only be determined in light of
all of the circumstances of the particular case: s 40-30(4). In Draft Ruling TR
2017/D1, the Commissioner suggests, based on case law, that the following
principles should be taken into account in determining whether a composite

item is a single depreciating asset or more than one depreciating asset:
• identifiable function –the depreciating asset will tend to be the item
that performs a separate identifiable function, having regard to the
purpose or function it serves in its business context;
• use –a depreciating asset will tend to be an item that performs a
discrete function. However, the item need not be self-contained or able
to be used on a stand-alone basis;
• degree of integration –the depreciating asset will tend to be the
composite item where there is a high degree of physical integration of
the components;
• effect of attachment –the item, when attached to another asset having
its own independent function, varies the performance of that asset;
• system –a depreciating asset will tend to be the multiple components
that are purchased as a system to function together as a whole and
which are necessarily connected in their operation.
For example, the motherboard in a laptop computer will not be a separate
depreciating asset as it is not separately identifiable and has no independent
use. The monitor or screen of a laptop is also not a separate depreciating asset.
Although it can be separately identified, it has no independent use. A printer
will be a separate depreciating asset as it is separately identifiable and has an
independent use.
As mentioned earlier, buildings are effectively treated as not being depreciating

assets since capital expenditure in relation to buildings is deducted under
Div 43, not Div 40. However, it may be necessary in some cases to identify
whether the expenditure relates to a separate depreciating asset (which
is deductible under Div 40) or the building itself (which is deductible under
Div 43). Again, the question is one of fact and degree which will be determined
in accordance with the individual circumstances of a case. In Rulings TR 2007/9
and TR 2004/16, the Commissioner suggests the following factors as being
relevant in making that determination:
• whether the item appears visually to retain a separate identity;
• the degree of permanence with which it has been attached;
• the incompleteness of the structure without it; and
• the extent to which it was intended to be permanent or whether it was
likely to be replaced within a relatively short period.
Example 14.1: Separate depreciating assets
A retail camping equipment shop specialising in speleological equipment
(ie, equipment used in cave exploration) has a fibreglass facade attached
to its shopfront. The facade was designed and constructed so that in
colour, texture and shape the doorway has the appearance of a cave
entrance which customers walk through to enter the shop. The interior
of the shop is decorated with various items to continue the cave theme.
The fibreglass facade does not form part of the premises. The facade has
a separate visual identity and is not necessary to complete the premises.
These factors outweigh considerations of the degree of permanence with
which the facade is attached and any intention that it remain in place for
a considerable period of time.
The sole purpose of the facade is to create a cave-like atmosphere or
ambience that is intended to attract caving equipment customers. Given
the nature of the equipment in which the business specialises, the
presentation of the cave-like atmosphere is a definable element in the
service the business provides and for which its customers are prepared
to pay. The facade’s function is not as part of the premises and is so
related to the business to warrant it being a separate depreciating asset.
The shopfront to which the fibreglass facade is attached merely forms
part of the premises and is not a depreciating asset.

Example 14.2: Separate depreciating assets
Liam owns an investment property which he rents out to students. He
recently spent $5,000 installing new kitchen cupboards.
Kitchen cupboards form part of the premises and therefore are part of the
setting of Liam’s rental income-producing activities. Kitchen cupboards
form part of the premises as they are fixed to the premises, intended to
remain in place indefinitely and are necessary to complete the premises.
Any separate visual identity is outweighed by the other factors. Since
kitchen cupboards form part of the premises, they are not depreciating
assets.
Source: Adapted
from Example 1 in Ruling TR 2004/16.
Claiming a deduction
[14.40] The main provision that provides taxpayers with a deduction in relation
to depreciating assets is s 40-25 of the ITAA 1997. According to s 40-25(1), the
amount of the deduction is equal to the decline in value for an income year of
a depreciating asset that is held by the taxpayer any time during the year. The
amount of the deduction is reduced for any use of the asset for a non-taxable
purpose: s 40-25(2).
Where the cost of the depreciating asset is less than $300 and the asset is
used predominantly in gaining or producing assessable income that is not
income from business (eg, an asset used by an employee for work purposes
or an asset used to gain or produce income from property), the cost of the
depreciating asset is immediately deductible under s 40- 80(2). Business
assets are not included in this exception but may be subject to pooling or an
immediate deduction in the case of small businesses: see [14.130] and [14.165]
respectively. An immediate deduction is also available for the cost of assets
used for exploration or prospecting for minerals in certain circumstances:
s 40-80(1).
The immediate deduction is not available, where:

• the asset is part of a set and the taxpayer started to hold the set in that
income year and the set costs more than $300: s 40-80(2)(c); or
• the total cost of the asset and any other identical or substantially
identical assets that the taxpayer starts to hold in that income year
exceeds $300: s 40-80(2)(d).
Example 14.3: Depreciating assets costing less than $300

Kieran purchased a table for an investment property which he rents out to
students. The table cost $200.
The cost of the table is immediately deductible to Kieran as it cost less
than $300 and is used to produce assessable income which is not business
income (ie, rental income).

In order to claim a deduction under s 40-25, it is necessary to understand when

a taxpayer has “held” a depreciating asset, the “decline in value” of the asset
and the “taxable purpose” of the asset. We will now consider each of these
elements in detail.
Held
[14.50] Under s 40-25 of the ITAA 1997, it is the holder of an asset who is
entitled to a deduction for the decline in value of a depreciating asset. The table
in s 40-40 outlines who will be the holder of an asset in specified circumstances.
Generally, the holder of an asset is its legal owner.
However, in certain circumstances, it may be the economic owner of an asset,

and not the legal owner, who is the holder of the asset and therefore entitled to
the depreciation deductions. For example, in a hire-purchase arrangement, it is
the lessee who is entitled to depreciation deductions as the economic owner of
the asset, and not the lessor, who is the legal owner of the asset. Broadly, the
economic owner of an asset is the person who bears all the risks and benefits
associated with the asset.
Example 14.4: Holder of a depreciating asset
Kieran purchased an air conditioner for his rental property which is rented
out to students. The decline in value of the air conditioner for the year was
$1,000.
Kieran is entitled to a deduction of $1,000 for the depreciation of the air
conditioner as it is used for income-producing purposes. Although the
asset is being used by the students, Kieran is the holder of the asset as he
is the legal and economic owner of the asset. He continues to bear all of
the risks and benefits associated with the asset.

Example 14.5: Holder of a depreciating asset
Big Accounting Pty Ltd acquires a car under a hire-purchase agreement
from Big Cars Pty Ltd. Under the terms of the agreement, Big Accounting
is required to pay monthly instalments for a period of three years at the
end of which legal ownership will be transferred to Big Accounting. During
the three years, Big Cars maintains legal ownership of the cars. However,
the costs and risks of ownership are borne by Big Accounting during this
period. The decline in value of the car is $3,000 per year.
Big Accounting is entitled to a deduction of $3,000 in respect of the

depreciation of the car. Although Big Accounting is not the legal owner of
the car, it bears all of the risks of ownership and is the economic owner of
the car. As such, it is the “holder” of the car under s 40-40.

[14.60] Jointly held depreciating assets. Section 40-35 of the ITAA 1997
ensures that a taxpayer is still entitled to a deduction for the decline in value of
a depreciating asset where the asset is held by more than one person. In this
situation, each person is entitled to a deduction for the decline in value of his
or her interest in the asset.
Example 14.6: Jointly held depreciating assets

Kieran and Rowan purchased a computer together for $5,000 in equal
proportions. They both use the computer for their respective income-
producing purposes only (ie, no private use). The decline in value of the
computer this year was $1,000.
Kieran and Rowan would each be entitled to a deduction of $500 in relation

to the decline in value of the computer as each has a 50% interest in the
computer, and each has used his interest in the computer for income-
producing purposes only.

However, in the case of depreciating assets held by partnerships, the

depreciating assets are deemed to be held by the partnership and not the
individual partners: s 40-40. Therefore, the partnership includes depreciation
deductions in calculating the partnership’s net income for the year. This is
contrary to the rules regarding CGT assets, where the partner, and not the
partnership, reports the CGT consequences in relation to an asset.
Decline in value
[14.70] Broadly, the decline in value of a depreciating asset is worked out by
apportioning the cost of the asset over the number of years that the asset is
expected to be of use.
The decline in value of a depreciating asset is calculated from the start time,
which is the time the asset is first used or is installed ready for use for any
purpose: s 40-60 of the ITAA 1997. Where the asset is acquired for use in a
business that has not yet commenced, the asset does not start to decline in
value until the business commences: Determination TD 2007/5.
Taxpayers have the option of calculating the decline in value of a particular

depreciating asset using either the diminishing value method or the prime
cost method: s 40-65. The choice of method is made on an asset-by-asset
basis and taxpayers can choose a different method for each of their assets.
However, once the choice of method is made, it cannot be changed: Note
1 to s 40-65; s 40-130. The taxpayer can change the method if the asset is
replaced (ie, a replacement asset does not have to use the same method as the
original asset). The taxpayer does not have a choice of method in the following
circumstances:
• Assets acquired from an associate: s 40- 65(2). The definition of
“associate” is found in s 318 of the ITAA 1936 and is discussed at [7.55].
In this situation, the taxpayer must use the same method as was used
by the associate. Section 40-140 specifies how the taxpayer is to obtain
the relevant information from the associate. See Example 14.9.
• The holder of the asset has changed but the user is the same or an
associate of the former user: s 40-65(3). The taxpayer is required to
use the same method as the former holder. Where the taxpayer does
not know or cannot readily find out the former holder’s method, the
diminishing value method must be used.
• Assets allocated to a low-value pool (see [14.140]): s 40-65(5). The

method is specified by subdiv 40-E.
• Research and development expenditure deductible under s 73BA of
the ITAA 1936: s 40-65(6). The taxpayer is required to use the same
method as was used under that section.
• The asset is in-house software, an item of intellectual property (except
copyright in a film), a spectrum licence, a datacasting transmitter
licence or a telecommunications site access right: ss 40-70(2) and 40-
72(2). The prime cost method must be used for these assets.
The diminishing value method (known as the “reducing-balance method” in
accounting) provides the taxpayer with greater deductions in the early years
of the asset’s life and is considered more appropriate for assets which wear
out more rapidly in the early years of use. The prime cost method (known
as the “straight-line method” in accounting) provides the taxpayer with equal
depreciation deductions each year (where there are no second element costs
incurred after acquisition) and is more appropriate for assets which wear out
evenly over time.
[14.80] The diminishing value method is set out in ss 40-70 and 40-72 of the
ITAA 1997 as follows:
Assets held pre-10 May 2006:
Days held 150%

Base value × ×
365 Asset’s effective life
Assets first held on or after 10 May 2006:
Days held 200%

Base value × ×

The prime cost method is set out in s 40-75 of the ITAA 1997 as follows:
Days held 100%

Asset value × ×

The percentage in each of the formulas represents the diminishing value factor.
The higher factor does not increase the overall depreciation deductions for
the asset or change the effective life of the asset. The higher factor provides
for greater deductions in the early years of an asset. The 200% rate was
introduced in 2006 as it was thought to more closely approximate the actual
decline in the economic value of assets generally due to rapidly advancing
technology.
[14.90] The elements in the above formulae are broadly explained as follows:
• The base value of an asset is its “opening adjustable value” plus any
second element costs incurred in the current year: s 40-70(1) of the
ITAA 1997. The “opening adjustable value” is the cost of the asset less
the decline in value of the asset in previous years: s 40-85. In the first
year that the asset is held, its base value will be its “cost”. Note that the
depreciation deduction for a particular year cannot exceed the asset’s
base value in that year: ss 40-70(3) and 40-72(3).
• The cost of a depreciating asset is outlined in detailed rules in subdiv
40-C. It is generally equal to the amount paid to acquire the asset (the
“first element” of cost: s 40-180) which can also include acquisition
costs such as customs duty, delivery and installation costs: Ruling
IT 2197. Any costs incurred after the acquisition of the asset which
contribute to bringing the asset to its present condition and location
(the “second element” of cost: s 40-190) can also be included in the
asset’s cost.
Note that:
– The cost of an asset is not limited to amounts paid by the taxpayer
and can include the value of any non-cash benefits or the amount of
a liability: s 40-185.
– Any expenses that are deductible under another provision of the tax
legislation (eg, repairs that are deductible under s 25-10) cannot be
included in the asset’s cost: s 40-215.
– Goods and Services Tax (GST) is not included in the cost to the
extent that the taxpayer is entitled to “input tax credits” (a refund of

GST paid on the acquisition: see [25.190]): s 27-80.
– Where the asset is acquired from a non-arm’s length party and the
amount paid for the asset exceeds market value, cost is deemed
to be market value: s 40-180(2) Item 8. Whether or not parties are
at arm’s length is a question of fact depending on any connection
between the parties and any other relevant factors: s 995-1. The
terms “arm’s length” and “market value” are discussed at [17.70].
– Where the depreciating asset is a car, the cost of the car for the
purposes of calculating the depreciation deduction is limited to
the amount specified as the “car limit” for the income year when
the taxpayer first started to hold the car: s 40-230. The car limit is
$59,136 for the 2020–2021 income year. See [14.125].
– Where the asset’s effective life is recalculated per s 40-110 (due to
changed circumstances) and the prime cost method is used, the
asset’s “cost” is its opening adjustable value for the change year
plus any second element costs incurred that year: s 40-75(2) and
(3). See Example 14.11.
• The days held are the number of days in the year that the asset is used
or installed ready for use for any purpose: s 40-70(1).
• The effective life is the number of years that the asset is expected to
be of use to any taxpayer for a taxable purpose (ie, it is the “life” of the
asset, not its expected “life” for the particular taxpayer). For example, a
car rental company may trade-in its cars after two years but the useful
life of these cars is five years. The effective life of the car in calculating
the car rental company’s depreciation deductions is five years.
In most cases, the taxpayer has the option of either estimating the effective life
of an asset themselves or using the Commissioner’s determination of effective
life: s 40-95(1). The Commissioner’s determination of effective life is listed
in Ruling TR 2020/3 and Income Tax (Effective Life of Depreciating Assets)
Determination 2015 (as amended by subsequent Amendment Determinations).
The Commissioner provides the effective lives for a large number of assets and
industries. Some examples of the Commissioner’s determination of effective
life of assets are included in the Appendix. Taxpayers who choose to use their
own estimates of effective life may be at greater risk of audits or penalties
if the estimates are found to be unrealistic, while taxpayers who rely on the
Commissioner’s determination of effective life will not be subject to penalties
even if the effective life is later determined to be incorrect or overly-generous.
Taxpayers must determine the effective life of an asset (whether through self-
assessment or using the Commissioner’s estimate) in the income year in which
the asset’s start time occurs: s 40-95(3).
However, taxpayers do not have a choice regarding effective life in the following
situations:
• The asset was acquired from an associate: s 40-95(4). The definition of
“associate” is found in s 318 of the ITAA 1936 and is discussed at [7.55].
The taxpayer’s effective life will depend on the associate’s choice of
method and effective life. Where the associate used the diminishing
value method, the taxpayer must continue to use the same effective
life. Where the associate used the prime cost method, the taxpayer
must use an effective life equal to any period of the asset’s effective life
the associate was using that is yet to elapse at the time the taxpayer
started to hold the asset. See Example 14.9.
• The holder of the asset has changed but the user is the same or an
associate of the former user: s 40-95(5). The taxpayer’s effective life
will depend on the former holder’s choice of method and effective
life. Where the former holder used the diminishing value method, the
taxpayer must continue to use the same effective life. Where the former
holder used the prime cost method, the taxpayer must use an effective
life equal to any period of the asset’s effective life the former holder was
using that is yet to elapse at the time the taxpayer started to hold the
asset: s 40-95(5)(c) and (d). Where the taxpayer is unable to obtain the
relevant information from the holder, the taxpayer cannot self-assess
the effective life and must use the Commissioner’s determination of
effective life: s 40-95(6).
• The asset is an intangible depreciating asset listed in s 40-95(7). The
section specifies the effective life of those assets. Where the intangible
asset is acquired from a former holder of the asset, the effective life of
the asset for the new holder is the number of years remaining in the
effective life specified in s 40-95(7) at the start of the income year in
which the new holder acquires the asset: s 40-75(5). See Example 14.10.
Note that:
• Certain assets have a statutory “capped life” (ie, a maximum effective
life) and taxpayers who use the Commissioner’s determination of
effective life cannot exceed the cap even though the Commissioner
may provide a longer effective life in the determination than the
“capped life”: s 40-102. Taxpayers who self-assess the effective life of
an asset may use a longer effective life than the “capped life”.
• If a taxpayer chooses to self-assess the effective life of an asset, they
must estimate the number of years that the asset is expected to be
of use for any taxpayer for income-producing purposes (ie, it is the
“life” of the asset, not its expected “life” for the taxpayer): s 40-105. In
making this determination, the taxpayer is expected to do so having
regard to the wear and tear they reasonably expect from their expected
circumstances of use and assuming that the asset will be maintained
in reasonably good order and condition. A shorter effective life may
be used where it is estimated that the asset is likely to be scrapped,

sold for no more than scrap value or abandoned at the end of a period:
s 40-105(2).
• A taxpayer is entitled to recalculate the effective life of a depreciating
asset in a later income year if the effective life that the taxpayer has
been using is no longer accurate because of changed circumstances
relating to the nature of the use of the asset: s 40-110(1). There are
also certain circumstances when the taxpayer is required to recalculate
the effective life of an asset: ss 40- 110(2) and (3) (eg, the asset’s
cost is increased by at least 10%). Where the asset’s effective life is
recalculated and the prime cost method is used, the effective life of the
asset for the purposes of working out the decline in value is the number
of years remaining under the new effective life: s 40-75(2) and (3). For
example, if a taxpayer has calculated the decline in value of an asset
for four years using an effective life of 10 years but then recalculates
the effective life to be eight years, the effective life of the asset for the
purposes of calculating the decline in value going forward will be four
years. See Example 14.11.
Example 14.7: Decline in value of laptop computer

Rani purchased a laptop computer for $3,000. The effective life of the
laptop computer is three years. Assume that the computer was purchased
on 1 July of Year 1 (after 10 May 2006) and is used 100% for income-
producing purposes.
Assuming it is not a leap year in each of the three years, the decline in
value of the laptop computer under each method will be as follows:
Prime cost method Diminishing value method

Year Decline Calculation Decline Calculation
in value in value
1 $1,000 $3,000 × 365/ $2,000 $3,000 × 365/365 ×
365 × (100%/3) (200%/3)
• Base value = cost as
this is the first year
asset is held
2 $1,000 $3,000 × 365/ $667 $1,000 × 365/365 ×
365 × (100%/3) (200%/3)
• Base value = opening
adjustable value as
there are no second
element costs incurred
this year
• Opening adjustable
value = Cost − decline
in value in previous
years = $3,000
− $2,000
3 $1,000 $3,000 × 365/ $222 $333 × 365/365 ×
365 × (100%/3) (200%/3)
• Base value = opening
adjustable value as
there are no second
element costs incurred
this year
• Opening adjustable
value = Cost − decline
in value in previous
years = $3,000 −
$2,000 − $667
Total $3,000 $2,889
deductions
The prime cost method provides for equal deductions in each year and the
cost is fully depreciated at the end of the asset’s effective life. The diminishing
value method provides for much higher depreciation deductions in the
early years of the asset’s effective life but tapers off towards the end of
the asset’s effective life. The taxpayer can continue to claim a depreciation
deduction for the asset in accordance with the diminishing value method
until the asset’s cost is fully deducted. If the taxpayer uses a low-value pool
(see [14.140]), the asset can be added to the low-value pool once it has an
opening adjustable value of less than $1,000.

Example 14.8: Calculating the decline in value of a depreciating asset

Kieran purchased a new refrigerator for his rental property on 15 June of
Year 1 for $2,000. The refrigerator was delivered to the premises on 20
July. The effective life of a refrigerator is 12 years. Kieran’s depreciation
deductions in respect of the refrigerator under both methods are as
follows (assume that it is not a leap year):
Kieran is not entitled to any depreciation deductions in the first income
year as the refrigerator is not used or installed ready for use in that
income year.
In the second income year Kieran is entitled to depreciation deductions
from 20 July when the refrigerator was first used or installed ready for
use. Therefore:
Days held = 347
Cost = $2,000
Effective life = 12 years
Diminishing value method:
Days held 200%

Base value × × : s 40 - 72
= $2,000 × (347/365) × (200%/12) = $317
Where:
200% is used because the asset was first used or installed ready for use
after 10 May 2006.
The base value is equal to the cost as this is the first year the asset is held.
Prime cost method:
Days held 100%

Asset’s value × × : s 40 - 75
= $2,000 × (347/365) × (100%/12) = $158
In the third income year the depreciation deduction is calculated as

follows:
= $1,683 × (365/365) × (200%/12) = $281
Where:
Base value = Opening adjustable value = Cost − Decline in value = $2,000 − $317 = $1,683
Prime cost method:

= $2,000 × (365/365) × (100%/12) = $167
Example 14.9: Decline in value of asset acquired from associate

Big Toes and Big Hands are wholly owned by Big Head. On 1 January, Big
Toes acquired a machine from Big Hands for $100,000. The market value
of the machine at the time of transfer was $80,000. Prior to the sale, Big
Hands had been depreciating the machine for a period of five years under
the prime cost method using an effective life of 15 years.
Big Toes and Big Hands are “associates” per s 318 of the ITAA 1997.
As such, Big Toes does not have a choice of method in calculating its
depreciation deductions for the asset: s 40-65(2). It must calculate the
decline in value of the machine using the prime cost method. The effective
life of the machine for Big Toes will be the remaining years of the effective
life used by Big Hands (ie, 10 years): s 40-95(4). Further, the “cost” of the
asset will be limited to its market value under s 40-180(2) Item 8.
Therefore, assuming it is not a leap year, Big Toes’ depreciation deduction
will be calculated as follows:

$80,000 × (181/365) × (100%/10) = $3,967
Example 14.10: Decline in value of intangible asset

On 1 July, Rosheen acquired a standard patent from Linda (the original
holder) for $30,000. Prior to the sale, Linda had held the patent for
five years.
As the relevant asset is an item of intellectual property, Rosheen does not
have a choice of method in calculating the decline in value of the asset.
The decline in value must be calculated using the prime cost method per
ss 40-70(2) and 40-72(2). The effective life of the asset is specified under
s 40-95(7) as 20 years and Rosheen cannot self-assess the effective life of
the patent. As Rosheen is not the original holder of the asset, her effective
life will be the remaining years of the effective life specified in s 40-95(7)
(ie, 15 years): s 40-75(5).
Therefore, assuming it is not a leap year, Rosheen’s depreciation
deduction will be calculated as follows:

$30,000 × (365/365) × (100%/15) = $2,000
Example 14.11: Impact of recalculation of effective life on decline

in value
Big Shoes Pty Ltd acquired a printing machine for $30,000 on 1 July of
the previous year. On 1 July this year, Big Shoes incurred expenses of
$5,000 in upgrading the machine to take advantage of the latest available
technology. The costs qualify as “second element costs”. Last year, Big
Shoes depreciated the machine using the prime cost method and an
effective life of eight years.
As the cost of the asset has increased by more than 10%, Big Shoes is
required to recalculate the effective life of the machine per s 40-110(2).
Big Shoes assesses the new effective life of the machine to be 15 years.
The effective life of the machine for the purposes of the decline in value
calculation going forward will be 14 years per s 40-75(2) and (3).
The cost of the asset will be its opening adjustable value plus any second
element costs incurred this year: s 40-75(2) and (3).
Opening adjustable value = Cost − Decline in value in previous years = $30,000 − ($30,000 ×

365/365 × 100%/8) = $30,000 − $3,750 = $26,250.
Decline in value this year = ($26,250 + $5,000) × 365/365 × 100%/14 = $2,232 (assuming it

is not a leap year).
Taxable purpose
[14.100] Section 40- 25(2) of the ITAA 1997 ensures that a depreciation
deduction can only be claimed in relation to depreciating assets used for a
taxable purpose. Under that section, the depreciation deduction must be
reduced by an appropriate percentage for any decline in value that is attributable
to the use of the asset for non-taxable purposes.
Generally, an asset will be used for a taxable purpose where it is used in the
production of assessable income or in exploration or prospecting, mining site
rehabilitation and environmental protection activities: s 40-25(7).
Example 14.12: Depreciating assets partly used for a taxable purpose

Naresh is a chef. He purchased a mobile phone on 1 July for $3,000.
He estimates that he uses the mobile phone for his own purposes 70%
of the time and for work purposes 30% of the time. The Commissioner
has assessed the effective life of mobile phones as three years. Naresh
uses the Commissioner’s determination of effective life and the prime
cost method to calculate all depreciation deductions. Assume that it is
not a leap year.
365 100%
Decline in value = $ 3, 000 × × = $1, 000
365 3
Naresh must reduce the $1,000 depreciation deduction by 70% as that

is the percentage of the asset’s decline in value which is attributable to
his use of the mobile phone for a non-taxable purpose (ie, not in the
production of his assessable income).
Therefore, Naresh’s deduction for the year in relation to the mobile phone
would be $1,000 − (70% × $1,000) = $300.

Balancing adjustments
[14.110] Under subdiv 40- D of the ITAA 1997, taxpayers must make an
adjustment to their taxable income if there is a balancing adjustment event.

A balancing adjustment event occurs under s 40-295, where:
• the taxpayer stops holding the depreciating asset;
• the taxpayer stops using the depreciating asset or having it installed
ready for use for any purpose and expects never to use it or have it
installed ready for use again;
• the taxpayer has not used the depreciating asset and either stops
having it installed ready for use or decides never to use it; or
• there is a change in the interests or holding of the depreciating asset
and it was a partnership asset before the change or becomes one as a
result of the change.
A balancing adjustment event does not occur simply because the taxpayer
splits or merges a depreciating asset: s 40-295(3). The most common balancing
adjustment event is the disposal of a depreciating asset but there can also be a
balancing adjustment for assets that become redundant. Balancing adjustments
effectively adjust for the over or under depreciation of an asset which has been
calculated using the asset’s estimated effective life.
The balancing adjustment amount is calculated under s 40-285 by comparing

the asset’s “termination value” with its “adjustable value”. Where, broadly:
• Termination value = Amount received by the taxpayer in relation to the
balancing adjustment event or its market value at the time of the event
in the case of redundant assets and non-arm’s length transactions:
s 40-300; and
• Adjustable value = Cost of the asset minus prior year decline in
value minus decline in value for the current year up to the date of the
balancing adjustment event: s 40-85. Note that the cost of the asset
is reduced by its decline in value over the relevant period, not the
depreciation deductions claimed by the taxpayer thus far. Any use
of the asset for non- taxable purposes is taken into account under
s 40-290: see [14.115].
Where:
• Termination value > Adjustable value, the difference is included in the
taxpayer’s assessable income for the year: s 40-285(1); and
• Termination value < Adjustable value, the difference is a deduction for
the taxpayer that year: s 40-285(2).
Example 14.13: Disposal of a depreciating asset
Following on from Example 14.8, assume that Kieran sold the refrigerator
on 30 September Year 3 for $1,500.
Decline in value calculated using the diminishing value method:

Termination value = $1,500 (amount received on disposal)
Adjustable value = $2,000 − $317 − $71 = $1,612
Where:
Depreciation for Year 2 = $317 (as calculated in Example 14.8)
Depreciation from 1 July to 30 September Year 3 = ($2,000 − $317) ×
(92/365) × (200%/12) = $71
Termination value ($1,500) < Adjustable value ($1,612). Therefore,
Kieran is entitled to a deduction of $112 in relation to the disposal of the
refrigerator.
Decline in value calculated using prime cost method:
Adjustable value = $2,000 − $158 − $39 = $1,803
Where:
Depreciation for Year 2 = $158 (as calculated in Example 14.8)
Depreciation for 1 July to 30 September Year 3 = ($2,000 − $158) × (92/

365) × (100%/12) = $39
Termination value ($1,500) < Adjustable value ($1,803). Therefore,
Kieran is entitled to a deduction of $303 in relation to the disposal of the
refrigerator.
In either case, Kieran is entitled to a deduction in relation to the disposal
of the refrigerator. However, the amount of the deduction will depend on
which method Kieran used to calculate his depreciation deductions.

Depreciating asset used for non-taxable purpose

[14.115] Where the depreciation deductions have been reduced because the
taxpayer used the depreciating asset for non-taxable purposes, s 40-290 of
the ITAA 1997 reduces the balancing adjustment amount calculated under
s 40-285. The reduction is calculated as follows:
Sum of reductions
× Balancing adjustment amount
Total decline
Broadly:
• The sum of reductions is the sum of the reductions to depreciation
deductions due to the use of the depreciating asset for non-taxable

purposes; and
• The total decline is the total decline in value of the depreciating asset
since the taxpayer started to hold it.
Example 14.14: Disposal of a depreciating asset partly used for

income-producing purpose
Following on from Example 14.12, assume Naresh bought the mobile
phone on 1 July and sold it on 30 June of the following year for $1,500.
Adjustable value = $3,000 (cost) − $1,000 (depreciation until date of
disposal from Example 14.12) = $2,000
As Termination value ($1,500) < Adjustable value ($2,000), Naresh
is entitled to a deduction of $500 in relation to the disposal of the
mobile phone.
However, as Naresh used the mobile phone only partly for income-
producing purposes, the balancing adjustment amount must be reduced
under s 40-290 as follows:
$700 (the total reduction in depreciation deductions)

× $500 = $350
$1000 (the total decline in values since Naresh started to hold
d the mobile phone)
Therefore, Naresh is entitled to a deduction of $150 on the disposal of the

mobile phone.

Interaction with capital gains provisions

[14.118] In some cases, a balancing adjustment event may also give rise to a
CGT event: see [11.40]. As mentioned earlier, the capital allowances provisions
take precedence over the capital gains provisions and any capital gain or
loss on a depreciating asset is disregarded under s 118-24 of the ITAA 1997.
However, where the asset is only partly used for a taxable purpose, the asset
is only partly accounted for under the capital allowances provisions (as we
have seen, the decline in value deduction and balancing adjustment amount
are reduced for any use of the asset for a non-taxable purpose). In this case,
the capital gains provisions have residual operation in relation to the part of the
asset that is not used for a taxable purpose and CGT event K7 (see [11.150])
may happen to the asset at the time of the balancing adjustment event.
Roll-over  relief
[14.120] Taxpayers may be entitled to roll-over relief in relation to a balancing
adjustment amount in certain circumstances.
Automatic roll-over relief applies where there is a disposal of a depreciating

asset that involves a CGT event and one of the following items applies:
• the asset is disposed to a wholly owned company;
• the asset is disposed by a partnership to a wholly owned company;
• the asset is transferred from a trust to a company under a trust
restructure;
• the disposal occurs because of a marriage or relationship breakdown;  or
• the asset is disposed of to another member of the same wholly
owned group.
In this situation, the relief depends on the relevant event and is specified in
s 40-340(1) of the ITAA 1997.
Taxpayers may choose roll-over relief where the balancing adjustment event
happens under s 40- 295(2) (ie, a change in the holding or interests of a
partnership asset) and the transferor and the transferee choose for roll-over
relief to apply: s 40-340(3). The roll-over relief is that the balancing adjustment
event does not happen and the transferee deducts the decline in value of the
asset using the same method and effective life that the transferor was using:
s 40-345.
Where there is an involuntary disposal of a depreciating asset for one of the

reasons specified in s 40-365(2) (eg, the asset is lost or destroyed) and the
taxpayer has a replacement asset, the taxpayer can choose to reduce some or
all of any amount that is included in the taxpayer’s assessable income (ie, the
balancing adjustment amount) as a result of the balancing adjustment event.
The amount that is not included in the taxpayer’s assessable income must be
applied to reduce the cost of the replacement asset: s 40-365(1).
Cars
[14.125] There are a number of special rules for “cars” which may deny
a deduction for depreciation or limit the amount of the deduction. “Car” is
defined in s 995-1 of the ITAA 1997 as a motor vehicle (except a motor cycle or
similar vehicle) designed to carry a load of less than one tonne and fewer than
nine passengers.
As mentioned earlier, taxpayers cannot claim a deduction for depreciation in

relation to a car where the deductions for car expenses have been calculated
in accordance with the cents per kilometre method (see Chapter 12) in that
year: s 40-55.
Under s 40-230, the cost of a car for the purposes of calculating the decline
in value is limited to the “car limit” for the financial year in which the taxpayer
started to hold the car. The limit does not apply to cars fitted out for transporting
disabled people in wheelchairs: s 40-230(2). The “car limit” is specified by the
Commissioner each year and, for the 2020–2021 income year, the car limit is
$59,136. The car limit is applied after taking into account any GST input tax
credits (see [25.230]) that the taxpayer may be entitled to in relation to the
car: Determination TD 2006/40.
Example 14.15: Calculating the decline in value of a car

Hoong purchased two new cars on 1 January 2021 for $110,000 (including
GST) and $60,000 (including GST) each. He uses the cars entirely for
income-producing purposes. The effective life of a car is eight years.
Hoong is entitled to input tax credits of $5,376 in respect of the acquisition
of each car. As we will see in Chapter 25, the input tax credits for a car are
also limited by the car limit and are therefore equal to $59,136/11.
In the 2020–2021 income year, Hoong would calculate his depreciation
deductions as follows:
Car 1
The cost of the car is reduced by the input tax credits of $5,376 to $104,624.
As this amount exceeds the car limit, the cost of the car is further reduced
to the car limit of $59,136. Hoong’s depreciation deduction in relation to
the car is calculated as follows:
Days held 200%

Base value × × : s 40 - 72
365 8

181 200%
= $59,136 × ×
365 8
= $7,331

Prime cost method:
Days held 100%

Asset’s cost × × : s 40 - 75
365 8

181 100%
= $59,136 × ×
365 8
= $3, 666

Car 2
The cost of the car is reduced by the input tax credits of $5,376 to $54,624.
As this amount does not exceed the car limit, the cost of the car will not
be further reduced under s 40-230. Hoong’s depreciation deduction in
relation to the car is calculated as follows:
Days held 200%

Base value × × : s 40 - 72
365 8

181 200%
= $54, 624 × ×
365 8
= $6,772
Prime cost method:
Days held 100%

Asset’s cost × × : s 40 - 75
365 8

181 100%
= $54, 624 × ×
365 8
= $3,386

Finally, the calculation of the balancing adjustment amount for a car will depend
on the method used for calculating car expenses (see Chapter 12) s 40-285(2)
Note 1 and s 40-370. The termination value of the car is adjusted under s 40-
325 where the cost of the car was limited to the “car limit”.
Pooling of assets
[14.130] Taxpayers have the choice of claiming deductions for the decline in
value of certain assets on a group basis under subdiv 40-E of the ITAA 1997.
The pooling of assets reduces compliance costs for taxpayers as individual
depreciation calculations are not required for each asset. There are two asset
pools in subdiv 40-E which may be utilised by taxpayers:
• low-value pool: see [14.140]; and
• software development pool: see [14.160].
Low-value  pool
[14.140] Under s 40- 425 of the ITAA 1997, taxpayers have the option of
establishing a low-value pool for any “low-cost” or “low-value” assets.
A “low-cost” asset is a depreciating asset (except a horticultural plant) whose

cost at the end of the income year in which the taxpayer started to use it,
or have it installed ready for use, for a taxable purpose is less than $1,000:
s 40-425(2). We have already discussed “cost” at [14.90] and “taxable purpose”
at [14.100].
A “low-value” asset is a depreciating asset (except a horticultural plant) held

by the taxpayer that has been depreciated using the diminishing value method
and has an opening adjustable value of less than $1,000: s 40-425(5). “Opening
adjustable value” is discussed at [14.90].
However, the following assets cannot be added to the low-value pool:

• Assets that qualify for an immediate deduction under s 40-80(2) –that
is assets that cost less than $300 and are used for an income-producing
purpose other than in a business: s 40-425(4).
• Assets that are deductible under subdiv 328-D –that is in respect of
capital allowances for small business entities (see [14.165]): s 40-425(7).
• Assets used in research and development activities which qualify for a
deduction under s 73BA of the ITAA 1936: s 40-425(8).
Note that although taxpayers have the option of using a low-value pool, once
a taxpayer creates a low-value pool (ie, by allocating a low-cost asset to a low-
value pool), all low-cost assets held by the taxpayer in that year and future
years must be added to the pool: s 40-430(1). The taxpayer continues to
have an option as to whether or not to add low-value assets to the pool on an
individual asset basis.
Example 14.16: Allocating assets to a low-value pool

Tanya runs her own bakery in Perth. Assume that it is not a “small
business entity”. Tanya is depreciating her oven and refrigerator using the
diminishing value method due to their substantial cost. She depreciates
all other assets, such as tables and chairs, using the prime cost method as
it is easier. Tanya has also chosen to use a low-value pool.
This year, Tanya acquired a new display rack for $200 and a television for
customers for $700. She has also determined that the opening adjustable
value (ie, the cost less the decline in value in previous years) of the
refrigerator is $1,500 and the oven is $900.
Tanya must add the display rack and television to her low-value pool as
they are low-cost assets. Although the display rack costs less than $300,
it is not immediately deductible as Tanya uses it in her business.
The oven is a low- value asset as it has been depreciated using the
diminishing value method and has an opening adjustable value less than
$1,000. Tanya can choose whether or not to add the oven to the low-
value pool. The refrigerator does not qualify as a low-value asset and
cannot be added to the low-value pool this year, although it may qualify
in future years once its opening adjustable value is less than $1,000.
The other assets must continue to be depreciated in accordance with the
prime cost method and can never be added to the low-value pool as they
will not qualify as low-cost or low-value assets.

[14.145] Taxable purpose. As with the general depreciation provisions,

depreciation deductions are only available in respect of low-value pool assets
to the extent that the assets are used for a taxable purpose. Taxpayers are
required to make a reasonable estimate of the taxable use percentage of the
asset when the asset is allocated to the low-value pool: s 40-435 of the ITAA
1997. The taxable use percentage is the extent to which the asset will be
used for taxable purposes over its remaining effective life. The amount that is
allocated to the low-value pool in relation to an asset is its cost multiplied by
the taxable use percentage.
Example 14.17: Taxable use percentage of low-cost and

low-value  assets
Paul uses a low-value pool for depreciating assets. This year he purchased
a printer for $550. Paul must allocate the printer to the low-value pool as
it is a low-cost asset. The effective life of a printer is three years. Paul
estimates that he will use the printer 50% for income-producing purposes
in the first year, 70% for income-producing purposes in the second year
and 30% for income-producing purposes in the third year. The taxable
use percentage of the printer will be 50% ((50 + 70 + 30)/3). Paul will
allocate $275 to his low-value pool this year in relation to the printer.
Paul has also reviewed all of his assets that are being depreciated using
the diminishing value method. He determined that the opening adjustable
value of two of the assets is less than $1,000. Paul has a choice whether to
allocate the assets to the low-value pool as they are low-value assets. He
decides to allocate one of the assets, a mahogany table, to the low-value
pool. The opening adjustable value of the table is $700. Paul determines
that the remaining effective life of the table is two years. He will use the
table 30% for income-producing purposes in the first year and 100%
for income- producing purposes in the second year. The taxable use
percentage of the table will be 65% ((30 + 100)/2). Paul will allocate $455
(65% × $700) to the low-value pool this year in respect of the table.

Note that the determination of taxable use percentage is done at the time that
the asset is allocated to the low-value pool and the legislation does not allow
for any change to the value of the asset once it is in the pool to take into
account any change of purpose.
Example 14.18: Taxable use percentage of low-cost assets

Kerry owns an investment property in Melbourne. She purchased a clothes
dryer for the property for $990. She maintains a low-value pool and must
allocate the clothes dryer to the low-value pool as it is a low-cost asset.
At the time of allocating the asset to the low-value pool, Kerry estimated
that the dryer would be 100% used for income-producing purposes over
its effective life as the property would be rented out to tenants. Kerry
allocated $990 to the low-value pool in relation to the dryer.
Due to unforeseen circumstances, Kerry was forced to move into the
property the following year and could no longer rent it out to tenants.
Kerry must continue to work out the decline in value of the dryer based
on her original reasonable estimate of the taxable use percentage of
the asset under s 40-435 even though the taxable use percentage has
changed.
Source: Adapted from former ATO ID 2004/940.

[14.150] Decline in value. The decline in value of low-value pool assets is

calculated in accordance with s 40-440(1) of the ITAA 1997 as follows:
• Step 1: Multiply the taxable use percentage cost of any low-cost assets
allocated to the low-value pool in the current year by 18.75%.
• Step 2: Multiply the taxable use percentage of any second element
costs incurred that year relating to low-value assets added to the pool
in that year or an earlier year by 18.75%.
• Step 3: Multiply the closing pool balance for the previous year and the
opening adjustable values of low-value assets added to the pool that
year by 37.5%.
• Step 4: Sum up the amounts in Steps 1, 2 and 3. The result is the
decline in value of the low-value pool.
The closing pool balance for the current income year is the sum of the closing
pool balance for the previous year plus the taxable use percentage of any low-
cost and low-value assets added to the pool in the current year, less the decline
in value of the pool calculated under s 40-440(1): s 40-440(2).
Example 14.19: Decline in value of low-value pool

Nicholas runs his own personal training business. He chooses to use a
low-value pool for qualifying assets. In Year 1, he purchased a table for
$700 and a printer for $600. He estimates that he will use both of these
assets 100% for income-producing purposes over their effective lives.
In Year 1, the decline in value of Nicholas’ low-value pool is 18.75% ×
$1,300 = $244. The full cost of both assets is added to the pool as their
taxable use percentage is 100%.
The closing pool balance is $1,056 (ie, $1,300 − $244).
In Year 2, Nicholas purchases a fancy new phone for the business for
$750. He also determines that the opening adjustable value of a piece
of equipment depreciated using the diminishing value method is $900.
Nicholas estimates that the taxable use percentage of the phone over its
effective life is 90%. He estimates that the taxable use percentage of the
equipment for the remainder of its effective life is 100%.
In Year 2, the decline in value of Nicholas’ low-value pool is:
• Step 1: $750 × 90% × 18.75% = $127
• Step 2: Not applicable.
• Step 3: ($1,056 × 37.5%) + ($900 × 37.5%) = $396 +
$337.50 = $733.50
• Step 4: Decline in value = $127 + $733.50 = $860.50
The closing pool balance in Year 2 is [$1,056 + ($750 × 90%) + $900]
− $860.50 = $1,770.50.

[14.155] Balancing adjustment events. Where a balancing adjustment

event (see [14.110]) happens to an asset in a low-value pool, the taxable use
percentage of the asset’s termination value (see [14.110]) is deducted from the
closing pool balance: s 40-445(1) of the ITAA 1997.
Example 14.20: Disposal of low-value pool asset

Following on from Example 14.19, Nicholas disposed of the printer in
Year 2 for $300. The decline in value of the low-value pool in Year 2 is
calculated as above. However, the closing pool balance in Year 2 will
be $1,470.50 ($1,770.50 − $300) to take into account the disposal of the

printer. The full $300 is deducted from the closing pool balance as the
taxable use percentage of the printer was 100%.

Where the taxable use percentage of the asset’s termination value is greater
than the closing pool balance, the closing pool balance is reduced to zero
and the excess is included in the taxpayer’s assessable income in that year:
s 40-445(2).
Example 14.21: Disposal of low-value asset
Following on from Example 14.19, assume that Nicholas disposed of
the printer in Year 2 for $2,000 to a collector who was willing to pay
such a high price. The decline in value of the low-value pool in Year 2
is calculated as per Example 14.19. However, the closing pool balance
in Year 2 will be 0 ($1,770.50 − $2,000) to take into account the disposal
of the printer. The full termination value of the printer is deducted from
the closing pool balance as the taxable use percentage of the printer was
100%. However, the deduction cannot take the pool balance below 0. The
excess of $229.50 ($2,000 − $1,770.50) is added to Nicholas’ assessable
income per s 40-445(2).

Software development pool
[14.160] Taxpayers who develop software are generally required to capitalise
any expenditure associated with the development of the software. Once the
project is completed and the software is used or ready for use in the business,
the taxpayer is entitled to claim a deduction for the decline in the value of the
asset over the period of its effective life. Tracking all expenditure related to
the development of software can be quite onerous and significantly increase
taxpayers’ compliance costs. As such, taxpayers have the option of allocating
any expenditure incurred in developing “in-house software” to a pool under
s 40-450 of the ITAA 1997. “In-house software” is defined in s 995-1 as computer
software or a right to use computer software that the taxpayer acquires,
develops or has another entity develop that is used mainly in performing the
functions for which the software was developed and which is not deductible
under another provision of the tax legislation outside Div 44 (eg, the general
deduction provision in s 8-1) and Div 328 (the small business provisions).
Only expenditure incurred by the entity in developing or having another entity
develop in-house software can be added to a software development pool –that
is the costs of acquiring in-house software cannot be added to the pool: s 40-
450(1). Further, in-house software expenses can only be added to a pool where
the software is used solely for a taxable purpose: s 40-450(3).
Once a taxpayer chooses to use an in-house software development pool, all

such expenditure must be allocated to the pool: s 40-450(2). The taxpayer must
create a separate pool in each income year that the taxpayer incurs expenditure
on in-house software development: s 40-450(4).
The decline in value of in-house software development pool expenditure is

calculated per s 40-455 as follows:
• first year expenditure allocated to the pool –no deduction;
• second year expenditure in pool – 30%;
• third year expenditure in pool – 30%;
• fourth year expenditure in pool –30%; and
• fifth year expenditure in pool – 10%.
This calculation applies to income years starting on or after 1 July 2015. Prior
to that date, the decline in value of in- house software development pool
expenditure was deducted over four years –no deduction in the first year, 40%
deduction in the second and third years and 20% deduction in the fourth year.
The taxpayer is required to include in its assessable income any consideration
received in respect of the software if the expenditure relating to the software
was added to a software development pool: s 40-460.
Small business entity concessions

[14.165] Finally, it should be noted that subdiv 328- D of the ITAA 1997
contains a number of concessions in the form of simpler depreciation rules
for small business entities. In this context, a “small business entity” is a sole
trader, partnership, company or trust that operates a business for all or part
of the income year and has an aggregated turnover of less than $10 million.
Broadly, “aggregated turnover” is the entity’s turnover plus the annual
turnover of any business that is connected or affiliated to the entity. Instead of
calculating depreciation deductions under the general depreciation provisions
in Div 40, small business entities can choose to claim depreciation deductions
in accordance with the provisions of subdiv 328-D: s 328-175(1). Subdivision
328-D does not apply to a depreciating asset to which Div 40 does not apply
because of s 40-45 (see [14.20]) although there are some exceptions to this
general rule (eg, primary production business assets): s 328-175(2)–(10).
Under subdiv 328-D, small business entities can:

• claim an immediate deduction for assets costing less than $1,000:
s 328-180; and
• put all other assets into a general small business pool and treat them as
if they are a single asset subject to one rate: s 328-185.

The threshold for immediate deduction was increased between 12 May 2015
and 31 December 2020 and also expanded to medium and large businesses.
For the period 1 July 2020 to 31 December 2020, the threshold for immediate
deduction was $150,000 and applied to businesses with a turnover less than
$500 million.
The general small business pool is effectively treated as a single asset and
under s 328-190, small business entities are entitled to a deduction of:
• 30% of the value of the assets already in the general small business
pool (ie, 30% × opening pool balance); and
• 15% of the value of general small business pool assets acquired in the
current income year.
The opening pool balance is determined in accordance with s 328-195. Note
that only the taxable use proportion of the asset’s cost is added to the pool:
s 328-205. However, unlike the general low-value pool discussed earlier, small
business entities are required to make a reasonable estimate of the taxable
purpose of any pooled assets each income year and make an adjustment to
the opening pool balance to take into account any change of taxable purpose
if necessary: s 328-225.
The closing pool balance is determined in accordance with s 328-200 and takes
into account the disposal of pool assets by deducting the asset’s termination
value from the pool balance. If the reduction results in the pool balance being
less than 0, the pool balance is taken to be 0 and the excess is included in
the taxpayer’s assessable income: s 328-215(2). In the case of the disposal of
an asset which qualified for an immediate deduction, the termination value is
included in the taxpayer’s assessable income: s 328-215(4).
Where the general small business pool value is low, the deduction is determined
in accordance with s 328-210 rather than s 328-190. This is determined by
calculating the following amount:
• Opening pool balance + Taxable use % of cost of new assets − Taxable
use % of termination values of depreciating assets allocated to the pool
for which a balancing adjustment event occurred during the year.
Where that amount is less than $1,000 but more than 0, the taxpayer can claim
an immediate deduction for the total amount and where that amount is less
than 0, the taxpayer must include the amount by which that amount is less than
0 in assessable income: ss 328-210 and 328-215. For income years ending on
or after 12 May 2015 and on or before 31 December 2020, the threshold for
immediate deduction is increased to $20,000, $25,000, $30,000 or $150,000 as
applicable (see above): Note 2 to s 328-210(1).
Taxpayers may choose not to use subdiv 328-D or may cease to qualify as a
small business entity in a particular year. In such situations, any pooled assets
continue to remain in the pool and deductions are claimed in accordance
with subdiv 328-D: s 328-220(1). However, any depreciating assets that the
taxpayer starts to hold in that year are not added to the pool and depreciation
deductions in relation to those assets are calculated in accordance with the
general capital allowances provisions in Div 40: s 328-220(2).
Capital works deductions

[14.170] Division 43 of the ITAA 1997 provides taxpayers with a deduction for
certain capital expenditure on buildings used for income-producing purposes
and other capital works. Section 43-20 specifies the capital works to which the
division applies as follows:
• A building or an extension, alteration or improvement to a building
begun in Australia after 21 August 1979 or begun outside Australia
after 21 August 1990.
• Capital works begun after 26 February 1992 (that do not fall within
the first category) that are structural improvements or extensions,
alterations or improvements to structural improvements in or outside

Australia. Examples of structural improvements include sealed roads,
sealed driveways, sealed car parks, bridges, pipelines, retaining walls,
fences, concrete or rock dams and sports fields.
• Capital works being earthworks or extensions, alterations or
improvements to earthworks if they are constructed as a result of
environmental protection activities can be economically maintained in
reasonably good order and condition for an indefinite period, are not
integral to the construction of capital works and the expenditure was
incurred after 18 August 1992.
Very broadly, the expenditure is deductible over a specified period at a rate of
either 4% or 2.5% per annum: s 43-25. The exact calculation is complex and
depends on the type of capital works, the use of the “construction expenditure
area” (eg, residential or non-residential buildings) and when the capital works
commenced. The Commissioner’s guidance in relation to the operation of
Div 43 is in Ruling TR 97/25.
Note that deductions are only available once construction is completed:

s 43-30. The amounts that are deductible must be “construction expenditure”:
s 43-15. “Construction expenditure” is capital expenditure incurred in respect
of the construction of capital works but does not include expenses such as
expenditure on acquiring land, demolishing existing structures, landscaping
or expenditure on plant: s 43-70. Deductions must be claimed within a period
of 25 years (where the 4% rate is used) and 40 years (where the 2.5% rate
is used).
Unlike the capital allowances regime in Div 40, Div 43 does not address the
disposal of a building that has been the subject of capital works deductions –
that is there is no “balancing adjustment”. The disposal of buildings is captured
by the capital gains provisions and any capital works deductions are taken into
account by adjusting the cost base or reduced cost base of the building: see
Chapter 11. Cost base or reduced cost base is reduced by any Div 43 deductions.
Therefore, the taxpayer will have a capital gain if the building is sold for more than
its written down value and a capital loss if it is sold for less than its written down
value. Additional deductions may be available under s 43-250 where the building
is destroyed rather than sold. Where the building is not a capital asset of the
taxpayer, no adjustment is made for the capital works deductions claimed (MLC
Ltd v DCT (2002) 51 ATR 283) and any undeducted capital works expenditure is
transferred to the purchaser who is allowed the deductions under s 43-10.
Black hole expenses

[14.180] In Chapter 12, we saw that non- personal expenses may not
be deductible under s 8-1 of the ITAA 1997 if they are incurred before the
commencement of a business or production of assessable income, or if they are

capital expenses. Some of these expenses may be deductible over a number
of years under the capital allowances provisions discussed in this chapter or
they may be taken into account when an event happens to the relevant asset
under the capital gains provisions discussed in Chapter 11. However, many
expenses did not fall within these regimes and were not recognised for tax
purposes, which resulted in them being labelled “black hole” expenses.
In 2001, subdiv 40-I was introduced to capture these so-called “black hole”
expenses for tax purposes. Subdivision 40- I captures two categories of
expenses that may not otherwise be recognised by the tax legislation.
Project pools
[14.190] Section 40-830 of the ITAA 1997 provides a deduction for capital
expenditure associated with a project that the taxpayer carries on for a taxable
purpose (ie, to produce assessable income) and mining or transport capital
expenditure. Broadly, the expenses are allocated to a “project pool” and are
deductible over the life of the project. Only expenses that do not form part
of the cost of a depreciating asset held by the taxpayer or are not deductible
under another provision can be added to the project pool: s 40-840. Examples
of capital expenses that can be added to a project pool include feasibility
studies, environmental studies, site preparation costs, amounts incurred
in seeking to obtain a right to intellectual property and amounts related to
creating or upgrading community infrastructure for a community associated
with the project: s 40-840(2)(d). “Mining capital expenditure” and “transport

capital expenditure” are defined in ss 40-860 and 40-865 respectively. The
Commissioner’s guidance on project pools is contained in Ruling TR 2005/4.
Business-related  costs
[14.200] The second category of “black hole” expenses captured by subdiv 40-I
of the ITAA 1997 is “business-related costs”. Section 40-880 provides taxpayers
with a deduction for business expenses that are not deductible because they
are capital in nature. Any expenses that are not deductible because they are
private or domestic expenses, incurred in gaining or producing exempt or
non-assessable non-exempt income, or specifically denied deductions under a
particular provision of the legislation (see Chapter 12) are not deductible under
s 40-880: s 40-880(5)(h)–(j).
Taxpayers are entitled to deduct qualifying capital expenses over a period of

five years, where the expense relates to the taxpayer’s business that is carried
on for the purpose of gaining or producing assessable income. The expenditure
is deducted in equal proportions over the five years: s 40-880(2).
The key limitation of s 40-880 is that it only applies to expenses that are not
otherwise taken into consideration under the income tax legislation. For
example, if the expense relates to a depreciating asset, can be deducted under
another legislative provision, forms part of the cost of land or is taken into
account in calculating the capital gain or loss on a CGT asset, the expense
cannot be deducted under s 40-880: s 40-880(5). In this case, the CGT rules
take precedence over s 40-880.
Example 14.22: Capital expenditure related to depreciating asset

Hamish wants to buy a computer that is not available in Australia for his
business. After extensive research, he travels to Germany to purchase the
computer. Hamish travels to Germany for the sole purpose of purchasing
the computer. The travel costs would not be immediately deductible as
they constitute a capital expense but would be included as part of the
first element of the cost of the computer because they are directed to and
result in the purchase of the computer, which is a depreciating asset. The
travel costs cannot be deducted under s 40-880 due to the operation of
s 40-880(5)(a).
Source: Adapted from Example 2.23 in Explanatory Memorandum to the
Tax Laws Amendment (2006 Measures No 1) Act 2006.

[14.210] Examples of capital expenditure that may be deducted under s 40-

880 of the ITAA 1997 include:
• expenditure to establish a business structure –for example, legal

expenses or registration costs associated with the formation of a
company;
• expenditure to change from one business structure to another –for
example, legal expenses to change from partnership to company;
• expenditure to raise equity for a business –for example, costs of issuing
a prospectus, legal costs, advertising costs;
• expenditure to defend a business against a takeover –for example,
legal expenses, advertising costs, mailing costs, consultancy
fees; and
• costs to stop carrying on a business, including liquidation and
deregistration costs.
These expenses would not be deductible under s 8- 1 as they are capital
expenses (relating to the taxpayer’s business structure rather than business
process). They do not relate to a depreciating asset and would not form part
of the cost base of a CGT asset (see Chapter 11) and therefore s 40-880 is
applicable.
Note that the business may be a previous or future business of the taxpayer.
Section 40-880(7) states that where the expenditure relates to a proposed
business, it must be reasonable to conclude that the business is proposed
to be carried on within a reasonable time. This is an objective test that is to
be determined on a case-by-case basis. The taxpayer may demonstrate their
commitment by having a business plan, establishing business premises,
undertaking research on the business and investing in assets.
Example 14.23: Capital expenditure relating to proposed business

Brewster Pty Ltd carries on a mobile ice cream business. The company
spent $5,000 on research into the market for soft drinks with the purpose
of establishing a new business. The research indicated that a mobile soft
drink business is unlikely to be profitable and, consequently, the new
business was not established.
Brewster Pty Ltd is entitled to a deduction of $1,000 per year over the next
five years as the expenses are capital expenditure relating to a proposed
business to be carried on for the purpose of gaining or producing
assessable income.

Example 14.24: Capital expenditure relating to proposed business

June Pty Ltd incurred expenditure on due diligence into a business that
it proposed to acquire and carry on. However, the vendor withdrew from
the sale before it could be finalised.
The expenditure is deductible over five years as a business-related cost.

The Commissioner’s views as to the operation and scope of s 40-880 are

contained in Ruling TR 2011/6.
Start-up expenses
[14.215] From 1 July 2015, qualifying individuals and small business entities
(see [14.165]) can claim an immediate deduction for expenditure related to a
proposed business or proposed structure that would otherwise be deductible
over five years under s 40-880: s 40-880(2A). Expenses that may be immediately
deductible under this provision include certain government fees and charges,
costs associated with raising capital and cost of advice or services related to the
proposed business or proposed structure. Individuals can claim an immediate
deduction for start-up expenses if they are not carrying on a business and are
not connected with, or an affiliate of, an entity that carries on a business that is
not a small business entity.
Questions
[14.220]
14.1 On 1 June 2019, Rogan purchased a new scooter for $6,000 for use
in his business. The Commissioner has assessed the effective life of
scooters as three years. Rogan decided to upgrade to a new scooter
and sold the old one to a reputable second-hand dealer for $3,000 on
31 August 2020. Rogan estimates that he used the scooter for business
purposes 90% of the time.
Advise Rogan of his income tax consequences arising on the disposal
of the scooter under both the diminishing value method and the prime
cost method. Assume that Rogan does not qualify as a small business
entity.
14.2 Jerry and Elaine own and run a diner together. The diner is run
through their partnership, Tom’s Diner. Jerry and Elaine also own a
residential investment property together which they purchased in
equal proportions. During the year, they undertook the following
transactions:
• Purchased a new dishwasher machine for the diner for $15,000 on

1 December 2020. The Commissioner has assessed the effective life
of dishwashers as eight years.
• Installed a new kitchen exhaust fan on 27 April 2021. The kitchen
fan cost $1,100 and it cost an additional $500 to install it. The
Commissioner has assessed the effective life of kitchen exhaust
fans as five years.
• Installed a new ducted vacuum cleaner in the investment property
on 1 February 2021. The ducted vacuum cleaner cost $5,000. The
Commissioner has assessed the effective life of residential ducted
vacuum cleaners as 10 years.
Advise Jerry and Elaine of their income tax consequences arising
out of the above information under both the diminishing value
method and the prime cost method (if relevant) for the year ended
30 June 2021. Assume that an immediate deduction is not available
for the assets.
14.3 On 1 October, Meghan acquired a standard patent from Kate (the

original holder) for $85,000. Prior to the sale, Kate had held the patent
for 12 years.
Advise Meghan as to her depreciation deduction in relation to the
standard patent. You may assume that it is not a leap year.
14.4 Acme Pty Ltd acquired a machine from its parent company for $500,000
on 1 January of this year. The market value of the machine at that time
was $300,000. The parent company has owned the machine for three
years and calculated its depreciation deductions using the prime cost
method and an effective life of eight years. Calculate the decline in
value of the machine for Acme this income year. Assume that it is not
a leap year and Acme is not a small business entity.
14.5 Following on from 14.4, Acme sold the machine to an unrelated party
for $400,000 on 1 December of this year. Advise Acme of its tax
consequences on disposal of the machine.
14.6 An extract of the asset register of Alpha Pty Ltd (Alpha) for the 2019–
2020 income year is as follows:
Asset Cost Opening Method Effective Decline in Closing

adjustable life value for adjustable
value this period value
Desktop 1,350 1,350 Diminishing 3 years 450 900
Computer Value
Furniture 5,000 3,000 Prime Cost 10 years 500 2,500
Filing 1,200 1,080 Prime Cost 10 years 120 960
Cabinets
All depreciable assets are for 100% business use and Alpha uses a
low-value pool for all eligible assets. The closing value of the low-
value pool at 30 June 2020 was $5,300. Alpha purchased a printer on
5 June 2021 for $700.
Advise Alpha of the income tax consequences arising out of the above
information for the 2020–2021 income year assuming an immediate
deduction is not available.
14.7 Jacaranda Pty Ltd is a new company operating in Perth, West Australia.
The company signed a commercial lease for a period of several years
with an option to further extend the lease at its discretion. The company
incurred various expenses in making the leased premises suitable
for its business. The expenses relate to the leased premises and are
considered a capital expense.
Advise Jacaranda as to its income tax consequences arising out of the
above information.
15
Offsets
Key points.................................................................................................... [15.00]
Introduction................................................................................................ [15.10]
Types of tax offsets.............................................................................. [15.20]
Tapered offsets.................................................................................... [15.30]
Refundable offsets............................................................................... [15.40]
Transferable offsets............................................................................. [15.50]
Carried forward offsets........................................................................ [15.60]
Tax offsets to recognise taxes already paid............................................. [15.70]
Tax offsets for shareholders and superannuation fund members.... [15.70]
Dividend tax offsets.................................................................................. [15.80]
Superannuation benefit offsets............................................................... [15.90]
Tax offsets for income subject to foreign tax................................... [15.100]
Concessional tax offsets provided as subsidies.................................... [15.110]

Concessional tax offsets vs concessional deductions..................... [15.120]
Concessional tax offsets to cap income tax rates............................ [15.130]
Common concessional offsets................................................................. [15.140]
Dependant offset................................................................................ [15.150]
Private health insurance offset.......................................................... [15.160]
Low income rebate and low and middle income offset................... [15.170]
Zone rebate........................................................................................ [15.180]
Overseas forces rebate and overseas civilian tax offset.................. [15.190]
Concessional offsets recently phased out or in the process
of being phased out.................................................................... [15.200]
Order of taking offsets............................................................................. [15.210]
Questions................................................................................................... [15.220]

Key points
[15.00]
• Tax offsets are a partial remission or cancellation of the income tax that
would otherwise be payable by a taxpayer.
• Because offsets are deducted from income tax payable, they are of
equal value to all taxpayers, as opposed to a deduction, which benefits
a taxpayer at the taxpayer’s highest marginal tax rate and thus benefits
high-income taxpayers more than low-income taxpayers.
• The largest group of tax offsets are known as concessional offsets.
• Concessional offsets, such as the dependency offset, low income tax
offset and medical expenses rebate, provide a subsidy to taxpayers
who undertake certain activities or responsibilities.
• Some concessional offsets are tapered or reduced as a taxpayer’s
income increases.
• Certain offsets, such as the franking credit, compensate a taxpayer for
tax already paid.
• To prevent double taxation, taxpayers may receive an offset for foreign
tax paid.
Introduction
[15.10] We saw in Chapter 3 that there were three steps to determining how
much income tax a taxpayer must remit to the Australian Taxation Office (ATO):
1. determine taxable income:

• add up the assessable income;
• subtract deductions;
2. determine the “basic” tax liability:
• multiply the taxable income × the tax rate or rates;
3. reduce the basic tax liability by tax offsets to which the taxpayer is
entitled.
Tax offsets are in effect a partial remission or cancellation of the income tax
that would otherwise be payable by a taxpayer. Over the years, they have
had a variety of names in the income tax laws. The current term “offsets” was
first used in the law in 1997. Prior to that, they were known as tax “rebates”
or tax “credits”. Several older parts of the law have been amended to replace
“rebates” and “credits” with the term “offsets”. However, the term “rebate”
continues to be used in a number of sections, particularly in the Income Tax
Assessment Act 1936 (Cth) (ITAA 1936). A full list of available offsets is found
in s 13-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).
15: Offsets [15.30] 539
Types of tax offsets

[15.20] There are two types of tax offsets:
• offsets to provide recognition for other taxes previously levied on
income received by a taxpayer; and
• concessional offsets provided as subsidies for various types of activities
carried out by or responsibilities assumed by taxpayers.
Offsets intended to provide recognition for other income tax previously
levied on income fall into two categories. The first deals with distributions
from companies where the distributed profits were taxed in the hands of the
companies when realised by the entities. The offset on distributed profits
prevents double taxation of the profits in Australia. The second deals with
foreign source income that was subject to tax in the jurisdiction from which
it derives. A foreign tax offset provides taxpayers a credit for foreign taxes
previously paid on the same income.
Generally, offsets may only be claimed against income tax payable (excluding
Medicare levy and Higher Education Loan Program (HELP) liability) in the year
in which they arise. However, in a limited number of circumstances, offsets
may be refundable, transferable to another person or able to be carried forward
to be used in future years.
Tapered offsets
[15.30] To reduce the value of a concessional (subsidy) tax offset to higher-
income taxpayers, the government may make the offset a “tapering” tax offset,
which reduces by a specified percentage for each dollar of taxable income a
taxpayer has in excess of a predetermined threshold.
An example of a tapering offset which is contained in our income tax regime

is the low income tax offset. The maximum offset is $700 for the 2020–2021
income year, reduced by 5.0 cents for every dollar of income exceeding $37,500
up to $45,000 and then by 1.5 cents for every dollar of income exceeding
$45,000 (thus being nil for incomes of $66,668 and higher).
Example 15.1: Tapered offset: low income tax offset

Edward has a low income that qualifies for the low income tax offset. His
taxable income in the year ending 30 June 2021 is $40,000. Edward is
entitled to the following rebate:
$700 − (($40,000 − $37,500) × 0.05) = $575

Refundable offsets
[15.40] Tapering can be used to reduce the value of tax offset subsidies for
higher-income persons. However, it cannot address the problems of low-
income persons with tax liabilities less than the amount of the offset. The offset
reduces the basic tax liability, but some or all of the subsidy will be lost where
the tax offset exceeds the basic tax liability or where the taxpayer has no basic
tax liability. A similar problem arises in respect of corporate taxpayers that are
in a loss position and unable to use additional offsets. To address this problem,
the government sometimes uses “refundable” tax offsets. A refundable tax
offset will be paid out in cash to a taxpayer to the extent the offset exceeds the
taxpayer’s income tax liability. This ensures that lower-income persons with
small tax liabilities can enjoy the full benefit of a tax offset. At this time, only a
small number of offsets have been made refundable.
Examples of refundable tax offsets contained in the income tax regime include:
• the private health insurance tax offset for individuals (found in s 61-
205 of the ITAA 1997) which helps subsidise the cost of private health
insurance. Section 67-23 of the ITAA 1997, Item 5 makes this offset a
refundable offset;
• the research and development (R&D) tax offset for companies (under
Div 355) which provides an incentive for companies to undertake
approved R&D activities for the benefit of Australia. The tax offset is
refundable when an eligible entity has an aggregated turnover less
than $20 million;
• the Junior Minerals Exploration Incentive (JMEI) provides an option

for eligible companies to distribute losses from greenfield mineral
exploration expenditure to shareholders as a refundable tax offset. The
rule applies for four years, from the 2017–2018 year through to the
2020–2021 year, with a cap on the total funding available for the offset
in each year.
Transferable offsets
[15.50] An alternative to a refundable tax offset to provide assistance to a
taxpayer unable to fully utilise an offset is a “transferable” offset that can be
transferred to another taxpayer who (hopefully) has a tax liability that can
absorb the offset.
Example 15.2: Transferable offset
Sonya is married to Russell, and they lived together for the whole
2020–2021 income year. Russell, who is a veteran, received a service
15: Offsets [15.70] 541
pension. Sonya and Russell were both over pension age and their combined
taxable income in 2020–2021 was less than the maximum threshold. They
were both eligible for the low-income aged persons and pensioners tax
offset (often referred to as the “senior Australians and pensioners tax
offset”) available under s 160AAAA of the ITAA 1936. Sonya’s taxable
income in 2020–2021 was $24,800 and Russell’s was $10,200.
Any tax offset that Russell does not use will be automatically transferred
to Sonya and taken into account when her tax liability is calculated.

Carried forward offsets

[15.60] A third approach that can be used to save the value of an excess
tax offset is to allow the taxpayer entitled to the offset that cannot be used
to “carry forward” the offset and apply it against a tax liability in future years.
Most entitlements to carry forward unused offsets have been removed and at
present there are only two types of tax offset that can be carried forward, an
offset that arises in some circumstances in the company imputation rules and
an offset for “early stage investors in innovation companies”.
Tax offsets to recognise taxes already paid

Tax offsets for shareholders and superannuation fund

members
[15.70] There are two types of offsets used to recognise taxes already paid
on income received by a taxpayer. The first type is an offset provided where
income is distributed from an entity that has paid tax on profits when they were
realised by the entity. The second type is an offset provided where income
is sourced overseas and has already been taxed in the foreign country from
which it derives.
Two types of tax offsets are provided to persons who receive distributions
from separate entities that have been subject to tax. These offsets are provided
to shareholders of companies and members of superannuation funds. In both
of these cases, entities in which a taxpayer holds an interest are subject to tax.
However, as the entities are merely legal creatures, the true economic burden
of the tax paid by a company or superannuation fund is borne by the taxpayers
with interests in the company or superannuation fund. The tax offsets for some
types of dividends paid by companies and for benefits paid by superannuation
funds recognise this by effectively treating the tax paid by the companies and
superannuation funds as if it had been paid by the investors with interests in

the companies and funds.
Dividend tax offsets

[15.80] As explained in Chapter 21, companies maintain an account that
records the taxes they have paid and the amount of retained earnings that have
already been subject to tax at the company level. When these taxed profits are
distributed to shareholders as dividends, the shareholders are entitled to an
offset equal to the tax that has been paid at the company level.
The effect of the formula is to treat the company as a type of agent of the
shareholder. Profits distributed by the company are adjusted to the pre-
company tax amounts and fully assessed in the hands of the shareholder
as if they had been earned directly by the shareholder and not through an
intermediary company. The resulting tax liability is reduced by a tax offset
equal to the taxes paid by the company on the profit that has been distributed
as if the company tax were a prepayment of tax on behalf of the shareholder:
s 207-20 of the ITAA 1997.
The combination of rules that:

• require companies to establish an account that shows whether
dividends were paid from fully taxed income;
• require shareholders to “gross- up” dividends paid from fully taxed
income to the original pre-company tax amount; and
• provide shareholders with a tax offset equal to the company tax that
was paid on the profits that are distributed,
is known as the imputation system. It is described in detail in Chapter 21.
Imputation offsets are treated as refundable offsets as a result of s 67-25 of the

ITAA 1997, which means shareholders who are entitled to imputation offsets
may claim a refund of any offsets that exceed their income tax liability for
a year.
Superannuation benefit offsets

[15.90] A superannuation fund is a savings vehicle (normally a trust)
that invests retirement savings for its members. Amounts contributed to
a superannuation fund by an employer on behalf of employees are exempt
from tax in the hands of the employees but are subject to tax when received
by the superannuation fund. Income derived from the investment of those
contributions is also subject to tax when derived by the superannuation fund.
Most superannuation benefits paid to persons aged 60 or older are exempt from
15: Offsets [15.110] 543
tax, but other superannuation benefits are taxable in the hands of recipients.
The taxation of benefits paid from superannuation funds and other types of
retirement income is described in Chapter 18.
To prevent double taxation when the previously taxed income is later

distributed to recipients in the form of taxable superannuation benefits,
ss 301-20–301-115 of the ITAA 1997 provide the recipients with superannuation
benefits tax offsets that compensate for the tax which was borne by the
superannuation fund and, in some cases, provide additional concessional
tax reductions. Any unused tax offset for superannuation benefits is not
refundable or transferable and cannot be carried forward.
Tax offsets for income subject to foreign tax

[15.100] It was explained in Chapter 4 that residents of Australia are subject
to tax on income from Australian and non- Australian sources while non-
residents are only assessable on Australian-sourced income. This basic system
is used by many countries –residents are taxed on worldwide income and
non-residents on local source income. This means that income derived by
Australian residents in other countries may be subject to tax in the source
countries as well as in Australia. To prevent double taxation of this income,
Australia provides residents with a tax offset equal to the foreign tax levied on
the income (subject to a cap of the Australian tax otherwise payable, where the
foreign tax is higher than the Australian tax): s 770-10 of the ITAA 1997. The
foreign income tax offset system is described in more detail in Chapter 22. Any
unused foreign income tax offset is not refundable or transferable and cannot
be carried forward.
Concessional tax offsets provided as subsidies

[15.110] The largest group of tax offsets in the income tax laws are
concessional measures, inserted in the income tax legislation to provide direct
subsidies for particular groups of taxpayers or for taxpayers undertaking
activities the government wishes to subsidise. The tax forgone as a result of
these concessional offsets is treated as the equivalent of a direct government
grant or expenditure and is recorded in a “Tax Benchmarks and Variations
Statement” (previously titled the “Tax Expenditures Statement”) published
annually by the Treasury.
Concessional tax offsets fall into two broad categories. One type of offset is
used to “cap” the tax imposed on a particular type of income. When this type
of offset operates, the ordinary tax rules apply to a taxpayer and then the offset
operates to in effect cancel the tax payable above the concessional cap rate.
The second type of tax offset applies without regard to tax rates, providing a
fixed credit against tax payable.
Concessional tax offsets vs concessional deductions

[15.120] A number of concessional tax offsets such as the dependency offset
and the former medical expenses rebate were once provided as concessional
deductions. Taxpayers were allowed to deduct a wide range of personal
expenses when calculating their taxable income. These concessions were
strongly criticised for their “upside-down” effect –a term used to describe the
fact that they provided the greatest benefit to those with highest incomes and
the least benefit to those with lower incomes.
In contrast, a tax offset can provide the same benefit for taxpayers with different
incomes who incur similar personal expenses because it is not affected by the
taxpayers’ tax brackets. It is simply a remission of tax based on a percentage
of the eligible expenses.
Example 15.3: Concessional tax deductions vs concessional tax offsets

Assume a high-income taxpayer facing a 45% tax rate, a low-income
taxpayer facing a 19% tax rate and a very low-income taxpayer (with a
taxable income less than $18,201) all incur $4,000 in eligible personal
expenses that qualify for a concessional deduction when calculating
taxable income or as a tax offset equal to 30% of the expense.
The value of a concessional deduction of $4,000 is:

High-income taxpayer: saves $4,000 × 45% = $1,800 of tax
Low-income taxpayer: saves $4,000 × 19% = $760 of tax
Very low-income taxpayer: saves $4,000 × 0% = $0 of tax
In contrast, the value of a concessional offset of $4,000 × 30% is:
High-income taxpayer: saves $4,000 × 30% = $1,200 of tax
Low-income taxpayer: saves $4,000 × 30% = $1,200 of tax
Lowest-income taxpayer: saves $4,000 × 30% = $1,200 of tax (which
may be refunded, as explained below, if the tax savings exceeds the tax
payable, as is the case with this taxpayer).

To prevent the upside-down effect of concessional deductions, the government

gradually shifted all concessional deductions to tax offsets. A tax offset avoids
the upside-down effect of a deduction by providing the same value concession
15: Offsets [15.130] 545
to high-income taxpayers (facing a high marginal tax rate) and low-income

taxpayers (facing a lower marginal tax rate). A simple offset may still suffer
from two shortcomings, however. First, in some cases, the government may
not wish to provide the same value offset to high-income persons and low-
income persons. Instead, it may wish to provide a larger subsidy to the low-
income person and a smaller subsidy for higher-income persons and perhaps
no subsidy at all for the very highest-income persons. Second, an ordinary
offset may provide no relief for lowest-income persons whose income tax
liability is less than the value of the offset. The government has developed two
modifications of simple offsets to address these problems: tapered offsets and
offsets that are refundable or transferable or which may be carried forward and
used in later years (see [15.30]–[15.60]).
Concessional tax offsets to cap income tax rates

[15.130] The individual income tax rate scale ranges from 19% to 45% with
a zero rate on the first $18,200 of taxable income. However, the legislature has
decided to apply maximum rates on some particular types of income lower
than the rates that might normally apply. It would be too complicated to set a
range of rate scales for different types of income. Instead, the ordinary income
tax rate scale is applied to all of a taxpayer’s income and an income tax offset is
then provided to reduce the tax payable on the special types of income chosen
for concessional treatment.
An example of a tax offset to set a maximum rate on a particular type of income

is the tax offset to set a rate cap for payments received by retiring employees
in respect of their unused long service leave entitlements: s 83- 85 of the
ITAA 1997.
Another offset intended to provide a reduced rate to a particular type of

income recently adopted is the offset in subdiv 328-F of the ITAA 1997 which
is designed to provide unincorporated small businesses with a benefit similar
to the reduced 26.0% income tax rate (for the 2020–2021 year) available to
small companies. The concessional offset is a non-refundable tax offset of 13%
of income tax payable (for the 2020–2021 year) on “total net small business
income” (which excludes net capital gains and personal services income),
capped to a maximum of $1,000. The aggregated turnover of the business
must be less than $5 million. The offset is not available to individuals taxed
in the capacity of a trustee, or to minors except in relation to any business
income from small business activities that they actually undertake themselves.
Legislation has been adopted to reduce the small company tax rate in stages
to 25% by the 2021–2022 year and for the unincorporated small business offset
to rise to 16% by that year.
Common concessional offsets

[15.140] The Tax Benchmarks and Variations Statement published annually
by the Treasury (see [15.110]) lists around 300 tax expenditures. While some
of these tax expenditures are in the form of tax exemptions, tax deductions
and deferrals of tax liability, many are in the form of offsets. It is, therefore, not
possible to detail all offsets potentially available to a taxpayer. However, there
are some offsets which are more commonly available to resident individual
taxpayers or which have recently been topical. Three examples of concessional
offsets are explained below:
• dependency offset: see [15.150];
• zone rebate: see [15.180]; and
• overseas forces rebate: see [15.190].
Two further offsets are listed in a concessional subdivision of the tax legislation
but are not considered to be concessions in the government’s separate Tax
Benchmarks and Variations Statement:
• the former low income tax offset available in the 2019–2020 and earlier
years (under the ITAA 1936, which was commonly called LITO but was
technically still a “rebate” under that Act, now replaced with a new
low income tax offset under the ITAA 1997 from the 2020–2021 year)
and the low and middle income tax offset available from the 2018–
2019 year to the 2020–2021 year: see [15.170].
Note that two of these offsets, the zone rebate and overseas forces rebate, are
still called “rebates”, which is a sign that they are longstanding concessions
that have not yet been amended to use current terminology. The list of all
“offsets” in s 13-1 of the ITAA 1997 includes amounts that are called “offsets”
and those called “rebates” in the actual operative legislative provisions. The
ATO website uses the term “offset” when referring to entitlements that are
offsets or rebates in the operative legislative provisions.
Dependant offset
[15.150] At one time, the ITAA 1936 contained a number of offsets for various
dependants of a taxpayer. These were consolidated in 2012 into a single
dependency offset under Div 61-A of the ITAA 1997 which is formally known
as the Dependant (Invalid and Carer) Tax Offset (DICTO) and referred to by the
ATO as the Invalid and Invalid Carer Tax Offset. Former rebates for support of
a non-student child or student dependant or for support provided by a sole
parent have been retained as notional entitlements in Div 961 of the ITAA 1997,
however, for taxpayers entitled to a zone rebate or overseas forces rebate.
15: Offsets [15.150] 547
The dependant offset is a single non-refundable offset available in respect of

a specified dependant (spouse, relative or spouse’s relative) who is genuinely
unable to work due to disability or carer obligations and so is in receipt of
a specified disability support, special needs disability support or invalidity
service pension.
The dependency offset is available to taxpayers who contribute to the

maintenance of a specified dependant invalid or carer dependant (a dependant
who cares for an immediate relative of the taxpayer or the taxpayer’s spouse),
where the sum of the adjusted taxable income of the taxpayer and (if not the
dependant in respect of which the offset is being paid) taxpayer’s spouse is
$100,000 or less. The offset is payable only where the relevant dependant is
an Australian resident, or where the dependant is the taxpayer’s spouse or
child who is a non-resident and the taxpayer had a domicile in Australia during
the year. The taxpayer will not be entitled to the offset in respect of a spouse,
where either the taxpayer or spouse receives another benefit known as the
Family Tax Benefit (Part B). The amount of the offset may also be reduced
where the dependant has adjusted taxable income (see below).
The dependant offset is a tapering offset but differs from most other tapering
offsets because the gradual reduction in the offset is not based on the income
of the taxpayer eligible for the offset. Instead, the offset reduces as the income
of another person, namely the dependant supported by the taxpayer, rises.
The maximum amount of DICTO for 2020– 2021 is $2,816 and is indexed
annually in accordance with the consumer price index (CPI).
The maximum offset allowable is reduced by $1 for every $4 by which the

adjusted taxable income of the dependant exceeds $282 (exclusive of the
disability support, special needs disability support or invalidity service pension
received by the dependant, as the case may be), so that for 2020–2021 no offset
is payable where the adjusted taxable income of the dependant is $11,546.
“Adjusted taxable income” is not the same as taxable income for income tax
purposes. “Adjusted taxable income” has the same meaning as it has for family
tax benefit purposes. Adjusted taxable income rather than taxable income is
used to calculate entitlement to the dependency offset because the offset
is intended to provide assistance for persons with more limited economic
capacity and taxable income does not necessarily reflect economic capacity.
For example, a person who is paid entirely by way of taxable fringe benefits will
have no taxable income but may have a very high economic capacity. Similarly,
a person receiving tax-free pensions may have a higher economic income but
a low taxable income. Thus, for example, the calculation of “adjusted taxable
income” includes the full gross value of reportable fringe benefits.
The adjusted taxable income of a taxpayer is determined as follows:
The sum of:
• taxable income;
• reportable employer superannuation contributions;
• deductible personal superannuation contributions;
• adjusted fringe benefits (generally being the grossed- up value of
reportable fringe benefits);
• certain tax-free government pensions or benefits;
• “target foreign income” (foreign source income that is not liable to tax
in Australia or received as a fringe benefit);
• net financial investment loss; and
• net rental property loss.
Less:
• any child support provided to another person.
Example 15.4: Dependency offset
Kate has her invalid father Edmond living with her and supports him
throughout the income year. For the 2020–2021 financial year, he earned
$1,400.
The maximum dependency offset for 2020–2021 is $2,816.
Kate will be entitled to a rebate of:

$2,816 − (($1,400 − $282) × 0.25) = $2,536.50

Private health insurance offset

[15.160] The private health insurance offset found in s 61-205 of the ITAA 1997
was adopted to subsidise taxpayers paying private health insurance premiums.
By virtue of s 67-23 of the ITAA 1997, it is a refundable offset. It is also means-
tested with the value of the offset reduced above one income threshold and
removed completely above a higher income threshold. A lower percentage of
the premium is allowed as an offset, where income is greater than $90,000 in
the case of single taxpayers and $180,000 in the case of families in 2019–2020
and no offset is available, where income is greater than $140,000 for singles
and $280,000 for families. The value of the offset is very gradually reducing with
the amount of the offset lowered each year by an indexation factor. Until 2014,
15: Offsets [15.180] 549
the rebate rate was 30% of the amount of private health insurance premiums.
The standard rebate rate from 1 July 2020 to 31 March 2021 for a single person
on base income is 25.059% of the private health insurance premiums.
Low income rebate and low and middle income offset

[15.170] Two offsets are available in the 2020–2021 income year for low and
middle income taxpayers. The low income tax offset provides an offset of $700
for taxpayers with income of up to $37,500, tapering at specified rates up to
income of $66,667. In addition, a low and middle income tax offset applies
for the 2020–2021 year only. It provides a maximum benefit of (i) $255 for
taxpayers with income up to $37,000; (ii) $255 plus 7.5% of income exceeding
$37,000 for taxpayers with income of more than $37,000 and up to $48,000; (iii)
$1,080 for taxpayers with income of more than $48,000 and up to $90,000; and
(iv) $1,080 less 3% of income exceeding $90,000 for taxpayers with incomes
greater than $90,000 up to $126,000.
Example 15.5: Low income rebate and low and middle income offset

Jenny has a taxable income for the 2020–2021 income year of $40,000.
She will be entitled to a low income rebate determined as follows:
$700 − (($40,000 − $37,500) × 0.05) = $575
She will also be entitled to a low and middle income tax offset of
$255 + (0.075 × $3000) = $480
for a total of $575 + $480 = $1,055.

Zone rebate
[15.180] Section 79A of the ITAA 1936 provides taxpayers who live in remote
areas with a zone rebate. The zone rebate was originally designed to recognise
the disadvantages to which taxpayers are subject because of the uncongenial
climate conditions, isolation and high cost of living in certain parts of Australia.
To qualify for the rebate, a taxpayer must generally have lived or worked within
the zone for 183 days or more in the income year, although there are exceptions
to this rule. Remote areas are classed as either Zone A or Zone B. There are
also special areas within these zones. The ATO provides an Australian zone list
on their website. From 1 July 2015, the government removed the rebate for “fly
in-fly out” and “drive in-drive out” workers whose “usual place of residence” is
outside a qualifying zone.
The amount of the rebate is dependent upon a number of factors, including the
zone, whether the taxpayer lives in a special area within the zone and the family
circumstances of the taxpayer. The rebates for the 2020–2021 income year
range from a basic Zone B rebate of $57 plus 20% of any notional rebate for
dependants to a Special area Zone A rebate of $1,173 plus 50% of any notional
rebate for dependants. From the 2014–2015 income year, the notional rebates
on which the uplift is based are the Dependant (Invalid and Carer) Tax Offset
in the ITAA 1997 and the rebates which were formerly payable for support of
a non-student child or student dependant, or for support provided by a sole
parent (see [15.150]).
A recipient of the zone rebate can claim the additional dependant rebate uplift
in respect of only one of the zone rebate, overseas forces rebate and overseas
civilian tax rebate.
Overseas forces rebate and overseas civilian tax offset

[15.190] Section 79B of the ITAA 1936 provides a rebate to eligible taxpayers
if they served in a specified overseas locality as a member of the Australian
Defence Force and income relating to that service was not specifically exempt
from tax. The operation of s 79B is discussed in Ruling TR 97/2. Section 23AB(7)
provides a similar offset for specified civilians. For the 2020–2021 income
year, the overseas forces rebate is $338 plus 50% of any notional rebate for
dependants. From the 2014–2015 income year, the notional rebates on which
the uplift is based are the Dependant (Invalid and Carer) Tax Offset in the ITAA
1997 and the rebates that were formerly payable for support of a non-student
child or student dependant, or (except in the case of the overseas civilian tax
offset) the former rebate for support provided by a sole parent (see [15.150]).
A recipient of the overseas forces rebate or overseas civilian rebate can claim
the additional dependant rebate uplift in respect of only one of the zone rebate,
overseas forces rebate and overseas civilian tax rebate.
Concessional offsets recently phased out or in the

process of being phased out
[15.200] In recent years, budget pressures have prompted governments led
by both major political parties to cut back on a number of spending programs,
including “spending” by way of tax expenditures that result in tax forgone by
way of concessional tax offsets. A recently terminated offset is the net medical
expenses tax offset (s 159P of the ITAA 1936), which provided a resident
taxpayer with an offset for net medical expenses (including expenses related
to disability aids and attendant or aged care) incurred in relation to himself
15: Offsets [15.220] 551
or herself or in respect of a dependant who was a resident. The main offset

for medical expenses ceased to operate after 30 June 2015, while the offset
continued to apply to taxpayers incurring expenses related to disability aids
and attendant or aged care until 30 June 2019.
Order of taking offsets

[15.210] We have seen that simple offsets will be lost to the extent they
exceed a taxpayer’s income tax liability for the year, while some offsets may
be carried forward to be used in future years, transferred to another person or
even refunded in cash if they are not fully used in the year in which entitlement
to the offset arises. To ensure these benefits are not lost, taxpayers would
prefer to use up simple offsets first and apply offsets that can be carried
forward, transferred or refunded last. However, the law prescribes in s 63-10
of the ITAA 1997 an ordering rule for applying offsets. The section contains a
table of all offsets and states that taxpayers must apply offsets in the order set
out in the table. The list requires taxpayers to apply all offsets that are neither
refundable nor entitled to be carried forward to future years before any offsets
that can be refunded or carried forward.
Questions
[15.220]
15.1 What is a tax expenditure? What do you consider the purpose of tax
expenditures?
15.2 What do you think are the largest measured tax expenditures for the
most recent tax year? (HINT: Visit the website of the Treasury to find
the latest Tax Benchmarks and Variations Statement.)
15.3 “Adjusted taxable income” determines a taxpayer’s eligibility to claim
certain offsets such as the dependency offset. It also determines the
extent (ie, the quantum) of a taxpayer’s claim. How does “adjusted
taxable income” differ from “taxable income”? Why would certain
offsets be based on “adjusted taxable income” and not “taxable
income”?
15.4 Leah has a salary sacrifice arrangement with her employer. Her
package results in an annual salary of $65,000 and reportable employer
superannuation contributions of $15,000. Leah also has an investment
property from which she derived rental income of $25,000 and had
deductible outgoings of $30,000. Calculate Leah’s adjusted taxable
income.
15.5 Kevin has an invalid brother, Jo, who lives with him. Jo receives a
disability support pension. What is Kevin’s allowable rebate for the
current tax year under the following scenarios?
• Jo has no adjusted taxable income and Kevin has adjusted taxable
income of $80,000;
• Jo has adjusted taxable income of $1,500 and Kevin has adjusted
taxable income of $80,000;
• Jo has adjusted taxable income of $2,000 and Kevin has adjusted
taxable income of $160,000.
15.6 Consult the ATO Australian zone list to determine whether the following
places are considered remote areas. Which zone do they fall in?
• Toowoomba
• Groote Eylandt
• Katherine
• Kalgoorlie
• Mt Isa

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Chapter 12 begins by explaining how all of the deductions available to

Chapter 13 examines deductions which are immediately deductible and

specific type of expense. Examples of specific deductions discussed are

Chapter 14 examines deductions available for capital expenditure.

In addition to being able to deduct certain expenses, a taxpayer may

positive limbs of s 8-​1?............................................................... [12.120]

Substantiation of deductions.................................................................. [12.320]

Apportionment and capital expenses............................................... [12.730]

• Taxpayers are required to maintain adequate records when claiming a

Section 4-​15 provides that:

Part 2 considered when an amount will be assessable income of the taxpayer.

Figure 12.1 illustrates the approach to determining when an expense is

• incurred in gaining exempt or non-​assessable non-​exempt income: see

Note that the deductibility of an expense is determined from the taxpayer’s

Figure 12.2 provides a guide to determining when an expense would be

The existence of a “loss or outgoing” is generally not an issue in claiming a

The nexus test –​positive limbs of section 8-​1

Case study 12.1: Losses incurred in the course of gaining or producing

Is the nexus sufficiently direct or too remote to satisfy

In the vast majority of cases, it is generally simple to see whether an expense is

Expenses involving alleged or actual wrongdoing by

[12.80] A number of cases have considered whether expenses arising due to

Case study 12.2: Legal expenses incurred in defending improper

requirement that the expense be “necessarily incurred” in the carrying on of

Case study 12.3: Necessarily incurred in carrying on a business

Case study 12.4: Necessarily incurred in carrying on a business

Case study 12.5: Legal expenses incurred in defending criminal

criminal proceedings. The taxpayer was accused of paying illegal secret

Case study 12.6: Expenses related to illegal business

Expenses to reduce future expenditure

Case study 12.7: Necessarily incurred in carrying on a business

conclusion, the Court noted that no expense directly increases a taxpayer’s

Involuntary losses or outgoings

or outgoing may be too remote to the production of assessable income. The

Is there a sufficient temporal nexus or connection to

Expenses related to the production of assessable income

Case study 12.8: Expenses related to income gained or produced in

In a business context, expenses incurred in anticipation of future assessable

Expenses related to the production of assessable income

subsequent cases have permitted the taxpayer a deduction for expenses

Case study 12.9: Expenses related to the production of assessable

The key to determining whether an expense incurred in producing assessable

In the context of an individual, it is necessary to consider whether the

In a business context, the courts have not applied a narrow interpretation

Non-​deductible expenses –​the negative limbs

Capital or capital in nature

particularly in a business context. Under s 8-​1(2)(a), a loss or outgoing that is

Unfortunately, there is no clear test in the legislation as to when an expense will

5 TC 529. In that case, Lord Dunedin stated that “capital expenditure is a

The courts continued to apply various tests in characterising expenses with

Case study 12.10: Capital expenses

which would allow it to do so. The taxpayer then claimed an immediate

In applying the distinction between business structure and business process,

• Character of the advantage sought. This requires a consideration as to

Since Sun Newspapers, courts generally conclude that a capital expense is

Manner in which the benefit is to be used or enjoyed

[12.190] Although there is a clear articulation of the distinction between

quite so straightforward in practice. In fact, the Commissioner and the taxpayer

Case study 12.11: Exclusivity payments not capital in nature

the advantage sought, the Privy Council suggested that it is necessary

Case study 12.12: Exclusivity payments capital in nature

Form and substance

substance of a payment and not just its form in determining whether an

positive limbs of s 8-1?............................................................... [12.120]

Section 4-15 provides that:

• incurred in gaining exempt or non-assessable non-exempt income: see

The nexus test –positive limbs of section 8-1

Non-deductible expenses –the negative limbs

Capital or capital in nature

particularly in a business context. Under s 8-1(2)(a), a loss or outgoing that is

Case study 12.11: Exclusivity payments not capital in nature

Case study 12.12: Exclusivity payments capital in nature

Incurred in gaining or producing exempt or non-

incurred in gaining or producing exempt or non-assessable non-exempt

including same-sex relationships.

– “Related entities” are defined in s 26-35(2) as the taxpayer’s relative

The legislation thus takes a broad-brush approach to the denial of deductions

The main exception to the non-deductibility of entertainment expenses is for

Apportionment –deductibility of dual purpose

The apportionment of expenses incurred for income-producing and private

of an expense or loss once it is determined that the requirements of s 8-1

Tax minimisation situations –purpose

Application of section 8-1 to commonly

Case study 12.22: Expenses incurred in gaining employment –

Travel expenses that relate to recreation and income-producing activities are a

Travel between home and work

Case study 12.24: Travel to work site on “fly in-fly out” basis

Case study 12.25: After-hours travel from home to work

In Draft Ruling TR 2019/D7, the Commissioner notes that in determining whether

Travel between two places of work

However, where the two places of work relate to different income-producing