SPECIFIC DEDUCTIONS

Chapter 20
Foundations of Taxation Law

Introduction
Specific deduction provisions are designed to provide deductions for particular kinds of expenditure that might not otherwise be deductible under the general deduction provision Checklist of provisions in Div 12 ITAA97 Expenditure may be deductible in the year in which it is incurred or spread over a period of years Specific deduction provisions operate subject to special provisions which deny or limit deductions

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Tax-related expenses (s 25-5 ITAA97)

Taxpayers allowed deductions to the extent that expenditure is incurred in managing their tax affairs Deductions expressly denied for: Payments of income tax or PAYG Fees paid to persons who are not recognised tax advisers Capital expenditure

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Repairs (s 25-10 ITAA97)

Taxpayers allowed deductions for non-capital expenditure on repairs to premises and depreciating assets held or used for the purpose of producing assessable income Nature of a repair: Involves restoring an asset to its previous condition without changing its character (W Thomas) Can involve the renewal or replacement of subsidiary parts of a whole but not reconstruction of the entirety (Lurcott)

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Maintenance costs
Expenditure upon repairs is properly attributed to revenue account when the repairs are for the maintenance of an income-producing capital asset (Kitto J in W Thomas) Costs incurred in fixing defects in an item which existed at the time of acquisition are usually capital (W Thomas, Law Shipping)

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Replacement & restoration

Repair often involves the replacement of parts of an asset with new parts (Rhodesia Railways) Extensive works may constitute the acquisition of a new asset rather than a repair (Lindsay) Repair will not generally arise where there is a functional improvement in the quality of the asset (Western Suburbs Cinemas)

[20.3](c)

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Borrowing expenses (s 25-25 ITAA97)

Deductions available for expenditure incurred in borrowing money to the extent that the money is used for the purpose of producing assessable income Expenditure is generally deductible over the period of the loan (or five years if this is shorter) Amounts of $100 or less are usually fully deductible in the relevant year

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Bad debts (s 25-35 ITAA97)

Taxpayers can deduct a debt (or part of a debt) written off as bad in an income year if: It was included in the taxpayers assessable income for the income year or an earlier income year, or It is in respect of money lent by the taxpayer in the ordinary course of a moneylending business

[20.5](a)

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Bad debts (cont)

Deductions are not available for debts that have been released, extinguished or compromised A debt has gone bad when it is reasonably regarded as irrecoverable A bad debt is deductible in the year that it is physically written off in the taxpayers accounts Special anti-avoidance rules apply to deal with trafficking in companies and trusts with bad debts

[20.5](b)

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Loss from profit-making undertaking or plan (s 25-40)

Taxpayers may claim a deduction for a loss arising from the carrying on or carrying out of a profit-making undertaking or plan if any profit from that plan would be assessable under s 15-15 ITAA97 A loss is not deductible if it arises in respect of the sale of property acquired on or after 20 September 1985 Special restrictions apply to the deductibility of losses that arise in respect of property

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Foundations of Taxation Law

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Lease related expenses

Section 25-15 ITAA97 allows a tenant to deduct an amount paid for failing to comply with a lease obligation to repair premises that have been used for the purpose of producing assessable income Section 25-20 ITAA97 allows a tenant to deduct expenditure incurred for preparing, registering, or stamping a lease of property used for producing assessable income Section 25-110 ITAA97 allows deductions for capital expenditure incurred to terminate a lease if the expenditure is incurred in carrying on a business or ceasing to carry on a business
Foundations of Taxation Law
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Pensions, gratuities and retiring allowances

Section 25-50 ITAA97 allows deductions for pensions, gratuities or retiring allowances that are paid during the income year to an employee, a former employee, or a dependant of an employee or former employee Payments are only deductible to the extent that they are paid in good faith in consideration of the employees or former employees past services in a business carried on by the taxpayer for the purposes of producing assessable income Deduction is not available if the payment is deductible under another provision

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Payments to associations
Section 25-55 ITAA97 provides deductions for payments made for membership of a trade, business or professional association Maximum amount deductible under s 25-55 for payments made in an income year to any one association is limited to $42 There is no requirement that the membership of the association have a link with any income-producing or business activities carried on by the taxpayer, but if there is a link, payments may be deductible under s 8-1 There is no limit on the amount that can be deducted under s 8-1.

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Election expenses
Expenditure incurred in contesting an election for membership of Parliament or ACT or NT Legislative Assemblies is generally deductible under s 25-60 ITAA97 Expenditure incurred in contesting a local government election is generally deductible under s 25-65 ITAA97, subject to a deduction limit of $1,000 per election (this limit can be exceeded in certain cases)

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Gifts (Div 30 ITAA97)

Taxpayers can claim deductions for inter vivos gifts made to specified charities, public institutions and other entities To constitute a gift, property must be transferred voluntarily without any material benefit to the donor (McPhail, Leary, Cyprus Mines) Deductions generally only available for gifts made to entities that have been endorsed by the Commissioner as deductible gift recipients Deductions are also available for testamentary gifts of property made under the Cultural Bequests Program

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