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Foundations of Taxation Law
SPECIFIC DEDUCTIONS
Chapter 20
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Foundations of Taxation Law[20.1] Foundations of Taxation Law CCH Australia Limited
Introduction
Specific deduction provisions are designed to providedeductions for particular kinds of expenditure thatmight not otherwise be deductible under the generaldeduction 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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Foundations of Taxation Law[20.2] Foundations of Taxation Law CCH Australia Limited
Tax-related expenses (s 25-5ITAA97) 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 taxadvisers
Capital expenditure
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Foundations of Taxation Law[20.3](a) Foundations of Taxation Law CCH Australia Limited
Repairs (s 25-10 ITAA97)
Taxpayers allowed deductions for non-capitalexpenditure on repairs to premises and depreciatingassets held or used for the purpose of producingassessable 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 reconstructionof the entirety (Lurcott)
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Foundations of Taxation Law[20.3](b) Foundations of Taxation Law CCH Australia Limited
Maintenance costs
Expenditure upon repairs is properly attributed torevenue account when the repairs are for themaintenance of an income-producing capital asset(Kitto J in W Thomas)
Costs incurred in fixing defects in an item which existedat the time of acquisition are usually capital (WThomas, Law Shipping)
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Foundations of Taxation Law[20.3](c) Foundations of Taxation Law CCH Australia Limited
Replacement & restoration
Repair often involves the replacement of parts of anasset with new parts (Rhodesia Railways)
Extensive works may constitute the acquisition of a newasset rather than a repair (Lindsay)
Repair will not generally arise where there is afunctional improvement in the quality of the asset(Western Suburbs Cinemas)
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Foundations of Taxation Law[20.4] Foundations of Taxation Law CCH Australia Limited
Borrowing expenses (s 25-25ITAA97)
Deductions available for expenditure incurred inborrowing money to the extent that the money is usedfor 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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Foundations of Taxation Law[20.5](a) Foundations of Taxation Law CCH Australia Limited
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
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Foundations of Taxation Law[20.5](b) Foundations of Taxation Law CCH Australia Limited
Bad debts (cont) Deductions are not available for debts that have been
released, extinguished or compromisedA 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 withtrafficking in companies and trusts with bad debts
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Foundations of Taxation Law[20.6] Foundations of Taxation Law CCH Australia Limited
Loss from profit-makingundertaking or plan (s 25-40) Taxpayers may claim a deduction for a loss arising from
the carrying on or carrying out of a profit-makingundertaking or plan if any profit from that plan wouldbe assessable under s 15-15 ITAA97
A loss is not deductible if it arises in respect of the saleof property acquired on or after 20 September 1985
Special restrictions apply to the deductibility of lossesthat arise in respect of property
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Foundations of Taxation Law[20.7] Foundations of Taxation Law CCH Australia Limited
Lease related expenses
Section 25-15 ITAA97 allows a tenant to deduct anamount paid for failing to comply with a lease obligationto repair premises that have been used for the purposeof producing assessable income
Section 25-20 ITAA97 allows a tenant to deduct
expenditure incurred for preparing, registering, orstamping a lease of property used for producingassessable income
Section 25-110 ITAA97 allows deductions for capital
expenditure incurred to terminate a lease if theexpenditure is incurred in carrying on a business orceasing to carry on a business
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Foundations of Taxation Law[20.8] Foundations of Taxation Law CCH Australia Limited
Pensions, gratuities and retiringallowances
Section 25-50 ITAA97 allows deductions for pensions,gratuities or retiring allowances that are paid during theincome year to an employee, a former employee, or adependant of an employee or former employee
Payments are only deductible to the extent that theyare paid in good faith in consideration of theemployees or former employees past services in abusiness carried on by the taxpayer for the purposes ofproducing assessable income
Deduction is not available if the payment is deductibleunder another provision
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Foundations of Taxation Law[20.9] Foundations of Taxation Law CCH Australia Limited
Payments to associations Section 25-55 ITAA97 provides deductions for
payments made for membership of a trade, business orprofessional association
Maximum amount deductible under s 25-55 forpayments 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 orbusiness 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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Foundations of Taxation Law[20.10] Foundations of Taxation Law CCH Australia Limited
Election expenses
Expenditure incurred in contesting an election formembership of Parliament or ACT or NT LegislativeAssemblies is generally deductible under s 25-60ITAA97
Expenditure incurred in contesting a local governmentelection is generally deductible under s 25-65 ITAA97,subject to a deduction limit of $1,000 per election (thislimit can be exceeded in certain cases)
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Foundations of Taxation Law[20.11] Foundations of Taxation Law CCH Australia Limited
Gifts (Div 30 ITAA97)
Taxpayers can claim deductions for inter vivosgiftsmade to specified charities, public institutions and otherentities
To constitute a gift, property must be transferredvoluntarily without any material benefit to the donor(McPhail, Leary, Cyprus Mines)
Deductions generally only available for gifts made toentities that have been endorsed by the Commissioneras deductible gift recipients
Deductions are also available for testamentary gifts ofproperty made under the Cultural Bequests Program
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