M 02

Module 2 Self assessment solutions
Module 2 Allowable deductions

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Self assessment questions 2.1
1. Your advice to the accountant of Wagga Pty Ltd should include a discussion of the
following:
Holiday pay/long service leave:
Section 26-10 provides that a deduction is not allowed for tax purposes for a provision
for holiday pay or long service leave payments. A deduction is only allowed if the
payment is actually made. (See the decision of James Flood Pty Ltd v FCT (1953) which
was decided before this section was inserted.)
Fines:
Section 26-5 provides that a deduction is not available for an amount paid by way of
penalty for a breach of the law of the Commonwealth, a State, a Territory or a foreign
country. In this case the Trade Practices Act is a Commonwealth Act and accordingly the
fine is non-deductible. (See also Mayne Nickless Ltd v FCT 84 ATC 4458.)
Entertaining customers:
While these expenses may be considered to be necessarily incurred, s 32-5 specifically
denies a deduction for amounts which could be described as entertainment. Section 32-10
defines entertainment to include food, drink or recreation and thus in this case as lunch
would have a drink and food component it would be entertainment and consequently not
deductible. Note that if the provision of entertainment constitutes a fringe benefit then
the entertainment expense incurred by an employer may be tax deductible, see s 32-20.
2. Relocation expenses of an employee are generally considered to be an expense not
incurred in earning assessable income of the employee, but are a pre-requisite to the
earning of assessable income. They could be considered in the same manner as expenses
of travelling from home to work and thus fail the first positive limb of s 8-1. For a
discussion of preliminary expenses see FC of T v Cooper 91 ATC 4396, Lodge v FC of T
(1972) 128 CLR 171 and Lunney v FC of T (1958) 100 CLR 478. In this case John is
very unlikely to be able to claim a deduction for the $2600 incurred in moving his
furniture and personal effects. See also Taxation Ruling IT2406.
3. The issue in this question is similar to the previous question and relates to an employee
incurring expenses which are preliminary to the activity of income-earning. For a salary
and wage earner to be able to claim a deduction for expenditure incurred that expenditure
must have been incurred in the course of their income-earning activities. In the case of
Lodge v FC of T (1972) 128 CLR 171 the High Court considered that the cost of childminding was not deductible because it was neither relevant nor incidental to the
taxpayers income-earning activities. The expenses were considered to be incurred at a
time prior to the income-earning activity. In this case it is very unlikely that Jane would
be able to claim a deduction for the $8500 incurred. The expenses fail the first positive
limb of s 8-1.
University of Southern Queensland
LAW5230 Taxation law
4. Section 8-1 of the ITAA allows a deduction for the cost of self-education expenses
incurred in relation to a course offered by a school, college, university or other
educational institution. Education expenses incurred under s 8-1 are limited to the excess
over $250, s 82A. A claim will not be allowed for Higher Education Funding Act charges
as per s 26-20, thus the $1800 is not deductible.
Jennifers expenses are incurred at the same time as she is in full-time employment and
thus she can satisfy the requirement that she is earning income at the time the expenses
are incurred. (See Pacific Placer Management v FCT (1995).) In order to be able to
claim the expenses incurred it will be necessary for Jennifer to show that there is a nexus
between her incurring the expenses and her current income-earning activities. It could be
suggested that she is currently working in the advertising industry as a model and thus
the course would be relevant to her current income-earning activity as it is to be expected
that undertaking of a Bachelor of Business course will enhance her skills in this area. On
the other hand it could be argued that her current income-earning activity is that of
modeling only, with her activities confined to modeling clothes. Accordingly, the course
would not have the necessary nexus to claim the expenses.
To fully address this question we would need more information on what she currently
does. If her current activities extend to discussing marketing strategy or business
management then the course will have the necessary nexus. Thus in all cases it will be
necessary to make a determination as to the existence of the nexus based on the facts.
Assuming that there is a nexus between the course and her current income-earning
activity it will be necessary for there to be a reasonable expectation that undertaking the
course would lead to increased earnings in the future (Hatchetts case). It is not
necessary that increased earnings have to actually be earned; it is sufficient that at the
outset of the course there is a potential that increased earnings will eventuate.
The main arguments Jennifer may use when looking at the deductibility of self-education
expenses would include the fact that:
She is currently employed and thus earning assessable income.
The course has sufficient connection with the earning of her current assessable
income.
There is a reasonable expectation that the course will lead to increased assessable
income being earned.
The negative limbs of s 8-1 will not be breached given that the acquisition of
knowledge will never be the acquisition of capital (Finn; Hatchett).
It is sufficient that the course may lead to future earnings when her course is
completed (Finn).
The expenses should not appear to be of a private or domestic nature and very much
related to her job or her income-earning activities.
Any increased earnings will be assessable and thus the expenses do not fail the
exempt income test in s 8-1.
A dominant factor in her being successful is in establishing that her intention or

purpose for doing the course was primarily to advance her career and to earn
additional assessable income.
Jennifer must have the relevant documentation to claim the expenses.
Taxation Ruling TR 98/9 sets out certain guidelines established by the Commissioner
and reference to this Ruling may be beneficial to Jennifer. In summary, if the relevant
factors are present, Jennifer would be able to claim the costs of the union fees, textbooks,
accommodation and stationery expenses as self-education expenses but the total

deductible under s 8-1 will be reduced by $250 as per s 82A. See ATH and the study
book for further discussion on s 82A.
5. The concern in relation to the franchise licence payment of $21 000 to Floors Pty Ltd is
whether the payment is of a capital or revenue nature. It would appear that in accordance
with the decision in Sun Newspapers and Associated Newspapers Ltd v FCT (1938)
61 CLR 337 the character of the benefit attained as a result of the expenditure is enduring
and thus pointing to a capital expense and non-deductible under the negative limbs of s 81. Another argument could possibly be raised that prior to incurring the expense in
relation to the licence, Jerry had no business and thus the expense is a preliminary
expense and thus incurred prior to the commencement of the income-earning activity and
thus failing the positive limbs of s 8-1. See Softwood Pulp and Paper Ltd v FC of T
76 ATC 4439. Consider also whether a deduction would be available under the capital
allowance provisions in division 40 (s 40880). While the expense may be considered to
be non-deductible, the $21 000 may be included in the cost base of the licence should
Jerry dispose of the licence at some time in the future. (See capital gains tax module.)
The annual fee of $7000 for advertising and promotion on the other hand would appear
to be on revenue account and accordingly deductible under s 8-1.
6. This question primarily looks at the deductibility of certain items of expenditure incurred
by Marge who works full-time as a beauty consultant.
Make-up: Section 8-1 would appear to be the appropriate section to consider the
deductibility of the expenses of make-up. It would appear that given the requirement of
Marges employer there is a connection between her earning her assessable income and
being well presented. Thus it is likely that Marge can satisfy the first positive limb of that
section. Given that there is no lasting benefit gained, the expenses will not be of a capital
nature and as the expenses are incurred to undertake her job the expenses will not be
incurred in relation to earning exempt income. The real concern here is whether the
expenses are or a private or domestic nature. The approach taken in previously decided
cases would point to the expenses being considered to be of a private nature. This is
supported by the decision in the case of Mansfield v FCT 96 ATC 4001. In summary the
expenses of $600 would be considered non deductible.
Overseas trip: Generally travel costs incurred in the course of the taxpayers work or in
travelling between one place of business and another will be an allowable deduction
under s 8-1. These will include the cost of airline travel. In Marges case the travel to
London to visit the trade fair is very closely related to her work duties and thus appears
to satisfy the nexus to income-earning activity. The real concern in this case is the fact
that while she is overseas she is taking some annual leave to do some sightseeing. Does
the fact that she is having a two-week holiday as well as the two-day trade fair reduce her
argument to claim the expenses? The answer to this question devolves on a determination
of her purpose for taking the trip. If Marge would have gone to the UK irrespective of the
fact that she took a brief holiday, then the travel costs of $2500 will most likely be
deductible. If the dominant reason for her travelling was for the holiday, then there may
need to be an apportionment of the expenses. For a discussion of purpose and
apportionment of expenses see Fletcher v FCT (1991) 22 ATR 613.
Clothing: Generally the cost of clothing is a private expense. However, certain expenses
incurred in relation to uniforms are deductible. It would appear that the conditions in
s 34-10 have been satisfied in relation to Marges non-compulsory uniform and thus the
costs of purchasing it of $600 and the costs of having the uniform cleaned of $380 would
be deductible.
House property: The rent received by Marge of $250 per week or $12 000 would be
assessable as income from the rental property and it will be derived on a receipts basis,
s 6-5. The interest and rates paid will be an allowable deduction under s 8-1 but only to
the extent to which the use of the property was for earning assessable income. In this
case it will be for 11 months and thus eleven-twelfths of these expenses will be
deductible. Thus the net income from the renting will be 12 000 less 9350 (11/12 of
$10 200) or $2650.
7. The $24 000 in legal fees incurred in defending Daniels sole right to market a brand of
software is a contentious issue. The issue centres on whether the legal fees are of a
capital or revenue nature for the purposes of s 8-1. Arguably Daniel is not acquiring an
asset, but is merely maintaining his existing position by defending his exclusive right to
market the software (See FCT v Duro Travel Goods Pty Ltd (1953) 87 CLR 524, 10 ATD
176 and Hallstroms Pty Ltd v FCT (1946) 3 AITR 436). In Hallstroms Pty Ltd v FCT
(1946) 3 AITR 436 similar expenses were held to be of a revenue nature. However, in
Hallstroms case the taxpayer was not defending an individual right, but a right which was
enjoyed in common with many other taxpayers.
A further argument that the expenses are on revenue account may be supported by the
decision in FCT v Duro Travel Goods Pty Ltd (1953) 87 CLR 524. In that case expenses
incurred by a company in securing a competitors agreement not to use trade marks or
trade names similar to its own were held by the Court not to be undertaken to preserve
the taxpayers rights but to exploit the rights from their use. As Daniel is defending a
right which is solely his, arguably it could be stated that the legal expenses were incurred
for the purpose of preserving and protecting that right, a capital asset, and in accordance
with the decisions in Broken Hill Theatres Pty Ltd v FCT (1952) 5 AITR 296 and Sun
Newspapers Ltd v FCT (1938) 1 AITR 403 would fail the negative capital limb of s 8-1.
The Broken Hill Theatres case placed strong emphasis on the question that the
expenditure incurred was a once and for all payment and, as such, having strong capital
characteristics. Broken Hill Theatres and Sun Newspapers cases placed strong support
for their finding that the expenses were of a capital nature on the ground that the
expenses were to preserve their business. In fact in the Sun Newspapers case if the
amount was not paid to the rival newspaper then there was a definite concern that the
paper would not be profitable and thus be forced to close. In the Broken Hill Theatres
case the taxpayer in question operated only 2 cinemas and thus the presence of another
cinema would be likely to create a concern in relation to the continuance of the
taxpayers existing business. It is noted that the taxpayers two theatres may not have
been the only two theatres in Broken Hill.
In addition an important point which was brought out by these two cases is that the costs
of defending of an existing right (not just the creation of a new asset) can be of a capital
nature. However, it may be possible to distinguish Daniels position from these
authorities on the basis that the loss of the sole rights to the software will have little or no
effect on the existence of his business with sales dropping by only $40 000 or just over
3% of total business income. The loss of the sole licence will not extinguish the software
sales but just reduce them. It can be seen that the existing authorities, while being clear in
their own right, fail to give precise guidelines on the degree of effect on the profits which
would give rise to a finding that the expense is of a capital nature.
It appears that Daniel has a good argument that the expenses are not of a capital nature
and thus deductible under s 8-1. If the legal expenses were of a capital nature and not
deductible under s 8-1 then some consideration of the Capital Gains Tax provisions
would appear appropriate, see Capital Gains Tax module.
8. Your advice to Nicholas should include a discussion of the following points:

Home office and storage. The primary issue here is whether the expenses incurred are
deductible to the extent to which they are incurred to earn assessable income as per s 81. The cases of FCT v Forsyth (1981) 11 ATR 657 and Handley v FCT (1981) 11 ATR
644 discuss the issue of the deductibility of expenses relating to the use of part of a home
for business purposes. While both cases denied a deduction to the two taxpayers in
question because the part of the home used by them remained an integral part of the
home, a general set of guidelines has emerged from the cases which would appear to
allow Nicholas to claim a deduction. The guidelines are that a taxpayer must show that
his home office was his principal place of work, he had clients visiting him at home and
the home office was not maintained as a matter of convenience. Support for this position
comes from Swinford v FC of T 84 ATC 4803.
Nicholas can satisfy these guidelines and thus be able to claim a proportionate part of the
expenses incurred based on the floor space used of 30%. Thus it would appear that $1853
or 30% of $6175 would be deductible. Nicholas may have capital gains consequence
arising from the part business use of his principal place of residence, see capital gains tax
module.
Licence fee. The issue in relation to the deductibility of the $20 000 is whether it is a
capital or revenue expense, as per s 8-1. The case of Sun Newspapers Limited v FCT
(1936) 61 CLR 337 discussed in detail the issue of whether an expense would be of a
capital or revenue nature. In that case a payment was made which gave a lasting benefit
for 3 years while the payment in this case is for only two years. One would have to
question whether the court would have decided in the same way if the period in question
was two years. The principles set down by that case appear to support an argument that
the $20 000 would be of a capital nature. However, there is another argument which
would suggest that if the payment was recurrent and had to be made every two years then
it may be on revenue account, see Vallambrosa Rubber Company Limited v Farmer
(1910) 5 TC 529. If it was deductible then it is likely to be deductible over the period of
benefit or two years as per s 82KZM. Section 40-880 may also be worth considering
determining if a deduction is available.
9. The deductibility of the interest will depend upon the application of s 8-1. The primary
test in determining whether interest payments relate to the production of assessable
income, and thus whether they are an allowable deduction, is the use which has been
made of the borrowed funds. Any security which has been given for the loan is irrelevant.
If the borrowed funds are used to purchase an income-producing property, the interest
paid on those borrowed funds will be an allowable deduction regardless of the security
which is given for the loan. On the other hand if the funds are used to purchase a private
residence to be used as such by the taxpayer, the interest expense will not be deductible,
regardless of the fact that the loan may be secured over income-producing assets.
In Jan and Michaels case they have borrowed to purchase a private home which is a
non-income-producing asset and thus the purpose of their borrowing was not to produce
assessable income but to acquire a non-income-producing asset. The $8900 earned in
rental income will be assessable as income from property in accordance with s 6-5 and
any part of the annual interest bill will not be deductible under s 8-1.
The fact that the interest paid is greater than the income derived would give rise to
negative gearing but that in itself is not the reason that the deduction is denied. Cases
which are relevant to the deductibility of interest in this situation are Ure v FCT (1981)
11 ATR 484 and Ilbery v FCT (1981) 12 ATR 563. Taxation Ruling TR 95/26 is relevant
to this case.
10. Gregs income is earned primarily because of his physical and mental skills in guiding
horses over a racecourse. The performance of a horse in a race is influenced by the
weight of the jockey. In order to suppress the performance of better horses extra weight
is placed on them to handicap them so the poorer quality horses may be able to compete
with them on a more even footing. Owners and trainers in this case did not want Gregs
weight to become excessive and interfere with the performance of their horses. This
would be considered to be a reasonable request and if Greg did not control his weight it
is almost guaranteed that he will lose his job.
The real concern with the expenses is whether they fail the private or domestic
expenditure exclusion. The prime authorities in this area until recently were Lodge v
FCT 72 ATC 4174 and Lunney V FCT (1958) 7 AITR 166 and these cases looked at the
issue of whether the expenses were deductible. However, the primary finding of each
case was that the expenses in question were preliminary to the earning of assessable
income. Such a clear distinction cannot be made for Greg and the case of FCT v Cooper
(1991) 21 ATR 1616 is more relevant to the issue of the food and cigars.
Cooper, a professional footballer, was required by his coach to consume additional food
and drink to increase his weight to retain his position in the football team. The facts
indicated that the extra food and drink was not incurred for the purpose of sustenance but
to increase his weight and the taxpayer tried to argue that the additional food was not a
private or domestic expense. Despite the strong arguments laid before, it the decision of
the Full Federal Court was that the expenditure on the extra food and drink was not
deductible. The line of logic used by the Justices in that case would appear to be
sufficient authority for the argument that Gregs expenses of the food and cigars are not
deductible. (See also Taxation Determination TD 93/114.)
It is noted that there is no point in discussing the negative limbs of s 8-1 if the positive
limbs have not been satisfied.
The question then arises as to whether the expenses of the fitness program are deductible.
Taxation Determination TD 93/114, which deals with police officers who are required to
maintain an adequate level of physical fitness in order to undertake their duties, is
relevant in this case. In that determination (para 3) it states that there may be
circumstances where such expenditure by a police officer is an essential element of
gaining income. The determination states that this could occur in those occupations
within the police force where strenuous physical activity by an officer is an essential and
regular element of performing an officers duties. It could be argued that Gregs
requirement to maintain a level of fitness falls into this category and be possibly
deductible. To support an argument for deductibility it is noted that in Coopers case the
Court allowed a deduction for fitness expenses.
However, there is probably an argument for some apportionment of expenses in
accordance with the interpretation of the word extent in s 8-1, ie between the cost of the
sauna which controls his weight and the cost of using the gym equipment which is
fitness-related.
11. The deductibility of Carmens travel expenses once again raises issues in s 8-1 for
consideration. While the expenses may have satisfied the necessary conditions of the
positive and negative limbs of that section, it is still a requirement that the expenses must
be incurred in the course of gaining or producing assessable income. Thus the income
against which Carmen is wishing to claim the expenses must have commenced at the
time the expenses are incurred. In the case of Softwood Pulp and Paper Ltd v FCT (1976)
7 ATR 101 the Court held that expenses incurred in a feasibility study before
establishing a business enterprise were of a capital nature and not deductible.
The case of Amalgamated Zinc (de Bavays) Ltd v FCT (1935) 54 CLR 295 also supports
this proposition that the income stream must currently exist for the expenditure to be
deductible. The more recent case of Placer Pacific Management Pty Ltd v FCT 95 ATC
4459 would also be relevant but unlikely to give Carmen any support, given that one
income-earning activity had ceased prior to her new business commencing and the
expenses relate to the new business rather than to her employment.
Some discussion of the issue of whether there is a nexus between the expenses and the
earning of assessable income may be relevant but, given that the expenses are not
incurred in earning assessable income, such a discussion is merely academic. Note a
consideration of s 40-880 may be relevant here as well.
Carmen could have improved her ability to claim the expenses by ensuring that she was
in the course of earning assessable income from her consulting business prior to
making the trip overseas. To achieve this it would be advisable that she actually
commence her business prior to departing for overseas. Indicators of commencing her
business may include the leasing of office premises, printing of stationery including
business cards, erection of advertising, listing in the yellow pages or telephone book and
the seeking of consulting contracts. Given the number of lucrative consulting contracts
gained prior to the year end it is highly likely that she would benefit from being able to
make the trip overseas fully tax-deductible.
12. The use of the word in as it appears in s 8-1 would appear to indicate that there must be
a purpose or a causal relationship between the loss or outgoing and earning assessable
income. It has been interpreted reasonably liberally by the Courts, to simply mean in the
course of gaining or producing the assessable income. The test is whether the loss or
outgoing is incidental and relevant to the income-producing activities.
The expenses in this case may be considered to be preliminary activities given that there
is no income being earned at the time that the expenses are incurred. Preliminary
expenses could be described as outgoings which are preparatory to the undertaking of an
income-earning activity. For example, in the case of Softwood Pulp and Paper Ltd v FC
of T 76 ATC 4439 which dealt the costs of a feasibility study, the Supreme Court of
Victoria found that unless a taxpayer has committed themselves completely to the
business at the time the expenses were incurred, the expenses will not be deductible.
In the present case it could be asserted that Deep Seas Pty Ltd had not committed itself to
the rock lobster operations and thus the $35 000 is not deductible to the company under
s 8-1. Consideration of s 40-880 may be relevant here.
13. Expenses incurred by a taxpayer after the income-earning activity to which they related
has ceased may not be deductible as they fail the positive limbs of s 8-1. In the case of
Amalgamated Zinc (De Bavays) Ltd v FC of T (1935) 54 CLR 295 which dealt with the
deductibility of expenses incurred by a mining company many years after its mining
activities had ceased, the Full High Court held that there was no deduction available
because the particular income-earning activity had ceased.
However, the case of Placer Pacific Management Pty Ltd v FC of T 95 ATC 4459 and
Brown v FC of T 98 ATC 4695 may give Hiteck Ltd much more assistance in claiming
deductions of $350 000 related to its former business. In the Placer Pacific Management
case the taxpayer successfully argued that expenditure arising as a result of former
conveyor belt manufacturing business was deductible, notwithstanding that the taxpayer
had sold this business at the time of incurring the expense.
It is suggested that Hiteck Ltd may be able to claim the expense of $350 000 in this case
under s 8-1 as the facts are very similar to the facts in the Placer Pacific Management
case. Another case that is likely to support this conclusion is the case of FCT v Brown
99 ATC 4600.
14. The third negative limb of s 8-1 the exempt income exclusion-denies a deduction for
expenses incurred to earn exempt income. This exclusion is reasonably self-explanatory,
and it simply means that if the income produced is exempt from taxation, then expenses
incurred in gaining or producing that income will not be allowable deductions. In this
case the income is clearly exempt under s 23AH and thus any expenses incurred in
earning that income will not be deductible under s 8-1.
15. No deduction is generally allowable to a taxpayer for expenditure incurred to earn the
assessable income of another taxpayer. However, there have been a couple of cases
where taxpayers have contended that they were entitled to such deductions. The Full
High Court in FC of T v Munro (1926) 38 CLR 153 denied deductions for interest paid
on monies borrowed and on-lent interest-free to a company in which the taxpayer was
only one of the shareholders. It would appear that the principle in the Munro case can be
applied to Arthur as the shares in question are in Pams name and thus he is no longer
receiving assessable income in the form of dividends in the current year. Thus it would
appear that Arthur cannot claim a deduction for the interest in the current year under s 81.
16. This question primarily looks at the availability of deductions for certain outgoings by a
taxpayer carrying on a business.
Lobby costs: It would appear that the most appropriate place to consider the availability
of deductions would be under the general deduction provision or s 8-1. The expense of
$7000 has obviously been incurred, having been paid on 1 October 2010. The amount
was incurred in the course of carrying on business to earn assessable income and thus
would appear to satisfy the positive limbs of the general deduction provision. The
concern arises here as to whether the expense will be denied deductibility under the
negative limbs, primarily the capital limb. It would be stated that Thomas is not acquiring
an asset, but is merely in association with his fellow traders defending an existing
position, see Hallstroms Pty Ltd v FCT (1946) 3 AITR 436).
In Hallstroms Pty Ltd v FCT (1946) 3 AITR 436 similar expenses were held to be of a
revenue nature. Similarly, in Hallstroms case the taxpayer was not defending an
individual right, but a right which was enjoyed in common by many other taxpayers. A
more relevant case would be FC of T v Rothmans of Pall Mall 92 ATC 4508 which
involved a manufacturer of tobacco products. Legislation was introduced into the
Victorian and South Australian Parliaments which, among other things, would increase
tobacco licence fees and place restrictions on the advertising and sale of tobacco
products, as well as on the sponsorship of sporting and cultural events. The taxpayer was
a member of an industry association which mounted a public relations campaign to
prevent the passing of the legislation.
To finance the campaign, the association imposed special levies on its members. In the
1987/88 income year the taxpayer paid $449 406 to the association and claimed a
deduction under s 8-1. The Federal Court held that the expenditure was incurred to defeat
the passage of legislation which would curtail sales and advertising of tobacco products
and probably result in loss of market share of the taxpayer while not posing a threat to
the existence of the taxpayers business or the business of any other tobacco company. In
addition the Court considered that the taxpayer did not gain an enduring advantage by
paying the levies. The taxpayer merely maintained its existing position in the
marketplace. The expenditure was incidental to the carrying on of the taxpayers business
and was deductible under s 8-1.
It would appear that if this principle is applied in this case, Thomas should be allowed a
tax deduction for the $7000 paid. Consideration of the decisions in Broken Hill Theatres
Pty Ltd v FCT (1952) 5 AITR 296, Sun Newspapers Ltd v FCT (1938) 1 AITR 403,
Wharf Properties Ltd v Commr of Inland Revenue (Hong Kong) 97 ATC 4225, National
Australia Bank Ltd v FC of T 97 ATC 5153 and Steele v FC of T 99 ATC 4242 would be
very relevant to determine whether an enduring benefit had been achieved.
Loan interest: For the expense of interest to be deductible it must be in relation to
borrowing used to earn assessable income. Assuming that Thomas is using the borrowing
to carry on his business it would appear that this requirement has been satisfied. Given
that Thomas has paid the interest, he has incurred the expense (James Flood case). On
balance, the requirements for a deduction under s 8-1 appear to have been satisfied.
However, consideration of s 82 KZM would be relevant. The timing rules for businesses
that are not SBE taxpayers (turnover greater than $2million) as set out in s 82 KZM
provide that expenditure will continue to be fully deductible where:
the expenditure is incurred under a pre-26 May 1988 agreement
the amount of the expenditure is less than $1000
the expenditure is required by an order of a court or by law or
the expenditure is for salary and wages.
Because the benefit from the payment of the interest for a period of 18 and 12 months
breach these conditions, it should be apportioned over the period of benefit. Thus the
deduction for the current year would be for only two days out of the 18 or 12 months. If
Thomas satisfied the requirements to be a small business entity taxpayer (SBE) he could
have gained a deduction for all the interest on the 12 month prepayment but still have to
apportion the interest on the 18 month prepayment.
17. The primary issue in this question centres on whether the interest incurred by Nicholas to
acquire the property is deductible. To address this question requires a full discussion of
both the positive and negative limbs of s 8-1. The facts of the case are extracted from the
case of Steele v FC of T 99 ATC 4242 where the Full High court reviewed whether
outgoings of interest, rates and other holding costs of land were deductible to a
development company.
The taxpayer in that case purchased a 7.4-hectare property in 1980 and initially used it
for the agistment of horses. She intended to redevelop the property by building a motel
on it, while continuing to use it for agistment purposes. In fact, the redevelopment, due to
a number of factors, was never completed and the taxpayer eventually sold the property.
The Court in coming to its decision considered that the taxpayer had a number of
purposes but agreed that there was a significant income earning purpose to allow the
deduction. Taxation Ruling TR 2004/4 provides good discussion on the availability of
interest deductions in a situation such as Nicholas. As the interest is deductible on
revenue account it will not be included in the cost base of the land for CGT purposes.
See capital gains tax module for a discussion of capital gains tax.
18. The primary issue in this question centres on whether the $40 000 paid on an annual
basis by First Flight Pty Ltd is deductible. To address this question requires a discussion
of s 8-1 but primarily the capital or negative limb of that section.
It would appear that there is no question but that First Flight is carrying on a business and
that the expense has been incurred in the course of carrying on that business. The
10
expense is clearly appropriate for the business given that the accountants consider that
the result of making the payment will provide a significant benefit to the company. The
issue of course is whether that benefit relates to the structure in which the company
carries on business and whether it is an enduring benefit.
The case of National Australia Bank Ltd v FCT 97 ATC 5153 reviewed a similar issue
and held that the amount was deductible. The case related to the Bank making a payment
for access to provide loans to Australian Defence Force (ADF) personnel. The main
points of the decision are as follows:
The scheme did not give a monopoly to the bank over a group of customers or
potential customers as it did not prevent other financial institutions from making
loans to ADF personnel on terms which were competitive in an overall sense with
those available under it. The primary advantage sought by the bank was the
expectation of being able to sell more home loans and make a profit out of the
interest derived from them and no specific goodwill or monopoly had been gained.
The payment was considered to be in the nature of a marketing expense or a loan

referral payment or commission paid to secure access to a new body of customers.
Based on this decision there appears to be an argument that the amount of the payment
made in consideration of additional expected profitability arising from providing services
to university staff and their families may be deductible. In other words that portion of the
$40 000 which relates to expected profitability of providing private travel services to
staff and their families may be deductible.
19. The deductibility of interest will depend on the application of s 8-1. While there is a
specific section in relation to borrowing expenses (s 25-25) interest deductions fall for
consideration under the general deduction provision. The primary test for deductibility is
the use to which the borrowing have been employed.
Accumulated profits: The borrowing to enable Paddy to go overseas is for a private or
domestic purpose a private holiday. It has little if any connection with the earning of
assessable income and accordingly a deduction should not be allowed. Cases such as Ure
or Ilbery provide discussion on the fact that interest incurred for a private or domestic
purpose is not deductible. Case 14/98 98 ATC 201 provides further authority to support
an argument that the interest is not deductible.
It may have been possible for Mick to structure his borrowing in a slightly different
manner and get a deduction for the interest incurred. Take for example the case of FC of
T v Roberts: FC of T v Smith 92 ATC 4380. In that case it was possible for a professional
partnership to claim a deduction for borrowing to replace working capital that had been
distributed to the partners of the firm. The distribution to the partners was of
accumulated profits. In this case if Micks other partners were prepared to allow the
partnership to distribute accumulated profits and replace them with borrowing the
partnership could have got an allowable deduction.
Business loan: The deductibility of the interest on the borrowing to invest in the
business would normally be deductible where the purpose of the borrowing was to earn
assessable income. Despite the fact that the restaurant business proved to be a financial
failure provided that the purpose of incurring the borrowing was to earn assessable
income the interest on the borrowing up to 4 April 2011 should be deductible. (See
Fletcher & Ors v FC of T 91 ATC 4950 for a discussion on the purpose of the
borrowing.)
A problem may arise in the case where the business ceased and the net funds of $110 000
is used to purchase the Telstra shares. A review of the decision in Brown v FCT 99 ATC
11
4516 may be relevant here as the court held in that case that expenses incurred in relation
to borrowing where the business ceased were still deductible. Browns case would be
relevant to Micks ability to claim the interest on the $20 000 (130 000 less 110 000) that
he lost on the business venture. There should be no doubt in relation to Micks ability to
claim an interest deduction for the $110 000 invested in purchasing the Telstra shares.
Taxation Ruling TR 2004/4 provides good discussion on the availability of interest
deductions in a situation such as Micks.
Rental property: It would appear that the borrowing to purchase the rental property is
for the purpose of earning assessable income and accordingly satisfies the positive limbs
of s 8-1 that the expense be incurred to earn assessable income. Given the fact that the
$16 000 was not paid until 1 August 2011 we need to determine whether the interest
expense has been incurred as at 30 June 2011 to enable the deduction to be claimed. It is
clear that there is a legal liability to pay the $16 000 from the outset of the loan and
accordingly it could be argued that the liability has been incurred. See FC of T v James
Flood Pty Ltd (1953) 88 CLR 492. The question then arises as to whether Mick can
claim a deduction for the full $16 000 or just 11/12th of this amount or $14 667. The
case of Coles Myer Finance Ltd v FC of T 93 ATC 4214 may be relevant to our
discussion in that the Full High Court held that the relevant financing charge for a
commercial bill should be apportioned over the period to which the borrowing related
rather than being fully deductible in the year that it was incurred. Taxation Ruling
TR 94/26 provides that the Commissioner is satisfied that the Coles Myer principle can
apply to similar financing situations. Accordingly, it could be argued that 11/12th of the
$16 000 should be deductible in the year ended 30 June 2011. It may be relevant to
review the loan agreement to determine exactly the liability in relation to the interest
component to confirm your advice in this matter.
If you concluded that no interest or only part of the interest was deductible in the year
ended 30 June 2011 then Mick should have organised his borrowing in a manner to
ensure that he paid the interest for the first 11 months on 30 June 2011.
20. This question essentially focuses on applying the negative limbs of s 8-1 to determine
whether the payments made represent the payment of a capital amount or whether they
are recurrent payments and accordingly giving rise to a revenue deduction.
This question essentially requires a consideration of whether the expenses incurred by
Daniel to secure the custom of the service stations are ordinary business expenses or
whether they are capital costs and thus not deductible. A consideration of section 8-1 is
required in this case study and it would appear that the positive limbs of s 8-1 have been
satisfied as the expenses were incurred in the course of Daniel earning assessable income
or carrying on a business to earn assessable income.
You should make reference to a number of cases and authorities in answering this
question including the following:
The case of Sun Newspapers Ltd v FC of T (1936) 61 CLR 337 which established one of
the better known tests called the Business Entity.
Dixon CJ, when he delivered his decision in this case expounded the virtue of a business
entity test and stated:
There are, I think, three matters to be considered:
1. the character of the advantage sought, and in this its lasting qualities may play a part
2. the manner in which it is used, relied upon or enjoyed, and in this and under the
former head recurrence may play its part
12
3. the means adopted to obtain it; that is, by providing a periodical reward or outlay to
cover its use or enjoyment for periods commensurate with the payment of by making
a final provision or payment so as to secure future use or enjoyment
The concept of an enduring benefit was discussed in the case of British Insulated &
Helsby Cables v Atherton [1925] All ER 623. That case looked at whether a loss or
outgoing resulted in an enduring benefit where an asset or advantage with enduring
characteristics was brought into existence. If such was the case then the expenditure must
be capital rather than revenue. The case of Vallambrosa Rubber Co Ltd v Farmer
(Surveyor of Taxes) (1910) 5 TC 529 indicated that an important factor to consider was
whether the loss or outgoing was recurrent or whether the expense was incurred once
and for all. If the expenses were recurrent then they were more likely to be a revenue
expense and thus deductible. Conversely, if it was incurred once and for all then it was
more likely to be capital and not deductible. The case of Broken Hill Theatres Pty Ltd v
FC of T (1952) 85 CLR 423, 457 built on the concepts established in Sun Newspapers
where it was held that certain expenses incurred to reduce competition were not
deductible.
The case of National Australia Bank v FC of T 97 ATC 5153 is also relevant. In that case
the taxpayer bank paid the Commonwealth an up-front payment of $42 million plus an
annual amount for each year of a 15 year franchise period to secure the exclusive right to
act as lender under a Commonwealth defence force housing loan assistance scheme. The
taxpayer payment was based on detailed calculations as to the profits that it might
reasonable obtain from the scheme. The Full Federal Court held that the $42 million
payment was revenue in nature. The Federal Court was influenced by the fact that the
NAB received no legal power to compel the defence force personnel to use their services.
In other words the payment was very like a promotional expense that only enabled the
NAB to be considered favourably by defence force personnel.
The payments by Daniel do give him the right to compel the service stations to buy fuel
from him. Thus the payments in that respect are similar to the payments made in the Sun
Newspapers case where on the payment of the amount the taxpayer could compel the
recipient of the payment not to enter into competition with it. As the payments in Sun
Newspapers was considered to be on capital account because it enhanced the income
earning structure a similar argument could be based in Daniels case. It is noted that in
Sun Newspapers case only one payment is made while in Daniels case he is making
such payments on a regular basis or at least a couple each year. In other words there is no
question but that the payments are recurrent in his business. It is noted that the
Vallambrosa Rubber case held that recurrent expenses are generally deductible. Another
issue to consider is the fact that Daniel makes 32% of his sales to the service stations.
(Obviously each individual payment relates to a much smaller part of his business). Is
this a very significant part of his business or if he did not have that aspect of his business
would he cease to operate? While 32% of his sales are significant would its absence
require him to cease business? The court in Sun Newspapers seemed influenced by the
fact that the payment supported or expanded the business entity or the income earning
structure or perhaps in the absence of the payment the business may have ceased to exist.
It could be argued that in the absence of the payments Daniel would still be in business
and perhaps making some sales to the service stations.
In conclusion while the facts of the case may support a finding that the Sun Newspapers
decision would be relevant and deny the deductions as outgoings of capital it could be
argued that because of the recurrence of the expenses and the fact that the payments may
not be required to ensure the continued existence of the business that they may be
deductible.
13

1. The issue here concerns the availability of a deduction for repairs and maintenance to the
Ford Truck. Section 25-10 provides a specific deduction for repairs. The engine appears
to satisfy the requirements of s 25-10 given that it is a replacement of a subsidiary part of
the vehicle. The fact that a petrol engine was replaced by a diesel one which was stronger
indicates that a significant improvement has taken place and accordingly it is not
deductible in accordance with s 25-10 as it is a capital expense and must be depreciated
in accordance with s 40-25. Case C73 (1953) 3 TBRD held that the replacement of a
petrol engine with a diesel engine in a truck was not deductible under s 25-10 (53(1)).
The issue of the notional amount of $3400 should be addressed and whether this is
deductible. FCT v Western Suburbs Cinemas Limited (1952) 86 CLR 102 is authority to
state that such notional amounts are not deductible. Thus in the present case Damien is
denied a deduction under s 25-10 and the cost of the new engine must be depreciated
over the effective life of the engine under division 40.
2. Carpark repairs: Section 25-10 allows a deduction for expenditure incurred by the
taxpayer in the year of income for repairs to premises or plant held or used for the
purpose of earning assessable income.
Points to note in relation to s 25-10:
The use of the word expenditure in the section indicates there must be some
payment made or incurred by the taxpayer in order to get the deduction.
The meaning attached to the word incurred in s 25-10 would appear to be the same
as in s 8-1.
While the property subject to the repair must be held, occupied or used by the
taxpayer for the purpose of producing assessable income or in carrying on a business
for that purpose, the taxpayer does not have to own the property.
The word repair is not defined in the Act so recourse to its ordinary meaning is
necessary.
If the conditions in s 25-10 are not satisfied it may be possible in certain situations
for the relevant expenditure to be depreciated over the effective life of the item.
The Oxford dictionary meaning of the word repair is the restoration of some material
thing or structure by the renewal of decayed or worn out parts by re-fixing what has
become loose or detached. In the present case it would appear that Debby has satisfied
the requirements to claim a deduction and even though she does not own the carpark can
claim the $2470 in repairs. A possible contentious issue may be in relation to whether the
replacement of the damaged area with new concrete may give rise to an improvement.
In many situations a repair will bring about some minor or inconsequential improvement
to the item being repaired. Minor improvements may arise from using somewhat
different materials to the materials used when the items were originally manufactured. To
be denied a deduction the repair must be performed to effect an improvement which may
reduce the likelihood of future repairs, increase the functions of the item or generally
enhance the operation of the item. The High Court, in FC of T v Western Suburbs
Cinemas Ltd (1952) 86 CLR 102, held that an expected reduction in future repairs gave
rise to a capital asset. It would not appear that the replacement of a section of the
driveway will increase the function of the driveway or reduce the likelihood of further
repairs and thus not amount to a substantial improvement.
14
Secondhand chair: The cost of purchasing the chair itself, $550, will be a capital cost
and will be depreciable over the effective life of the chair, division 40. A consideration
of the repairs to the broken leg may be contentious. As has already been noted in the
discussion in relation to the carpark, s 25-10 allows a deduction for expenditure incurred
by the taxpayer in the year of income for repairs, where the item repaired was held,
occupied or used by him for the purpose of producing assessable income, or in carrying
on a business for that purpose. At the time that the leg was broken the chair was not
being used by Debby in her business and thus would not appear to satisfy the
requirements for a deduction under s 25-10. The $56 should accordingly be added to the
cost of $550 and depreciated over the chairs effective life.
The repair to the arm rest was done at a time when the chair was being used to earn
assessable income but the damage was present at the time of acquisition. It would also
appear that the purchase price had been adjusted by Bob because of the rip in the arm
rest.
Normally, where a taxpayer is required to repair an item at the time of acquisition in
order to make it suitable for the use it was intended, such repairs are part of the cost of
acquiring the asset and not deductible repairs.
In Law Shipping Company Ltd v Inland Revenue Commissioners (1924) 12 TC 621 the
Court of Sessions (Scotland) held that initial expenses effected to put a ship into a safe
and useable condition are part of the cost of acquiring the ship and thus capital. In a
similar manner the High Court in the Australian case of W Thomas & Co Pty Ltd v
FC of T (1965) 115 CLR 58 denied a deduction under s 25-10 (53(1)) for expenses
incurred in respect of a recently acquired building.
By comparison the UK Court of Appeal in Odeon Associated Theatres Ltd v Jones
(Inspector of Taxes) (1972) 1 All ER 681 allowed deductions for repairs to remedy faults
existing in a cinema at the time of acquisition. The decision of Salmon LJ, in that case,
distinguished the facts from the Law Shipping case on the grounds that the purchase price
of the cinema was not affected by the state of disrepair and the cinema was in a fit state
for use when purchased.
Debbys situation has a mixture of the issues in both the Law Shipping case, given that
the purchase price was adjusted to accommodate the rip, and the Odeon Associated
Theatres case, in that the chair worked well for the first 4 months. It is likely that given
the decision in W Thomas & Co Pty Ltd case (Australian case) the decision in the Law
Shipping Company case would be followed and the cost of $120 considered to be initial
repairs. The $120 should accordingly be added to the cost of $550 and the repair to the
leg of $56 and depreciated over the chairs effective life.
Old computer: The repairs to the computer would appear to have been undertaken at a
time after it ceased to be income-earning. In common with the non-deductibility of initial
repairs, it may also be possible that repairs effected after an item had ceased to be used to
earn assessable income may not be deductible. These types of expenses are sometimes
called terminal repairs. The construction of s 25-10 indicates that in order to claim a
deduction the item in question must be currently used to earn assessable income. To be
able to make a claim for repairs the item must therefore be used by the taxpayer for the
purpose of producing assessable income or in carrying on a business for that purpose.
The administrative practice of the Commissioner appears to be that since the computer
was used at some time during the current year of income a deduction for the repairs of
$300 would be allowed. The replacement computer should be depreciated over its
effective life of 5 years in accordance with division 40. There may also be a balancing
adjustment on the disposal of the old computer in accordance with division 40. See a
15
discussion on balancing adjustments for depreciation purposes in the Australian tax

handbook.
3. Bad debts are a normal incident of carrying on a business and arise where that business
provides credit to its customers and some of those customers fail to pay the amount
owing. Section 25-35 provides for the deduction of bad debts expenses and has a number
of conditions that must be satisfied:
1. There must be a debt owing.
2. The debt must be bad.
3. It must be written off during the year of income in which the claim is made.
4. It must have been previously brought to account as assessable income
5. It must be in respect of money lent in the ordinary course of business of the lending
of money by a taxpayer who carries on that business.
The debt must be in existence at the time that Sam writes it off. If Sam performs the
writing off prior to 30 June in the current year of income and the debt is in existence at
that time he will have satisfied conditions 1 and 3. See GE Crane Sales Pty Ltd v FC of T
71 ATC 4268; (1971) 126 CLR 177 and Point v FC of T 70 ATC 4021; (1970) 119 CLR
453.
For a debt to be bad it is not necessary that it be totally irrecoverable. A debt may be
considered to be bad in a number of circumstances including:
where the debtor has died leaving no assets or where the debtor has left the country
where all reasonable efforts have been undertaken to make contact with the debtor by
the creditor but the debtor cannot be located
where there are no assets which the creditor may use to recover or satisfy his debt
where the debt is statute-barred and the creditor is relying on this defence for nonpayment
where for some commercial or business reason it would not be feasible to proceed
with attempting to collect the debt.
Based on these criteria it would be possible to state that the debt is irrecoverable at least
at the moment. Given that Sam is using the accruals method of accounting the debt would
have been previously brought to account as assessable income. Accordingly all
conditions would appear to be able to be satisfied and thus Sam may be able to claim a
deduction under s 25-35 for the $13 500.
4. The disposal of the electric heater to the Royal Society for the Prevention of Cruelty to
Animals Australia Inc. is a disposal of trading stock not in the ordinary course of
business s 70-90. The market value of the electric heater ($830) at the date of disposal
must be included in assessable income s 70-90. In accordance with s 30-15 a deduction
can be had for trading stock as long as the organisation is approved s 30-15. The Royal
Society for the Prevention of Cruelty to Animals Australia Inc. is an acceptable recipient.
The value of the deduction as set out in s 30-15 is the value included for the purposes of
s 70-90 in assessable income or $830.
It is noted that a deduction for the cost of the heater would have been deductible under
s 8-1. The assessable amount under s 70-90 and the deductible amount under s 30-15 of
$830 will offset each other, giving Dorothy a net deduction of $700 which is the original
cost to her.
16
5. An individual taxpayer may be able to claim a deduction for superannuation

contributions actually made to a complying superannuation fund. In order to claim the
contribution as a deduction the individual must be an eligible person. In this case we
are told that Desiree is an eligible person. An eligible person is someone that is a selfemployed person or a substantially self-employed person. A substantially self-employed
person is a person whose salary or wage income from employment in respect of which
employer-financed superannuation is provided is less than 10% of the persons total
assessable income.
Concessional tax treatment applies to contributions up to $25,000 from 1 July 2010 and
as the $12,000 contributed is less than $25,000 she can get a deduction for this amount
and the contribution will be treated concessionally in her super fund.
6. In your advice to Daniel you should discuss the following issues:
Political party. The primary issue here relates to the deductibility of the donation.
Section 30-15 provides that a donation of an amount in excess of $2 to political parties is
deductible. Donations to political parties are limited to $1500. The deduction may not be
available, however, because the gift is not given as disinterested, in fact Daniel expects
to gain a benefit of a material character the increase in his business income as a result
of the donation and thus the $400 is not a gift in accordance with the rule set down in
FCT v McPhail (1968) 117 CLR 111. Thus the $400 may not be able to be claimed as a
donation.
The question could also be posed that the amount should be deductible under s 8-1 as
being necessarily incurred to earn assessable income as it was given as an incentive to
prospective customers to do business with the firm. It is unlikely that the expenses would
be denied by the negative limbs of s 8-1 but you need to question whether the expense
satisfies the test for being in gaining or producing assessable income and whether the
expense is necessarily incurred. It could be argued that public policy may deny the
deduction; however, lobbying costs were held to be deductible in FCT v Rothmans of
Pall Mall (Australia) Ltd 92 ATC 4508. On balance the $400 may be deductible as an
expense necessarily incurred in earning assessable income.
Robbery. Section 25-45 provides that where a loss of money incurred by a taxpayer
through embezzlement, larceny by a person employed by the taxpayer has occurred and
the taxpayer has included that amount as assessable income a deduction can be claimed.
If Daniels suspicion proves to be wrong and the theft was not performed by his
employee, then a deduction under s 8-1 may be possible in accordance with the decision
in Charles Moore & Co (WA) Pty Ltd v FCT (1956) 95 CLR 344.
Legal fees. Section 25-20 allows a deduction for the cost of preparing lease documents.
The Commissioner seems to take the view that a deduction under the section may be
allowable either to the lessor or the lessee, Case G71 (1956) 7 TBRD. In this case Daniel
is entitled to a deduction of $370 for the legal fees incurred.
7. Division 28 deals with the calculation of car expenses and s 28-15 identifies four
methods of claiming such expenses:
the cents per kilometre method
the 12% of original value method
the one-third of actual expenses method
the log-book method.
There is a reasonable level of choice in the method to use and the diagram in s 28-15
outlines the conditions applicable to each method. Section 28-20 provides that only one
17
method can be chosen for any car for a particular year but the method can be changed
from year to year. The methods of keeping log-books are set out in s 28-105 to s 28-130
and they prescribe that a log-book must be kept for 12 weeks and must be done every five
years. The cents per kilometre method requires a minimum amount of record-keeping
with a reasonable estimate of the business kilometres travelled being sufficient. This
claim is limited to a maximum of 5 000 kilometres even if more than that have been
travelled.
In Kates case we must undertake the following calculations:
Costs:
Registration
320
Insurance
435
Interest on borrowings
Fuels and oils
3 200
980
Repairs and maintenance
1 250
Depreciation
9 616
Total expenses
15 801
As Kate used the diminishing value method of depreciation in s 40-72 as follows:

45 000 273/365 200%/7 = $9 616.
Log-book method:
Business Percentage is 14 000/20 000 = 70%.
Claim is 15 801 70% = $11 061.
One-third of actual expenses method (no log book):
If a log-book has not been kept Kate would not be able to use the Log-Book Method and
thus reliance on the One-third of Actual Expenses Method would be appropriate:
As the total costs are $15 801 then one-third of those expenses are:
15 801 33.3% = $5 267.
It is evident that the Log-Book Method gives the higher claim based on the facts and thus
it is critical that a log-book in maintained in an appropriate manner to enable a claim to
be made under that method.
The 12% of original cost method:
Under this method you can claim 12% of the original cost as a tax deduction provided
that the vehicle travelled 5 000 kilometres. The claim is calculated as follows:
45 000 12% 273/365 = 4 039.
It is evident that the 12% of cost method gives the lowest claim based on the information
given. The best claim can be achieved by using the log-book method of $11 061.
If the business kilometres falls to 6 000 then the business percentage will be 30% which
gives a lesser claim to the claim available under the One-third of cost method. Thus the
One-third of cost method should be chosen as it gives a higher claim. The cents per
kilometre method, which has not been calculated, would give a lower claim than the
other three methods.
18
8. Your advice to Robert should include reference to the following points:

Painting: Initially a consideration of whether a deduction is available under s 25-10
should be undertaken but prior to looking too deeply into the section it would be
beneficial to determine whether the re-painting constituted a repair. The essence of
repairs is the renewal of something which has become broken and needs fixing. From the
evidence the painting did not appear to be damaged or faded but was undertaken to make
the business premises brighter and more attractive to customers. It would appear that
what has been undertaken is not a repair but something else. Robert may wish to argue
that the purpose of the painting was a form of advertising to attract customers and
attempt to claim the $3500 under s 8-1. It would appear easy to satisfy the positive limbs
of that section but if the painting was expected to give rise to an enduring benefit then it
may be considered to be denied by the negative limbs. If similar painting was envisaged
on a regular basis then there would be no enduring benefit. If a deduction is not available
under s 8-1 then the costs may need to be capitalised and perhaps included in the cost
base of the building.
Tax agent fees: Section 25-5 allows a deduction to a taxpayer for expenses incurred in
relation to the management or administration of their tax affairs. The cost of $600 would
appear to be deductible under that section as the expenses relate to his tax affairs and the
lack of complete records is not an offence which would deny his ability to claim.
However, the payment of the additional tax and the penalties would not be deductible
under s 25-5. The penalties would be specifically denied under s 26-5.
Computer: The acquisition of the computer is the acquisition of a depreciating asset and
as such is not deductible under s 8-1. Section 40-25 allows a deduction for depreciation
by apportioning the cost over the effective life of the asset. The rate of depreciation is
established in s 40-72 for the diminishing value method. The depreciation calculation is
performed as follows:
3200 200%/5 122/365 = $428.
Trade debtors: section 25-35 allows a deduction for bad debts provided the following
conditions are satisfied:
1. There must be a debt owing.
2. The debt must be bad.
3. It must be written off during the year of income in which the claim is made.
4. It must have been previously brought to account as assessable income.
5. It must be in respect of money lent in the ordinary course of business of the lending
of money by a taxpayer who carries on that business.
In this case Robert has satisfied all the conditions and as such he is entitled to make a
claim for the $160 written off.
9. Your advice to Nicholas should include a discussion of the following points:
Computer: The purchase of computer software may be deductible provided that it
satisfies the relevant nexus to income-earning. If the individual items of software cost
less than $300 then they will be deductible immediately. Alternatively if the $375 is for
one piece of software then it will be deductible over its effective life, division 40. Note
that s 40-450 is unlikely to apply because the software is not in-house software. The cost
of the repairs to the computer of $650 will be generally deductible under s 25-10 on the
grounds that the repairs do not effect an improvement to the computer. It should also be
noted that Nicholas does not have to own the computer to get the claim and also he was
using the computer to earn assessable income at the time of the accident.
19
Motor vehicle. The acquisition of the motor vehicle is a depreciating asset and thus not
deductible under s 8-1. It is, however, depreciable under s 40-25 with the rates being
established in s 40-72 for the diminishing value method and s 40-75 for the prime cost
method. The damage done to the vehicle requiring panel beating costing $1300 is likely
to be deductible as a repair under s 25-10 because it is a repair of a subsidiary part of the
vehicle, it is not a substantial improvement, it is not an initial repair and not a notional
repair and the vehicle was being used to earn assessable income at the time when the
damage occurred.
The cost of fixing up the fault with the engine of $2100 is likely to be a non-deductible
repair because while it was a replacement of a subsidiary part of the engine, not a
notional repair, not a substantial improvement in function of the vehicle, it was an initial
repair. The deterioration in the engine requiring the repair did not occur while Nicholas
was using the vehicle but while the previous owner was using it. Furthermore it could be
asserted that the vehicle was not suitable to function as it was likely to break down at any
time and accordingly to put it in a condition to do its job certain work had to be done to
the vehicle. The costs of these non-deductible repairs should be added to the cost of the
vehicle of $20 000 and depreciated over the life of the vehicle.
Relevant cases to discuss include Lurcott v Wakely Wheeler (1911) 1 KB 905, Lindsay v
FCT (1961) 106 CLR 377, The Law Shipping Company Ltd v The Commissioner of
Inland Revenue (1923) 12 TC 621, W Thomas & Co Pty Ltd v FCT (1965) 115 CLR 58
and Odeon and Associated Theatres Limited v Jones (Inspector of Taxes) (1972) 1 All
ER 681.
10. In order to encourage taxpayers to make donations to certain funds or institutions s 30-15
provides a tax deduction for gifts or donations made to such funds or institutions. The
common conditions attaching to being allowed a tax deduction are:
The fund, authority or institution must be in Australia.
The gift must be in money or property other than money which was purchased by the
taxpayer within 12 months immediately preceding the making of the gift.
The gift may be trading stock to which s 70-90 applies (valuation is established by
s 30-15).
The gift must be $2 or more in value.
The gift must not be the result of a will.
Any special conditions of the fund, authority or institution must have been satisfied.
Person in street: While the person to whom Norma gave the $15 was very deserving, he
is not an appropriate fund or authority for the purposes of s 30-15 and accordingly no
deduction is available to her.
Painting: It is possible for Norma to satisfy the conditions of s 30-15 in relation to the
painting as it was purchased within 12 months of the donation. The value of the
deduction is the cost of $200 as per s 30-15 (lower of cost or market value at the time of
making the donation).
Girl guides: While the Girl Guides Association of Australia is an appropriate authority
or fund Norma must actually give money or property which was purchased in the last
12 months. The mere donation of time does not satisfy the conditions for a deduction
under s 30-15.
Political party: Sections 30-242 provide for deductions to political parties by taxpayers
but limits the deduction to $1500. The property or money must be transferred voluntarily
20
and no advantage of a material character must have been received in return for the gift.
As Normas total donation was $160 she can claim the full amount of $160.
11. A loss is defined in s 36-10 as amounts equal the excess of allowable deductions over
assessable income and net exempt income in any year. If there are previous years losses
in existence such losses are not included in the calculation of current year losses. It is
important to note that both in the year that the loss is incurred and the year it is claimed
as a tax deduction it must be reduced by the net exempt income earned in that year, ss 3610, 36-15, 36-20. The pay received from the Regular Army Emergency Reserve is
exempt under s 51-5 and thus Bev must reduce her past year losses by this amount. The
calculation of Bevs taxable income for the current year is as follows:
Income before losses:
23 000
Reduced by:
2008 Loss
12 000
Less: Exempt Income
(1300)
2009 Loss
1400
2010 Loss
5000
Taxable income
17 100
$5900
12. Section 25-5 provides that expenditure (other than capital expenditure) incurred after
1 July 1989 in respect of a tax-related matter will be an allowable deduction. A taxrelated matter includes the management or administration of the income tax affairs of the
taxpayer or the compliance with an obligation imposed on the taxpayer by a law of the
Commonwealth, insofar as that obligation relates to the income tax affairs of another
taxpayer. Expenditure in relation to offences is not deductible under this section. If the
expense relates to advice, the person providing tax advice must be a recognised
professional tax adviser. It is assumed for the purposes of this question that Dannys
accountant is a tax professional.
Tax office expenses: The expenses of $300 and $500 were incurred in order to comply
with an obligation imposed on Danny by a law of the Commonwealth and the obligation
related to the income tax affairs of two other taxpayers. Such expenses are deductible in
accordance with s 25-5.
Tax objection: The expenses in relation to preparing his return of $300, the $200 for the
preparation of the objection and the cost of representing Danny of $270 would be
expenses incurred in relation to the management of administration of his tax affairs and
thus deductible under s 25-5. Similarly the cost of $500 in attending at the AAT would
be deductible. The $150 has been incurred to seek to extend the time to pay tax and thus
is also part of the administration of his tax affairs and is also tax-deductible. The costs of
$1500 are unlikely to be deductible because essentially the suits are conventional
clothing and the principle established in the Edwards case is unlikely to apply here.
21

1. The machine is depreciable in accordance with s 40-30 because it is a depreciating asset
used for a taxable purpose. Because the machine is used totally for business purposes no
apportionment is required between business and private use of the machine. However,
since the machine was purchased part-way into the first year and disposed of part-way
through the 2011 year apportionment is required on the total depreciation available in
both years.
The cost to be depreciated is $313 000, i.e. the $300 000 plus the installation costs of
$13 000. The rate of depreciation is determined as per s 40-72 and the calculation is as
follows:
2010 313 000 273/365 200%/7 = $66 888.
2011 246 112 215/365 200%/7 =
Depreciation calculation:
Year
2010
2011
Depreciation claim
66 888
41 420
Adjustable value (written down value)

246 112
204 692
The adjustable value (written down value) at the date of disposal is $204 692 and to this
we add the cost of dismantling or $3500 to give us a total adjustable value of $208 192.
When this is compared with the termination value of $285 000 an assessable amount of
$76 808 in accordance with s 40-285 should be brought to account.
It is noted from the above calculation that the costs of dismantling are part of the cost of
the depreciating asset rather than a reduction in the termination value. Note also that
capital gains tax does not apply to disposals of plant used 100% for a taxable purpose as
per s 118-24.
The base cost of the replacement machine is $355 000 (340 000 + 15 000).
The depreciation expense for this new machine for the 2011 year is based on a
depreciation rate of 50% (200%/4) because the new machine has an effective life of only
4 years.
Depreciation calculation:
Year
2011
Depreciation claim
$72 945
Adjustable value (written down value)

$282 055
2. The Holden motor car is depreciable in accordance with s 40-30 because it is a

depreciating asset of plant used to produce assessable income. Because the vehicle is
used part of the time for private use, a claim for depreciation must be apportioned
between the business and private use of the vehicle. Also, since the vehicle was
purchased part-way into the first year and disposed of part-way through the 2011 year,
apportionment is also required on the total depreciation available in both years s 40-70
and s 40-72. Section 40-230 requires consideration also as this section imposes a
depreciation cost limit. However, in this case the cost limit set out in that section has not
been breached so the actual cost of $42 000 can be depreciated. The rate of depreciation
is 22.5% is established based on an approximate effective life of nine years.
22
a. Depreciation for year ended 30 June 2011.

Year
2009
2010
2011
Depreciation
3884
8576
6100
Adjustable Value
38 116
29 540
23 440
Depreciation Deduction
2525
5574
3965
The depreciation expense is $3965 for the year ended 30 June 2011.
(b) Section 42-285 and 40-290 are relevant here.
(i) Sale price of $22 000.
The loss according to s 40-285 and 40-290 is 23 440 22 000 = 1440 65% = $936.
Allowable: $936.00.
(ii) Sale Price of $26 000.
The sale consideration is greater than the adjustable value so the amount assessable
under ss 40-285 and 40-290 is:
26 000 23 440 = $2560 65% = $1664.
(iii) Sale Price of $35 000.
The sale price exceeds the adjustable value and ss 40-285 and 40-290 again apply:
35 000 23 440 = $11 560 65% = $7514
(iv) Sale Price of $43 000.
Section s 40-285 and 40-290 apply again and the amount assessable is:
43 000 23 440 = $19 560 65% = $12 714.
As cars are exempt from capital gains tax under s 118-5 then there is no
consideration of capital gains tax required.
3. This question essentially focuses on the calculation of depreciation expense and any
adjustment required on the disposal of assets used to earn assessable income.
Cold room: The cold room would be considered to be a depreciating asset for the
purposes of section 40-30 and thus depreciable. The cost of acquiring it would be
established in section 40-180 as follows:
Purchase price
Transport costs
Installation costs
Total purchase price
$37 500
700
1 200
$39 400
Depreciation expense (effective life rates):

39 400 351/365 200%/12 = $6315
depreciation claim. The adjustable value (WDV) on 30 June 2011 is $33 085.
The next issue which needs to be addressed is whether the $2750 incurred in relation to
the replacement motor is deductible as a repair under section 25-10 or whether it should
be included as part of the cost of the cold room and depreciated.
23
Section 25-10 allows a deduction for expenditure incurred by the taxpayer in the year of
income for repairs, not being expenditure of a capital nature, to any premises, or part of
premises, plant, machinery, implements, utensils, rolling stock, or articles held, occupied
or used by him for the purpose of producing assessable income, or in carrying on a
business for that purpose.
become loose or detached. Windeyer J in W Thomas & Co Pty Ltd v FC of T (1965)
115 CLR 58 commented on his understanding of repairs, by stating:
It may sometimes be convenient for some purposes to contrast a repair with a
replacement or a renewal. But repairs to a whole are often made by replacement of
worn-out parts by new parts. Repair involves a restoration of a thing to a condition it
formally had without changing its characterit is the restoration of efficiency in
function rather than exact repetition of form or material.
The essence of a repair, as determined through decided cases, is the restoration of an
item to its original state or condition, at the time it was acquired by a taxpayer. It is not a
complete replacement or a substantial improvement in the original state or condition of
the item. In taking this approach the courts have been influenced by the phrase not being
expenditure of a capital nature in s 25-10. To obtain a deduction for repairs under s 2510 the repair must not:
amount to a replacement of the entirety
amount to a substantial improvement
be a notional repair
be an initial repair
be a terminal repair.
It is clear that the replacement of the motor is not the replacement of an entirety and thus
satisfies this requirement. (Lindsay v FC of T (1961) 106 CLR 377).
The motor that was installed in the cold room on 5 March 2011 did not increase the
functional capacity of the cold room and thus is not an improvement, FC of T v Western
Suburbs Cinemas Ltd (1952) 86 CLR 102.
The replacement of the motor did actually take place and the cost of $2750 was incurred
and thus the amount is not a notional expense, FC of T v Western Suburbs Cinemas Ltd
(1952) 86 CLR 102.
The fault in relation to the motor arose as a result of an accident in operating it and was
not present at the time it was acquired and thus is not an initial repair, Law Shipping
Company case.
Given that all the requirements for section 25-10 have been satisfied a deduction for
$2750 is available for the replacement of the motor.
Refrigeration and display cabinets:
Depreciation claim calculated as:
37 968 0.25 = $9492. The adjustable value (WDV) at 30 June 2011 is $28 476.
Note that as the item was not purchased during the year that the depreciation is just
continued at the existing rates.
24
Toyota delivery truck:

The cost of repairing the Toyota truck of $11 000 is deductible under section 25-10 as an
ordinary repair based on a similar line of reasoning that was used above in relation to the
motor in the cold room. The receipt of the $10 000 is assessable income of the business
in accordance with section 20-20(2).
Year
Depreciation claim
Adjustable value (WDV) on

4 January 2011
2011
$3115
$17 045
The depreciation is calculated on the basis of the existing rates as the item was not
acquired during the year. The balancing adjustment as per s 40-285 is $1455 (18 500
17 045) and must be included in assessable income for the year. Note no capital gains
will be applicable because the truck is disposed of after 21 September 1999. The cost of
the Fiat truck for depreciation purposes is $28 000.
Diminishing value is chosen as this will give the greatest deduction and minimise Toms
taxable income. The rate of depreciation will be 25% or 200%/8. The calculations are as
follows:
Year
Depreciation claim

30 June 2011
2011
$3394 (25% rate)
$24 606
Year
Depreciation claim

10 July 2010
2011
$126
$20 296
Holden car:
The balancing adjustment as per s 40-285 is $3704 (24 000 20 296) and this must be
included in assessable income. The Porsche has been purchased for greater than the
depreciation cost limit as per section 40-230. However, given that the depreciation cost
limit is $57 466 this amount can be used for depreciation purposes. The depreciation
expense for the Porsche is 57,466 x 317/365 x 200%/8 = $12,477.
Year
Depreciation claim

1 June 2011
2011
$12 477 (25%)
$44 989
The termination value on the disposal of the Porsche is $69 000 but as this relates to the
whole car we must use section 40-325 to adjust this value as follows:
69 000 (57 466/95 000) = $41 738.
This is the adjusted termination value and when used in association with section 40-285
will give a deduction on disposal of $3251 (44 989 41 738).
The depreciation cost limit does not apply to the Toyota as its purchase price is less than
$57 466. The rate of depreciation is 28.57% (s 40-72). The claim for depreciation is
reduced by the amount of the private use of 20%. The actual calculation is as follows:
57 000 24/365 200%/7 = $1 071.
25
Toyota:
Year
Depreciation claim

30 June 2011
2011
$856 ($1,071 80%)
$55 929
Year
Depreciation claim

30 June 2011
2011
$3400 (20% rate)
$4800
Year
Depreciation claim

30 June 2011
2011
$1600 (20% rate)
$3800
Forklift:
Office furniture:
Tom may be entitled to claim a deduction for the temporary investment allowance in
relation to some of his acquisitions during the period 13 December 2009 to 31 December
2010.
4. This question predominantly requires the calculation of depreciation expense and the
provision of some supporting discussion.
Repairs to Honda:
The first issue which needs to be addressed is whether the $2700 incurred in relation to
putting the new engine in the Honda is a repair to the vehicle and deductible as per
section 25-10 or whether it should be included as part of the cost of the vehicle and
depreciated.
Section 25-10 allows a deduction for expenditure incurred by the taxpayer in the year of
income for repairs, not being expenditure of a capital nature, to any premises, or part of
premises, plant, machinery, implements, utensils, rolling stock, or articles held, occupied
or used by him for the purpose of producing assessable income, or in carrying on a
business for that purpose.
become loose or detached. Windeyer J in W Thomas & Co Pty Ltd v FC of T (1965)
115 CLR 58 commented on his understanding of repairs, by stating:
It may sometimes be convenient for some purposes to contrast a repair with a
replacement or a renewal. But repairs to a whole are often made by replacement of
worn-out parts by new parts. Repair involves a restoration of a thing to a condition it
formally had without changing its character it is the restoration of efficiency in
function rather than exact repetition of form or material.
The essence of a repair, as determined through decided cases, is the restoration of an
item to its original state or condition, at the time it was acquired by a taxpayer. It is not a
complete replacement or a substantial improvement in the original state or condition of
the item. In taking this approach the courts have been influenced by the phrase not being
expenditure of a capital nature in s 25-10. To obtain a deduction for repairs under s 2510 the repair must not:
26
amount to a replacement of the entirety
amount to a substantial improvement
be a notional repair
be an initial repair
be a terminal repair.
It would appear to be clear that the $2700 incurred for the cost of repairing the vehicle is
deductible under s 25-10.
Disposal of Honda:
The Honda needs to be depreciated to the date of disposal or 15 April 2011:
15 825 22.5% 289/365 = $2819
Thus the written down value of the Honda on the date of disposal is:
$15 825 2819 = $13 006
There is a balancing adjustment on disposal of:
$17 000 less $13 006 = $3994 assessable amount, s 40-285.
It is not possible to offset this amount against the cost of a replacement item as Kate is
not an SBE taxpayer and the disposal is not an involuntary disposal.
Acquisition of BMW:
The cost of the BMW is limited to $57 466 because of the depreciation cost limit, s 40230
The effective life is calculated as:
250 000/20 000 = 12.5 years.
The depreciation claim is:
$57 466 77/365 200%/12.5 = $1940 (diminishing value method, s 40-72); or
$57 466 77/365 100%/12.5 = $970 (prime cost method, s 40-75).
You can use either the prime cost or diminishing value method to calculate the
depreciation claim. But once you select a method you need to stick with it.
Disposal of Ford:
The ford needs to be depreciated to the date of disposal:
$8600 30% 304/365 = $2149.
The written down value at the date of disposal is:
$8600 2149 = $6451.
There is a loss on disposal as the termination value is less than the written down value,
s 42-195.
It is calculated as:
$6451 5000 = $1451 loss, s 40-285.
27
Acquisition of Toyota:
The cost is $32 900 for depreciation purposes while the other costs ($560 and $430) are
normally deductible under s 8-1. The effective life is 4 years so the depreciation claim is
calculated as follows:
$32 900 61/365 200%/4 = $2749 diminishing value method, s 40-72; or
$32 900 61/365 100%/4 = $1375 prime cost method, s 40-75.
Note that you could have used either the prime cost or diminishing value method to
calculate the depreciation claim. But once you select a method you need to stick with it
for later income years.
Kate may be entitled to claim a deduction for the temporary investment allowance in
relation to some of her acquisitions during the period 13 December 2009 to 31 December
2010.
5. Division 40 (s 40-230) limits the amount of depreciation for motor cars and the
depreciation cost limit for 2011 is $57 466. She has held the car for 61 days in the 2011
year and thus the calculation for her depreciation claim for the year ended 30 June 2011
is as follows:
$57 466 61/365 200%/7 = $2744 using the formula in s 4072.
The adjustable value (written down value) of the car at 30 June 2011 is $54 722.

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Module 2 Self assessment solutions

Module 2 Allowable deductions

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LAW5230 Taxation law

She is currently employed and thus earning assessable income.

A dominant factor in her being successful is in establishing that her intention or

Jennifer must have the relevant documentation to claim the expenses.

Module 2 Self assessment solutions

accommodation and stationery expenses as self-education expenses but the total

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LAW5230 Taxation law

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Module 2 Self assessment solutions

8. Your advice to Nicholas should include a discussion of the following points:

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LAW5230 Taxation law

University of Southern Queensland

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University of Southern Queensland

LAW5230 Taxation law

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the expenditure is incurred under a pre-26 May 1988 agreement

the amount of the expenditure is less than $1000

the expenditure is required by an order of a court or by law or

the expenditure is for salary and wages.

LAW5230 Taxation law

The payment was considered to be in the nature of a marketing expense or a loan

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Module 2 Self assessment solutions

University of Southern Queensland

LAW5230 Taxation law

University of Southern Queensland

Module 2 Self assessment solutions

Self assessment questions 2.2

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discussion on balancing adjustments for depreciation purposes in the Australian tax

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LAW5230 Taxation law

5. An individual taxpayer may be able to claim a deduction for superannuation

the cents per kilometre method

the 12% of original value method

the one-third of actual expenses method

the log-book method.

Module 2 Self assessment solutions

Repairs and maintenance

As Kate used the diminishing value method of depreciation in s 40-72 as follows:

LAW5230 Taxation law

8. Your advice to Robert should include reference to the following points:

Module 2 Self assessment solutions

The fund, authority or institution must be in Australia.

The gift must be $2 or more in value.

The gift must not be the result of a will.

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Less: Exempt Income