Revenue Law

Lecture 5
Specific Deductions Text Chapter 13
Capital Allowances Text Chapter 14

Specific Deductions
ITAA97 s12-5 provides a comprehensive list of
all specific deductions.

Most specific deductions are contained in

ITAA97 Division 25

The negative limb of ITAA97 s8-1

ITAA97 Division 26 provides a list of specific

items that are not deductible expenses.

Tax Related Expenses

ITAA97 s25-5 provides taxpayers with a
deduction any expenditure incurred in
managing their tax affairs, that is, in fulfilling
their tax obligations.
The section also provides a deduction
for interest paid on underpayment or
late payment of tax.

Repairs: Capital

A repair that constitutes a capital expense is not deductible:

s 25-10(3).

Three broad categories of expenditure on repairs that may be

classified as capital:

Capital expenditure
on repairs

Initial repairs

Improvements

Replacements

PoTL 2015 paragraph [13.37]

Repairs
ITAA97 s25-10 provides that;
1)
You can deduct expenditure you incur for repairs
to premises (or part of premises), or a depreciating
asset that you held or used solely for the purpose
of producing assessable income.
2)
If you held the property partly for that purpose, you
can deduct so much of the expenditure as is
reasonable in the circumstances.
3)
You cannot deduct capital expenditure under this
section.

Initial Repairs
In Law Shipping Co Ltd v IRC (1923) 12 TC
621 repairs undertaken to remedy defects
which exist at the time property is acquired
are not deductible as they are capital
expenses.
This is because the taxpayer would have
received a deduction in the purchase price of
the asset and so it is appropriate to treat the
expenditure as part of the cost of acquisition.

Improvements
FCT v Western Suburbs Cinema Ltd (1952) 86
CLR 102

Improvements Western Suburbs Cinema

Damaged ceiling repaired with newer better
materials because the existing materials
were no longer available.
Held not deductible because;
1. Using the new materials was an
improvement which changed the character
of the asset, and
2. The test is whether the actual expenditure
incurred by the taxpayer constituted a
repair.

Replacements
Where repair to property involves a
replacement it is necessary to distinguish
between;
1. The replacement of part of an asset
treated as a repair and deductible, or
2. The replacement of the whole of an asset
treated as a replacement and not deductible
as capital.

Replacements

In Lindsay v FCT the taxpayer replaced a

wooden slipway with a longer concrete slipway.
Held to be a capital expense as the new
slipway replaced the existing asset and was
not part of the asset

Replacements
Samuel Jones & Co (Devondale) Ltd v IRC
(1951)
The Court held that the replacement of a
chimney in need of repair with a new chimney
was a repair as the chimney was an
inseparable part of the entire asset being the
factory.

Notional Repairs

Notional repairs are not deductible see FCT

v Western Suburbs Cinemas Ltd.

Bad Debts (cont)

In order to claim a deduction under s25-35 it is
important that in the income year the
deduction is claimed;
1. There is an existing debt,
2. The debt is bad (T/R 92/18) and
3. The debt was actually written off, creating a
provision is not sufficient

Point v FCT (1970) 119 CLR 453

The taxpayer entered into an agreement to
release a debtor from its obligations to the
taxpayer in one income year and the debt
was written off the debt in the following
income year.

Point v FCT (1970) 119 CLR 453 (cont)

The HC held that the taxpayer was not entitled
to a deduction;
1. In the year the debt was forgiven because it
had not been written off
2. In the following year as there was no
existing debt

Payments to Associations
ITAA97 s25-55 allows a deduction to a
maximum of $42 for payments made for
membership of a trade, business or
professional association.
If there is a nexus between the payment and
the earning of income then a deduction can
be claimed under s8-1 which is not limited to
$42.

Travel Between Workplaces

Under ITAA97 s25-100 a deduction is allowed
for travel directly between two workplaces
where the taxpayer is engaged in income
earning activities at each workplace. The
expenses are not deductible if
one of the workplaces is also
the taxpayers residence,
s25-100(3).

Gifts
ITAA97 division 30 provides taxpayers with a
deduction for gifts to deductible gift recipients.
Gifts can be of money or property.
In T/R 2005/13 to be deductible a gift must be;
1.
Voluntary,
2.
Transfer the beneficial interest in the property
to the recipient and
3.
Made without expectation of material
advantage in return.

FCT v McPhail (1968) 117 CLR 111

Taxpayer made a contribution to a building fund

to his sons school in return for lower school
fees. Taxpayer denied a deduction for his
contribution to the building fund on the basis
that it was not a true gift because the
taxpayer received a material advantage in
return.

Prior Year Losses

ITAA97 Division 36 deals with tax losses which
you may be able to deduct in a later income
year.

S36-10 How to calculate a tax loss for a

particular year

Tax Loss ITAA97 s36-10

Tax loss = Allowable deductions assessable
income Net exempt income
Net exempt income = exempt income losses
or outgoings incurred in producing exempt
income any foreign tax paid

Sample Calculation
For the year ended 30 June 2012 Joe has
assessable income of $100,000 and exempt
income of $15,000. Allowable deductions of
$110,000 and outgoings that relate to the
exempt income of $10,000.

Calculate Joes taxable income or tax loss.

Limitations on Losses
Prior year losses can be carried forward
indefinitely. However entitlement to use
losses may be restricted by;
1. Companies the continuity of ownership
and the same business test rules (ITAA97
Div 165)
2. Individuals non-commercial loss rules
(ITAA97 Div 35)

Capital Allowances Chapter 14

Introduction

The general deduction provision prohibits a deduction for a capital

item: s 8-1(2)(a).

Specific provisions may allow a deduction over the period of time

that the expense is expected to derive a benefit:

Types of deductible
capital expenditure

Depreciation
deductions

Capital works
deductions

Black hole
expenses

PoTL 2015 paragraph [14.10]

Capital Allowances
ITAA97 Division 40 Capital Allowances
This division allows you to claim as a deduction
an amount equal to the decline in value of a
depreciating asset over the term of its
effective life where that asset is held, used, or
installed ready for use by the taxpayer for a
taxable purpose.

Depreciating Asset
Depreciating assets s40-30(1) are assets that
have a limited effective life and can be
reasonably be expected to decline in value
over the time it is used.

Assets Excluded from Definition

ITAA97 s40-30
Land
Trading stock
Intangible assets unless listed in s40-30(2)
Buildings unless considered capital works
under Div 43 (s40-45(2))

Claiming a deduction
S40-25 (1)
You can deduct an amount equal to the
decline in value for an income year of a
depreciating asset that you held for any time
during the year.

Jointly Held Assets

S40-25(1) Note 3
Generally, only one taxpayer can deduct
amounts of a depreciating asset. However, if
you and another taxpayer jointly hold the
asset, each of you deduct amounts for it: see
section 40-35.

Reduction of Deduction
S40-25 (2)
You must reduce your deduction by the part of
the assets decline in value that is attributable
to your use of the asset, or your having it
installed ready for use, for a purpose other
than a taxable purpose.

Immediate Deduction
Assets costing less than $300 used
predominantly in earning assessable income,
that is not income from business, is
immediately deductible under s40-80(2)

Choice of Method
Generally, a taxpayer has a choice of two
methods to work out the decline in the value
of a depreciating asset.

Diminishing value method (s40-70) and

Prime cost method (s40-75)

Diminishing Value
Diminishing value method asset held pre 10 May 2006
Base value x

Days Held x
365

150%
assets effective life

Diminishing value method asset held post 10 May 2006

Base value x

Days Held x
365

200%
assets effective life

Prime Cost Method

Prime Cost Method
Assets Cost x Days Held
365

100%
assets effective life

Claiming a deduction:
2. Decline in value

Example: Diminishing value method

Depreciable asset purchased for $6,000 (excluding GST)

on 1 July 2014 and has an effective life of 3 years.
Year 1:

Year 2:

Year 3:

PoTL 2015 paragraph [14.80]

Claiming a deduction:
2. Decline in value

Example: Prime cost method

Depreciable asset purchased for $5,000 (excluding GST)

on 1 July 2014 and has an effective life of 3 years.
Year 1:

Year 2:

Year 3:

PoTL 2015 paragraph [14.80]

Disposals of Depreciating Assets

Balancing adjustment (s40-285) the profit or
loss on the sale or disposal of a depreciating
asset (s40-30)
Balancing Adjustment Amount = Termination
Value Adjustable Value
Where the termination value is the amount
received on disposal of the asset and the
adjustable value is the WDV of the asset at
the date of disposal

Balancing adjustments

Taxpayers taxable income adjusted where a balancing

adjustment event occurs under s 40-295:

Broadly, an event occurs when the taxpayer stops

holding the asset, stops or never uses the asset.

Adjustment:
Termination
Value

Adjustable
Value

Difference is
included in
assessable
income

Termination
Value

Adjustable
Value

Difference is
included in
deductions

PoTL 2015 paragraph [14.110]

Balancing adjustments

Elements

Term

Explanation

Termination
Value

Amount received by the taxpayer in relation to the

balancing adjustment event: s 40-300.

Assets cost less prior year decline in value less

decline in value up to the date of the balancing
Example adjustment event: s 40-85.

Adjustable
Value

Asset purchased on 1 July X1 for $3,000. Effective

life is 3 years. Method: prime cost. Sold 30 June
X2 for $2,500.

Termination
Value: $2,500

Adjustable
Value: $2,000
($3,000 - $1,000)

Difference:
$500 included
in assessable
income
PoTL 2015 paragraph [14.110]

Pooling of Assets
Pooling of assets is allowed under certain
circumstances.
1. Low value pool
2. Software pool
3. SBE pool (Div 328)

Low Value Pool

Low value pool assets used for income
producing purposes which cost less than
$1,000 or have an opening WDV of less than
$1,000 if diminishing value method has been
used.
Assets in the pool for the first time are
depreciated at 18.75%, thereafter at 37.5%.

Software Development Pool

The cost of developing in-house software may
be allocated to a software development pool
which provides for a decline in value as
follows;
1st year no deduction
2nd year 40%
3rd year 40%
4th year 20%

Capital Works
Division 43 provides deductions for expenditure
on income-producing buildings and other
capital works. The division allows taxpayers
to write off the capital costs incurred in the
construction, extension, alteration or
improvement of a relevant item at the rate of
either 4% or 2.5%, that is, over either 24 or
40 years.

Blackhole Expenditure
Business expenses that are not deductible
because they are capital in nature may be
deductible in equal proportions over 5 years
s40-880

Homework
Homework this week text questions, 13.1, 13.2,
14.1 and 14.3.