TABL5551/ TABL 5559
Term 1, 2024
Week 5
13 March 2024
Announcements
• The multiple choice quiz opens on Friday 15th March,2024
10am and closes Saturday 16th March, 2024 at 10am.
• The quiz makes up 20% of the total assessment.
• The quiz consists of 10 questions (2 marks each).
• The quiz will be for a duration of 60 mins. Once you start the
quiz your timer starts then.
• The results for the quiz will be made available on Friday 22nd
of March,2024.
• No tutorials or lectures in Week 6 (Reading week) coming up
Recap of last week and plan for today
• Last week, we rounded off the CGT regime and then started
on deductions
• We saw that the general deduction provision, section 8-1, is
broken into 2 positive limbs and 4 negative limbs
• Today we’ll continue looking at deductions, in particular:
– The treatment of common taxpayer expenses
– Those ‘before’ and ‘after’ expenses
– The revenue/capital distinction (the 1st negative limb)
5.1 Personal/non-personal boundary
expenditure
• This topic focuses on how the income tax regime treats those
common taxpayer expenses that have a connection to their
income-earning activity, but have a private ‘flavour’ to them
• We’ll limit our focus to 4 broad categories: travel, home office,
clothing and self-education expenses
• We looked at 2 of these categories last week (travel expenses
and Lunney case; self-education expenses and Anstis case
and Home office expenses)
• Recall that food and drink expenses generally won’t satisfy the
positive limbs (Cooper case)
5.1 Personal/non-personal boundary
expenditure
• The analysis under this topic will focus on the positive limbs of
section 8-1, i.e. are either of the positive limbs satisfied?
• Note also the 2nd negative limb which denies deductibility for
expenses that are ‘private or domestic’ in nature
• This is an area courts have had difficulty in drawing the line
between what is deductible and what is non-deductible
• Parliament has intervened in some of these areas, enacting
deduction denial provisions or deduction conferral provisions –
an example is following the Anstis decision
5.1A Travel to and from work
• General rule: travel expenses for trips between home and work
fail the positive limbs – Lunney case is authority for this
• These expenses aren’t incurred by taxpayer in the course of
performing their work, but put them in a position to start their
work – they are therefore private expenses
• There are 6 exceptions to this general rule – in this course we’ll
cover 2 of those exceptions:
– On-call workers
– Travel between 2 separate workplaces
5.1A Travel to and from work
On-call workers
FCT v Collings
• Taxpayer was a computer consultant who mainly worked in the
office – outside of working hours she was ‘on call’ for employer
• When ‘on call’, she tried to fix problems remotely from home, but
if she couldn’t, she returned to the office to deal with them there
• Taxpayer sought to deduct additional costs of travelling from
home to work outside her ordinary working hour commuting
• Issue: deductibility of these additional costs
5.1A Travel to and from work
FCT v Collings (continued)
• HELD: additional costs incurred to travel to office outside of
ordinary office hours were deductible expenses
• These costs related to work activities that started at the home,
not at the office, when taxpayer tried to fix problems remotely
• Therefore, the trip to the office was not a trip to go to work, but a
trip in the course of work
• Caution: it is not enough for a taxpayer to be ‘on call’ in order to
rely on Collings to deduct home to office travel expenses
5.1A Travel to and from work
Travel between 2 separate workplaces
FCT v Payne
• Taxpayer was a Qantas pilot, flying out of Sydney airport, who
owned a deer farming property in Northern NSW
• He sought to deduct cost of travelling between the 2 unrelated
places of income-earning activity
• HELD: by 3:2 majority the travel between the 2 places didn’t
occur when taxpayer was engaged in either of the activities –
therefore wasn’t in the course of his income-earning activity
5.1A Travel to and from work
FCT v Payne (continued)
• Government responded to overcome the reasoning in Payne
(not the actual decision) by introducing section 25-100
• Section 25-100 allows deductions for travel expenses between
2 unrelated places of income-earning activity
– Note the exception in section 25-100(3): no deduction if the
taxpayer lives at one of the places where income produced
– This means section 25-100 wouldn’t have applied to the
taxpayer in Payne if facts in that case occurred today
5.1B Home office cf. home study (Recap)
• Employees working from home may incur a range of expenses
relating to that work, e.g. interest on home loan, council rates,
water rates, building insurance, electricity, gas and internet
• An important distinction is the ‘running expenses’ vs.
‘occupancy expenses’ distinction
– ‘Running expenses’ are those expenses such as electricity
and gas, phone and internet
– ‘Occupancy expenses’ include rent, interest on home loan,
council rates and building insurance
• Why is the distinction important?
5.1B Home office cf. home study
• ‘Running expenses’ are deductible, provided taxpayer is working
in a room and there’s no other family member there at same time
– dedicated home study vs. lounge room where other household
members are watching television at the same time
• ‘Occupancy expenses’ are generally more significant expenses
and are more difficult in terms of determining deductibility:
– Very difficult to claim a deduction for these expenses because
they will relate to the taxpayer’s home
– Starting assumption: not deductible, unless taxpayer can
show certain factors (as we will see in the following cases)
5.1B Home office cf. home study
Handley v FCT
• Taxpayer used a room in his house as a study where he did work
relating to his profession as a barrister
• Room was predominantly used for this purpose, though on other
occasions it was used for other reasons
• Taxpayer sought deduction for proportion of interest on mortgage
repayments and rates expenses
• Issue: deductibility of these expenses
5.1B Home office cf. home study
Handley v FCT (continued)
• HELD: no deduction allowed for the expenses
• The study remained an integral part of family home, even though it
was used by taxpayer for another purpose for some of the time
• Expenses were private outgoings related to the entire home and
would have been incurred for the entire home whether or not the
taxpayer used part of it as his study for some of the time
• Key takeaway: expenses related to home office generally non-
deductible private outgoings if would’ve been incurred regardless
5.1B Home office cf. home study
Swinford v FCT
• Taxpayer was a self-employed professional writer of radio and
television scripts who worked from her home
• She set aside one room in her rental to be used exclusively for her
writing work – she used it for writing purposes and for meetings
• Taxpayer sought a deduction for a portion of her rent (based on a
floor area basis) arguing that there were 2 purposes for the rent
• Issue: deductibility of the portion of the taxpayer’s rent
5.1B Home office cf. home study
Swinford v FCT (continued)
• HELD: a portion of the rent was deductible to the taxpayer
• Taxpayer had established a distinct work room and this amounted
to a separate application of the rental
• Key takeaway: there was an absence of an alternative place for the
taxpayer (other than her home) to carry out her work
• Conclusion: to deduct ‘occupancy expenses’ taxpayer generally
needs extensive use of the room in the home (zero or minimal
domestic use), and absence of alternative work location
5.1C Clothing
• This category of expenses will involve section 8-1, but also
specific sections in Division 34
• Clothing expenses can be broken up into 5 categories:
– Convention clothing
– Occupation-specific clothing
– Protective clothing
– Compulsory uniforms
– Non-compulsory uniforms
• Clothing generally can’t be deducted, with a few exceptions
5.1C Clothing
Convention clothing
• This is everyday clothing worn by people regardless of their
occupation, or clothing that doesn’t fit into the other 4 categories
• Examples: business attire worn by office workers, jeans work by
tradespeople
• Cost of conventional clothing is non-deductible, even if taxpayer’s
employer says the clothing is compulsory, or taxpayer only wears
it while at work
5.1C Clothing
Occupation-specific clothing
• This is clothing that distinctively identifies the wearer as belonging
to a particular occupation: section 34-20(1)
• Examples: judge’s robe or chef’s chequered pants
• Cost of occupation-specific clothing is deductible, provided the
taxpayer wears the clothing for work: section 34-10(3) says
Division 34 does not deny a deduction
5.1C Clothing
Protective clothing
• This is clothing that protects the wearer from the risk of death,
disease or injury from work activities: section 34-20(2)
• Examples: sun-protection clothing, steel-capped boots
• Cost of protective clothing is deductible, provided the taxpayer
wears the clothing for work: section 34-10(3) says Division 34
does not deny a deduction
5.1C Clothing
Compulsory uniform
• This is one or more items of clothing that identifies the wearer as
an employer of an organisation: section 34-15(1)
• The employer must make it compulsory to wear the uniform, e.g.
in a strictly enforced workplace agreement or policy
• Cost of compulsory uniforms is deductible, provided the employer
makes it compulsory for taxpayer to wear the uniform
5.1C Clothing
Non-compulsory uniform
• This is a uniform that the employer doesn’t require the employee
to wear: section 34-15(2)
• The starting point is that the cost of a non-compulsory uniform is
non-deductible: section 34-10(2)
• However, the cost will be deductible if the employee wears the
uniform at work and the employer has registered the design with
AusIndustry: section 34-10(1)
5.1D Self-education
• This self-education expenses category can be difficult – in
addition to the general deduction provision, section 8-1, we also
have various deduction denial provisions to consider
• Self-education expenses cover all costs associated with gaining
information, knowledge, skills, etc.
• Examples: course fees, seminar fees, textbooks, stationery,
internet and data usage, travel to the place of education
• From the cases there appears to be 3 rules under the positive
limbs, which we’ll examine on the following slides
5.1D Self-education
Rule 1 – getting an initial qualification
• This involves self-education expenses incurred to obtain a
qualification or certificate to commence a profession, or enable
a taxpayer to do a certain job
• These expenses will not satisfy the positive limbs in section 8-1
• Reasoning: the expenses are incurred to get an income source,
(to get a job) and are not an expense of the income source
• Example: taxpayer incurs self-education expenses to change
employment from nursing to medicine
5.1D Self-education
Rule 2 – keeping up to date
• This involves self-education expenses where the topic area is
connected to the taxpayer’s current employment
• The self-education maintains or improves the specific skills or
knowledge required in the taxpayer’s current employment
• These expenses will satisfy the positive limbs in section 8-1
• Reasoning: the expenditure enables taxpayer to improve or
maintain skills or knowledge in their income-earning area
5.1D Self-education
Rule 3 – guaranteed higher future income
• This involves self-education expenses where the taxpayer is
virtually guaranteed to obtain a higher paying position on
successfully completing the self-education
• This is because of its relevance to the future income in the new,
higher paying position
• These expenses will satisfy the positive limbs in section 8-1
• This type of expenditure is unlikely to happen often – see the
FCT v Wilkinson case for an example of where it did arise
5.1D Self-education
• Deduction denial provisions:
– Section 26-19: introduced following Anstis decision and
denies expenses incurred in course of non-work activities
that entitle eligible persons to Youth Allowance and other
relevant government assistance payments
– Section 26-20: denies repayments of loan repayments,
such as under HELP
5.2 Contemporaneity principle
• The contemporaneity principle has to do with the positive limbs
of section 8-1
• We have, to an extent, already come across this principle when
examining travel and self-education expenses
• The idea here is that expenditure that is not incurred in the
course of an income-earning activity is not expenditure incurred
in gaining assessable income
• Here we look at expenses that are incurred before and after an
income-earning activity is carried on
• Note: this area is heavily qualified by recent case law
5.2 Contemporaneity principle
• First principle is that expenses related to obtaining work are
not deductible
FCT v Maddalena
• Taxpayer was professional football player and incurred travel
and legal expenses to obtain a contract with a different club
• Taxpayer sought to deduct the expenses
• HELD: the expenses were not deductible because they were
not incurred in the course of an income-earning activity, but
incurred to obtain employment
5.2 Contemporaneity principle
• Expenses incurred to decide whether to start a business are
not deductible
Softwood Pulp and Paper Ltd v FCT
• Taxpayer company was formed to establish a paper mill and
incurred expenses for a feasibility study for the project
• On the basis of the feasibility study, the project did not proceed
• HELD: preliminary expenses, such as cost of feasibility study,
are incurred before taxpayer starts earning assessable income
– these expenses do not satisfy the positive limbs
5.2 Contemporaneity principle
• Note: there are provisions which would provide a deduction if
facts in Softwood Pulp and Paper Ltd occurred today which
we’ll look at after the break (sections 40-832 and 40-840)
Steele v DFCT
• Taxpayer used borrowed funds to purchase land in 1980 to be
used in a commercial development
• Negotiations with the proposed partner fell through and the
project was abandoned, with taxpayer selling the land in 1987
• Taxpayer sought to deduct interest costs incurred while holding
the land prior to the sale
5.2 Contemporaneity principle
Steele v DFCT (continued)
• The court said the question is whether there is a relevant
connection between the interest costs and the taxpayer’s
assessable income
• The court also said interest expenses will hardly ever by capital
• The court reminded us of 2 things:
– The expense doesn’t have to be incurred in the same year
the assessable income is derived
– The expense doesn’t have to be successful in producing
assessable income for it to be deductible
5.2 Contemporaneity principle
Steele v DFCT (continued)
• Ultimately, it is a question of fact, taking into account:
– Time gap between expense and actual/expected income
– Degree of commitment from taxpayer to project
– Whether taxpayer had any non-income producing use in mind
• The court sent the issue back to the AAT for decision, however
before it went back to the AAT, the ATO allowed the deduction
• Implication: ATO must have considered the taxpayer would have
satisfied the positive limbs based on the 3 guidelines above
5.2 Contemporaneity principle
• We’ll now switch to expenses incurred after taxpayer’s income-
earning activity has ceased
Placer Pacific Management Pty Ltd v FCT
• Taxpayer carried on various businesses including manufacture
of conveyor belt systems
• Business ceased and some 8 years later, taxpayer was required
to meet liability claim for manufacturing a faulty system
• When claim arose, taxpayer’s activities were limited to
investment and management of related companies
• Issue: deductibility of settlement amount and related legal fees
5.2 Contemporaneity principle
Placer Pacific Management Pty Ltd v FCT (continued)
• HELD: outgoings satisfied 2nd positive limb and were deductible
• Occasion of the loss was the contract entered into with customer
which was part of carrying on of a business to produce income
• The fact the business was no longer carried on didn’t prevent
the deductibility of the outgoing
• This case established that ‘long tail liabilities’ may be deductible
even though business to which liabilities relate may’ve ceased
• The court commented it would be unjust to deny a deduction for
these types of outgoings – it takes time for liabilities to eventuate
5.2 Contemporaneity principle
• Other cases that consider the contemporaneity principle are
Spriggs v FCT; Riddell v FCT and FCT v Brown
FCT v Brown
• In 1988, the taxpayer borrowed funds to acquire a business, the
debt being repayable over 10 years
• In 1990, the business was sold and the sale proceeds were
used to pay down the loan, but an amount remained outstanding
• The taxpayer continued to incur interest outgoings
• Issue: deductibility of the interest expenses in 1993 and 1994
where the business to which the loan related had ceased
5.2 Contemporaneity principle
FCT v Brown (continued)
• HELD: the interest outgoings continued to be deductible
• Applying the principle in Steele, the court said that occasion of
the interest outgoing was to be determined by reference to the
purpose of the borrowing and the use to which funds were put
• Case is authority for principle that interest deductions will be
allowed where the original borrowing was used in a business
directed at producing assessable income
• Due to COVID-19, there may be taxpayers who are required to
close their business while they have outstanding loans
5.3 Revenue/capital boundary
• Recall that in order to obtain a deduction under section 8-1, the
expense must satisfy one of the 2 positive limbs and avoid falling
into one of the 4 negative limbs
• The 1st negative limb denies deductibility for expenses that are
‘capital’ or ‘of a capital nature’
• In a practical sense, if the expense falls in the 1st negative limb,
you should consider one of the capital allowance regimes (e.g.
depreciation deductions for decline in value)
• That means that as you are answering the revenue vs. capital
question here, you are also answering it under the other regime
5.3 Revenue/capital boundary
• Similarly, when you are addressing the positive limbs of section
8-1, you are also addressing the ‘relevance’ question in the capital
allowance regime
• Approach the question in a systematic way – start with the positive
limbs, before moving to the ‘capital’ negative limb
• Broadly, the revenue vs. capital distinction in section 8-1 is similar
to the revenue vs. capital distinction in section 6-5 – bear in mind
though we are now looking at the deductions side of the formula
• Tangible assets: answer is usually clear
• Intangible assets: answer is less clear, causing most problems
5.3 Revenue/capital boundary
• Most courts, tribunals and the ATO refer to the statements of Dixon
J in the Sun Newspapers case:
– The character of the advantage sought, and in this its lasting qualities
may play a part [What is the advantage/asset and how long will it last?]
– The manner in which it is to be used, relied upon or enjoyed and in this
and under the former head, recurrence may play its part [How is the
advantage/asset used?]
– 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 or by making a final provision or payment so as to secure
future use or enjoyment [How was the advantage/asset paid for?]
5.3 Revenue/capital boundary
• The first consideration (character of the advantage sought) is the
most important one, therefore more weight should be given to it
• Key statements from other cases on the revenue vs. capital issue:
– Is the expense a working expense? If so, revenue
– Is the expense one that establishes, acquires or adds to the
taxpayer’s profit-earning structure (if so, capital), or is the
expense a cost of operating that structure (if so, revenue)
– Is the expense one that is made to meet a continuous or
constant demand of the taxpayer’s income-earning activity (if
so, revenue), or is it made once and for all (if so, capital)
5.3 Revenue/capital boundary
– Does the expense bring into existence an asset or an
advantage for the enduring benefit of the taxpayer’s business?
If so, capital
• Note that the accounting treatment of the asset is irrelevant, e.g. the
fact it is classified as a non-current asset does not make it capital
for section 8-1 purposes
• Examples in a café: coffee beans would be revenue expense, while
coffee machine, table and chairs are all capital expenses
5.3 Revenue/capital boundary
Sun Newspapers
• Sun Newspapers wanted to prevent competitor from introducing a
new and competitive newspaper into Sydney market
• Sun Newspapers paid its competitor a restrictive covenant
expense for the competitor agreeing not to publish a newspaper
within 300 miles of Sydney for 3 years
• Issue: deductibility of the expense
• HELD: the expense was a non-deductible capital expenses
because Sun Newspapers had achieved a lasting benefit by
effectively buying out its competitor with the payment
5.3 Revenue/capital boundary
Sun Newspapers (continued)
• Reasoning: the expense strengthened and preserved taxpayer’s
business organisation – it removed competition and its main aim
was to preserve the business from immediate impairment (loss of
newspaper circulation due to competitor’s lower cost newspaper)
• The expense was not recurrent; it was a once-only expense
• The statements of Dixon J remain the basis for the revenue vs.
capital analysis
5.3 Revenue/capital boundary
Broken Hill Theatres Pty Ltd v FCT
• Taxpayer incurred legal expenses opposing licence application by
a potential competitor
• Licence applications were heard annually, so the taxpayer was
protected from competition for 12 months as a result of expenses
• Issue: deductibility of the expenses
• HELD: the expenses were characterised as capital
• Reasoning: expenses directed at limiting competition, preserving
and protecting the taxpayer’s existing business
5.3 Revenue/capital boundary
BP Australia Ltd v FCT
• BP was petrol refiner that entered into ‘tied trade’ agreements
with independent retailers
• In return for lump sum payments from BP, retailers agreed to
only sell BP fuel for periods between 3 – 5 years
• Issue: deductibility of the payments
• HELD: the payments were revenue expenses
• Reasoning: payments related the process of finding customers,
not the business’s structure
5.3 Revenue/capital boundary
National Australia Bank Ltd v FCT
• Taxpayer carried on retail banking business
• Taxpayer made a lump sum payment to Commonwealth for the
exclusive right for 15 years to offer loans to defence force
members – members could still obtain loans from other banks
• Issue: deductibility of the lump sum payment
• HELD: the payment was on revenue account
• Reasoning: nature of advantage sought was an expansion of
the taxpayer’s customer base and increase in income earned
5.3 Revenue/capital boundary
National Australia Bank Ltd v FCT (continued)
• The case was considered to be not unlike BP Australia
• The payment didn’t enlarge the taxpayer’s business framework,
but rather was incurred as part of the process by which the
taxpayer obtained regular returns
• Observation: despite the advantage lasting 15 years, the lump
sum payment was treated as a revenue expense
• The courts will focus on the nature of the advantage sought
when determining the revenue vs. capital issue
5.3 Revenue/capital boundary
• Other cases that examined the revenue vs. capital distinction
are FCT v Star City Ptd Ltd, Herald & Weekly Times Ltd v FCT
and Charles Moore & Co (WA) Pty Ltd v FCT
• In the Herald & Weekly Times and Charles Moore cases, the
revenue vs. capital issue was very brief, with the courts in both
cases finding the expense in question was a revenue expense
5.3 Revenue/capital boundary
FCT v Sharpcan Pty Ltd
• Taxpayer conducted a hotel and gaming business
• Due to legislative changes in Victoria, to continue running the
gaming activities, the taxpayer had to bid for gaming machine
entitlements (‘GMEs’) to operate its 18 machines
• Taxpayer incurred $600,000 to purchase the GMEs, which gave
them the right to conduct gaming for 10 years
• Issue: deductibility of the amount incurred to purchase GMEs
5.3 Revenue/capital boundary
FCT v Sharpcan Pty Ltd (continued)
• HELD: amount was capital
• The court said the question is what is the advantage obtained
from the expenditure, and once identified, that advantage needs
to be characterised as either the acquisition or extension of the
business structure, or the payment for the use of an asset
• The GMEs were a barrier to entry – you could not have gaming
machines without GMEs – the payment was in the nature of a
once and for all payment to acquire an enduring asset
End of lecture
• Thank you – enjoy your break in Week 6