ATO Interpretative Decision

ATO ID 2001/696

Income Tax

• Note: Division 42 of the Income Tax Assessment Act 1997 has been repealed with effect from 1 July 2001. This ATO ID continues to be a precedential view in respect of decisions relating to the former Division 42. The principles contained in the ATO ID in relation to the former provisions may be relevant to decisions where a rewritten or replacement provision is applied.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

How should the costs incurred in the acquisition, training and maintenance of a guard dog to protect business premises be treated under the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Acquisition and training costs are capital and are depreciable under Division 42 of ITAA 1997.

The maintenance costs are deductible under section 8-1 of the ITAA 1997.

Facts

A guard dog was purchased by a taxpayer to protect materials, equipment and supplies that are left at premises where his business is operated. The dog had received initial obedience training and the taxpayer is incurring expenses relating to guard dog training. The dog is not being socialised with other people or animals and is kept exclusively at the business premises.

Reasons for Decision

In order to be deductible under section 8-1 of the ITAA 1997, expenditure must have the essential character of an outgoing incurred in gaining assessable income (Lunney & Anor v. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404). There must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL & Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431), and the expenditure must not be capital, private or domestic in nature.

Expenses related to a guard dog where that dog is used to protect an individual, their family or personal assets would be considered a private and domestic expense, without sufficient nexus to income earning activities. In this case, the expenditure on a guard dog to the extent that it is used to guard equipment and materials at business premises arose as a direct result of the taxpayer's income earning activities and is not a private or domestic expense.

A guard dog used to provide security for business premises would be considered to be a working beast or plant, as they are serving a productive function of the business. Consequently, the purchase expense of the guard dog relates to a purchase of plant, which is a capital purchase, and is not allowable under section 8-1 of the ITAA 1997 but is depreciable under Division 42 of the ITAA 1997.

The expenses of training the dog, as a guard dog, will provide an enduring benefit to the taxpayer's business, namely a well-trained guard dog to provide the appropriate level of security to the business property. Other expenses that would be classified as capital and therefore be depreciable under Division 42 of the ITAA 1997 would include veterinary expenses for the initial check up and desexing of the dog.

Maintenance expenses of the guard dog would generally be an allowable deduction as business expenditure under section 8-1 of the ITAA 1997.

Year of income:  Year ended 30 June 2001 Year ending 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   section 8-1
   Division 42

Case References:
Lunney & Anor v. Federal Commissioner of Taxation
   (1958) 100 CLR 478
   (1958) 11 ATD 404

Related Public Rulings (including Determinations)
TR 2000/18

Keywords
Deductions & expenses
Depreciation
Working animals

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  30 November 2001

ISSN: 1445-2782