Tax Law Improvement Act 1997 (121 of 1997)

Schedule 1   Amendment of the Income Tax Assessment Act 1997

4   Before Division 26

Insert:

Division 25 - Some amounts you can deduct

Guide to Division 25

25-1 What this Division is about

This Division sets out some amounts you can deduct. Remember that the general rules about deductions in Division 8 (which is about general deductions) apply to this Division.

Table of sections

Operative provisions

25-5 Tax-related expenses

25-10 Repairs

25-15 Amount paid for lease obligation to repair

25-20 Lease document expenses

25-25 Borrowing expenses

25-30 Expenses of discharging a mortgage

25-35 Bad debts

25-40 Loss from profit-making undertaking or plan

25-45 Loss by theft etc.

25-50 Payments of pensions, gratuities or retiring allowances

25-55 Payments to associations

25-60 Parliament election expenses

25-70 Deduction for election expenses does not extend to entertainment

25-75 Rates and land taxes on premises used to produce mutual receipts

Operative provisions

25-5 Tax-related expenses

(1) You can deduct expenditure you incur to the extent that it is for:

(a) managing your *tax affairs; or

(b) complying with an obligation imposed on you by a *Commonwealth law, insofar as that obligation relates to the *tax affairs of an entity; or

(c) interest under section 170AA (Underpayment of tax) or 207A (Late payment of tax) of the Income Tax Assessment Act 1936.

Note: To find out whether a trustee of a deceased estate can deduct expenditure under this section, see subsection 69(7) of the Income Tax Assessment Act 1936.

No deduction for certain expenditure

(2) You cannot deduct under subsection (1):

(a) *tax; or

(b) an amount payable under Part VI (Collection and recovery of tax) of the Income Tax Assessment Act 1936; or

(c) expenditure for borrowing money (including payments of interest) to pay an amount covered by paragraph (a) or (b); or

(d) expenditure for a matter relating to the commission (or possible commission) of an offence against an *Australian law or a *foreign law; or

(e) a fee or commission for advice about the operation of a *Commonwealth law relating to taxation, unless that advice is provided by a *recognised tax adviser.

No deduction for expenditure excluded from general deductions

(3) You cannot deduct expenditure under subsection (1) to the extent that a provision of this Act (except section 8-1) expressly prevents or limits your deducting it under section 8-1 (about general deductions). It does not matter whether the provision specifically refers to section 8-1.

No deduction for capital expenditure

(4) You cannot deduct capital expenditure under subsection (1). However, for this purpose, expenditure is not capital expenditure merely because the *tax affairs concerned relate to matters of a capital nature.

Example: Under this section, you can deduct expenditure you incur in applying for a private ruling on whether you can depreciate an item of property.

Use of property taken to be for income producing purpose

(5) Under some provisions of this Act it is important to decide whether you used property for the *purpose of producing assessable income. For provisions of that kind, your use of property is taken to be for that purpose insofar as you use the property for:

(a) managing your *tax affairs; or

(b) complying with an obligation imposed on you by a *Commonwealth law, insofar as that obligation relates to the *tax affairs of another entity.

Example: You buy a computer to prepare your tax returns. The expenditure you incur in buying the computer is capital expenditure and cannot be deducted under this section.

However, to the extent that you use the computer in preparing your income tax return, you will be able to depreciate your computer and deduct an amount under section 54 (Depreciation) of the Income Tax Assessment Act 1936. That is because, under this subsection, the computer is property that you are taken to use for the purpose of producing assessable income.

(6) If another provision of this Act expressly provides that a particular use of property is not taken to be for the *purpose of producing assessable income, that provision overrides subsection (5).

25-10 Repairs

(1) You can deduct expenditure you incur for repairs to premises (or part of premises), *plant, machinery, tools or articles that you held or used solely for the *purpose of producing assessable income.

Property held or used partly for that purpose

(2) If you held or used the property only partly for that purpose, you can deduct so much of the expenditure as is reasonable in the circumstances.

No deduction for capital expenditure

(3) You cannot deduct capital expenditure under this section.

25-15 Amount paid for lease obligation to repair

You can deduct an amount that you pay for failing to comply with a lease obligation to make repairs to premises if you use or have used the premises for the *purpose of producing assessable income.

Note: The amount is assessable income of the entity to which you pay it: either as ordinary income under section 6-5 or because it is included by section 15-25.

25-20 Lease document expenses

(1) You can deduct expenditure you incur for preparing, registering or stamping:

(a) a lease of property; or

(b) an assignment or surrender of a lease of property;

if you have used or will use the property solely for the *purpose of producing assessable income.

Property used partly for that purpose

(2) If you have used, or will use, the leased property only partly for that purpose, you can deduct the expenditure to the extent that you have used, or will use, the leased property for that purpose.

25-25 Borrowing expenses

(1) You can deduct expenditure you incur for borrowing money, to the extent that you use the money for the *purpose of producing assessable income. In most cases the deduction is spread over the *period of the loan.

For the cases where the deduction is not spread, see subsection (6).

Note: Your deductions under this section may be reduced if any of your commercial debts have been forgiven in the income year: see Subdivision 245-E of Schedule 2C to the Income Tax Assessment Act 1936.

Income year when money used solely for the purpose of producing assessable income

(2) You can deduct for an income year the maximum amount worked out under subsection (4) if you use the borrowed money during that income year solely for the *purpose of producing assessable income.

Example: In 1997-98 you borrow $100,000 and incur expenditure of $1,500 for the borrowing. You use the money to buy a house. Throughout 1998-99 you rent the house to a tenant. You can deduct for the expenditure for 1998-99 the maximum amount worked out under subsection (4).

Income year when borrowed money used partly for that purpose

(3) If you use the money only partly for that purpose during that income year, you can deduct the proportion of that maximum amount that is appropriate having regard to the extent that you used the borrowed money for that purpose.

Note: You cannot deduct anything for that income year if you do not use the money for that purpose at all during that income year.

Maximum deduction for an income year

(4) You work out as follows the maximum amount that you can deduct for the expenditure for an income year:

Method statement

Step 1. Work out the remaining expenditure as follows:

• For the income year in which the *period of the loan begins, it is the amount of the expenditure.

• For a later income year, it is the amount of the expenditure reduced by the the maximum amount that you can deduct for the expenditure for each earlier income year.

Step 2. Work out the remaining loan period as follows:

• For the income year in which the *period of the loan begins, it is the period of the loan (as determined at the end of the income year).

• For a later income year, it is the period from the start of the income year until the end of the period of the loan (as determined at the end of the income year).

Step 3. Divide the remaining expenditure by the number of days in the remaining loan period.

Step 4. Multiply the result from Step 3 by the number of days in the remaining loan period that are in the income year.

Example: To continue the example in subsection (2): suppose the original period of the loan is 4 years starting on 1 September 1997. What is the maximum amount you can deduct for the expenditure for 1997-98?

Applying the method statement:

After Step 1: the remaining expenditure is $1,500 (the amount of the expenditure).

After Step 2: the remaining loan period is 4 years from 1 September 1997 (1,461 days).

After Step 3: the result is $1,500 divided by 1,461 = $1.03.

After Step 4: the result is $1.03 multiplied by 302 days = $310.06.

Suppose you repay the loan early, on 31 December 1998. What is the maximum amount you can deduct for the expenditure for 1998-99?

Applying the method statement:

After Step 1: the remaining expenditure is $1,500 (the amount of the expenditure) reduced by $310.06 (the maximum amount you can deduct for 1997-98) = $1,189.94.

After Step 2: the remaining loan period is the period from 1 July 1998 to 31 December 1998 (183 days).

After Step 3: the result is $1,189.94 divided by 183 days = $6.50.

After Step 4: the result is $6.50 multiplied by 183 days = $1,189.94.

Meaning of period of the loan

(5) The period of the loan is the shortest of these periods:

(a) the period of the loan as specified in the original loan contract;

(b) the period starting on the first day on which the money was borrowed and ending on the day the loan is repaid;

(c) 5 years starting on the first day on which the money was borrowed.

When deduction not spread

(6) If the total of the following is $100 or less:

(a) each amount of expenditure you incur in an income year for borrowing money you use during that income year solely for the *purpose of producing assessable income;

(b) for each amount of expenditure you incur in that income year for borrowing money you use during that income year only partly for that purpose - the proportion of that amount that is appropriate having regard to the extent that you use the money during that income year for that purpose;

you can deduct for the income year:

(c) each amount covered by paragraph (a); and

(d) each proportion covered by paragraph (b).

25-30 Expenses of discharging a mortgage

Mortgage for borrowed money

(1) You can deduct expenditure you incur to discharge a mortgage that you gave as security for the repayment of money that you borrowed if you used the money solely for the *purpose of producing assessable income.

Mortgage for property bought

(2) You can deduct expenditure you incur to discharge a mortgage that you gave as security for the payment of the whole or part of the purchase price of property that you bought if you used the property solely for the *purpose of producing assessable income.

Money or property used partly for that purpose

(3) If you used the money you borrowed, or the property you bought, only partly for the *purpose of producing assessable income, you can deduct the expenditure to the extent that you used the money or property for that purpose.

No deduction for payments of principal or interest

(4) You cannot deduct payments of principal or interest under this section.

25-35 Bad debts

(1) You can deduct a debt (or part of a debt) that you write off as bad in the income year if:

(a) it was included in your assessable income for the income year or for an earlier income year; or

(b) it is in respect of money that you lent in the ordinary course of your *business of lending money.

Note: If a bad debt is in respect of a payment that is required to be made under a qualifying security (within the meaning of Division 16E of Part III of the Income Tax Assessment Act 1936): see subsection 63(1A) of that Act.

Writing off a debt you have bought

(2) You can deduct a debt that you write off as bad in the income year if you bought the debt in the ordinary course of your *business of lending money. However, you cannot deduct more than the expenditure you incurred in buying the debt.

Writing off part of a debt you have bought

(3) You can deduct a part of a debt if:

(a) you write off that part as bad in the income year; and

(b) you bought the debt in the ordinary course of your *business of lending money.

(4) However, the maximum that you can deduct under subsection (3) for one or more income years is the amount (if any) by which:

• the expenditure you incurred in buying the debt;

exceeds:

• so much of the debt as has not yet been written off as bad.

Special rules affecting deductions under this section

(5) Your entitlement to deductions under this section may be affected by the rules described in the table.

Provisions of the Income Tax Assessment Act 1997 are identified in normal text. The other provisions, in bold , are provisions of the Income Tax Assessment Act 1936.

25-40 Loss from profit-making undertaking or plan

(1) You can deduct a loss arising from the carrying on or carrying out of a profit-making undertaking or plan if any profit from that plan would have been included in your assessable income by
section 15-15 (which is about profit-making undertakings and plans).

When section does not apply

(2) You cannot deduct a loss under subsection (1) if the loss arises in respect of the sale of property acquired on or after 20 September 1985.

Note: If you sell property you acquired before 20 September 1985 for profit-making by sale, you may be able to deduct a loss on the sale: see section 52 of the Income Tax Assessment Act 1936.

Notice to Commissioner

(3) You can deduct a loss under subsection (1), insofar as it arises in respect of property, only if:

(a) you notified the Commissioner that you acquired the property for the purpose of profit-making by sale or for the carrying on or carrying out of any profit-making undertaking or plan (however described); or

(b) the Commissioner is satisfied that you acquired the property for either of those purposes.

When notice must have been given

(4) The notice must have been given at or before the time you lodged your *income tax return:

(a) for the income year in which you acquired the property; or

(b) if you were not required to lodge an income tax return for that income year - for the first income year after that income year for which you were required to lodge one.

25-45 Loss by theft etc.

You can deduct a loss in respect of money if:

(a) you discover the loss in the income year; and

(b) the loss was caused by theft, stealing, embezzlement, larceny, defalcation or misappropriation by your employee or *agent (other than an individual you employ solely for private purposes); and

(c) the money was included in your assessable income for the income year, or for an earlier income year.

25-50 Payments of pensions, gratuities or retiring allowances

(1) You can deduct a payment of a pension, gratuity or retiring allowance that you make to:

(a) an employee; or

(b) a former employee; or

(c) a dependant of an employee or a former employee.

(2) However, you can deduct it only to the extent that it is made in good faith in consideration of the past services of the employee, or former employee, in any *business that you carried on for the purpose of gaining or producing assessable income.

(3) You cannot deduct a payment under this section if you can deduct it under any other provision of this Act.

25-55 Payments to associations

(1) You can deduct a payment you make for membership of a trade, business or professional association.

Note: Alternatively, you can deduct the expense under section 8-1 (which is about general deductions) if you satisfy the requirements of that section.

Maximum amount - $42

(2) However, $42 is the maximum amount you can deduct under this section for the payments that you make in the income year to any one association.

If you deduct under section 8-1

(3) If you deduct a payment under section 8-1 (which is about general deductions) instead of this section:

(a) the payment does not count towards the $42 limit; and

(b) the amount that you can deduct for the payment is not limited to $42.

25-60 Parliament election expenses

You can deduct expenditure you incur in contesting an election for membership of:

(a) the Parliament of the Commonwealth; or

(b) the Parliament of a State; or

(c) the Legislative Assembly for the Australian Capital Territory; or

(d) the Legislative Assembly of the Northern Territory of Australia.

Note: Entertainment expenses are excluded: see section 25-70.

[The next section is section 25-70.]

25-70 Deduction for election expenses does not extend to entertainment

(1) To the extent that you incur expenditure in respect of providing *entertainment, you cannot deduct it under section 25-60.

(2) However, subsection (1) does not stop you deducting expenditure to the extent that you incur it in respect of:

(a) providing *entertainment that is available to the public generally; or

(b) providing food or drink to yourself, unless it would be concluded that you have a purpose of enabling or facilitating *entertainment to be provided to someone else.

25-75 Rates and land taxes on premises used to produce mutual receipts

(1) An entity can deduct these amounts it pays for premises:

(a) rates which are annually assessed;

(b) land tax imposed under a *State law or *Territory law.

But only if it uses the premises:

(c) for the purpose of producing mutual receipts; or

(d) in carrying on a *business for the purpose of producing mutual receipts.

When premises used only for deductible purposes

(2) The entity can deduct the whole of the rates or land tax if it uses the premises only in one or more of these ways:

(a) for the purpose of producing mutual receipts;

(b) in carrying on a *business for the purpose of producing mutual receipts;

(c) for the *purpose of producing assessable income.

When premises used partly for deductible purposes

(3) If the entity uses the premises partly in one or more of the ways referred to in subsection (2) and partly in some other way, it can deduct the rates or land tax to the extent that it uses the premises in one or more of the ways referred to in that subsection.

No deduction under section 8-1

(4) The entity cannot deduct the rates or land tax under section 8-1 (which is about general deductions).