Tax Law Improvement Act 1997 (121 of 1997)

Schedule 1   Amendment of the Income Tax Assessment Act 1997

5   Division 26 (heading and link note)

Repeal the heading and the link note, substitute:

Division 26 - Some amounts you cannot deduct, or cannot deduct in full

Guide to Division 26

26-1 What this Division is about

This Division sets out some amounts that you cannot deduct, or that you cannot deduct in full.

Table of sections

Operative provisions

26-5 Penalties

26-10 Leave payments

26-20 HECS and student assistance

26-30 Relative’s travel expenses

26-35 Reducing deductions for amounts paid to related entities

26-40 Maintaining your family

26-45 Recreational club expenses

26-50 Expenses for a leisure facility or boat

Operative provisions

26-5 Penalties

You cannot deduct under this Act:

(a) an amount (however described) payable, by way of penalty, under an *Australian law or a *foreign law; or

(b) an amount ordered by a court to be paid on the conviction of an entity for an offence against an *Australian law or a *foreign law.

26-10 Leave payments

(1) You cannot deduct under this Act a loss or outgoing for long service leave, annual leave, sick leave or other leave except:

(a) an amount paid in the income year to the individual to whom the leave relates (or, if that individual has died, to that individual’s dependant or *legal personal representative); or

(b) an *accrued leave transfer payment that is made in the income year.

(2) An accrued leave transfer payment is a payment that an entity makes:

(a) in respect of an individual’s leave (some or all of which accrued while the entity was required to make payments in respect of the individual’s leave, or leave the individual might take); and

(b) when the entity is no longer required (or is about to stop being required) to make payments in respect of such leave; and

(c) to another entity when the other entity has begun (or is about to begin) to be required to make payments in respect of such leave; and

(d) under (or for the purposes of facilitating the provisions of) an *Australian law, or an award, order, determination or industrial agreement under an *Australian law.

It does not matter whether the leave accrues to the individual as an employee or for some other reason.

Example: Your employee goes to a new employer. You pay the new employer $2,000 for the employee’s unused long service leave because an industrial agreement requires you to make that payment.

Note: An accrued leave transfer payment is included in the assessable income of the entity to which it is made: see section 15-5.

[The next section is section 26-20.]

26-20 HECS and student assistance

(1) You cannot deduct under this Act:

(a) a contribution made under Chapter 4 of the Higher Education Funding Act 1988; or

(b) a basic charge within the meaning of Chapter 5 of that Act; or

(c) a payment made to reduce a debt to the Commonwealth under Chapter 5A of that Act; or

(d) a payment made to reduce a debt to the Commonwealth, or to a participating corporation, under Part 4A of the Student Assistance Act 1973.

Exception when you provide a fringe benefit

(2) Subsection (1) does not stop you deducting expenditure you incur in *providing a *fringe benefit.

[The next section is section 26-30.]

26-30 Relative’s travel expenses

(1) You cannot deduct under this Act a loss or outgoing you incur, insofar as it is attributable to your *relative’s travel, if:

(a) you travelled in the course of performing your duties as an employee, or in the course of carrying on a *business for the purpose of gaining or producing your assessable income; and

(b) your relative accompanied you while you travelled.

Exception to subsection (1)

(2) Subsection (1) does not stop you deducting a loss or outgoing if:

(a) your *relative, while accompanying you, performed substantial duties as your employer’s employee, or as your employee; and

(b) it is reasonable to conclude that your relative would still have accompanied you even if he or she had not had a personal relationship with you.

Exception when you provide a fringe benefit

(3) Subsection (1) does not stop you deducting expenditure you incur in *providing a *fringe benefit.

This section applies to PAYE earners

(4) If an individual is not an employee, but is a *PAYE earner, this section applies to him or her as if:

(a) he or she were an employee; and

(b) the entity (the notional employer ) who pays (or is liable to pay) *PAYE earnings because of which he or she is (or would be) a *PAYE earner were his or her employer; and

(c) any other individual who receives (or is entitled to receive) *PAYE earnings:

(i) because of which the other individual is (or would be) a *PAYE earner; and

(ii) that the notional employer pays (or is liable to pay) to the other individual;

were also an employee of the notional employer.

This section applies to entities liable to PAYE earnings

(5) If an entity is not an employer, but pays (or is liable to pay) *PAYE earnings, this section applies to the entity as if:

(a) it were an employer; and

(b) an individual to whom the entity pays (or is liable to pay) *PAYE earnings were the entity’s employee.

26-35 Reducing deductions for amounts paid to related entities

You can only deduct reasonable amounts paid to related entities

(1) If, under another provision of this Act, you can deduct an amount for a payment you make, or for a liability you incur, to a *related entity, then you can only deduct so much of the amount as the Commissioner considers reasonable.

Note: This section has a special operation if the payment is made, or the liability is incurred, by a partnership in which a private company is a partner: see section 65 (Payments to associated persons and relatives) of the Income Tax Assessment Act 1936.

Meaning of related entity

(2) A related entity is any of the following:

(a) your *relative; or

(b) a partnership in which your relative is a partner.

(3) In the case of a partnership, a related entity is any of the following:

(a) a *relative of a partner in the partnership;

(b) an individual who is or has been a director of a company that is a partner in the partnership and is a *private company for the income year;

(c) an entity that is or has been a shareholder in a company of that kind;

(d) a *relative of an individual who is or has been a director or shareholder of a company of that kind;

(e) a beneficiary of a trust if the trustee is a partner in the partnership;

(f) a *relative of a beneficiary of a trust if the trustee is a partner in the partnership;

(g) another partnership, if a partner in the other partnership is a *relative of a partner in the first partnership.

However, a partner in a partnership is not a related entity of the partnership.

If you can’t deduct, then related entity doesn’t include amount as income

(4) To the extent that subsection (1) stops you deducting an amount, the amount is neither assessable income, nor exempt income, of the *related entity.

Amendments of assessments

(5) The Commissioner can amend an assessment at any time for the purpose of giving effect to subsection (4).

Example: An amount was not included in the related entity’s assessable income because at the time you could not deduct the amount. At a later time you discover that you could deduct the amount and your assessment is amended. The Commissioner can amend the entity’s assessment so that the amount is included in the entity’s assessable income.

26-40 Maintaining your family

You cannot deduct under this Act expenditure you incur for maintaining:

(a) your *spouse (except a spouse permanently living separately and apart from you); or

(b) your *child who is under 16 years.

Example: A farmer cannot deduct an amount for food or lodgings that the farmer provides to his or her child who is under 16 years for the work the child performs on the farm.

26-45 Recreational club expenses

(1) You cannot deduct under this Act a loss or outgoing to the extent you incur it to obtain or maintain:

(a) membership of a *recreational club; or

(b) rights to enjoy (otherwise than as a *member) facilities provided by a *recreational club for the use or benefit of its *members;

whether for yourself or someone else.

Meaning of recreational club

(2) A recreational club is a company that was established or is carried on mainly to provide facilities, for the use or benefit of its *members, for drinking, dining, *recreation or entertainment.

Exception when you provide a fringe benefit

(3) Subsection (1) does not stop you deducting expenditure you incur in *providing a *fringe benefit.

26-50 Expenses for a leisure facility or boat

(1) You cannot deduct under this Act a loss or outgoing to the extent you incur it:

(a) to acquire ownership of a *leisure facility or boat; or

(b) to retain ownership of a *leisure facility or boat; or

(c) to acquire rights to use a *leisure facility or boat; or

(d) to retain rights to use a *leisure facility or boat; or

(e) to use, operate, maintain or repair a *leisure facility or boat; or

(f) in relation to any obligation associated with your ownership of a *leisure facility or boat; or

(g) in relation to any obligation associated with your rights to use a *leisure facility or boat.

However, there are exceptions (see subsections (3), (4), (5), (6) and (8)).

What is a leisure facility ?

(2) A leisure facility is land, a building, or part of a building or other structure, that is used (or held for use) for holidays or *recreation.

Exception - leisure facilities

(3) Subsection (1) does not stop you deducting a loss or outgoing for a *leisure facility if at all times in the income year:

(a) you hold the leisure facility for sale in the ordinary course of your business of selling leisure facilities; or

(b) you use the leisure facility (or hold it for use) mainly to provide it:

(i) in the ordinary course of your *business of providing leisure facilities for payment; or

(ii) to produce your assessable income in the nature of rents, lease premiums, licence fees or similar charges; or

(iii) for your employees to use; or

(iv) for the care of your employees’ children.

In the case of a company, subparagraphs (b)(iii) and (iv) do not apply to employees who are *members or directors of the company.

Exception - part year use of leisure facilities

(4) If you use a *leisure facility (or hold it) as described in subsection (3) at all times during part of the income year, then subsection (1) does not stop you deducting so much of the loss or outgoing as is reasonable in the circumstances.

Exception - boats

(5) Subsection (1) does not stop you deducting a loss or outgoing for a boat if at all times in the income year you:

(a) hold the boat as *trading stock for sale in the ordinary course of a *business that you carry on; or

(b) use the boat (or hold it) mainly for letting it on hire in the ordinary course of a *business that you carry on; or

(c) use the boat (or hold it) mainly for transporting for payment in the ordinary course of a *business that you carry on, the public or goods; or

(d) use the boat for a purpose that is essential to the efficient conduct of a *business that you carry on.

Exception - part year use of boats

(6) If you use a boat (or hold it) as described in subsection (5) at all times during part of the income year, then subsection (1) does not stop you deducting so much of the loss or outgoing as is reasonable in the circumstances.

Anti-avoidance - when exceptions do not apply

(7) A *leisure facility or boat is taken not to be used (or held) as described in subsection (3) or (5) if:

(a) apart from this subsection, the leisure facility or boat would be used (or held) in that way because of a *scheme; and

(b) in the Commissioner’s opinion, the scheme would not have been entered into or carried out if this section had not been enacted.

Exception when you provide a fringe benefit

(8) Subsection (1) does not stop you deducting expenditure you incur in *providing a *fringe benefit.