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Ruling

Subject: Business - deductions

Question

Are you entitled to a deduction for the expenses incurred in relation to your animals?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

01 July 2011

Relevant facts and circumstances

You run a business from your home.

You have incurred expenses in relation to purchasing a maintaining a number of animals.

The animals are used for purposes related to your business.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 section 40-25

Income Tax Assessment Act 1997 subsection 40-25(7)

Income Tax Assessment Act 1997 subsection 40-80(2)

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature or relate to the earning of exempt income.

A number of significant court decisions have determined that, for an expense to satisfy the tests in section 8-1 of the ITAA 1997, it must have the essential character of an outgoing incurred in gaining assessable income (Lunney v. FC of T, Hayley v. FC of T (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 AITR 166) and 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 v. FC of T (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236).

The animals that you have purchased are inherently considered to be pets, so generally the expenses incurred in maintaining them are considered to be a private or domestic expense

However, in some limited circumstances an animal will be considered a working beast or item of plant for a business, for example, a guard dog used to provide security for business premises, as it is serving a productive function of the business. A working dog used to muster stock is also serving a productive function. Usually, the guard and working dogs remain on the business premises and do not socialise with owners at all. These dogs are relevant to the operation of the business and maintenance expenses, such as food, shampoos and flea treatments, of a guard dog would generally be an allowable deduction as business expenditure under section 8-1 of the ITAA 1997.

A deduction is also allowable for police officers in maintaining, feeding, grooming, exercising and training police dogs (but not privately owned dogs). A deduction is not allowable for expenses which are reimbursed by the employer.

In your situation, although the animals are used in conjunction with your business activities; this not sufficient to modify the inherently private expenses incurred in maintaining your animals into expenses that are incurred in earning your assessable income.

Therefore you are not entitled to a deduction for any of the expenses related to your animals under section 8-1 of the ITAA 1997 as these expenses are considered to be of a private or domestic nature.

Initial purchase costs

Division 40 of the ITAA 1997 deals with deductions for the cost of depreciating assets. Section 40-25 of the ITAA 1997 allows a taxpayer to deduct an amount equal to the decline in value of a depreciating asset which is held for any time during an income year and used for a taxable purpose. A taxable purpose includes the purpose of producing assessable income (subsection 40-25(7) of the ITAA 1997).

The initial purchase cost of an animal, which is used predominantly for the production of assessable income, is considered to be a depreciating asset for taxation purposes.

Subsection 40-80(2) of the ITAA 1997 provides that all of the costs relating to buying an animal will be deductible in the income year the costs are incurred if:

· the costs do not exceed $300, and

· the animal is used predominantly for the production of assessable income.

As previously established the animals are not utilised to produce assessable income; therefore you are not entitled to a deduction for the initial purchase costs of your animals under Division 40 of the ITAA 1997.