Edited version of private advice

Authorisation Number: 1052154771041

Date of advice: 24 August 2023

Ruling

Subject: Deductions - assistance dog to an employee

Question 1

Does section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to allow the Company a deduction in relation to the following expenditures:

(a)          The cost of purchasing a dog that was then trained to be an assistance dog?

(b)          The cost of training the dog to be an assistance dog?

(c)           The application fee charged by an accredited organisation to assist with the training a dog to be an assistance dog?

(d)          The public access test fee charged in respect of the dog's certification as an assistance dog?

(e)          The fee charged for the annual re-certification of the dog as an assistance dog?

(f)            The ongoing cost for the dog's upkeep?

Answer 1

(a)  No.

(b)  No.

(c)   No.

(d)  No.

(e)  Yes.

(f)    Yes.

The expenditures in relation to acquiring the dog and the expenditure in relation to the initial training as an assistance dog are capital in nature and thus not deductible under section 8-1.

The expenditure paid to the accredited organisation in relation to the initial application for certification of the dog and public access test are capital in nature and thus not deductible under section 8-1.

The subsequent annual recertification and public access test fees and the ongoing costs in relation to the continuing ownership of dog, e.g. veterinary costs and insurance, are recurrent expenditures, i.e. they do not provide the requisite enduring benefit to be considered capital in nature. The expenditures are revenue in nature and in relation to the business carried on by the Company, and are thus deductible under section 8-1.

Question 2

Is the Company entitled to choose to claim an immediate deduction in relation to the capital expenditure incurred in acquiring and training of the dog to be an assistance dog in the income year ended 30 June 2020 under subsection 328-180(1) of the ITAA 1997?

Answer 2

Yes.

Question 3

Is the Company entitled to choose to claim an immediate deduction for identified capital expenditure incurred in relation to the dog to be an assistance dog in the income years ended 30 June 2021 and 30 June 2022 under subsection 328-180(2) of the ITAA 1997?

Answer 3

Yes. All of the capital expenditure incurred on training the assistance dog and obtaining its certification by Company in the income years ended 30 June 2021 and 2022 are deductible under sections 328-180(2) and section 328-210(1) in the income year in which those expenses are incurred.

This ruling applies for the following periods

Year ended 30 June 2020

Year ended 30 June 2021

Year ended 30 June 2022

Year ended 30 June 2023

Year ended 30 June 2024

The scheme commenced on:

1 January 2020

Relevant facts and circumstances

1.         An employee of the Company and has been medically diagnosed medical condition that would benefit for having an assistance dog.

2.         The company acquired the dog in DD MM 20XX.

3.         The Company made an application with an accredited organisation for the training and certification of assistance dogs on DD MM 20YY to acquire an assistance dog.

4.         The dog underwent assistance dog training and certified by the accredited organisation as an assistance dog on DD MM 20ZZ.

5.         The dog was recertified as an assistance dog after follow-up testing 12 months later.

6.         The dog has been provided by the Company to the employee continuously, including when they are performing their employment duties.

7.         The Company have paid the expenses in relation to training acquiring and training the dog to be an assistance dog. In addition, the Company has incurred the expenditure in maintaining the dog accreditation as an assistance dog and its upkeep (medical expenses, food, etc.).

8.         The Company is a small business entity as defined in Subdivision 328-A and has chosen to apply the rules in Subdivision 328-D in relation to the dog in the relevant income years.

9.         The Company applied the small business instant asset write-off in relation to the dog.

10.      The capital expenditure incurred in relation to acquiring and training the dog towards certification as an assistance dog in the 20XX income year was less than $30,000.

11.      The total capital expenditure incurred in each of the 20YY and 20ZZ income years in relation to training and certification of the dog, was less than $30,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 40-30

Income Tax Assessment Act 1997 subsection 40-180

Income Tax Assessment Act 1997 subsection 40-185

Income Tax Assessment Act 1997 subsection 40-190

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 subsection 328-175(1)

Income Tax Assessment Act 1997 subsection 328-180(1)

Income Tax Assessment Act 1997 subsection 328-180(2)

Income Tax (Transitional Provisions) Act 1997 paragraph 328-180(4)(c)

Income Tax (Transitional Provisions) Act 1997 section 328-181

Income Tax (Transitional Provisions) Act 1997 subsection 328-181(3)

Income Tax (Transitional Provisions) Act 1997 subsection 328-181(5)

Question 1

Reasons for decision

1.    Section 8-1 provides that a taxpayer is entitled to a deduction for a loss or outgoing to the extent that the loss or outgoing is incurred in producing assessable income or necessarily incurred in carrying on a business for the gaining or producing assessable income. However, the taxpayer is not entitled to a deduction if the loss or outgoing is capital in nature or private and domestic in nature.

2.    In order to satisfy subsection 8-1(1), there must be a sufficient nexus between an outgoing and the income producing activities or business of the taxpayer.

3.    The High Court in Ronpibon Tin NL & Tong Kah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47 held that the required nexus will be established where the loss or outgoing is 'incidental and relevant' to the income producing activities of the taxpayer. A loss or outgoing will be considered 'incidental and relevant' to the income producing activities of a taxpayer where the occasion of the outgoing is found in whatever is productive of actual or expected income.[1]

4.    Outgoings incurred by a business in relation to the employment of its employees are necessarily incurred in carrying on a business and are deductible under section 8-1, to the extent they are not capital in nature.

5.    The expenditures in relation to the acquisition, training and maintenance of dog to be used as assistance dog are necessarily incurred by the Company in the course of carrying on its the business, being in relation the employment of an employee, and therefore are deductible to the extent that they are not capital in nature.

6.    In determining whether a deduction for expenses is allowed, the nature of the expenditure must be considered, Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 3 AITR 436; (1946) 8 ATD 190). The nature or character of the expense follows the advantage that is sought to be gained by incurring the expense. If the advantage to be gained is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature.

7.    The leading authority on the distinction between revenue and capital outgoings is the judgment of Dixon J in Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 23; 1 AITR 403 (Sun Newspapers). Dixon J set out three matters to be considered (at CLR 363):

(a)          the character of the advantage sought, and in this its lasting qualities may play a part,

(b)          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, and the dog

(c)           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.

Cost of the dog

8.    Applying the factors in Sun Newspapers to the expenditure in relation to purchasing the dog, the expenditure is made to provide a benefit for the business over the working life of the dog, as the dog will be able to provide the employee of the Company with assistance to more effectively undertake their duties.

9.    In addition, the outgoing is not incurred over the life of the dog, but to obtain outright ownership of the dog.

10.  Accordingly, the expense is capital and not deductible under section 8-1.

The expenses in training the dog

11.  Applying the factors in Sun Newspapers, the expenses incurred in training the dog as an assistance dog are paid to provide the dog with skills that produce a benefit for the business over the dog's working life, i.e. an enduring benefit.

12.  The outgoings are not incurred over the life of the dog, but as expenses preliminary to undergoing the process to become a certified assistance dog.

13.  Accordingly, these expenses are of a capital nature and are not deductible under section 8-1.

The initial application fee and fee to undertake the public access test

14.  Applying the factors in Sun Newspapers, the benefits obtained from these expenditure on the fees incurred as part of the process for the dog to become certified as an assistance dog.

15.  These expenses are not incurred over the life of the dog, but as expenses necessary for the dog to achieve certification as an assistance dog.

16.  Accordingly, these expenses are of a capital nature and are not deductible under section 8-1.

The annual re-certification and other expenditure in relation to maintaining the dog

17.  Applying the factors in Sun Newspapers to the expenses for re-registration of the dog as an assistance dog and the ongoing costs of maintaining Coco, e.g. veterinarian's fees, food, these expenses are recurrent and the benefit is to maintain the dog's classification as an assistance dog and to keep it in good health to ensure that it can continue to safely and effectively provide the employee with the assistance required.

18.  The advantage that these expenditures provide are not of an enduring nature and are appropriately considered to revenue in nature.

19.  Accordingly, the expenditures on annual recertification of the dog as an assistance dog and the expenses in relation to keeping the dog that, includes veterinary costs, insurance, food, etc) are deductible under section 8-1.

Question 2

Detailed reasoning

20.  A taxpayer can claim an immediate deduction under subsection 328-180(1) for the 'taxable purpose' proportion of cost of a depreciating asset provided:

(a)          the taxpayer qualifies as a small business entity in the income year in which it started to hold the depreciating asset;

(b)          the taxpayer qualifies as a small business for the income year in which it starts to use the depreciating asset, or have it installed ready for use for a taxable purpose;

(c)           the cost of the depreciating asset at the end of the income year in which it the taxpayer starts to use is it less than the relevant small business instant write-off threshold;

(d)          the taxpayer chooses to use the small business simplified depreciation rules under subsection 328-175(1).

21.  In the first year that you start to use, or have installed ready for use, a depreciating asset, you must make a reasonable estimate for that year of the proportion of use for a taxable purpose (subsection 328-205(2)).

22.  The 'taxable purpose' proportion of the cost of a depreciating asset is, for an income year for which you are a small business entity, the reasonable estimate for that year of the proportion you will use, or have installed ready for use, the asset for the purpose of producing assessable income (subsections 328-205(2) and 40-25(7)).

23.  The cost of a depreciating asset is generally the amount paid by the taxpayer to acquire the asset, per item 1 of the table contained in subsection 40-185(1) applies.

24.  The dog is to be used by the Company wholly for a taxable purpose, and thus the taxable use proportion of the dog is 100%.

25.  Paragraph 328-180(4)(c) of the Income Tax (Transitional Provisions) Act 1997 (the ITTPA 1997) modifies the small business instant asset write-off threshold from $1,000 to $30,000 for assets acquired after 7.30pm legal time in the Australian Capital Territory (ACT) on 12 May 2015, but before 12 March 2020. This small business asset write-off threshold applies to the Company, as the dog was acquired in January 2020 and used in the gaining or producing of the Company's assessable income from that time.

26.  The Company will be able to claim an immediate write-off under subsection 328-180(1) for 100% of the capital expenditure incurred in the 2020 income year in relation to purchasing the dog because:

•                     The dog is a depreciating asset, per the definition in section 40-30, as a dog has a limited working life and would be expected to decline in value over time as it ages.

•                     The Company began holding and using the dog in the 2020 income year, and qualified as a small business entity, per section 328-110, in that income year.

•                     The Company has elected to use the small business simplified depreciation rules under subsection 328-175(1) in relation to the dog, and

•                     The capital expenditure incurred in the 2020 income year in regard to purchase of the dog was less than $30,000, which is less than the relevant instant asset write-off threshold.

Question 3

Summary

Yes. All of the capital expenditure incurred on training the dog and obtaining its certification as an assistance dog by the Company in the income years ended 30 June 2021 and 2022 are deductible under subsections 328-180(2) and 328-210(1) in the income year in those expenses are incurred.

Detailed reasoning

27.  Subsection 328-180(2) provides that you can also deduct for an income year for which you are a small business entity and you choose to use Subdivision 328, the taxable purpose proportion of an amount included in the second element of the cost of an asset for which you have deducted an amount under subsection 328-180(1) if:

28.  The amount so included is less than $1,000; and

29.  you stated to use the asset, or have it installed ready for use, for a taxable purpose during an earlier income year.

30.  Expenditure that is a second-element cost, as defined in subsection 40-190(2), is the amount you are taken to have paid (including, for the purpose of item 1 of the table in subsection 40-185(1), the amount you in fact paid) for each economic benefit that has contributed to bringing the asset to its present condition and location from time to time since you started to hold the asset.

31.  The 'taxable purpose' proportion of the second element of cost is, for an income year for which you are a small business entity, is the proportion you estimated in the year you hold or start to use the asset (subsection 328-205(3)).

32.  The training of the dog to provide them with the additional skills to be an assistance dog is considered to be a second element cost. Consistent with the taxable purpose proportion of the cost of acquiring the dog, the taxable purpose proportion of the second element costs is 100%.

33.  Paragraph 328-180(3)(b) provides that an asset for which you have deducted an amount under this section is allocated to your general small business pool if any amount of $1,000 or more is included in the second element of the asset's cost, or any amount is included in the second element of the asset's cost and you have or could have deducted an amount under subsection 328-180(2) for an amount previously included in the second element of the asset's cost.

34.  Subsection 328-210(1) provides that you are able to deduct the amount calculated under subsection 328-210(2), subject to the relevant threshold being met.

35.  Subsection 328-210(1) provides that your deduction in relation to a small business pool for an income year is the amount worked out under subsection 328-210(2), if that amount is less than $1,000, but more than zero. The small business general pool amount is calculated under subsection 328-210(2) with reference to a number of items, including the taxable purpose proportion of any cost additions that are not deductible under subsection 328-190(3) and thus allocated to the pool in the income year.

36.  For second element costs included in the cost of an eligible depreciating asset:

(i)            subsection 328-181(3) of the ITTPA 1997 removes the threshold in subsection 328-180(2) for determining the second element costs incurred at any time in the period starting on or after 7.30pm legal time in the ACT on 6 October 2020 (the 2020 Budget Time) and ending no later than 30 June 2022 that are deductible; and

(ii)           subsection 328-181(5) of the ITTPA 1997 removes the threshold in subsection 328-210(1) for the deductible amount in relation to the general small business pool.

37.  Law Companion Ruling LCR 2012/3: Temporary full expensing (LCR 2021/3) includes the Commissioner's view about application of the removal of the threshold (i.e. the 'temporary full expensing' of depreciating assets) in relation to small business entities that choose simplified depreciation under Subdivision 328-D.

38.  Paragraph 149 of the LCR 2021/3 confirms that a small business entity can deduct the following amounts:

•                     under subsection 328-180(2), the taxable purpose portion of the second element costs incurred in the period starting on or after the 2020 Budget Time and ending no later than 30 June 2022 in respect of depreciating assets for which an amount was deductible in an earlier income year under subsection 328-180(1), and

•                     under subsection 328-210(1), for the income years ended 30 June 2021 and 2022, the taxpayer must deduct the balance of the general small business pool.

39.  As set out above, the costs incurred in the years ended 30 June 2021 and 2022 for the training and certification for the dog to become an assistance dog are considered second element costs.

40.  Accordingly, there are two periods that need to be considered in determining the deductibility of expenditure incurred by the Company:

(i)            1 July 2020 up to the 2020 budget time; and

(ii)           the 2020 budget time to 30 June 2022.

1 July 2020 up to the 2020 budget time

41.  Any capital expenditures incurred on training the dog and obtaining certification as an assistance dog by the Company in that period are second element costs (as set out above) and deductible under subsection 328-180(2) by the Company in the income year in which they are incurred because:

(a)          The Company deducted the cost of purchasing the dog under section 328-180(1) in the income year ended 30 June 2020 (See detailed reasoning from Question 2 above for details),

(b)          The second element costs incurred in this period are deductible under subsection 328-180(2) if the total second costs incurred in this period is less than $1,000, or

(c)           If the total second element costs are $1,000 or more, Those second element costs are allocated to the small business general pool, and the balance of the pool as at 30 June 2021 is deductible in full under subsection 328-210(1) because the threshold is disregarded pursuant to subsection 328-181(5) of the ITTPA 1997.

On or after the 2020 budget time to 30 June 2022

42.  Any capital expenditures incurred on training the dog and obtaining certification as an assistance dog by the Company in the period from the 2020 budget time to 30 June 2022 are deductible under subsection 328-180(2) by the Company in the income year in which they are incurred because:

(a)          The Company deducted the cost of purchasing the dog under section 328-180(1) in the income year ended 30 June 2020 (See detailed reasoning from Question 2 above for details),

(b)          the expenditures are second-element costs as defined in section 40-190, and

(c)           subsection 328-181(3) of the ITTPA 1997 removes the threshold in subsection 328-180(2) for determining the second element costs that are deductible in relation to an eligible depreciating asset.

43.  Thus, all capital expenditure incurred by the Company in relation to the training and certification of the dog in the income years ended 30 June 2021 and 2022, will be deductible in the income year in which it is incurred.

[1] Federal Commissioner of Taxation v Payne (2001) 202 CLR 93, at p100 para 11.