Non-deductible expenses

The following expenses are not deductible for tax purposes:

Expenses used to get mutual receipts

Generally, where an organisation has non-assessable income, the expenses it incurs to get that revenue will not be deductible.

Mutual receipts are not assessable income. Therefore, costs incurred to get mutual receipts are not deductible. Also, under the mutuality principle, where other expenses are incurred when dealing with members, these costs cannot be claimed as deductions.

Expenses used to get mutual receipts include the costs of:

  • collecting membership subscriptions
  • increasing membership
  • member loyalty schemes
  • running member-only facilities such as gyms, pools and squash courts
  • drinks sold at the bar to members
  • food and beverages sold to members
  • running member-only functions (for example, dinners, parties, dances, presentations and workshops).

Other expenses incurred when dealing with members include the costs of:

  • running an annual general meeting
  • producing a member-only magazine
  • scholarships and awards for members
  • members' discounts
  • members' badges
  • members' birthdays
  • wreaths, flowers and hospital visits to members.

Not all dealings involving members are mutual dealings.

Where an organisation and a member enter into a transaction that is in the nature of trade, the expenses incurred by the organisation in relation to the transaction may be deductible.

Example: Deductible - expenses related to lease payments from member

A NFP club leases part of its premises to a member so the member can operate a gym business.

Expenses the club incurs in relation to the lease income may be deductible.

End of example

For an explanation of the 'nature of trade', see Nature of trade.

Expenses classified as non-deductible under tax law

Income tax law classifies what expenses are non-deductible.

These expenses are losses or outgoings that are either:

  • not incurred in earning assessable income
  • incurred in earning non-assessable income
  • capital or of a capital nature
  • of a private or domestic nature
  • incurred in earning exempt income or non-assessable, non-exempt income
  • specified under income tax law as non-deductible.

Example: Non-deductible - expenses related to benefit for members

A NFP association has paid various awards and scholarships for the benefit of its members. The funds to pay these amounts have been derived from interest earned from the investment of bequests from members. The interest earned is part of the association's assessable income.

The scholarship and award expenses are not deductible, as they are incurred when dealing with members. This does not change even when the expenses are paid out of the association's assessable income. The costs of the scholarships and awards are not necessary in directly earning the interest income from the investment of moneys bequeathed by members.

End of example

Expenses specified under income tax law as non-deductible include:

  • fines and penalties imposed under an Australian or foreign law, or ordered by the courts
  • borrowing expenses related to a loan that was taken out to pay a federal tax liability
  • fees for advice on the operation of a federal tax law (except where the advice is given by a registered tax agent or legal practitioner)
  • provisions for employees' long service leave, annual leave, sick leave or other leave (except where the organisation actually paid these amounts to an employee).

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    Last modified: 23 Jun 2016QC 23099