Tax Law Note

S4-10 ITAA 1997 Tax payable = (taxable income * rate) – tax offset

S 4-15 Taxable income = assessable income – allowable deduction

Deduction is expense of taxpayer which is deductible for tax purposes as it is incurred in gaining or producing income that is assessable for tax purpose. Deduction is applied against taxpayer’s assessable income to determine “taxable income” upon which taxpayer’s tax liability is calculated. “taxable income” s considered a better reflection of taxpayer’s taxable capacity or ability to pay.

* Deduction set out in Div 8 of ITAA 1997, 2 categories = general deductions s8-1 and specific deduction s8-5.

* Section 8-1 has the potential to apply to any taxpayer.

* A loss or outgoing (ie an expense) may:

* Be deductible under s 8-1 and a specific provision. In these cases, use the “most appropriate” provision: s 8-10 (expense should be deducted under “most appropriate” section s 8-10 deducted once

* Not qualify for a deduction under a specific provision. In these cases, consider deductibility under s 8-1.

General deduction rule = positive limb

* A taxpayer can deduct from his or her assessable income a loss or outgoing to the extent that it is (s 8-1(1)) =

* Incurred in gaining or producing assessable income OR

* Necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income

* Only one of the two positive limbs needs to be satisfied.

Negative limb

* However, a loss or outgoing is not deductible under the general deduction rule if it satisfies any of the negative limbs (s 8-1(2)):

* Capital or capital in nature

* Private or domestic

* Incurred in gaining exempt or non-assessable non-exempt income OR

* Prevented from being deducted by a specific provision of the income tax legislation.

* Deductibility is determined from the perspective of the taxpayer which...