© National Core Accounting Publications Chapter 9 General Deductions © National Core Accounting Publications

© National Core Accounting Publications Overview Deductions defined s.995(1) - deductions mean “an amount that you can deduct.” The ITAA divides deductions into: General deductions, and Specific deductions © National Core Accounting Publications

General deductions under s.8-1 s.8-1(1) provides the general formula to determine whether deductions are allowable. Under this section any loss or outgoing can be deducted from assessable income if: it is incurred in gaining or producing assessable income, or it is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. © National Core Accounting Publications

General deductions under s.8-1 Under s.8-1(2) no deduction is allowed for losses or outgoings that are: Capital in nature Private or domestic in nature Incurred in relation to producing exempt income Made specifically non-deductible by another section of the ITAA © National Core Accounting Publications

© National Core Accounting Publications

Specific non-deductions s.26-5 Fines or penalties imposed under another law s.26-20 HELP payments s.26-40 Expenditure incurred in maintaining your family s.26-53 Bribes to public officials s.26-54 Losses and outgoings in relation to activities for which the taxpayer has been convicted of an indictable offence (i.e. at least 1 year imprisonment) s.32-5 Entertainment expenses (with some exceptions) © National Core Accounting Publications

© National Core Accounting Publications Business Deductions Ordinary recurring operating expenses of a business are deductible under s.8-1(1). Capital expenditure is, of course, not deductible - s.8-1(2). However, certain capital expenditure related to commencing and ceasing a business is deductible under s.40-880 – “blackhole expenditure”. © National Core Accounting Publications

© National Core Accounting Publications Business Deductions s.40-880 deduction – “blackhole expenditure” 20% of the following expenditure is deductible in the income year incurred, and the balance is allocated equally over the next 4 income years: in relation to a business. in relation to a business that used to be carried on. in relation to a business proposed to be carried on. to liquidate or deregister a company, to wind up a partnership, or to wind up a trust that carried on a business. © National Core Accounting Publications

Illustration: Blackhole Expenditure In April 2015, Aldo incurred $5,000 capital (blackhole) expenditure in incorporating a company to carry on a business. Required: Calculate the deduction available under s.40-880.   Solution: The deduction in 2014/15 under s.40-880 is: $5,000 x 20% = $1,000 The same deduction would also apply in each of the next four years. © National Core Accounting Publications

© National Core Accounting Publications Employee Deductions Under s.8-1(1) examples of deductible expenses include: Tools of trade, equipment Protective and occupational clothing Technical and trade books Meal allowances Union and professional association subscriptions Premiums for sickness, accident insurance Home office expenses Self-education expenses Internet and Telephone Motor vehicle expenses © National Core Accounting Publications

© National Core Accounting Publications Rental Deductions Examples of deductible rental expenses include: Advertising for tenants Agent’s commission and management fees Body corporate fees Council and water rates Decline in Value Garden Maintenance Insurance Land tax Loan interest Repairs and maintenance Travel Expenses (to collect rent and inspect the property) Quantity surveyor’s fees © National Core Accounting Publications

© National Core Accounting Publications Travel expenses Employees Travel to and from home and work - is private in nature and not deductible. Travel from work to: another place of work (second job) another office, branch or work site a place of approved self education - is deductible. © National Core Accounting Publications

© National Core Accounting Publications Travel Expenses Self-employed persons Basically, the same principles apply to the deductibility of travel expenses incurred by self employed taxpayers as they do to employees. Where a taxpayer conducts a business at their residence, the cost of travel to visit clients to conduct business is deductible. © National Core Accounting Publications

Self-education expenses Self-education expenses are deductible under s.8-1(1) but may be limited by s.82A ITAA36. Self-education expenses may include course fees, stationery, textbooks, materials, decline in value on assets used, internet usage and travel costs. © National Core Accounting Publications

Self-education expenses Guidelines Expenses incurred in keeping up to date are generally deductible. Where a new /additional qualification is sought, there must be a connection between the course of study and the taxpayer’s profession, occupation, trade or business. The connection must also lead to the possibility of an increase in the taxpayer’s income. © National Core Accounting Publications

Self-education Expenses Guidelines Motor Vehicle expenses. Only the first leg of travel is deductible where a taxpayer travels from work to place of self-education and then to home (or vice versa). © National Core Accounting Publications

Self-education Travel Expenses Home Place of Education Work – Not Deductible Home - Deductible Travel Expense Deductible Work Place of Education Work – Deductible Home – Not Deductible Travel Expense Deductible © National Core Accounting Publications

Self-education expenses Limit on self-education expenses s.82A ITAA36 allows only the excess of expenses of self-education over $250 as a deduction. However, the disallowed first $250 may itself be reduced by expenses that are not allowed as a deduction. e.g. non-allowable travel costs and child care costs to attend classes. © National Core Accounting Publications

Illustration: Deductibility of Self-education Expenses Y. Study was employed as book-keeper and, during the income year, incurred the following expenses in relation to undertaking an Accounting degree on a part-time basis. Y. Study attends lectures and tutorials on one day per week. Course fees $ 700 Textbooks and stationery 300 Bus fares from work to university 150 Bus fares from university to home 120 Required: Calculate the deduction available for self-education expenses. © National Core Accounting Publications

© National Core Accounting Publications Solution: Course fees $ 700 Textbooks and stationery 300 Bus fares from work to university 150 1,150 less first $250 disallowed reduced by non-deductible self-education expenses of $120 130 1,020 © National Core Accounting Publications

© National Core Accounting Publications Home Office expenses Home office as a place of business Where a taxpayer carries on a business from their home, then home office expenses are deductible. Home office as a work-place of “convenience” Home office expenses are deductible where an employee maintains an office to perform work more conveniently done away from their normal work-place. © National Core Accounting Publications

Motor Vehicle expenses Where the taxpayer is engaged in business the term motor vehicle expenses is generally used. Where a taxpayer is an employee or investor the term car expenses is commonly used. © National Core Accounting Publications

Motor Vehicle expenses A car expense is a loss or outgoing to do with a car. Examples include petrol, repairs, services, registration, insurance, tyres, decline in value, lease charges, interest on car finance, and car washes. Division 28 imposes substantiation rules to claims for car expenses for vehicles which carry less than 9 passengers or 1 tonne load. © National Core Accounting Publications

Motor Vehicle Expenses There are several methods of claiming car expenses: Business Travel exceeds 5,000km annually Where Business Travel is 5,000km or less annually Log Book Method Yes 1/3 Actual Car Expenses Method No 12% Original Cost Method Cents per Km Method © National Core Accounting Publications

Motor Vehicle expenses Log Book method - considers the business proportion of expenses only. Requires: maintenance of a log book for at least 12 continuous weeks in the first year. fuel and oil costs require either written evidence or a reasonable estimate based on odometer records receipts for all other car expenses. odometer readings to calculate kms travelled both during the log book period and the entire year. © National Core Accounting Publications

Motor Vehicle expenses 1/3 Actual Car Expenses method - considers both business and private expenses. Requires: fuel and oil costs require either written evidence or a reasonable estimate based on odometer records. receipts for all other car expenses. a summary of total kms travelled during the year. © National Core Accounting Publications

Motor Vehicle expenses 12% of Original Value method - considers only the original cost of the vehicle (subject to a car cost limit). Requires: a record of the cost of the vehicle. an estimate of kms travelled. © National Core Accounting Publications

Motor Vehicle expenses Cents per Kilometre Method - applies a set rate per kilometre to kilometres travelled up to a maximum of 5,000 kms. Requires: a detailed and reasonable estimate of number of business kms travelled. engine capacity of the vehicle. claim is limited to a maximum of 5,000 kms. © National Core Accounting Publications

Motor Vehicle expenses Cents per Kilometre Method The rates per kilometre for 2013/14 were as follows: Engine capacity Rate per kilometre 1,600cc or less 65c 1,601cc to 2,600cc 76c 2,601cc + 77c The rates for 2014/15 are expected to be announced in the May 2015 Federal Budget. © National Core Accounting Publications

Motor Vehicle expenses Summary of methods   Cents per Km 12% of Original Value 1/3 of Actual Expenses Log Book Eligibility Rules Limited to a maximum of 5,000 kms Business / employment use must exceed 5,000 kms Car must be owned or leased Expense Base Business kms Original value (subject to a car limit) Car running expenses Calculation Multiply by cents per km Multiply by 12% Multiply by 1/3 Multiply by % business use Substantiation required? No Yes © National Core Accounting Publications

Illustration: Motor vehicle expenses For each of the following taxpayers calculate the most advantageous deduction in respect of motor vehicle expenses for the year ended 30 June 2015.   (a) Taxpayer: F. Falcon Car engine capacity: 4,400cc Vehicle cost: $24,000 Full records? Yes, inc. a log book Total kms: 35,000 Business kms: 20,000 Other Details Total cash expenses: $4,400 Depreciation expense: $4,100 (b) Taxpayer: M. Lancer Car engine capacity: 2,500cc Vehicle cost: $27,000 Full records? No Estimated business use: 70% (over 5,000 kms) Total cash expenses (documented): $2,100 Depreciation expense: $8,800 © National Core Accounting Publications

© National Core Accounting Publications (c) Taxpayer: H. Astra Car engine capacity: 2,000cc Vehicle cost: $21,000 Full records? No Other Details Estimated business use: 60% (over 5,000 kms) Estimated cash expenses: $1,500 Depreciation expense: $8,900   (d) Taxpayer: M. Cooper Car engine capacity: 1,500cc Vehicle cost $15,000 Full records? No Estimated business km: 4,600 Estimated cash expenses: $3,600 Depreciation expense: $1,100 (e) Taxpayer: M. Benz Car engine capacity: 3,500cc Vehicle cost: $40,000 Full records? Yes. Total kms: 25,000 Business kms: 10,000 Total cash expenses: $2,600 Depreciation expense: $8,400 © National Core Accounting Publications

© National Core Accounting Publications Solution: Click for Solution Cents per Km Log Book 1/3 of Actual Expenses 12% of Original Value (a) F. Falcon   5,000 x 77c = $3,850 20,000 x 100 35,000 1  = 57.14% (4,400+4,100) x 57.14% = $4,857 1/3 x 8,500 = $2,833 12% x 24,000 = $2,880 (b) M. Lancer 5,000 x 76c = $3,800 N/A No log book 1/3 x 10,900 = $3,633 12% x 27,000 = $3,240 (c) H. Astra = $3,800  No receipts 12% x 21,000 = $2,520 (d) M. Cooper 4,600 x 65c = $2,990  No log book  N/A  Cannot use because less than 5,000 kms   Cannot use because less than 5,000 kms (e) M. Benz 10,000 x 100 25,000 1 = 40% (2,600+8,400) x 40% = $4,400 1/3 x 11,000  = $3,667 12% x 40,000 = $4,800 © National Core Accounting Publications

© National Core Accounting Publications Prepaid Expenses Prepaid expenses are incurred for things done under an agreement in a later income year(s) and are apportioned over the period in which the service is provided. Exclusions: Amounts less than $1,000. Payments under a contract of service. Amounts required to be paid by Court Order or government legislation. Amounts that are private, capital or domestic in nature. © National Core Accounting Publications

© National Core Accounting Publications Prepaid Expenses 12 month rule This rule allows an immediate deduction for prepaid expenses where: Payment is incurred for a period of service not exceeding 12 months, and The period of service ends in the next income year, © National Core Accounting Publications

Illustration: 12 month rule satisfied On 1 June 2015 Herbie paid $1,200 for a subscription for the provision of a monthly professional journal over the period 1 June 2015 to 31 May 2016.   Required: Calculate the deduction available for prepaid expenses in 2014/15. Solution: The $1,200 is fully deductible in the 2014/15 income year because the service provided under the agreement is wholly provided within a 12 month period which ends before the last day of the next income year. © National Core Accounting Publications

Illustration: 12 month rule not satisfied Josie owns a rental property. On 30 October 2014 she made an interest only payment of $15,000 in relation to her loan used to finance purchase of that property. Her payment covers the period 1 November 2014 to 1 February 2016. Required: Calculate the deduction available for prepaid expenses. © National Core Accounting Publications

© National Core Accounting Publications Solution: Josie cannot claim an immediate deduction for the $15,000 because the eligible service period exceeds 12 months. Therefore, her prepaid expenditure deductions are as follows: 2014/15 15,000 x 242 (1 November 2014 to 30 June 2015) 457 (1 November 2014 to 1 February 2016) = $7,943 2015/16 15,000 x 215 (1 July 2015 to 1 February 2016) 457 = $7,057 The total deduction allowed proportionately over the 2015 and 2016 income years is $15,000. © National Core Accounting Publications

© National Core Accounting Publications Substantiation Work Expenses - are expenses incurred by a taxpayer in producing wages or salary. - must be substantiated by written evidence. e.g. receipt, invoice, credit card or bank statement, electronic receipt or similar document. © National Core Accounting Publications

© National Core Accounting Publications Substantiation Exemptions/exclusions The requirement to obtain documentary evidence does not apply where: Total claims are ≤ $300 Individual minor claims are ≤ $10 and which cumulatively do not exceed $200 in total Laundry expenses do not exceed $150 © National Core Accounting Publications

© National Core Accounting Publications Substantiation Retention of Evidence Documents and records which evidence work and business deductions must be retained by the taxpayer for 5 years. Records may be paper or electronic. They must be in English. © National Core Accounting Publications

© National Core Accounting Publications Double Deduction s.8-10 provides that if two or more provisions of the Act allow a deduction, the deduction must be claimed under the most appropriate provision. The general rule is that the specific provision will override the general provision. © National Core Accounting Publications