1. Prepare Tax Documentation for Individuals
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Chapter 9
General Deductions
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Overview
Deductions defined
s.995(1) - deductions mean “an amount that you can deduct.”
The ITAA divides deductions into:
General deductions, and
Specific deductions
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4. 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.
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5. 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
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7. Specific non-deductions
s Fines or penalties imposed under another law
s HELP payments
s Expenditure incurred in maintaining your family
s Bribes to public officials
s 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 Entertainment expenses (with some exceptions)
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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 – “blackhole expenditure”.
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Business Deductions
s 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:
Examples of business related capital costs expenditure include:
expenditure to raise equity for a business.
costs of defending a business against a takeover.
costs of starting a business (such as the cost of feasibility studies and setting up the business entity).
costs of business restructuring.
costs of ceasing a business (e.g. cost of liquidating or deregistering a company, or to wind up a trust that carried on a business).
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10. Illustration: Blackhole Expenditure – 5 year write-off
In May 2016, Kyme incurred $5,000 capital expenditure in re-structuring her business so as to operate as a company. Previously Kyme was a sole trader.
Required: Calculate the deduction available under s
Solution:
The deduction in 2015/16 under s is:
$5, x 20% = $1,000
The same deduction would also apply in each of the next four years.
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11. Small Business Start-up Expenses
Commencing 1 July 2015, s allows for certain start-up expenses, including costs associated with raising capital, to be immediately deductible where they are incurred by a small business entity.
Expenses can be fully deductible in the year in which the expenditure is incurred if the expenditure relates to a small business that is proposed to be carried on and is either:
incurred in obtaining advice or services relating to the proposed structure or the proposed operation of the business.
a payment to an Australian government agency of a fee, tax or charge incurred in relation to setting up the business or establishing its operating structure.
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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
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Rental Deductions
Examples of deductible rental expenses include:
Advertising for tenants
Agent’s commission and management fees
Body corporate fees
Cleaning and rubbish removal
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
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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.
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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.
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16. 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.
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17. 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.
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18. 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).
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19. Self-education Travel Expenses
Home
Travel Expense Deductible
Place of Education
Work – Not Deductible
Home - Deductible
Work
Travel Expense Deductible
Place of Education
Work – Deductible
Home – Not Deductible
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20. 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.
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21. 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.
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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 $
1,020
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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.
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24. 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.
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25. 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.
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26. Motor Vehicle Expenses
There are two methods of claiming car expenses:
Log Book method
Rate per km method
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27. 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.
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28. 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 at the rate of 66 cents per km.
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29. 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 2016.
 (a) Taxpayer: F. Falcon
Vehicle cost: $24,000 Full records? Yes, inc. a log book
Total kms: 35,000 Business kms: 20,000
Running expenses (documented): $4,400
Depreciation expense: $4,100
 (b) Taxpayer: M. Cooper
Vehicle cost $15,000 Full records? No log book
Estimated business kms: 4,600
Running expenses (documented): $3,600
Depreciation expense: $1,100
(c) Taxpayer: M. Benz
Vehicle cost: $40,000 Full records? Yes.
Total kms: 25,000 Business kms: 5,000
Running expenses (documented): $2,600
Depreciation expense: $8,400
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Solution:
Cents per Km
Log Book
(a) F. Falcon
5,000 x 66c
= $3,300
20,000 x 100
35,  
= 57.14%
(4, ,100) x 57.14%
= $4,857
(b) M. Cooper
4,600 x 66c
= $3,036 
N/A
No log book 
(c) M. Benz
5,000 x 100
25,
= 20%
(2, ,400) x 20%
= $2,200
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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.
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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,
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33. Illustration: 12 month rule satisfied
On 1 June 2016 Herbie paid $1,200 for a subscription for the provision of a monthly professional journal over the period 1 June 2016 to 31 May 2017.
Required: Calculate the deduction available for prepaid expenses in 2015/16.
Solution:
The $1,200 is fully deductible in the 2015/16 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.
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34. Illustration: 12 month rule not satisfied
Josie owns a rental property. On 30 October 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 2015 to 1 February 2017.
Required:
Calculate the deduction available for prepaid expenses.
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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: 2015/16 15,000 x 243 (1 November 2015 to 30 June 2016) 458 (1 November 2015 to 1 February 2017) = $7, /17 15,000 x 215 (1 July 2016 to 1 February 2017) 458 = $7,041 The total deduction allowed proportionately over the 2016 and 2017 income years is $15,000.
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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.
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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
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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.
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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.
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