Tax Deductions and Contemporaneity Principle

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Questions and Answers

Which type of expenses generally cannot be claimed as a deduction according to the contemporaneity principle?

Expenses incurred prior to starting an income-earning activity (correct)

Expenses for maintaining a business once it has commenced

Expenses incurred during an income-earning activity

Expenses related to the operation of a current business

In the case of FCT v Maddalena, why were the travel and legal expenses not deductible?

They were related to obtaining employment rather than earning income (correct)

They did not meet the requirements of relevant case law

They were incurred before any income-earning activity took place

They were incurred in the course of a personal activity

What fundamental principle restricts the deduction of expenses incurred before a business starts operating?

The relevance principle

The contemporaneity principle (correct)

The nexus principle

The direct connection rule

Which scenario illustrates an expense that is likely not deductible due to the contemporaneity principle?

Legal fees for forming a company before revenue generation Signup and view all the answers

What decision was made in the case of Softwood Pulp and Paper Ltd v FCT regarding feasibility study expenses?

They were deemed non-deductible because they were incurred before revenue generation Signup and view all the answers

What does the first limb of the expenditure test primarily focus on?

Expenditure incurred in producing assessable income Signup and view all the answers

Which statement best describes the second limb of the expenditure test?

It is concerned with expenditures made for business purposes Signup and view all the answers

What is required to demonstrate a sufficient nexus for an outgoing under the income test?

The outgoing must have a direct relationship to income production Signup and view all the answers

According to the general principles, what does section 8-10 specify about deductions?

Double deductions under different sections are prohibited Signup and view all the answers

In the context of the first limb, what does 'incurred' mean?

A commitment to make the payment is sufficient Signup and view all the answers

What does the term 'necessarily incurred' imply in the context of business expenses?

Expenses must be clearly appropriate for carrying on business Signup and view all the answers

What is the principal issue addressed by the case 'Ronpibon Tin NL v FCT' regarding deductions?

The amount of loss or outgoing is based on actual expenditure incurred Signup and view all the answers

Which of the following is NOT a requirement for an outgoing to satisfy the Nexus requirement?

It must have a documented contract Signup and view all the answers

What is the main criterion for deducting interest costs based on the contemporaneity principle?

There must be a relevant connection between interest costs and assessable income. Signup and view all the answers

In Steele v DFCT, what did the court conclude regarding the timing of expense deductions?

Expenses can be deductible even if incurred after income-earning activities cease. Signup and view all the answers

What principle did Placer Pacific Management Pty Ltd v FCT clarify regarding past business liabilities?

Liabilities related to ceased businesses may still be deductible. Signup and view all the answers

What related principle was upheld in FCT v Brown regarding interest deductibility?

Interest deductibility depends on the purpose of the original borrowing. Signup and view all the answers

Under s 8-1, which of the following is a negative limb that denies deductibility?

Expenses that are capital or of a capital nature. Signup and view all the answers

What factor does NOT influence the deductibility of interest costs according to the contemporaneity principle?

Nature of the business conducted by the taxpayer. Signup and view all the answers

In the context of the contemporaneity principle, what does 'long tail liabilities' refer to?

Liabilities that may emerge long after a business has ceased trading. Signup and view all the answers

What is the significance of the time gap between an expense and actual income in deduction evaluation?

It helps establish a connection to ongoing income-earning activities. Signup and view all the answers

What does the court mean by interest expenses being 'capital'?

Interest that contributes to acquiring a capital asset. Signup and view all the answers

Why might a taxpayer in a situation like FCT v Brown still incur deductible expenses after business closure?

Expenses may relate to previous income-producing activities. Signup and view all the answers

Study Notes

Introduction to Tax Law - Lecture Week 4

Assessable Income - CGT (continued): This topic continues the discussion on assessable income, including capital gains tax.
Tax Calculations - Individual Taxpayer: Focuses on calculating tax for individual taxpayers.
Expense and Cost Recognition - Overview: Provides an overview of recognizing expenses and costs.
Deductions - General Provision and Specific Provisions: Outlines general and specific provisions for deductions.

Review/Overview

Assessable income: The part of taxable income focused on so far. Includes ordinary income and statutory income.
Net Capital Gain: Included in assessable income as a form of statutory income.
CGT Regime Introduction: Introduced on a prospective basis, applying to assets acquired after September 20, 1985.

Determining Assessable Income: Inclusion and Integration with Non-CGT Provisions

Exemptions and Exclusions: Covers areas of capital gains that are exempt, and not part of the assessable income.
Rules Preventing Double Taxation: Explores methods to prevent a taxpayer from being taxed twice on the same amount.
CGT Netting Off Rules: Outlines rules for handling gains and losses in a CGT context.
Taxpayer Choices Regarding CGT Discount: Discusses options available to taxpayers regarding CGT discounts.

Exemptions and Exclusions from the CGT regime

Capital Gains Exempt: Some capital gains are specifically excluded from the taxpayer's assessable income.
Capital Losses Disregarded: Some capital losses are disregarded and cannot be used to offset capital gains.
Examples:
- Main residence: Specific sections (s 118-110) apply.
- Compensation/damages: Sections (s 118-37) for compensation or damages received for injuries or wrongs.
- Cars, motorcycles, and similar vehicles: Specific section (s 118-5) for deductions.

Preventing Double Taxation

Anti-overlap Provisions: Methods to prevent a taxpayer from being taxed on the same amount twice, often where the amount falls under both non-CGT and CGT provisions.
Section 118-20: Provides specifics on how double taxation is prevented by reducing a taxpayer's capital gain.

Method Statement in Section 102-5(1)

Taxpayer's Capital Gain: The capital gain calculation does not directly impact the assessable income; it must go through a method statement.
Capital Losses/Losses: Allows the subtraction of current or past year net capital losses.
Capital Gains Discount: Allows certain capital gains to be discounted.
Result of Method: An amount included in the taxpayer's assessable income, after accounting for all aspects of the method statement.

Other Rules Interacting with the Method Statement

Taxpayer Choice: Natural persons may choose the method used in calculating their capital gain (indexation or discount).
Limited Selling Assets: Fewer taxpayers will be selling assets from before 21 September 1999.
Capital Losses on Collectibles: These losses are quarantined and can only be used against capital gain on a collectible rather than other types of assets.

Calculating Tax Position: Individuals

Taxpayer's Taxable Income: Calculated in Step 1.
Tax on Taxable Income: Calculated in Step 2.
Non-refundable Tax Offsets/Rebates: Subtracted in Step 3.
Medicare Levy, Surcharge, and Other Payments: Added in step 4.
Refundable Tax Offsets/Credits and Tax Already Paid: Deducted before further calculation.
Final Calculation: The difference is the estimated tax owing or refund.

Taxable Income Rates (2023-24)

Resident Individuals: Rates for different income brackets are provided, showing tax rates for various income levels.
Non-Resident Individuals: Similar tax rates, but with varying income levels.

Tax Offsets

Non-refundable: Unused offsets cannot be refunded. Examples: low-income tax offset (LITO).
Refundable: Results in a tax refund if the total amount of refundable credits exceeds payable tax. Examples: franking credits.

Medicare Levy & Surcharge

Medicare Levy: A 2% levy on taxable income for resident individuals.
Reductions/Exemptions: Reductions for low-income earners and exemptions are provided.
Medicare Levy Surcharge: Ranges from 1%, 1.25%, and 1.5% of taxable income. Only applies where a high-income earner doesn't maintain adequate private health insurance.
FY 2024 Thresholds: Threshold amounts for single taxpayers, couples, and dependents are included.

HECS/HELP

Study/Training Support Loans: Individuals with accumulated loans have additional amounts withheld from salaries.
Employer Deductions: Employers are required to deduct the repayment amount.
Annual Updates: Amounts are updated annually, indexed with CPI.

Overview of Expense Recognition under the Income Tax Assessment Acts

Changeover Point: Shift from assessable income to deductions in the taxable income formula.
Net Position: Income tax laws ensure only net position is taxed.
Expenditure Recognition: Taxpayer's expenses are recognized for gaining income.
Immediate Deduction: The best outcome.
Time-Based Deduction: Deduction over time (e.g., depreciation)
Inclusion in Cost Base: Alternative method.
Reduced Cost Base: Alternative method for some specific circumstances.

Deductions: General Principles

General Deduction Provision: Details of section 8-1.
Deduction Conferral Provisions: Allowing a deduction where section 8-1 doesn't.
Denial Provisions: Conditions under which a deduction is denied.
Anti-Double Deduction Rules: Prevent expenses from being double-counted.
Positive & Negative Limbs: Two positive limbs and four negative limbs.

Incurred: 1st Limb

Payment Not Required: Actual outgoing not a requirement.
Actual Outgoing: Actual outgoing, not a commitment.
Total Commitment: Taxpayer's full commitment signifies 'incurred'.
*Cash or Accrual Method: Applicability is not dependent on the method used by the taxpayer.

Necessarily Incurred in Carrying On Business (2nd Limb)

'Clearly Appropriate': Expenditure need not be compulsory.
Business Judge: Taxpayer is the judge of what is necessary.
Actual Expenditure: Actual expenditure, not reasonable estimates.
Excessive Expenditure: Excessive spending can question the purpose.

Deductions: Difference between 'Loss' and 'Outgoing'

Loss: Accidental losses, commercial losses (e.g., on a transaction.)
Outgoing: Voluntary payments (e.g., rent, wages, interest).

Deductions: Additional Principles

Deduction Not Precluded: A deduction is not excluded simply because the loss or outgoing doesn't directly produce income.
Apportionment: Specific loss or outgoing items may need specific apportionment.
Business Activities: Illegality of business activities does not prevent a deduction.
Negative Limbs: Briefly mentions the two additional negative limbs.

Relevant Expenditure: Tests under Positive Limbs of Section 8-1

Nexus to Income: Expenditure needs a connection with income-earning activities. Tests for this are explained.
Incidental and Relevant: The expenditure needs to be incidental to and relevant to the income-producing activities.
Essential Character: The expenditure must have an "essential character" as an income-producing/ business expense.

Relevant Expenditure: Tests under Positive Limbs of Section 8-1 (Specific Cases)

Herald & Weekly Times v FCT: Discussion of costs to settle defamation actions and their deductibility.
W Nevill & Co Ltd v FCT: Discussion on a redundancy payment and its deductibility.
Charles Moore & Co (WA) Pty Ltd v FCT: Details on the deductibility of cash earnings loss.
Lunney v FCT: Explores the deductibility of commuting expenses.
FCT v Cooper: Analysis of expenditure on additional food and beer for a rugby player.
Softwood Pulp and Paper Ltd v FCT: Examines expenses incurred before starting paper mill activities.
Steele v FCT: Focuses on interest costs incurred while holding land.
FCT v Anstis: Analysis of self-education expenses and their deductibility.
FCT v Day: Examines legal expenses arising from disciplinary proceedings against a public servant.
Other Cases: Discusses relevant case law concerning similar situations.

Contemporaneity Principle

Income-Earning Activity: Expenses incurred before or after income-earning activities may not be deductible.
FCT cases: Relevant cases are discussed, explaining circumstances where expenses either were or were not considered deductible. Cases of a professional footy player, setting up a business, issues with purchasing gaming machines.

Expense Apportionment

Apportioning Expenses: Methods for apportioning when expenses are not solely for producing assessable income.
Specific Examples: Detailed examples regarding the apportionment of expenses.
Fair and Reasonable Basis: The most appropriate basis for apportioning expenses.
Legal Rights/Purposive Approach: Methods for determining the nature and purpose.
Aggressive Tax Planning Case: A case for calculating an income from borrowed money, where interests costs need to be apportioned.

Revenue/Capital Boundary

Advantage/Benefit: Focuses on the advantage/benefit gained, and how long it lasts. Important cases are discussed.
Expense Characterisation: Working vs. profit-earning structure, continuous vs. once-off expense.
Asset Creation: Does the expense bring an asset or advantage for the business?
Cases: Several cases illustrate how a court determines a capital expense. Cases such as newspapers, and license applications are highlighted as examples.

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Description

This quiz explores the principles governing tax deductions, particularly the contemporaneity principle. Examine key cases and fundamental principles that delineate which expenses may not be claimed as deductions. Test your understanding of various scenarios that affect business expense deductions.