1.

4 Deductions Flowchart
General
Deductions (s8-1)
First Limb: Individual incurred in
gaining or producing AI
Second Limb: Business
necessarily incurred
- Ronpibon Tin clearly adapted and
appropriate for
Incurred
Presently existing liability
TR97/7
Carrying on a business:
-extent of system and org (Ferguson)
-scale of activity (Thomas, Walker)
-repetition of transactions (Whitfords)
-intention to make profit (Stone)

Incidental
Natural Consequence of producing
AI?
- The Herald Weekly Times

Positive limbs
Loss or Outgoing?
- Charles Moore
To the Extent?
- Ronpibon Tin

Relevant?
Essential Character: Business vs
Living expense?
- Lumley v Hayley

YES
Capital?
1) Once and for all
-Vallambrosa Rubber Co Ltd v Farmer
2) Enduring Benefit
- British Insulated
3) Process vs Structure
- Sun Newspaper Ltd v FCT

NO
Negative limbs

Personal/Domestic?
- Lumney v Hayley
Business vs Living

Apportionment
- Ronpibon Tin not up to
the courts what TP should
spend, rather what they
did spend
- Ure v FCT

Relates to earning
exempt income,
or non-exempt non
assessable
income (s23AI-K)

Specifically
denied under part
of Act (s12-5 - list)

YES
Specific
Deductions (s8-5)

Other refer to page 2

Plant? s45-40
articles, machinery,
tools and rolling stock
- Wangaratta Woolen
Mills v FCT

Prime cost s40-75

Held
Depreciating Asset?
Plant? s45-40

Capital Works?

Division 40
s40-25(1)
decline in value of
depn assets held

Division 43
s43-10
- construction expenditure area?
- pool of construction exp
- TP used to produce AI
ASSUMED
- ICI v FCT

Neither

Depreciating asset? s40-30

- has a useful life
- reasonably expected to
decline in value
- excl land, trading stock,
intangibles outside of s4030(2)

YES

CGT

Diminishing value
s40-70
Yes

Involuntary disposals s40-365

-lost/destroyed
-acq by AUS govt
Choices:
A) may include AI bal adj (no election)
B) acq replacement asset(s) and
reduce the cost, or base value if 1) acq
1yr before and after invol disposal, and Splitting ( s40-115)/merging (s402) Used/installed ready for use for
125) assets
wholly taxable purpose by end of
-treated as if you stopped holding and
income year which it started to be held
started holding new assets
-cost allocated reasonably s40-205
-cost added for merged assets
*no bal adj s40-295

Prepayments

Prepayment?
1) Deductible under s8-1
2) >$1000
3) Not required by law, or paid
under contract of service?

Yes

Held

Stopped holding/using Balancing adjustments s40-295

TV > AV
AI s40-285(1)
D s40-285(2)
TV < AV
TV=proceeds less disposal cost s40-300/
315
Capital works? s43-20(1)-(3)
AV=WDV s40-85
- building
* business portion only
- extension
CGT Event K7
s104-235
- alteration
- improvement to building
Div 43 prevails over
2.5% over 40years
Div 40 (s40-45(2)),
s43-25
UNLESS expenditure
YES
Refer to 2-5 flowchart
is plant s43-20(2)(e) &
for more detail!
Cost Base (s110-25)
43-50(1)

Balancing Adjustments
Change of ownership or interests
s40-295
-formation/dissolution of a partnership
-variation in the partnership
constitution, or interest of partners
*s40-300(2) item 5 triggered to deem
disposal at MV, BUT s40-340 joint
election can be made to ignore bal adj

Held? s40-40
- see table, earlier items
take priority
-economic user = holder

Balancing Adjustments Other

info
- TV for luxury car is multiplied by
(57009 +2nd element/total cost)
-Where disposal is undervalued,
MV substituted s40-300 Item 6
*consider GST implications on
disposal

Apportion over the

period with a max
10yrs
s82KZMA,D
*AI under s6-5
Business

Requirement:
1) STS/Individual
2) <12 months
Business, STS or
deduction in full
Individual? STS/Individual
-orApportion over period with max
10yrs s82KZM

Repairs s25-10
-Ongoing repairs s25-10
restoring item to org condition (W
Thomas)
-Entirety - TR97/23, not a repair if replacing entirety
Repairs do not change nature or improve
-Initial repairs not deductible, factored into price at acquisition (Law
Shipping Co)
COST BASE for CGT
IF NOT REPAIR
Other
Prepaid salary excluded prepayment s82KZL(1)
Substantiation ONLY applies to ind and ptnerships (s900-5)
- work expenses >$300 s900-30, travel s900-50
Borrowing expense s25-25 - <$100
write-off, >$100
write-off
over period or 5yrs
Bad debt s25-35 must be existing debt, must have been brought
into acct through AI or loan previously
Tax-related expense s25-5 GST not incl, but ded under s8-1
Super Contrib s82AAC by employers on behalf ded; s82AAS
s82AAT eligible)
governs self-employed (ie<10% income is salary
Entertainment denied under s32-5, exceptions under s32-20,32-50
CLP72
Leave payments s26-10 Cannot deduct accruals, only incurred
Stock obsolescence s70-50 revalue below s70-45
Business capital expenditure s40-880 blackhole expenditure
relating to business structure and issuing of shares (2.3 Cap Allow)
Deduction for WIP s25-95 if WIP can b completed within 12mths
Interest deductible when withholding tax is paid s26-25

Ken Choi 2007

1.4 Deductions Flowchart p2

Specific Deductions

Car Expense Div 28, s900-70

Ken Choi 2007