An example comes from s8-1(1) of the Income Tax Assessment Act 1996
(Cth), which makes provision for general deductions.
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As their name
suggests, deductions are subtracted from a taxpayer’s assessable income to
reduce the amount of their taxable income and in consequence to reduce the
amount of income tax liability. Section 8-1 provides as follows:
8-1 General deductions
Deductible losses and outgoings
(1)
You can deduct from your assessable income any loss or outgoing to the extent that:
(a)
it is incurred in gaining or producing your assessable income; or
(b)
it is necessarily incurred in carrying on a business for the purpose of gaining or
producing your assessable income.
In this way s 8-1 of the ITAA Act 1997 provides a general formula for
deducting business and employment expenses. These deductions are
appropriately labelled ‘general deductions’ by tax practitioners.
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Section 8-1 (a) and (b) contains the following elements:
Element (i)
There is a loss or an outgoing. A loss is the failure of an asset
to realise its cost, or the permanent deprivation of an asset. An outgoing is an
outlay or an expense.
Element (ii)
The gains or losses are incurred. This means one of two things,
depending on the tax payer’s accounting system (as designated for income tax
purposes) –
(i) that a present liability exists to pay, or (ii) that payment has
actually been made.
Element (iii)
There is assessable income of the taxpayer. This can be income
from the past, in the present or off in the future. Whether income is assessable
is determined by other provisions of the statute, but most income is
assessable.
Element (iv)
This assessable income is gained or
produced. This phrase is
the equivalent of the more commonly used term ‘derived.’ In common talk,
this means that the income has to have been earned.
Element (v)
There is the connection between ‘incurring the loss or outgoing’
as in Elements (i) and (ii) and ‘the gaining or producing of assessable income’
in Elements (iii) and (iv). In s8-1(1)(a) this relationship is determined by the
word “in”. In s8-1(1)(b) the connection is expressed in the phrase “in carrying
on a business for the purpose of”.
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Section 8-1(2) creates exceptions to s8-1. It is not reproduced or discussed
since it is not directly relevant to this discussion. Section 8-1 of the ITAA Act 1997
is the successor to s51 of the Income Tax Assessment Act 1936.
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The label ‘general deductions’ is much used by tax practitioners. It is in fact
formally conferred in a statutory baptism by s8-1(3) of the Income Tax Assessment
Act 1996 (Cth).
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