In most
of the cases that arise Elements (i)-(iv) are not in dispute, so that the
major area of ambiguity resides within Element (v). In each case, the key word
is “in”. Section 8-1(1)(a) utilises this directly. There the word “in” prescribes
the link between incurring a loss or outgoing and gaining or producing
assessable income.
Section 8-1(1)(b) uses a more elaborate formula, which is contained in the
phrase “in carrying on a business for the purpose of” [gaining or producing
the assessable income]. In many cases, however, there is not a dispute about
whether the taxpayer is carrying on a business and typically business is carried
on for the purpose of gaining or producing assessable income. Thus in
practice
s8-1(1)(b) is also largely about the interpretation of the word “in”.
However, there the word “in” is the direct link between incurring a loss or
outgoing and carrying on a business. But the business itself is linked directly to
gaining or producing assessable income because it is carried on for this
purpose. Thus the word “in” links the loss or outgoing with assessable income
as it does in s8-1(1)(b), but does so along a chain that entails a carrying on a
business for the purpose of gaining or producing assessable income.
Important conclusions follow from the status of “in” as the pivotal ambiguity
in s8-1. First, “in” gives little indication as to the link that is required.
Consequently, s8-1 is authorising statutory common law. Courts are both
authorised and required to make a common law that puts some shape and
substance on the link that the word “in” requires. To do this courts have to
draw on the policy behind taxation legislation for guidance.
Some suggested salient principles for formulating when a deduction is
allowable are arguably as follows. First, the deduction should fairly relate in a
business sense to the income or business activity.
Second, deductions should not be used as a cover for improper tax
minimisation. For an illustrative example, assume that a professional
association of lawyers in some Australian jurisdiction decided to hold their
annual conference overseas in Paris. Assume that a solicitor from this
jurisdiction flies to France and attends the conference and that sessions of the
conference are entirely about Australian law. For that income year, assume that
the solicitor seeks to deduct the return airfares between Australia and France.
On the basis that deduction should not be used as cover for improper tax
minimisation the Commissioner could argue that there was no professional
reason for the conference to be held in France. Consequently, the return cost
of air travel between Australia and France would not be an allowable
deduction.
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