Lunney fct hayley fct potl paragraphs nexus test positive limbs judicial tests
Topic 10
General deductions
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• Section 8-1 has the potential to apply to any taxpayer.
• A loss or outgoing (ie an expense) may:
General deduction rule:
Positive limbs
• Only one of the two positive limbs needs to be satisfied.
deduction rule if it satisfies any of the negative limbs (s 8-1(2)):
General deduction rule:
Loss or outgoing
– Outgoing: eg, an expense.
• Determining whether there is a loss or outgoing is not generally
Nexus test – positive limbs of s 8-1
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Nexus / connection | ||
Nexus / connection:
Must be sufficient and necessary that the loss or outgoing is:1.Productive of assessable income; or
2.Expected to produce assessable income
• The courts have adopted a number of approaches to determine whether a loss or outgoing is incurred in the course of gaining or producing assessable income:
1. Incidental and relevant test
• A loss or outgoing is sufficiently connected to the production of assessable income where:
• See, Lunney v FCT; Hayley v FCT (1958).
• Courts have considered whether the occasion of the expenditure arises out of income-producing activities: FCT v Payne (2001) and FCT v Day (2008)
– Requires an assessment as to what is productive of the taxpayer’s assessable income.
• If the nexus between the expense and the production of assessable income is too remote, it is not deductible
• Some cases exist where it is questionable as to whether a nexus can be established, for example:
1. Expenses involving alleged or actual wrongdoing
• Nexus satisfied for expenses arising from alleged or actual wrongdoing incurred by:
– Employees defending improper conduct charges which are “quasi-personal”: FCT v Day (2008)
– Business taxpayers in respect of defending claims (eg, for libel actions) arising out of the ordinary course of business: Herald and Weekly Times v FCT (1932) and FCT v Snowden v Willson Pty Ltd (1958).
Nexus test – positive limbs of s 8-1:
Nexus sufficiently direct or too remote?
PoTL 2016 paragraphs [12.100] – [12.110]
expenses are incurred:
Loss / outgoing
eg, expense
1. Expenses related to the production of assessable income in future years
– The expense is to put an employee in a position to gain or produce assessable income: Lunney v FCT; Hayley v FCT.
2. Expenses related to the production of assessable income in prior years
• Likely to be deductible providing the expense relates to the time when the business was operating. For example:
– Satisfaction of obligations arising from previous business: Placer Pacific Management Pty Ltd v FCT (1995)
– Interest expense on a business: FCT v Jones (2002):
• An expense is not deductible to the extent that it satisfies any one of the negative limbs
Non-deductibles – negative limbs of s 8-1
• Distinction between “revenue” (not capital) and “capital”:
– Expenditure spent on an “once and for all” basis (capital) or recurring basis (revenue): Vallambrosa Rubber Co Ltd v Farmer (1910)
– Expenditure made to bring an asset into existence or to bring an advantage for an enduring benefit: British Insulated and Helsby Cables Ltd v Atherton (1926).
• Key judicial decision to distinguish between business
processes (revenue) and business structure (capital):
PoTL 2016 paragraph [12.180]
