Explain the deductions related to loss and outgoing, as per Australian Income tax.

Australian Income Tax
Deduction related to Losses and outgoings
Division 8 of the ITAA 1997 explains, the core rules for deductibility of losses and
outgoings. The division has two deductions, general deductions and specific deductions.
General deductions
According to Section 8-1 of the ITAA 1997, general deduction is a loss or outgoing which is
deductible under the general principles of deductibility. The deduction requires that the loss
or outgoing should have the relevant connection with assessable income or the ca
ying on
of a business on condition that it does not have a capital, private or domestic nature
Specific Deduction
According to Section 8-5 of the ITAA 1997 (section 12-5 provides list of provisions about
deductions), specific deduction, is a loss or outgoing which is deductible under a specific
provision of the Tax Acts other than section 8-1 of the ITAA 1997.
Section 8-10 of the ITAA 1997, a loss or outgoing is deductible under two or more
provisions of the Tax Acts, a taxpayer can only deduct the amount under the provision that
is most appropriate. Like a loss occu
ed from a debt on the revenue account written off
during the year of income as bad debt may be deductible under the general deduction
provision of section 8-1 and the specific deduction provision of section 25-35 of the ITAA
1997.
Provisions of Deductions,
Section 8-1 of the ITAA 1997 states the general deduction provisions:
1) Deductible from assessable income any loss or outgoing to the extent that
a) Incu
ed in gaining or producing assessable income; or
b) Necessarily incu
ed on a business for the purpose of gaining or producing
assessable income.
2) Under this section, Cannot deduct a loss or outgoing to the extent that:
(a) loss or outgoing of capital, or of a capital nature; or
(b) loss or outgoing of a private or domestic nature; or
(c) Incu
ed in relation to gaining or producing your exempt income or your
non-assessable non-exempt income; or
(d) Provision of this Act prevents from deducting it.
Accordingly, entitled to avail general deduction under section 8-1 for a loss or outgoing.
Conditionally, satisfies either one of the two positive limbs as explained in subsection 8-1(1)
or none of the four negative limbs mentioned in subsection 8-1(2).
Positive Limbs
According to subsection 8-1(1) of the ITAA 1997, two positive limbs , allows deduction on a
loss or outgoing from their assessable income to the extent that:
(a) Incu
ed in gaining or producing the taxpayer’s assessable income (first positive
limb); or
(b) Necessarily incu
ed in ca
ying on a business for the purpose of gaining or
producing the taxpayer’s assessable income (second positive limb).
The first positive limb is for all that generates assessable income, i
espective of loss or
outgoing is incu
ed in the ca
ying on of a business (FCT v Green (1950). Second positive
limb applies only on a business for the purpose of gaining or producing assessable income.
Taxpayers ca
ies business may rely either or both of the positive limbs (FCT v Snowden &
Willson Pty Ltd (1958))It’s totally depends on fact and degree, whether a loss or outgoing
satisfies first positive limb or second positive limb (Maryborough Newspaper Co Ltd v FCT
(1929) pg. 452-453).
To the extent ,assesses are required to apportion the expenditure between different purposes
or characterisations (subsection 8-1(1) and (2) of the ITAA 1997 and Ronpibon Tin NL v FCT
(1949) )The outgoing will be deductible only it is incidental and relevant to the taxpayer’s
operations, result of assessable income generated (Ronpibon Tin’s case, Amalgamated Zinc
(de Bavay's) Ltd v FCT (1935)) and W Neville & Co Ltd v FCT (1937)), has the essential
character of an assessable income producing expense, as opposed to being incu
ed for other
purposes(Charles Mo
e's case, Lunney v FCT; Hayley v FCT (1958), perceived connection
etween the outgoing and the gaining or producing of assessable income(FCT v Hatchett ), as
a term or condition of employment (FCT v Cooper (1991))
Sufficient nexus under the second...