Edited version of private ruling

Authorisation Number: 1011737626386

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Ruling

Subject: Business related expenses

Question 1

Are you able to deduct expenses associated with your business against payment from an income protection policy?

Answer

No.

Question 2

Are you able to deduct expenses associated with your medical care against your income protection payment or your business income?

Answer

No.

Question 3

Are you able to deduct the costs associated with travel to and from medical appointments against your income protection payment or your business income?

Answer

No.

Question 4

Are you entitled to a deduction for self education expenses for a training course?

Answer

No.

This ruling applies for the following period

Year ending 30 June 2010.

The scheme commenced on

1 July 2009.

Relevant facts

You have a business.

You are a sole trader.

You had a work place accident.

You have an income protection policy.

You have been receiving weekly payments from this policy.

This money is not paid to you as wages and it is not taxed.

You receive a small amount of money from limited work you still carry out in your business.

You would like to claim for the following items:

· depreciation of existing tools and equipment

· motor vehicle

· phone

· reference books and stationery

· consumable supplies

· training course

· medical expenses

Relevant provisions

Taxation Administration Act 1953 section 12-B.

Taxation Administration Act 1953 section 12-C.

Taxation Administration Act 1953 section 12-D.

Taxation Administration Act 1953 section 12-55.

Income Tax Assessment Act 1936 section 6-1.

Income Tax Assessment Act 1936 paragraph 139GA(1)(a).

Income Tax Assessment Act 1997 section 8-1.

Income Tax Assessment Act 1997 Division 35.

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

The courts have considered the meaning of 'incurred in gaining or producing assessable income'. In Ronpibon Tin NL Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; 56 ALR 785; 8 ATD 431 the High Court stated that:  

For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing assessable income it must be incidental and relevant to that end. The words "incurred in gaining or producing the assessable income" mean in the course of gaining or producing such income.

Therefore we need to determine whether your outgoings are incurred in gaining or producing assessable income

The expression employee is relevantly defined in paragraph 139GA(1) (a) of the Income Tax Assessment Act 1936 (ITAA 1936) as a person who receives, or is entitled to receive, work and income support related withholding payments and benefits.

The phrase work and income support related withholding payments and benefits is in turn defined by subsection 6(1) of the ITAA 1936 to include payments from which an amount must be withheld under a provision of Subdivision 12-B (other than section 12-55), 12-C or 12-D in Schedule 1 to the Taxation Administration Act 1953 (TAA) (even if the amount is not withheld). Payments captured under Subdivision 12-B in Schedule 1 to the TAA include payments of salary, wages, commission, bonuses or allowances to an individual as an employee and payments of remunerations to directors.

The payment that you receive from your income protection policy is not for work performed. The payment you receive is a benefit paid to you while you are unable to work.

Therefore you are not entitled to a deduction, against the income from your income protection policy, for the following business related expenses:

· motor vehicle expenses,

· phone calls,

· depreciation of tools,

· reference books and stationery, and

· consumable supplies.

Medical expenses

The deductibility for expenditure on medical appliances is addressed in Taxation Ruling IT 2217. The ruling discusses two Taxation Board of Review decisions in relation to whether a medical appliance can be claimed as a work related expense. In Case P31 82 ATC 141; Case 96 25 CTBR (NS) 715, a quadriplegic law lecturer was not allowed an income tax deduction for depreciation, maintenance and insurance on a motorized wheelchair which he used 75% of the time in connection with his employment. Similarly, in Case Ql7 83 ATC 62; Case 82 26 CTBR(NS) 556, a farmer was denied the cost of a hearing aid which he claimed was an essential tool in carrying on his business.

In both cases the Board found that the sole purpose of the medical appliance was to aid the taxpayer to overcome his personal disability so that he could earn his assessable income. The Board concluded that, although the taxpayer might be unable to earn his assessable income without the aid of the relevant appliance, the outlay on the appliance was not incurred in gaining assessable income or carrying on a business for that purpose. The expenditure was incurred to help overcome a disability suffered by the taxpayer.

Although in your situation your expense is related to medical expenses and not medical appliances the same line of reasoning as that used in the Board of Review decisions above can be applied to your situation

The purpose of your visits to the medical specialists is for treatment of your illness. Although you might be unable to receive your income protection payments without the treatment, the outlay of the expenses were not incurred in gaining assessable income.

Consequently, the expenditure is not deductible under section 8-1 of the ITAA 1997 as it is considered a private expense and an expense that is not incurred in earning your assessable income, either from your business or the income protection policy.

Travel expenses to and from medical appointments

A deduction is generally not allowable for the cost of travel by an employee between home and their normal workplace as it is considered to be a private expense. The case of Lunney v. Federal Commissioner of Taxation (1957-1958) 81 ATC 186 ALR 225;1958 settled the principle that travel to and from work is ordinarily not deductible under section 8-1 of the ITAA 1997. This travel is considered to be of an essentially private or domestic nature. Similarly, visits to medical appointments are also seen to be essentially private or domestic in nature and are not deductible under section 8-1 of the ITAA 1997.

Training course

Section 8-1 of the Income Tax Assessment Act 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Taxation Ruling TR 98/9 discusses circumstances in which self-education expenses are allowable as a deduction. If your current income-earning activities are based on the exercise of a skill or some specific knowledge and the subject of self-education enables you to maintain or improve that skill or knowledge, the self-education expenses are allowable as a deduction.

If the study of a subject of self-education objectively leads to, or is likely to lead to, an increase in your income from your current income-earning activities in the future, the self-education expenses are allowable deduction.

Paragraph 15 of TR 98/9 also mentions that no deduction is allowable for self-education expenses if the study is to enable you to obtain employment, to obtain new employment or to open up a new income-earning activity (whether in business or in your current employment). This includes studies relating to a particular profession, occupation or field of employment in which you are not yet engaged. The expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.

Paragraph 15 of TR 98/9 clearly sets out the circumstances where a deduction for self education is not allowed.

In your case there is no connection between the training and your business.

Therefore the costs associated with the training are not deductable under section 8-1 of the ITAA 1997.

Please note:

Please find below information on the deductibility of losses from carrying on a business.

Division 35 may apply to your circumstances.

Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) provides guidance on the deductibility of losses from business activities for individuals, either on their own, or in a general law partnership. In order for Division 35 to apply, an individual must be carrying on an activity that constitutes a business. Taxation Ruling TR 2001/14 has been issued to provide further guidance on Division 35 and the non-commercial business loss provisions.

Section 35-10 of the ITAA 1997 states that unless in each year:

(a) the individuals business activity meets one of the four tests,

(b) the individual comes within the Exception, or

(c) the individual is covered by an exercise of the Commissioners discretion in relation to that business activity.

A loss from the business activity will not be deductible in the income year in which is arose. The loss may be available for a deduction in a later year if the three rules above are met in that later year.

If your activity makes a profit in a following year, you can offset the deferred loss against this profit, but only to the extent of that profit. You can only offset a deferred loss against income from other sources other than your business activity if, in a following year, the business activity passes one of the four tests or the Commissioner exercises the discretion.

If the relevant business activity passes at least one of the tests, comes within the exception of has a favourable exercise of the Commissioner's discretion, they will be able to deduct the excess deductions against their other assessable income.

The four tests

There are four tests outlined in Division 35. At least one of these tests must be satisfied each year in order for a loss to be able to be deducted from other income. These four tests are the assessable income test, the real property test, the other assets test and the profits test.

Assessable income test

In order to meet the assessable income test, as outlined in section 35-30 of the ITAA 1997, the assessable income for that year from the business activity must be at least $20,000. If the business activity started or ceased during the year, the test is based on the taxpayers reasonable estimate of the amount that would have been the assessable income of the activity had been carried on for the whole year.

In order to meet the real property test, as outlined in section 35-40 of the ITAA 1997, the total reduced cost bases of real property or interest in real property used on a continuing basis in carrying on the activity must be at least $500,000.

Real Property is not defined in the income tax legislation, therefore it is taken to have its common meaning. Real property includes land, interest in land such as leases and structures such as buildings. Real property, for the purposes of the real property test, does not include a dwelling and adjacent land that is used mainly for private purposes, and fixtures owned by you as a tenant.

Other assets test

In order to meet the other assets test, as outlined in section 35-45 of the ITAA 1997, the total value of other assets (other than motor vehicles) used on a continuing basis in the activity must be at least $100,000. This comprises the written down value of depreciated assets, the tax value of trading stock and leased assets, and the reduced cost base of trade marks, patents, copyrights and similar rights.

Profits test

In order to meet the profits test, as outlined in section 35-35 of the ITAA 1997, the particular activity must have resulted in taxable income in at least three out of the last five income years, including the current year.

There are two exceptions under which the non-commercial loss provisions do not apply. These exceptions under section 35-10 of the ITAA 1997 are:

1. an individual carrying on a primary production business or a professional arts business if the income from other sources is less than $40,000; and

2. activities that do not constitute a business.

Commissioner's discretion

Under section 35-55 of the ITAA 1997, the Commissioner has the discretion not to defer the loss. This discretion may be exercised in two circumstances:

1. The activity is affected by special circumstances outside the control of the taxpayer.

2. The business activity has started and there is an objective expectation that the activity will either meet one of the tests or will produce taxable income within a period that is commercially viable for the industry concerned. The business activity must not have satisfied the tests because of its nature.

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