13A: Handout Week Nine: 9.3 - Other Deduction Conferral Provisions
(Three pages)
9.3A Interest
Broad Definition: Cost of using someone elses money (lender), or the cost of hiring money
for a period (i.e. cost of money). Do not mix up the cost of mone y with the cost of
borrowing (e.g. loan establishment fee, property valuation fee). Usually interest accrues on a
day-per-day basis (i.e. a borrower incurs an amount of interest every day that he/she/it has kept
use of the lenders money or has not repaid principal).
No Specific Deduction Provision for Interest: There is no specific deduction provision
dealing with the deductibility of interest. Accordingly, the only place to obtain a deduction is
under the general deduction provision (s 8-1 of the ITAA 1997).
Test(s) of Deductibility : Usage test, namely, have the borrowed funds (on which interest
accrued) been used to purchase an assessable income-producing asset?
Alternatively, where no asset can be identified, have the borrowed funds (on which interest
accrued) been used in the process of operating a business (e.g. business overdraft for meeting
ongoing business expenses)?
If the answer to either question is yes, the interest is deductible.
Examples of Application of Use Test: (a) Interest on loan to purchase a home to live in? (b)
Interest on loan to purchase a rental property? (c) Interest on loan to purchase shares? and (d)
Interest on loan to purchase units in a unit trust?
Caution where Statement is made that the Test of Deductibility is a Purpose Test:
Illustration of a change of use of a property from a home to a rental property.
Negative Gearing: Meaning : Situation where a taxpayers deductions from a particular
investment (asset) are (deliberately/with full knowledge) greater than the assessable income
from the investment (asset) (i.e. tax loss). The amount of interest on a loan is usually the reason
why a tax loss occurs. Consider the following example of a rental property for an income year:
Rent (s 6-5)
$19,000
Expenses
Real Estate Agents Fees (s 8-1)
Repairs (s 25-10)
Depreciation of Assets (s 40-25) (e.g. dishwasher)
Depreciation of Capital Work (building) (s 43-10)
Solicitors Fees to Collect Rent (s 8-1)
Interest on Loan to Purchase Property (s 8-1)
$960
$830
$90
$2,500
$1,200
$21,000
Tax Loss (excess of deductions over assessable income)
$26,580
($7,580)
Question: Is negative gearing acceptable? Generally yes. Be aware of the status of Ures case
and Fletchers case. Also, the tax loss quarantining rule in s 35-10 of the ITAA 1997 does
not apply to passive property income.
Can Interest be Capital in Nature, or on Capital Account ? Issue arose in Steeles case and
in Firths case. Answer is generally no. This is important in light of the third element of the
cost base of a CGT asset (i.e. non-capital costs (revenue costs) of ownership of the asset: s 11025(4)).
Steeles case : A brief reminder of case discussed under the contemporaneity principle.
Firths case: Facts and decision briefly.
1. Taxpayer (TP) borrowed money at rates of interest between 17-19%. Normal interest rates
were a lot less at that time;
2. The loans were referred to as protected equity investment loans (PEILs);
3. Under PEILs, the lender would lend money to TP, but TP could only purchase shares in
public companies from an approved list (e.g. three banks);
4. Key feature of a PEIL (and also why the interest was so high) was that the borrower had the
option of repaying the loan principal by handing back the shares (purchased with the loan
money) to the lender (i.e. handing the shares over to the lender is full repayment of the
loan). In effect, the borrower has a put option (i.e. option to sell an asset at a specified
price);
5. Accordingly, if the shares fell below the original purchase cost, the TP would simply hand
over the shares to the lender. If the shares went up in value, the TP would not hand over the
shares, and would repay the loan;
6. ATO denied TP a deduction for interest above the rate of 13.15% (i.e. only allowed a
deduction for 13.15% of the interest). The ATO regarded the excess as a capital protection
fee and therefore on capital account. The argument was that the higher interest rate paid
(amount paid) provided TP with a lasting advantage/enduring advantage, namely, not being
required, or most likely not being required, to repay the full principal amount; and
7. Court Held : For TP. Reasoning was that there was nothing in the PEIL to show that the
interest was not to raise and maintain use of the borrowed funds (i.e. advantage was to
obtain use of the borrowed funds). The reason for the high interest rate was due to the
lender taking on more risk associated with this loan; a bit like a no security loan.
Federal Government is unhappy with the outcome in Firths case. The government has said it
will legislate to provide that part of the interest on PEILs will not be deductible, but it will be
included in the cost base of the releva nt asset acquired with the borrowed monies (i.e.
effectively treated as capital). No legislation exists yet: Treasurers Media Release No 19, 16
April 2003.
When the legislation is enacted, it will apply from 16 April 2003.
------------------------Hart & Anor v FCT 2002 ATC 4608 (Split loans/linked loans) will be examined in Week
Fourteen under the general anti-avoidance provision.
Interest Incurred After an Income Activity (e.g. Business) Comes to an End: A brief
reminder of a couple of the cases under the contemporaneity principle. FCT v Brown 99 ATC
4600 and FCT v Jones 2002 ATC 4135.
2
Borrowing Costs/Costs of Borrowing : To be distinguished from interest on the loan (cost of
money). Examples of borrowing costs are: (a) Loan establishment fees cha rged by lenders (b)
Property valuation fee charged by property valuer (c) Legal fees charged by solicitor for
assisting with arranging the loan/borrowing and (d) Paying a friend or associated company a
fee for being guarantor of the loan (i.e. guarantor fee).
Tax Analysis of Borrowing Costs : Assuming that the borrowed monies are used to produce
assessable income, such costs will usually be on capital account under s 8-1, and therefore not
deductible under that provision. However, s 25-25 provides a deduction on an amortisation
basis. The deduction under s 25-25 is available over the period of the loan on a daily basis, or
over five- years if the period of the loan is more than five-years: s 25-25(5). Note the $100 or
less de minimis rule where immediate deduction is available (i.e. no need to amortise
deduction): s 25-25(6).
End of Loan: Expense(s) of Discharging the Mortgage. Examples appear to include: (a) Stamp
duty payable to State Government (Office of State Revenue) and (b) Solicitors fee in
arranging the discharge of the mortgage.
Tax Analysis of Mortgage Discharge Expenses : Assuming that the borrowed monies (loan)
were used to produce assessable income, and that the mortgage was security for the repayment
of the loan, such costs will usually be on capital account under s 8-1, and therefore not
deductible under that provision. However, s 25-30 provides a deduction for such costs
immediately.
3
Handout 14: Week Ten: 10.1 - Deduction Denial Provisions (Three pages)
Example One: General Position under Australias Income Tax of Aggregating Taxable
Income from various Activities (i.e. No Quarantining of Activities)
Colin has: (1) A job (2) A pottery business and (3) A passive investment. Putting aside the
possible application of Division 35 (Section 35-10(2) of the ITAA 1997), Colins taxable
income for the income year ending 30 June 2004 is as follows:
Salary
Pottery
Business
Rental
Property
Totals
Assessable Income
Deductions
$38,200
$1,200
$14,000
$24,000
$9,000
$23,000
$61,200
$48,200
Taxable Income/(Tax Loss)
$37,000
($10,000)
($14,000)
$13,000
The taxable income position from the above for Colin would be $13,000 (i.e. $61,200 $48,200, or $37,000 - $10,000 - $14,000). In effect, the tax loss on the rental property and the
share investment are used against the taxable income from salary, thereby effectively reducing
tax on the salary.
Example Two: Application of Division 35 (Section 35-10) Quarantining Rule
The operation of the new quarantining rule in s 35-10(2) can be examined by building on
Example One above.
Pottery
Rental
Salary
Business Property
Totals
Assessable Income
Deductions
$38,200
$1,200
$14,000
$24,000
$9,000
$23,000
Taxable Income/(Tax Loss)
$37,000
($10,000) ($14,000)
$61,200
$48,200
$13,000
The pottery business is clearly in a tax loss position for the 2003-04 income year. The
quarantining rule in s 35-10(2) of the ITAA 1997 should apply to the pottery business,
assuming that none of the exceptions in Division 35 apply. Section 35-10(2) of the ITAA 1997
does not apply to Colins rental property, as it is not a business (business activity).
Accordingly, Colins taxable income for the year is $23,000 (i.e. $61,200 - $48,200 + $10,000,
or $37,000 - $14,000), as the excess of deductions over assessable income from the pottery
business (i.e. $10,000) is treated as not being incurred in the 2003-04 income year. Instead, the
amount of the excess is attributable to the following income year in which the activity is
carried on.
4
Example Three: Operation of Division 35 in Income Year(s) Following a Quarantining
Income Year
To continue Example Two above, say the results from the pottery business in the following
two income years is as follows, and that at no time does Colin satisfy one of the exceptions to
the quarantining rule:
2003-04
Income Year
2004-05
Income Year
2005-06
Income Year
Assessable Income
Deductions
$14,000
$24,000
$15,000
$18,000
$18,000
$7,000
Excess for Income Year
$10,000 (loss)
$3,000 (loss)
($11,000) (taxable income)
Deferred Deductions
from Previous
Income Year(s)
Nil
$10,000
$13,000 ($10,000 + $3,000)
The $10,000 excess for the 2003-04 income year is attributable to the 2004-05 income year.
However, as the pottery business also makes a loss in the 2004-05 income year ($3,000), no
part of the $10,000 loss can be used in 2004-05 income year. The loss of $3,000 for the 200405 income year is also not available as a deduction in the 2004-05 income year, and it becomes
attributable to the 2005-06 income year. The $10,000 loss also becomes attributable to the
2005-06 income year, bringing the total of quarantined losses on the pottery business to
$13,000.
As the pottery business has a taxable income of $11,000 for the 2005-06 income year (aside
from prior-year losses), it can use up to $11,000 of previously denied/deferred losses.
Accordingly, only $2,000 ($13,000 less $11,000) of quarantined losses becomes attributable to
the 2006-07 income year in regard to the pottery business as $11,000 of those losses can be
used in the 2005-06 income year.
5
Example(s) Four: Satisfying an Exception to the Division 35 Quarantining Rule
Part A: Assessable Income Test Satisfied: s 35-30
This builds on Example Three above but the facts are varied slightly. The difference is that
Colin satisfies one of the exceptions to the quarantining rule in the 2005-06 income year. In
particular, Colin derives $22,000 in assessable income (instead of $18,000) for the 2005-06
income year, which satisfies one of the exceptions in Division 35 (i.e. assessable income of
$20,000 or more for the income year: s 35-30). Further, deductions are $11,000 (instead of
$7,000). Accordingly, the position looks like this:
2003-04
Income Year
2004-05
Income Year
2005-06
Income Year
Assessable Income
Deductions
$14,000
$24,000
$15,000
$18,000
$22,000
$11,000
Excess for Income Year
$10,000 (loss) $3,000 (loss)
($11,000) (taxable income)
Deferred Deductions
from Previous
Income Year(s)
Nil
$13,000 ($10,000 + $3,000)
$10,000
In these circumstances, Colin will be able to deduct (use) the whole $13,000 ($10,000 +
$3,000) of deductions that were deferred from the 2003-04 and 2004-05 income years, in the
2005-06 income year. As the whole $13,000 is used, there will be no further deferred
deductions from the pottery business. Strictly, the $13,000 becomes a deduction against the
$22,000 of assessable income from the pottery business for the 2005-06 income year. This
means a tax loss of $2,000 ($34,000 ($17,000 + $17,000) - $26,000) arises from the pottery
business for the 2005-06 income year. This can be used against other taxable income.
Part B: Profits (Taxable Income) Test Satisfied: s 35-35
This test is satisfied if, for at least three of the past five years, the deductions from the business
activity are less than the assessable income from the activity: s 35-35 of the ITAA 1997. The
past five years includes the current year. Consider the following (new) example in regard to the
application of the profits test to Colins pottery business:
Income Years
2001-2002
2002-2003
2003-2004
2004-2005
2005-2006
Assessable Income
Deductions
$16,000
$15,000
$14,000
$12,500
$17,000
$16,500
$12,000
$23,000
$13,000
$19,800
Test Satisfied
Yes
Yes
Yes
No
No
Even though Colin fails the assessable income test for both the 2004-05 and the 2005-06 income years
(i.e. not $20,000 or more), Colin satisfies the profits test in both income years. In regard to the 2004-05
income year, there are three years over the past five income years where the amount of deductions from
the pottery business is less than the income assessable from the activity. The same point can be made in
regard to the 2005-06 income year. Accordingly, the $11,000 tax loss for the 2004-05 income year can
be used against Colins other taxable income in the 2004-05 income year, and the $6,800 tax loss for
the 2005-06 income year can be used against Colins other taxable income for the 2005-06 income year.
6
Handout 14A: Week Ten - 10.3 Tax Accounting for Assessable Income
(Three pages)
1. Australias ITAAs have more than one assessable income provision; there are a number of
assessable income provisions (e.g. ss 6-5, 15-10, 15-20, 15-25 and 40-285 of the ITAA
1997, ss 26(e) and 27H(1)(a) of the ITAA 1936). Accordingly, our focus has got to be on
the tax accounting rule in the relevant assessable income provision.
2. However, the provision that applies to most receipts obtained by taxpayers is s 6-5
(ordinary income provision). This is where our main focus is.
Ordinary Income Provision: s 6-5 of the ITAA 1997
If a taxpayer is a resident of Australia, the taxpayers assessable income includes the ordinary
income he/she derived : s 6-5(2) of the ITAA 1997.
Key Concept is Derived. Or, key question is, when has a taxpayer derived income, or what is
the meaning of derived?
The term Derived can either mean: (a) Cash Received (or Receipt) or (b) Accruals (or
Earning).
In other words, whether the taxpayer has derived an amount of income depends on: (a) Which
basis of income derivation (deriving) he or she is on and (b) Whether the facts have occurred to
satisfy the relevant basis of derivation.
Two Basis of Income Derivation: Cash Basis (Receipts) and Accruals Basis (Earnings)
Cash Basis : A taxpayer whose activity (activities) is on the cash basis derives income when he
or she actually receives payment of the income (or the money representing income). For
example, an auditor who carries out an audit over four weeks completes the audit but only gets
paid three weeks after completing the audit, only derives income when the audit fee is
received. However, actual receipt into the hands/pocket is not always required. The
constructive receipt principle may apply to deem the taxpayer to have received their income
(see below).
Accruals Basis : A taxpayer whose activity (activities) is on the accruals basis derives income
when he or she earns it. This occurs when the right to obtain payment comes into existence,
which usually means the time at which the taxpayer has performed the obligation that gives
rise to the right to demand payment of the income (i.e. performance of obligation is
completed). Following on from the example under the Cash Basis immediately above, the
auditor would derive income when the audit is completed (or arguably at the latest, when the
invoice is sent out to the client).
Constructive Receipt Principle : Encompassed in ss 6-5(4) and 6-10(3) of the ITAA 1997.
The principle treats an amount as having been received in circumstances where the amount is
applied or dealt with on your behalf or as you direct. In other words, actual receipt is no t
always required in order to derive an amount under the Cash Basis of income derivation. Two
common examples of constructive receipt are: (1) Your bank credits periodical interest on your
principal to your bank account instead of paying the interest to yo u and (2) A company in
which you hold shares applies your dividends to the purchase of new shares in the company
under a dividend reinvestment plan (DRP), instead of paying the cash dividends to you.
7
Cash Basis-Accruals Basis Dichotomy Focuses on Activity-Per-Activity
Importantly, the cash basis-accruals basis dichotomy does not focus on the taxpayer per se.
Rather, it focuses on the taxpayer and each income activity of the taxpayer (e.g. a taxpayer who
is in employment but also operates a business may not be on the same basis of income
derivation for both activities). In other words, an analysis of each activity is required to see
which of the two basis of income derivation is appropriate to that activity.
Best approach is to break down our analysis around the recognised Income Categories, and
to analyse the cases, as far as possible, around those categories.
Income from Personal Exertion
Employees: Cash Basis.
Non-Employees (Independent contractors/services rendered/sole trader business):
Depends on Facts.
Income from Business
Provisions of Services: Depends on Facts.
Sale of Trading Stock : Generally Accruals Basis.
Outside Ordinary Course of Business (e.g. compensation receipt): Cash Basis: Heavy
Minerals Pty Ltd v FCT (1966) 14 ATD 282.
Income from Property
Rent : Generally Cash Basis. Qualification is if taxpayers property holdings amount to a
business, then taxpayer likely to be on the accruals basis.
Royalties: Generally Cash Basis, especially if small number of property rights generating the
royalties.
Interest: Generally Cash Basis. Qualification is if taxpayer in the business of lending money or
taxpayer is a financier.
Dividends : See later in course, as a specific assessable income provision applies.
Annuities (Superannuation Pensions): See below under s 27H(1)(a) of the ITAA 1936.
8
Other Assessable Income Provisions (e.g. ss 26(e) and 27H(1)(a) of the ITAA 1936, ss 1510, 15-20, 15-25 and 40-285 of the ITAA 1997)
Section 26(e) of the ITAA 1936 : Value to taxpayer of allowances, benefits, etc, Allowed,
Given or Granted to taxpayer.
Section 27H(1)(a) of the ITAA 1936 : Annuities Derived. It is strongly arguable that derived
means Received for most taxpayers.
Section 15-10 of the ITAA 1997 : Bounty or subsidy Received.
Section 15-20 of the ITAA 1997 : Royalty Received.
Section 15-25 of the ITAA 1997 : Lease obligation to repair payment Received.
Section 40-285 of the ITAA 1997 : Balancing adjustment event Occurs (e.g. sale of
depreciable asset).
CGT event A1 in s 104-10 of the ITAA 1997 : Generally, when disposal contract entered into.
Section 103-15 confirms that a taxpayer can have a capital gain or capital loss even though he
or she does not receive the capital proceeds for sale of an asset until a later income year (i.e.
time of receipt of capital proceeds is not relevant to operation of the CGT event).
Income Received in Advance (Pre -Received Income): Arthur Murray (NSW) Pty Ltd v
FCT; FCT v Arthur Murray (NSW) Pty Ltd (1965) 14 ATD 98
Facts and Decision
Can Principle(s) in Arthur Murray Apply even if Taxpayer is on the Cash Basis of Income
Derivation (e.g. employees, income from property)?
9
Handout 14B: Week Ten - 10.4 Tax Accounting for Deductions (Three
pages)
Australias ITAAs have more than one deduction provision; there are a number of deduction
provisions (e.g. ss 8-1, 25-5, 25-10, 25-25 and 40-285 of the ITAA 1997). Accordingly, our
focus has got to be on the tax accounting rule in the relevant deduction provision.
However, the provision that applies to most losses or outgoings incurred by taxpayers is s 81 of the ITAA 1997 (general deduction provision). This is where our main focus is.
General Deduction Provision: s 8-1 of the ITAA 1997
A taxpayer can deduct from his or her assessable income any loss or outgoing to the extent it is
incurred in gaining assessable income, etc: s 8-1(1) of the ITAA 1997.
Key Concept is Incurred. The key question is, when has a taxpayer incurred a loss or
outgoing, or what is the meaning of incurred?
Recall that under the concept of Derived under the ordinary income provision (s 6-5), there
was a Cash Basis and an Accruals Basis. In short, there does not appear to be such a
dichotomy under the incurred concept.
Meaning of Incurred, or Tests of Incurred
Has a definite obligation to make a payment come into existence, even if the payment is to be
made in the future (i.e. not required to be made for some time)?
Is the taxpayer definitely committed/definitively committed to the outgoing?
Has the taxpayer completely subjected himself/herself/itself to the outgoing? On the other
hand, is the outgoing merely impending, threatened or expected?
Has a presently existing liability come into existence?
Notion of incurred can still be satisfied even if the liability is defeasible.
Gloss on the General Deduction Provision or Gloss on the Incurred Concept: Properly
Referable Concept
Other Deduction Provisions (e.g. ss 25-5, 25-10, 25-25, 25-45, 26-10 and 40-285 of the
ITAA 1997)
Section 25-5 of the ITAA 1997 : Tax related expenses when Incurred.
Section 25-45 of the ITAA 1997 : Loss by theft when taxpayer Discovers Loss.
Section 26-10 of the ITAA 1997 : Outgoings for long service leave, annual leave, sick leave,
etc, are only deductible when Paid.
Section 40-285 of the ITAA 1997 : Balancing adjustment event Occurs (e.g. sale of
depreciable asset).
10
Treatment of Pre -Paid Expenditure under the General Deduction Provision, and the
Deduction Deferral Rules
Definition of a Pre -Payment : Payment for goods and services to be delivered in the future, or
a payment that stops a liability coming into existence.
Treatment under the General Deduction Provision: The actual making of a payment is an
outgoing Incurred. Therefore, the timing rule (only the timing rule) in s 8-1 of the ITAA
1997 is satisfied.
If deductibility established under the general deduction provision, there is a need to consider
the application of the deduction deferral rules.
TYPE OF ACTIVITY (CARRYING ON A BUSINESS, OR NOT
CARRYING ON A BUSINESS (E.G. DERIVING PROPERTY
INCOME, INCOME FROM EMPLOYMENT))
TYPE OF
TAXPAYER
NOT CARRYING
ON A BUSINESS
CARRYING ON
A BUSINESS
Individual
(Natural Person)
If ESP for Expense
is 12-Months or Less,
Immediate Deduction
Available (i.e. No Deferral) (1)
If ESP for Expense
Extends Beyond the Year
of Incurrence (Payment),
Deduction is Spread over
the ESP (i.e. Deferral) (3)
If ESP for Expense
is More Than 12-Months,
Deduction is Spread over
the ESP (i.e. Deferral) (2)
Company
If ESP for Expense
Extends Beyond the Year
of Incurrence (Payment),
Deduction is Spread over
the ESP (i.e. Deferral) (4)
If ESP for Expense
Extends Beyond the Year
of Incurrence (Payment),
Deduction is Spread over
the ESP (i.e. Deferral) (5)
Partnership
If ESP for Expense
Extends Beyond the Year
of Incurrence (Payment),
Deduction is Spread over
the ESP (i.e. Deferral) (6)
If ESP for Expense
Extends Beyond the Year
of Incurrence (Payment),
Deduction is Spread over
the ESP (i.e. Deferral) (7)
Trust Estate (Trust)
If ESP for Expense
Extends Beyond the Year
of Incurrence (Payment),
Deduction is Spread over
the ESP (i.e. Deferral) (8)
If ESP for Expense
Extends Beyond the Year
of Incurrence (Payment),
Deduction is Spread over
the ESP (i.e. Deferral) (9)
STS Taxpayer
Not relevant, as to be an
STS Taxpayer, the Taxpayer
must carry on a business (10)
Same as for Individuals (11)
11
Notes to Table and Definitions
Notes to Table
1. Section 82KZM(1) of the ITAA 1936.
2. Section 82KZM(1) of the ITAA 1936.
3. Sub-sections 82KZMA(1), 82KZMA(2)(a)(i), 82KZMA(3)(a)(i) and 82KZMA(3)(c), and s
82KZMD(2) of the ITAA 1936.
4. Sub-sections 82KZMA(1), 82KZMA(2)(a)(ii), 82KZMA(3)(a)(ii) and 82KZMA(3)(c), and s
82KZMD(2) of the ITAA 1936.
5. Sub-sections 82KZMA(1), 82KZMA(2)(a)(i), 82KZMA(3)(a)(i) and 82KZMA(3)(c), and s
82KZMD(2) of the ITAA 1936.
6. Sub-sections 82KZMA(1), 82KZMA(2)(a)(ii), 82KZMA(3)(a)(ii) and 82KZMA(3)(c), and s
82KZMD(2) of the ITAA 1936.
7. Sub-sections 82KZMA(1), 82KZMA(2)(a)(i), 82KZMA(3)(a)(i) and 82KZMA(3)(c), and s
82KZMD(2) of the ITAA 1936.
8. Sub-sections 82KZMA(1), 82KZMA(2)(a)(ii), 82KZMA(3)(a)(ii) and 82KZMA(3)(c), and s
82KZMD(2) of the ITAA 1936.
9. Sub-sections 82KZMA(1), 82KZMA(2)(a)(i), 82KZMA(3)(a)(i) and 82KZMA(3)(c), and s
82KZMD(2) of the ITAA 1936.
10. Section 328-365(1)(a) of the ITAA 1997. (Students should ignore the treatment of STS
Taxpayers, as it is not part of this course).
11. Section 82KZM(1) of the ITAA 1936. (Students should ignore the treatment of STS
Taxpayers, as it is not part of this course).
12. Be aware of the less than $1,000 de minimis rule (i.e. excluded expenditure): ss
82KZL(1), 82KZM(1)(b) and 82KZMA(4) of the ITAA 1936. In short, the deduction deferral
rules do not apply if the expenditure is less than $1,000.
Definitions
ESP (Eligible Service Period) : In relation to an amount of expenditure, means the period over
which the recipient of the payment (i.e. payee/provider of services) is required to do something
in return for the payment: s 82KZL(1) of the ITAA 1936. (Ignore the 10-year rule in the
definition of ESP in s 82KZL(1) because in practice, very few taxpayers are going to make a
10-year pre-payment).
Expenses expressly covered by the deduction deferral rules are: (a) Interest on a loan (b)
Payment of rent for use of property and (c) Payment of an insurance premium: s 82KZL(2) of
the ITAA 1936. However, the deduction deferral rules are clearly not limited to these three
types of expenses.
Individuals (Natural Persons), Companies, Partnerships and Trust Estates (Trust) :
Students are already familiar with most of these four types of entities. In any event, we will
be dealing with partnerships, trusts and companies over the next four weeks of the course.
Carrying on a Business, and Not Carrying on a Business : Students will already be familiar
with the distinction made here (e.g. owning one rental property is very unlikely to be a
business, owning shares for long-term investment is very unlikely to be a business).
Example(s)
12