Tax Law: Analysis of Deductions for Travelling Expenses, Computer and Travel Costs, Home Office Expenses, and Forex Losses

This article provides an analysis of deductions for travelling expenses, computer and travel costs, home office expenses, and forex losses under Tax Law. It discusses the key issues and relevant sections of the Income Tax Assessment Act 1997 (ITAA 1997) and provides examples and case laws to support the analysis.

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DEDUCTIONS
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Question 1
a) The key issue to be analysed in the situation presented is if the lawyer can claim deduction
for the given travelling expenses or not. In accordance with s. 8(1) Income Tax
Assessment Act 1997 (ITAA 1997), an individual can deduct expenses if atleast one of the
below mentioned positive limbs is complied with (CCH, 2013).
 The expense is incurred in producing assessable income
 It is incurred in the normal process of business which produces assessable income
However, even if the underlying expense does satisfy the above two limbs, then also the
expense may not be deductible if it falls under any of the four “negative limbs” outlined in s.
8(1) (Barkoczy, 2015).
 The expense is of capital nature
 The expense is of domestic or private nature
 Expense is incurred in gaining income that is non-assessable for tax purposes
 There is a particular provision which prevents expense from deduction
Considering the amount of practice put in football, it is apparent that lawyer is travelling not
as a hobby but to actually gain income. Hence, it is possible that the first possible limb is
satisfied in the given case. However, under the given situation the commentary in FCT v
Payne (2001) 46 ATR 228 case becomes relevant whereby s.8(1) would not be applicable
considering that there are two work places which are associated with two different income
producing activities i.e. one as a lawyer and the other as a footballer. However, it would be
possible to still deduct these expenses under the ambit of s. 25-100, ITAA 1997 provided
there is direct travel between the given two workplaces and one of these is not the residence
of the taxpayer (Gilders et. al., 2016).
If the taxpayer is undergoing these trips for income generation and eventually no income
arises, then as per the verdict in the FTC v Maddalena (1971) 2 ATR 541 case, no deduction
would be available for the taxpayer as no link can be satisfied between the expense and
assessable income (Deutsch et al., 2015). Thus, it may be concluded that deduction of
expense would be permissible only if these trip to the club result in producing assessable
income.

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b) The key issue is to determine if the expenses related to computer and travel can be
deducted immediately or whether they would be termed as capital expenditure. Further, it
also needs to be discussed if the travel cost is deductible immediately or not in the event of
manager also being present at the seminar.
Some expenses owing to their capital nature cannot be deducted immediately under any of
the two sections i.e. s. 8(1) and s. 8(5) ITAA 1997. For such expenses, capital allowance is
available which stretched over time as outlined under DIVISION 40, ITAA 1997 provided
they are meant for assessable income production. In accordance with s. 40-25, ITAA 1997,
the deduction claimed by the company on an annual basis would be equal to the decline in
value of computer (Barkoczy, 2015). Further, the company would have the choice of
choosing between two methods i.e. prime cost method and diminishing value method as per
s. 40-65, ITAA 1997. An example of the computation of decline in value is captured in the
table highlighted below (CCH, 2013).
Under the diminishing value method, the remaining value can also be claimed till the
complete deduction is not done.
As per subdiv 40(1), ITAA 1997 certain ‘business related costs’ termed as capital works may
be considered deductible but s 40-880(5) specifies that this is permissible only when the

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underlying expense is related to a particular depreciating asset. In the given situation, the US
travel has taken place with the sole purpose of acquiring computer, hence it can be termed as
being directly related to the computer cost. The travel cost thus would be considered as part
of the computer cost and would be depreciated along with computer cost as highlighted above
(Nethercott, Richardson and Devos, 2017).
If the manager does attend the seminar, then the travel expense can be related to both income
and capital. Thus, the amount of money spent exclusively on the seminar would be treated as
expense under s. 8(1) while the remaining expense of the US travel would be termed as
capital costs related to the computer (CCH, 2013).
c) For the given case, it needs to be determined whether a deduction can be claimed by
Adrian on account of the expenses based on the fact that a part of the home is used as an
office for the purpose of producing assessable income.
As per s. 8-1, ITAA 1997, expenses such as occupancy expenses can be deductible if the
underlying taxpayer tends to delegate a portion of the house as office for conducting income
producing activities. Further, as per this section, running expenses tend to include expenses
such as utility costs, professional phone calls, furniture, internet related to work. Further,
occupancy expenses would include items such as mortgage, rent, home insurance, council
rates, interest (Nethercott, Richardson and Devos, 2017).
The deduction of the home related expenses is dependent on whether the home officer serves
as a genuine work office for the taxpayer or is just a matter of convenience. The following
factors are critical in accordance with TR 93/30 for the home office to be considered genuine
(Gilders et. al., 2016).
 Clear identification of portion of home as business place
 That particular home portion cannot be used for private purpose
 The concerned house portion is used only for purpose of business
 Also, this house portion is used by clients and customers for visit.
With regards to Adrian, some of the above elements clearly seem lacking and hence it would
be appropriate to conclude that the house serves only convenience. Hence, only a small

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portion of the running expenses may be claimed. Further, in accordance with the ATO case
law, only that portion of internet usage and computer usage would lead to deductions as has
been used for work (evening writing conference papers and marking assignments and exam
papers), Also, the occupancy expenses cannot be claimed since the house is not a place of
business and merely a place of convenience (Deutsch et. al., 2015).
d) As per s. 8-1 and s. 6-5, ITAA 1997, the gains and losses related to FOREX are usually
taken to contribute towards allowable deductions or assessable income provided the same
is on the revenue account. In the given situation, the key issue is to determine if the losses
are work related or of private nature. The loss would be deductible as per s. 8(1) till the
time any of the following conditions are satisfied (CCH, 2013).
 The expense is incurred in producing assessable income
 It is incurred in the normal process of business which produces assessable income
Hence, in the given situation if the relationship between the incurred losses and any of the
above limbs can be established, then the $ 75,000 loss would be deductible. However, if the
losses on foreign exchange are of private nature, then the same would not be deductible as
per Division 775-30, ITAA 1997 (Barkoczy, 2015).
In relation to the interest expenses ($20,000) which Daniel incurred, the deductibility would
be contingent on the use of borrowed funds by the taxpayer. Deduction under s. 8(1) would
be available for the interest if the borrowed funds were deployed for producing assessable
income. In accordance with TR 2004/4, the interest incurred even when income producing
asset leads to loss can be deductible. But if the transaction is termed as domestic or private,
then even the interest would be deductible for tax purposes (Gilders et. al., 2016).

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References
Barkoczy, S. (2015), Foundation of Taxation Law 2015, 7th ed., North Ryde: CCH
Publications
CCH (2013), Australian Master Tax Guide 2013, 51st ed., Sydney: Wolters Kluwer
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2015), Australian tax
handbook 8th ed., Pymont: Thomson Reuters,
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016), Understanding taxation
law 2016, 9th ed., Sydney: LexisNexis/Butterworths.
Nethercott, L., Richardson, G. and Devos, K. (2016), Australian Taxation Study Manual
2016, 4th ed., Sydney: Oxford University Press