Copyright: (c) Australian Taxation Office 2007
Citation: (c) Australian Taxation Office 2007


Australian Taxation Office locations
Tax Office Shopfronts

Our shopfront addresses and mailing addresses for correspondence are listed below. Please send correspondence to the office shown on your last notice of assessment, if you have one; otherwise send it to the nearest tax office.

If you have an enquiry you can visit our website at www.ato.gov.au or you can contact us by phone. Refer to the list of our telephone infoline services.

If you prefer to make your enquiry in person, please phone 13 28 61 to make an appointment at one of our shopfronts.

NOTE:
PAYING YOUR TAX DEBT
We do not accept payments over the counter at our shopfronts. The various ways you can pay your tax debt are set out on the back of your notice of assessment. If you need more information phone 1800 815 886.

SHOPFRONTS

Australian Capital Territory

Canberra	Ground floor, Ethos House 28-36 Ainslie Avenue, Canberra GPO Box 9990 Canberra ACT 2601

New South Wales

Albury	567 Smollett Street Albury PO Box 9990 Albury NSW 2640
Chatswood	Shop 43 Lemon Grove Shopping Centre 441 Victoria Avenue Chatswood GPO Box 9990 Sydney NSW 2001
Hurstville	1st Floor MacMahon Plaza 14-16 Woodville Street Hurstville PO Box 9990 Hurstville BC NSW 1481
Newcastle	266 King Street Newcastle PO Box 9990 Newcastle NSW 2300
Parramatta	Commonwealth Offices Ground Floor 2-12 Macquarie Street Parramatta PO Box 9990 Parramatta NSW 2123
Sydney	2 Lang Street, Sydney GPO Box 9990 Sydney NSW 2001
Wollongong	93-99 Burelli Street Wollongong PO Box 9990 Wollongong NSW 2500

Northern Territory

Alice Springs	Jock Nelson Centre 16 Hartley Street Alice Springs GPO Box 9990 Adelaide SA 5001
Darwin	24 Mitchell Street Darwin GPO Box 9990 Adelaide SA 5001

Queensland

Brisbane	280 Adelaide Street Brisbane GPO Box 9990 Brisbane QLD 4001
Townsville	Stanley Place 235 Stanley Street Townsville PO Box 9990 Townsville QLD 4810
Upper Mt Gravatt	Ground Floor, Nexus Building 96 Mt Gravatt-Capalaba Road Upper Mt Gravatt PO Box 9990 Upper Mt Gravatt QLD 4122

South Australia

Adelaide	91 Waymouth Street Adelaide GPO Box 9990 Adelaide SA 5001
Tasmania
Hobart	200 Collins Street Hobart GPO Box 9990 Hobart TAS 7001
Launceston	54 Cameron Street, Launceston GPO box 9990 Hobart TAS 7001
Victoria
Melbourne	Casselden Place, Level 1,  2 Lonsdale Street Melbourne PO Box 9990 Dandenong VIC 3175
Cheltenham	4A, 4-10 Jamieson Street Cheltenham PO Box 9990 Dandenong VIC 3175
Dandenong	14 –16 Mason Street Dandenong PO Box 9990 Dandenong VIC 3175
Geelong	92-100 Brougham Street Geelong PO Box 9990 Geelong VIC 3220

Western Australia

Northbridge	45 Francis Street Northbridge GPO Box 9990 Perth WA 6848
OTHER OFFICES

Box Hill tax office
PO Box 9990 Box Hill VIC 3128

Chermside tax office
PO Box 9990 Chermside QLD 4032

Moonee Ponds tax office
PO Box 9990 Moonee Ponds VIC 3039

Penrith tax office
PO Box 9990 Penrith NSW 2740


Publications, taxation rulings, forms and the Taxpayers' Charter
Publications, taxation rulings, practice statements and forms

Access to many publications is readily available through e-tax, however if the publication is not available through e-tax you have three options:

1.	Visit our website at www.ato.gov.au for publications, taxation rulings and forms.

2.	Phone our Publications Distribution Service on 1300 720 092 for all referred publications, including forms.

Before you phone, check to see if there are other publications you may need – this will save you time and help us. For each publication you order, quote the full title. An automated self-help publication ordering service is available 24 hours a day every day where you know the title of the publication. Alternatively, you can speak to an operator between 8.00am and 6.00pm Monday to Friday.

3.	Visit a Tax Office shopfront – refer to our street addresses.


Infolines

See also Publications, taxation rulings, practice statements and forms.

If you have an enquiry about your tax, phone the relevant infoline below. Make sure you have e-tax running when you phone us.

We can offer a more personalised service if you provide (TFN) and have your last notice of assessment with you when you phone us.

If you require access to your Tax Office records you will be asked to prove your identity by providing your TFN and either details from your last notice of assessment or some personal details.

Our infolines are open Monday to Friday 8.00am to 6.00pm except where otherwise indicated. Our automated self-help services are available 24 hours per day every day of the year.

You can find a list of Tax Office infolines in your White Pages.

Phoning from overseas

If you are phoning us from overseas, phone +61 2 6216 1111

Phone during our business hours, 8.30am and 4.45pm (Australian Eastern Standard or daylight-saving time). Note that our infoline numbers may not work from all countries.

You can also fax us: +61 2 6216 2830

Personal Tax Infoline  13 28 61

Phone between 8.00am and 6.00pm.

Enquiries about the following subjects can be made to this service:

•	tax affairs for seniors who are retired or planning to retire

•	family tax benefit and baby bonus

•	tax file number queries

•	pay as you go (PAYG), including instalment activity statements

•	student loan schemes (HECS, HELP and SFSS)

•	capital gains, rental income, foreign income

•	preparation of an e-tax tax return

•	notice of assessment

•	general income tax, including replacement cheque and account queries and lodgment

•	binding oral advice

Business Infoline  13 28 66

Complaints  13 28 70

Fax (FREECALL)  1800 060 063

EFT Infoline  1800 802 308

For enquiries about direct deposit of your tax refund

Family Assistance Office (FAO)  13 61 50

Superannuation Infoline  13 10 20

Aboriginal and Torres Strait Islander Infoline  13 10 30

Specialises in helping Indigenous clients with their personal tax matters.

Tax Office personal self-help  13 28 65

Our automated phone service is available 24 hours a day every day, so you can:

•	check the progress of your refund

•	find lost superannuation

•	make an arrangement to pay a tax debt

•	lodge your application for a refund of franking credits

•	lodge your application for a baby bonus

•	order a publication where you know the title of the publication.

NOTE:
Although providing your TFN is voluntary, you need to quote your TFN to use these self-help services (except publications ordering).

Fax  13 28 60

Get information faxed to you about individual taxes. Follow the instructions to order information to be faxed to you.

People with hearing, speech or vision impairment

If you are deaf or have a hearing or speech impairment, you can phone us through the National Relay Service:

•	If you are a TTY or modem user, phone 13 36 77 and ask for the number you want.  For 1800 free call numbers, phone 1800 556 677 and ask for the number you want.

•	If you are a voice-only (speak and listen) user, phone 1300 555 727 and ask for the number you want.  For 1800 free call numbers, phone 1800 555 727 and ask for the number you want.

If you have vision impairment you can prepare your tax return on your personal computer and lodge online using e-tax which is available on our website. You will need the internet and screen reader and/or screen magnification software.  We recommend that you use a Microsoft Windows operating system.

We have available free audio tapes and compact disks of TaxPack 2007 and TaxPack 2007 supplement. To get copies of these phone: 13 28 61

To report tax evasion

Phone (FREECALL)  1800 060 062

Fax (FREECALL)  1800 804 544

Go to our website www.ato.gov.au/reportevasion

Mail Locked Bag 6050, Dandenong  VIC  3175.


Need help with your tax affairs?
Tax Help – serving the community

ARE YOU ON LOW INCOME?

FREE HELP WITH YOUR TAX RETURN

If you want to complete your own tax return, application for a refund of franking credits or baby bonus claim – and you are a low income earner – but think you may need some assistance, then Tax Help may be the answer.

Our network of community volunteers are trained and supported by the Tax Office to help you.

Tax Help is a free and confidential service for people on low incomes. People who use Tax Help include seniors, people from non-English speaking backgrounds, people with a disability, Aboriginal people, Torres Strait Islander people, and students.

Volunteers can explain your tax obligations and help you prepare your tax return accurately. They can help people with income from Australian and overseas pensions, salary or wages, interest, dividends and government allowances and benefits. Volunteers cannot help with more complex tax affairs such as business income and income from rental properties.

There are Tax Help centres throughout Australia. If you want to visit one of the trained volunteers you need to make an appointment. Take all your relevant papers with you when you visit.

For more information, or to find out where your nearest Tax Help centre is, phone the Personal Tax Infoline.


Deceased estate – are you lodging a tax return for someone who died during the year?

A date of death return is the tax return lodged by the trustee, executor or other authorised person to cover the financial period between 1 July and the date the taxpayer died. It is a standard Individual return form for the year in which the person died to which some additional information must be attached. Any income received after the person dies is usually required to be disclosed in a Trust estate return.

e-tax should not be used to prepare a tax return on behalf of a deceased taxpayer. If e-tax were used to prepare a tax return for a deceased taxpayer the information on the return could be incorrect and an incorrect assessment could result.

However, e-tax can be used to determine if a tax return is required to be lodged for a deceased taxpayer. Do you need to lodge a tax return? will tell you if a tax return is required to be lodged for the deceased taxpayer.

If yes, refer to TaxPack 2007 (NAT 0976.6.2007) for instructions on how to prepare and lodge a written (paper) return on behalf of the deceased taxpayer.

If you have any further questions, phone the Personal Tax Infoline.


If you need more help

ADVICE

You can visit our website

You can visit the Tax Office website at www.ato.gov.au for information on anything that you read in e-tax. You can use the tools and calculators on the website to help you complete your tax return.

You can phone the Tax Office

You can phone the Tax Office on 13 28 61 if you need assistance with a question in e-tax or another matter concerning your tax affairs. If you decide to phone us, please have e-tax running on your computer. We can offer a more personalised service if you provide your tax file number (TFN) and have your last notice of assessment with you when you phone us. If you require access to your Tax Office records you will be asked to prove your identity by providing your tax file number and either details from your last notice of assessment or some personal details. If you would like to visit the Tax Office and speak to us in person, phone for an appointment. See Tax Office locations for our addresses.

Hearing or speech impairment

If you are deaf or have a hearing or speech impairment, you can phone us through the National Relay Service.

•	If you are a TTY or modem user, phone 13 36 77 and ask for the number you want. For 1800 free call numbers, phone 1800 555 677 and ask for the number your want.

•	If you are a voice-only (speak and listen) user, phone 1300 555 727 and ask for the number you want. For 1800 free call numbers phone 1800 555 727 and ask for the number you want.

You can ask for a taxation ruling

Private rulings

If you have a complex enquiry about your tax affairs, you can ask us for a private ruling that will relate to your particular circumstances.

To do this, either contact us or complete a Private ruling application form (non-tax professionals) (NAT 13742). To find out how to get this publication, see publications.

Lodge your tax return by the due date, even if you are waiting for the reply to your private ruling. You may need to request an amendment to your tax return once you have received the private ruling.

We publish all private rulings on our website. (Before we publish them, we edit the text to make sure we do not publish information that identifies you). For more information, see How to apply for a private ruling (NAT 9188).

You can ask for a review of your private ruling if you disagree with it.  However, if we have issued an assessment for the period to which the ruling relates the private ruling cannot be reviewed.  If we have issued your assessment you can ask for your assessment to be reviewed. We send you details of the review procedures when we send your ruling to you.

Oral Rulings

You can apply for an oral ruling from the Tax Office over the phone on a simple non-business tax enquiry that relates specifically to your own tax affairs or the tax affairs of someone for whom you are the legal personal representative. An oral ruling is binding on the Tax Office in much the same way as a private ruling.

To be eligible for an oral ruling you must meet certain conditions. Your enquiry must be about a simple non-business related income tax matter and you must be able to confirm your identity. Your tax file number and most recent notice of assessment will usually be sufficient proof of identity.

We will confirm your eligibility for an oral ruling by asking you a series of questions. If you receive an oral ruling the Tax Office will provide you with a receipt number for your ruling.

To get further information or to apply for an oral ruling phone the Personal Tax Infoline.

Product rulings

To find out if there is a product ruling for a managed investment scheme you have invested in, the Tax Office website has more information about product rulings and lists of current product rulings– log onto www.ato.gov.au/atp. A product ruling provides certainty for investors in the arrangement it relates to by confirming that the tax benefits set out in the product ruling are available, provided that the arrangement is carried out in accordance with the details provided by the applicant and described in the product ruling.

PUBLICATIONS

You can get other publications and tax returns

Because we can't cover everything in e-tax Help, we will sometimes refer you to other publications that will help you to complete your tax return. These publications are available on our website, or to find out how to get a printed copy, see publications.


What are your choices for doing your tax return?

USE e-tax, THE EASIEST AND QUICKEST WAY- AND YOU GET A FASTER REFUND

You can do it yourself. Using e-tax 2007 you can prepare your tax return on your own computer and lodge it quickly and securely online using the internet. Using e-tax makes doing your tax return easy; it asks you questions and completes each section based on your answers. It will works out any capital gain or capital loss for you and estimates your tax refund or tax debt.

We process most tax returns lodged using e-tax within 14 days. If you are eligible for a refund, you will receive it quickly. If you have a tax debt, your debt will not be due before 21 November 2007.

Just follow the instructions and make sure you lodge your tax return by 31 October 2007. You should not lodge your tax return if it is incomplete. If you think you will still be missing information on 31 October ask us if you can lodge at a later date.

SOMEONE ELSE CAN DO IT FOR YOU

Family member or friend

A family member or friend can help you but they cannot charge you a fee. Even if a family member or friend helps you to prepare your tax return, you must electronically sign the Taxpayer’s declaration in e-tax and you are still legally responsible for the accuracy of the information on your tax return. See Self-assessment – it's your responsibility.

Tax help community volunteers

Tax Help is a network of community volunteers trained to help people prepare their tax returns, baby bonus claims and claims for a refund of franking credits.

This free service is available for people on low incomes – including people who are seniors, are from non-English speaking backgrounds, have a disability, and are Aboriginal or Torres Strait Islanders or are students.

See Free help with your tax return for more information.

Registered tax agents

Registered tax agents are the only people who can prepare and lodge your tax return for a fee. You should ensure that you are using a registered tax agent. A list of registered tax agents can be found at www.tabd.gov.au or you can check with the Tax Agents' Board on 1300 362 829. If you did not go to a tax agent last year – or you will be going to a different tax agent this year – make sure that you see them before 31 October 2007.

If a registered tax agent prepares your tax return, you must also sign a declaration stating that:

•	you have authorised the agent to lodge your tax return, and

•	the information you provided to the agent for the preparation of your tax return is true and correct.

SIGNING YOUR TAX RETURN

You must electronically sign the Taxpayer's declaration in e-tax to confirm that the information on your tax return it is true and correct.

If you are lodging a paper tax return you must sign and date the Taxpayer’s declaration on page 8 of your tax return to confirm that the information on your tax return is true and correct.

MAKING IT EASIER TO COMPLY

As part of our program to make tax ‘easier, cheaper and more personalised’ we are currently:

•	providing a short tax return that can be lodged over the phone or by mail. We would have sent you a short tax return pack if you were eligible to use it.

•	expanding our online lodgment service, e-tax – for example, you can now save time and pre-fill your e-tax return with:

o	medical expenses details from Medicare Australia medical

o	payment details from Centrelink and the Department of Education, Science and Training

o	interest or unit trust distribution details from some banks, credit unions and other financial institutions

o	dividend details from some share registries

•	providing calculators and decision tools to help you

•	tailoring our website to particular audiences, for example www.ato.gov.au/youth for under 25s, and

•	providing a personal tax record keeper that will help you keep your tax records for the year

NOTE:
You will find more detail about our plans in Making it easier to comply (NAT 9497-01.2006) available on our website www.ato.gov.au or to get a printed copy phone our Publications Distribution Service.

IN THE FUTURE

 When using e-tax you will be able to pre-fill your e-tax return with even more information, such as salary and wages details. This will save you time, and reduce the chances of error. Your tax agent will also have access to this information.


How we work out your tax

INCOME	e-tax shows this amount at TOTAL INCOME OR LOSS on your tax return.
minus
ALLOWABLE DEDUCTIONS	e-tax shows this amount at TOTAL DEDUCTIONS on your tax return. You may also show an amount at L1, e-tax will take this amount away from your income to work out your taxable income.
equals
TAXABLE INCOME	e-tax shows this amount at TAXABLE INCOME OR LOSS on your tax return. We use this amount to work out your tax. If you want to work it out refer to Tax on taxable income
TAX ON TAXABLE INCOME
minus
TAX OFFSETS	e-tax shows most tax offsets at TOTAL TAX OFFSETS on your tax return. If you are entitled to a low income, beneficiary, senior Australians, pensioner, mature age worker, y or Medicare levy surcharge lump sum tax offset or a transfer of unused 30% child care tax rebate from your spouse, we work it out for you. If you want to work it out refer to senior Australians or pensioner tax offset, mature age worker tax offset and beneficiary tax offset or use the calculators on our website www.ato.gov.au  Refundable tax offsets on the other hand are included below in the amount for tax credits and refundable tax offsets.
equals
NET TAX PAYABLE
plus
HELP AND SFSS REPAYMENTS	If you have a Higher Education Loan Programme (HELP) debt or Student Financial Supplement Scheme (SFSS) debt, we work out your repayment.  If you want to work it out refer to HELP and SFSS repayment or use the calculators on our website www.ato.gov.au
plus
MEDICARE LEVY AND SURCHARGE	We work these out from items M1 and M2 on your tax return. If you want to work it out refer to Medicare levy and Medicare levy surcharge calculations or use the calculators on our website www.ato.gov.au
minus
TAX CREDITS AND REFUNDABLE TAX OFFSETS	We work out these amounts from tax you paid during the year and  any refundable tax offsets that have not already been credited or refunded. The baby bonus (item T7), private health insurance (itemT5) and any franking credit (item 11 or 12) are refundable tax offsets
equals
REFUND OR AMOUNT OWING	We show this amount on your notice of assessment. Your refund may be affected by any outstanding liabilities to the Tax Office or the Child Support Agency. These amounts will appear on your notice of assessment as ‘Other amounts payable’. Your family tax benefit (FTB) entitlement or top-up may be affected by any Family Assistance Office debt (which includes FTB and child care benefit debts). This may also affect your refund or amount owing.


What you need to know before you can work out your tax refund or tax debt
Working out your tax refund or tax debt

WHAT YOU NEED TO KNOW BEFORE YOU CAN WORK OUT YOUR TAX REFUND OR TAX DEBT

You do not have to work out your tax refund or tax debt. We will work it out from the information you provide on your tax return and advise you of the result in your notice of assessment.

If you do want to work out your tax refund or tax debt for your own purposes, we show you how in the following Help topics (click on the >> button). Or you can use the calculators on our website at www.ato.gov.au.

There are some situations where we cannot show you how to work out your tax refund or tax debt because the nature of the calculation is too complex to explain in e-tax.

These situations include where you:

•	had income subject to capital gains tax

•	had an eligible termination payment

•	are entitled to the unused portion of your spouse’s senior Australian or pensioner tax offset

•	had an unused amount of the 30% child care tax rebate transferred to you

•	had a lump sum payment in arrears

•	had a lump sum payment because you retired or finished working in a job

•	were under 18 years old and earned more than $1,333 in interest, dividends or other investment income

•	had credit for tax paid by a trustee

•	had a family tax benefit claim

•	had exempt foreign employment income

•	had income that was subject to averaging

•	had film industry investment deductions

•	had a dividend from a New Zealand company with Australian franking credits attached.

•	have claimed the entrepreneurs tax offset.

WORKING OUT YOUR TAX REFUND OR TAX DEBT

To do this you need to work out:

•	your tax-free threshold

•	the tax on your taxable income

•	your beneficiary tax offset, if any

•	your pensioner or senior Australians tax offset, if any

•	your mature age worker tax offset, if any

•	your low income tax offset, if any

•	your Medicare levy, if any

•	your Medicare levy surcharge, if any

•	your Student Financial Supplement Scheme (SFSS) compulsory repayment, if any

•	your Higher Education Loan Programme (HELP) compulsory repayment if any.

•	your baby bonus, if any.

When you have worked out all these components the FINAL WORKSHEET shows you how to calculate your tax refund or tax debt.


Working out your tax refund or tax debt

FINAL WORKSHEET

Click on the Print button to get a copy of this page.

Complete all the steps. If any of the amounts listed do not apply to you, write ‘0’ in the appropriate box.

STEP 1	Tax on taxable income Transfer the amount of tax you worked out.	$________________	A
STEP 2	Tax offsets Total tax offsets claimed on page 4 of your tax return – do not include your private health insurance tax offset (G item T5 on your tax return) – this is shown at step 9	$________________
	Senior Australians, pension or beneficiary tax offset. If you have more than one, use the one that gives you the most.	$________________
	Tax offset on life insurance bonuses 30% of W from item 21.	$________________
	Low income tax offset	$________________
	Mature age worker tax offset	$________________
	30% child care tax rebate
	Add up all your tax offsets.	$________________	B
STEP 3	Tax payable Take B away from A. If this amount is less than zero write ‘0’ here.	$________________	C
STEP 4	Medicare levy and Medicare levy surcharge Medicare levy.	$________________
	Medicare levy surcharge.	$________________
	Add up all your Medicare levy and Medicare levy surcharge.	$________________	D
STEP 5	Total tax payable Add C and D.	$________________	E
STEP 6	Foreign tax credits Foreign tax credits – amount at O item 19 on your tax return	$________________	F
	Take F away from E. If this amount is less than zero write ‘0’ here.	$________________	G
STEP 7	HELP and SFSS repayments HELP repayments	$________________
	SFSS repayments	$________________
	Add up your HELP and SFSS repayments	$________________	H
STEP 8	Add G and H.	$________________	I
STEP 9	Tax credits and refundable tax offsets Pay as you go (PAYG) instalments – from your instalment activity statement if you have one Total credits from payment summaries – amount at: $ item TOTAL TAX WITHHELD on your tax return E item 22 on your tax return Credits from tax withheld – amounts at: P + A item 12 on your tax return G + H + J item 13 on your tax return D + W + E + F item 14 on your tax return Credits from tax file number amounts withheld – amounts at: M item 10 on your tax return V item 11 on your tax return R item 12 on your tax return Credit for interest on early payments – amount at: L item C1 on your tax return private health insurance tax offset – amount at: G item T5 on your tax return Franking tax offset (franking credit)- amounts at: U item 11 on your tax return Q item 12 on your tax return Baby bonus – amount e-tax worked out Add up all your tax credits and refundable tax offsets	$________________ $________________ $________________ $________________ $________________ $________________ $________________ $________________ $________________ $________________ $________________	J
STEP 10	Refund or Net tax payable Take J away from I	$________________	K
Are you entitled to a refund or do you have a tax debt?

If K is negative (less than zero), this is the amount of refund due to you. If you have any Family Assistance Office debts (which includes family tax benefit and child care benefit debts), tax debt or outstanding child support payments, we may deduct some or all of them from your refund. If K is positive (more than zero), this is the net amount you have to pay.


V1
V1	No TXID file received

Transmission does not contain a TXID file.

If this error is displayed, please contact the Personal Tax Infoline.


V2
V2	No returns received with this TXID

Transmission does not contain one or more forms.

If this error is displayed, please contact the Personal Tax Infoline.


V3
V3	Invalid tag

Tag is invalid for form type and year or TXID.

If this error is displayed, please contact the Personal Tax Infoline.


V4
V4	Missing tag ZZZ

Files in a transmission do not end with ^ZZZ.

If this error is displayed, please contact the Personal Tax Infoline.


V5
V5	Tag missing or out of sequence in associated group

Tags in the association are either not present or not in the correct order.

If this error is displayed, please contact the Personal Tax Infoline.


V6
V6	Transmission exceeds 1000 returns. Excess discarded

Transmission exceeds 1000 returns.

If this error is displayed, please contact the Personal Tax Infoline.


V7
V7	Maximum field length exceeded

Data has exceeded maximum length allowed in this field.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Shorten the information you have typed in so that the maximum length is not exceeded. If this is a persistent problem, please contact the Personal Tax Infoline.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V8
V8	Tags that are not multi-valued appear more than once in a file

The return file contains a second occurrence of the same tag when the tag is not multi valued.

If this error is displayed, please contact the Personal Tax Infoline.


V9
V9	Invalid Text field

A text character must be one of the following.

A....Z a....z o...9 ! @ $ % & * ( ) - = [ ] ; : ' " , . ? / or a space character.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Delete the invalid character/s and replace them with characters from the list displayed above.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V9
V9	Invalid text characters in stand alone Additional information schedule

A text character must be one of the following.

A....Z a....z o...9 ! @ $ % & * ( ) - = [ ] ; : ' " , . ? / or a space character.

How to correct this error

1.	Click on the Next button. e-tax will move to the Getting started section.

2.	Click on the Additional Information button to access the stand alone Additional information schedule you have completed.

3.	Delete the invalid character/s and replace them with characters from the list displayed above.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V11
V11	Invalid Date8 format

The date of birth must be a valid date and in the format of DDMMCCYY.

How to correct this error

1.	Click on the Next button. e-tax will move to the date field in error.

2.	Check the date. Delete the field and type it in again correctly. For example, to enter 3rd April 2007, you would type ‘03042007’.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V15
V15	Invalid restricted name text character/s

Only restricted text characters A....Z a....z 0....9 – ' or a space character are allowed in this field.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Delete the invalid character/s and replace them with characters from the list displayed above.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V17
V17	Mandatory field not present or complete

You have failed to complete a field which must contain data before your return can be lodged.

How to correct this error

1.	Click on the Next button. e-tax will move to the field that MUST be completed.

2.	Enter the required information.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.

Fields which must be completed are listed below. Many of the fields will not be completed by you directly because e-tax will complete the field based on your answers to related interview questions.

•	Tax file number

•	Are you a resident for tax purposes?

•	Sex code (‘M’ or ‘F’)

•	Family name

•	Response to question: ‘Has any part of your name changed since completing your last tax return?’

•	Current postal address – Street name and number

•	Current postal address – Suburb/Town

•	Date of birth

•	Final tax return

•	Response to question: ‘Do you want to use EFT for your refund this year?’

•	Taxable income or loss

•	Total tax offsets.

•	Response to question: ‘For the whole period 1 July 2006 to 30 June 2007, were you and all your dependants (including your spouse) – if you had any – covered by private patient HOSPITAL cover?’ – item M2.

•	Response to question: ‘Did you have either a direct or indirect interest in a controlled foreign company (CFC)?’ – item 18.

•	Response to question: ‘Have you ever, either directly or indirectly, caused the transfer of property (incl. money) or services to a non-resident trust estate?’ – item 18.

•	Response to question: ‘Did you have an interest in a foreign investment fund (FIF) or a foreign life assurance policy (FLP)?’ – item 18.

•	Response to question: ‘During the year did you own, or have an interest in, assets located outside Australia during the year which have a total value of AUD $50,000 or more?’ – item 19.


V20
V20	Invalid Tax File Number (TFN)

Your tax file number has failed the TFN algorithm check.

How to correct this error

1.	Click on the Next button. e-tax will move to the Tax File Number field.

2.	Check and reinput the correct TFN.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V21
V21	Invalid tax agent number

The tax agent number embedded in the e-tax electronic return is invalid. If this error is displayed, please contact the Personal Tax Infoline.


V23
V23	Invalid $ value

Whole dollar field, values 0....9 only to be used.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Check and reinput the dollar amount – do not include cents.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V24A
V24A	ETP withholding amount or amount retained not present

Refer to item 4 – Eligible Termination Payments.

An ETP worksheet has been included but no relevant amounts have been entered.

If an ETP worksheet is completed, at least one of the following amounts must be entered:

•	tax withheld deducted from ETP, or

•	amounts retained:

o	excessive component,

o	non-qualifying component,

o	udeducted contributions,

o	post-June 1994 invalidity component,

o	CGT-exempt component,

o	concessional component,

o	pre-July 83 component, or

o	untaxed element of post-June 83 component.

How to correct this error

1.	Click on the Next button. e-tax will move to item 4.

2.	Click on the Yes button. e-tax will open a blank ETP worksheet.

3.	Use the Existing worksheets navigator to gain access to each worksheet you have completed.

4.	Correct the worksheet in error. (If you want to delete an ETP worksheet, click on the worksheet in the Existing worksheets list and then click on the Delete button.)

5.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V26B
V26B	Spouse name absent

Refer to item T1 – Spouse (without dependent child or student), child-housekeeper or housekeeper.

Where your spouse tax offset equals $1,655 and no dependents tax offset claim type code is present then your spouse or de facto spouse's family name must also be entered in the Spouse details – married or de facto screen.

or

Where your spouse's taxable income or exempt pension income has been entered in the Spouse details – married or de facto screen your spouse or de facto spouse's family name must also be entered.

e-tax will write the dependants tax offset claim type code to your return. If the code written to the return indicates you are claiming the spouse tax offset, you must enter your spouse's family name.

Dependents tax offset claim type codes are:

C	You are claiming the spouse (without dependent child or student) tax offset for part of the year and the housekeeper or child-housekeeper tax offset for another part of the year
H	You are claiming the child-housekeeper or housekeeper tax offset
No code	You are claiming the spouse (without dependent child or student) tax offset
How to correct this error

1.	Click on the Next button. e-tax will move to Spouse details – married or de facto.

2.	Enter your spouse's family name.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V27
V27	Amount retained entered which is not required for death benefits paid to a dependent of the deceased

Refer to item 4 – Eligible Termination Payments.

When eligible termination payments are death benefits and you were a dependant of the deceased, either at the time of death or at the time of the payment, the taxable amounts retained are not to be shown with the exception of any excessive component.

How to correct this error

1.	Click on the Next button. e-tax will move to item 4.

2.	Click on the Yes button. e-tax will open a blank ETP worksheet.

3.	Use the Existing worksheets navigator to gain access to each worksheet you have completed.

4.	Correct the worksheet in error. (If you want to delete an ETP worksheet, click on the worksheet in the Existing worksheets list and then click on the Delete button.)

5.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V28
V28	Answer required to dependent of the deceased question

Refer to item 4 – Eligible Termination Payments.

When eligible termination payments are death benefits you are required to indicate if you were a dependant of the deceased either at the time of death or at the time of the payment.

How to correct this error

1.	Click on the Next button. e-tax will move to item 4.

2.	Click on the Yes button. e-tax will open a blank ETP worksheet.

3.	Use the Existing worksheets navigator to gain access to each worksheet you have completed.

4.	Correct the worksheet in error. (If you want to delete an ETP worksheet, click on the worksheet in the Existing worksheets list and then click on the Delete button.)

5.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V30
V30	Taxable income of spouse must be present for claim of senior Australians tax offset

Refer to item T2 – senior Australians tax offset.

Your spouse's 2006-07 taxable income must be present when senior Australians tax offset indicator is equal to B, C, D or E.

SENIOR AUSTRALIAN TAX OFFSET CODE LETTERS

If at any time during 2006-07, you were single, separated or widowed	A
If you and your spouse – married or de facto – ‘had to live apart due to illness’ or because one of you was in a nursing home at any time in 2006-07 and you are both eligible for the senior Australians tax offset	B
If you and your spouse – married or de facto – ‘had to live apart due to illness’ or because one of you was in a nursing home at any time in 2006-07 but your spouse is not eligible for the senior Australians tax offset	C
If you and your spouse – married or de facto – were living together and you are both eligible for the senior Australians tax offset	D
If you and your spouse – married or de facto – were living together but your spouse is not eligible for the senior Australians tax offset	E
How to correct this error

1.	Click on the Next button. e-tax will move to item T2.

2.	Check your answers by stepping through each interview screen. If you had a spouse enter your spouse's taxable income. If your spouse's taxable income was zero, enter 0 (zero). If you did not have a spouse check and re-enter the tax offset code.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V32
V32	Maximum number of one type of schedule exceeds 200

A return file cannot contain more than 200 schedules of one type. If you receive this error, please contact the Personal Tax Infoline.


V35
V35	Field must contain a valid value

The field named must contain a valid value. e-tax will expand this message to include the required contents of the field in error. For example, if you leave the Sex field blank e-tax will display the following message:

V35 – Sex must be selected as either Male or Female

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Check the valid values appropriate to the field in the return form and reinput.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.

NOTE:
Item T1 – Spouse, (without dependent child or student), child-housekeeper and housekeeper tax offset

e-tax will display a V35 error message if the amount of tax offset claimed at item T1 label P is greater than $1,984. This may happen because:

•	you have claimed more than one tax offset for the same period and no special circumstances exist – if this applies to you, you must correct the number of days you are claiming each tax offset for;

OR

•	you are entitled to the both the spouse tax offset and the housekeeper tax offset for the same period because special circumstances exist or because you are in receipt of a disability support pension. Even though the amount of tax offset you are claiming is valid, a tax return form with an amount of tax offset greater than $1,984 cannot be lodged electronically via the Internet. Follow the instructions below to create a tax return that can be lodged electronically and which will also allow you to claim your full entitlement at item T1.

So that you can lodge your tax return using e-tax follow these steps:

1.	Click on the Next button. e-tax will move to item T1.

2.	Check and correct your answers to the interview questions about your dependent spouse. e-tax will calculate and display the amount of spouse tax offset you are entitled to. Remember, you cannot claim a child-housekeeper tax offset for any period you had a spouse during the income year and you can only claim a housekeeper tax offset for any period you had a spouse during the year if special circumstances exist.

3.	Check and correct your answers to the interview questions about your child-housekeeper. e-tax will calculate and display the amount of child-housekeeper tax offset you are entitled to. Remember, you cannot claim a child-housekeeper tax offset for any period you had a spouse during the income year or for any period you are claiming a housekeeper tax offset. If necessary, adjust the numbers of days you had a child-housekeeper accordingly.

4.	Check and correct your answers to the interview questions about your housekeeper.

5.	If no special circumstances exist, you cannot claim a housekeeper tax offset for any period you had a spouse or for any period you are claiming a child-housekeeper tax offset. If necessary, adjust the numbers of days you had a housekeeper accordingly.

6.	If special circumstances exist or your spouse is in receipt of a disability support pension, complete the Additional Information Schedule, explaining your circumstances. MAKE SURE YOU INCLUDE THE NUMBER OF DAYS FOR WHICH YOU ARE CLAIMING THE HOUSEKEEPER TAX OFFSET. When e-tax asks you to enter the number of days you had a housekeeper, enter zero – ‘0’. We will use the additional information you have provided to calculate your full entitlement to tax offsets at item T1.


V38
V38	Invalid $c value

This is a dollar/cent field. Values of nnn.nn – where n is a digit from 0 to 9 – can only to be used.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Check and reinput the amount.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V39
V39	Duplicate file number

An electronic return for the same taxpayer and year of return has been previously sent to and accepted by the Tax Office.

If this error is displayed, please contact the Personal Tax Infoline.


V40
V40	Invalid $/L value

Whole Dollar/Loss field, values nnnnnnnn – where n is a digit 0-9 – only to be used with optional /L appended. $/L field is used for a positive, zero or negative $ value.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Check and reinput the amount.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V41A
V41A	Title does not match sex code

If Title relates to a ‘male’ taxpayer, then Sex code must have a value of M. For example, a title of Mr means the sex must be set to Male.

How to correct this error

1.	Click on the Next button. e-tax will move to the Personal details screen.

2.	Correct the field in error; that is, the Title or the Sex.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V41B
V41B	Title does not match sex code

If Title relates to a ‘female’ taxpayer, then Sex code must have a value of F. For example, a title of Mrs means the sex must be set to Female.

How to correct this error

1.	Click on the Next button. e-tax will move to the Personal details screen.

2.	Correct the field in error; that is, the Title or the Sex.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V42
V42	Invalid name text character/s

Value for data type Name text must only contain characters A....Z a....z 0....9 – ' ` " ( ) / & @ # $ % ( ) _ = { } [ ] ! \ : ; ? or a space character.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Check and reinput the information.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V43
V43	Invalid question field

The valid value for a question field is either ‘Y’ or ‘N’. If the question field is not mandatory then blank (NULL) is acceptable.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Check and reinput the response.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V44
V44	Invalid integer field

Numeric field, values nnn – where n is a digit 0-9 – only to be used.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Check and reinput the value.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V45A
V45A	Occupation code and description absent

Refer to item 1 – Salary or wages

Occupation code and occupation description must be present in the return if wage and salary income is entered.

e-tax displays a list of valid occupations to choose from. When you select an occupation, e-tax writes the corresponding code to your tax return.

How to correct this error

1.	Click on the Next button. e-tax will move to item 1.

2.	Check and correct your answers to each screen in items 1 and 3.

If necessary, select your Occupation from the list which is displayed when you click on the list button, [image]. If you need to clear an incorrectly entered occupation, highlight the Occupation field and press the <Backspace> key.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V45B
V45B	Check gross payment or payer ABN

Refer to item 1 – Salary or wages

An occupation description or code has been written to the tax return and no corresponding wage and salary income details have been entered. That is, no payer's ABNs and gross payments have been entered in the worksheet table.

How to correct this error

1.	Click on the Next button. e-tax will move to item 1.

2.	Check and correct your answers to each screen in items 1 and 3.

If you need to clear an incorrectly entered occupation, highlight the Occupation field and press the <Backspace> key.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V46A
V46A	Check franked amount and franking credit amount

Refer to item 11 – Dividends.

Franking credit cannot be greater than 48% of dividends-franked amount.

How to correct this error

1.	Click on the Next button. e-tax will move to item 11.

2.	Click on the Yes button to move to the next screen. Use your dividend statements to check and correct the total amounts received.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V46B
V46B	Check franking credit amount

Refer to item 11 – Dividends.

The dividends-franked amount is greater than zero and dividends-franking credit is blank.

How to correct this error

1.	Click on the Next button. e-tax will move to item 11.

2.	Click on the Yes button to move to the next screen. Use your dividend statements to check and correct the amounts you have entered in the table.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V47A
V47A	Check Non-PP income distribution amount

Refer to item 12 – Partnerships and trusts.

At least one of the following deductions, expenses, or tax credits are present with a value greater than zero without any non-PP distribution amount from partnerships (Label O) or trusts (Label U) being present:

•	Other deductions relating to distribution (Label Y)

•	Landcare operations expenses (Label J)

•	Share of franking credit from franked dividends (Label Q)

•	Share of credit for TFN amounts withheld from interest, dividends and unit trust distributions (Label R).

How to correct this error

1.	Click on the Next button. e-tax will move to item 12.

2.	Check and correct your answers by stepping through each interview screen in item 12.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V47B
V47B	Check PP and Non-PP income distribution amount

Refer to item 12 – Partnerships and trusts Part C.

Your share of credit where ABN not quoted (Label P) is greater than zero at item 12 without any distribution amount from trusts and partnerships (Primary Production or non-Primary Production).

How to correct this error

1.	Click on the Next button. e-tax will move to item 12.

2.	Check and correct your answers by stepping through each interview screen in item 12.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V49
V49	Check total tax withheld

Refer to item 1 – Salary or wages

Gross payment is greater than zero and total tax withheld is absent.

How to correct this error

1.	Click on the Next button. e-tax will move to item 1.

2.	Check your payment summaries for tax withheld and correct the data you have entered in the e-tax screen. If no amount is present for tax withheld then 0 (zero) can be used.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V0
V50	Check occupation code

Refer to item 1 – Salary or wages

The occupation code written to the tax return is not a valid salary and wages occupation code.

e-tax only allows you to complete this field by selecting a code from a list of valid codes. If this error is displayed, please contact the Personal Tax Infoline.


V52A
V52A	Check other Australian pension or annuity income

Refer to item 7 – Other Australian pensions or annuities including superannuation pensions

A description of other Australian pensions or annuities is present at item 7 without a corresponding amount of other pensions or annuities greater than zero being present at Label J.

How to correct this error

1.	Click on the Next button. e-tax will move to item 7.

2.	Check and correct your answers by stepping through each interview screen in item 7.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V52B
V52B	Check description of other Australian pensions or annuities

Refer to item 7 – Other Australian pensions or annuities including superannuation pensions

An amount of other Australian pensions or annuities at item 7 label J is greater than zero without a corresponding description.

How to correct this error

1.	Click on the Next button. e-tax will move to item 7.

2.	Check and correct your answers by stepping through each interview screen in item 7.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V52C
V52C	Check other Australian pensions or annuities TID’s and income

Refer to item 7 – Other Australian pensions or annuities including superannuation pensions

Tax withheld amounts at item 7 are greater than or equal to the amount of pensions or annuities at label J.

How to correct this error

1.	Click on the Next button. e-tax will move to item 7.

2.	Check both amounts and correct as necessary by stepping through each interview screen in item 7.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V54
V54	Check net capital gains

Refer to item 17 Capital gains

Label W-Net capital gains is greater than zero and Label R-Net capital losses carried forward is greater than zero.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen in item 17.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V55
V55	Number of occurrences exceeds the number specified in the Tags Table column MV

If you receive this error, please contact the Personal Tax Infoline.


V56A
V56A	Income during period as student or residency date absent

Refer to item A2 – Part-year tax-free threshold.

The number of months you are eligible for part year tax free threshold is present but you have not entered the income you earned while you were a full-time student;

OR

you have told e-tax you changed residency status during 2006-07 and you have not entered the date you either became a resident of Australia or you stopped being a resident of Australia.

How to correct this error

1.	Click on the Next button. e-tax will move to item A2.

2.	Check your answers in each interview screen for item A2 and correct as necessary.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V56B
V56B	Number of months absent

Refer to item A2 – Part-year tax-free threshold

The date you stopped full-time education or the income you earned while you were a full-time student is present without the number of months you are eligible for the part year tax free threshold.

How to correct this error

1.	Click on the Next button. e-tax will move to item A2.

2.	Check your answers in each interview screen for item A2 and correct as necessary.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V61A
V61A	Primary production business income required

Refer to

•	item 14 – Net income or loss from business

•	Business and professional items schedule 2007 (2543-6.2007)

Net primary production income/loss amount is present at item 14 without total business income from primary production.

Total business income is the sum of:

•	Gross payments where ABN not quoted

•	Gross payments – voluntary agreement

•	Gross payments – labour hire or other payments

•	Assessable government industry payments

•	Other business income.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	Check your answers in each interview screen for item 14 and correct as necessary. Check that all income and expense amounts are entered in the correct column – primary production or non-primary production.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V61B
V61B	Net primary production income absent

Refer to

•	item 14 – Net income or loss from business

•	Business and professional items schedule 2007 (2543-6.2007)

Total business income from primary production is present at item 14 without net primary production income/loss amount.

Total business income is the sum of:

•	Gross payments where ABN not quoted

•	Gross payments – voluntary agreement

•	Gross payments – labour hire or other payments

•	Assessable government industry payments

•	Other business income.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	Check your answers in each interview screen for item 14 and correct as necessary. Check that all income and expense amounts are entered in the correct column – primary production or non-primary production.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V63A
V63A	Non-primary production business income required

Refer to:

•	item 14 – Net income or loss from business

•	Business and professional items schedule 2007 (2543-6.2007)

Net non-primary production income/loss amount is present at item 14 without total business income from non-primary production.

Total business income is the sum of:

•	Gross payments where ABN not quoted

•	Gross payments subject to Foreign Resident Withholding

•	Gross payments – voluntary agreement

•	Gross payments – labour hire or other payments

•	Assessable government industry payments

•	Other business income.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	Check your answers in each interview screen for item 14 and correct as necessary. Check that all income and expense amounts are entered in the correct column – primary production or non-primary production.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V63B
V63B	Net non-primary production income absent

Refer to

•	item 14 – Net income or loss from business

•	Business and professional items schedule 2007 (2543-6.2007)

Total business income from non-primary production is present without net non-primary production income/loss amount.

Total business income is the sum of:

•	Gross payments where ABN not quoted

•	Gross payments subject to Foreign Resident Withholding

•	Gross payments – voluntary agreement

•	Gross payments – labour hire or other payments

•	Assessable government industry payments

•	Other business income.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	Check your answers in each interview screen for item 14 and correct as necessary. Check that all income and expense amounts are entered in the correct column – primary production or non-primary production.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V66
V66	Transmitter is not registered to transmit ELS returns with a pseudo tax agent number

If you receive this error, please contact the Personal Tax Infoline.


V70
V70	Check claim for early payment interest credit – claim must not be less than 50 cents

Refer to item C1 – Credit for interest on early payments-amount of interest

An amount of credit for interest on early payments of less than 50 cents cannot be claimed.

How to correct this error

1.	Click on the Next button. e-tax will move to item C1.

2.	Check your answers in each interview screen for item C1 and correct as necessary.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V71
V71	Invalid text address character/s

A value for data type Address Text contains characters other than A..Za..z0..9&'/-() or a space character.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Check and reinput the address field.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V76
V76	No data should appear after ^ZZZ

Tag ZZZ must be the last tag present in the TXID or return file.

If this error is displayed, please contact the Personal Tax Infoline.


V77
V77	Return type, year of return, and tax agent number are not in the required sequence

Return form type, year of return, and tax agent number must be the first three sequential tags in this order in a return file.

If this error is displayed, please contact the Personal Tax Infoline.


V80
V80	Check Newstart, allowances or special benefits tax withheld

Refer to item 5- Australian Government allowances and payments

Tax withheld at item 5 from Newstart, allowances or special benefits are greater than or equal to the amount of Australian Government allowances and payments.

How to correct this error

1.	Click on the Next button. e-tax will move to item 5.

2.	Check both the Tax withheld and Amount received amounts and correct as necessary.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V81
V81	Check pension tax withheld amounts

Refer to item 6 – Australian Government pensions and allowances

Tax withheld amounts at item 6 from Australian Government pensions and allowances are greater than or equal to the amount of Australian Government pensions and allowances at label B.

How to correct this error

1.	Click on the Next button. e-tax will move to item 6.

2.	Check both the Tax withheld and Amount received amounts and correct as necessary.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V82
V82	Check Personal contributions and gifts as these deductions cannot create or add to a loss before tax losses of earlier income years are deducted

Refer to:

•	item D8 – Gifts or donations

•	item D13 – Personal superannuation contributions

Where non-employer sponsored superannuation (NESS) contributions and gifts or donations have created or added to a loss (i.e. after calculating total income less all deductions at Labels A,B,C,D,E,I,L,M,G,Y,E,J) before deducting total tax losses of earlier income years claimed this year (primary production and non-primary production) then either partial or full adjustment is required to item D13 – Non-employer sponsored superannuation contributions and item D8 – Gifts or donations to correct this error.

How to correct this error

1.	To determine the amount of allowable non-employer sponsored superannuation contributions (NESS) and gifts or donations deductions subtract all deductions except NESS contributions, gifts or donations, and tax losses of earlier income years (primary production and non-primary production) from total income and:

(a)	if this result is zero or negative then do not claim any deductions for NESS contributions and Gifts or donations; or

(b)	if this result is positive and greater than NESS contributions and Gifts or donations then allow both amounts in full; or

(c)	if this result is positive and less than or equal to NESS contributions and Gifts or donations then only that amount that reduces taxable income/loss to zero is allowed (i.e. do not enter any NESS contributions and gifts that would create a loss).

(You may need to click on [image] to see what e-tax has written to your return.)

2.	Click on the Next button. e-tax will move to item D8.

3.	Check and correct item D8 as necessary. Then check and correct item D13 as necessary.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V85
V85	Form type is not valid for this lodger of ELS forms

The form type is not authorised for the pseudo tax agent number. e-tax should not allow the creation of a return form that is not compatible with the pseudo tax agent number.

If this error is displayed, please contact the Personal Tax Infoline.


V86
V86	Check allowances, earnings, tips, director's fees, tax withheld

Refer to item 2 – Allowances, earnings, tips, director's fees, etc

Tax withheld at item 2 are greater than or equal to the amount of allowances, earnings, etc at Label K.

How to correct this error

1.	Click on the Next button. e-tax will move to item 2.

2.	Check both the Tax withheld and Gross received amounts and correct as necessary.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V87
V87	Total tax withheld incorrect

The total tax withheld does not equal the sum of the amounts of tax withheld entered at items 1 to 8 in the tax return form.

If this error is displayed, please contact the Personal Tax Infoline.


V91
V91A	Gross rent absent

Refer to item 20 – Rent

Interest deductions, capital works deductions or other rental deductions are greater than zero and gross rent is absent.

How to correct this error

1.	Click on the Next button. e-tax will move to item 20.

2.	Click on the Yes button. e-tax will open a blank Rental property worksheet.

3.	Use the Existing worksheets navigator to gain access to each worksheet you have completed.

4.	Correct the worksheet in error. (If you want to delete a Rental worksheet, click on the worksheet in the Existing worksheets list and then click on the Delete button.)

5.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V91B
V91B	Check interest deductions, capital works deductions or other rental deductions

Refer to item 20 – Rent.

Gross rent is greater than zero and no rental expense items are present. (Rental expense items are interest deductions, capital works deductions and other rental deductions). If there are no rental expenses then 0 (zero) is acceptable in one of these fields.

How to correct this error

1.	Click on the Next button. e-tax will move to item 20.

2.	Click on the Yes button. e-tax will open a blank Rental property worksheet.

3.	Use the Existing worksheets navigator to gain access to each worksheet you have completed.

4.	Correct the worksheet in error. If there are no rental expenses then enter 0 (zero) in one of the expense fields. (If you want to delete a Rental worksheet, click on the worksheet in the Existing worksheets list and then click on the Delete button.)

5.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V91C
V91C	Rental schedule must be completed

Refer to item 20 – Rent.

A Rental property schedule must be completed for each rental property.

How to correct this error

1.	Click on the Next button. e-tax will move to item 20.

2.	Complete the required schedule/s.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V91D
V91D	Rental income and deduction amounts are required

Refer to item 20 – Rent.

A Rental property schedule has been included but no amounts greater than zero have been shown.

How to correct this error

1.	Click on the Next button. e-tax will move to item 20.

2.	Click on the Yes button. e-tax will open a blank Rental property worksheet.

3.	Use the Existing worksheets navigator to gain access to each worksheet you have completed.

4.	Correct the worksheet in error. (If you want to delete a Rental worksheet, click on the worksheet in the Existing worksheets list and then click on the Delete button.)

5.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V94
V94	Interest or dividend income absent

Refer to

•	item D7 – Interest and dividend income deductions

•	item 10 – Gross interest

•	item 11 – Dividends

Interest and dividend deductions is greater than zero at item D7 Label I and gross interest at item 10 or dividends-unfranked amount or dividends-franked amount at item 11 are missing.

How to correct this error

1.	Click on the Next button. e-tax will move to item 10. If you have not been paid or credited interest or dividend income, you may still be entitled to allowable deductions. In this case, you must enter a value of zero at either item 10 or item 11.

2.	Step through items 10 and 11 to check and correct your answers.

3.	Use the navigator to go to item D7. If you have not entered any gross interest at item 10 or an amount of dividends-unfranked or dividends-franked at item 11, e-tax will automatically delete any interest and dividend deductions that were entered previously.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V95
V95	Taxable income must equal income less deductions

The amount of TAXABLE INCOME OR LOSS written to the e-tax electronic return does not equal the total income entered at items 1 to 22 less deductions entered at items D1 to D15 less tax losses of earlier income years claimed this year entered at item L1.

If this error is displayed, please contact the Personal Tax Infoline.


V96A
V96A	Check spouse tax offset and dependants claim type code

Refer to item T1 - Spouse (without dependent child or student), child-housekeeper or housekeeper

The dependants tax offset claim type code is set to H and the separate net income of the your spouse or child-housekeeper exceeds $282;

AND

the amount of spouse, child-housekeeper, housekeeper tax offset at item T1 is greater than the maximum tax offset allowable calculated by subtracting 25% of the separate net income of the spouse or child-housekeeper (in excess of $282) from the maximum tax offset of $1,984.

e-tax will write the dependants tax offset action code to your return. Dependants tax offset claim type codes are:

C	You are claiming the spouse (without dependent child or student) tax offset for part of the year and the housekeeper or child-housekeeper tax offset for another part of the year;
H	You are claiming the child-housekeeper or housekeeper tax offset;
No code	You are claiming the spouse (without dependent child or student) tax offset.
How to correct this error

1.	Click on the Next button. e-tax will move to item T1.

2.	You have changed your own or your spouse's income details since you completed item T1.

Check and correct your answers in each interview screen for item T1 including the Spouse details – married or de facto screen. e-tax will re-calculate your tax offset and set the dependants tax offset claim type code accordingly;

OR

Check and correct your total assessable income by stepping through your answers to each of the items in the Income section. Now complete item T1 again so that e-tax can re-calculate your tax offset.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V96B
V96B	Check spouse tax offset and dependants claim type code

Refer to item T1 – Spouse (without dependent child or student), child-housekeeper or housekeeper

There is no dependants tax offset claim type code present indicating you are only claiming the spouse tax offset; and
the separate net income of the your spouse or child-housekeeper does not exceed $282; and
the amount of spouse, child-housekeeper, housekeeper tax offset at item T1 is greater than the maximum spouse tax offset allowable of $1,655.

e-tax will write the dependants tax offset action code to your return. Dependants tax offset claim type codes are:

C	You are claiming the spouse (without dependent child or student) tax offset for part of the year and the housekeeper or child-housekeeper tax offset for another part of the year;
H	You are claiming the child-housekeeper or housekeeper tax offset;
No code	You are claiming the spouse (without dependent child or student) tax offset.
How to correct this error

1.	Click on the Next button. e-tax will move to item T1.

2.	You have changed your own or your spouse's income details since you completed item T1.

Check and correct your answers in each interview screen for item T1 including the Spouse details – married or de facto screen. e-tax will re-calculate your tax offset and set the dependants tax offset action code accordingly;

OR

Check and correct your total assessable income by stepping through your answers to each of the items in the Income section. Now complete item T1 again so that e-tax can re-calculate your tax offset.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V99
V99	Total tax offsets incorrect

Total tax offsets do not equal the sum of all tax offsets claimed at Items T1,T4, T5, T8 to T12 and T15. If you receive this error, please contact the Personal Tax Infoline.


V100
V100	Levy exemption days exceeds limit

Refer to item M1 – Medicare levy reduction or exemption.

The number of days you qualify for full levy exemption and/or the number of days you qualify for half levy exemption exceed 365.

How to correct this error

1.	Click on the Next button. e-tax will move to item M1.

2.	Check and correct your answers in each interview screen for item M1. Make sure that you complete ALL the interview screens for item M1.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V103
V103	Check Tax Office ANZSIC code

 Refer to	item P2 – Description of main business or professional activity

OR

 item P9 – Business loss activity.

The Tax Office ANZSIC code is not one of the valid codes that can be used for lodgment.

If you receive this error, please contact the Personal Tax Infoline.


V104A
V104A	Tax Office ANZSIC code required

Refer to P2 – Description of main business or professional activity.

Both Income (PP or non-PP) at business income and deductions (Item P8) and Personal Services income (Item 13, Label A) present without a Tax Office ANZSIC code (Item P2 Label A).

How to correct this error

1.	Click on the Next button. e-tax will move to Item 14.

2.	Check and correct your answers by stepping through each interview screen. e-tax will use your answers to correct your return.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V104B
V104B	Check total business income, personal services income and description of main business activity

Refer to P2 – Description of main business or professional activity.

A Tax Office  ANZSIC code is present and description of main business activity (Item P2) is missing or total business income (PP or non-PP) is missing at business income and deductions (Item P8) or Personal services income is missing at (Item 13, Label A).

How to correct this error

1.	Click on the Next button. e-tax will move to Item 14.

2.	Check and correct your answers by stepping through each interview screen. e-tax will use your answers to correct your return.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V104C
V104C	Number of business activities required

Refer to

•	item 14 – Net income or loss from business

•	Business and professional items schedule 2007 (2543-6.2007)

Net business income (primary production or non-primary production) is present at item P8 on your Business and professional items schedule and item P3 Number of business activities is blank.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	Check and correct your answers in each interview screen for item 14. e-tax will complete the Business and professional items schedule using your answers at item 14.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V105
V105	Net business income PP or non-PP required

Refer to

•	item 14 – Net income or loss from business

•	Business and professional items schedule 2007 (2543-6.2007)

Other business and professional items are present in the return form (items P11 to P18) without any net business income (primary production or non-primary production) being present at item 14.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	Check and correct your answers in each interview screen for item 14. Make sure that all income and expense amounts have been entered in the correct columns – primary production or non-primary production.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V108A
V108A	Spouse's name or spouse's 2006-07 separate net income required

Refer to item T1 - Spouse (without dependent child or student), child-housekeeper or housekeeper

The spouse, child-housekeeper, housekeeper tax offset is greater than zero at item T1 and dependents tax offset claim type code is not equal to H and spouse's name or separate net income of spouse is missing at Spouse details.

e-tax will write the dependants tax offset action code to your return. Dependants tax offset claim type codes are:

C	You are claiming the spouse (without dependent child or student) tax offset for part of the year and the housekeeper or child-housekeeper tax offset for another part of the year;
H	You are claiming the child-housekeeper or housekeeper tax offset;
No code	You are claiming the spouse (without dependent child or student) tax offset.
How to correct this error

1.	Click on the Next button. e-tax will move to item T1

2.	Check and correct your answers in each interview screen for item T1. Make sure that ALL your spouse's details are entered correctly in the Spouse details – married or de facto screen. e-tax will adjust the tax offset claim type code accordingly.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V109A
V109A	Incomplete main business name and address details

Refer to

•	item 14 – Net income or loss from business

•	Business and professional items schedule 2007 (2543-6.2007)

Total business income (primary production or non-primary production) is present at item 14 and either the business name or business street address is missing.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers for this item. Otherwise, check and complete your answers to each interview screen for item 14.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V109B
V109B	Total business income amount required

Refer to

•	item 14 – Net income or loss from business

•	Business and professional items schedule 2007 (2543-6.2007)

Business name of main business or street address of main business is present at item 14 and total business income (primary production or non-primary production) is missing at business income and expenses.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and complete your answers to each interview screen for item 14.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V110
V110	Check pension or annuity amount

Refer to

•	item 7 – Other Australian pensions or annuities including superannuation pensions

•	item D9 – Deductible amount of undeducted purchase price (UPP) of Australian pension or annuity

Amount of other Australian pensions or annuities at item 7 Label J must be completed if you are claiming for an undeducted purchase price of Australian pension or annuity at item D9 Label L. The undeducted purchase price cannot be greater than the amount of other Australian pensions or annuities.

How to correct this error

1.	Click on the Next button. e-tax will move to item 7.

2.	Check and correct your answers in each interview screen for item 7. If you click on No in response to the first question, e-tax will delete all your previous answers.

Use the navigator to move to item D9. If you have not shown any income from an Australian pension or annuity at item 7, e-tax will now clear any previous entries at item D9. Otherwise, check and correct your answers in each interview screen for item D9.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V112A
V112A	Tax agent registration number mismatch or account locked for a preparer

The tax agent number on the return form does not match the Tax Office's ELS registered details or, in the case of a preparer, the account is locked.

If this error is displayed, please contact the Personal Tax Infoline.


V112B
V112B	Tax agent registration number not registered as a preparer

Transmission is sent as ‘P’ (production) and the Tax Agent number is not registered against the Tax Office's ELS approval number and is not registered as a preparer.

If this error is displayed, please contact the Personal Tax Infoline.


V113
V113	All returns in a transmission must have the same tax agent number

Returns in a single transmission do not have the same tax agent number

If this error is displayed, please contact the Personal Tax Infoline.


V117E
V117E	Enter number of days NOT liable for Medicare levy surcharge

Refer to item M2 – Medicare levy surcharge.

You have indicated that you and all your dependants – including your spouse – were not covered by private hospital cover for the whole of the period 1 July 2006 to 30 June 2007 and the number of days NOT liable for Medicare levy surcharge is missing.

How to correct this error

1.	Click on the Next button. e-tax will move to item M2.

2.	Check and correct your answers in each interview screen for item M2.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V117F
V117F	Enter health fund ID, membership number and cover code

Refer to item M2 – Medicare levy surcharge.

You have indicated that you and all your dependants – including your spouse – were covered by private hospital cover for the whole of the period 1 July 2006 to 30 June 2007 and you have not provided any policy details at Private health insurance policy details.

How to correct this error

1.	Click on the Next button. e-tax will move to item M2.

2.	Check and correct your answers in each interview screen for item M2. Check and correct the policy details entered in the Private health insurance policy details screen.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V117G
V117G	Incorrect value for number of days NOT liable for Medicare levy surcharge

Refer to item M2 – Medicare levy surcharge.

You have indicated that you and all your dependants – including your spouse – were covered by private hospital cover for the whole of the period 1 July 2006 to 30 June 2007 and there is an amount other than 365 entered at number of days NOT liable for Medicare levy surcharge.

How to correct this error

1.	Click on the Next button. e-tax will move to item M2.

2.	Check and correct your answers in each interview screen for item M2.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V117I
V117I	Health fund membership details are incomplete

Refer to the Private health insurance policy details entered at:

•	item T5 – Private health insurance rebate, and/or

•	item M2 – Medicare levy surcharge.

If ANY policy information is entered then ALL details – Health fund ID, Membership Number and Type of Cover – must be completed.

How to correct this error

1.	Click on the Next button. e-tax will move to item T5. Check and, if necessary, correct your answers to item T5. You MUST complete all the screens at item T5. Do not use the Prev button to move backwards through the interview.

NOTE:
If you are not claiming the private health insurance rebate at item T5 you will not have entered any fund details at item T5.

2.	If you did not correct the health fund details at step 1, use the navigator to move to item M2. You MUST complete all the screens at item M2. Do not use the Prev button to move backwards through the interview.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V117J
V117J	Details of health fund required

Refer to the Private health insurance policy details entered at:

•	item T5 – Private health insurance rebate, and/or

•	item M2 – Medicare levy surcharge.

You have entered a policy with a Health fund ID of OTH and you have not completed an Additional information schedule.

How to correct this error

1.	Click on the Next button. e-tax will move to item T5. Check and, if necessary,correct your answers to item T5. You MUST complete all the screens at item T5. Do not use the Prev button to move backwards through the interview.

NOTE:
If you are not claiming the private health insurance rebate at item T5 you will not have entered any fund details at item T5.

2.	If you did not correct the health fund details at step 1, use the navigator to move to item M2. You MUST complete all the screens at item M2. Do not use the Prev button to move backwards through the interview.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V117Z
V117Z	Item M2 is compulsory for all taxpayers

Refer to item M2 – Medicare levy surcharge

This item is compulsory for all taxpayers. If you do not complete the item you may be charged the full Medicare levy surcharge.

How to correct this error

1.	Click on the Next button. e-tax will move to item M2.

2.	Complete item M2.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V118
V118	Check gross interest income

Refer to item 10 – Gross interest.

The TFN amounts deducted on interest are greater than or equal to 50% of gross interest.

How to correct this error

1.	Click on the Next button. e-tax will move to item 10.

2.	Check and correct your answers in each interview screen for item 10.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V119
V119	Personal superannuation contributions information absent

Refer to item D13 – Non-employer sponsored superannuation contributions.

Non-employer sponsored super fund contributions claimed as a deduction at item D13 are present
AND
either the fund's ABN or fund's tax file number is missing, and either the full name of fund or the account number is missing.

How to correct this error

1.	Click on the Next button. e-tax will move to item D13.

2.	Check and correct your answers in each interview screen for item D13. If you click on No in response to the first question – ‘Are you entitled to claim a deduction for your personal superannuation contributions?’ – e-tax will delete all your previous answers.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V121
V121	Check other Australian pension or annuity income amount

Refer to

•	item T4 – Superannuation contributions, annuity and pension tax offsets

•	item 7 – Other Australian pensions or annuities including superannuation pensions.

The superannuation tax offset is greater than zero at item T4 and the amount of other Australian pensions or annuities at item 7 Label J is either missing or equal to zero.

How to correct this error

1.	Click on the Next button. e-tax will move to item T4.

2.	Check and correct your answers in each interview screen for item T4. If you click on No in response to the first question, e-tax will delete all your previous answers.

3.	Use the navigator to move to item 7. Check and correct your answers in each interview screen for item 7.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V124A
V124A	Description of claim for other deductions required

Refer to item D15 – Other deductions

Other deduction amount is present at item D15 Label J and description of the claim is missing.

How to correct this error

1.	Click on the Next button. e-tax will move to item D15.

2.	Check and input the missing information.

If you click on No in response to the first question – Did you have any other expenses that you have not been able to claim as deductions at items D1 to D14 or elsewhere on your tax return? – e-tax will delete all your previous answers.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V124B
V124B	Amount of other deductions required

Refer to item D15 – Other deductions

A description of other deduction claim is present at item D15 and other deduction amount is either missing or equal to zero.

How to correct this error

1.	Click on the Next button. e-tax will move to item D15.

2.	Check and input the missing information.

If you click on No in response to the first question – Did you have any other expenses that you have not been able to claim as deductions at items D1 to D14 or elsewhere on your tax return? – e-tax will delete all your previous answers for this item.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V126
V126	Spouse or de facto spouse's family name and first name must be present

Refer to the Spouse details – married or de facto screen.

Spouse's or de facto spouse's family name or first name must be present when first name or other given names is keyed.

How to correct this error

1.	Click on the Next button. e-tax will move to the Spouse details – married or de facto screen.

2.	Check and input the missing information. If your spouse has only one name, it must be entered in the field next to Family name. If you did not have a spouse at any time during 2006-07, delete all the fields in this screen.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V127
V127	Check dividends

Refer to item 11 – Dividends.

TFN amounts deducted on dividends is greater than 50% of dividends-unfranked amount.

How to correct this error

1.	Click on the Next button. e-tax will move to item 11.

2.	Check the amounts you have entered and correct accordingly.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V128
V128	Check business items

Refer to item 14 Net income or loss from business.

At business income and deductions item P8, Total business income (primary production or non-primary production) less all business expenses less other allowable expense items plus other reconciliation adjustments is not equal to net business income (primary production or non-primary production).

If you receive this error, please contact the Personal Tax Infoline.


V131
V131	Spouse's taxable income must be present

Refer to item M1 – Medicare levy reduction or exemption

Spouse's family name is present at Spouse details – married or de facto and the number of dependent children and students at item M1 label Y is present and spouse's taxable income is missing at Spouse details married or de facto.

How to correct this error

1.	Click on the Next button. e-tax will move to item M1.

2.	Check all answers and correct accordingly. If your spouse's taxable income is zero, enter 0 (zero).

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V132
V132	Check CFC/foreign trust question or income

Refer to item 18 – Foreign entities

A No response to the question concerning either a direct or indirect interest in a foreign trust or controlled foreign company (CFC) is present at item 18 Label I, however, an amount of income is present at Label K.

How to correct this error

1.	Click on the Next button. e-tax will move to item 18.

2.	Check both the question response and the amount of income and correct accordingly.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V134
V134	Check transferor trust question or income

Refer to item 18 – Foreign entities

A No response to the question concerning the transfer of property (including money) or services to a non-resident trust estate is present at item 18 Label A and an amount of transferor trust income is present at Label B.

How to correct this error

1.	Click on the Next button. e-tax will move to item 18.

2.	Check both the question response and the amount of income and correct accordingly.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V135
V135	Foreign pension income must be greater than zero

Refer to item 19 – Foreign source income and foreign assets or property

Foreign employment and foreign pension action code is present and the amount of foreign employment and foreign pension income at item 19 Label L is either missing or equal to zero.

When you complete item 19, e-tax will write P to your return if you had no net foreign employment income but you had net foreign pension or annuity income without an undeducted purchase price.

How to correct this error

1.	Click on the Next button. e-tax will move to item 19.

2.	Check all answers and correct accordingly.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V136C
V136C	Check dependants tax offset claim type code

Refer to item T1 – Spouse (without dependent child or student), child-housekeeper or housekeeper

The amount of spouse, child-housekeeper, housekeeper tax offset is greater than $1,655 at item T1 Label P and the dependants tax offset action code is absent.

e-tax will write the dependants tax offset claim type code to your return. Dependants tax offset claim type codes are:

C	You are claiming the spouse (without dependent child or student) tax offset for part of the year and the housekeeper or child-housekeeper tax offset for another part of the year;
H	You are claiming the child-housekeeper or housekeeper tax offset;
No code	You are claiming the spouse (without dependent child or student) tax offset.
How to correct this error

1.	Click on the Next button. e-tax will move to item T1.

2.	Check and correct your answers in each interview screen for item T1. e-tax will set the tax offset action code accordingly.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V145
V145	Check form type and year of return or version identifier

Form type, Year of return and/or version identifier number are not valid for ELS lodgment.  If this error occurs contact your software producer for assistance.

If this error is displayed, please contact the Personal Tax Infoline.


V137A
V137A	Person's name field contains MR, MRS, MISS, MS, ‘Exec for’, ‘Rep for’, or ‘Trustee for’

A person's name field contains titles MR, MRS, MISS, MS, "Exec for", "Rep for" or "Trustee for" at the beginning of the name field with a space after, in the field with a space before and after or at the end of the field with a space before. These abbreviations cannot be used.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Delete the abbreviation being used.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V138B
V138B	Field cannot contain all numeric characters including any spaces

A field contains all numeric characters with any combination of spaces. At least one alpha must be present in a field of this type.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Enter the correct information.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V138C
V138C	Person's name field contains repeated hyphen, apostrophe, or space characters

A person's name field contains repeated hyphen, apostrophe, or space characters. These combinations of characters cannot be used.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Enter the correct information.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V139
V139	Name field must not have space hyphen space combinations

A name field cannot contain ‘space hyphen space’.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Enter the correct information.

For example, ‘Smith - Jones’ must be entered as ‘Smith-Jones’. That is, delete the spaces.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V140
V140	Person's name field cannot contain tile MR, MRS, MISS, MS

A person's name field contains titles MR, MRS, MISS or MS at the beginning of the field with a space after, in the field with a space before and after or at the end of the field with a space before. These abbreviations cannot be used in a person's name field.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Delete any abbreviations.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V141
V141	Person's name field contains suffix abbreviation

A person's name field contains suffix ESQ, II, III, IV, JNR, JP, MHA, MHR, MLA, MLC, MP, QC or SNR at the beginning of the field with a space after, in the field with a space before and after or at the end of the field with a space before.  These abbreviations cannot be used in a person's name field.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Delete any abbreviations.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V142A
V142A	Work related self-education expenses indicator required

Refer to item D4 – Work related self-education expenses

An amount of work related self-education expenses is present at item D4 Label D and the work related self-education expenses action code is missing.

When you complete item D4, you must select an action code that best describes your claim:

K	There is a direct connection between the self-education and your current work activities because the study maintains or improves a skill or specific knowledge required for your current work activities.
I	There is a direct connection between the self-education and your current work activities because you can show that the study leads to, or is likely to lead to, increased income from your current work activities.
O	Other circumstances exist where there is a direct connection between your self-education and your current work activities.
How to correct this error

1.	Click on the Next button. e-tax will move to item D4.

2.	Check and correct your answers in each interview screen for item D4.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V142B
V142B	Check work related self-education expenses

Refer to item D4 – Work related self-education expenses

The work related self-education expenses action code is present and the amount of work related self-education expenses at item D4 Label D is either missing or equal to zero.

How to correct this error

1.	Click on the Next button. e-tax will move to item D4.

2.	Check and correct your answers in each interview screen for item D4. If you tell e-tax you did not have any work related self-education expenses, the action code will be removed.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V144
V144	Check foreign tax credit and foreign source income

Refer to

•	item 18 – Foreign entities

•	item 19 – Foreign source income and foreign assets or property

Foreign tax credit at item 19 Label O is greater than or equal to total foreign source income.

Total foreign source income is the sum of

•	CFC income plus

•	transferor trust income plus

•	FIF and FLP income plus

•	net foreign employment and net foreign pension or annuity income without UPP plus

•	net foreign pension or annuity income with UPP plus

•	other net foreign source income at item 18 and item 19.

How to correct this error

1.	Click on the Next button. e-tax will move to item 18.

2.	Check and correct your answers in each interview screen for item 18 and item 19.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V146
V146	Check total ETPs

Refer to item 4 – Eligible termination payments.

The amount returned at total ETPs item 4 Label I is not equal to the sum of 5% of Concessional component – amount retained plus the sum of 5% of Pre-July 83 component – amount retained plus the sum of Post-June 83 component untaxed element -amount retained plus the sum of Post-June 83 component taxed element – amount retained for all ETP worksheets in the return.

If you receive this error, please contact the Personal Tax Infoline.


V148A
V148A	Check excepted net income action code

Refer to item A1 – Under 18 .

Under 18 excepted net income is greater than or equal to zero at item A1 Label J and the under 18 action code is missing.

If you complete item A1, e-tax will write the appropriate code to your return:

M	Excepted net income is present
How to correct this error

1.	Click on the Next button. e-tax will move to item A1.

2.	Check and correct your answers in each interview screen in item A1. e-tax will write the correct code to your return.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V148B
V148B	Check excepted net income

Refer to item A1 – Under 18 .

Under 18 action code is present and the amount of Under 18 excepted net income at item A1 Label J is missing.

If you complete item A1, e-tax will write the appropriate code to your return:

M	Excepted net income is present
How to correct this error

1.	Click on the Next button. e-tax will move to item A1.

2.	Check and correct your answers in each interview screen in item A1. e-tax will adjust the code accordingly.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V149A
V149A	Work related car expenses must be greater than zero

Refer to item D1 – Work related car expenses

Work related car expenses action code is present and the amount of work related car expenses at item D1 Label A is either missing or equal to zero.

If you complete item D1, e-tax will write a work related car expenses action code to your return:

S – Method 1 Cents per kilometer

T – Method 2 12% of cost of car

O – Method 3 One-third actual expenses

B – Method 4 Log book.

If more than one method is used, e-tax will use the code that applies to the largest claim.

How to correct this error

1.	Click on the Next button. e-tax will move to item D1.

2.	Check and correct your answers in each interview screen in item D1. e-tax will adjust the code accordingly. If you click on No in response to the first question – ‘Did you have any car expenses relating to your work as an employee?’ – e-tax will delete all your previous answers for this item.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V149B
V149B	Work related car expenses action code must be present

Refer to item D1 – Work related car expenses

An amount of work related car expenses is present at item D1 Label A and the work related car expenses action code is missing.

If you complete item D1, e-tax will write a work related car expenses action code to your return:

S – Method 1 Cents per kilometer

T – Method 2 12% of cost of car

O – Method 3 One-third actual expenses

B – Method 4 Log book.

If more than one method is used, e-tax will use the code that applies to the largest claim.

How to correct this error

1.	Click on the Next button. e-tax will move to item D1.

2.	Check and correct your answers in each interview screen in item D1. e-tax will adjust the code accordingly. If you click on No in response to the first question – ‘Did you have any car expenses relating to your work as an employee?’ – e-tax will delete all your previous answers for this item.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V150A
V150A	Work related/uniform expenses etc must be greater than zero

Refer to item D3 – Work related uniform, occupation specific clothing, protective clothing, laundry and dry cleaning expenses

The action code is present and the amount of work related uniform, occupation specific clothing, protective clothing, laundry and dry cleaning expenses at item D3 Label C is either missing or equal to zero.

If you complete item D3, e-tax will write a clothing and laundry expenses action code to your return:

P – Protective clothing

C – Compulsory work uniform

N – Non-compulsory work uniform

S – Occupation specific clothing.

How to correct this error

1.	Click on the Next button. e-tax will move to item D3.

2.	Check and correct your answers in each interview screen in item D3. e-tax will adjust the code accordingly. If you click on No in response to the first question – ‘Did you have any uniform, occupation specific clothing, protective clothing, laundry or dry cleaning expenses that relate to your work as an employee?’ – e-tax will delete all your previous answers for this item.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V150B
V150B	Work related/uniform expenses indicator must be present

Refer to item D3 – Work related uniform, occupation specific clothing, protective clothing, laundry and dry cleaning expenses

An amount of work related uniform, occupation specific clothing, protective clothing, laundry and dry cleaning expenses is present at item D3 Label C and the action code is missing.

If you complete item D3, e-tax will write a clothing and laundry expenses action code to your return:

P – Protective clothing

C – Compulsory work uniform

N – Non-compulsory work uniform

S – Occupation specific clothing.

How to correct this error

1.	Click on the Next button. e-tax will move to item D3.

2.	Check and correct your answers in each interview screen in item D3. e-tax will adjust the code accordingly. If you click on No in response to the first question – Did you have any uniform, occupation specific clothing, protective clothing, laundry or dry cleaning expenses that relate to your work as an employee? – e-tax will delete all your previous answers for this item.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V151
V151	Amount of other tax offsets must be greater than zero

Refer to item T15 – Other tax offsets.

Other tax offsets action code is present and the amount of other tax offsets at item T15 Label C is either missing or equal to zero.

When you complete item T15, e-tax will write a tax offset action code to your return:

H	if you are claiming a tax offset for heritage conservation work
I	if you are claiming a tax offset for infrastructure borrowings
If you are claiming for both these tax offsets, e-tax will use the code letter that applies to the largest amount.

How to correct this error

1.	Click on the Next button. e-tax will move to item T15.

2.	Check and correct your answers in each interview screen for this section.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V152
V152	Check total salary and wage expenses and total business expenses

Refer to

•	item 14 – Net income/loss from business

•	Business and professional items schedule 2007 (2543-6.2007)

On your return form, Cost of sales is greater than zero at item P8 and Total salary and wage expenses at item P13 Label G is greater than Total business expenses (item P8 Labels F to U).

How to correct this error

1.	Click on the Next button. e-tax will move to the item 14.

2.	Check and correct your answers in each interview screen for item 14. Make sure that all income and expense amounts have been entered in the correct columns – primary production or non-primary production.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V153A
V153A	Spouse details provided for taxpayer without spouse

Refer to Spouse details – married or de facto.

You have indicated you did not have a spouse at any time during the period 1 July 2006 to 30 June 2007 and other spouse details are provided.

How to correct this error

1.	Click on the Next button. e-tax will move to the Spouse details – married or de facto screen.

2.	Check and correct your answers. If you had a spouse, make sure the dates are set correctly. Otherwise, delete your answers to all other questions.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V153W
V153W	Answer to spouse question required

Refer to Spouse details – married or de facto.

The question ‘Did you have a spouse for the full year? 1 July 2006 to 30 June 2007’ must be answered if any of the following labels have been completed:

Label K:	Spouse's date of birth
Labels M and N:	Period you had a spouse during the year
Label O:	Spouse's taxable income
Label P:	Amount of Australian Government pensions or allowances
How to correct this error

1.	Click on the Next button. e-tax will move to the Spouse details – married or de facto screen.

2.	Check and correct your answers.

o	If the answer to the question ‘Did you have a spouse for the full year?’ is blank – that is you did not have a spouse at any time during the year, all the other labels must also be blank.

o	If the answer is ‘No’ and any of the other labels has been completed, you must complete labels M and N giving the period that you had a spouse during the year.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V154
V154	The deduction claimed for personal superannuation contributions is greater than the taxpayer's deduction limit – refer Section 82AAT(2A) of ITAA1936 or 26-80 of ITAA1997.  Adjust Accordingly.

Refer to item D13 – Personal superannuation contributions.

The amount claimed at item D13 is greater than the limit allowed for the taxpayer based on their date of birth. Your deduction claim is limited by the age when you made your last contribution for the year. If you were under 35 at that time, your deduction limit is $15,260; 35 to 49, $42,385; 50 to 75, $105,113; over 70, nil.

How to correct this error

This error will happen if you change your date of birth after you have completed item D13. To correct this error:

1.	Click on the Next button. e-tax will move to item D13.

2.	If your date of birth is correct, check and correct your answers in each interview screen in item D13. If you click on No in response to the first question – ‘Are you entitled to claim a deduction for your personal superannuation contributions?’ – e-tax will delete all your previous answers for this item.

Otherwise, use the navigator to move to the Personal details screen. Check and correct your date of birth.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V156
V156	Check eligible service period before 1/7/1983

Refer to item 4 – Eligible termination payments

The total number of days in the eligible service period before 1/7/1983 cannot be greater than 35,000.

The number of days in the eligible service period is shown on your ETP payment summary.

How to correct this error

1.	Click on the Next button. e-tax will move to item 4.

2.	Click on the Yes button. e-tax will open a blank ETP worksheet.

3.	Use the Existing worksheets navigator to gain access to each worksheet you have completed.

4.	Correct the worksheet in error. (If you want to delete an ETP worksheet, click on the worksheet in the Existing worksheets list and then click on the Delete button.)

5.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V157
V157	Check eligible service period after 30/6/1983

Refer to item 4 – Eligible termination payments

The total number of days in the eligible service period after 30/6/1983 cannot be greater than 8,402.

The number of days in the eligible service period is shown on your ETP payment summary.

How to correct this error

1.	Click on the Next button. e-tax will move to item 4.

2.	Click on the Yes button. e-tax will open a blank ETP worksheet.

3.	Use the Existing worksheets navigator to gain access to each worksheet you have completed.

4.	Correct the worksheet in error. (If you want to delete an ETP worksheet, click on the worksheet in the Existing worksheets list and then click on the Delete button.)

5.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V170
V170	Check net rent

Refer to

•	item 20 – Rent

•	Rental property schedule.

The net rental income figure is not equal to the sum of rental income less the sum of rental expenses.

If you receive this error, please contact the Personal Tax Infoline.


V171
V171	Amount of spouse, housekeeper or child-housekeeper tax offset must be greater than zero

The dependents tax offset claim type code is present and spouse, child-housekeeper, housekeeper tax offset is missing or equal to zero at item T1 Label P.

How to correct this error

1.	Click on the Next button. e-tax will move to item T1

2.	Check and correct your answers in each interview screen for item T1. e-tax will adjust the tax offset claim type code accordingly.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V173A
V173A	Daytime phone number required

Refer to Personal details

Daytime phone area code is present without daytime phone number.

Your telephone number is entered to 2 fields – the area code and the telephone number. For example: if your phone number is (03) 1234 5678, the area code is 03 and the telephone number is 12345678.

If you have entered an area code you MUST enter the telephone number. If you prefer, both fields may be left blank.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Enter the correct information.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V173B
V173B	Daytime phone area code required

Refer to Personal details

Daytime phone number is present without daytime phone area code.

Your telephone number is entered to 2 fields – the area code and the telephone number. For example:. if your phone number is (03) 1234 5678, the area code is 03 and the telephone number is 12345678.

If you have entered the telephone number you MUST enter an area code. If you prefer both fields may be left blank.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Enter the correct information.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V176
V176	Bank/State/Branch number invalid

Refer to EFT election.

The Bank/State/Branch (BSB) number is present and it is either less than six characters in length or the number is less than or equal to 012000.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Enter the correct BSB number.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V178A
V178A	No EFT information is required if EFT is not being used this year

Refer to EFT election.

Although you have indicated you do not want to use EFT for a refund, information has been provided at BSB number, or account number, or account name.

How to correct this error

1.	Click on the Next button. e-tax will move to the EFT screen.

2.	If you do not want to use EFT for a refund, answer No to the question ‘Do you wish to use electronic funds transfer (EFT) to receive your refund (if any) from the Tax Office?’ e-tax will clear all fields on the EFT details screen.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V178B
V178B	BSB Number, Account Number and Account Name must be present

Refer to EFT election.

You have indicated you want to use EFT for a refund and a change of account details is indicated, however, not all of the information is present.

How to correct this error

1.	Click on the Next button. e-tax will move to the EFT screen.

2.	If you have indicated a change of account details, you must complete all the bank details. Check BSB number, account number, and account name and enter the missing information.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V179
V179	Payer ABN, salary and wages tax withheld, or gross salary in a missing PAYG payment summary schedule must be recorded as an occurrence in the equivalent PAYG payment summary fields in the return form

Refer to item 1 – Salary and wages.

A Missing PAYG payment summary schedule has been completed and the payment summary details do not appear in the table of salary and wages received in item 1.

The Missing PAYG payment summary schedule is not supported in this release of e-tax. If you receive this error, please contact the Personal Tax Infoline.


V180
V180	Excepted net income of taxpayer under 18 years missing

Refer to item A1- Under 18 .

You were under 18 years of age at 30 June 2007 and your excepted net income is missing at item A1 Label J.

How to correct this error

1.	Click on the Next button. e-tax will move to item A1.

2.	Check and correct your answers in each interview screen in item A1.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V181
V181	Check net foreign pension or annuity income with an undeducted purchase price

Refer to

•	item 19 – Foreign source income and foreign assets or property

•	item D12 – Deductible amount of undeducted purchase price of foreign pension or annuity

Net foreign pension or annuity income with an undeducted purchase price at item 19 Label D must accompany a claim for an undeducted purchase price of foreign pension or annuity at item D12 Label Y. The undeducted purchase price cannot be greater than the net foreign pension or annuity income.

How to correct this error

1.	Click on the Next button. e-tax will move to item 19.

2.	Check and correct your answers in each interview screen in item 19.

3.	Use the navigator to move to item D12. Check and correct your answers in each interview screen in item D12.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V183A
V183A	Superannuation contributions on behalf of your spouse tax offset absent

Refer to item T8 – Superannuation contributions on behalf of your spouse.

Superannuation contributions paid on behalf of your spouse is present and the tax offset amount claimed is either missing or equal to zero at item T8 Label A.

How to correct this error

1.	Click on the Next button. e-tax will move to item T8.

2.	Check and correct your answers in each interview screen in item T8. If you click on No in response to the first question, e-tax will delete all your previous answers for this item.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V183B
V183B	Contributions paid must be present

Refer to item T8 – Superannuation contributions on behalf of your spouse.

Superannuation contributions paid on behalf of your spouse tax offset amount is present at item T8 Label A and the contributions paid is either missing or equal to zero.

How to correct this error

1.	Click on the Next button. e-tax will move to item T8.

2.	Check and correct your answers in each interview screen in item T8. If you click on No in response to the first question e-tax will delete all your previous answers for this item.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V191
V191	Number of dependent children and students required

Refer to

•	item T1 – Spouse (without dependent child or student), child-housekeeper or housekeeper

•	item M1 – Medicare levy reduction or exemption.

You have claimed an amount of child-housekeeper or housekeeper tax offset at item T1 Label P that indicates you had a dependent child or student and you have not claimed a senior Australians tax offset at item T2 or a pensioner tax offset at item T3
and
your taxable income is in the range to qualify you for a reduced medicare levy but the number of dependent children and students is either missing or equal to zero at item M1 Label Y.

How to correct this error

1.	Click on the Next button. e-tax will move to item M1.

2.	Check and correct your answers in each interview screen in item M1. If necessary use the navigator to check and correct your answers in each interview screen in item T1.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V193
V193	Check dates the taxpayer had a spouse for part of the year

Refer to Spouse details – married or de facto.

The dates you had a spouse are for the full year 1 July 2006 to 30 June 2007, therefore, either the date from or date to requires adjustment.

How to correct this error

1.	Click on the Next button. e-tax will move to Spouse details – married or de facto.

2.	 If you had a spouse for the full year, a ‘yes’ response is required to the question ‘Did you have a spouse for the full year 1 July 2006 to 30 June 2007’ and the part year dates must be deleted. Check and correct your answers accordingly.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V197
V197	Invalid characters

Refer to Electronic funds transfer

Account name contains invalid characters _ ! @ $ % [ ] ? = : ; " , .

How to correct this error

1.	Click on the Next button. e-tax will move to the Electronic funds transfer screen.

2.	Delete the invalid characters present in the account name or enter the correct account name.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V199
V199	Account number cannot contain apostrophe character or embedded spaces

Refer to Electronic funds transfer

An apostrophe (') and/or embedded spaces is/are present in the account number.

How to correct this error

1.	Click on the Next button. e-tax will move to the electronic funds transfer screen.

2.	Delete the apostrophe or the embedded spaces in the account number or enter the correct account number.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V210A
V210A	Suburb/town contains numerics

Numerics [0..9] are not allowed in the suburb/town field.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Enter the suburb/town without any numerics.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V210A
V210B	Suburb/town has State code present

State code [QLD,NSW,VIC,SA,WA,NT,ACT,TAS] or a leading space or combination of spaces with a State code is present in the suburb/town field.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Delete the State code from the suburb/town field and enter it correctly.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V210C
V210C	Australian address details incomplete

Refer to Family Tax Benefit

The claimant's current postal address or the current postal address of a spouse is incomplete.

An Australian postal address must contain a street or post box, suburb/town, postcode and a State code.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Complete all the required address fields.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V210D
V210D	Overseas address details incomplete

Refer to Family Tax Benefit

The Country field has been completed and not all the required fields in a claimant's current postal address or in the current postal address of a spouse have been completed.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Complete all the required address fields.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V210E
V210E	State, postcode, or country requires checking

Country name is present with State or postcode in the address field.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Determine whether the address is Australian or overseas. If the address is Australian, delete the country name. If the address is not Australian, delete the postcode and State. You must first hightlight the State field and then press <backspace>.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V210F
V210F	State, postcode, or country requires checking

Refer to Family Tax Benefit

Country name is present when State or postcode have been completed in the claimant's current postal address or in the current postal address of a spouse.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Determine whether the address is Australian or overseas. If the address is Australian, delete the country name. If the address is not Australian, delete the postcode and State fields. You must first hightlight the State field and then press <backspace>.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V210G
V210G	Postcode must be present

State is present in the address field without a postcode.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Enter the missing postcode.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V210H
V210H	State must be present

Postcode is present in the address field without a State code.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Enter the missing State code.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V210I
V210I	State, postcode, or country requires checking

State, postcode, or country are missing from the address field.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Determine whether the address is Australian or overseas. If the address is Australian, complete the State and postcode fields. If the address is not Australian, complete the Country field.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V210J
V210J	Business address details must be present

Refer to item 14 – Net income or loss from business.

Business address details must be complete with street name and number, suburb/town, State, and postcode.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers for this item. Otherwise, check and complete your answers to each interview screen for item 14.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V210K
V210K	Country cannot be Australia

The Country field is set to ‘Australia’. The country field is only to be completed if the address is NOT in Australia.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Check and correct the Country field.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V210M
V210M	‘UNKNOWN’ is invalid

An address field contains ‘UNKNOWN’

How to correct this error

1.	Click on the Next button. e-tax will move to the address field in error.

2.	Enter the full address.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V222A
V222A	Date of birth must be less than or equal to today's date

Your date of birth is later than today's date.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Check and correct the date of birth. If the date of birth is correct, you may need to check and correct your computer system's date.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V234A
V234A	Net farm management deposits exceeds net primary production income

Refer to

•	item 12 – Partnerships and trusts

•	item 14 – Net income or loss from business

•	item 16 – Net farm management deposits or withdrawals

The net farm management deposits entered at item 16 label E is greater than your net primary production income.

Net primary production income is the sum of:

•	primary production distribution from partnerships at item 12 label N, plus

•	primary production distribution from trusts at item 12 label L, plus

•	net primary production income or loss from business at item 14 label B.

How to correct this error

1.	Click on the Next button. e-tax will move to item 12.

2.	Check and complete your answers to each interview screen for item 12. If necessary, check and correct your answers to items 14 and/or 16. Use the navigator to access these items.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V234B
V234B	Primary production income is absent

Refer to

•	item 12 – Partnerships and trusts

•	item 14 – Net income or loss from business

•	item 16 – Net farm management deposits or withdrawals

An amount of farm management withdrawals is entered at item 16 label E and there is no net primary production income shown on your return.

Net primary production income is the sum of:

•	primary production distribution from partnerships at item 12 label N, plus

•	primary production distribution from trusts at item 12 label L, plus

•	net primary production income or loss from business at item 14 label B.

How to correct this error

1.	Click on the Next button. e-tax will move to item 12.

2.	Check and complete your answers to each interview screen for item 12. If necessary, check and correct your answers to items 14 and/or 16. Use the navigator to access these items.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V254
V254	A non-resident cannot claim a senior Australians tax offset

Refer to item T2 – Senior Australians

You have told e-tax that you are not a resident of Australia and a senior Australians tax offset claim type is present on your return form at item T2. A non-resident cannot claim a senior Australians tax offset.

How to correct this error

1.	Click on the Next button. e-tax will move to the Getting started section.

2.	Check and correct your residency status. Use the navigator to access item T2. e-tax will adjust your senior Australians tax offset claim accordingly.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V255A
V255A	Total salary and wage expenses action code required

Refer to:

•	item 14 – Net income or loss from business

•	Business and professional items schedule 2007 (NAT 543-6.2007)

Total salary and wage expenses is present at item P13 label G on your return form and the action code is missing.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers for this item. Otherwise, check and complete your answers to each interview screen for item 14. If you have salary and wages expenses, you must enter the type code.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V255B
V255B	Check total salary and wage expenses amount

Refer to:

•	item 14 – Net income or loss from business

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

Total salary and wage expenses action code is present at item P13 label G on your return form and the amount salary and wages expenses is either missing or equal to zero.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers for this item. Otherwise, check and complete your answers to each interview screen for item 14. Only enter the type code if you have salary and wages expenses.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V256A
V256A	Check main business motor vehicle expenses

Refer to:

•	item 14 – Net income or loss from business

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

Motor vehicle expenses action code is present at business income and expenses item P8 Label N on your return form and the amount of motor vehicle expenses is either missing or equal to zero.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers for this item. Otherwise, check and complete your answers to each interview screen for item 14. Only enter the action code if you have motor vehicle expenses.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V256B
V256B	Check motor vehicle expenses action code

Refer to:

•	item 14 – Net income or loss from business

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

Motor vehicle expenses amount is present at business income and expenses item P8 Label N and the motor vehicle expenses action code is missing.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers for this item. Otherwise, check and complete your answers to each interview screen for item 14. If you have motor vehicle expenses you must enter the action code.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V257A
V257A	Check closing stock amount

Refer to:

•	item 14 – Net income or loss from business

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

The closing stock action code is present at item P8 label M on your return form and the amount of closing stock is either missing or equal to zero.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers for this item. Otherwise, check and complete your answers to each interview screen for item 14. Only enter the action code if you have closing stock.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V257B
V257B	Closing stock action code must be present

Refer to:

•	item 14 – Net income or loss from business

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

Closing stock is present at item P8 label M on your return form without closing stock action code. A code detailing method used to value closing stock is required.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers for this item. Otherwise, check and complete your answers to each interview screen for item 14. If you enter a closing stock amount, you must enter the action code.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V266
V266	Check PP income distribution from partnerships and trusts

Refer to item 12 – Partnerships and trusts

Either other primary production (PP) deductions relating to distribution (Label X) or PP landcare operations and deduction for decline in value of water facility (Label I) is present and an amount of  PP distribution from partnerships (Label N) or trusts (Label L) is missing.

How to correct this error

1.	Click on the Next button. e-tax will move to item 12.

2.	Check and correct your answers in each interview screen in item 12.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V270
V270	Dates incomplete for a taxpayer who had a spouse for less than a full year

Refer to the Spouse details – married or de facto screen.

If the date you had a spouse from (Label M) or date you had a spouse to (Label N) is present then both dates must be present.

How to correct this error

1.	Click on the Next button. e-tax will move to the Spouse details – married or de facto screen.

2.	Check and correct your answers.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V281
V281	Spouse's name is absent

Refer to Spouse details – married or de facto.

You have indicated you either had a spouse for the full year 1 July 2006 to 30 June 2007 or you had a spouse for part of the year and the spouse's family name is missing.

How to correct this error

1.	Click on the Next button. e-tax will move to the Spouse details – married or de facto screen.

2.	Enter your spouse's family name.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V282
V282	Check spouse's name or 2006-07 taxable income of spouse

Refer to item T8 – Superannuation contributions on behalf of your spouse.

Superannuation contributions on behalf of your spouse tax offset amount is present at item T8 Label A and either the spouse's family name or 2006-07 taxable income of spouse (Label O) is missing at Spouse details – married or de facto.

How to correct this error

1.	Click on the Next button. e-tax will move to item T8.

2.	Check and correct your answers to each screen in item T8. If the 2006-07 taxable income of your spouse was zero, enter 0 (zero).

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V285
V285	Assessable PP government industry payments amount must be present with the action code

Refer to

•	item 14 – Net income or loss from business

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

Assessable primary production government industry payments action code is present at item P8 Label G in your return form and either the amount of payment is missing or equal to zero.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers for this item. Otherwise, check and complete your answers to each interview screen for item 14. Only enter the assessable primary production government industry payments action code if you enter a payment amount which includes a diesel fuel tax offset.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V286
V286	Assessable non-PP government industry payments amount must be present

Refer to

•	item 14 – Net income or loss from business

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

Assessable non-primary production government industry payments action code is present at item P8 Label H in your return form and either the amount of payment is missing or equal to zero.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers for this item. Otherwise, check and complete your answers to each interview screen for item 14. Only enter the assessable non-primary production government industry payments action code if you enter a payment amount which includes a diesel fuel tax offset.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V287
V287	Superannuation tax offset exceeds the maximum allowable

Refer to

•	item 7 – Other Australian pensions or annuities – including superannuation pensions

•	item D9 – Deductible amount of undeducted purchase price (UPP) of Australian pension or annuity

•	item T4 – Superannuation annuity and pension.

The superannuation tax offset claimed at item T4 Label S exceeds 15% of the difference between the amount of other Australian pensions or annuities at item 7 Label J and the undeducted purchase price of Australian pension or annuity at item D9 Label L.

How to correct this error

1.	Click on the Next button. e-tax will move to item 7.

2.	Check and correct your answers in each interview screen in item 7. Then use the navigator to move to items D9 and T4. Check and correct your answers to items D9 and/or T4. e-tax will adjust the tax offset accordingly.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V289
V289	Other income type category two details are incomplete

Refer to item 22 – Other income

When any component of other income type category two is present at item 22 then both description and amount must be present.

How to correct this error

1.	Click on the Next button. e-tax will move to item 22.

2.	Check and correct your answers in each interview screen in item 22.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V290
V290	Other income type category one details are incomplete

Refer to item 22 – Other income

When any component of other income type category one is present at item 22 then both description and amount must be present.

How to correct this error

1.	Click on the Next button. e-tax will move to item 22.

2.	Check and correct your answers in each interview screen in item 22.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V301D
V301D	First name must be present

Other given name/s is present without first name.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Enter the missing first name.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V309A
V309A	Check FIF/FLP question or income

Refer to item 18 – Foreign entities.

There is a "No" response to the question concerning whether the entity had an interest in a foreign investment fund or a foreign life assurance policy and there is also an amount of FIF/FLP income present in the return.

How to correct this error

1.	Click on the Next button. e-tax will move to item 18.

2.	Check both the question response and the amount of income and correct accordingly.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V311
V311	An overall trust loss cannot be distributed to an individual

Refer to

•	item 12 – Partnerships and trusts

•	item 17 – Capital gains

•	item 19 – Foreign source income and foreign assets or property.

The sum of:

•	primary production distribution from trusts (item 12 Label L) plus

•	non-primary production distribution from trusts less net capital gains and foreign income (item 12 Label U) plus

•	total capital gains (item 17 – Label H)

•	foreign source income  (item 19 Labels L, D, M and F)

is less than zero which indicates that an overall trust loss is being distributed from a trust to an individual.

How to correct this error

1.	Click on the Next button. e-tax will move to item 12.

2.	If the amounts entered at items 17 and 19 are correct, correct the distributed amounts at item 12. The sum of all the fields described above should be greater than or equal to zero.  Any net capital gain included in a trust distribution is entered at item 17, not item 12. Any foreign income included in a trust distribution is entered at item 19, not item 12.

Otherwise, use the navigator to move to items 17 and 19. Check and correct your answers.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V312
V312	Date of birth must be less than or equal to today's date

Refer to Spouse details – married or de facto

Your spouse's date of birth is later than today's date.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Check and correct the date of birth. You may need to check and correct your computer system's date.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V334
V334	Check health fund ID code

Refer to Private health insurance policy details.

The health fund ID is not a valid value. e-tax writes the health fund ID to your return when you select your health fund from the list of valid funds.

If you receive this error, please contact the Personal Tax Infoline.


V350
V350	Private health insurance incentive action code missing

Refer to item M2 – Medicare levy surcharge.

At item M2 there is a ‘yes’ response to the question ‘Were you and all of your dependants – including your spouse – covered by private patient hospital cover for the whole period 1 July 2006 to 30 June 2007?’ and there are no policies entered at Private health insurance policy details with a Type of H – Hospital or C – Combined.

How to correct this error

1.	Click on the Next button. e-tax will move to item M2.

2.	Check and correct your answers in each interview screen in item M2. If necessary, check and correct the Private health insurance policy details screen.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V368
V368	Schedule type is not valid for this return form

The schedule is not authorised for the e-tax return form.

If you receive this error, please contact the Personal Tax Infoline.


V370
V370	Check business expenses PP and non PP

Refer to item 14 – Net income or loss from business.

At business income and expenses item P8 in the Business and professional items schedule, the sum of business expenses (primary production and non-primary production) is not equal to the sum of Label S and Label T.

If you receive this error, please contact the Personal Tax Infoline.


V372
V372	Number of full days Medicare levy exemption required

Refer to item M1 – Medicare levy reduction or exemption

The number of days full Medicare levy exemption is being claimed must be present with the action code at item M1 Label V.

e-tax will write the action code – C –  to your tax return if you are claiming the full Medicare levy exemption and you are in exemption category 6.

How to correct this error

1.	Click on the Next button. e-tax will move to item M1.

2.	Check and correct your answers in each interview screen in item M1.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V471A
V471A	Taxpayer previous surname required

You have indicated that a part of your name changed since you lodged your last tax return and the Previous surname is blank.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Check and correct your answers.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V471B
V471B	Previous surname not required

You have indicated that your name has not changed since you lodged your last tax return and the Previous surname is not blank.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Check and correct your answers.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V408A
V408A	Number of days not liable for surcharge or spouse income details missing

Refer to item M2 – Medicare levy surcharge

You have told e-tax you had a spouse during 2006-07 and you have answered ‘N’ to the question Were you and all your dependants (including your spouse) – if you had any – covered by private patient hospital cover for the whole period 1 July 2006 to 30 June 2007?
AND
either the Number of days not liable for surcharge is blank or you have not completed your spouse's income details in Spouse details – married or de facto.

How to correct this error

1.	Click on the Next button. e-tax will move to item M2.

2.	Check and correct your answers in each interview screen in item M2.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V408B
V408B	Number of days not liable for surcharge or spouse income details missing

Refer to item M2 – Medicare levy surcharge.

You have told e-tax you had a spouse during 2006-07 and you have answered ‘Y’ to the question ‘Were you and all your dependants (including your spouse) – if you had any – covered by private patient hospital cover for the whole period 1 July 2006 to 30 June 2007?’
AND
either the Number of days not liable for surcharge is blank or you have not completed your spouse's income details in Spouse details – married or de facto.

How to correct this error

1.	Click on the Next button. e-tax will move to item M2.

2.	Check and correct your answers in each interview screen in item M2.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V414
V414	Full name of health fund and policy number and type of fund required

An amount of Private health insurance tax offset is present at item T5 Label G
AND
health fund ID, policy number or policy type is missing at Private health insurance policy details.

How to correct this error

1.	Click on the Next button. e-tax will move to item T5.

2.	Check and correct your answers in each interview screen in item T5.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V964
V964	Superannuation contributions surcharge tax forms cannot be present in a transmission with other returns

A transmission of superannuation contributions surcharge tax forms cannot include any other ELS forms.

If this error is displayed, please contact the Personal Tax Infoline.


V1005
V1005	Check assessable foreign source income amount

Refer to item 19 – Foreign source income and foreign assets or property.

Assessable foreign source income amount at item 19 Label E is less than the sum of Net foreign employment and net foreign pension or annuity income without an undeducted purchase price Label L plus Net foreign pension or annuity income with an undeducted purchase price Label D plus Other net foreign source income Label M plus Australian franking credits from a New Zealand company (Label F).  Check and correct.

How to correct this error

1.	Click on the Next button. e-tax will move to item 19.

2.	Check and correct your answers in each interview screen for item 19.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1122
V1122	Check Total current year capital gains

Refer to item 17 Capital gains

Net capital gain has not been completed and Net Capital losses carried forward to later income years is equal to zero or absent
AND
Total current year capital gains contains an amount greater than zero indicating that capital losses have been applied.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17. Remember, capital losses can only be applied to the total current year capital gains to the extent that they reduce the net capital gain to zero.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1158A
V1158A	‘Self-assessed depreciating assets’ or ‘Self-assessed motor vehicles’ amounts required

Refer to Capital allowances schedule 2007 (NAT 4089-06.2007).

Refer to Part A Item 4 in the schedule. You have answered ‘Yes’ to the question ‘Have you self-assessed the effective life of any of these assets?’
AND
the total costs for calculating decline in value is zero or no amount has been entered for both self-assessed depreciating assets (other than motor vehicles) and self-assessed motor vehicles.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	Check and correct your answers.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1158B
V1158B	‘Self-assessed depreciating assets’ or ‘Self-assessed motor vehicles’ not required

Refer to Capital allowances schedule 2007 (NAT 4089-06.2007).

Refer to Part A Item 4 in the schedule. You have answered ‘No’ to the question ‘Have you self-assessed the effective life of any of these assets?’
AND
an amount of Total costs for calculating decline in value for self-assessed depreciating assets have been entered.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	Check and correct your answers.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1163A
V1163A	‘Recalculated effective life depreciating assets’ or ‘Recalculated effective life motor vehicles’ amounts required

Refer to Capital allowances schedule 2007 (NAT 4089-06.2007).

Refer to Part B item 3 in the schedule. You have answered ‘Yes’ to the question ‘Did you recalculate effective life for any of your assets this income year?’
AND
the Total opening adjustable values is zero or no amount has been entered for both depreciable assets (excluding motor vehicles) or motor vehicles.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	Check and correct your answers. If the correct answer to the question is ‘Yes’, you must enter the Total undeducted cost amounts.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1163B
V1163B	‘Recalculated effective life depreciating assets’ or ‘Recalculated effective life motor vehicles’ amounts  not required

Refer to Capital allowances schedule 2007 (NAT 4089-06.2007).

Refer to Part B item 3 in the schedule. You have answered ‘No’ to the question ‘Did you recalculate effective life for any of your assets acquired this income year?’
AND
an amount of Total opening adjustable values for depreciable assets or motor vehicles has been entered.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	Check and correct your answers. If the correct answer to the question is ‘No’, you must delete any Total undeducted cost amounts already entered.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1182B
V1182B	Check capital gains

Refer to item 17 Capital gains

e-tax has written No in answer to the question Did you have a CGT event during the year? and the amount of Net capital gain or Total current year capital gains is greater than zero.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17. You MUST step through every section of the e-tax interview. If you have created any CGT worksheets in error, make sure you delete the worksheets.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1182C
V1182C	Answer to CGT event question required

Refer to item 17 Capital gains

The answer to the question Did you have a CGT event during the year? is blank or No and the amount of Net capital gain is greater than zero.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17. You MUST step through every section of the e-tax interview. If you have created any CGT worksheets in error, make sure you delete the worksheets.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1200
V1200	Invalid ABN

You have been asked to enter an Australian Business Number (ABN) and the number you have entered has failed the ABN algorithm check.

How to correct this error

1.	Click on the Next button. e-tax will move to the ABN field in error.

2.	Check and correct the number entered. A valid ABN will pass the algorithm check.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1203
V1203	Production returns cannot have test tax file number

You have attempted to lodge a production return which has a test tax file number.

If you receive this error, please contact the Personal Tax Infoline.


V1211
V1211	Production return has a test tax agent number

You have attempted to lodge a production return which has a test tax agent number.

If you receive this error, please contact the Personal Tax Infoline.


V1212
V1212	‘AS ABOVE’ is invalid

An address field contains ‘AS ABOVE’ at the beginning of the field with a space after, in the field with a space before and after, or at the end of the field with a space before.

How to correct this error

4.	Click on the Next button. e-tax will move to the address field in error.

5.	Enter the full address. If you do not need to complete the address, leave all the fields blank.

6.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1213
V1213	Address field contains incorrect care of reference

Your current postal address or the current postal address of a spouse contains an incorrect reference to ‘care of’ – that is, Line 1 of the address contains ‘C/O’, ‘C/’, ‘Care Of’ or ‘CO’ at the beginning of a field, or address line 1 contains ‘C/O’, ‘C/’, ‘Care Of’ or ‘CO’ in the field with a leading space and a space after.

How to correct this error

1.	Click on the Next button. e-tax will move to the address field in your return or to the start of the Family tax benefit (FTB) item.

If the error is in the FTB section of your return, use the FTB Navigator to move to the Spouse/former spouse(s) section. Answer ‘Yes’ to the Did you have a spouse? question. The Spouse details screen will be displayed. The Existing worksheets navigator will list the worksheet(s) you have completed. Click on the entry in the navigator list to open a worksheet.

2.	Check and correct the address Line 1 in each spouse worksheet you have completed. If you want to use a ‘care of’ reference, enter ‘C/-‘.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1214
V1214	Address line 2 field contains care of reference

The second line of your current postal address or the current postal address of a spouse contains a reference to ‘care of’ – that is, address Line 2 contains ‘C/O’, ‘C/’, ‘Care Of’, or ‘CO’ either at the beginning of a field, in the field with a leading space and a space after.

How to correct this error

1.	Click on the Next button. e-tax will move to the address field in your return or to the start of the Family tax benefit (FTB) item.

If the error is in the FTB section of your return, use the FTB Navigator to move to the Spouse/former spouse(s) section. Answer ‘Yes’ to the Did you have a spouse? question. The Spouse details screen will be displayed. The Existing worksheets navigator will list the worksheet(s) you have completed. Click on the entry in the navigator list to open a worksheet.

2.	Check and correct the address Line 2 in each spouse worksheet you have completed. Delete any reference to ‘care of’. If you want to use a reference to ‘care of’, it must be entered using ‘C/-‘ in address Line 1.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1215
V1215	Check individual title code

Your tax return includes a name that has an invalid title code – valid title codes are ‘Mr’, ‘Ms’ etc.

This error should not occur because you can only select titles from a list of valid codes. If you receive this error, please contact the Personal Tax Infoline.


V1216
V1216	Check individual suffix code

Your tax return includes a name that has an invalid suffix code – valid suffix codes are ‘Esq’, ‘MP’ etc.

This error should not occur because you can only select suffixes from a list of valid codes. If you receive this error, please contact the Personal Tax Infoline.


V1217
V1217	Check individual name

Your tax return includes a person's name that begins with a character other than a letter of the alphabet – that is, A – Z or a – z.

How to correct this error

1.	Click on the Next button. e-tax will move to the name field in error.

2.	Enter the correct name. The name must begin with one of the letters A – Z or a – z.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1220
V1220	C/- must be followed by a Name and the Address on line 2

Address line 1 contains a ‘care of’ reference (‘C/-‘) and no street address in Address line 2. If a ‘care of’ reference is on Address line 1, it must be followed by a name then Address line 2 must contain the street address.For example,

C/- Mrs M. I. Mother
100 Home Street

How to correct this error

1.	Click on the Next button. e-tax will move to the address screen.

2.	Check and correct the address. If you are using a ‘care of’ reference make sure it is entered correctly.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1310
V1310	Capital losses applied exceeds capital gains for indexation method

Refer to item 17 – Capital gains

e-tax has completed a Capital gains tax schedule and the total capital losses applied to gains calculated using the indexation method that is written to part D is greater than the total current year capital gains calculated using the indexation method written to part A of the schedule.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17. You MUST step through every section of the item so that e-tax can re-apply any losses you made during the current year or carried forward from a prior year. e-tax will use your answers to complete a new Capital gains tax schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1311
V1311	Capital losses applied exceeds capital gains for discount method

Refer to item 17 – Capital gains

e-tax has completed a Capital gains tax schedule and the total capital losses applied to gains calculated using the discount method that is written to part D is greater than the total current year capital gains calculated using the discount method written to part A of the schedule.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17. You MUST step through every section of the item so that e-tax can re-apply any losses you made during the current year or carried forward from a prior year. e-tax will use your answers to complete a new Capital gains tax schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1312
V1312	Capital losses applied exceeds capital gains for other capital gains category

Refer to item 17 – Capital gains

e-tax has completed a Capital gains tax schedule and the total capital losses applied to gains calculated using a method other than indexed or discount that is written to part D is greater than the total current year capital gains calculated using a method other than indexed or discount written to part A of the schedule.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17. You MUST step through every section of the item so that e-tax can re-apply any losses you made during the current year or carried forward from a prior year. e-tax will use your answers to complete a new Capital gains tax schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1317A
V1317A	CGT discount on non-active asset capital gains incorrect

Refer to item 17 – Capital gains

e-tax has completed a Capital gains tax schedule and the discount percentage applied to capital gains from non-active assets that is written to label J part F is not equal to 50% of the current year discount capital gain after applying capital losses from non-active assets written to label B part E of the schedule.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17. You MUST step through every section of the item so that e-tax can re-apply any discount percentage to discount gains. e-tax will use your answers to complete a new Capital gains tax schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1317B
V1317B	CGT discount on active asset capital gains incorrect

Refer to item 17 – Capital gains

e-tax has completed a Capital gains tax schedule and the discount percentage applied to capital gains from active assets that is written to label K part F is not equal to 50% of the current year discount capital gain after applying capital losses from non-active assets written to label E part E of the schedule.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17. You MUST step through every section of the item so that e-tax can re-apply any discount percentage to discount gains. e-tax will use your answers to complete a new Capital gains tax schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1320A
V1320A	Small business active asset reduction incorrect for indexation method

Refer to item 17 – Capital gains

e-tax has completed a Capital gains tax schedule and the small business active asset reduction applied to indexed capital gains from active assets that is written to label L part F is greater than 50% of the current year indexed capital gain after applying capital losses from active assets written to label D part E of the schedule.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17. You MUST step through every section of the item so that e-tax can re-apply any small business concessions. e-tax will use your answers to complete a new Capital gains tax schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1320B
V1320B	Small business active asset reduction incorrect for other capital gains

Refer to item 17 – Capital gains

e-tax has completed a Capital gains tax schedule and the small business active asset reduction applied to other capital gain from active assets that is written to label L part F is greater than 50% of the current year other capital gain after applying capital losses from active assets written to label D part E of the schedule.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17. You MUST step through every section of the item so that e-tax can re-calculate any other capital gains. e-tax will use your answers to complete a new Capital gains tax schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1321
V1321	Small business active asset reduction incorrect for discount method

Refer to item 17 Capital gains

e-tax has completed a Capital gains tax schedule and the amount at Part G label M – Small business 50% active asset reduction applied to discount gains is greater than 50% of Part E label E – Discount gains for active assets after applying capital losses less Part F label K – Discount gains from active assets after the CGT discount has been applied.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17. You MUST step through every section of the e-tax interview. If you have created any CGT worksheets and have changed the asset type, make sure you check each section of the worksheet.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1324
V1324	Small business concessions exceed active asset capital gains for indexation method

Refer to item 17 Capital gains

e-tax has completed a Capital gains tax schedule and the total amount of small business concession to be applied to indexed capital gains written to part G labels L,O and R is greater than the total current year indexed capital gains for active assets written to part E label D in the schedule.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17.

You MUST step through every section of the e-tax interview. If you have created any CGT worksheets and have changed the asset type, make sure you check each section of the worksheet.

You MUST step through every section of the item so that e-tax can re-apply any small business concessions. e-tax will use your answers to complete a new Capital gains tax schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1325
V1325	CGT discount and small business concessions exceed active asset capital gains for discount method

Refer to item 17 Capital gains

e-tax has completed a Capital gains tax schedule and the total amount of discount and small business concessions to be applied to discount capital gains written to part F label K and part G labels M, P and S is greater than the total current year discount capital gains for active assets written to part E label E in the schedule.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17.

You MUST step through every section of the e-tax interview. If you have created any CGT worksheets and have changed the asset type, make sure you check each section of the worksheet.

You MUST step through every section of the item so that e-tax can re-apply any small business concessions. e-tax will use your answers to complete a new Capital gains tax schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1326
V1326	Small business concessions exceed active asset capital gains for other capital gains category

Refer to item 17 Capital gains

e-tax has completed a Capital gains tax schedule and the total amount of small business concession to be applied to other capital gains written to part G labels N, Q and T is greater than the total current year other capital gains for active assets written to part E label F in the schedule.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17.

You MUST step through every section of the e-tax interview. If you have created any CGT worksheets and have changed the asset type, make sure you check each section of the worksheet.

You MUST step through every section of the item so that e-tax can re-apply any small business concessions. e-tax will use your answers to complete a new Capital gains tax schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1327
V1327	Total of small business concessions incorrect for indexation method

Refer to item 17 Capital gains

e-tax has completed a Capital gains tax schedule and the total amount of small business concession to be applied to indexed capital gains written to part H label A is not equal to the sum of small business concessions applied to indexed gains entered at part G labels L, O and R.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17.

You MUST step through every section of the e-tax interview. If you have created any CGT worksheets and have changed the asset type, make sure you check each section of the worksheet.

You MUST step through every section of the item so that e-tax can re-apply any small business concessions. e-tax will use your answers to complete a new Capital gains tax schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1328
V1328	Total of CGT discount and small business concessions incorrect for discount method

Refer to item 17 Capital gains

e-tax has completed a Capital gains tax schedule and the total amount of CGT discount and small business concession to be applied to discount capital gains written to part H label B is not equal to the sum of CGT discount and small business concessions applied to discount gains entered at part F labels J and K and part G labels M, P and S.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17.

You MUST step through every section of the e-tax interview. If you have created any CGT worksheets and have changed the asset type, make sure you check each section of the worksheet.

You MUST step through every section of the item so that e-tax can re-apply any CGT discount and small business concessions. e-tax will use your answers to complete a new Capital gains tax schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1329
V1329	Total of small business concessions incorrect for indexation method

Refer to item 17 Capital gains

e-tax has completed a Capital gains tax schedule and the total amount of small business concession to be applied to indexed capital gains written to part H label A is greater than the current year capital gains for indexed method written to part E.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17.

You MUST step through every section of the e-tax interview. If you have created any CGT worksheets and have changed the asset type, make sure you check each section of the worksheet.

You MUST step through every section of the item so that e-tax can re-apply any small business concessions. e-tax will use your answers to complete a new Capital gains tax schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1330
V1330	Total of CGT discount and small business concessions incorrect for discount method

Refer to item 17 Capital gains

e-tax has completed a Capital gains tax schedule and the total amount of CGT discount and small business concession to be applied to discount capital gains written to part H label B is greater than the current year capital gains for discount method written to part E.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17.

You MUST step through every section of the e-tax interview. If you have created any CGT worksheets and have changed the asset type, make sure you check each section of the worksheet.

You MUST step through every section of the item so that e-tax can re-apply any CGT discount and small business concessions. e-tax will use your answers to complete a new Capital gains tax schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1331
V1331	Total of small business concessions incorrect for other capital gains

Refer to item 17 Capital gains

e-tax has completed a Capital gains tax schedule and the total amount of small business concession to be applied to other capital gains written to part H label C is not equal to the sum of small business concessions applied to other gains entered at part G labels N, Q and T.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17.

You MUST step through every section of the e-tax interview. If you have created any CGT worksheets and have changed the asset type, make sure you check each section of the worksheet.

You MUST step through every section of the item so that e-tax can re-apply any small business concessions. e-tax will use your answers to complete a new Capital gains tax schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1332
V1332	Total of small business concessions incorrect for other capital gains

Refer to item 17 Capital gains

e-tax has completed a Capital gains tax schedule and the total amount of small business concession to be applied to other capital gains written to part H label C is greater than the current year other capital gains written to part E.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17.

You MUST step through every section of the e-tax interview. If you have created any CGT worksheets and have changed the asset type, make sure you check each section of the worksheet.

You MUST step through every section of the item so that e-tax can re-apply any small business concessions. e-tax will use your answers to complete a new Capital gains tax schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1333
V1333	Net capital gains from indexation method incorrect

Refer to item 17 Capital gains

e-tax has completed a Capital gains tax schedule and the net capital gains from indexation method written to part H label D does not equal the current year capital gains for indexed method written to part E less the total amount of small business concession to be applied to indexed capital gains written to part H label A.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17.

You MUST step through every section of the e-tax interview. If you have created any CGT worksheets and have changed the asset type, make sure you check each section of the worksheet.

You MUST step through every section of the item so that e-tax can re-apply any small business concessions. e-tax will use your answers to complete a new Capital gains tax schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1334
V1334	Net capital gains from discount method incorrect

Refer to item 17 Capital gains

e-tax has completed a Capital gains tax schedule and the net capital gains from discount method written to part H label E does not equal the current year capital gains for discount method written to part E less the total amount of CGT discount and small business concession to be applied to indexed capital gains written to part H label B.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17.

You MUST step through every section of the e-tax interview. If you have created any CGT worksheets and have changed the asset type, make sure you check each section of the worksheet.

You MUST step through every section of the item so that e-tax can re-apply any CGT discount and small business concessions. e-tax will use your answers to complete a new Capital gains tax schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1335
V1335	Net capital gains from other capital gains incorrect

Refer to item 17 Capital gains

e-tax has completed a Capital gains tax schedule and the net capital gains from other method written to part H label F does not equal the current year capital gains for other method written to part E less the total amount of small business concession to be applied to other capital gains written to part H label C.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17.

You MUST step through every section of the e-tax interview. If you have created any CGT worksheets and have changed the asset type, make sure you check each section of the worksheet.

You MUST step through every section of the item so that e-tax can re-apply any small business concessions. e-tax will use your answers to complete a new Capital gains tax schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1337
V1337	Unapplied net capital losses from collectables invalid

Refer to item 17 Capital gains

e-tax has completed a Capital gains tax schedule. There is an amount of unapplied net capital losses from collectables carried forward written to part I label H and there are capital gains from collectables entered at part A labels J, K and L.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17.

You MUST step through every section of the e-tax interview. If you have created any CGT worksheets and have changed the asset type, make sure you check each section of the worksheet.

You MUST step through every section of the item so that e-tax can re-apply any capital losses. e-tax will use your answers to complete a new Capital gains tax schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1338A
V1338A	Unapplied net capital losses from all other CGT assets and CGT events invalid

Refer to item 17 Capital gains

e-tax has completed a Capital gains tax schedule. There is an amount of unapplied net capital losses from all other CGT assets and CGT events carried forward written to part I label I and there are net capital gains entered at part H labels D, E and F.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17.

You MUST step through every section of the e-tax interview. If you have created any CGT worksheets and have changed the asset type, make sure you check each section of the worksheet.

You MUST step through every section of the item so that e-tax can re-apply any capital losses. e-tax will use your answers to complete a new Capital gains tax schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1338B
V1338B	Unapplied net capital losses from all other CGT assets and CGT events invalid

Refer to item 17 Capital gains

e-tax has completed a Capital gains tax schedule. There is an amount of unapplied net capital losses from all other CGT assets and CGT events carried forward written to part I label I and there is an amount of current year capital gains after applying capital losses written to part E.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17.

You MUST step through every section of the e-tax interview. If you have created any CGT worksheets and have changed the asset type, make sure you check each section of the worksheet.

You MUST step through every section of the item so that e-tax can re-apply any capital losses. e-tax will use your answers to complete a new Capital gains tax schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1339A
V1339A	CGT asset or CGT event code missing

Refer to item 17 Capital gains

e-tax has completed a Capital gains tax schedule. There is an amount of small business 15-year exemption written to part J label J and no CGT asset or CGT event code has been written to label K.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17.

You MUST step through every section of the e-tax interview. If you have created any CGT worksheets and have changed the asset type, make sure you check each section of the worksheet.

You MUST step through every section of the item so that e-tax can re-apply any small business concessions. e-tax will use your answers to complete a new Capital gains tax schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1339B
V1339B	CGT asset or CGT event code not required

Refer to item 17 Capital gains

e-tax has completed a Capital gains tax schedule. There is no amount of small business 15-year exemption written to part J label J and a CGT asset or CGT event code has been written to label K.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17.

You MUST step through every section of the e-tax interview. If you have created any CGT worksheets and have changed the asset type, make sure you check each section of the worksheet.

You MUST step through every section of the item so that e-tax can re-apply any small business concessions. e-tax will use your answers to complete a new Capital gains tax schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1341A
V1341A	Enter amounts for original interests and replacement interests

Refer to item 17 Capital gains

e-tax has completed a Capital gains tax schedule. Refer to part K – Scrip for scrip roll-over for exchanging taxpayer. There is a ‘Y’ written to label A indicating that you have chosen scrip for scrip roll-over relief and no amounts have been entered for original interests and replacement interests at labels B and C.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17.

You MUST step through every section of the e-tax interview. If you have created any CGT worksheets for shares, make sure you check each section of the worksheet.

You MUST step through every section of the item so that you can check the information e-tax has collected about scrip for scrip roll-overs. e-tax will use your answers to complete a new Capital gains tax schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1341B
V1341B	Original interests and replacement interests not required

Refer to item 17 Capital gains

e-tax has completed a Capital gains tax schedule. Refer to part K – Scrip for scrip roll-over for exchanging taxpayer. There is an ‘N’ written to label A indicating that you have not chosen scrip for scrip roll-over relief and amounts have been entered for original interests and replacement interests at labels B and C.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17.

You MUST step through every section of the e-tax interview. If you have created any CGT worksheets for shares, make sure you check each section of the worksheet.

You MUST step through every section of the item so that you can check the information e-tax has collected about scrip for scrip roll-overs. e-tax will use your answers to complete a new Capital gains tax schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1354A
V1354A	Answer to ‘self-assessed effective life’ question required

Refer to Capital allowances schedule 2007 (NAT 4089-06.2007).

Refer to Part A of the schedule. You have provided details of depreciating assets first deducted in the 2007 income year and you have not answered the question ‘Have you self-assessed the effective life of any of these assets?’.

Where depreciating assets first deducted are listed, you are required to answer the question.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	Check and correct your answers.  e-tax will use your answers to complete a new Depreciation schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1354B
V1354B	Answer to ‘self assessed effective life’ question not required

Refer to Capital allowances schedule 2007 (NAT 4089-06.2007).

Refer to Part A of the schedule. You have not provided details of depreciating assets first deducted in the 2007 income year and there is an answer to the question ‘Have you self-assessed the effective life of any of these assets?’ written to the schedule.

Where no depreciating assets first deducted are listed, you are not required to answer the question.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	Check and correct your answers.  e-tax will use your answers to complete a new Depreciation schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1356
V1356	Self-assessed depreciating assets (excluding motor vehicles) incorrect

Refer to Capital allowances schedule 2007 (NAT 4089-06.2007).

The self-assessed cost of depreciating assets (excluding motor vehicles) written to part A item 4 of the schedule is greater than the cost of depreciating assets (excluding motor vehicles) written to part A items 1 and 2.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	Check and correct your answers.  e-tax will use your answers to complete a new Depreciation schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1357
V1357	Self-assessed motor vehicles incorrect

Refer to Capital allowances schedule 2007 (NAT 4089-06.2007).

The self-assessed cost of motor vehicles written to part A item 4 of the schedule is greater than the purchase cost of motor vehicles written to part A item 3.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	Check and correct your answers.  e-tax will use your answers to complete a new Depreciation schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1366
V1366	Low-cost assets allocated to pool amount incorrect

Refer to Capital allowances schedule 2007 (NAT 4089-06.2007).

The amount of new assets added to the low value pool that is written to part B item 2 label N is greater than the cost of depreciating assets less than $1,000 and the cost of motor vehicles written to part A items 1 and 3.

Low-cost assets allocated to pool must be less than or equal to depreciating assets and motor vehicles.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	Check and correct your answers.  e-tax will use your answers to complete a new Depreciation schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1369
V1369	Net capital gains in return must equal total net capital gains in CGT schedule

Refer to item 17 Capital gains

A Capital gains tax schedule has been completed and the amount of Net capital gains written to item 17 of your tax return does not equal the total net capital gains written to the schedule:

Part E Current year capital gains after applying capital losses – indexation method

label A: Non-active assets

plus	label D: Active assets

Part G Small business concessions applied – indexation method

less	label L: Small business active asset reduction (SBAAR)

less	label O: Small business retirement exemption (SBRE)

less	label R: Small business roll-over relief (SBRO)

Part E Current year capital gains after applying capital losses – discount method

label B: Non-active assets

plus	label E: Active assets

Part G Small business concessions applied – discount method

less	label J: Discount percentage non-active assets

less	label K: Discount percentage active assets

less	label M: Small business active asset reduction (SBAAR)

less	label P: Small business retirement exemption (SBRE)

less	label S: Small business roll-over relief (SBRO)

Part E Current year capital gains after applying capital losses – other gains

label C: Non-active assets

plus	label F: Active assets

Part G Small business concessions applied – other gains

less	label N: Small business active asset reduction (SBAAR)

less	label Q: Small business retirement exemption (SBRE)

less	label T: Small business roll-over relief (SBRO)

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17. You MUST step through every section of the e-tax interview. e-tax will create a Capital gains tax schedule based on your answers at item 17.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1370
V1370	Net income or loss from business missing

Refer to

•	item 14 – Net income or loss from business

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

An amount has been entered at Tax withheld voluntary agreement (Item, 14 Label D), Tax withheld where ABN not quoted (Item 14 Label W), Tax withheld Foreign Resident Withholding (Item 14 Label E) or Tax withheld labour hire and other payments, but no amounts have been entered for net income or loss from business (Item 14 Labels B and C).  Check and correct.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and complete your answers to each interview screen for item 14. If the amounts of tax withheld are correct, make sure you enter the details of the corresponding payments.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1372A
V1372A	Payment summary schedule required for business income

Refer to

•	item 14 – Net income or loss from business

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

Amounts have been entered at Primary Production – Gross payments OR Non-Primary Production – Gross payments and there is no Payment Summary schedule attached.  Please complete and attach a Payment Summary Schedule.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and complete your answers to each interview screen for item 14. e-tax will prepare a Payment summary schedule using your answers to item 14.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1375
V1375	Primary production and/or Non-primary production total deferred losses amount incorrect

Refer to

•	item 15 – Deferred non-commercial business losses

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

The sum of primary production Total deferred losses (Item 15 Label  I) and Non-primary production deferred losses (Item 15 Label J) does is does not equal the sum of Deferred losses from partnership activities (Item 15 Label F) and Deferred losses from sole trader activities (Item 15 Label G).

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

3.	Otherwise, check and complete your answers to each interview screen for item 15.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1376
V1376	Deferred losses from partnership activities missing

Refer to

•	item 15 – Deferred non-commercial business losses

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

You have indicated that you have a deferred loss from a partnership business activity at item P9 and there is no amount of partnership deferred losses at item 15.

Type of loss activity codes written to item P9 are as follows:

1	Assessable income test
2	Profits test
3	Real property test
4	Other assets test
5	Arts business
6	Commissioner's discretion
7	Primary production business
8	Deferred loss
How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and complete your answers to each interview screen for item 15. e-tax will use your answers at item 15 to complete item P9 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1377
V1377	Deferred losses from sole trader activities missing

Refer to

•	item 15 – Deferred non-commercial business losses

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

You have indicated that you have a deferred loss from a sole trader business activity at item P9 and there is no amount of sole trader deferred losses at item 15.

Type of loss activity codes written to item P9 are as follows:

1	Assessable income test
2	Profits test
3	Real property test
4	Other assets test
5	Arts business
6	Commissioner's discretion
7	Primary production business
8	Deferred loss
How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and complete your answers to each interview screen for item 15. e-tax will use your answers at item 15 to complete item P9 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1378
V1378	Business loss activity details missing

Refer to

•	item 15 – Deferred non-commercial business losses

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

Primary production deferred lossesTotal deferred losses  and /or Non-primary production deferred losses have been entered at item 15 label I&J and no business activities have been described at item P9 in your Business and professional items schedule.

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and complete your answers to each interview screen for item 15. e-tax will use your answers at item 15 to complete item P9 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1379A
V1379A 	Business loss activity details not completed

Refer to item 15 – Deferred non-commercial business losses.

Data has been entered at some of the labels for Activity 1 at Item P9, but not all of the labels have been completed. Check Description of activity (Label D), Industry code (Label E), Partnership or sole trader (Label F), Loss code (Label G) and Loss (Label I).

How to correct this error

1.	Click on the Next button. e-tax will move to Item 15.

2.	Check and correct your answers by stepping through each interview screen. e-tax will use your answers to correct your return.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1379B
V1379B 	Business loss activity details not completed

Refer to item 15 – Deferred non-commercial business losses.

Data has been entered at some of the labels for Activity 2 at Item P9, but not all of the labels have been completed. Check Description of activity (Label J), Industry code (Label K), Partnership or sole trader (Label L), Loss code (Label M) and Loss (Label O)

How to correct this error

1.	Click on the Next button. e-tax will move to Item 15.

2.	Check and correct your answers by stepping through each interview screen. e-tax will use your answers to correct your return.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1379C
V1379C 	Business loss activity details not completed

Refer to item 15 – Deferred non-commercial business losses.

Data has been entered at some of the labels for Activity 3 at Item P9, but not all of the labels have been completed. Check Description of activity (Label P), Industry code (Label Q), Partnership or sole trader (Label R), Loss code (Label S) and Loss (Label U).

How to correct this error

1.	Click on the Next button. e-tax will move to Item 15.

2.	Check and correct your answers by stepping through each interview screen. e-tax will use your answers to correct your return.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1380
V1380	Business loss activity details missing

Refer to

•	item 14 – net income or loss from business

•	item 15 – Deferred non-commercial business losses

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

You have shown a net loss from primary production or non-primary production business at item 14 or net personal service income at item 13
AND
there are no Business loss activity details written to item P9 in the Business and professional items schedule.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and complete your answers for each worksheet completed at item 14. If you have made a net loss from either a primary production business or a non-primary production business, you MUST complete item 15.

e-tax will use your answers from item 15 to complete the business loss activity details at item P9 on your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1381
V1381	Primary production and/or Non-primary production total deferred losses amount incorrect

Refer to

•	item 15 – Deferred non-commercial business losses

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

Only one business loss activity has been entered at item P9 in the Business and professional items schedule and the amount of loss from the activity does not equal the Total deferred losses Primary production and /or Non- primary production entered at item 15.

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and complete your answers for each worksheet completed at item 15. e-tax will use your answers at item 15 to complete item P9 in your Business and professional items schedule.

If you have completed a worksheet in error, make sure you delete the worksheet from the Existing worksheets list.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1382
V1382	Primary production and/or Non-primary production total deferred losses amount incorrect

Refer to

•	item 15 – Deferred non-commercial business losses

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

At least one business loss activity entered at item P9 in the Business and professional items schedule has a Type of loss set to 8 – Deferred loss and there are no deferred losses entered at item 15 label I&J.

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and complete your answers for each worksheet completed at item 15. e-tax will use your answers at item 15 to complete item P9 in your Business and professional items schedule.

If you have completed a worksheet in error, make sure you delete the worksheet from the Existing worksheets list.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1383A
V1383A	PSI Tax withheld where ABN not quoted is incorrect

Refer to

•	item 13 – Personal services income (PSI)

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

The amount of Personal Services Income (PSI) Tax withheld where ABN not quoted at item 13 is more than half the amount of PSI where ABN not quoted written to item P1 Part B of your Business and professional items schedule.

How to correct this error

1.	Click on the Next button. e-tax will move to item 13.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 13. Make sure you have entered the payment details in the correct columns in each table. e-tax will use your answers at item 13 to complete item P1 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1383B
V1383B	PSI Tax withheld where ABN not quoted is required

Refer to

•	item 13 – Personal services income (PSI)

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

There is an amount of Personal Services Income (PSI) where ABN not quoted written to item P1 Part B of your Business and professional items schedule and there is no amount of PSI Tax withheld where ABN not quoted at item 13.

How to correct this error

1.	Click on the Next button. e-tax will move to item 13.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 13. Make sure you have entered the payment details in the correct columns in each table. e-tax will use your answers at item 13 to complete item P1 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1384A
V1384A	Tax withheld where ABN not quoted is incorrect

Refer to

•	item 14 – net income or loss from business

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

There is an amount of Tax withheld from payments where ABN not quoted at item 14 and it is greater than half the total Gross payments where ABN not quoted income shown at item P8 on your Business and professional items schedule.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 14. Make sure you have entered the payment details in the correct columns in each table. e-tax will use your answers at item 14 to complete item P8 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1384B
V1384B	Tax withheld where ABN not quoted is required

Refer to

•	item 14 – net income or loss from business

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

There is an amount of Gross payments where ABN not quoted written to item P8 of your Business and professional items schedule and there is no amount of Tax withheld from payments where ABN not quoted at item 14.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 14. Make sure you have entered the payment details in the correct columns in each table. e-tax will use your answers at item 14 to complete item P8 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1386B
V1386B	Personal services business determination required

Refer to item 13 – Personal services income (PSI)

You have answered ‘No’ to the question ‘Did you satisfy the results test?’ and you have not answered the next question ‘Did you receive a personal services business determination(s) that was in force for the whole of the period you earned PSI?’

You must answer the questions in item P1 part A sequentially until the answer to a question is ‘Yes’ or until all answers are ‘No’.

How to correct this error

1.	Click on the Next button. e-tax will move to item 13.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 13. Make sure you complete all the interview screens in this item. e-tax will use your answers at item 13 to complete item P1 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1386C
V1386C	80% or more PSI from one source answer required

Refer to item 13 – Personal services income (PSI) .

You have answered ‘No’ to the question ‘Did you receive a personal services business determination(s) that was in force for the whole of the period you earned PSI?’ and you have not answered the next question ‘Did you receive 80% or more of your PSI from one source?’

You must answer the questions in item P1 part A sequentially until the answer to a question is ‘Yes’ or until all answers are ‘No’.

How to correct this error

1.	Click on the Next button. e-tax will move to item 13.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 13. Make sure you complete all the interview screens in this item. e-tax will use your answers at item 13 to complete item P1 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1391A
V1391A	Tax withheld PSI voluntary agreement amount incorrect

Refer to

•	item 13 – Personal services income (PSI)

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

The amount of Personal Services Income (PSI) Tax withheld – voluntary agreement at item 13 is more than half the amount of PSI voluntary agreement written to item P1 Part B of your Business and professional items schedule.

How to correct this error

1.	Click on the Next button. e-tax will move to item 13.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 13. Make sure you have entered the payment details in the correct columns in each table. e-tax will use your answers at item 13 to complete item P1 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1391B
V1391B	PSI voluntary agreement amount incorrect

Refer to

•	item 13 – Personal services income (PSI)

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

There is an amount of Personal Services Income (PSI) voluntary agreement written to item P1 Part B of your Business and professional items schedule and there is no amount of PSI Tax withheld – voluntary agreement at item 13.

How to correct this error

1.	Click on the Next button. e-tax will move to item 13.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 13. Make sure you have entered the payment details in the correct columns in each table. e-tax will use your answers at item 13 to complete item P1 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1397A
V1397A	Tax withheld labour hire or other specified payments incorrect

Refer to

•	item 13 – Personal services income (PSI)

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

The amount of Personal Services Income (PSI) Tax withheld – labour hire or other specified payments at item 13 is more than half the amount of PSI – labour hire or other specified payments written to item P1 Part B of your Business and professional items schedule.

How to correct this error

1.	Click on the Next button. e-tax will move to item 13.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 13. Make sure you have entered the payment details in the correct columns in each table. e-tax will use your answers at item 13 to complete item P1 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1397B
V1397B	Tax withheld labour hire or other specified payments incorrect

Refer to

•	item 13 – Personal services income (PSI)

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

There is an amount of Personal Services Income (PSI) labour hire or other specified payments written to item P1 Part B of your Business and professional items schedule and there is no amount of PSI Tax withheld – labour hire or other specified payments at item 13.

How to correct this error

1.	Click on the Next button. e-tax will move to item 13.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 13. Make sure you have entered the payment details in the correct columns in each table. e-tax will use your answers at item 13 to complete item P1 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1398
V1398	Tax withheld from attributed PSI incorrect

Refer to item 8 – Attributed personal services income

The total amount of Tax withheld from attributed personal services income entered at item 8 is more than half the total Attributed personal services income entered.

How to correct this error

1.	Click on the Next button. e-tax will move to item 8.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 8. Make sure you have entered the payment details in the correct columns in the table.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1403
V1403	Capital gains tax schedule required

Refer to item 17 Capital gains.

The Total current year capital gains entered at item 17 is greater than $10,000 and no Capital gains tax schedule has been completed.

If you receive this error, please contact the Personal Tax Infoline.


V1410A
V1410A	Amount withheld where no ABN quoted is incorrect

Refer to

•	item 13 – Personal services income (PSI)

•	item 14 – Net income or loss from business

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

You have entered details of personal services income at item 13 or business income at item 14 from which amounts have been withheld and e-tax has used the information entered to complete an Individual PAYG payment summary schedule.

A payment of type N – withholding where ABN not quoted has been written to the schedule and the amount of tax withheld is more than half the gross payment.

How to correct this error

1.	Click on the Next button. e-tax will move to item 13.

If you click on No in response to the first question in item 13, e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 13. Make sure you have entered the payment details in the correct columns in each table. e-tax will use your answers at item 13 to complete item P1 in your Business and professional items schedule.

If you have entered business payments from which amounts of tax have been withheld at item 14, you may have to check your answers to item 14 as well.

If you click on No in response to the first question in item 14, e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 14. Make sure you have entered the payment details in the correct columns in each table. e-tax will use your answers at item 14 to complete item P8 in your Business and professional items schedule.

e-tax will use your answers at items 13 and 14 to create a new Individual PAYG payment summary schedule.

2.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1410B
V1410B	Amount withheld for voluntary agreements is incorrect

Refer to

•	item 13 – Personal services income (PSI)

•	item 14 – Net income or loss from business

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

You have entered details of personal services income at item 13 or business income at item 14 from which amounts have been withheld and e-tax has used the information entered to complete an Individual PAYG payment summary schedule.

A payment of type V – voluntary agreement has been written to the schedule and the amount of tax withheld is more than half the gross payment.

How to correct this error

1.	Click on the Next button. e-tax will move to item 13.

2.	If you click on No in response to the first question in item 13, e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 13. Make sure you have entered the payment details in the correct columns in each table. e-tax will use your answers at item 13 to complete item P1 in your Business and professional items schedule.

3.	If you have entered business payments from which amounts of tax have been withheld at item 14, you may have to check your answers to item 14 as well.

If you click on No in response to the first question in item 14, e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 14. Make sure you have entered the payment details in the correct columns in each table. e-tax will use your answers at item 14 to complete item P8 in your Business and professional items schedule.

4.	e-tax will use your answers at items 13 and 14 to create a new Individual PAYG payment summary schedule.

5.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1410C
V1410C	Amount withheld for labour hire or other specified payments is incorrect

Refer to

•	item 13 – Personal services income (PSI)

•	item 14 – Net income or loss from business

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

You have entered details of personal services income at item 13 or business income at item 14 from which amounts have been withheld and e-tax has used the information entered to complete an Individual PAYG payment summary schedule.

A payment of type V – labour hire or other specified payment has been written to the schedule and the amount of tax withheld is more than half the gross payment.

How to correct this error

1.	Click on the Next button. e-tax will move to item 13.

2.	If you click on No in response to the first question in item 13, e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 13. Make sure you have entered the payment details in the correct columns in each table. e-tax will use your answers at item 13 to complete item P1 in your Business and professional items schedule.

3.	If you have entered business payments from which amounts of tax have been withheld at item 14, you may have to check your answers to item 14 as well.

If you click on No in response to the first question in item 14, e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 14. Make sure you have entered the payment details in the correct columns in each table. e-tax will use your answers at item 14 to complete item P8 in your Business and professional items schedule.

4.	e-tax will use your answers at items 13 and 14 to create a new Individual PAYG payment summary schedule.

5.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1410D
V1410D	Amount withheld for attributed Personal Services Income is incorrect

Refer to item 8 – Attributed personal services income

You have entered details of attributed personal services income at item 8 and e-tax has used the information entered to complete an Individual PAYG payment summary schedule.

A payment of type A – attributed personal services income has been written to the schedule and the amount of tax withheld is more than half the gross payment.

How to correct this error

1.	Click on the Next button. e-tax will move to item 8.

2.	Check and correct your answers for each screen at item 8. Make sure you have entered the payment details in the correct columns in the table. e-tax will use your answers at item 8 to create a new Individual PAYG payment summary schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1410E
V1410E	Amount withheld – foreign resident withholding is incorrect

Refer to item 14 – Net income or loss from business

The sum of amount withheld – foreign resident withholding on the payment summary schedule is greater than 50% of the sum of Gross Payment.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	Check your answers by stepping through each interview screen.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1412
V1412	Income type not present

Refer to

•	item 13 – Personal services income (PSI)

•	item 14 – Net income or loss from business

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

You have entered details of payments from which tax has been withheld at items 13 or 14 and e-tax has used the information entered to complete an Individual PAYG payment summary schedule.

The Nature of income type has not been written to the schedule. Possible types are:

B – business

P – personal services

e-tax automatically sets this field when creating the Individual PAYG payment summary schedule. If you receive this error, please contact the Personal Tax Infoline.


V1434A
V1434A	Net capital gain incorrect

Refer to item 17 Capital gains

An amount greater than zero has been entered at Net capital gain and it is greater than the amount entered at Total current year capital gains.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17. You MUST step through every section of the e-tax interview. If you have completed the labels at item 17 manually, remember the net capital gain is the total current year capital gains reduced by any capital losses carried forward from previous years (according to any applicable capital gains tax rules).

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1434B
V1434B	Total current year capital gains required

Refer to item 17 Capital gains

An amount greater than zero has been entered at Net capital gain and no amount has been entered at Total current year capital gains.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17. You MUST step through every section of the e-tax interview. If you have completed the labels at item 17 manually, remember the net capital gain is the total current year capital gains reduced by any capital losses carried forward from previous years (according to any applicable capital gains tax rules).

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1435
V1435	Net capital losses carried forward incorrect

Refer to item 17 Capital gains

A Capital gains tax schedule has been completed and the Unapplied net capital losses from collectables plus the Unapplied net capital losses from all other CGT assets and CGT events written to Part I of the schedule does not equal the amount entered at Item 17 Label V – Net capital losses carried forward to later income years in the tax return.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17. You MUST step through every section of the e-tax interview. e-tax will create a Capital gains tax schedule based on your answers at item 17.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1437
V1437	Scrip for scrip rollover in part L is not required

Refer to item 17 Capital gains.

A Capital gains tax schedule is attached to the return and at least one of the fields in Part L has been completed.

An individual taxpayer does not have to complete Part L of the Capital gains tax schedule.

If you receive this error, please contact the Personal Tax Infoline.


V1441A
V1441A	Title does not match sex code

Refer to the Family tax benefit (FTB) on-line documentation

You have completed a spouse details worksheet and the spouse's title does not match their sex. The spouse is not ‘Male’ and the spouse's title has been set to ‘Mr’.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Spouse/former spouse(s) section.

2.	Answer ‘Yes’ to the Did you have a spouse? question. The Spouse details screen will be displayed. The Existing worksheets navigator will list the worksheet(s) you have completed. Click on the entry in the navigator list to open a worksheet.

3.	Check and correct the Sex and Title details.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1441B
V1441B	Title does not match sex code

Refer to the Family tax benefit (FTB) on-line documentation

You have completed a spouse details worksheet and the spouse's title does not match their sex. The spouse is not ‘Female’ and the spouse's title has been set to ‘Mrs’, ‘Miss’ or ‘Ms’.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Spouse/former spouse(s) section.

2.	Answer ‘Yes’ to the Did you have a spouse? question. The Spouse details screen will be displayed. The Existing worksheets navigator will list the worksheet(s) you have completed. Click on the entry in the navigator list to open a worksheet.

3.	Check and correct the Sex and Title details.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1447A
V1447A	Did you have an Employee Share Scheme in place at any time question not required

Refer to item 17 Capital gains.

A Capital gains tax schedule is attached to the return and Part M has been completed.

An individual taxpayer does not have to complete Part M of the Capital gains tax schedule. If you receive this error, please contact the Personal Tax Infoline.


V1449
V1449	Same majority underlying ownership question not required

Refer to item 17 Capital gains.

A Capital gains tax schedule is attached to the return and Part N has been completed.

An individual taxpayer does not have to complete Part N of the Capital gains tax schedule. If you receive this error, please contact the Personal Tax Infoline.


V1450A
V1450A	Family profile – ‘to date’ cannot be earlier than ‘from date’

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has created a Family profile schedule and the ‘date to’ is earlier than or equal to the ‘date from’.

Your family profile is the make-up or composition of your family at a point in time, during the FTB claim period. e-tax will prepare a description of each family profile using the dates of each of your changes in family circumstances. These dates are entered at each stage of the FTB item – for example, dates you were not eligible for FTB, periods you were overseas, changes in your marital status and changes in the number of dependent children you had.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item.

2.	Check and correct all your answers in the FTB interview. If you have completed multiple worksheets in any of the sections, check and correct each worksheet.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1450B
V1450B	Family profile dates outside the valid range

Refer to the Family tax benefit (FTB) on-line documentation.

e-tax has created a Family profile schedule and:

•	the ‘date from’ is earlier than the 1st July 2006, or

•	the 'date to' is later than the 30 June 2007.

Your family profile is the make-up or composition of your family at a point in time, during the FTB claim period. e-tax will prepare a description of each family profile using the dates of each of your changes in family circumstances. These dates are entered at each stage of the FTB item – for example, dates you were not eligible for FTB, periods you were overseas, changes in your marital status and changes in the number of dependent children you had.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item.

2.	Check and correct all your answers in the FTB interview. If you have completed multiple worksheets in any of the sections, check and correct each worksheet.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1464
V1464	Capital losses transferred not required

Refer to item 17 Capital gains

A Capital gains tax schedule is attached to the return and details of capital losses transferred out have been provided at Part D.

An individual taxpayer does not have to complete details of capital losses transferred out at Part D of the Capital gains tax schedule. If you receive this error, please contact the Personal Tax Infoline.


V1451
V1451	Spouse number absent

Refer to the Family tax benefit (FTB) on-line documentation.

e-tax has created a Family profile schedule and there is no number identifying your marital status during the period.

Your family profile is the make-up or composition of your family at a point in time, during the FTB claim period. e-tax will prepare a description of each family profile using the dates of each of your changes in family circumstances. These dates are entered at each stage of the FTB item – for example, dates you were not eligible for FTB, periods you were overseas, changes in your marital status and changes in the number of dependent children you had.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item.

2.	Check and correct all your answers in the FTB interview. If you have completed multiple worksheets in any of the sections, check and correct each worksheet.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1465
V1465	Current year capital losses applied incorrect

Refer to item 17 Capital gains

A Capital gains tax schedule has been completed and the total amount of current year capital losses applied that is written to part D of the schedule is greater than the total current year capital losses – other than from collectables written to part B.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17. You MUST step through every section of the e-tax interview so that e-tax can correctly calculate and re-apply capital losses. e-tax will create a Capital gains tax schedule using your answers at item 17.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1466
V1466	Check total current year capital gains calculation

Refer to item 17 Capital gains

A Capital gains tax schedule has been completed and the amount of Total current year capital gains entered at item 17 does not equal the total of all Capital gains from CGT assets and CGT events written to labels A to U in Part A of the schedule.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17. You MUST step through every section of the e-tax interview. e-tax will create a Capital gains tax schedule using your answers at item 17.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1467
V1467	Check active assets – indexation method

Refer to item 17 Capital gains

A Capital gains tax schedule has been completed and the total amount of current year indexed gains after applying capital losses -active assets that is written to part E label D of the schedule does not equal the total current year indexed gains -active assets that is written to part A labels M, P and S.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17. You MUST step through every section of the e-tax interview so that e-tax can correctly calculate and re-apply capital losses. e-tax will create a Capital gains tax schedule using your answers at item 17.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1468
V1468	Check active assets – discount method

Refer to item 17 Capital gains

A Capital gains tax schedule has been completed and the total amount of current year discount gains after applying capital losses -active assets that is written to part E label E of the schedule does not equal the total current year discount gains -active assets that is written to part A labels N, Q and T.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17. You MUST step through every section of the e-tax interview so that e-tax can correctly calculate and re-apply capital losses. e-tax will create a Capital gains tax schedule using your answers at item 17.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1469
V1469	Check active assets – other capital gains

Refer to item 17 Capital gains

A Capital gains tax schedule has been completed and the total amount of current year other gains after applying capital losses -active assets that is written to part E label F of the schedule does not equal the total current year other gains -active assets that is written to part A labels O, R and U.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17. You MUST step through every section of the e-tax interview so that e-tax can correctly calculate and re-apply capital losses. e-tax will create a Capital gains tax schedule using your answers at item 17.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1470
V1470	Check CYCG calculation – indexation method

Refer to item 17 Capital gains

A Capital gains tax schedule has been completed and the total current year capital gains after applying capital losses – indexation method written to part E does not equal the total current year capital gains-indexation method written to part A less the total capital losses applied – indexation method written to part D.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17. You MUST step through every section of the e-tax interview so that e-tax can correctly calculate and re-apply capital losses. e-tax will create a Capital gains tax schedule using your answers at item 17.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1471
V1471	Check CYCG calculation – discount method

Refer to item 17 Capital gains

A Capital gains tax schedule has been completed and the total current year capital gains after applying capital losses – discount method written to part E does not equal the total current year capital gains-discount method written to part A less the total capital losses applied – discount method written to part D.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17. You MUST step through every section of the e-tax interview so that e-tax can correctly calculate and re-apply capital losses. e-tax will create a Capital gains tax schedule using your answers at item 17.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1472
V1472	Check CYCG calculation – other capital gains

Refer to item 17 Capital gains

A Capital gains tax schedule has been completed and the total current year capital gains after applying capital losses – other method written to part E does not equal the total current year capital gains-other method written to part A less the total capital losses applied – other method written to part D.

How to correct this error

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and correct your answers in each interview screen for item 17. You MUST step through every section of the e-tax interview so that e-tax can correctly calculate and re-apply capital losses. e-tax will create a Capital gains tax schedule using your answers at item 17.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1473
V1473	Dependant number, surname, first name, sex code or date of birth absent

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has created a Dependant details schedule and the dependant"s number, surname, first name, sex code or date of birth are missing.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Dependants details section.

2.	The Dependant details screen will be displayed. The Existing worksheets navigator will list the worksheet(s) you have completed. Click on the entry in the navigator list to open a worksheet.

3.	Check and correct the information entered in each worksheet.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1475
V1475	Spouse is current spouse, spouse TFN or exemption code, spouse number, sex code, surname, date of birth or spouse income details absent

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has created at least one Spouse details schedule and some, but not all, of the information required on the schedule(s) has been completed.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Spouse/former spouse(s) section.

2.	Answer 'Yes' to the Did you have a spouse? question. The Spouse details screen will be displayed. The Existing worksheets navigator will list the worksheet(s) you have completed. Click on the entry in the navigator list to open a worksheet.

3.	Check and correct each worksheet.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1476
V1476	There are less than 3 Dependant schedules where ‘M’ has been coded at the Date of birth field

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has created less than 3 Dependant details schedules which have the multiple birth allowance (MBA) indicator set.

If you enter the details of a child who was under the age of 6 at any time during the income year, e-tax will ask you to indicate whether this child was part of a multiple birth. To qualify for the multiple birth allowance, you must enter details of at least 3 dependent children who were part of a multiple birth.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Dependants details section.

2.	The Dependant details screen will be displayed. The Existing worksheets navigator will list the worksheet(s) you have completed. Click on the entry in the navigator list to open a worksheet.

3.	Check and correct the information entered in each worksheet.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1477
V1477	Check spouse is the current spouse

Refer to the Family tax benefit (FTB) on-line documentation.

e-tax has created more than one Spouse details schedule with the response to the question ‘Was this your spouse on 30/6/2007?’ set to ‘Y’. e-tax uses the information you enter in the Marital status section to answer this question in the schedule.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Marital status section.

2.	Check and correct your entries in the marital status table.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1478
V1478	Spouse's sex code is the same as client's sex code

Refer to the Family tax benefit (FTB) on-line documentation

You have completed a spouse details worksheet and the spouse's sex code has been set to the same as yours.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Spouse/former spouse(s) section.

2.	Answer ‘Yes’ to the Did you have a spouse? question. The Spouse details screen will be displayed. The Existing worksheets navigator will list the worksheet(s) you have completed. Click on the entry in the navigator list to open a worksheet.

3.	Check and correct the details.

4.	If this does not correct the error, you must check your own sex code. Use the e-tax navigator to move to the Personal details section. Check and correct your personal details.

5.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1479A
V1479A	First name must be present

Refer to the Family tax benefit (FTB) on-line documentation

You have created a dependant's worksheet. The dependant's Other Name field has been completed and the Given Name field is blank.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Dependants details section.

2.	The Dependant details screen will be displayed. The Existing worksheets navigator will list the worksheet(s) you have completed. Click on the entry in the navigator list to open a worksheet.

3.	Check and correct the information entered in each worksheet.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1479B
V1479B	First name must be present

Refer to the Family tax benefit (FTB) on-line documentation

You have completed a spouse details worksheet and the spouse's Other Name field has been completed and the Given Name field is blank.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Spouse/former spouse(s) section.

2.	Answer ‘Yes’ to the Did you have a spouse? question. The Spouse details screen will be displayed. The Existing worksheets navigator will list the worksheet(s) you have completed. Click on the entry in the navigator list to open a worksheet.

3.	Check and correct the details.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1480
V1480	Check Date of Birth and Date of Death

Refer to the Family tax benefit (FTB) on-line documentation

You have completed a spouse details worksheet and the spouse's Date of Death has been set to a date earlier than, or the same as, their Date of Birth.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Spouse/former spouse(s) section.

2.	Answer ‘Yes’ to the Did you have a spouse? question. The Spouse details screen will be displayed. The Existing worksheets navigator will list the worksheet(s) you have completed. Click on the entry in the navigator list to open a worksheet.

3.	Check and correct the details.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1481A
V1481A	Check Payer number for maintenance income and Payer number for the Relevant periods

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has prepared a Family tax benefits schedule that includes Maintenance income paid to you from a payer and no Relevant period details are entered for the payer.

For the purposes of FTB, the relevant period for the assessment of maintenance income is the period that you, your spouse or any of your dependants is entitled to receive maintenance during an income year.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the List of maintenance payers section.

2.	Check and correct the details you have entered at each screen in the maintenance income section. You will have to use the Existing worksheets navigator to view and check all the child maintenance and spousal maintenance worksheets you have created.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1481B
V1481B	Check Payer number for Maintenance income and Payer number for the Relevant Periods

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has prepared a Family tax benefits schedule that includes Relevant period details for maintenance income paid to you by a specified payer and no Maintenance income details relating to this payer have been entered.

For the purposes of FTB, the relevant period for the assessment of maintenance income is the period that you, your spouse or any of your dependants is entitled to receive maintenance during an income year.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the List of maintenance payers section.

2.	Check and correct the details you have entered at each screen in the maintenance income section. You will have to use the Existing worksheets navigator to view and check all the child maintenance and spousal maintenance worksheets you have created.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1481C
V1481C	Payer number or Maintenance received amount absent

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has prepared a Family tax benefits schedule with details of your maintenance income that includes a Payer number or Maintenance income but not both. If one field is completed on the schedule, both fields must be.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the List of maintenance payers section.

2.	Check and correct the details you have entered at each screen in the maintenance income section. You will have to use the Existing worksheets navigator to view and check all the child maintenance and spousal maintenance worksheets you have created.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1481D
V1481D	Payer number, Relevant period from date or Relevant period to date absent

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has prepared a Family tax benefits schedule with details of your maintenance income that includes a Payer number, Relevant period From date or Relevant period To date but not all these 3 fields are completed. If one of these fields is completed on the schedule, all 3 fields must be.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the List of maintenance payers section.

2.	Check and correct the details you have entered at each screen in the maintenance income section. You will have to use the Existing worksheets navigator to view and check all the child maintenance and spousal maintenance worksheets you have created.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1481E
V1481E	Maintenance income – from date must be earlier than to date

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has prepared a Family tax benefits schedule with details of your maintenance income that includes a Relevant period From date that is later than, or the same as, the Relevant period To date.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the List of maintenance payers section.

2.	Check and correct the details you have entered at each screen in the maintenance income section. You will have to use the Existing worksheets navigator to view and check all the child maintenance and spousal maintenance worksheets you have created.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1481F
V1481F	Maintenance income Relevant period dates outside the valid date range

Refer to the Family tax benefit (FTB) on-line documentation.

e-tax has prepared a Family tax benefits schedule with details of your maintenance income that includes a Relevant period From date that is earlier than 1/7/2006 or a Relevant period To date that is later than 30/6/2007.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the List of maintenance payers section.

2.	Check and correct the details you have entered at each screen in the maintenance income section. You will have to use the Existing worksheets navigator to view and check all the child maintenance and spousal maintenance worksheets you have created.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1481G
V1481G	Each Payer number can appear only once

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has prepared a Family tax benefits schedule with details of your maintenance income that includes a more than one occurrence of Maintenance income from the same Payer.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the List of maintenance payers section.

2.	Check and correct the details you have entered at each screen in the maintenance income section. You will have to use the Existing worksheets navigator to view and check all the child maintenance and spousal maintenance worksheets you have created.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1482A
V1482A	Check Payer number for Maintenance income and Payer number for the Relevant Periods

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has prepared a Spouse details schedule that includes Maintenance income paid to your spouse (or former spouse) from a payer and no Relevant period details are entered for the payer.

For the purposes of FTB, the relevant period for the assessment of maintenance income is the period that you, your spouse or any of your dependants is entitled to receive maintenance during an income year.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the List of maintenance payers section.

2.	Check and correct the details you have entered at each screen in the maintenance income section. You will have to use the Existing worksheets navigator to view and check all the child maintenance and spousal maintenance worksheets you have created.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1482B
V1482B	Check Payer number for Maintenance income and Payer number for the Relevant Periods

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has prepared a Spouse details schedule that includes Relevant period details for maintenance income paid to your spouse (or former spouse) by a specified payer and no Maintenance income details relating to this payer have been entered.

For the purposes of FTB, the relevant period for the assessment of maintenance income is the period that you, your spouse or any of your dependants is entitled to receive maintenance during an income year.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the List of maintenance payers section.

2.	Check and correct the details you have entered at each screen in the maintenance income section. You will have to use the Existing worksheets navigator to view and check all the child maintenance and spousal maintenance worksheets you have created.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1482C
V1482C	Payer number or Maintenance received amount absent

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has prepared a Spouse details schedule with details of your spouse's (or former spouse's) maintenance income that includes a Payer number or Maintenance income but not both. If one field is completed on the schedule, both fields must be.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the List of maintenance payers section.

2.	Check and correct the details you have entered at each screen in the maintenance income section. You will have to use the Existing worksheets navigator to view and check all the child maintenance and spousal maintenance worksheets you have created.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1482D
V1482D	Payer number, Relevant period from date or Relevant period to date absent

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has prepared a Spouse schedule with details of your spouse's (or former spouse's) maintenance income that includes a Payer number, Relevant period From date or Relevant period To date but not all these 3 fields are completed. If one of these fields is completed on the schedule, all 3 fields must be.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the List of maintenance payers section.

2.	Check and correct the details you have entered at each screen in the maintenance income section. You will have to use the Existing worksheets navigator to view and check all the child maintenance and spousal maintenance worksheets you have created.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1482E
V1482E	Spouse Maintenance income Relevant period from date must be earlier than to date

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has prepared a Spouse details schedule with details of your spouse's (or former spouse's) maintenance income that includes a Relevant period From date that is later than, or the same as, the Relevant period To date.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the List of maintenance payers section.

2.	Check and correct the details you have entered at each screen in the maintenance income section. You will have to use the Existing worksheets navigator to view and check all the child maintenance and spousal maintenance worksheets you have created.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1482F
V1482F	Maintenance income Relevant period dates outside the valid date range

Refer to the Family tax benefit (FTB) on-line documentation.

e-tax has prepared a Spouse details schedule with details of your spouse's (or former spouse's) maintenance income that includes a Relevant period From date that is earlier than 1/7/2006 or a Relevant period To date that is later than 30/6/2007.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the List of maintenance payers section.

2.	Check and correct the details you have entered at each screen in the maintenance income section. You will have to use the Existing worksheets navigator to view and check all the child maintenance and spousal maintenance worksheets you have created.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1482G
V1482G	Each Payer number can appear only once

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has prepared a Spouse details schedule with details of your maintenance income that includes a more than one occurrence of Maintenance income from the same Payer.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the List of maintenance payers section.

2.	Check and correct the details you have entered at each screen in the maintenance income section. You will have to use the Existing worksheets navigator to view and check all the child maintenance and spousal maintenance worksheets you have created.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1483
V1483	Only one Family Tax Benefit schedule allowed

Refer to the Family tax benefit (FTB) on-line documentation.

e-tax has attached more than one Family tax benefit schedule to your income tax return.

 If you receive this error, please contact the Personal Tax Infoline.


V1484A
V1484A	Dependant dates of periods overseas – From date must be earlier than To date

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has prepared a Dependant details schedule and the Dates of periods overseas have been completed. The Period from date is later than, or the same as, the Period to date.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Dependants details section.

2.	The Dependant details screen will be displayed. The Existing worksheets navigator will list the worksheet(s) you have completed. Click on the entry in the navigator list to open a worksheet.

3.	Check and correct the information entered in each worksheet.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1484B
V1484B	Dependant dates of periods overseas – Period From date absent

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has prepared a Dependant details schedule and the Dates of periods overseas are incomplete. The Period to date has been completed and the Period from date is blank.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Dependants details section.

2.	The Dependant details screen will be displayed. The Existing worksheets navigator will list the worksheet(s) you have completed. Click on the entry in the navigator list to open a worksheet.

3.	Check and correct the information entered in each worksheet.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1484C
V1484C	Dependant's Period overseas From date is outside the valid date range

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has prepared a Dependant details schedule and the Dates of periods overseas are outside the valid range. The Period from date must be later than or equal to 1/7/2003 and earlier than or equal to 30/6/2007.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Dependants details section.

2.	The Dependant details screen will be displayed. The Existing worksheets navigator will list the worksheet(s) you have completed. Click on the entry in the navigator list to open a worksheet.

3.	Check and correct the information entered in each worksheet.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1485
V1485	Dependant schedule or Family Profile Schedule absent

Refer to the Family tax benefit (FTB) on-line documentation.

e-tax has attached a Family tax benefit schedule to your income tax return and no Dependant schedule or Family profile schedule has been attached.

If you receive this error, please contact the Personal Tax Infoline.


V1486
V1486	Family Tax Benefit schedules must be in sequence

Refer to the Family tax benefit (FTB) on-line documentation.

e-tax has attached a Family tax benefit schedule, Spouse details schedule(s), Dependant schedule(s) and Family profile schedule(s) to your income tax return and they are not in the correct sequence for transmission to the Tax Office.

If you receive this error, please contact the Personal Tax Infoline.


V1487A
V1487A	Dates of periods overseas – From date must be earlier than To date

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has prepared a Family tax benefit schedule and your Dates of periods overseas have been completed. The Period from date is later than, or the same as, the Period to date.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Your details section.

2.	Check and correct the information you have entered.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1487B
V1487B	Claimant's Dates of periods overseas – Period From date absent

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has prepared a Family tax benefit schedule and the Dates of periods you were overseas are incomplete. The Period to date has been completed and the Period from date is blank.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Your details section.

2.	Check and correct the information you have entered.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1487C
V1487C	Claimant's Period overseas From date outside the valid date range

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has prepared a Family tax benefit schedule and the Dates of periods you were overseas are outside the valid range. The Period from date must be later than or equal to 1/7/2003 and earlier than or equal to 30/6/2007.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Your details section.

2.	Check and correct the information you have entered.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1491A
V1491A	Tax withheld voluntary agreement required

Refer to

•	item 14 – net income or loss from business

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

There is an amount of Gross payments voluntary agreement written to item P8 of your Business and professional items schedule and there is no amount of Tax withheld voluntary agreement at item 14.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 14. Make sure you have entered the payment details in the correct columns in each table. e-tax will use your answers at item 14 to complete item P8 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1491B
V1491B	Tax withheld voluntary agreement incorrect

Refer to

•	item 14 – net income or loss from business

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

There is an amount of Tax withheld voluntary agreement at item 14 and it is greater than half the total Gross payments voluntary income shown at item P8 on your Business and professional items schedule.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 14. Make sure you have entered the payment details in the correct columns in each table. e-tax will use your answers at item 14 to complete item P8 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1492
V1492	Family tax benefit schedule absent

Refer to the Family tax benefit (FTB) on-line documentation.

e-tax has attached a Spouse details schedule(s), Dependant schedule(s) and Family profile schedule(s) to your income tax return and no Family tax benefit schedule has been attached.

If you receive this error, please contact the Personal Tax Infoline.


V1493A
V1493A	Tax withheld labour hire required

Refer to

•	item 14 – net income or loss from business

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

There is an amount of Gross payments labour hire or other specified payments written to item P8 of your Business and professional items schedule and there is no amount of Tax withheld labour hire or other specified payments at item 14.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 14. Make sure you have entered the payment details in the correct columns in each table. e-tax will use your answers at item 14 to complete item P8 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1493B
V1493B	Gross payments labour hire required

Refer to

•	item 14 – net income or loss from business

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

There is an amount of Tax withheld labour hire or other specified payments at item 14 and there is no amount of Gross payments labour hire or other specified payments written to item P8 of your Business and professional items schedule.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 14. Make sure you have entered the payment details in the correct columns in each table. e-tax will use your answers at item 14 to complete item P8 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1494
V1494	Tax withheld labour hire incorrect

Refer to

•	item 14 – net income or loss from business

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

There is an amount of Tax withheld labour hire or other specified payments at item 14 and it is greater than half the total Gross payments labour hire or other specified payments income shown at item P8 on your Business and professional items schedule.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 14. Make sure you have entered the payment details in the correct columns in each table. e-tax will use your answers at item 14 to complete item P8 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1495
V1495 	Business loss activity details required

Refer to item 15 – Deferred non-commercial business losses.

Business loss activity 1 details required.

How to correct this error

1.	Click on the Next button. e-tax will move to Item 15.

2.	Check and correct your answers by stepping through each interview screen – enter the name of your business activity.  e-tax will use your answers to correct your return.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1498
V1498	Dependant Period – ‘To date’ cannot be earlier than or equal to ‘From date’

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has completed a Family profiles section and the Period to date is earlier than, or the same as, the Period from date for the period you had a dependant.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Dependants details section.

2.	The Dependant details screen will be displayed. The Existing worksheets navigator will list the worksheet(s) you have completed. Click on the entry in the navigator list to open a worksheet.

3.	Check and correct the information entered in each worksheet.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1499
V1499 	Number of business activities missing

Refer to item 14 – net income or loss from business.

ANSZIC code has been entered at Item P2 Label A and Number of business activities (Item P3 Label B) is missing.

How to correct this error

1.	Click on the Next button. e-tax will move to Item 14.

2.	Check and correct your answers by stepping through each interview screen. Enter number of business activities.  e-tax will use your answers to correct your return.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1500
V1500	There is more than one schedule for a Spouse

Refer to the Family tax benefit (FTB) on-line documentation.

e-tax has created a Family tax benefit schedule and more than one Spouse details schedule has been attached.

If you receive this error, please contact the Personal Tax Infoline.


V1528
V1528	Spouse's details required

Refer to Consent to repay FTB debt in the Getting started section.

You have given consent to the Tax Office to use part or all of your tax refund to repay your partner's FTB debt and some you have entered some – but not all – of your partner's (the Claimant) details have been entered.

If you are giving consent, you must complete all the claimant's details – that is, their Centrelink Customer Reference Number, name, title, sex and date of birth.

How to correct this error

1.	Click on the Next button. e-tax will move to the Family Tax Benefit item.

2.	Otherwise, check and correct your answers for each screen in the Family Tax Benefit item.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1529
V1529	Cost base adjustments resulting from debt forgiveness not required

Refer to item 17 Capital gains.

A Capital gains tax schedule is attached to your return and details of cost base adjustments resulting from debt forgiveness have been included at Part O.

An individual taxpayer does not have to complete Part O of the Capital gains tax schedule. If you receive this error, please contact the Personal Tax Infoline.


V1532A
V1532A	PSI details not required

Refer to

•	item 13 – Personal services income (PSI)

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

You have answered ‘Yes’ to one of the questions:
Did you satisfy the results test? or
Have you received a personal services business determination(s) that was in force for the whole of the period you earned the PSI?
AND
there are amounts of PSI income shown at Part B item P1 in the Business and professional items schedule..

If the answer to any of the questions is ‘Y’, you do not have to provide details of PSI income.

How to correct this error

1.	Click on the Next button. e-tax will move to item 13.

2.	If you click on No in response to the first question, e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 13. Make sure you complete all the interview screens in this item. e-tax will use your answers at item 13 to complete item P1 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1532B
V1532B	PSI amounts not required

Refer to

•	item 13 – Personal services income (PSI)

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

You have indicated that you did not receive 80% or more of your PSI from one source. You have also indicated that you satisfied one of the three personal services businesses tests:

•	the unrelated clients test;

•	the employment test;

•	the business premises test.

This means your personal services income is excluded from the PSI measures and you do not enter details of the income at item 13. However, PSI income has been written to item P1 part B.

How to correct this error

1.	Click on the Next button. e-tax will move to item 13.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 13. Make sure you complete all the interview screens in this item. e-tax will use your answers at item 13 to complete item P1 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1532C
V1532C	Personal services income part B or gross payments subject to FRW – P8 required

Refer to item 13 – Personal services income (PSI)

You have indicated that you did not receive 80% or more of your PSI from one source. You have also indicated that you did not satisfy any of the three personal services businesses tests:

•	the unrelated clients test;

•	the employment test;

•	the business premises test.

This means your personal services income is not excluded from the PSI measures and you must enter details of the income at item 13. However, no PSI income has been written to item P1 part B or item P8 gross payments subject to FRW.

How to correct this error

1.	Click on the Next button. e-tax will move to item 13.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 13. Make sure you complete all the interview screens in this item. e-tax will use your answers at item 13 to complete item P1 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1539
V1539	Business loss activity details out of sequence

Refer to

•	item 15 – Deferred non-commercial business losses

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

The business loss activity details entered at item P9 in the Business and professional items schedule are out of sequence.

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and complete your answers for each worksheet completed at item 15. e-tax will use your answers at item 15 to complete item P9 in your Business and professional items schedule.

If you have completed a worksheet in error, make sure you delete the worksheet from the Existing worksheets list.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1541
V1541	Business loss activity details required

Refer to

•	item 12 – Partnerships and trusts

•	item 15 – Deferred non-commercial business losses

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

There is a net distribution of a loss from a partnership or trust at item 12 and no business loss activity details have been entered at item P9 in your Business and professional items schedule.

If you have received a net distribution of a loss from a partnership or trust at item 12 you MUST complete item 15.

How to correct this error

1.	Click on the Next button. e-tax will move to item 12.

2.	Check and correct your answers to item 12.

3.	If you have made a net loss from your partnership or trust distributions, you must enter details of the loss(es) at item 15. e-tax will use your answers at item 15 to complete item P9 in your Business and professional items schedule.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1544
V1544	Dependant is over 6 – multiple birth code not valid

Refer to the Family tax benefit (FTB) on-line documentation.

e-tax has created a Dependant details schedule. The child's date of birth is before 1/7/2000 – that is the child is over 6 at the start of the income year – and the multiple birth allowance (MBA) is being claimed for this child.

The multiple birth allowance can only be claimed for children under the age of 6.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Dependants details section.

2.	The Dependant details screen will be displayed. The Existing worksheets navigator will list the worksheet(s) you have completed. Click on the entry in the navigator list to open a worksheet.

3.	Check and correct the information entered in each worksheet.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1545
V1545	Family Tax Benefit cannot be claimed for this Dependant

Refer to the Family tax benefit (FTB) on-line documentation.

e-tax has created a Dependant details schedule. The child's date of birth is after 30/6/2007. You cannot claim FTB for a child born after the end of the income year.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Dependants details section.

2.	The Dependant details screen will be displayed. The Existing worksheets navigator will list the worksheet(s) you have completed. Click on the entry in the navigator list to open a worksheet.

3.	Check and correct the information entered in each worksheet.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1546
V1546	There is more than one schedule for a Dependant

Refer to the Family tax benefit (FTB) on-line documentation.

e-tax has created more than one Dependant details schedule with the same Dependant Number.

If you receive this error, please contact the Personal Tax Infoline.


V1547
V1547	Date entitled to apply or claim for child maintenance absent

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has created a Dependant details schedule. Either a Dependant maintenance action code is present or the Date maintenance action taken is present and the Date entitled to apply or claim for child maintenance is blank.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the List of maintenance payers section.

2.	Check and correct the details you have entered at each screen in the maintenance income section. You will have to use the Existing worksheets navigator to view and check all the child maintenance and spousal maintenance worksheets you have created.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1548A
V1548A	Family Profile From date or Family Profile To date absent

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has created a Family profile schedule and either the Date from or Date to is blank.

Your family profile is the make-up or composition of your family at a point in time, during the FTB claim period. e-tax will prepare a description of each family profile using the dates of each of your changes in family circumstances. These dates are entered at each stage of the FTB item – for example, dates you were not eligible for FTB, periods you were overseas, changes in your marital status and changes in the number of dependent children you had.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item.

2.	Check and correct all your answers in the FTB interview. If you have completed multiple worksheets in any of the sections, check and correct each worksheet.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1548B
V1548B	Dependant number, Dependant From Date or Dependant To date absent

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has created a Family profile schedule and the Dependant details are incomplete.

Your family profile is the make-up or composition of your family at a point in time, during the FTB claim period. e-tax will prepare a description of each family profile using the dates of each of your changes in family circumstances. The information you enter in the Dependant details section will be applied to the dates for this profile.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Dependants details section.

2.	The Dependant details screen will be displayed. The Existing worksheets navigator will list the worksheet(s) you have completed. Click on the entry in the navigator list to open a worksheet.

3.	Check and correct the information entered in each worksheet.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1548C
V1548C	Family Profile Dependant details required for at least 1 dependant

Refer to the Family tax benefit (FTB) on-line documentation.

e-tax has created a Family profile schedule and no dependant details are included. You cannot claim FTB for any period you do not have a dependant.

If you receive this error, please contact the Personal Tax Infoline.


V1549
V1549	Spouse schedule missing

Refer to the Family tax benefit (FTB) on-line documentation.

e-tax has created a Family profile schedule that includes spouse details and no Spouse details schedule has been created.

If you receive this error, please contact the Personal Tax Infoline.


V1550
V1550	Dependant schedule missing

Refer to the Family tax benefit (FTB) on-line documentation.

e-tax has created a Family profile schedule that includes dependant details and no Dependant details schedule has been created.

If you receive this error, please contact the Personal Tax Infoline.


V1551A
V1551A	The same payer number has a date range overlap

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has prepared a Spouse details schedule with details of your spouse's (or former spouse's) maintenance income that includes more than one set of Relevant period dates relating to one payer and these dates overlap.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the List of maintenance payers section.

2.	Check and correct the details you have entered at each screen in the maintenance income section. You will have to use the Existing worksheets navigator to view and check all the child maintenance and spousal maintenance worksheets you have created.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1551B
V1551B	The same payer number has a date range overlap

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has prepared a Family tax benefits schedule with details of your maintenance income that includes more than one set of Relevant period dates relating to one payer and these dates overlap.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the List of maintenance payers section.

2.	Check and correct the details you have entered at each screen in the maintenance income section. You will have to use the Existing worksheets navigator to view and check all the child maintenance and spousal maintenance worksheets you have created.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1552A
V1552A	The Dependant From Date is outside the Family Profile dates

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has created a Family profile schedule and the date you had a dependant from is either earlier than the Date from for this profile or later than the Date to for this profile.

Your family profile is the make-up or composition of your family at a point in time, during the FTB claim period. e-tax will prepare a description of each family profile using the dates of each of your changes in family circumstances. These dates are entered at each stage of the FTB item – for example, dates you were not eligible for FTB, periods you were overseas, changes in your marital status and changes in the number of dependent children you had.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item.

2.	Check and correct all your answers in the FTB interview. If you have completed multiple worksheets in any of the sections, check and correct each worksheet.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1552B
V1552B	The Dependant To Date is outside the Family Profile dates

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has created a Family profile schedule and the date you had a dependant to is either earlier than the Date from for this profile or later than the Date to for this profile.

Your family profile is the make-up or composition of your family at a point in time, during the FTB claim period. e-tax will prepare a description of each family profile using the dates of each of your changes in family circumstances. These dates are entered at each stage of the FTB item – for example, dates you were not eligible for FTB, periods you were overseas, changes in your marital status and changes in the number of dependent children you had.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item.

2.	Check and correct all your answers in the FTB interview. If you have completed multiple worksheets in any of the sections, check and correct each worksheet.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1553
V1553	Maximum number of schedules exceeded

Refer to the Family tax benefit (FTB) on-line documentation.

e-tax has attached more than 20 Family profile schedules to your tax return.

If you receive this error, please contact the Personal Tax Infoline.


V1555
V1555	Claimant's Dates of periods overseas overlap

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has prepared a Family tax benefit schedule and the Dates of periods you were overseas overlap.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Your details section.

2.	Check and correct the information you have entered.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1556
V1556	Dependant's Dates of periods overseas overlap

Refer to the Family tax benefit (FTB) on-line documentation

e-tax has prepared a Dependant details schedule and the Dates of periods overseas  overlap.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Dependants details section.

2.	The Dependant details screen will be displayed. The Existing worksheets navigator will list the worksheet(s) you have completed. Click on the entry in the navigator list to open a worksheet.

3.	Check and correct the information entered in each worksheet.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1557
V1557	Family Profile dates overlap

Refer to the Family tax benefit (FTB) on-line documentation.

e-tax has created more than one Family profile schedule and the dates of the family profiles overlap.

If you receive this error, please contact the Personal Tax Infoline.


V1558
V1558	The same dependant number has a date range overlap

Refer to the Family tax benefit (FTB) on-line documentation.

e-tax has created more than one Family profile schedule and the dates for a dependant overlap.

If you receive this error, please contact the Personal Tax Infoline.


V1559
V1559	There is a dependant period which occurs later than the period in which the dependant died

Refer to the Family tax benefit (FTB) on-line documentation.

e-tax has created a Family profile schedule and it includes a period for a dependant after the dependant's date of death.

If you receive this error, please contact the Personal Tax Infoline.


V1560A
V1560A	Gross payment where ABN not quoted is incorrect

Refer to

•	item 14 – net income or loss from business

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

e-tax has completed a Payment summary schedule where the nature of income type is B – Business and the payment type is N – Withholding where ABN not quoted and the Gross payment amount on the schedule does not equal the total Gross payments where ABN not quoted entered at item P8 in your Business and professional items schedule.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 14. e-tax will use your answers at item 14 to complete the Payment summary schedule – if applicable – and item P8 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1560B
V1560B	Gross payments – voluntary agreement is incorrect

Refer to

•	item 14 – net income or loss from business

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

e-tax has completed a Payment summary schedule for a payment of type V – Voluntary agreement and the Gross payment amount on the schedule does not equal the total Gross payments voluntary agreement entered at item P8 in your Business and professional items schedule.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 14. e-tax will use your answers at item 14 to complete the Payment summary schedule – if applicable – and item P8 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1560C
V1560C	Gross payments – labour hire or other payments is incorrect

Refer to

•	item 14 – net income or loss from business

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

e-tax has completed a Payment summary schedule for a payment of type S – Labour hire or other specified payments and the Gross payment amount on the schedule does not equal the total Gross payments labour hire or other specified payments entered at item P8 in your Business and professional items schedule.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 14. e-tax will use your answers at item 14 to complete the Payment summary schedule – if applicable – and item P8 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1560E
V1560E	Gross payment – foreign resident withholding is incorrect

Refer to item 14 – net income or loss from business

The sum of gross payment with indicator ‘F’ in the Payment Summary schedule should be equal to the total gross payment – foreign resident withholding on the return form.  e-tax will do this automatically.

If you receive this error, please contact the Personal Tax Infoline.


V1561
V1561	Payment summary schedule required for business income tax withheld

Refer to

•	item 14 – net income or loss from business

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

Amounts have been entered at Net income/loss from business tax withheld and there is no Payment Summary schedule attached.  Please complete and attach a Payment Summary schedule.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 14. Make sure you have entered the payment details in the correct columns in each table. e-tax will use your answers at item 14 to complete the Payment summary schedule – if applicable – and item P8 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1562
V1562	Date entitled to apply or claim for child maintenance is later than 30/6/2007

Refer to the Family tax benefit (FTB) on-line documentation.

e-tax has created a Dependant details schedule and the Date entitled to apply or claim for child maintenance is later than the end of the income year – 30/6/2007.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the List of maintenance payers section.

2.	Check and correct the details you have entered at each screen in the maintenance income section. You will have to use the Existing worksheets navigator to view and check all the child maintenance and spousal maintenance worksheets you have created.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1563A
V1563A	Tax withheld where ABN not quoted amount is incorrect

Refer to

•	item 14 – net income or loss from business

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

e-tax has completed a Payment summary schedule and the Amount withheld on the schedule with a type N – Gross payments where ABN not quoted does not equal the amount of Tax withheld where ABN not quoted at item 14 on your tax return form.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 14. e-tax will use your answers at item 14 to complete the Payment summary schedule – if applicable – and item P8 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1563B
V1563B	Tax withheld – voluntary agreement amount is incorrect

Refer to

•	item 14 – net income or loss from business

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

e-tax has completed a Payment summary schedule and the Amount withheld on the schedule with a type V – Gross payments voluntary agreement does not equal the amount of Tax withheld voluntary agreement at item 14 on your tax return form.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 14. e-tax will use your answers at item 14 to complete the Payment summary schedule – if applicable – and item P8 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1563C
V1563C	Tax withheld – labour hire or other payments amount is incorrect

Refer to

•	item 14 – net income or loss from business

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

e-tax has completed a Payment summary schedule and the Amount withheld on the schedule with a type S – Labour hire or other specified payments does not equal the amount of Tax withheld labour hire or other specified payments at item 14 on your tax return form.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 14. e-tax will use your answers at item 14 to complete the Payment summary schedule – if applicable – and item P8 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1563D
V1563D	Tax withheld – foreign resident withholding is incorrect

Refer to item 14 – net income or loss from business

The sum of Tax withheld – foreign resident withholding amount in the Payment summary schedule for business income and personal services income is different from the amount shown in Item 14 Label E in the tax return.

If you receive this error, please contact the Personal Tax Infoline.


V1566
V1566	Family Profile number occurs more than once

Refer to the Family tax benefit (FTB) on-line documentation.

e-tax has created more than one Family profile schedule with the same Family profile number.

If you receive this error, please contact the Personal Tax Infoline.


V1567
V1567	There are greater than 20 occurrences of a Payer number

Refer to the Family tax benefit (FTB) on-line documentation.

e-tax has created a Spouse details schedule and the maintenance income details for your spouse (or former spouse) includes more than 20 Payer numbers.

If you receive this error, please contact the Personal Tax Infoline.


V1568
V1568	There are greater than 20 occurrences of a Payer number

Refer to the Family tax benefit (FTB) on-line documentation.

e-tax has created a Spouse details schedule and your maintenance income details include more than 20 Payer numbers.

If you receive this error, please contact the Personal Tax Infoline.


V1570
V1570	Only one Capital allowances schedule may be attached

If you are required to complete a Capital allowances schedule 2007 based on your answers at item 14, e-tax will automatically create one for you.

If you receive this error, please contact the Personal Tax Infoline.


V1577
V1577	Phone area code should contain 2 numeric characters

Your daytime telephone number has been completed and the area code is invalid. An area code must contain 2 or more digits.

Your telephone number is entered in 2 fields (boxes) – the area code and the telephone number. For example:

•	if the phone number is (03) 1234 5678, the area code is 03 and the telephone number is 12345678; or

•	if the mobile phone number is 0102 123 456, the area code is 0102 and the telephone number is 123456.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Enter the correct information. If you prefer, both fields may be left blank.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1578
V1578	Superannuation payer death benefit code incorrect

Refer to item 4 – Eligible Termination Payments.

A worksheet has been created with a payment type of ‘Superannuation ETP payment summary’ and the type of ETP is not set to ‘Superannuation fund – no untaxed element’ or ‘Superannuation fund – with untaxed element’.

How to correct this error

1.	Click on the Next button. e-tax will move to item 4.

2.	Click on the Yes button. e-tax will open a blank ETP worksheet.

3.	Use the Existing worksheets navigator to gain access to each worksheet you have completed.

4.	Correct the worksheet in error. (If you want to delete an ETP worksheet, click on the worksheet in the Existing worksheets list and then click on the Delete button.)

5.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1580A
V1580A	Business loss activity details not completed

Refer to

•	item 15 – Deferred non-commercial business losses

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

Some of a business activity has been described at item P9 in your Business and professional items schedule but the details are incomplete. If you complete a deferred losses worksheet at item 15 you must complete all sections of the worksheet.

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and complete your answers for each worksheet completed at item 15. e-tax will use your answers at item 15 to complete item P9 in your Business and professional items schedule.

If you have completed a worksheet in error, make sure you delete the worksheet from the Existing worksheets list.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1580B
V1580B	Business loss activity details not completed

Refer to

•	item 15 – Deferred non-commercial business losses

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

Some of a business activity has been described at item P9 in your Business and professional items schedule but the details are incomplete. If you complete a deferred losses worksheet at item 15 you must complete all sections of the worksheet.

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and complete your answers for each worksheet completed at item 15. e-tax will use your answers at item 15 to complete item P9 in your Business and professional items schedule.

If you have completed a worksheet in error, make sure you delete the worksheet from the Existing worksheets list.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1580C
V1580C	Business loss activity details not completed

Refer to

•	item 15 – Deferred non-commercial business losses

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

Some of a business activity has been described at item P9 in your Business and professional items schedule but the details are incomplete. If you complete a deferred losses worksheet at item 15 you must complete all sections of the worksheet.

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and complete your answers for each worksheet completed at item 15. e-tax will use your answers at item 15 to complete item P9 in your Business and professional items schedule.

If you have completed a worksheet in error, make sure you delete the worksheet from the Existing worksheets list.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1581
V1581	Payment summary schedule required

Refer to item 8 – Attributed personal services income.

There is an amount of Attributed personal services income at label O item 8 on written to the tax return and no Payment summary schedule has been completed.

e-tax completes the Payment summary schedule using your answers at item 8. If you receive this error, please contact the Personal Tax Infoline.


V1582
V1582	Payment summary schedule required for PSI income

Refer to:

•	item 13 – Personal services income

•	item 14 – Net income or loss from business.

There is an amount of Tax withheld from personal services income at item 13 or there is an amount of personal services income at item P1 in your Business and professional items schedule and a Payment summary schedule has not been completed.

e-tax completes the Payment summary schedule using the answers at item 13 and item 14. If you receive this error, please contact the Personal Tax Infoline.


V1584
V1584	Only one Payment Summary schedule may be attached

e-tax automatically completes the Payment summary schedule using your answers at item 8, 13 and 14.If you receive this error, please contact the Personal Tax Infoline.


V1609A
V1609A	PSI tax withheld – voluntary agreement incorrect

Refer to item 13 – Personal services income.

There is an amount of Tax withheld from personal services income voluntary agreement at label G item 13 and a Payment summary schedule has been completed. The amount of tax withheld at label G item 13 does not equal the total amount withheld for all payments summaries of type P – Personal income and V – PSI voluntary agreement that have been written to the Payment summary schedule.

e-tax completes the Payment summary schedule using your answers at item 13.If you receive this error, please contact the Personal Tax Infoline.


V1609B
V1609B	PSI tax withheld where ABN not quoted is incorrect

Refer to item 13 – Personal services income.

There is an amount of Tax withheld where ABN not quoted at label H item 13 and a Payment summary schedule has been completed. The amount of tax withheld at label H item 13 does not equal the total amount withheld for all payments summaries of type P – Personal income and N – PSI where ABN not quoted that have been written to the Payment summary schedule.

e-tax completes the Payment summary schedule using your answers at item 13. If you receive this error, please contact the Personal Tax Infoline.


V1609C
V1609C	PSI tax withheld – labour hire and other specified payments is incorrect

Refer to item 13 – Personal services income.

There is an amount of Tax withheld labour hire and other specified payments at label J item 13 and a Payment summary schedule has been completed. The amount of tax withheld at label J item 13 does not equal the total amount withheld for all payments summaries of type P – Personal income and S – labour hire and other specified payments that have been written to the Payment summary schedule.

e-tax completes the Payment summary schedule using your answers at item 13. If you receive this error, please contact the Personal Tax Infoline.


V1611A
V1611A	PSI – voluntary agreement is incorrect

Refer to item 13 – Personal services income.

There is an amount of Personal services income voluntary agreement income at label G item P1 and a Payment summary schedule has been completed. The amount of income at label G item P1 does not equal the total income for all payments summaries of type P – Personal income and V – PSI voluntary agreement that have been written to the Payment summary schedule.

e-tax completes item P1 and the Payment summary schedule using your answers at item 13. If you receive this error, please contact the Personal Tax Infoline.


V1611B
V1611B	PSI where ABN not quoted is incorrect

Refer to item 13 – Personal services income.

There is an amount of PSI where ABN not quoted income at label H item P1 and a Payment summary schedule has been completed. The amount of income at label H item P1 does not equal the total amount of income for all payments summaries of type P – Personal income and N – PSI where ABN not quoted that have been written to the Payment summary schedule.

e-tax completes item P1 and the Payment summary schedule using your answers at item 13. If you receive this error, please contact the Personal Tax Infoline.


V1611C
V1611C	PSI – labour hire and other specified payments is incorrect

Refer to item 13 – Personal services income.

There is an amount of PSI – labour hire and other specified payments at label I item P1 and a Payment summary schedule has been completed. The amount of income at label I item P1 does not equal the total income for all payments summaries of type P – Personal income and S – labour hire and other specified payments that have been written to the Payment summary schedule.

e-tax completes item P1 and the Payment summary schedule using your answers at item 13. If you receive this error, please contact the Personal Tax Infoline.


V1612A
V1612A	Tax withheld from attributed personal services income is incorrect

Refer to item 8 – Attributed personal services income.

There is an amount of Tax withheld at item 8 and a Payment summary schedule has been completed. The amount of tax withheld at item 8 does not equal the total amount withheld for all payments summaries of type P – Personal income and A – attributed personal services income that have been written to the Payment summary schedule.

e-tax completes the Payment summary schedule using your answers at item 8. If you receive this error, please contact the Personal Tax Infoline.


V1612B
V1612B	Attributed personal services income is incorrect

Refer to item 8 – Attributed personal services income

There is an amount of Income at item 8 and a Payment summary schedule has been completed. The amount of income at item 8 does not equal the total amount of income for all payments summaries of type P – Personal income and A – attributed personal services income that have been written to the Payment summary schedule.

e-tax completes the Payment summary schedule using your answers at item 8. If you receive this error, please contact the Personal Tax Infoline.


V1615A
V1615A	Check spouse details for 30/06/2007

Refer to the Family tax benefit (FTB) on-line documentation.

e-tax has created a Family profile schedule for the period ended 30/06/2007. A Spouse details schedule has been created for this family profile and the answer to the question ‘Was this your spouse on 30/06/2007?’ does not equal ‘Yes’.

If you receive this error, please contact the Personal Tax Infoline.


V1615B
V1615B	Family profile spouse number not present for 30/06/2007

Refer to the Family tax benefit (FTB) on-line documentation.

e-tax has created a Family profile schedule for the period ended 30/06/2007. There is no Spouse details schedule for this family profile and at least one Spouse details schedule has been created with the answer to the question ‘Was this your spouse on 30/06/2007’ set to ‘Yes’.

If you receive this error, please contact the Personal Tax Infoline.


V1640A
V1640A	Assessable income from Activity 1 must be at least $20,000

Refer to item P9 – Business loss activity details.

For business activity 1:

•	the business type is ‘Sole trader’

•	the type of loss is set to 1 – Assessable income test

•	the status of the business indicates that you did not cease your main business during 2006-07 or commence a new business during 2006-07

AND

your assessable business income (net PP and NPP income plus total PP and NPP business expenses) is less than $20,000.

The assessable income from your business activities must be at least $20,000 in the income year for you to pass the assessable income test.

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and complete your answers to each interview screen for item 15. e-tax will use your answers at item 15 to complete item P9 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1640B
V1640B	Assessable income from Activity 2 must be at least $20,000

Refer to item P9 – Business loss activity details.

For business activity 2:

•	the business type is ‘Sole trader’

•	the type of loss is set to 1 – Assessable income test

•	the status of the business indicates that you did not cease your main business during 2006-07 or commence a new business during 2006-07

AND

your assessable business income (net PP and NPP income plus total PP and NPP business expenses) is less than $20,000.

The assessable income from your business activities must be at least $20,000 in the income year for you to pass the assessable income test.

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and complete your answers to each interview screen for item 15. e-tax will use your answers at item 15 to complete item P9 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1640C
V1640C	Assessable income from Activity 3 must be at least $20,000

Refer to item P9 – Business loss activity details.

For business activity 3:

•	the business type is ‘Sole trader’

•	the type of loss is set to 1 – Assessable income test

•	the status of the business indicates that you did not cease your main business during 2006-07 or commence a new business during 2006-07

AND

your assessable business income (net PP and NPP income plus total PP and NPP business expenses) is less than $20,000.

The assessable income from your business activities must be at least $20,000 in the income year for you to pass the assessable income test.

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and complete your answers to each interview screen for item 15. e-tax will use your answers at item 15 to complete item P9 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1640D
V1640D 	Assessable income from Activity 1 must be at least $20,000

Refer to item P9 – Business loss activity details

For business activity 1:

•	the business type is ‘Sole trader’

•	the type of loss is set to 1 – Assessable income test.

•	the status of the business indicates that you did not cease your main business during 2006-07 or commence a new business during 2006-07

AND

your assessable business income (net PP and NPP income plus total PP and NPP business expenses) is less than $20,000.

The assessable income from your business activities must be at least $20,000 in the income year for you to pass the assessable income test.

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

3.	Otherwise, check and complete your answers to each interview screen for item 15. e-tax will use your answers at item 15 to complete item P9 in your Business and professional items schedule.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1640E
V1640E 	Assessable income from Activity 2 must be at least $20,000

Refer to item P9 – Business loss activity details For business activity 2:

•	the business type is ‘Sole trader’

•	the type of loss is set to 1 – Assessable income test.

•	the status of the business indicates that you did not cease your main business during 2006-07 or commence a new business during 2006-07

AND

your assessable business income (net PP and NPP income plus total PP and NPP business expenses) is less than $20,000.

The assessable income from your business activities must be at least $20,000 in the income year for you to pass the assessable income test.

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	 If you click on No in response to the first question e-tax will delete all your previous   answers.

3.	Otherwise, check and complete your answers to each interview screen for item 15. e-tax will use your answers at item 15 to complete item P9 in your Business and professional items schedule.

4.	 Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1640F
V1640F 	Assessable income from Activity 3 must be at least $20,000

Refer to item P9 – Business loss activity details

For business activity 3:

•	the business type is ‘Sole trader’

•	the type of loss is set to 1 – Assessable income test.

•	the status of the business indicates that you did not cease your main business during 2006-07 or commence a new business during 2006-07

AND

your assessable business income (net PP and NPP income plus total PP and NPP business expenses) is less than $20,000.

The assessable income from your business activities must be at least $20,000 in the income year for you to pass the assessable income test.

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

3.	Otherwise, check and complete your answers to each interview screen for item 15. e-tax will use your answers at item 15 to complete item P9 in your Business and professional items schedule.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1641A
V1641A	Assessable income from other sources must be less than $40,000

Refer to item P9 – Business loss activity details

For business activity 1 the type of loss is set to 6 – Commissioner's discretion or 7 – Primary production business

AND

your assessable income from other sources (that is, Taxable income or loss plus Loss from activity 1 minus Net capital gain) is greater than $40,000.

Your assessable income from other sources must be less than $40,000 for the exception to apply.

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and complete your answers to each interview screen for item 15. e-tax will use your answers at item 15 to complete item P9 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1641B
V1641B	Assessable income from other sources must be less than $40,000

Refer to item P9 – Business loss activity details

For business activity 2 the type of loss is set to 6 – Arts business or 7 – Primary production business

AND

your assessable income from other sources (that is, Taxable income or loss plus Loss from activity 2 minus Net capital gain) is greater than $40,000.

Your assessable income from other sources must be less than $40,000 for the exception to apply.

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and complete your answers to each interview screen for item 15. e-tax will use your answers at item 15 to complete item P9 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1641C
V1641C	Assessable income from other sources must be less than $40,000

Refer to item P9 – Business loss activity details

For business activity 3 the type of loss is set to 6 – Arts business or 7 – Primary production business

AND

your assessable income from other sources (that is, Taxable income or loss plus Loss from activity 3 minus Net capital gain) is greater than $40,000.

Your assessable income from other sources must be less than $40,000 for the exception to apply.

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and complete your answers to each interview screen for item 15. e-tax will use your answers at item 15 to complete item P9 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1642A
V1642A	Passive investment losses – entity must be a partnership

Refer to item P9 – Business loss activity details

For business activity 1 the type of business is NOT partnership and the type of loss has been set to 0 – Passive investment partnership.

This type of loss only applies to a partnership.

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and complete your answers to each interview screen for item 15. e-tax will use your answers at item 15 to complete item P9 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1642B
V1642B	Passive investment losses – entity must be a partnership

Refer to item P9 Business loss activity details.

For business activity 2 the type of business is NOT partnership and the type of loss has been set to 0 – Passive investment partnership.

This type of loss only applies to a partnership.

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and complete your answers to each interview screen for item 15. e-tax will use your answers at item 15 to complete item P9 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1642C
V1642C	Passive investment losses – entity must be a partnership

Refer to item P9 – Business loss activity details.

For business activity 3 the type of business is NOT partnership and the type of loss has been set to 0 – Passive investment partnership.

This type of loss only applies to a partnership.

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and complete your answers to each interview screen for item 15. e-tax will use your answers at item 15 to complete item P9 in your Business and professional items schedule.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1658A
V1658A	Capital allowances schedule required where depreciation expenses exceeds $15,000

Refer to Capital allowances schedule 2007 (NAT 4089-6.2007).

You have not elected to enter, and is not continuing in, the Simplified Tax System
AND
there is an amount greater than $15,000 at Depreciation expenses at item P8
AND
no Capital allowances schedule 2007 has been completed.


V1658C
V1658C	Capital allowances schedule required

Refer to Capital allowances schedule 2007 (NAT 4089-6.2007).

You have not elected to enter, and is not continuing in, the Simplified Tax System
AND
there is an amount greater than $75,000 at either item P15 Intangible assets first deducted or item P16 Other depreciating assets first deducted
AND
no Capital allowances schedule 2007 has been completed.


V1658D
V1658D	Capital allowances schedule required

Refer to Capital allowances schedule 2007 (NAT 4089-6.2007). You have not elected to enter, and is not continuing in, the Simplified Tax System
AND
there is an amount greater than $1,000 at Business deduction for project pool in the reconciliation section of item P8
AND
no Capital allowances schedule 2007 has been completed.


V1658E
V1658E	Capital allowances schedule not required

Refer to Capital allowances schedule 2007 (NAT 4089-6.2007). You have elected to enter, or are continuing in, the Simplified Tax System
AND
a Capital allowances schedule 2007 has been completed.


V1662
V1662	Check maintenance action date

Refer to the Family tax benefit (FTB) on-line documentation

A Dependant details schedule has been created and the Date maintenance action was taken is before the Date entitled to apply or claim for child maintenance.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Dependants details section.

2.	The Dependant details screen will be displayed. The Existing worksheets navigator will list the worksheet(s) you have completed. Click on the entry in the navigator list to open a worksheet.

3.	Check and correct the information entered in each worksheet.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1663
V1663	Check dependant date of birth

Refer to the Family tax benefit (FTB) on-line documentation

A Dependant details schedule has been created and the dependant's Date of birth is the same as either your date of birth or a spouse's date of birth.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Dependants' details section.

2.	The Dependant details screen will be displayed. The Existing worksheets navigator will list the worksheet(s) you have completed. Click on the entry in the navigator list to open a worksheet.

3.	Check and correct the information entered in each worksheet.

4.	If necessary, use the FTB Navigator to move to the Spouses' details section. Check and correct the information entered in each Spouse details worksheet.

5.	If necessary, use the e-tax navigator to move to the Personal details section. Check and correct your date of birth.

6.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1659B
V1659B 	Capital Allowances schedule required where depreciating assets first deducted exceeds $75000

Refer to Capital allowances schedule 2007 (NAT 4089-6.2007).

You have not elected to enter, and are not continuing in, the Simplified Tax System

AND

there is an amount greater than $75,000 at either item P15 Intangible assets first deducted or item P16 Other depreciating assets first deducted

AND

no Capital allowances schedule 2007 has been completed.

If you receive this error, please contact the Personal Tax Infoline.


V1661
V1661	Prior year FTB claim cannot be made in the current processing year

A 2006 tax return has been lodged after 30/6/2007 and a Family tax benefit (FTB) claim is attached.

Prior year FTB claims cannot be lodged.

If you receive this error, please contact the Personal Tax Infoline.


V1664
V1664	Check spouse year of birth

Refer to the Family tax benefit (FTB) on-line documentation.

A Spouse details schedule has been created and an exemption from providing the spouse's tax file number has been requested. The spouse's date of birth entered on the schedule is after 1/7/2007.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Spouses' details section.

2.	The Spouse details screen will be displayed. The Existing worksheets navigator will list the worksheet(s) you have completed. Click on the entry in the navigator list to open a worksheet.

3.	Check and correct the information entered in each worksheet.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1665A
V1665A	Check spouse TFN

Refer to the Family tax benefit (FTB) on-line documentation

A Spouse details schedule has been created and the spouse's tax file number is the same as your tax file number.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Spouses' details section.

2.	The Spouse details screen will be displayed. The Existing worksheets navigator will list the worksheet(s) you have completed. Click on the entry in the navigator list to open a worksheet.

3.	Check and correct the information entered in each worksheet.

4.	If necessary, use the e-tax navigator to move to the Personal details section. Check and correct your date of birth.

5.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1665B
V1665B	Check spouse TFN

Refer to the Family tax benefit (FTB) on-line documentation

More than one Spouse details schedule has been created and the spouse's tax file number is the same as another occurrence of a spouse's tax file number.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Spouses' details section.

2.	The Spouse details screen will be displayed. The Existing worksheets navigator will list the worksheet(s) you have completed. Click on the entry in the navigator list to open a worksheet.

3.	Check and correct the information entered in each worksheet.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1673A
V1673A	Net PP income/loss incorrect

Refer to item 14 – Net income or loss from business .

The primary production item P8 Net income or loss from business this year less item P8 Deferred non-commercial business losses from the prior year does not equal item 14 Net income or loss from business.

This is an e-tax calculation. If you receive this error, please contact the Personal Tax Infoline.


V1673B
V1673B	Net non-PP income/loss incorrect

Refer to item 14 - Net income or loss from business

The non-primary production item P8 Net income or loss from business this year less item P8 Deferred non-commercial business losses from the prior year does not equal item 14 Net income or loss from business.

This is an e-tax calculation. If you receive this error, please contact the Personal Tax Infoline.


V1674
V1674	Spouse details required

Refer to item T2 - Senior Australians

A Veteran code letter of W – your spouse is a veteran or X – you and your spouse are both veterans has been entered and one of the following amounts has not been entered in the Spouse details – married or de facto worksheet:

•	spouse's 2006-07 taxable income, or

•	amount of any Australian Government pensions or allowances the spouse received in 2006-07, or

•	the amount of any exempt pension income that the spouse received.

How to correct this error

1.	Click on the Next button. e-tax will move to item T2.

2.	Check your answers in each interview screen for item T2 and correct as necessary. If any of the amounts listed above are zero, you must enter ‘0’.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1677
V1677	Check spouse date of death

Refer to the Family tax benefit (FTB) on-line documentation.

A Spouse details schedule has been created and the spouse's date of death is not during the claim year – that is, it is before 1/7/2006 or after 30/6/2007.

The spouse's date of death must fall within the claim year.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item. Use the FTB Navigator to move to the Spouses' details section.

2.	The Spouse details screen will be displayed. The Existing worksheets navigator will list the worksheet(s) you have completed. Click on the entry in the navigator list to open a worksheet.

3.	Check and correct the information entered in each worksheet.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1678A
V1678A	STS depreciating assets not allowed unless entering or continuing in STS

Refer to item 14 - Net income or loss from business

You have not elected to enter, and are not continuing in, the Simplified Tax System (STS)
AND
there is an amount greater than zero entered in at least one of the labels at item P10 STS depreciation.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 14. e-tax will use your answers at item 14 to complete item P10 in your Business and professional items schedule 2007.

3.	If necessary, use the e-tax navigator to move to the Personal details section. Check and correct your answers in the Simplified tax system worksheet.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1678B
V1678B	STS depreciating assets not allowed

Refer to item 14 – Net income or loss from business

You have indicated that you are eligible but choosing to leave, or no longer eligible to be in, the Simplified Tax System (STS)
AND
there is an amount greater than zero entered in at least one of the labels at item P10 STS depreciation.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 14. e-tax will use your answers at item 14 to complete item P10 in your Business and professional items schedule 2007.

3.	If necessary, use the e-tax navigator to move to the Personal details section. Check and correct your answers in the Simplified tax system worksheet.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1687
V1687	Check action code

Refer to item 12 – Partnerships and trusts.

There is no amount greater than zero at Other deductions relating to a primary production distribution and a corresponding Deferred non-commercial loss code has been written to the return.

When other deductions relating to a primary production and non-primary production distribution are written to the tax return, e-tax will write the appropriate Deferred non-commercial loss code to the right of the label:

•	D – All of the amount consists of prior year deferred non-commercial losses;

•	P – Part of the amount consists of prior year deferred non-commercial losses.

•	If the amount at label X Other deductions relating to a primary production distribution or Y Other deductions relating to a non-primary production distribution does not consist of prior year deferred non-commercial losses the code box is left blank.

How to correct this error

1.	Click on the Next button. e-tax will move to item 12.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 12. e-tax will use your answers at item 12 to complete the deferred non-commercial loss code.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1688
V1688	Check action code

Refer to item 12 – Partnerships and trusts.

There is no amount greater than zero at Other deductions relating to a non-primary production distribution and a corresponding Deferred non-commercial loss code has been written to the return.

When other deductions relating to a primary production and non-primary production distribution are written to the tax return, e-tax will write the appropriate Deferred non-commercial loss code to the right of the label:

•	D – All of the amount consists of prior year deferred non-commercial losses;

•	P – Part of the amount consists of prior year deferred non-commercial losses.

•	If the amount at label X Other deductions relating to a primary production distribution or Y Other deductions relating to a non-primary production distribution does not consist of prior year deferred non-commercial losses the code box is left blank.

How to correct this error

1.	Click on the Next button. e-tax will move to item 12.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, check and correct your answers for each screen at item 12. e-tax will use your answers at item 12 to complete the deferred non-commercial loss code.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1690
V1690	Check attributed personal services tax withheld

Refer to item 8 – Attributed personal services income.

There is an amount greater than zero of Tax withheld and there is no amount of Gross payment entered.

How to correct this error

1.	Click on the Next button. e-tax will move to item 8.

2.	Check and correct your answers for each screen at item 8.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1691
V1691	Net personal services income (PSI) or Gross payments subject to FRW required

Refer to item 13 – Personal services income

There is a ‘Yes’ response to the question ‘Did you receive 80% or more of their PSI from one source?’ and there is no amount of Net PSI or Gross payments subject to FRW written to item 13 on the return.

How to correct this error

1.	Click on the Next button. e-tax will move to item 13.

2.	Check and correct your answers for each screen at item 13. If you answer ‘Yes’ to the question above, you must provide details of your PSI.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1699A
V1699A	Check claim year taxable income

Refer to Base year and taxable income.

A Baby bonus claim has been completed and
the Claim year taxable income is blank.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Enter the claim year taxable income. If the taxable income is nil or a loss, you must enter ‘0’.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1699B
V1699B	Check claim year taxable income

Refer to Base year and taxable income.

A Baby bonus claim has been completed and
you have taxable income and the Claim year taxable income is not equal to your taxable income
OR
your taxable income is nil or a loss and the Claim year taxable income is not equal to ‘0’.

The claim year taxable income must be the same as that shown in your tax return. If you alter your taxable income, you must re-visit the baby bonus claim so that e-tax can write the correct information to the schedule.


V1700
V1700	Check child's given names

Refer to Are you eligible for the baby bonus?.

A Baby bonus claim has been completed and the eligible child's given name is blank and the child's other given names has been completed.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Enter the names in the correct boxes. If you enter other given names, you must also enter the child's given name.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1701
V1701	Check child's date of birth

Refer to Are you eligible for the baby bonus?.

A Baby bonus claim has been completed and the child's date of birth is after 30/6/2004.

The baby must be born before the end of the income in which the claim is being made.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Enter the correct date of birth.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1702
V1702	Check child's date of birth

Refer to Are you eligible for the baby bonus?.

A Baby bonus claim has been completed and the child's date of birth is equal to the taxpayer's date of birth or the spouse's date of birth.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Check and correct the date of birth you have entered in your personal details interview screen, the spouse details screen (only if your spouse is transferring their eligibility to you) and the eligible child's details screen.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1703A
V1703A	Check child's date of birth

Refer to Are you eligible for the baby bonus?.

A Baby bonus claim has been completed and the child's date of birth is:

•	greater than the date you became legally responsible for the child or

•	before 1/7/2001.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Enter the correct date of birth.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1703B
V1703B	Check child's date of birth

Refer to Are you eligible for the baby bonus?.

A Baby bonus claim has been completed and the Date you became legally responsible for the child has not been entered and the child's date of birth is before 1/7/2001.

To be eligible for the baby bonus you (or your spouse if they are transferring eligibility to you) must have had a baby or became legally responsible for a child – for example, through adoption after 30 June 2001.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Enter the correct date of birth or enter the day you became legally responsible for the child.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1704
V1704	Check legally responsible date

Refer to Are you eligible for the baby bonus?.

A Baby bonus claim has been completed and the date you/your spouse became legally responsible for the child is before 1/7/2001, or after 30/6/2004.

The date you (or your spouse if they are transferring their eligibility to you) became legally responsible must be after 30 June 2001 and before 1 July 2004.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Enter the correct legally responsible date.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1706
V1706	Spouse's family name and first name must be present

Refer to Does your spouse want to transfer their eligibility for the baby bonus to you?.

Your spouse is transferring their eligibility for the tax offset to you
AND
either the spouse's family name or first name has been completed but not both.

If the spouse only has one name you should enter this name in both the Surname or family name and Given names boxes in the e-tax interview screen.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Enter your spouse's name details correctly.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1707
V1707	Check base year

Refer to Base year and base year income.

Your spouse is transferring their eligibility for the tax offset to you
AND
the base year is less than ‘2001’ or greater than ‘2006’.

For a transferee the base year is the year prior to the year in which the entitlement was first transferred.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Check and correct your answers.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1708
V1708	Check spouse date of birth

Refer to Does your spouse want to transfer their eligibility for the baby bonus to you?.

Your spouse is transferring their eligibility for the tax offset to you
AND
the spouse's date of birth is after today's date.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Check and correct your answers. If the date of birth is correct, you may need to check and correct your computer system's date.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1709
V1709	Check transfer details

Refer to Does your spouse want to transfer their eligibility for the baby bonus to you?.

Your spouse is transferring their eligibility for the baby bonus to you
AND
at least one of the spouse's family name, first name or date of birth has been completed but not all fields have been completed.

If your spouse is transferring their eligibility, all fields must be completed. If the spouse only has one name you should enter this name in both the Surname or family name and Given names boxes in the e-tax interview screen.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Check and correct your answers.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1710
V1710	Check residency status

Refer to Are you eligible for the baby bonus?.

A Baby bonus claim has been completed and your spouse is not transferring their eligibility for the baby bonus to you
AND
you are not a resident of Australia and at item A2 the number of months the taxpayer is eligible for the part-year tax-free threshold has not been completed indicating you have not been a resident for the whole of the income year.

If your spouse is transferring their eligibility, you can be a non-resident. Otherwise you must be an Australian resident to claim the baby bonus.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Check and correct your answers. If necessary, check and correct your residency status in the personal details section of the e-tax interview.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1711
V1711	Check ‘Number of Days’ is greater than ‘0’

Refer to Variation to claim period.

A Baby bonus schedule has been completed and the Number of days the claim period has been varied to is ‘0’.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Check and correct your answers. If the claim period is not being varied, you must enter the number of days in the claim period that e-tax displays on the screen. For example, if e-tax displays 365 for the number of days in the claim period and the claim period is not being varied you must enter 365 in the box provided – not ‘0’.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1724
V1724	Check ‘Number of Days’ is greater than ‘0’

Refer to item T7 – Ongoing baby bonus claim.

The Number of eligible days for an ongoing baby bonus claim is ‘0’.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Check and correct your answers. If you are not making an ongoing baby bonus claim this label should be left blank.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1725
V1725	Baby Bonus Schedule cannot be attached

Refer to item T7 – Ongoing baby bonus claim.

The Number of eligible days for an ongoing baby bonus claim has been completed and a Baby bonus schedule is attached to the return.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Check and correct your answers at item T7. If you are making an ongoing baby bonus claim, e-tax will not attach a Baby bonus schedule to your tax return.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1726
V1726	Bereavement Code present.  ‘Number of days’ required

Refer to item T7 – Ongoing baby bonus claim.

The Number of eligible days for an ongoing baby bonus claim is blank and the Bereavement code has been completed.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Check and correct your answers. If the bereavement code is completed you must enter the number of eligible days. Otherwise, clear both labels.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1731
V1731	‘Number of Days’ present, Residency Indicator has ‘N’ and A2, Label N is absent

Refer to item T7 – Ongoing baby bonus claim.

The Number of eligible days for an ongoing baby bonus claim has been completed
AND
in the Personal details section of the interview, your Residency status has been set to Non-resident and at item A2 Part-year tax-free threshold, the number of months you have been eligible for the tax-free threshold is blank indicating you have not been a resident during the income year.

You must be an Australian resident for the period you are claiming the baby bonus.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Check and correct your answers in the Personal details section, item T7 and item A2.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1769A
V1769A	STS election label G missing

Refer to item S1 – Simplified Tax System (STS) election.

There is a response to either ‘Are you electing to enter the STS?’ or ‘Are you continuing in the STS?’ and there is no response to ‘Are you eligible for the Simplified Tax System (STS)?’

e-tax will not allow you to close the STS worksheet unless you answer the eligibility question. If you receive this error, please contact the Personal Tax Infoline.


V1769B
V1769B	Both Entering or Continuing and Exiting STS election columns present

Refer to item S1 – Simplified Tax System (STS) election.

There is a response to at least one of the questions indicating the taxpayer is entering or continuing in the STS:

‘Are you eligible for the Simplified Tax System (STS)?’,

‘Are you electing to enter the STS?’,

‘Are you continuing in the STS?’, or

‘Is your business grouped with another business?’

AND
there is a response to at least one of the questions indicating the taxpayer is exiting the STS:

‘Eligible but choosing to leave?’

‘No longer eligible?’.

e-tax will not allow you to close the STS worksheet unless you answer the eligibility question. If you receive this error, please contact the Personal Tax Infoline.


V1769C
V1769C	Both electing to enter the STS and continuing in the STS present

Refer to item S1 – Simplified Tax System (STS) election.

There is a response to both the questions:

‘Are you electing to enter the STS?’, and

‘Are you continuing in the STS?’.

If there is a response to one of these questions, the other must be left blank.

e-tax will not allow you to close the STS worksheet unless you answer the eligibility question. If you receive this error, please contact the Personal Tax Infoline.


V1769D
V1769D	Both exiting the STS and no longer eligible for the STS present

Refer to item S1 – Simplified Tax System (STS) election.

There is a response to both the questions:

‘Eligible but choosing to leave?’, and

‘No longer eligible?’

If there is a response to one of these questions, the other must be left blank.

e-tax will not allow you to close the STS worksheet unless you answer the eligibility question. If you receive this error, please contact the Personal Tax Infoline.


V1775
V1775 	Lump sum payments indicator must be present

Refer to item 3 – Lump sum payments.

An amount greater than zero has been entered in the Lump sum payment column and no Lump sum payment code has been entered.

If an amount of lump sum payments is entered, you must enter the code to describe the lump sum payment.

If you receive this error, please contact the Personal Tax Infoline.


V1776
V1776	Total amount of Lump sum payments must be greater than zero

Refer to item 3 – Lump sum payments.

No amount has been entered in the Lump sum payment column and a Lump sum payment code has been entered.

If no amount of lump sum payments is entered, you should delete any code that has been entered.

If you receive this error, please contact the Personal Tax Infoline.


V1802
V1802	Net Personal Services Income (PSI) must equal PSI income less deductions

Refer to item P1 – Personal services income (PSI).

The sum of PSI entered at item P1 less any allowable deductions entered at item P1 does not equal the net PSI entered at Item 13.

e-tax uses the information entered in the personal services income interview to complete both items P1 and 13.

If you receive this error, please contact the Personal Tax Infoline.


V1836A
V1836A	ETP payment date is not within the current year

Refer to item 4 – Eligible Termination Payments.

An ETP worksheet has been completed and the ETP payment date is not within the current income year.

If an ETP worksheet is attached to a return, the payment date must be within the current income year.

How to correct this error

1.	Click on the Next button. e-tax will move to item 4.

2.	Click on the Yes button. e-tax will open a blank ETP worksheet.

3.	Use the Existing worksheets navigator to gain access to each worksheet you have completed.

4.	Correct the worksheet in error. (If you want to delete an ETP worksheet, click on the worksheet in the Existing worksheets list and then click on the Delete button.)

5.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1891
V1891	Previous child's bereavement date is not within permitted range

Refer to Eligible child details.

The Previous Child’s Bereavement Date has been completed
AND
the Previous Child’s Bereavement Date is before 1 July 2001 or after 30 June 2006.

If your previous eligible child died before 1 July 2005 and before their fifth birthday, and you have not already advised the Tax Office of this, the Previous Child’s Bereavement Date must be within range of 1 July 2001 and 30 June 2006

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Check and correct your answer. If the date of birth is correct, you may need to check and correct your computer system's date.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1892
V1892	Spouse's base year not within permitted range

Refer to Base year and taxable income.

Your spouse is transferring their eligibility for the tax offset to you
AND
the Spouse’s base year is less than ‘2001’ or greater than ‘2004’.

If your spouse is transferring their eligibility, Spouse’s base year must be completed and must be within range of 2001 and 2004.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Check and correct your answers.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1893
V1893	Spouse's base year complete and spouse transfer of eligibility in base year is not

Refer to Baby bonus transfer – from your spouse to you.

Your spouse is transferring their eligibility for the tax offset to you
AND
the Spouse's Base Year has been completed
AND
Spouse Transfer of Eligibility in Base Year has not been completed.

Check Spouse Transfer of Eligibility in Base Year.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Check and correct your answers.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1894
V1894	Did you receive any PSI answer required

Refer to item 14 - Net income or loss from business If you complete item P8 of the Business and Professional Items schedule with any of the items Primary Production expenses, Non-Primary Production expenses, Net Primary Production income or loss or Net Non-Primary production income or loss, an answer to the question "Did you receive any personal services income?" is required.

e-tax will complete the answer to this question automatically

If you receive this error, please contact the Personal Tax Infoline.


V1895
V1895	Did you satisfy the results test answer required

Refer to Item 13 – Personal Services Income.

You have indicated that you are in receipt of Personal Services Income (PSI), but have not completed an answer to the question ‘Did you satisfy the results test?’

How to correct this error

1.	Click on the Next button. e-tax will move to item 13.

2.	If you are not in receipt of PSI, click the No button. e-tax will correct your answer and move to the next section.

3.	If you are in receipt of PSI, click the Yes button and then the Next button.

4.	Proceed to answer all of the questions that e-tax presents to you in item 13 until you complete the question.


V1896
V1896	Check PP and Non-PP income distribution amounts

Refer to item 12 – Partnerships and Trusts .

Share of credit for amounts withheld from foreign resident withholding is greater than zero at Item 12 without any distribution amount from trusts and partnerships (PP or non-PP) (Item 12 Labels N, L, O, U).

How to correct this error

1.	Click on the Next button. e-tax will move to item 12.

2.	Check and correct your answers by stepping through each interview screen. e-tax will use your answers to correct your return.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1897
V1897	Foreign resident withholding amount required

Refer to item 14 – Net income or loss from business

Amounts have been entered for Gross payments subject to foreign resident withholding (Item P8 Label A, B) and foreign resident withholding amount (Item 14 Label E) is missing.

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	Check and correct your answers by stepping through each interview screen. e-tax will use your answers to correct your return.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1898
V1898	Tax withheld foreign resident withholding incorrect

Refer to item 14 – Net income or loss from business

Amounts have been entered for foreign resident withholding amount (Item 14 Label E) is greater than 50% of Gross payments subject to foreign resident withholding (Item P8 Labels A and B).

How to correct this error

1.	Click on the Next button. e-tax will move to item 14.

2.	Check and correct your answers by stepping through each interview screen. e-tax will use your answers to correct your return.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1899A
V1899A	Depreciation expenses incorrect. Check and correct

Refer to item 14 – Net income or loss from business

Total of the STS Depreciating assets is greater than the amount entered at the Depreciation expenses and/or the other deductions against PSI.

If you receive this error, please contact the Personal Tax Infoline.


V1900A – Capital allowances schedule not required
V1900A	Capital allowances schedule not required

If Depreciation expenses is greater than zero and Depreciation expenses action code is equal to ‘S’ and Intangible depreciating assets first deducted and Other depreciating assets first deducted is less than or equal to $75,000 and Deduction for project pool is less than or equal to $1,000 and Deduction for decline in value of depreciating assets is less than or equal to $15,000 then a capital allowances schedule not required. Check and correct..

If you receive this error, please contact the Personal Tax Infoline.


V1900B – Capital allowances schedule not required
V1900B	Capital allowances schedule not required

If Depreciation expenses is greater than zero and Depreciation expenses action code is equal to ‘S’ and Intangible depreciating assets first deducted and Other depreciating assets first deducted is less than or equal to $75,000 and Deduction for project pool is less than or equal to $1,000 then a capital allowances schedule not required. Check and correct.

If you receive this error, please contact the Personal Tax Infoline.


V1900C
V1900C	Capital allowances schedule not required

Refer to item 14 – Net income or loss from business

 If Depreciation expenses is greater than zero and Depreciation expenses action code is equal to ‘S’ and Intangible depreciating assets first deducted or Other depreciating assets first deducted is less than or equal to $75,000 and Deduction for project pool is less than or equal to $1,000 and Low value pool deduction is less than or equal to $15,000 then a capital allowances schedule not required. Check and correct. e-tax will do this automatically.

If you receive this error, please contact the Personal Tax Infoline.


V1901
V1901	Senior Australians tax offset must be present

Refer to item T2 – senior Australians

A senior Australians veteran code is present and the senior Australians offset code is missing. You have not completed this item in full.

How to correct this error

1.	Click on the Next button. e-tax will move to item T2.

2.	Check your answers by stepping through each interview screen. e-tax will use your answers to set the correct offset code in your return.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1902
V1902	Senior Australians or Pensioner tax offset code required

Refer to item T2 - senior Australians and/or item T3 – Pensioner

You have included income at item 6 – Australian Government Pensions and Allowances, so you may be entitled to one of the above offsets. e-tax requires you to answer either item T2 or item T3 to determine your eligibility.

How to correct this error

1.	Click on the Next button.

2.	If you may be entitled to the senior Australians tax offset, e-tax will take you to screen number 5301. If you believe you are entitled to this offset, or you are unsure, click on Yes and proceed through the e-tax interview for item T2. If e-tax determines that you are not entitled to this offset, you should complete item T3. If you know that you are not entitled to this offset, click on No and complete item T3.

3.	If you are not old enough to qualify for the senior Australians tax offset, e-tax will take you to screen 5302 in item T3. Click on the Next button and proceed through the e-tax interview to complete item T3.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1903
V1903	Total amount of Australian Government pensions and allowances (Item 6 Label B) must be present

A Pensioner Tax Offset code cannot be entered into e-tax unless you receive income from an Australian Government Pension or Allowance, which should be shown at item 6.

If you believe that you are entitled to this offset, make sure that you have entered your income at item 6, and then complete item T3 – Pensioner Tax Offset.

If you receive this error, please contact the Personal Tax Infoline.


V1940
V1940	Depreciation expenses are not present

Refer to item 14 - Net income or loss from business

Depreciation expenses code box has been completed and the Depreciation expenses are not present.

If you receive this error, please contact the Personal Tax Infoline.


V1941	Depreciation expenses code should only be completed if exiting or previously exited STS

Refer to STS election

Depreciation expenses code box cannot be completed unless you are exiting or have previously exited the STS.

How to correct this error

1.	Click on the Next button. e-tax will move to the Simplified Tax System election.

2.	Check and correct your answers by stepping through each interview screen. e-tax will use your answers to correct your return.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1965
V1965	Check residency status or age

If there is any amount at Item T13, Label M, then the claimant must be 55, and over and an Australian resident.

If you receive this error, please contact the Personal Tax Infoline.


V1966A
V1966A	Check net income from working amounts

Refer to item T13 – Net income from working – supplementary section .

Net income from working – supplementary section item T13 label M is greater than zero without any net income from working amounts at Items 12N, 12I, 12X, 12O, 12J, 12Y, 13A, 14B, 14C, 15I&J, 19L, 22V and D15J.

If you receive this error, please contact the Personal Tax Infoline.


V1966B
V1966B	Check net income from working amounts

Refer to item T13 – Net income from working – supplementary section

Net income from working – one or more supplementary income labels 12X, 12Y, 19L, 22V and D15J have been completed.

If you receive this error, please contact the Personal Tax Infoline.


V1967A
V1967A	Losses claimed cannot be greater than the subtotal

Refer to item L1 – Tax losses of earlier income years

Losses claimed at Item L1 cannot be greater than the subtotal.

If you receive this error, please contact the Personal Tax Infoline.


V1967B
V1967B	Losses claimed must equal to zero

Refer to item L1 – Tax losses of earlier income years

Losses claimed at Item L1 must equal to zero.

If you receive this error, please contact the Personal Tax Infoline.


V1968A
V1968A 	PP losses claimed this income year amount cannot be greater than PP losses carried forward from earlier income years amount

Refer to item L1 – Tax losses of earlier income years

PP losses claimed this income year amount cannot be greater than PP losses carried forward from earlier income years amount

If you receive this error, please contact the Personal Tax Infoline.


V1968B
V1968B 	Non-PP losses claimed this income year amount cannot be greater than non-PP losses carried forward from earlier income years amount

Refer to item L1 – Tax losses of earlier income years

Non-PP losses claimed this income year amount cannot be greater than non-PP losses carried forward from earlier income year’s amount

If you receive this error, please contact the Personal Tax Infoline.


V1972
V1972	Net supplementary income from working must equal net income from working – supplementary section

Refer to item T13 – Net income from working – supplementary section .

If net supplementary income from working labels 12Y, 12X, 19L, 22V and D15  are not greater than zero then net income from working – supplementary section item T13 label M must be equal to the sum of net supplementary income from working labels 12N, 12I, 12O, 12J, 13A, 14B, 14C and 15I &J and 16E.

If you receive this error, please contact the Personal Tax Infoline.


V1983A – Activity 1 – Reference code and/or number are required
V1983A	Activity 1 – Reference code and/or number are required

Refer to item 15 – Deferred non-commercial business losses.

Reference code 5 and /or business loss activity number are required.

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	Check your answers by stepping through each interview screen.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1983B – Activity 1 – Invalid or missing reference for loss type 5 code
V1983B	Activity 1 – Invalid or missing reference for loss type 5 code

Refer to item 15 – Deferred non-commercial business losses.

If Business loss activity 1 – Reference code 5 and /or business loss activity 1 – number are present then the label ‘Type of loss’ must equal ‘5’.

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	Check your answers by stepping through each interview screen.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1984A – Activity 2 – Reference code and/or number are required
V1984A	Activity 2 – Reference code and/or number are required

Refer to item 15 – Deferred non-commercial business losses.

If label ‘Type of loss’ equals ‘5’ then labels Business loss activity 2 – Reference code 5 and /or Business loss activity 2 – number are required.

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	Check your answers by stepping through each interview screen.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1984B – Activity 2 – Invalid or missing Type of loss code
V1984B	Activity 2 – Invalid or missing Type of loss code

Refer to item 15 – Deferred non-commercial business losses.

If Business loss activity 2 – Reference code 5 and /or business loss activity 2 – number are present then the label "Type of loss" must equal "5".

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	Check your answers by stepping through each interview screen.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1985A – Activity 3 – Reference code and/or number are required
 V1985A	Activity 3 – Reference code and/or number are required

Refer to item 15 – Deferred non-commercial business losses.

If label ‘Type of loss’ equals ‘5’ then labels Business loss activity 3 – Reference code 5 and /or Business loss activity 3 – number are required.

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	Check your answers by stepping through each interview screen.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1985B
V1985B	Activity 3 – Invalid or missing Type of loss code

Refer to item 15 – Deferred non-commercial business losses.

If Business loss activity 3 – Reference code 5 and /or business loss activity 3 – number are present then the label "Type of loss" must equal "5".

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	Check your answers by stepping through each interview screen.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1986A
V1986A	Activity 1 – Reference for code 5 – number exceeds the range, 1 to 200000

Refer to item 15 – Deferred non-commercial business losses.

Activity 1 – reference for code 5 is ‘AN’ and private ruling number exceeds 200000.  The range for private ruling number is 1 to 200000.

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	Check your answers by stepping through each interview screen.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1986B
V1986B	Activity 2 – Reference for code 5 – number exceeds the range, 1 to 200000

Refer to item 15 – Deferred non-commercial business losses.

Activity 2 – reference for code 5 is ‘AN’ and private ruling number exceeds 200000.  The range for private ruling number is 1 to 200000.

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	Check your answers by stepping through each interview screen.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1986C
V1986C	Activity 3 – Reference for code 5 – number exceeds the range, 1 to 200000

Refer to item 15 – Deferred non-commercial business losses.

Activity 3 – reference for code 5 is ‘AN’ and private ruling number exceeds 200000.  The range for private ruling number is 1 to 200000.

How to correct this error

1.	Click on the Next button. e-tax will move to item 15.

2.	Check your answers by stepping through each interview screen.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1988
V1988	STS group turnover exceeds the eligibility threshold

Refer to item T14 – Entrepreneurs Tax Offset.

To be eligible for an entrepreneurs tax offset, the simplified tax system group turnover relating to a source of net simplified income must be less than $75,000.

How to correct this error

1.	Click on the Next button. e-tax will move to item T14.

2.	Check and correct your answers by stepping through each interview screen. e-tax will use your answers to correct your return.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1989
V1989	STS group turnover amount is missing or incorrect

Refer to item T14 – Entrepreneurs Tax Offset.

If Net simplified tax system income label is greater than zero, then the simplified tax system group turnover label imust be greater than zero.  If the entity is ungrouped, the STS group turnover is equal to the entity's STS annual turnover .

How to correct this error

1.	Click on the Next button. e-tax will move to item T14.

2.	Check and correct your answers by stepping through each interview screen. e-tax will use your answers to correct your return.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1990
V1990	STS income amount is missing or incorrect

Refer to item T14 – Entrepreneurs Tax Offset.

If Simplified tax system group turnover label amount is present, then the simplified tax system income label amount must be greater than zero.

How to correct this error

1.	Click on the Next button. e-tax will move to item T14.

2.	Check and correct your answers by stepping through each interview screen. e-tax will use your answers to correct your return.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1991
V1991	Electing into STS or continuing in STS label is missing

Refer to STS election.

When net STS income is greater than zero and action code equals ‘S’ to indicate sole trader the taxpayer must indicate if they are electing into or continuing in the STS.

How to correct this error

1.	Click on the Next button. e-tax will move to the Simplified Tax System election.

2.	Check and correct your answers by stepping through each interview screen. e-tax will use your answers to correct your return.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1992
V1992	Net STS income action code is missing

Refer to item T14 – Entrepreneurs Tax Offset.

If the net simplified tax system income is greater than zero then the action code is required at the net simplified tax system income action code label.

How to correct this error

1.	Click on the Next button. e-tax will move to item T14.

2.	Check and correct your answers by stepping through each interview screen. e-tax will use your answers to correct your return.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1993
V1993	Net STS income amount is missing or incorrect

Refer to item T14 – Entrepreneurs Tax Offset.

If the net simplified tax system action code is present then an amount greater then zero is required to be entered at the net simplified tax system income label.

How to correct this error

1.	Click on the Next button. e-tax will move to item T14.

2.	Check and correct your answers by stepping through each interview screen. e-tax will use your answers to correct your return.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1994
V1994	Only one claim as Sole Trader allowed

Refer to item T14 – Entrepreneurs Tax Offset.

Multiple activities as a sole trader are considered collectively to determine eligibility for an entrepreneurs tax offset.

How to correct this error

1.	1. Click on the Next button. e-tax will move to item T14.

2.	Check and correct your answers by stepping through each interview screen. e-tax will use your answers to correct your return.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1996
V1996	Net STS income present and Net PSI and business income are missing

Refer to item 14 - Net income or loss from business

If net STS income is greater than zero and action code equals ‘S’ indication sole trading, then net personal services income or net income or loss from business are required.

How to correct this error

1.	Click on the Next button. e-tax will move to item T14.

2.	Click on Income – Item 14 Net income or loss from business in the navigator.

3.	Check and correct your answers by stepping through each interview screen. e-tax will use your answers to correct your return.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1997
V1997	Net STS income present and distribution income is missing

Refer to item 12 – Partnerships and Trusts.

If net STS income is greater than zero and action code equals ‘P’ indicating Partnership, then distributions from partnerships are required.

How to correct this error

1.	Click on the Next button. e-tax will move to item T14.

2.	Click on Income – Item 12 Partnerships in the navigator.

3.	Check and correct your answers by stepping through each interview screen. e-tax will use your answers to correct your return.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1998
V1998	Entrepreneurs Tax Offset details are incomplete

Refer to item T14 – Entrepreneurs Tax Offset.

If any one of the Entrepreneurs Tax Offset labels (STS group turnover, Net STS Income and action code) is present, then all of the remaining Entrepreneurs Tax Offset labels are required.

How to correct this error

1.	Click on the Next button. e-tax will move to item T14.

2.	Check and correct your answers by stepping through each interview screen. e-tax will use your answers to correct your return.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V1999
V1999	Spouse’s details are required

Refer to item T6 – 30% child care

Spouse’s TFN, spouse’s name and spouse’s date of birth are required for 30% child care tax rebate transfer advice.

How to correct this error

1.	Click on the Next button. e-tax will move to item T6.

2.	Enter your spouse’s tax file number. Click on the Next button.

3.	Click on Spouse Details in the navigator and complete spouse’s name and date of birth.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V2000
V2000	Spouse’s tax file number cannot match your tax file number

Refer to item T6 - 30% child care

Spouse’s tax file number cannot match your tax file number.

How to correct this error

1.	Click on the Next button. e-tax will move to item T6.

2.	Enter your spouse’s tax file number. Click on the Next button.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V2001
V2001	Total claim for child care tax rebate amount is missing

Refer to item T6 – 30% child care

The total claim for 30% child care tax rebate must be present when a transfer advice is completed.

How to correct this error

1.	Click on the Next button. e-tax will move to item T6.

2.	Enter your claim details. Click on the Next button.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V2002
V2002	Spouse details are missing

Refer to item T6 - 30% child care

When a 30% child care tax rebate transfer advice is completed the check box for having a spouse for a full year or dates you had a spouse during the year must be completed.

How to correct this error

1.	Click on the Next button. e-tax will move to item T6.

2.	Click on the Spouse Details in the navigator.

3.	Complete the dates you had a spouse during the year.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V2003
V2003	Spouse to date is incorrect

Refer to item T6 - 30% child care

To complete a 30% child care tax rebate transfer advice you must have had a spouse on 30/06/2007.

How to correct this error

1.	Click on the Next button. e-tax will move to item T6.

2.	Click on the Spouse Details in the navigator.

3.	Complete the dates you had a spouse during the year.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V2038
V2038	Net STS income present and distribution income is missing

Refer to item 12 – Partnerships and Trusts.

If net STS income is greater than zero and action code equals ‘T’ indicating Trust, then distribution from trust are required.

How to correct this error

1.	Click on the Next button. e-tax will move to item T14.

2.	Click on Income – Item 12 Trusts in the navigator.

3.	Check and correct your answers by stepping through each interview screen. e-tax will use your answers to correct your return.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V2040
V2040	Date return to work cannot be earlier than or equal to Date stopped paid work

Refer to the Family tax benefit (FTB) on-line documentation.

The date return to work entered cannot be earlier than or equal to the date stopped paid work entered.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item.

2.	Check and correct all your answers in the FTB interview.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V2042
V2042	Date stopped paid work and Date return to work are outside the valid date range

Refer to the Family tax benefit (FTB) on-line documentation.

The date stopped paid work entered and the date return to work entered must be within the range 30/06/2006 to 30/06/2007.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item.

2.	Check and correct all your answers in the FTB interview.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V2043
V2043	Dependant Details Dependant number must equal Return to work Dependant number on the return to work schedule

Refer to the Family tax benefit (FTB) on-line documentation.

Return to work dependant number is present and the dependant details dependant number does not equal the return to work dependant number.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item.

2.	Check and correct all your answers in the FTB interview.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V2047
V2047	Spouses’ number on the family profile schedule must equal spouses’ number on the return to work schedule

Refer to the Family tax benefit (FTB) on-line documentation.

Return to work spouse number is present and the family profile spouse number does not equal the return to work spouse number.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item.

2.	Check and correct all your answers in the FTB interview.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V2049
V2049	Other employment related income from date is outside the stopped paid and returned to work dates

Refer to the Family tax benefit (FTB) on-line documentation.

If other employment related income ‘from date’ is present, it cannot be outside the ‘stopped paid’ and ‘returned to work’ dates entered.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item.

2.	Check and correct all your answers in the FTB interview.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V2050
V2050	Other employment related income to date is outside the stopped paid and returned to work dates

Refer to the Family tax benefit (FTB) on-line documentation.

If other employment related income ‘to date’ is present, it cannot be outside the range of the dates entered for ‘stopped paid work’ and ‘returned to work’.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item.

2.	Check and correct all your answers in the FTB interview.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V2052
V2052	Return to work Period number occurs more than once

Refer to the Family tax benefit (FTB) on-line documentation.

Each return to work period number from 1-10 can only occur once.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item.

2.	Check and correct all your answers in the FTB interview.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V2053
V2053	Payer number does not start at 1 or is not sequential

Refer to the Family tax benefit (FTB) on-line documentation

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item.

2.	Check and correct all payer details in the FTB interview.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V2063
V2063	Other employment related income labels are incomplete

Refer to the Family tax benefit (FTB) on-line documentation.

If Yes is answered to the lower income earner receiving other employment related income then dates from and to must be completed.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item.

2.	Check and correct all your answers in the FTB interview.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V2064
V2064	Spouse details are incomplete

Refer to Spouse details.

If Spouses' CRN number is present, then the spouses' details labels (Spouses' family name, given name, date of birth and sex code) are required.

How to correct this error

1.	Click on the Next button. e-tax will move to to the field in error.

2.	Check and correct all your answers.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V2065
V2065	Dependant number cannot occur more than once.  Range is 1 to 40

Refer to the Family tax benefit (FTB) on-line documentation.

Dependant number cannot occur more than once.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item.

2.	Check and correct all your answers in the FTB interview.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V2066
V2066	Label T and U cannot overlap for two period numbers where Label W is the same for both period numbers

Refer to the Family tax benefit (FTB) on-line documentation.

Date stopped paid work (Label T), Date return to work (Label U) and Spouse number (Label W) are present and there is more than one occurrence of Return to work Period number and the date range for Labels T and U overlap where the spouse number is the same.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item.

2.	Check and correct all your answers in the FTB interview.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V2067
V2067	Other employment related income (Labels X and Y) cannot not overlap for a dependant number

Refer to the Family tax benefit (FTB) on-line documentation.

If there is more than one period of Other employment related income (Labels X and Y) for a dependant number then these periods cannot overlap.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item.

2.	Check and correct all your answers in the FTB interview.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V2068
V2068	Return to work period number does not start at 1 or is not sequential

Refer to the Family tax benefit (FTB) on-line documentation.

The first value of Return to work Period number must equal 1 and subsequent values must increment sequentially.

How to correct this error

1.	Click on the Next button. e-tax will move to the start of the FTB item.

2.	Check and correct all your answers in the FTB interview.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V2069A
V2069A	Spouse’s sex code is the same as the client’s sex code

Spouse’s sex code is the same as client’s sex code.

Refer to Spouse details.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Enter the correct information.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V2069B
V2069B	Spouse sex code is the same as the CCTR claimant sex code

Spouse sex code cannot be the same as the 30% child care tax rebate claimant’s sex code.

Refer to Spouse details.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Enter the correct information.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V2089A
V2089A	Total primary production and non-primary production deferred losses can not be less than the total Net loss

Refer to

•	item 15 – Deferred non-commercial business losses

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

The sum of primary production Total deferred losses (Item 15 Label I) and Non-primary production deferred losses (Item 15 Label J) can not be less than the total Net loss amounts at label I and label O and label U at item P9

If you receive this error, please contact the Personal Tax Infoline.


V2089B
V2089B	Total primary production and non-primary production deferred losses can not be less than the total Net loss

 Refer to

•	item 15 – Deferred non-commercial business losses

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

The sum of primary production Total deferred losses (Item 15 Label I) and Non-primary production deferred losses (Item 15 Label J) can not be less than the total Net loss amounts at label I and label O at item P9

If you receive this error, please contact the Personal Tax Infoline.


V2089C
V2089C	Total primary production and non-primary production deferred losses can not be less than the total Net loss

Refer to

•	item 15 – Deferred non-commercial business losses

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

The sum of primary production Total deferred losses (Item 15 Label I) and Non-primary production deferred losses (Item 15 Label J) can not be less than the total Net loss amounts at label I and label U at item P9

If you receive this error, please contact the Personal Tax Infoline.


V2089D
V2089D	Total primary production and non-primary production deferred losses can not be less than the total Net loss

Refer to

•	item 15 – Deferred non-commercial business losses

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

The sum of primary production Total deferred losses (Item 15 Label I) and Non-primary production deferred losses (Item 15 Label J) can not be less than the total Net loss amounts at label O and label U at item P9

If you receive this error, please contact the Personal Tax Infoline.


V2089E
V2089E	Total primary production and non-primary production deferred losses can not be less than the total Net loss

Refer to

•	item 15 – Deferred non-commercial business losses

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

The sum of primary production Total deferred losses (Item 15 Label I) and Non-primary production deferred losses (Item 15 Label J) can not be less than the total Net loss amounts at label I at item P9

If you receive this error, please contact the Personal Tax Infoline.


V2089F
V2089F	Total primary production and non-primary production deferred losses can not be less than the total Net loss

Refer to

•	item 15 – Deferred non-commercial business losses

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

The sum of primary production Total deferred losses (Item 15 Label I) and Non-primary production deferred losses (Item 15 Label J) can not be less than the total Net loss amounts at label O at item P9

If you receive this error, please contact the Personal Tax Infoline.


V2089G
V2089G	Total primary production and non-primary production deferred losses can not be less than the total Net loss

Refer to

•	item 15 – Deferred non-commercial business losses

•	Business and professional items schedule 2007 (NAT 2543-6.2007)

The sum of primary production Total deferred losses (Item 15 Label I) and Non-primary production deferred losses (Item 15 Label J) can not be less than the total Net loss amounts at label U at item P9

If you receive this error, please contact the Personal Tax Infoline.


V9999	Check tax losses claimed this year

Refer to item L1 - Tax losses of earlier income years

When you completed item L1, e-tax recorded the amount of taxable income (after losses were applied). This must be done because you may change an income or deduction amount after you have completed item L1, thereby changing the amount of taxable income or loss before losses are applied.

During validation of the tax return, e-tax has checked the amount of taxable income or loss written to your tax return against the item L1 amount it recorded internally. The 2 amounts differ. You must re-visit item L1 so that the application of losses from earlier income years can be re-calculated.

How to correct this error

1.	Click on the Next button. e-tax will move to item L1.

2.	Check and correct your answers.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V9999
V9999	Review imported data

All data that has been imported must be reviewed.

How to correct this error

1.	Click on the Next button. e-tax will move to the item where data needs to be reviewed.

2.	Review all data that has been imported.  Click on the Next button.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V9999 - Check T14 Entrepreneurs Tax Offset
V9999	Check T14 Entrepreneurs Tax Offset

Refer to item T14- Entrepreneurs Tax Offset

Since completing item T14 you may have changed data that item T14 uses. You will need to revisit item T14 to review your claim for Entrepreneurs Tax Offset.

How to correct this error

1.	Click on the Next button. e-tax will move to item T14.

2.	Check and correct your answers.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V9999
V9999	Spouse details are incomplete

Refer to Spouse details.

Spouse sex code is compulsory when you are claiming a transfer of your unused child care tax rebate to your spouse.

How to correct this error

1.	Click on the Next button. e-tax will move to the field in error.

2.	Check and correct all your answers.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


V9999	UPP – Additional information schedule is incomplete

Refer to item D9 - Deductible amount of UPP of Australian Pension or Annuity.

An additional information schedule has been created as your pension or annuity provider cannot tell you your deductible amount but the details are incomplete. If you complete an additional information schedule at item D9 you must complete all sections of the schedule before you can lodge your return.

How to correct this error

1.	Click on the Next button. e-tax will move to item D9.

2.	If you click on No in response to the first question e-tax will delete all your previous answers.

Otherwise, click on Yes and check and complete your answers for the additional information schedule.

If you have completed the additional information schedule in error, make sure you clear the information from the Additional information schedule.

3.	Click on the Next button.

4.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


TE5002
TE5002	Work deductions exceed $300. Ensure the taxpayer has receipts to substantiate this.

The total work-related deductions claimed at items D1 to D5 is greater than $300.

If your total claims exceed $300, you must keep written evidence to prove the total amount, not just the amount over $300. The $300 limit does not include claims for car, meal allowance, award transport payments allowance and travel allowance expenses. You must have written evidence to prove your claims for these expenses. There are some exceptions to the written evidence rule – explained in the relevant items.

This message has been generated by e-tax. It is the result of a data integrity check and will not stop you lodging your tax return.

You may need to check and, if necessary, correct your answers in the interview at item D1 to D5.


TE5003
TE5003	Tax withheld from dividends is greater than dividend income

Refer to item 11 – Dividends

The total of the TFN Amounts Withheld column is greater than the total of the Franked Dividends and Unfranked Dividends columns in the e-tax data entry table at item 11.

If you had TFN amounts withheld from your unfranked dividends, it is calculated at the highest marginal rate plus the Medicare levy, a total of 48.5 per cent.

This message has been generated by e-tax. It is the result of a data integrity check and will not stop you lodging the tax return.

You may need to check and, if necessary, correct your answers in the interview at item 11. Make sure you have entered only your share of any TFN amounts withheld.


TE5004
TE5004	No interest income is shown. Check bank accounts to ensure any interest is disclosed.

Refer to item 10 – Gross interest

e-tax has noted that no amount of interest income has been entered at item 10.

This message has been generated by e-tax. It is the result of a data integrity check and will not stop you lodging the tax return.

You may need to check that you have provided details of all your bank accounts.


TE5005
TE5005	Deductions are high compared to taxable income. Review deductions and ensure they can be substantiated.

e-tax has noted that deductions are high compared to taxable income. If (total deductions multiplied by 4) is greater than taxable income then this warning generated.

This message has been generated by e-tax. It is the result of a data integrity check and will not stop you lodging the tax return.

You may need to check that the income and deductions amounts are correct.


TE5009
TE5009	Taxpayer's date of death cannot be in the future

Your date of death has been completed and it is after 30th June 2007.

This message has been generated by e-tax. It is the result of a data integrity check and will not stop you lodging the tax return.

Check and correct the date of birth. It is entered in the Personal details section of the interview.


TE5013
TE5013	Please check item M2 to determine if any liability exists to pay the Medicare levy surcharge.

Refer to item M2 – Medicare levy surcharge.

e-tax has noted that your taxable income – and that of your spouse if you had one – is inconsistent with the information written to item M2 in the tax return.

For example, the combined taxable income is less than $100,000 and the number of days the taxpayer is NOT liable for the surcharge is set to zero. This situation could arise if you have adjusted your spouse's taxable income after you completed item M2.

This message has been generated by e-tax. It is the result of a data integrity check and will not stop you lodging the tax return.

You may need to check your taxable income and the taxable income of your spouse if you had one. If the taxable income is correct, use the navigator to move to item M2. Step through each screen in the worksheet at item M2. e-tax will correct the answers written to item M2.


TE5014
TE5014	FTB information is incomplete

e-tax has noted that there are inconsistencies between the FTB tax claim worksheet and the data written to the tax return.

For example:

•	no spouse details have been entered at the FTB item, and the tax return indicates you had a spouse. This situation could arise if you have adjusted your spouse details after you completed the FTB item without stepping through the FTB item again; or

•	your taxable income – and your current spouse if you had one – is inconsistent with the information entered in the FTB tax claim. This will happen if taxable income amounts are adjusted after you have completed the FTB item.

This message has been generated by e-tax. It is the result of a data integrity check and will not stop you lodging the tax return.

Step through all the screens in the FTB item. If you have completed worksheets in any section these will have to be checked as well. Use the Active worksheets navigator to open each worksheet. Make sure you delete any unwanted worksheets.


TE5015
TE5015	Check eligibility for annuity tax offset

Refer to item T4 - Superannuation annuity pension

There is an amount of Australian annuity or pension income at item 7. Check your eligibility for the superannuation annuity or pension tax offset at item T4.

This message has been generated by e-tax. It is the result of a data integrity check and will not stop you lodging the tax return.

To make sure you have correctly calculated your entitlement to this tax offset, check the amount of Australian annuity or pension in the interview at item 7 and then check the interview at item T4.


TE5016
TE5016	Check eligibility for deduction for UPP of Australian pension or annuity

Refer to item D9 – Deductible amount of UPP of an Australian pension or annuity.

There is an amount of Australian annuity or pension income at item 7. Check your eligibility for a deduction for the undeducted purchase price of an Australian pension or annuity at item D9.

This message has been generated by e-tax. It is the result of a data integrity check and will not stop you lodging the tax return.

To make sure you have correctly calculated your entitlement to this deduction, check the amount of Australian annuity or pension in the interview at item 7 and then check the interview at item D9.


TE5017
TE5017	Check eligibility for senior Australians tax offset

Refer to Personal details.

The date of birth is over 65 years (male) or 63 years (female). You may be eligible for the senior Australians tax offset at item T2.

This message has been generated by e-tax. It is the result of a data integrity check and will not stop you lodging the tax return.

To make sure you have correctly calculated your entitlement to this tax offset, check your date of birth. If it is correct, check the interview at item T2.


TE5018
TE5018	Check eligibility for deduction for UPP of foreign pension or annuity

Refer to item D12 – Deductible amount of UPP of a foreign pension or annuity.

There is an amount of foreign annuity or pension income at item 19. Check your eligibility for a deduction for the undeducted purchase price of a foreign pension or annuity at item D12.

This message has been generated by e-tax. It is the result of a data integrity check and will not stop you lodging the tax return.

To make sure you have correctly calculated your entitlement to this deduction, check the amount of Australian annuity or pension in the interview at item 7 and then check the interview at item D9.


TE5021
TE5021	You may be entitled to a reduction in the Medicare Levy

Refer to item M1 – Medicare Levy Reduction or Exemption

e-tax has noted that you have completed Spouse Details but you have not completed M1 Medicare Levy Reduction or Exemption.

You may be eligible for a reduced levy based on your family income.  Refer to the relevant threshold amount.

This message has been generated by e-tax. It is the result of a data integrity check and will not stop you lodging the tax return.

1.	Click on the Next button. e-tax will move to item M1.

2.	Check your answers in each interview screen in item M1.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


TE5022
TE5022	No 30% child care tax rebate has been claimed

Refer to item T6 – 30% child care tax rebate.

e-tax has noted that no amount of 30% child care tax rebate has been claimed at item T6.

The 30% child care tax rebate covers 30% of your out-of-pocket child care expenses for approved child care, with a rebate of up to $4,096 (indexed) per child per year.

NOTE:
The rebate is for approved child care fees you had to pay between 1 July 2005 to 30 June 2006. You can download your rebate entitlements directly into e-tax from data supplied by the Family Assistance Office.

This message has been generated by e-tax. It is the result of a data integrity check and will not stop you lodging the tax return.

1.	If you wish to review this item or claim the rebate click on the Next button. e-tax will move to item T6.

OR

2.	If you have previously reviewed this item click on the Yes button. e-tax will then allow you to begin the process of lodging your tax return.


TE5023
TE5023	You may be eligible for the entrepreneurs tax offset

Refer to item T14 - Entrepreneurs tax offset.

e-tax has noted that you have total business income of less than $75,000 and you have not completed item T14.

You may be entitled to the entrepreneurs tax offset which can reduce your tax liability relating to business income by up to 25%.

The entrepreneurs tax offset may be available if you:

•	had net STS income from business, and

•	had STS group turnover of less than $75,000 between 1 July 2006 and 30 June 2007.

This message has been generated by e-tax. It is the result of a data integrity check and will not stop you lodging the tax return.

To claim the entrepreneurs tax offset:

1.	Click on the Next button, e-tax will move to item T14.

2.	Check your answer in each interview screen.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


TE5024
TE5024	Check eligibility for the entrepreneurs tax offset

Refer to Simplified Tax System (STS) election and item T14 - Entrepreneurs tax offset.

e-tax has noted that you have not elected into the STS and have total business income of less than $75,000. If you elect into the STS, you may be entitled to the entrepreneurs tax offset which can reduce your tax liability relating to business income by up to 25%.

The entrepreneurs tax offset may be available if you:

•	elect into or continue in the STS

•	had net STS income from business, and

•	had STS group turnover of less than $75,000 between 1 July 2006 and 30 June 2007.

This message has been generated by e-tax. It is the result of a data integrity check and will not stop you lodging the tax return.

To be eligible for the entrepreneurs tax offset, you need to have elected into or continue in the STS:

1.	Click on the Next button, e-tax will move to the STS election.

2.	Check your answer in each interview screen.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen

OR

If you have previously reviewed this item click on the Yes button. e-tax will then allow you to begin the process of lodging your tax return.


TE5025
TE5025	You may be eligible for the entrepreneurs tax offset

Refer to Simplified Tax System (STS) election and item T14 - Entrepreneurs tax offset.

e-tax has noted that you are eligible for the STS but you have elected to leave, and that you have total business income of less than $75,000. If you continue in the STS, you may be entitled to the entrepreneurs tax offset which can reduce your tax liability relating to business income by up to 25%.

The entrepreneurs tax offset may be available if you:

•	elect to continue in the STS

•	had net STS income from business, and

•	had STS group turnover of less than $75,000 between 1 July 2006 and 30 June 2007.

This message has been generated by e-tax. It is the result of a data integrity check and will not stop you lodging the tax return.

To be eligible for the entrepreneurs tax offset, you need to have elected to continue in the STS:

1.	Click on the Next button, e-tax will move to the STS election.

2.	Check your answer in each interview screen.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen

OR

If you have previously reviewed this item click on the Yes button. e-tax will then allow you to begin the process of lodging your tax return.


TE5026
TE5026	Emergency payments present

You have pre-filled your tax return and received emergency and general assistance payments from Centrelink.

You must manually enter the taxable amounts of emergency and general assistance payments at item 5 – Australian Government allowances and payments and/or item 22 – Other income.

This message has been generated by e-tax. It is the result of a data integrity check and will not stop you lodging the tax return.

To view this information, click Printing in the Navigator when it appears on the left hand side of the screen. Select Centrelink/DEST/DVA Payment Summary in the Downloaded Data section and select Preview or Print. An emergency and general assistance payment will appear as Emergency Payment on the Centrelink/DEST/DVA payment summary.

Interim income support payments and Cyclone Larry or Cyclone Monica income support payments are not reported as separate amounts on Centrelink PAYG payment summaries, but are included in the total amount reported for emergency and general assistance payments. If you received these payments you will need a letter from Centrelink notifying you of the amount you have received. Manually enter interim income support payments and Cyclone Larry or Cyclone Monica income support payments at item 5 – Australian Government allowances and payments in order to get the correct tax offset.

Manually enter the balance of the taxable amount of Emergency Payment shown on the Centrelink/DEST/DVA payment summary at item 22 – Other income.


W0501
W501	Name field contains repeated alphas

A Name field contains three or more identical contiguous alpha characters. For example, ‘Jennny’.

This is a warning only. It will not prevent you from lodging this tax return using e-tax.

1.	Click on the Next button. e-tax will move to the name field.

2.	If necessary, correct the name field.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


W0502
W502	Name field contains repeated characters

A Name field contains two or more contiguous characters other than alphas or numerics.

This is a warning only. It will not prevent you from lodging this tax return using e-tax.

1.	Click on the Next button. e-tax will move to the name field.

2.	If necessary, correct the name field.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


W0503
W503	Name field contains all numerics

A Name field contains all numerics.

This is a warning only. It will not prevent you from lodging this tax return using e-tax.

1.	Click on the Next button. e-tax will move to the name field.

2.	If necessary, correct the name field.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


W0505
W505	First name field is blank

The Family name field has been completed and the First name field is blank.

This is a warning only. It will not prevent you from lodging this tax return using e-tax.

1.	Click on the Next button. e-tax will move to the name field.

2.	If necessary, correct the name field.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


W0506
W506	Words are not to be split between name lines 1 and 2

Where 2 lines are completed for a name field, the 38th character in line 1 should be a SPACE to indicate the start of a new word in line 2.

This is a warning only. It will not prevent you from lodging this tax return using e-tax.

1.	Click on the Next button. e-tax will move to the name field.

2.	If necessary, correct the name field.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


W0507
W507	The Early payment interest credit is greater than $100.00

Refer to item C1 – Credit for interest on early payments

Early payment interest credit at item C1 is greater than $100.00.

This is a warning only. It will not prevent you from lodging this tax return using e-tax.

1.	Click on the Next button. e-tax will move to item C1.

2.	Check that the amount is an early payment as defined in e-tax Help or other tax technical publications. If necessary, correct the amount of early payment interest credit being claimed.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


W0508
W508	RPS credit exceeds $10,000 and 30% of gross RPS income

Refer to item 14 – Net income or loss from business

RPS credit claimed is greater than $10,000 and greater than 30% of gross RPS income.

This is a warning only. It will not prevent you from lodging this tax return using e-tax.

1.	Click on the Next button. e-tax will move to item 14.

2.	Check RPS credit and RPS income. If necessary, correct the amounts.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


W0510
W510	No income and deductions are present on the return. Is this a nil return?

There are no income and deductions present on the return.

This is a warning only. It will not prevent you from lodging this tax return using e-tax.

1.	Click on the Next button. e-tax will move to item 1.

2.	Check your answers in each e-tax interview screen.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


W0511
W511	Check that zero income is correct

If you leave some return fields blank, e-tax will automatically enter a 0 (zero) value so that the tax return will pass the Tax Office’s electronic lodgment system validation checks.

This is a warning only. It will not prevent you from lodging this tax return using e-tax.

1.	Click on the Next button. e-tax will move to the field in question.

2.	Check that 0 (zero) is this correct entry for this field. If necessary, enter the correct amount.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


W0512
W512	Check that the date of death is not today's date nor the taxpayer's date of birth

The taxpayer's date of death has been completed. Check the date of death.

This is a warning only. It will not prevent you from lodging this tax return using e-tax.

This version of e-tax does not allow you to enter date of death returns. If this warning is displayed, please contact the Personal Tax Infoline.


W0513
W513	Verify the claim for superannuation deductions

Refer to item D13 – Personal superannuation contributions

Non-employer superannuation contributions at item D13 are greater than zero and salary and wage assessable income is greater than 10% of assessable income.

This is a warning only. It will not prevent you from lodging this tax return using e-tax.

1.	Click on the Next button. e-tax will move to item D13.

2.	Check your answers in item D13. If necessary, use the navigator to access and check the items in the e-tax Income section.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


W0514
W514	An arithmetic error at Total tax instalments deducted is present

This message will be displayed where total of tax instalments deducted is present, or any TID field at items 1 to 8 are present, and the amount shown at total of tax instalments deducted does not equal the sum of items 1 to 8 TID amounts on the tax return.

Under normal circumstances, this message should not appear as this is an e-tax calculation.

This is a warning only. It will not prevent you from lodging this tax return using e-tax.

1.	Click on the Next button. e-tax will move to item 1.

2.	Use the navigator to access and check the items in the e-tax Income section.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


W0515
W515	The amount shown at taxable income or loss does not equal the sum of income minus the sum of deductions

This message will be displayed if taxable income or loss is absent or not equal to the sum of all income items (items 1 to 22) minus the sum of all deduction items (items L1, D1 to D15).

Under normal circumstances, this message should not appear as this is an e-tax calculation.

This is a warning only. It will not prevent you from lodging this tax return using e-tax.

1.	Click on the Next button. e-tax will move to item 1.

2.	Use the navigator to access and check the items in the e-tax Income and Deduction sections.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


W0516
W516	Occupation does not match listed occupations

Refer to item 1 – Salary or wages

The main salary and wage occupation description is present in the return at item 1, and it does not match against the occupation descriptions required by the Tax Office electronic lodgment system.

Under normal circumstances, this message should not appear as you can only load the occupation from the e-tax list of occupations.

This is a warning only. It will not prevent you from lodging this tax return using e-tax.

1.	Click on the Next button. e-tax will move to item 1.

2.	Re-enter your answers to item 1 in the e-tax interview.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


W0521
W521	Daytime contact phone number is not present on the return

The daytime contact phone number has not been entered on the tax return. If we need to ask you about your tax return, it is quicker by telephone.

This is a warning only. It will not prevent you from lodging this tax return using e-tax.

1.	Click on the Next button. e-tax will move to the Getting started section.

2.	If required, enter your daytime contact phone number.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


W0522
W522	Zero amount at Spouse details Label O or Label Q

Refer to item 6 – Australian Government pensions and allowances

An Australian government pension is present in the tax return at item 6 with pension tax offset calculation code of P, I, Q or J at item T2 and in the Spouse details – married or de facto screen a 0 (zero) is entered at  a) 2006-07 taxable income of spouse,  or  b) amount of any exempt pension received by your spouse in 2006-07.

You must verify that the zero value is not present because the spouse's taxable or exempt income is unknown. The amount of zero must be the actual amount.

This is a warning only. It will not prevent you from lodging this tax return using e-tax.

1.	Click on the Next button. e-tax will move to item 6.

2.	Check and, if necessary, correct your answers.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


W0551
W551	Please check item M2 of e-tax to determine if any liability exists to pay the Medicare levy surcharge

Refer to item M2 – Medicare levy surcharge

The taxable income of the spouse (Spouse details – married or de facto – Label O):

•	is present and the taxable income of spouse is greater than $100,000

AND

•	no data is present at item M2 Label A.

This is a warning only. It will not prevent you from lodging this tax return using e-tax.

1.	Click on the Next button. e-tax will move to item M2.

2.	Check your answers in each interview screen in item M2.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


W0552
W552	Code ‘P’ is required at item 19 if an amount is entered at Label L that includes a foreign pension

Refer to item 19 – Foreign source income and foreign assets or property.

You have entered an amount at item 19 Label L. If any of this amount includes a foreign pension, code P is required at this item.

This is a warning only. It will not prevent you from lodging this tax return using e-tax.

1.	Click on the Next button. e-tax will move to item 19.

2.	Check your answers in each interview screen in item 19. e-tax will adjust the code accordingly.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


W0553
W553	An amount has been entered at item 19 Label D and there is no UPP deductible amount claimed at item D12 Label Y

Refer to

•	item 19 – Foreign source income and foreign assets or property

•	item D12 – Deductible amount of undeducted purchase price of a foreign pension or annuity

You have entered an amount of Net foreign pensions or annuity income with an undeducted purchase price (UPP) at item 19 Label D and there is no UPP deductible amount claimed at item D12 Label Y.

This is a warning only. It will not prevent you from lodging this tax return using e-tax.

1.	Click on the Next button. e-tax will move to item 19.

2.	Check and, if necessary, correct your answers in each interview screen in item 19. Use the navigator to move to item D12. Check and, if necessary, correct your answers in each interview screen in item D12.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


W0572
W572	Net capital gains present and Net capital losses carried forward present

Refer to item 17 – Capital gain.

Net capital gains is present and Net capital losses carried forward is also present. This is only correct where all the Net capital losses carried forward relate to collectables.

This is a warning only. It will not prevent you from lodging this tax return using e-tax.

1.	Click on the Next button. e-tax will move to item 17.

2.	Check and, if necessary, correct your answers in each interview screen in item 17.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


W0628
W628	Check work-related income at items 1 and 2

Work related expenses have been claimed at label A item D1 or label B item D2 or label C item D3 or label D item D4 or label E item D5 and no gross payment of salary and wages is shown at item 1 and no allowances are shown at item 2.

This is a warning only. It will not prevent you from lodging this tax return using e-tax.

1.	Click on the Next button. e-tax will move to item 1.

2.	Check your answers in each interview screen at items 1 and  2. If necessary, also check items D1, D2, D3, D4 and D5.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


W0629
W629	Check the taxpayer's occupation code

Refer to item 1 – Salary and wages.

Salary and wages are present at item 1 and work related expenses have been claimed at label A item D1 or label B item D2 or label C item D3 or label D item D4 or label E item D5
and
the occupation code at item 1 is blank or has a value of 9900 – Occupations not listed.

This is a warning only. It will not prevent you from lodging this tax return using e-tax.

1.	Click on the Next button. e-tax will move to item 1.

2.	Check your answers in each interview screen at items 1. Please select an appropriate occupation code.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


W0653
W653	Check the claim for work-related clothing and/or laundry expenses

Refer to item D3 – Work-related uniform, occupation specific or protective clothing, laundry and dry cleaning expenses.

Claim for clothing and/or laundry in excess of $2,000 at item D3. Please check that claim is wholly deductible.

This is a warning only. It will not prevent you from lodging this tax return using e-tax.

1.	Click on the Next button. e-tax will move to item D3.

2.	Check and, if necessary, correct your answers in each interview screen in item D3.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


W0999
W999	Base year has been keyed as 2007

Refer to Baby bonus claim 2007 (NAT 6580-6.2007).

The base year entered on the return is 2007.

This message is a warning. It will not stop you lodging the return.

Base year cannot be 2007.

How to correct this error

1.	Click on the Next button. e-tax will move to item T7.

2.	Check and correct your answers.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


W1000
W1000	Are you amending previously advised Baby Bonus detail?

Refer to Baby bonus claim 2007 (NAT 6580-6.2007)

If you are amending previously advised Baby Bonus detail, you cannot alter or revoke the elected Base Year.

This message is a warning. It will not stop you lodging the return.


W1001
W1001	Claim year taxable income is greater than $25,000

Refer to Baby bonus claim 2007 (NAT 6580-6.2007)

The Claim year taxable income is greater than $25,000. A stand-alone claim cannot be lodged. A full income tax return must be completed to claim Baby Bonus.

This message is a warning. It will not stop you lodging the return.


W1002 – Net capital gains present and Net capital losses carried forward present
W1002	Net capital gains present and Net capital losses carried forward present. This is only correct where all of the net capital losses carried forward relate to collectables.

Refer to Item 17 - Capital gains

This is a warning only. It will not prevent you from lodging this tax return using e-tax.

You have an amount greater than zero at Net capital gain (Label A) at item 17, and a loss carried forward at Net capital losses carried forward to later income years (Label V).

This is only possible if all of the losses carried forward relate to collectables.

All other capital losses should be applied against net capital gains.

1.	Click on the Next button. e-tax will move to item 17.

2.	Check, and if necessary, correct your answers in each interview screen in item 17. If you have losses brought forward from earlier years, you may have entered them in to the wrong box in the ‘Unapplied losses’ section on screen 2005.

3.	If you change any data, you will need to go back to the "Application of choices" section of item 17 to re-calculate your net capital gain or capital loss.

4.	Go through the rest of item 17 to complete the question, then click on "Lodgment" in the e-tax Navigator. e-tax will return to the Validation screen.


W9998
W9998	Check that zero tax withheld is correct

Refer to Item 1 – Salary or wages.

You have entered an amount of gross income and no amount of tax withheld has been entered.

This message is a warning. It will not stop you lodging the return.

1.	Check and, if necessary, correct the answers in the worksheet at item 1.


W9999
W9999	Spouse taxable income not required

Refer to Spouse details – married or defacto.

You have entered your spouse's taxable income. Based on your answers in the rest of the e-tax interview, you do not need to tell us your spouse's taxable income.

This is a warning only. It will not prevent you from lodging this tax return using e-tax.

1.	Click on the Next button. e-tax will move to the spouse details screen.

2.	Delete your spouse's taxable income.

3.	Click on the Lodgment button in the navigator. e-tax will return to the Validation screen.


Are you eligible for the baby bonus?
	Are you the eligible person for the baby bonus?
An eligible person is someone who has the right to claim the baby bonus and can decide to transfer their eligibility for the baby bonus to their spouse. Usually, the eligible person is the mother. To find out if you are the eligible person, you need to work through the steps in the e-tax interview.

Even if you claimed the baby bonus last year, you will still need to work through the steps in the interview to see if you are eligible this year.

You can only claim the baby bonus this year if you gained legal responsibility of a child aged under five (for example, through adoption) on or after 1 July 2001 and before 1 July 2004.

NOTE:
There can only be one eligible person. Usually, it is the mother who is the eligible person.
The e-tax interview will also help you work out if you have an eligible child. There can only be one eligible child. This is the child you first became legally responsible for on or after 1 July 2001 and before 1 July 2004.

e-tax will ask a series of questions to make sure you are eligible.

STEP 1	Do you satisfy the basic eligibility requirements?

You must satisfy all of the following points:

•	You became legally responsible for a child on or after 1 July 2001 and before 1 July 2004 – for example, by birth or through adoption. If you adopted a child, see the note below.

•	You were an Australian resident at the time.

•	You did not have legal responsibility for the child before 1 July 2001.

•	If you adopted the child with another person, that person was not legally responsible for the child before 1 July 2001.

NOTE: Did you adopt?
If you adopted the child with another person, and that other person was legally responsible for the child before 1 July 2001, you cannot claim the baby bonus for that child.
If your child turned five on 1 July 2006, you may be able to claim this year. You will only be entitled to claim for the number of days from the date you gained legal responsibility to 30 June of your base year if:
 -  you were the eligible person
 -  you did not transfer your eligibility in your base year, and
 -  you chose the income year you gained legal responsibility as your base year.

If you do not satisfy the conditions of Step 1, you can only claim the baby bonus if your spouse is eligible and transfers their eligibility to you.

STEP 2	Did you have an eligible child during the 2006-07 income year?

You had an eligible child if the child was aged under five during the income year and, at that time, you:

•	had legal responsibility for and care of that child and

•	were an Australian resident.

NOTE:
If you satisfied the two dot points above, but your child turned five on 1 July 2006 and you chose the income year you gained legal responsibility for the child as your base year and you did not transfer your eligibility in your base year, you should answer ‘Yes’ to this question. You are not entitled to the baby bonus in 2007 (as your child was five for all of the income year) but you may be entitled to the baby bonus for the number of days from the date you gained legal responsibility to 30 June of your base year.

If you did not have an eligible child, you can only claim the baby bonus if your spouse is eligible for a child and transfers their eligibility to you.

There can only be one eligible child. This is the child you first became legally responsible for on or after 1 July 2001 and before 1 July 2004.

If you do have an eligible child, you must also answer this second question.

Were you an Australian resident and did you have legal responsibility for and care of the child for the whole of the claim period?

If you answer ‘No’ to this second question, later in the interview you will have to provide details of the period you were an Australian resident and had legal responsibility for and care of the child. Refer to Variation to claim period.

STEP 3	Have you ever been the eligible person for any other child?

IMPORTANT:
If you have claimed the baby bonus for another child who has died before their fifth birthday, answer ‘No’ to this question.

If you have been the eligible person for another child, you are not eligible for the baby bonus. You can only claim the baby bonus if your spouse is eligible for a child and transfers their eligibility to you.

STEP 4	Was there another person, including your spouse, who had legal responsibility for and care of the child during the income year?

If you answer ‘No’, go to step 6. Otherwise read on.

STEP 5	Has that other person ever been the eligible person for another child?

If you are unsure, you should consider the information presented in this topic with regard to that person.

If that other person has been an eligible person for another child you must also answer this second question:

‘Did that other person have legal responsibility for and care of your child for all of the claim period?’

If you answer ‘No’ to this second question, later in the interview you will have to provide details of the period that this person did not have legal responsibility for and care of your child. Refer to Variation to claim period.

You are not eligible for the baby bonus if another person:

•	had legal responsibility for and care of the eligible child during the claim period and

•	is currently, or has been, eligible for the baby bonus for another child.

You can only claim the baby bonus if your spouse is eligible for the other child and transfers their eligibility to you.

STEP 6	Are you the birth mother?

If you are the birth mother, e-tax will now ask you to provide the details of your baby bonus claim.

STEP 7	Were you the eligible person for this child?

If you were the only person who met the conditions outlined in Steps 1 and 2 for this child then you are the eligible person.

If more than one person met the conditions in Steps 1 and 2 for this child, the eligible person will be the person who appears before the other person in the Selection list below.

Selection list:

1	the birth mother

2	the adoptive mother

3	any other woman

4	the natural father

5	the adoptive father

6	any other man

If you were the eligible person for this child you must also answer this second question:

Were you the eligible person for the whole claim period?

If you answer ‘No’ to this second question, later in the interview you will have to provide details of the period that you were the eligible person. Refer to Variation to claim period.

If you are the eligible person, you can claim the baby bonus. e-tax will now ask you to provide the details of your baby bonus claim.

If you are not the eligible person you can only claim the baby bonus if your spouse is eligible and they transfer their eligibility to you.


Auto-completing your claim form
	Pre-filling your baby bonus details
If you lodged a valid baby bonus claim in 2002, 2003, 2004, 2005 or 2006, the Tax Office can access that information to complete your claim this year.

To have e-tax pre-fill your baby bonus claim, you must:

•	have lodged a valid baby bonus claim in any of the previous five years, and

•	be claiming the baby bonus for the same child.

NOTE:
If the system is unavailable, e-tax cannot pre-fill your claim for you. You can either enter your claim details manually or try to use the pre-fill service later. For details about when the service may be available again, see e-tax pre-filling information.

VERIFICATION

You must provide information that allows the Tax Office to verify your identity before your data is pre-filled into e-tax. To do this

1.	Click on Pre-filling in the Navigator or the Pre-filling button on the relevant screens.

2.	e-tax will ask you for your password or information that will allow the Tax Office to verify your identity. When you have successfully matched your details against the Tax Office records, you will be issued with a password.

NOTE:
Keep your password as you will need it to lodge your tax return or claim form.

For more details about obtaining a Tax Office password using e-tax refer to Tax Office password.


Baby bonus transfer - from your spouse to you
	Baby bonus transfer –  from your spouse to you
STOP:
Only your spouse can transfer eligibility for the baby bonus to you. They must have been your spouse for the entire claim period and you must not be eligible for the baby bonus for another child.

DOES YOUR SPOUSE WANT TO TRANSFER THEIR ELIGIBILITY FOR THE BABY BONUS TO YOU?

NOTE:
This part only applies if you are NOT eligible for the baby bonus

If your answers in any of the interview steps in the section Are you eligible for the baby bonus? mean you are not eligible for the baby bonus, you may still need to complete a baby bonus claim if your spouse wants to transfer their eligibility to you.

For more information on transferring eligibility for the baby bonus see Will you get more baby bonus if you transfer your eligibility?.

If you complete the transfer details, you and your spouse – as the eligible person – must complete the  Baby bonus transfer agreement 2007.

IS YOUR SPOUSE ELIGIBLE FOR THE BABY BONUS?

e-tax will ask a series of questions to help you decide whether your spouse is eligible for the baby bonus. For more information, see Is your spouse eligible for the baby bonus?

If your spouse is eligible you will need to provide the following information so that e-tax can complete the claim and calculate the amount of baby bonus you are entitled to:

Base year and taxable income

Eligible child details

Variation to the claim period

YOUR SPOUSE'S DETAILS

Enter your spouse’s full name. If their name has changed since last notifying the Tax Office, enter their current name and previous surname. Make sure you complete both the Surname or family name and Given names boxes. If your spouse only has one name you should enter this name in both the Surname or family name and Given names boxes on the e-tax screen.

e-tax can now complete the claim and calculate the amount of baby bonus you are entitled to. See Your baby bonus entitlement.


	Is your spouse eligible for the baby bonus?
STEP 1	Does your spouse satisfy the basic eligibility requirements?

Your spouse must satisfy ALL of the following points:

•	Your spouse had a baby or became legally responsible for a child on or after 1 July 2001 and before 1 July 2004.

•	Your spouse was an Australian resident at the time.

•	Your spouse was not legally responsible for the child before 1 July 2001.

•	If your spouse adopted the child with another person, that person was not legally responsible for the child before 1 July 2001.

If your spouse does not satisfy the conditions of Step 1, they are not eligible for the baby bonus. They cannot transfer their eligibility for the baby bonus to you.

STEP 2	Did your spouse have an eligible child during the 2006-07 income year?

Your spouse had an eligible child if the child was aged under five during the income year and, at that time, your spouse:

•	had legal responsibility for and care of that child and

•	was an Australian resident.

NOTE:
If your spouse satisfied the two dot points above, but their child turned five on 1 July 2006 and they chose their base year to be the income year they gained legal responsibility for the child and they didn't transfer in their base year, you should answer ‘Yes’ to this question. Your spouse will only be entitled to claim for the number of days from the date they gained legal responsibility to 30 June of their base year.

If your spouse did not have an eligible child, you cannot claim the baby bonus.

There can only be one eligible child. This is the child your spouse first became legally responsible for on or after 1 July 2001 and before 1 July 2004.

If your spouse does have an eligible child, you must also answer this second question.

Was your spouse an Australian resident and did they have legal responsibility for and care of the child for the whole of the claim period?

If you answer ‘No’ to this second question, later in the interview you will have to provide details of the period your spouse was an Australian resident and had legal responsibility for and care of the child. Refer to Variation to claim period.

STEP 3	Has your spouse ever been the eligible person for any other child?

Important: If your spouse has claimed the baby bonus for another child who has died before their fifth birthday, answer "No" to this question.

If your spouse has been the eligible person for another child, they are not eligible for the baby bonus.

STEP 4	Was there another person, other than your spouse, who had legal responsibility for and care of your spouse's child during the income year?

If you answer ‘No’, go to step 6. Otherwise read on.

STEP 5	Has that other person ever been the eligible person for another child?

If you are unsure, you should consider the information presented in this topic with regard to that person.

If that other person has been an eligible person for another child you must also answer this second question:

‘Did that other person have legal responsibility for and care of the child for all of the claim period?’

If you answer ‘No’ to this second question, later in the interview you will have to provide details of the period that this person did not have legal responsibility for and care of your spouse's child. Refer to Variation to claim period.

Your spouse is not eligible for the baby bonus if another person:

•	had legal responsibility for and care of the eligible child during the period of eligibility and

•	is currently, or has been, eligible for the baby bonus for another child.

STEP 6	Is your spouse the birth mother?

If your spouse is the birth mother, e-tax will now ask you to provide the details of the baby bonus claim.

STEP 7	Was your spouse the eligible person for this child?

If your spouse was the only person who met the conditions outlined in Steps 1 and 2 for this child then they are the eligible person.

If more than one person met the conditions in Steps 1 and 2 for this child, the eligible person will be the person who appears before the other person in the Selection list below.

Selection list:

1	the birth mother

2	the adoptive mother

3	any other woman

4	the natural father

5	the adoptive father

6	any other man.

If your spouse was the eligible person you must also answer this second question:

Was your spouse the eligible person for the whole claim period?

If you answer ‘No’ to this second question, later in the interview you will have to provide details of the period that your spouse was the eligible person. Refer to Variation to claim period.

If your spouse is the eligible person, they can transfer their eligibility to you. You can claim the baby bonus. e-tax will now ask you to provide the details of the baby bonus claim.

If your spouse is not the eligible person you cannot claim the baby bonus.


	Base year and taxable income
If you have claimed the baby bonus before and you are claiming for the same child this year you can find your base year and base year taxable income on the notice you received from the Tax Office.

You need your taxable income amounts for your base year and claim year to complete this section.

CAUTION:
You must show your taxable income amounts, even if these amounts are zero.

BASE YEAR

The amount of your baby bonus and when you can start to receive it is determined by your base year. There are two possible base years. Your base year will be the income year before legal responsibility started for your child, unless you choose the income year that legal responsibility started. If you were not an Australian resident in the income year before legal responsibility started, your base year must be the income year legal responsibility started. Whatever year you choose this will be your base year for all future claims for this child. If you have claimed the baby bonus before for this child the Tax Office will verify your base year.

If you adopted a child, you have four possible base years. Information to help you choose your base year is available on the Tax Office website at www.ato.gov.au or phone the Personal Tax Infoline on 13 28 61.

If you choose the income year that legal responsibility started as your base year, you must complete the Base year election.

Your baby bonus is calculated by comparing your taxable income in your base year to your taxable income in your claim year. If your taxable income is lower in your claim year, you will get some baby bonus. If your taxable income is $25,000 or less in the year you claim, your minimum bonus for a full year will be $500. Your baby bonus will be reduced if you have not had legal responsibility for and care of your child for a whole year.

IMPORTANT:
Once a base year has been chosen, it cannot be changed or revoked. You need to keep a record of your base year to help you claim in future years.

If you are the transferee and this is the first time you have claimed for this child, your base year is 2006. If you have claimed for this child before, your base year is on the notice you received from the Tax Office.

BASE YEAR TAXABLE INCOME

Enter your taxable income for your base year. If you have claimed the baby bonus before or lodged an income tax return for your base year the Tax Office will verify your taxable income.

If you lodged a tax return in your base year, you can find this amount on your notice of assessment from the Tax Office for that year. If you did not lodge a tax return for your base year, you will still need to work out your taxable income and enter this amount on your claim, even if it is zero.

If your taxable income was a loss in your base year, enter ‘0’.

BASE YEAR GROSS TAX

Your base year gross tax is the tax calculated on your taxable income for your base year. If you have received a notice of assessment, your base year gross tax is the amount shown as ‘Tax on taxable income’. If you were not required to lodge a tax return for your base year, enter ‘0’ for your base year gross tax.

If you want e-tax to calculate your base year gross tax, enter your base year, base year taxable income and then click on Tax calculator. This will calculate the tax at basic tax rates on your base year taxable income. The tax calculator is unable to calculate your base year gross tax where any of the following apply:

•	You received any primary production income.

•	You were under 18 years of age.

•	You received any sports persons and abnormal income.

•	You received any exempt net foreign employment income.

•	You are entitled to a part-year tax-free threshold.

•	You are not an Australian resident.

Enter the amount manually if any of the above applied to you.

CLAIM YEAR TAXABLE INCOME

This claim year is 2007 (1 July 2006 to 30 June 2007). Enter your taxable income for 2007.

You can find this amount at TAXABLE INCOME OR LOSS on page 3 of your 2007 tax return. If you are not required to lodge a 2007 tax return, you will still need to work out your taxable income and enter this amount in the e-tax screen, even if it is zero.

If your taxable income was a loss this year, enter ‘0’.

YOUR SPOUSE'S BASE YEAR ELECTION

If your spouse has transferred their eligibility for the baby bonus to you, enter their base year election. Before transferring their eligibility to you, they – as the eligible person – must have decided which year is their base year. Their base year will be the income year before legal responsibility started for the child unless they choose the income year that legal responsibility started. If you were not an Australian resident in the income year before legal responsibility for your child started, your base year must be the income year legal responsibility started. This will be their base year if they make a claim in the future.

Once a base year has been chosen it cannot be changed or revoked.

If this is the first time they are claiming the baby bonus or transferring their eligibility for this child and they have chosen the income year legal responsibility started as their base year they must complete the Base year election.

BASIC TAX RATES 2004 INCOME YEAR

Basic tax rates are:

Taxable income	Tax on this income
$1 to $6,000	Nil
$6,001 to $21,600	17 cents for each $1 over $6,000
$21,601 to $52,000	$2,652 + 30 cents for each $1 over $21,600
$52,001 to $62,500	$11,772 + 42 cents for each $1 over $52,000
$62,501 and over	$16,182 + 47 cents for each $1 over $62,500
BASIC TAX RATES 2003 INCOME YEAR

Basic tax rates are:

Taxable income	Tax on this income
$1 to $6,000	Nil
$6,001 to $20,000	17 cents for each $1 over $6,000
$20,001 to $50,000	$2,380 + 30 cents for each $1 over $20,000
$50,001 to $60,000	$11,380 + 42 cents for each $1 over $50,000
$60,001 and over	$15,580 + 47 cents for each $1 over $60,000


Base year election

The Base year election must be completed by the eligible person if this is the first time they are claiming the baby bonus or transferring their eligibility for this child and they have chosen the income year that legal responsibility started as their base year. It must be made before claiming the baby bonus or transferring their eligibility.

e-tax will print a base year election at the end of the interview if it is required.

The base year election must be kept by the eligible person with their tax records for six years from the date of the election. It is not lodged with the claim or given to the transferee.

I .............................………………………………………………….....................,

                                          Eligible person’s name

elect the ..................................... as my base year for baby bonus purposes.

                       Income year

My eligible child is .…………………………………………………..………... and

                                                              Child’s name

the date I gained legal responsibility for the child is  ........... /........... / ............

The total number of days I was eligible to claim the baby bonus is .................

I understand that this election cannot be changed or revoked.

.……………………………………………..……….    ........... / ........... / ...........

                Signature of eligible person                                    Date


Do you want to transfer your eligibility for baby bonus to your spouse this year?
	Do you want to transfer your eligibility for the baby bonus to your spouse this year?
You can transfer your eligibility for the baby bonus to your spouse (your husband or wife with whom you live on a genuine domestic basis, whether you are legally married or not.  However, under taxation laws your spouse cannot be the same sex as you) who then becomes the ‘transferee’. They must have been your spouse for the whole claim period and they must not be eligible for the baby bonus for another child.

You would consider doing this if your spouse could get a higher baby bonus amount than you. If you did not have a spouse for the whole claim period, you cannot transfer your eligibility.

Your spouse may get a higher baby bonus amount than you if their taxable income is $25,000 or less and your taxable income is more than $25,000. They might also get a higher amount if their taxable income is more than $25,000 and significantly lower than their base year taxable income.

WILL YOU GET MORE BABY BONUS IF YOU TRANSFER YOUR ELIGIBILITY?

STOP:
You can only transfer your eligibility to your spouse. They must have been your spouse for the entire claim period and they must not be eligible for the baby bonus for another child.

To assist you in deciding whether to transfer your eligibility for the baby bonus, you and your spouse should use the e-tax baby bonus calculator to help you work out which person will get the higher baby bonus amount.

TRANSFEREE’S BASE YEAR:
If this is the first time the transferee has claimed for this child, their base year is 2006.
If the transferee has claimed for this child before, their base year is on the notice they received from the Tax Office.

You only transfer the number of days you can claim - you do not transfer the amount that you can claim.

EXAMPLE

Diane and Richard had baby Joe on 14 October 2003. Diane took paid leave around the time of Joe’s birth and then returned to work. Richard then took leave without pay to stay at home and look after Joe. When compared to their respective base years Diane’s income for 2007 has not reduced while Richard’s has. Based on this, they calculate that if Diane claimed the baby bonus she would not get a payment - so she decides to transfer her eligibility to Richard.

If you - as the eligible person - choose to transfer your eligibility to your spouse, you and your spouse must work through the steps below. You do not lodge a claim yourself. A claim must be completed and lodged by your spouse.

HOW TO TRANSFER YOUR ELIGIBILITY TO YOUR SPOUSE FOR 2007

STEP 1	If this is the first baby bonus claim for this child, the eligible person may need to complete the Base year election. This will be their base year if they make a claim in the future. If the baby bonus has previously been claimed or transferred for this child the base year election has already been made.

STEP 2	The eligible person and the transferee must complete the 2007 baby bonus transfer agreement.

A baby bonus transfer agreement:

•	must be made before lodging a baby bonus claim

•	cannot be made for less than the claim period

•	is valid for only one income year and cannot be changed or revoked

•	must be kept by the transferee with their tax records for six years from the date of the agreement. It is not lodged with the claim.


Baby bonus transfer agreement
2007 baby bonus transfer agreement

e-tax will print a 2007 baby bonus transfer agreement at the end of the interview.

The eligible person and the transferee must complete the 2007 baby bonus transfer agreement.

A baby bonus transfer agreement:

•	must be made before lodging a baby bonus claim

•	cannot be made for less than the claim period

•	is valid for only one income year and cannot be changed or revoked

•	must be kept by the transferee with their tax records for six years from the date of the agreement. It is not lodged with the claim.

DATE YOU BECAME LEGALLY RESPONSIBLE:
You only need to complete this date if it is different to your child's date of birth.

I .........................………………………………………………………........................ ,

                                                 Eligible person’s name

agree to transfer my eligibility for the baby bonus for 2007

to my spouse .....................……………………………………………………………..

                                                                Spouse’s name

For my child ..………………………………………………………………............. and

                                                      Child’s name

the child's date of birth is ........... /........... / ............  and

the date I became legally responsible for the child was .......... /........... / ............

The total number of days I was eligible to claim the baby bonus was  ................

………........................................................................................

                        Signature of eligible person

I .................................………………………………………………………................. ,

                                                     Transferee’s name

was the spouse of the above named eligible person for the entire claim period.

.………………………………………………………………….    ........... / ........... / ...........

                            Signature of transferee                                              Date


	Eligible child details
CHILD’S NAME

Enter the eligible child’s name in the relevant boxes. Make sure that you complete both the Surname or family name and Given names boxes. If the child only has one name you must enter this name in both the Surname or family name and Given names boxes.

CHILD’S DATE OF BIRTH

Enter the eligible child’s date of birth.

DATE THE ELIGIBLE PERSON BECAME LEGALLY RESPONSIBLE FOR THE CHILD

Only complete this date if you (or your spouse, if they are transferring their eligibility to you) gained legal responsibility of the child (for example, through a court order) and this date is different to the child's date of birth.

If you are an adoptive parent and your base year is either the year before, or the year that the child came into your care, you do not enter the date you became legally responsible for the child. You must enter the date the child came into your care. If this date is earlier than 1 July 2001 enter 1 July 2001.

BEREAVEMENT

If the child died during the income year but before their fifth birthday, enter the date the child died. This extends the eligibility to the baby bonus to the end of the income year and lets the eligible person claim the baby bonus for another eligible child in a future year.

PREVIOUSLY THE ELIGIBLE PERSON FOR ANOTHER CHILD

If your eligible child died before 1 July 2006 and before their fifth birthday, and you have not already advised the Tax Office of this, enter the date that your child died. This will let you claim for your other child.


	How does the baby bonus work?
IMPORTANT:
All references made to year are to income year – 1 July to 30 June. For example, the income year 1 July 2006 to 30 June 2007 is 2007.

The amount of your baby bonus and when you can start to receive it is determined by your base year. If you are the eligible person there are two possible base years. Your base year will be the income year before legal responsibility started for your child, unless you choose the income year that legal responsibility started. If you were not an Australian resident in the income year before legal responsibility started, your base year must be the income year legal responsibility started. This will be your base year for all future claims for this child. If you choose the year that legal responsibility started you must complete the Base year election.

If you adopted a child, you have four possible base years. Information to help you choose your base year is available on the Tax Office website at www.ato.gov.au or phone the Personal Tax Infoline.

If you are the transferee and this is the first time you have claimed for this child, your base year is 2006. If you have claimed for this child before, your base year is on the notice you received from the Tax Office.

Your baby bonus is calculated by comparing your taxable income in your base year to your taxable income in your claim year. If your taxable income is lower in your claim year, you will get some baby bonus. If your taxable income is $25,000 or less in the year you claim, your minimum bonus for a full year will be $500.

IMPORTANT:
Once a base year has been chosen, it cannot be changed or revoked. You need to keep a record of your base year to help you claim in future years.

IF YOUR GROSS TAX FOR BOTH POSSIBLE BASE YEARS IS LESS THAN OR EQUAL TO $2,500.

You should keep the year before you started to have legal responsibility for the child as your base year. If you don’t, you will have to wait another year before you can claim.

If your taxable income is $25,000 or less in the year you claim the baby bonus, you will be entitled to an annual amount of $500. This applies even if you are not required to lodge a tax return or pay tax. The annual amount will be reduced if you have not had legal responsibility for and care of your child for a whole year.

If your taxable income is more than $25,000 in a claim year, then you will not get a baby bonus that year.

IF YOUR GROSS TAX FOR AT LEAST ONE POSSIBLE BASE YEAR IS MORE THAN $2,500.

You should only choose the year that you started to have legal responsibility for the child as your base year if your taxable income (and the gross tax calculated) was higher in that year than the year before.

If you keep the year before you started to have legal responsibility for the child as your base year, and you make a claim each year, you will be entitled to a part-year payment in the year the child was born and the year the child turns five, and full-year payments for the four years in between.

If you choose the year that you started to have legal responsibility for the child as your base year and you make a claim each year, you will be entitled to full-year payments up to and including the year the child turns five. For an adoptive child the last year may not be a full year payment.

EXAMPLE

Sharon and Allan had a baby, Lily, on 23 August 2003. Sharon’s taxable income for 2003 was $52,000 (gross tax of $12,220), and her taxable income for 2004, the year Lily was born, was $26,000 (gross tax of $3,972).

Sharon uses the e-tax calculator and works out that if she chooses 2003 instead of 2004 as her base year she could get more money over five years. Sharon’s base year taxable income is $52,000.

Sharon’s taxable income for 2003 will be compared to her taxable income in each claim year (until Lily turns five). If her income reduces, or is $25,000 or less in the claim year, Sharon will get a baby bonus amount.


	Baby bonus claim
IMPORTANT:
All references made to year are to income year – 1 July to 30 June. For example, the income year 1 July 2006 to 30 June 2007 is 2007.

You may be entitled to the baby bonus, if you or your spouse have a baby or gain legal responsibility of a child aged under five – for example, through adoption – on or after 1 July 2001 and before 1 July 2004.

WHAT IS THE BABY BONUS?

The baby bonus is a refundable tax offset – even if you do not pay tax, do not have any income or do not have to lodge a tax return you can still claim it. You can only claim it from the Tax Office. The baby bonus is paid whether or not you currently get any other family benefits.

WHO IS IT FOR?

If you had a baby or you gained legal responsibility of a child aged under five (for example, through adoption), on or after 1 July 2001 and before 1 July 2004 – whether or not you already have other children – you could receive the baby bonus. Usually, it is the mother of the child who is eligible to claim the baby bonus.

If neither of you have a child who may be eligible, you cannot claim the baby bonus and this item does not apply to you. Otherwise read on.

You should complete the e-tax interview to see if you are eligible for the baby bonus. If you are not eligible, your spouse may choose to transfer their eligibility to you so that you can claim the baby bonus. If this is the case, the interview questions will verify your spouse's eligibility for the baby bonus.

HOW MUCH WILL YOU GET?

How much baby bonus you get depends on your own taxable income each year. If your taxable income is $25,000 or less you will be entitled to a minimum annual amount of $500. You may get less in the first year, as the baby bonus is calculated from your baby’s date of birth (or the date you gained legal responsibility for your child).

If your taxable income is more than $25,000 when you claim, you will only get the baby bonus if your income has reduced. You may get more than $500 if there is a significant reduction in your taxable income.

ADOPTIVE PARENT

The baby bonus legislation ensures that adoptive parents receive their full entitlement to the baby bonus. An adoptive parent can claim the baby bonus for an extra number of days – the number of days from when the child entered your care to when you gained legal responsibility for the child. You cannot claim for any days the child was in your care before 1 July 2001.

WHAT IF YOU HAVE ALREADY CLAIMED THE BABY BONUS USING THE DATE THE CHILD ENTERED YOUR CARE?

As your baby bonus has already been calculated correctly, you have to do nothing.

WHAT HAPPENS TO YOUR BASE YEAR?

Use the following table to work out happens to the base year.

If the date the child entered your care is...		Then...
in the same year of income as the date the adoption was finalised		there is no change to your base year. You must claim the extra number of days,
not in the same year of income as the date the adoption was finalised		your base year can now be: • the year before, or  • the year that the child first entered your care. your base year, however, cannot be earlier than 2001.
WHAT IF CHANGING YOUR BASE YEAR REDUCES YOUR BABY BONUS?

If the change in base year means that your baby bonus is reduced you are not entitled to claim the extra number of days. This is because you can only claim for the extra number of days if it means that you would get more baby bonus.

HOW DO YOU KNOW IF CHANGING YOUR BASE YEAR REDUCES YOUR BABY BONUS?

The Tax Office has a base year calculator and baby bonus calculator on our website www.ato.gov.au to help you decide which base year may be of most benefit to you. Input the relevant information for each possible base year and claim year to see how the change in base year would affect your baby bonus. Remember, your base year cannot be earlier than 2001 and you cannot claim for any days before 1 July 2001. If changing your base year means that you would get less baby bonus, then the new law does not apply to you and you are not entitled to claim for the extra number of days.

HOW DO YOU REQUEST AN AMENDMENT TO YOUR BABY BONUS CLAIM?

Use the following to determine how to request an amendment to a baby bonus claim.

If your base year...	And your base year...	Then...
has not changed	is not the year the child entered your care	you must write to the Tax Office providing the details of the date the child entered your care and the extra number of days you want to claim for.
has not changed	is the year the child entered your care	you have to wait until the year the child turns five to claim the extra number of days. you must write to the Tax Office now providing the details of the date the child entered your care.
has changed	is not the year the child entered your care	you have to wait until the year the child turns five to claim the extra number of days. you must write to the tax office now providing the details of the date the child entered your care and also request an amendment to any baby bonus claim that you have made. You also need to request an amendment to any baby bonus claim that you have made. in this amendment request, you need to state that you are an adoptive parent, the date your child entered your care and your new base year and base year taxable income.
has changed	is the year the child entered your care	you have to wait until the year the child turns five to claim the extra number of days. you must write to the tax office now providing the details of the date the child entered your care and also request an amendment to any baby bonus claim that you have made. In this amendment request, you need to state that you are an adoptive parent, the date your child entered your care and your new base year and base year taxable income. If you have a new year that you can claim the baby bonus, you also need to complete a baby bonus claim for that year.
EXAMPLE

You adopted a child on 21 April 2004. The child came into your care on 21 April 2003. Your base year was 2003 but is now going to be 2002.

Although your first baby bonus claim was for the 2004 year, you can also claim for the period 21 April 2003 to 30 June 2003, and also claim for the number of days from 1 July 2003 to 20 April 2004. You need to lodge a 2003 baby bonus claim with the Tax Office and you also need to ask for an amendment to your 2004 and later baby bonus claims to calculate your baby bonus using the new base year and the date the child came into your care.


	Important terms
AUSTRALIAN RESIDENT

Generally, the Tax Office considers you to be an Australian resident if:

•	you have always lived in Australia or you have come to Australia and live here, OR

•	you have been in Australia for more than half of the income year – unless your usual home is overseas and you do not intend to live in Australia.

BASE YEAR

A base year is the year which acts as a basis to compare taxable income in your claim year. This base year stays the same for all future claim years for the baby bonus for an eligible child. Once a base year is chosen it cannot be changed or revoked.

If you have claimed the baby bonus before for your child, your base year is shown on the notice you received from the Tax Office.

For an eligible person their base year will be the year before legal responsibility started for the eligible child, unless they choose the year that legal responsibility started. If they choose the year that legal responsibility started they must complete the Base year election.

For an eligible person who is an adoptive parent, their base year can also be the year before, or the year that, the child entered their care if this will give them more baby bonus. However, a base year cannot be earlier than the 2001 income year.

For a transferee, if this is the first year they will claim the baby bonus for the eligible child their base year is 2006.

For an eligible person who was not an Australian resident in the year immediately prior to gaining legal responsibility for the eligible child, their base year is the year they gained legal responsibility for the child.

CARE

For a child to be in your care, it is not a requirement for the child to be living with you on a daily basis. For example, parents who place their child in a creche or home based day-care would still be considered to have care of the child. This is because the parents are ultimately responsible for making decisions in relation to that child and will continue to make those decisions.

Where parents share the legal responsibility for and care of a child (for example, where a child spends alternate weeks with their separated parents), the child is considered to be in the care of both parents at all times. Where there is shared care, usually the mother will be the eligible person (see the Selection list).

A parent who has ceased to be involved in the child’s daily life and has ceased to provide for the day-to-day care, welfare and development of the child would not be considered to have care of that child.

CLAIM PERIOD

A claim period is the period within the claim year for which you are eligible to claim the baby bonus.

CLAIM YEAR

A claim year is the year in which you make a claim. You may make a claim each year until your eligible child turns five.

ELIGIBLE CHILD

The eligible child is the child for whom you first satisfy steps 1 and 2. It is usually the first child you gave birth to or the first child who you gained legal responsibility for and care of, on or after 1 July 2001 and before 1 July 2004. It is not necessarily your oldest or first born child.

A stillborn child cannot be an eligible child.

GROSS TAX

Your gross tax is the amount shown as Tax on taxable income on your notice of assessment. If you are unsure of how to calculate your gross tax, you can get more information:

•	on the Tax Office website at www.ato.gov.au OR

•	you can phone the Personal Tax Infoline.

LEGAL RESPONSIBILITY

You have legal responsibility for a child if:

•	you are responsible (whether alone or with someone else) for the day-to-day care, welfare and development of the child

AND

•	you are their birth mother or natural father OR

•	you have a court order giving you legal responsibility (for example, through adoption).

SPOUSE

Your spouse is your husband or wife to whom you are legally married, or a person who lives with you on a genuine domestic basis as your husband or wife. Under Australian law your husband or wife cannot be the same sex as you.

TAXABLE INCOME

Your taxable income can be found on your notice of assessment from the Tax Office or on your tax return.

Taxable income is your assessable income – for example, salary or wages, most Centrelink payments, interest, dividends – less any allowable deductions that you have incurred in earning that income.

Centrelink payments such as maternity allowance and family tax benefit are not assessable income.

If you are unsure of how to calculate your taxable income, more information can be found:

•	at How we work out your tax

•	on the Tax Office website at www.ato.gov.au OR

•	you can phone the Personal Tax Infoline.

TRANSFEREE

When a person who is the eligible person for the baby bonus transfers their eligibility to their spouse, their spouse is referred to as the transferee.


Variation to claim the period
	Variation to the claim period
You are only eligible for the baby bonus for the periods in which the eligible person was an Australian resident and they had legal responsibility for and care of the eligible child and the period another person (who has been an eligible person for another child) did not have legal responsibility for and care of the eligible child.

e-tax will work out and display the number of days from the child's date of birth, or the date you gained legal responsibility, to the end of the claim period.

WHERE THERE IS NO VARIATION TO THE CLAIM PERIOD

If you have indicated during the interview that there is no variation to the claim period the From/To boxes will be greyed out and you will not be able to enter anything in them.

WHERE THERE IS A VARIATION TO THE CLAIM PERIOD

If you have indicated during the interview that there was a variation to the claim period you must enter the dates that the variation applied in the e-tax screen.

•	Period the eligible person was an Australian resident and had legal responsibility for and care of the eligible child.

•	Period another person (who is or has been an eligible person themselves) did not have legal responsibility for and care of the eligible child.

•	Period the eligible person appeared first in the Selection list.

EXAMPLE

Craig and Alison have a child, Andrew – date of birth 1 November 2003. Alison is the eligible person. They decide to permanently leave Australia and emigrate to Canada on 14 April 2007. Alison would enter 01/07/2006 in the From box and 14/04/2007 in the To box.


	Your baby bonus entitlement
e-tax will calculate and display the amount of baby bonus you are entitled to.

How much baby bonus you get depends on some choices you have to make. e-tax will help you make these choices. For more information see Do you want to transfer your eligibility for the baby bonus to your spouse?.

If you want to see how e-tax calculates your baby bonus, read Baby bonus calculation.

SUPERANNUATION:
If you receive an amount of baby bonus you will be entitled to make a personal superannuation contribution of this or any other amount. You may already be eligible to make personal superannuation contributions if, for example, you are employed. For full details on how to make a contribution contact your superannuation fund or retirement savings account provider.


Baby bonus calculation
How e-tax calculates your baby bonus

Click on the Print button to get a copy of this worksheet.

The Tax Office will work out your baby bonus for you and the amount will be shown on your notice of assessment which will be posted to you.

e-tax will calculate and display your baby bonus amount using the information you have entered in the interview screens. If you are considering transferring your eligibility to your spouse, e-tax provides a calculator to help you work out who will get the higher baby bonus amount.

If you want to know how e-tax calculates your baby bonus, work through the following steps.

Generally, if your taxable income is $25,000 or less for the year you claim (claim year), the baby bonus you will be entitled to (for the full year) is $500.

STEP 1	Complete the following table

NOTE:
Your base year gross tax is the tax calculated on your taxable income for your base year. If you have received a notice of assessment your base year gross tax is the amount shown as "Tax on taxable income". If you were not required to lodge a tax return for your base year, write "0" for your base year gross tax.

Base year taxable income	Claim year taxable income
$____________ .00	$________________
Base year gross tax
$____________ . __
STEP 2	Is your base year taxable income more than $25,000?

NO	Go to step 5.

YES	Go to step 3.

STEP 3	Is your claim year taxable income less than your base year taxable income?

NO	You are not entitled to any baby bonus. Do not continue working through the steps.

YES	Go to step 4.

STEP 4	Is your claim year taxable income more than $25,000?

NO	Go to Calculation 1 and Calculation 3 to work out your baby bonus. Your bonus will be the higher of these two calculations. Do not continue working through the steps.

YES	Go to Calculation 1 to work out your baby bonus. Do not continue working through the steps.

STEP 5	Is your claim year taxable income more than $25,000?

NO	Go to step 6.

YES	You are not entitled to any baby bonus. Do not continue working through the steps.

STEP 6	Is your claim year taxable income zero or a loss?

NO	Go to step 7.

YES	Go to Calculation 2 and Calculation 3 to work out your baby bonus. Your baby bonus will be the higher of these two calculations. Do not continue working through the steps.

STEP 7	Is your claim year taxable income less than or the same as your base year taxable income?

NO	Go to Calculation 3 to work out your baby bonus. Do not continue working through the steps.

YES	Go to step 8.

STEP 8	Is your base year gross tax more than $2,500?

NO	Go to Calculation 3 to work out your baby bonus.

YES	Go to Calculation 1 and Calculation 3 to work out your baby bonus. Your baby bonus will be the higher of these two calculations.

FOOTNOTES:
Check the footnotes where indicated as you work through the calculations.

CALCULATION 1

Claim year taxable income	$_________________	A
Base year taxable income	$_________________	B
Divide A by B	__________________	C
Take C away from 1.00	__________________	D
Base year gross tax*	$_________________	E
Divided E by 5	__________________	F
Number of days eligible**	__________________	G
Divide G by 365	__________________	H
Multiply D by F	__________________	I
Multiply I by H	$_________________	Calculation 1 total***
The amount at C and D will be 1 or less than 1.

CALCULATION 2

Base year gross tax*	$_________________	J
Divide J by 5	_________________	K
Number of days eligible**	_________________	L
Divide L by 365	_________________	M
Multiply K by M	$_________________	Calculation 2 total***

CALCULATION 3

Number of days eligible**	_________________	N
Divide N by 365	_________________	O
Multiply O by $500	$_________________	Calculation 3  total

FOOTNOTES:

*	If your base year gross tax was more than $12,500 – write $12,500.
**	Number of days eligible is the number of days the eligible person satisfied the following: • they were an Australian resident and had legal responsibility for and care of the child, and • the child was aged under five, But does not include the number of days where:  • another person had legal responsibility for and care of the child and has been the eligible person for another child.
***	The maximum amount that can be shown here is $2,500.


Claiming expenses that relate to your work as an employee
Claiming deductions for expenses that relate to your work as an employee

You can claim deductions for work related expenses you incurred while performing your job. You incur a work-related expense when:

•	you receive a bill or invoice for an expense that you are liable for and must pay

•	you do not receive a bill or invoice but you are charged and you pay for it.

Refer to Taxation Ruling TR97/7 – Income tax: subsection 51(1) – meaning of ‘incurred’ timing of deductions for more information.

NOTE:
If your income comes from carrying on a business, claim your expenses at item 13 or item 14.

If your work-related expenses include an amount of goods and services tax (GST), the GST is part of the total expense and is therefore part of any allowable deduction.

Basic rules:

•	You must have incurred the expense in 2006-07.

•	You cannot claim an expense that your employer (or any other person) has or will reimburse you for.

•	You must have incurred the expense in the course of earning your assessable income and it must not be private, domestic or capital in nature. For example, the costs of normal travel to and from work or buying lunch each day are private. If you incurred an expense that was both work related and private or domestic, you can only claim a deduction for the work related portion of the expense.

•	If you incurred an expense for services paid in advance, you need to read Advance expenditure below to decide what part of the expense is allowable in 2006-07.

•	You must be able to substantiate your claims with written evidence if the total amount you are claiming for expenses, not including claims for car, meal allowance, award transport payments allowance and travel allowance expenses, is greater than $300 (see Written evidence rule – records you need to keep for claims of more than $300 below).

•	If the total amount you are claiming is $300 or less – you need to be able to show how you worked out your claims – but you do not need written evidence.

ADVANCE EXPENDITURE

You must follow the apportionment rules for advance expenditure if you prepay for a service costing more than $1,000 and the service extends for a period of more than 12 months or beyond 30 June 2008. Under these rules you may be entitled to claim only part of the expenditure this year and the remainder in future years. If you incurred expenditure in a prior income year that has been apportioned under the advance expenditure rules and the prepaid service extended into the 2006-07 income year, you may claim the relevant portion of the expenditure on your 2007 tax return. If you need to know more, refer to the publication Deductions for prepaid expenses 2007 (NAT 4170-6.2007).

ALLOWANCES

Receiving an allowance from your employer does not automatically entitle you to a deduction. You must still meet the basic rules listed above to make a claim. You can claim only the total amount you incurred even if the allowance is more. For example, if you received a tools allowance of $500 and your tool expenses were $400, you must include the whole amount of the allowance at item 2 and the deduction you can claim at item D5 is $400.

WRITTEN EVIDENCE RULE – RECORDS YOU NEED TO KEEP FOR CLAIMS OF MORE THAN $300

You must have written evidence to prove your claims if your total claims exceed $300. The records you keep must prove the total amount, not just the amount over $300. The $300 limit does not include claims for car, meal allowance, award transport payments allowance and travel allowance expenses. There are special written evidence rules for these claims, which are explained at the relevant questions.

NOTE:
Do not send in your receipts or other records with your tax return unless we request you to do so in writing.

WHAT IS WRITTEN EVIDENCE?

Written evidence can be:

•	a document from the supplier of goods or services, showing:

o	the name of the supplier

o	the amount of the expense

o	the nature of the goods or services – if not shown, you may write this on the document before you lodge your tax return

o	the date the expense was incurred

o	the date of the document.

•	another document or combination of documents containing the information listed above. If you use a combination of documents, the dates of the documents are not required but they need to contain the date you incurred the expense. These documents can be in written or electronic form. They include:

o	bank and other financial institution statements

o	credit card statements

o	BPAY reference numbers, often also called receipt or transaction numbers

o	email receipts

o	your PAYG payment summary – individual non business; this may show, for example, your total union fees

o	paper or electronic copies of documents – these must be true and clear reproduction of the original.

•	evidence you have recorded yourself:

o	for expenses of $10 each or less, providing the total of these expenses is not more than $200

o	if you have been unable to obtain written evidence – for example, for toll or parking fees where you cannot get a receipt.

Your records must show the same details as a document from a supplier as described above.

Your documentation must be in English unless the expense was incurred outside Australia.

NOTE:
For more information refer to PS/LA 2005/7 Substantiation of deductions claimed by individual taxpayers for work and car expenses incurred in the course of earning non-business and non-investment income.

ELECTRONIC RECORDS

We recommend that if you store your records electronically you make a back-up copy to ensure the evidence is easily accessible if the original becomes inaccessible or unreadable (for example, where a compact disk, floppy disk or hard drive is corrupted).

CLAIMS OF $300 OR LESS

We may ask you to tell us how you worked out your claim and explain why your claim is reasonable, based on the requirements of your occupation. You do not need written evidence – you can make reasonable estimates.

Don't leave it too late!
Will your total claims for work related expenses exceed $300 next year?
If you are unsure, you may want to keep written evidence of your expenses during the year. You will need this evidence if you want to claim more than $300.

HOW LONG YOU NEED TO KEEP YOUR RECORDS

You must keep your written evidence for five years from the date you lodge your tax return. If at the end of this period you are in a dispute with the Tax Office that relates to a work expense, you must keep the relevant records until the dispute is resolved.

NOTE:
`Depreciating asset’ is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.

For depreciating assets, you must keep records for the entire period over which you claim deductions for the decline in value for those assets. You must keep your records for a further five years from the date of your last claim. For example, if this was your last claim year, the five years start from the date you lodge your 2007 tax return. This period is extended if, when the five years end, you are in a dispute with the Tax Office that relates to a depreciating asset.

EXAMPLE

Keeping records

Linda buys a computer for $4,000 in July 2003. Linda uses her computer for work 60% of the time. She claimed 60 per cent of the decline in value on the cost of her computer over four years. Linda's last claim for deduction for decline in value is on her 2007 tax return which she lodges on 14 October 2007.

Linda must keep her records until 31 October 2012. If at this time she is in a dispute with the Tax Office that relates to this claim, she must keep her records until the dispute is resolved.

If you have lost your records, or they have been destroyed, phone the Personal Tax Infoline to find out what you can do.

WHY YOU NEED TO KEEP YOUR RECORDS

We will work out your refund or tax debt using the information you provide on your tax return. We may ask for more information or audit this information at a later date. You need to keep your records to prove your deduction claims in case we audit you.

Items D1 to D6 show you how to claim deductions for expenses that relate to your work as an employee.

EXTRA INFORMATION FOR SOME OCCUPATIONS

The Tax Office provides summaries of tax rulings for 16 occupations:

•	Airline employees (NAT 2331-6.2007)

•	Australian Defence Force members (NAT 2321-6.2007)

•	Building workers (NAT 2324-6.2007)

•	Cleaners (NAT 2328-6.2007)

•	Factory workers (NAT 2329-6.2007)

•	Hair dressers (NAT 2320-6.2007)

•	Hospitality industry employees (NAT 2326-6.2007)

•	Journalists (NAT 2782-6.2007)

•	Lawyers (NAT 2327-6.2007)

•	Nurses (NAT 2319-6.2007)

•	Performing artists (NAT 2325-6.2007)

•	Police officers (NAT 2316-6.2007)

•	Real estate employees (NAT 2323-6.2007)

•	Shop assistants (NAT 2322-6.2007)

•	Teachers (NAT 2317-6.2007)

•	Truck drivers (NAT 2318-6.2007)


Item D10 Cost of managing tax affairs
	Cost of managing tax affairs
This topic covers:

Who does this item apply to?

You need to know

WHO DOES THIS ITEM APPLY TO?

Complete this item if you have expenses:

•	relating to managing your own tax affairs

•	for advice relating to a claim for family tax benefit (FTB) lodged through the tax system

•	imposed by the Tax Office as an interest charge

•	imposed by the Tax Office for underestimating a varied goods and services tax (GST) or pay as you go (PAYG) instalment

•	for complying with your legal obligations relating to another person’s tax affairs.

YOU NEED TO KNOW

Expenses for managing your own tax affairs

These include expenses relating to:

•	preparing and lodging your tax return and activity statements

•	travel, to the extent that it is associated with obtaining tax advice – for example, the travel costs of attending a meeting with a recognised tax adviser

•	appealing to the Administrative Appeals Tribunal or courts, and

•	obtaining a valuation needed for a deductible gift or donation of property or for a deduction for entering into a conservation covenant.

Expenses relating to preparing and lodging your tax return and activity statements include costs associated with:

•	buying tax reference material

•	lodging your tax return through a registered tax agent

•	obtaining tax advice from a recognised tax adviser, and

•	dealing with the Tax Office about your tax affairs.

You can claim fees paid to a recognised tax adviser for preparing or lodging your tax return if those fees were incurred in 2006-07. Generally, you incur the fees the year you pay them. A recognised tax adviser is a registered tax agent, barrister or solicitor. Refer to What are your choices for doing your tax return? for information on how to check whether your tax agent is registered.

EXAMPLE

Louise engaged a registered tax agent to prepare and lodge her 2007 tax return. The tax agent lodged her return in September 2007 and charged Louise $100, which she paid immediately. Louise can claim a deduction for the tax agent’s fee in her 2008 tax return.

You cannot claim for the cost of tax advice given by a person who is not a recognised tax adviser. Tax shortfall and other penalties for failing to meet your obligations are not deductible.

Expenses relating to an FTB tax claim

You can claim the cost of advice from a recognised tax adviser in relation to an FTB tax claim lodged with the Tax Office at this item.

Expenses incurred as an interest charge

The Tax Office imposes an interest charge on:

•	late payments of taxes and penalties, and

•	the amount of any increase in your tax liability as a result of an amendment to your assessment, and

•	the amount of any increase in other tax liabilities, such as GST or PAYG amounts.

You can claim any interest charge the Tax Office imposed if the interest charge was incurred in 2006-07. Interest charges imposed when an income tax assessment is amended are incurred when you are charged the interest. Interest charges in the other situations listed are generally incurred in the year in which the interest accrues.

Expenses incurred as a penalty for underestimating a varied GST or PAYG instalment

If the Tax Office has charged you an amount for underestimating a varied instalment for GST or PAYG in 2006-07, you can claim that expense at this item.

Expenses for complying with your legal obligations relating to another person's tax affairs

This category includes expenses relating to:

•	complying with the PAYG withholding obligations – for example, where you withheld tax from a payment to a supplier because the supplier did not quote an Australian business number, and

•	providing information requested by the Tax Office about another taxpayer.


Item D12 Deductible amount of undeducted purchase price (UPP) of foreign pension or annuity
	Deductible amount of UPP of a foreign pension or annuity
This topic covers:

Who does this item apply to?

You need to know

WHO DOES THIS ITEM APPLY TO?

Complete this item if you received a foreign pension or annuity which has a deductible amount of undeducted purchase price (UPP).

NOTE:
If you are claiming a deduction at this item check that you have shown your net foreign pension or annuity income at item 19 Foreign source income and foreign assets or property in the Income section. If you have not shown income from a foreign pension or annuity at item 19, you are not able to claim this type of deduction. e-tax will display a message.

YOU NEED TO KNOW

UPP of a foreign pension or annuity

If you showed income from a foreign pension or annuity at item 19 on your tax return, you may be entitled to claim a deduction to reduce the taxable amount of the pension or annuity income if your pension or annuity has a UPP. Only some foreign pensions and annuities have a UPP.

The UPP is the amount you contributed towards the purchase price of your pension or annuity – your personal contributions.

That part of your annual pension or annuity income which represents a return to you of your personal contributions is free from tax. This tax free portion is called the deductible amount of the UPP deductible amount, and it is usually calculated by dividing the UPP of your pension or annuity by a life expectancy factor according to life expectancy statistics.

If you already know your deductible amount, enter the deductible amount of your UPP in the box provided in the e-tax screen.

British pensions

If you received a category A pension or category B widows pension from the United Kingdom State (UK State) Pension(previously known as the British National Insurance Scheme), (BNIS), you are entitled to a UPP deduction. BNIS These pensions are paid from Newcastle-upon-Tyne.

One method of calculating your deduction is to multiply your BNIS UK State pension (in Australian dollars) by 8%. We accept tThis method is accepted by the Tax Office and itgenerally results in the maximum deduction you are entitled to. However, there is another method – the exact method. If you wish to find out about this method or you receive another type of British pension and you are not sure about a UPP entitlement, phone the Superannuation Infoline on 13 10 20.

Dutch pensions

If you received an old age pension, or a widows, widowers or orphans pension from the Sociale Verzekeringsbank (SVB) under the Netherlands social insurance system and you can obtain all the necessary information to determine the deductible amount of your UPP, claim the amount you have worked out. If you cannot determine the deductible amount of your UPP, you can claim an annual UPP deduction equal to 25% of your gross pension payment.

Italian pensions

If you receive an Italian government pension, the Italian government authorities will send you an Article 10 letter (previously known as an Article 17 letter) each year giving you an estimate of the amount of pension income you will receive, and the amount that you contributed towards your pension. If you are unable to work out your UPP deductiondeductible amount, you should leave this item blank and complete the form Request for a determination of the deductible amount of UPP of a Foreign pension or annuity (NAT 16543) and send the form together with any additional information required to the Tax Office. Your request will be addressed in the form of a Private Binding Ruling (PBR) and is legally binding on the Commissioner.

Austrian pensions

If you received an age, premature age, invalid, disability, widowed persons or orphans pension paid by an Austrian superannuation insurance fund under one of the Austrian social insurance Acts – Allgemeines Sozialversicherungsgesetz (ASVG), Gewerbliches Sozialversicherungsgesetz (GSVG) or Bauern-Sozialversicherungsgesetz (BSVG) – you are entitled to a UPP deductiondeductible amount.

Where you have evidence of your actual contributions, actual monthly salary or youhave received from the Austrian superannuation insurance fund a list of your insurance periods, we will calculate your UPP deduction for you. You should leave this item blank and complete the form Request for a determination of the deductible amount of UPP of a Foreign pension or annuity (NAT 16543) and send the form together with any additional information required to the Tax Office. Your request will be addressed in the form of a Private Binding Ruling (PBR) and is legally binding on the Commissioner.

German pensions

If you received a German pension you will need to provide a copy of the insurance resume (Vericherungsverlauf) from the pension provider. for the pension you are requesting a ruling on. You will need to contact the pension provider directly to obtain this information for the above pension. You should leave this item blank and when you have evidence of your employment history and the salary income that you earned at those dates, you will need to complete a Request for a determination of the deductible amount of UPP of a Foreign pension or annuity (NAT 16543) and send the form together with any additional information required to the Tax Office. Your request will be addressed in the form of a Private Binding Ruling (PBR) and is legally binding on the Commissioner.

NOTE:
If you:
 -  receive a pension from another country,
 -  do not know the deductible amount, or
 -  do not know if your pension or annuity has a UPP
phone the Superannuation Infoline on 13 10 20.

Pensions from another country

If you received a pension from another country, other than a British, Dutch, Italian, Austrian or German pension and you think you are entitled to claim a UPP deduction amount complete a Request for a determination of the deductible amount of UPP of a Foreign pension or annuity (NAT 16543) and send the form together with any additional information required to the Tax Office.  Your request will be addressed in the form of a Private Binding Ruling (PBR) and is legally binding on the Commissioner.

NOTE:
If you need information or assistance with item D12, phone the Superannuation Infoline on 13 10 20.


Item D13 Non-employer sponsored superannuation
	Personal superannuation contributions
This topic covers:

Who does this item apply to?

You need to know

Record keeping

WHO DOES THIS ITEM APPLY TO?

Complete this item if you are entitled to claim a deduction for your personal superannuation contributions.

You may be able to claim a deduction for personal contributions you made to a complying superannuation fund or retirement savings account (RSA) in 2006-07 if:

•	you have written to your fund or RSA provider and advised them of the amount you intend to claim as a deduction, and

•	your fund or RSA provider has provided you with a written acknowledgment of your letter and

•	any of the following apply to you:

o	you were fully self-employed and not working under contract principally for your labour

o	you were partly self-employed but none of the people you worked for provided superannuation support for you or was required to pay the superannuation guarantee charge

o	you were partly self-employed but your income (including exempt income) plus your total reportable fringe benefits amounts (shown at item 9) from the people who provided your superannuation support – or were required to pay the superannuation guarantee charge – was less than 10% of the sum of your total assessable income and total reportable fringe benefits amounts. In working out your income from the people who provided you with superannuation support, add all of the income you received from your employers who were required to provide superannuation support for you or pay the superannuation guarantee charge during any time in the year of income.

•	you did not receive or were not entitled to receive any employer superannuation support for the year of income. Situations where you might not be entitled to receive superannuation support, include for example, where:

o	for the whole year, your work was wholly or principally of a private or domestic nature, and you worked for no more than 30 hours in any week in the year

o	you were under 18 years of age and worked part time (30 hours or less per week) for an employer for the whole year

o	you received salary or wages of less than $450 per employer in every calendar month of 2006-07

o	you were not in eligible employment, for example you were a full-time investor

o	you were a religious practitioner and were not treated as an employee by your religious institution.

You cannot claim a deduction at this item for personal superannuation contributions if:

•	you were entitled to a Super Co-contribution in respect of the contributions, or

•	you were 70 years of age or over and the contributions were paid after the day that is 28 days after the end of the month in which you turned 70 years of age, or

•	you were under 18 years of age at the end of the income year and you did not receive any income from eligible employment or from carrying on a business.

YOU NEED TO KNOW

The deduction you claim can only reduce your taxable income to nil. It cannot add to or create a loss.

If you have reached 65 years of age, you can only make personal contributions if you meet certain conditions. You should check with your superannuation fund or RSA provider.

You were in eligible employment if you performed duties that resulted in you being treated as an employee for the purposes of the superannuation guarantee.

You were carrying on a business if you were engaged in any profession, trade, employment, vocation or calling other than being an employee.

You are not taken to have received employer superannuation support if you have received contributions from someone other than in connection with eligible employment – for example, if you have received superannuation contributions from your spouse.

Only complete this item if your superannuation fund or RSA provider has given you a written acknowledgement of your notice, advising them of the amount you intend to claim as a deduction.

Superannuation contributions-splitting

Complying superannuation funds and RSA providers may allow you to split your superannuation contribution with your spouse.

If you intend to lodge a notice of intention to claim a deduction for personal superannuation contributions with your fund, you must do it before you make your superannuation-splitting application for those contributions.

A superannuation contributions-splitting application can only be made to your fund or RSA provider:

•	during the income year that follows the income year you made the contributions, or

•	during the same income year you made the contributions if your entire benefit is to be rolled over or transferred before the end of that year.

Once an amount has been rolled over to your spouse as a consequence of a superannuation contributions-splitting application, it is too late to claim a deduction for the related contribution.

Government Super Co-contribution

You may be entitled to the Government Super Co-contribution if your total income (that is, your assessable income plus reportable fringe benefits) is less than $58,000 and more than 10% of your total income is related to eligible employment. We will use the information on your income tax return and contribution information we receive from your superannuation fund or RSA provider to work out whether you are eligible. If you are, we will automatically calculate the co-contribution amount and deposit it into your superannuation account. You do not need to report your personal contributions at this item.

The Government Super Co-contribution will generally be paid directly into the superannuation account to which you made your personal superannuation contribution, providing the fund holding that account will accept the co-contribution.

If you wish to have your co-contribution paid into a particular superannuation fund, you can complete a superannuation fund nomination form which is available on www.ato.gov.au/super or by phoning the Superannuation Infoline on 13 10 20.

HOW YOUR PERSONAL SUPERANNUATION CONTRIBUTIONS DEDUCTION IS WORKED OUT

NOTE:
If you reached 70 years of age between 1 June 2006 and 31 May 2007 inclusive, add up all the contributions you made between 1 July 2006 and the 28th day of the month following your 70th birthday (inclusive). If the total is $5,000 or less this is the amount you can claim. Otherwise, read on.

If your contributions total more than $5,000, you can claim the lesser of:

•	$5,000 plus 75% of your contributions over $5,000

•	your age-based deduction limit. Your deduction claim is limited by your age when you made your last contribution for the year. If you were under 35 years at that time, your deduction limit is $15,260; if aged 35 to 49 years it is $42,385; and if aged 50 to 70 years it is $105,113.

If the amount of the deduction you can claim is lower than the amount your superannuation fund or RSA provider acknowledged, you must notify them.

If your personal superannuation contributions are higher than the amount your superannuation fund or RSA provider acknowledged, you must notify them. You must get a written acknowledgment from them before claiming the additional amount.  If you have not received the notice from the fund before lodging your tax return, claim only the amount acknowledged initially and request an amended assessment claiming the additional amount at a later stage.

If you need more information, phone the Superannuation Infoline on 13 10 20.

RECORD KEEPING

Keep your written agreement(s) from your fund or RSA provider with your other tax records. The Tax Office may ask to see them.


D13  Definition
Assessable income is the TOTAL INCOME OR LOSS e-tax has
written to page 2 of your tax return unless:

•	you have a distribution from a partnership or trust, income or
losses from rent or business (including personal services
income), capital gains or capital losses or foreign source
income or

•	you claimed a deductible amount for a pension or an annuity
at item D9 or D12.

In either case, phone the Superannuation Infoline on 13 10 20 for
help in working out your assessable income.


Personal superannuation contributions are amounts you have
paid to a complying superannuation fund to provide benefits for
yourself or your dependents upon your retirement or death.

Most superannuation funds are complying superannuation funds.
If you are unsure contact your superannuation fund.


Item D2 Work related travel expenses
	Work related travel expenses
This topic covers:

Who does this item apply to?

You need to know

What you may need

Show at this item

WHO DOES THIS ITEM APPLY TO?

Complete this item if you have any travel expenses relating to your work as an employee.

At this item you claim travel expenses, including for vehicles other than cars-for example, utility trucks or panel vans with a carrying capacity of one tonne or more, vehicles with a carrying capacity of nine or more passengers, and motorcycles.

YOU NEED TO KNOW

You can claim travel expenses directly connected with your work. If your travel was partly private and partly for work, you can claim only the part that related to work. Travel expenses you may be able to claim include meals, accommodation and incidental expenses you incurred while away overnight for work – for example, going to an interstate work conference. Generally, if your travel did not involve an overnight stay, you cannot claim meals even if you received a travel allowance.

Other travel expenses you may be able to claim include air, bus, train, tram and taxi fares, bridge and road tolls, parking and car hire fees.

You cannot claim a deduction for expenses you incurred for the direct operation of a car that your employer provided, if at any time you or your relatives used it for private purposes, even if the expenses were work-related. Examples of direct operation expenses are petrol, oil and repairs. Such expenses form part of the valuation of the car for fringe benefits tax purposes. However, you may be able to claim expenses linked to the car that are not related to its direct operation, such as parking fees and bridge tolls.

You cannot claim the cost of normal trips between your home and your workplace as that travel is private. You cannot claim it even if:

•	you did minor tasks – for example, picking up the mail on the way to work or home

•	you had to travel between your home and your workplace more than once a day

•	you were on call – for example, you were on standby duty and your employer contacted you at home to come into work

•	there was no public transport near where you work

•	you worked outside normal business hours – for example, shift work or overtime, or

•	your home was a place of business and you travelled directly to a place of employment.

You can claim for the cost of trips undertaken between your home and your workplace if:

•	you used your vehicle or had other travel expenses because you had to carry bulky tools or equipment that you used for your work and you could not leave at your workplace – for example, an extension ladder or cello

•	your home was a base of employment – you started your work at home and travelled to a workplace to continue the work, or

•	you had shifting places of employment – you regularly worked at more than one site each day before returning home. Taxation Ruling TR 95/34 – Income tax: Employees carrying out itinerant work has more information on travel expenses for employees who have shifting places of employment.

You can claim the cost of travelling directly between two separate places of employment – for example, when you have a second job.

EXAMPLE

Sue is a clerk at a large department store. During 2006-07 she travelled by bus from her normal workplace to her second job as a waitress. After finishing work as a waitress, she went directly home.

Sue’s travel costs from her normal workplace to her second job are an allowable deduction. However, she cannot claim the cost of travelling home from her second job.

You can claim the cost of travelling:

•	from your normal workplace to an alternative workplace – for example, a client's premises – while still on duty and back to your normal workplace or directly home

•	from your home to an alternative workplace for work purposes and then to your normal workplace or directly home.

EXAMPLE

Janet is a clerk at a large department store in the city. In 2006-07 she was required to attend meetings at her employer's other store in the suburbs. She travelled by bus to the suburban store. As the meetings finished late, she went straight home by train.

Janet can claim the cost of each journey.

Records you need

The table below explains what records you need if you are claiming domestic or overseas travel expenses for accommodation, food, drink or incidentals.

If you are claiming travel expenses and you receive a travel allowance from your employer, you must show the allowance at item 2 on your tax return.

We set the reasonable allowance amount for your circumstances in an annual taxation determination which explains when you do not need to have evidence of your expenses and the way in which you can claim them. For 2006-07 refer to Taxation Determination TD 2006/43 - Income tax: what are the reasonable travel and meal allowance expense amounts for 2006-07?. This determination should be read together with Taxation Ruling TR 2004/6 – Income tax: substantiation exception for reasonable travel and overtime meal allowance expenses.

NOTE:
If your travel allowance was not shown on your payment summary and was not more than the reasonable allowance amount for your circumstances, you do not have to include the allowance at item 2 providing you have fully expended the allowance on deductible travel expenses and you do not claim a deduction for these expenses.

TRAVEL EXPENSE RECORDS

	DOMESTIC TRAVEL	OVERSEAS TRAVEL
	Written evidence	Travel diary	Written evidence	Travel diary
If you did not receive a travel allowance:
• travel less than six nights in a row	Yes	No	Yes	No
• travel six or more nights in a row	Yes	Yes	Yes	Yes
If you received a travel allowance and your claim does not exceed the reasonable allowance amount:
• travel less than six nights in a row	No	No	No*	No
• travel six or more nights in a row	No	No	No*	Yes**
If you received a travel allowance and your claim exceeds the reasonable allowance amount:
• travel less than six nights in a row	Yes	No	Yes	No
• travel six or more nights in a row	Yes	Yes	Yes	Yes**
A travel diary is a document in which you record the dates, places, times and duration of your activities and travel.

*	Written evidence is required for overseas accommodation expenses regardless of the length of the trip.

**	Members of international aircrews do not have to keep a travel diary if they limit their claim to the amount of the allowance received.

NOTE:
You must have written evidence for the whole of your claim, not just the excess over the reasonable amount.

Utility trucks, panel vans, large passenger-carrying vehicles and motorcycles

If you owned, leased or hired (under a hire purchase agreement), one or more of the following vehicles and used them for work purposes, you can claim the costs you incurred relating to this work use (for example, the cost of petrol and oil):

•	a utility truck or panel van with a carrying capacity of one tonne or more

•	a vehicle with a carrying capacity of nine or more passengers

•	a motorcycle

You can claim the costs you actually incurred. As these types of vehicles are not considered to be cars you cannot use the ‘cents per kilometre’ method or any other method described at item D1 to calculate your claim.

Car owned or leased by somebody else – a borrowed car

You can claim the actual costs you actually incurred when using a car owned or leased by somebody else for work-related purposes – for example, the costs of petrol and oil. You cannot use the cents per kilometre method or any other method described at item D1 to calculate your claim.

Award transport payments

Award transport payments are allowances covering either transport expenses or car expense reimbursements which are paid under an industrial law or award that was in force on 29 October 1986.

Some changes made to the industrial law or award after that date are treated as if they had been made on that day. Your union or employer can tell you the ‘29 October 1986 amount’.

Award transport payments are assessable income and you must include any payments as income on your tax return. If you have incurred work-related transport expenses or car expenses covered by these payments, you may be able to claim a deduction for these expenses.

If you choose to claim no more than the ‘29 October 1986’ amount, claim these expenses at this item. You do not need written evidence.

If you choose to claim more than the ‘29 October 1986’ amount for:

•	Transport expenses, make the claim at this item. You will need written evidence for the whole of the claim.

•	Car expenses make the claim at item D1.

You can also claim additional car expenses not covered by the award transport payment at item D1.

WHAT YOU MAY NEED

Read You need to know to find out what records you need.

SHOW AT THIS ITEM

At this item you claim travel expenses including for vehicles other than cars – for example, utility trucks or panel vans with a carrying capacity of one tonne or more, or vehicles with a carrying capacity of nine or more passengers and motorcycles.

Claim at this item any work related running costs you incurred for a car owned or leased by somebody else – a borrowed car.


Item D3 Work related uniform, occupation specific or protective clothing, laundry and dry cleaning expenses
	Work related clothing, laundry and dry- cleaning expenses
This topic covers:

Who does this item apply to?

You need to know

What you may need

Show at this item

Do not show at this item

Further information:

Working out your laundry claim

Record keeping

WHO DOES THIS ITEM APPLY TO?

Complete this item if you had:

•	protective clothing

•	uniform

•	occupation specific clothing, or

•	laundry or dry cleaning

expenses relating to your work as an employee.

YOU NEED TO KNOW

You cannot automatically claim a deduction simply because you received a uniform, clothing, laundry or dry-cleaning allowance from your employer. Carefully read the section Claiming deductions for expenses that relate to your work as an employee before claiming a deduction.

Work uniform

This is a uniform – either compulsory or non-compulsory – that is unique and distinctive to the organisation that you work for.

NOTE: Definition
Clothing is unique if it has been designed and made only for the employer. Clothing is distinctive if it has the employer’s logo permanently attached and the clothing is not available to the public

Compulsory work uniform

This is a set of clothing that identifies you as an employee of an organisation which has a strictly enforced policy that makes it compulsory for you to wear the uniform while you are at work.

You may be able to claim a deduction for shoes, socks and stockings where they are an essential part of a distinctive compulsory uniform, the characteristics of which (colour, style and type) are specified in your employer's uniform policy.

For more information about work uniforms, read Taxation Determination TD 1999/62 –Income tax:  What are the criteria to be considered in deciding whether clothing items constitute a compulsory corporate uniform/wardrobe?

You may be able to claim for a single item of distinctive clothing, such as a jumper, if it is compulsory for you to wear it at work.

Non-compulsory work uniform

You cannot claim expenses incurred for non-compulsory work uniforms unless your employer has registered the design with AusIndustry. Ask your employer for advice.

Shoes, socks and stockings can never form part of a non-compulsory work uniform, and neither can a single item such as a jumper.

NOTE:
Employers can obtain information about registering non-compulsory work uniforms from the AusIndustry website at www.ausindustry.gov.au.

Occupation specific clothing

This is clothing that is specific to your occupation, is not everyday in nature and would allow the public to easily recognise your occupation, for example, the checked pants a chef wears.

Protective clothing

This is clothing and footwear that you wear to protect yourself from the risk of illness or injury posed by your income-earning activities or the environment in which you are required to carry them out. To be considered protective, the items must provide a sufficient degree of protection against that risk. Examples of protective clothing include fire-resistant and sun-protection clothing, safety-coloured vests, non-slip nurse's shoes, rubber boots for concreters, steel-capped boots, hard hats, gloves overalls and heavy duty shirts and trousers. We also consider that overalls, smocks and aprons that you wear to avoid damage or soiling to your ordinary clothes during the course of your income-earning activities are protective clothing. Ordinary clothes such as jeans, drill shirts and shorts, trousers and socks that lack protective qualities designed for the risks of your work are not protective clothing.

Laundry expenses

You can claim the costs of washing, drying and ironing eligible work clothes. These costs can include laundromat expenses. You must have written evidence – for example, diary entries and receipts – for your laundry expenses if:

•	the amount of your claim is greater than $150, and

•	your total claim for work expenses exceeds $300 – not including car, meal allowance, award transport payments allowance and travel allowance expenses.

Working out your laundry claim

If you do not need to provide written evidence for your laundry expenses, you may use a reasonable basis to work out your claim.

For washing, drying and ironing you did yourself, The Tax Office considers that a reasonable basis for working out your laundry claim would be $1 per load – this includes washing, drying and ironing – if the load is made up only of the clothes described in this item, and 50 cents per load if other laundry items are included. If you choose a different basis to work out your claim, we may ask you to explain that basis.

To work out your claim you can use the work-related uniform expenses calculator on our website.

Dry cleaning expenses

You can claim the cost of dry cleaning eligible work clothes. You must have written evidence to substantiate your claim if your total claim for work expenses exceeds $300 – not including car, meal allowance, award transport payments allowance and travel expenses.

WHAT YOU MAY NEED

•	written evidence from your goods or services supplier and

•	diary records of your laundry costs, if you need written evidence.

SHOW AT THIS ITEM

You can claim the cost of buying, renting, repairing and cleaning occupation specific clothing, protective clothing and certain work uniforms.

DO NOT SHOW AT THIS ITEM

If you received an allowance from your employer for clothing, uniforms, laundry or dry cleaning, make sure that you have shown the amount at item 2.

You cannot claim the cost of purchasing or cleaning a plain uniform or clothes you bought to wear for work that are not protective or specific to your occupation even if your employer tells you to wear them, for example, a bartender's black trousers and white shirt or a manager's suit or stockings.

For more information read:

•	Taxation Ruling TR 98/5 – Income tax: Calculating and claiming a deduction for laundry expenses

•	Taxation Ruling TR 97/12 – Income tax: Deductibility of expenses on clothing, uniform and footwear

•	Taxation Ruling TR 2003/16 – Income tax: Deductibility of protective items and

•	Taxation Ruling TR 94/22 – Income tax: Deductibility of expenditure on conventional clothing .

RECORD KEEPING

Keep written evidence to prove your claims, where required. You need to keep these records for five years from the date you lodge your tax return. If at the end of this period you are in a dispute with the Tax Office that relates to this work expense, you must keep your records until the dispute is resolved.


Item D4 Work related self-education expenses
	Work related self-education expenses
This topic covers:

Who does this item apply to?

You need to know

What you may need

Do not show at this item

Further information

How your claim is worked out

WHO DOES THIS ITEM APPLY TO?

Complete this item if you have any self-education expenses relating to your work as an employee.

YOU NEED TO KNOW

You can only claim self-education expenses that related to your work as an employee at the time you were studying. If your self-education was to help you get a new job or commence a new income-earning activity, you cannot claim your expenses.

Self-education expenses are expenses related to a course of education provided by a school, college, university or other place of education. You must have undertaken the course to gain a formal qualification for use in carrying on a profession, business or trade or in the course of employment.

What you cannot claim

You cannot claim a deduction for the following expenses:

•	self-education expenses that you incurred if the only income you received was from youth allowance, austudy, ABSTUDY or similar schemes providing payments in the nature of financial assistance.

•	self-education expenses for a contribution amount paid to an education provider by you or by the Australian Government under HECS-HELP.

•	the repayments you made, whether compulsory or voluntary, on debts you have under the following student loan schemes:

o	Student Financial Supplement Scheme (SFSS)

o	Higher Education Loan Programme (HELP)

•	The cost of meals generally; for when you can claim the cost of meals, see What you can claim further down the document

The Higher Education Loan Programme (HELP) is the student loan scheme that was introduced on 1 January 2005.

HELP has three types of loan:

•	HECS-HELP, for eligible students enrolled in a Commonwealth supported place

•	FEE-HELP, for eligible fee-paying students enrolled at an eligible higher education provider or Open Universities Australia

•	OS-HELP, which helps students who wish to undertake some of their study overseas.

For more information on HELP, see the Department of Education, Science and Training website at www.goingtouni.gov.au.

Other allowable self-education expenses

NOTE:
Depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.

What you can claim

You can claim deductions for the following expenses:

•	your tuition fees payable under FEE-HELP (Higher Education Loan Programme), provided there was a direct connection between the course and your work activities at the time you incurred the debt – even if  the Australian Government paid your fees for you under FEE-HELP

•	self-education expenses paid with your OS-HELP loan provided there was a direct connection between the course and your work activities at the time you incurred the expenses.

•	the cost of meals during an absence from home, if:

o	you were participating in self-education directly connected to your current work, and

o	that self-education required you to be temporarily away from your home for one or more       nights

•	other expenses such as textbooks, stationery, student union fees, course fees and the decline in value of your computer. If you did not use your computer solely for self-education purposes, you will need to apportion your deduction. This means you divide the amount between private use and work related use. For example, if you used your computer 40% of the time for deductible self-education purposes and 60% of the time for private purposes, then you can only claim 40% of the decline in value.

•	 expenses for travel between:

o	your home and your place of education

o	your place of education and your home

o	your workplace and your place of education, and

o	your place of education and your workplace.

However, only the first leg of each trip is deductible where you travelled:

•	from your home to your place of education and then to your workplace, or

•	from your workplace to your place of education and then to your home.

To work out the amounts of allowable car or other travel expenses, you will need to read item D1 (car expenses) or item D2 (travel expenses). However, you must generally claim these amounts here at item D4.

$250 reduction

In certain circumstances you may have to reduce your allowable self-education expenses by $250. However, e-tax will calculate your allowable self-education expenses based on the information that you enter in Categories A,B,C,D and E.

Category A

Category A expenses are general expenses that are allowable as a deduction. Include in this category the cost of textbooks, stationery, student union fees, course fees, public transport fares and car expenses (excluding amounts for decline in value) worked out under the ‘logbook’ or ‘one-third of actual expenses’ methods.

Category B

Category B expenses are deductions for the decline in value of depreciating assets used for self-education purposes, including a car for which you are claiming deductions under the ‘logbook’ or ‘one-third of actual expenses’ methods.

NOTE:

1. Make your claim for the decline in value of a low-value pool (which includes assets used for self-education purposes) at item D6.

2. If you are in business and are eligible to enter or continue in the Simplified Tax System (STS) and you have chosen to do so at item S1, you will need to calculate your work-related deduction for depreciating assets using the STS rules. In that case, claim your work-related deduction for depreciating assets at item 14. e-tax will include the amount at item P8 in the 2007 Business and professional items schedule.

3. If you did not carry on any business during 2006-07 but have STS pool deductions because you have allocated depreciating assets to an STS pool in a prior year, make your claim for STS pool deductions at item D15. Refer to The Simplified Tax System: A guide for tax agents and small businesses (NAT 6459)

Category C

 Category C expenses are expenses for repairs to items of equipment used for self-education purposes.

Category D

 Category D expenses are car expenses related to your self-education activities which are claimed using the cents per kilometre method or 12% of original value method.

You cannot claim car expenses under this category if you have included deductions for decline in value or repairs to your car under categories B or C.

Category E

 Category E expenses are self-education expenses you have incurred that are not allowable as a deduction. For example:

•	travel expenses in respect of the last leg of each trip:

o	from your home to a place of education and then to your workplace, or

o	from your workplace to a place of education and then your home

•	child care costs related to attendance at lectures or other self-education activities, or

•	capital cost of items acquired in 2006-07 and used for self-education purposes – for example, a computer or desk.

WHAT YOU MAY NEED

•	written evidence

•	Taxation Ruling TR 98/9 – Income tax: Deductibility of self-education expenses

•	Guide to depreciating assets 2007 (NAT 1996-6.2007). This publication contains information about deductions for decline in value and balancing adjustments, and immediate deductions for certain depreciating assets. It also explains the option to pool low-value depreciating assets for which you cannot claim an immediate deduction. If you choose this option, see item D6 Low value pool deduction.

DO NOT SHOW AT THIS ITEM

•	the cost of formal education courses provided by professional associations. Show these at item D5 Other work related expenses.

•	the cost of attending seminars, education workshops or conferences that are connected to your work activities but do not relate to your course of education. Show these at item D5 other work related expenses.

•	 amounts for decline in value of items included in a low value pool. Show these at item D6 Low value pool deduction

•	deductions for depreciating assets if you are in business and have chosen to enter or continue in the Simplified Tax System (STS). Show these at item 14 Net income or loss from business.

•	STS pool deductions for depreciating assets if you are not carrying on any business during 2006-07. Show these at item D15 Other deductions.

FURTHER INFORMATION

You may want to read how your claim is worked out.


D4	Self-education expenses – how your claim is worked out

STEP 1	If you had any category A expenses, go to step 2. Otherwise, read on.

If you do not have any category A expenses, e-tax does not have to reduce your claim. e-tax will add any category B, C and D amounts and show the total at D item D4 on your tax return. Go to the examples below.

STEP 2	If the total of your category C, D and E amounts is less than $250, go to step 3. Otherwise, read on.

If the total of your category C, D and E amounts is $250 or more e-tax does not have to reduce your claim. e-tax will add any category A, B, C and D amounts and show the total at D item D4 of your tax return. Go to the examples below.

STEP 3	e-tax will take away the total of any category C, D and E amounts from $250.

STEP 4	e-tax will take your answer from step 3 away from your total category A amount. If this leaves you with zero or less, your category A amount is reduced to zero.

STEP 5	e-tax will add your step 4 amount – if any – to the total of your category B, C and D amounts and show your answer at D item D4 of your tax return.

EXAMPLES OF HOW TO WORK OUT A CLAIM

EXAMPLE 1

Maureen studied hairdressing at a TAFE college and the course was directly related to her current employment as an apprentice hairdresser.

Her expenses		Category
Course fees	$180	A
Textbooks	$ 70	A
Student union fees	$ 40	A
Total expenses	$290
Take away	$250
Maureen can claim	$ 40
EXAMPLE 2

Ian was unemployed and got a Newstart allowance. He went to a course to gain a second qualification to help his job prospects.

Ian cannot claim any self-education expenses as there was no direct connection between the expense and his income source.

EXAMPLE 3

Lachlan was a clerk in the public service who was studying gourmet cooking part time in order to become a chef. Lachlan cannot claim any self-education expenses as there was no direct connection between the expense and his income source.

EXAMPLE 4

Katelin studied full time at a university and received an austudy payment as her only source of income. Katelin cannot claim any self-education expenses as there was not a sufficient connection between the expense and her austudy payment.

EXAMPLE 5

Angus studied part time at a university and the course was directly related to his current employment. He travelled by bus from his work to university.

His expenses		Category
Stationery	$10	A
Textbooks	$240	A
Course fees	$200	A
Bus fares	$150	A
Student union fees	$150	A
Repair to home printer	$ 70	C
Total allowable expenses	$820
Self-education expenses not allowable as a deduction
Child care costs	$520	E
The general expenses for stationery, textbooks, course fees, bus fares and student union fees are category A amounts. The repair expense is a category C amount.

Angus does not have to reduce his category A expenses as the total of his category C (repairs $70) and E (child care costs $520) is more than $250.

Angus can claim $820 – his category A and C amounts.

However, if Angus had no child care costs then his claim would be worked out using the steps above, as follows:

STEP 3	$250 less $70 (the category C amount) = $180

STEP 4	$750 (category A amount) less $180 (step 3 amount) = $570

STEP 5	$570 (step 4 amount) plus $70 (category C amount) = $640

Angus could claim $640.


 D4 Work related self-education expenses

Do not show at this item:

•	The cost of formal education courses provided by professional organisations. Show these at item D5 Other work related expenses.

•	The cost of attending seminars, education workshops or conferences that are connected to your work activities but do not relate to your course of education. Show these at item D5 Other work related expenses.

•	Amounts for decline in value of items included in a low value pool. Show these at item D6 Low value pool deduction.

•	Deductions for depreciating assets if you are in business and have chosen to enter or continue in the Simplified Tax System (STS). Show these at item 14 Net income or loss from business.

•	STS pool deductions for depreciating assets if you are not carrying on any business during 2006-07. Show these at item D15 Other deductions.


Item D5 Other work related expenses
	Other work related expenses
This topic covers:

Who does this item apply to?

You need to know

What you may need

Do not show at this item

WHO DOES THIS ITEM APPLY TO?

Other expenses include union fees, overtime meals, attending formal education courses provided by professional associations, seminars, conferences or education workshops, books, journals and trade magazines, tools and equipment, protective items such as sunscreens and sunglasses, computers and software, telephone and home office expenses. Phone the Personal Tax Infoline if you are not sure if you can claim an expense.

YOU NEED TO KNOW

You cannot claim the cost of entertainment, fines or penalties.

You cannot claim private expenses such as child care expenses or fees paid to social clubs.

Receiving an allowance from your employer does not automatically entitle you to a deduction. To claim a deduction, you must have included the whole of the allowance at item 2 and incurred the expense, and it must be related to your work as an employee.

If your total claim for all work expenses as an employee exceeds $300, you may need written evidence to prove your claim. Read the written evidence rule.

NOTE:
Depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.

Simplified Tax System (STS)

If you are in the simplified tax system (STS) and you have elected to do so at item S1, you will need to calculate your work-related deduction for depreciating assets using the STS rules. You claim your work related deduction for decline in value at item 14. e-tax will include the amount at item P8 in the Business and professional items schedule 2007.

If you did not carry on any business during 2006-07 but have STS pool deductions because you have allocated depreciating assets to an STS pool in a prior year, make your claim for STS pool deductions at item D15. Refer to The Simplified Tax System: A guide for tax agents and small businesses (NAT 6459).

Union fees and subscriptions to associations

You can claim a deduction for union fees and subscriptions to trade, business or professional associations. You can only claim payments of levies to a strike fund where the fund is used solely to maintain or improve the contributors' pay. Your payment summary may show fees or subscriptions paid by you.

Overtime meals

You can claim a deduction for overtime meal expenses you incurred if you worked overtime and you received a bona fide overtime meal allowance from your employer which was paid under an industrial law, award or agreement. You can claim only the amount of expenditure you incurred. If your claim is more than $21.90 per meal, you will need written evidence.

You can only claim for overtime meal expenses incurred on those occasions when you worked overtime and you received an overtime meal allowance payment for that overtime.

An amount for overtime meals that has been ‘folded in’ (for example, under a workplace agreement) as part of your normal salary or wages income is not considered to be an overtime meal allowance.

Amounts received as overtime meal allowances must be included as income at item 2, subject to the note below.

NOTE:
If your award overtime meal allowance was not shown on your payment summary and was not more than $21.90 for each meal, you do not have to include the amount at item 2 provided that you have fully expended the allowance and do not claim a deduction for overtime meal expenses.

Seminars, conferences or education workshops

You can claim the cost of attending seminars, conferences or education workshops that are sufficiently connected to your work activities.

Books, journals and professional libraries

You can claim the cost of trade magazines, technical journals and reference books that you need to do your work.

You can claim for the decline in value of a professional library that includes books, tapes, compact discs, records, DVDs and videos that you need to do your work.

Protective equipment and other items

This is equipment or other items, other than clothing items, that you used to protect yourself from the risk of illness or injury posed by your income earning activities or the environment in which you were required to carry them out, for example, safety equipment, sunscreens and sunglasses. Make your claim for the cost of protective clothing and footwear at item D3.

Computers and software

You can claim a deduction for the work related proportion of the decline in value of computers. If you used your computer for private purposes you must divide your decline in value amount between your work related and private use. For example, if you used a computer 30% of the time for work and 70% of the time for non-work purposes, then you can only claim 30% of the decline in value.

You can also claim a deduction for the work related proportion of the cost of repairs to your computer and interest on money borrowed to finance the cost of your computer.

You may need to make a balancing adjustment if you cease to hold or to use a computer where you have previously claimed a deduction for its decline in value. See Guide to depreciating assets 2007 (NAT 1996-6.2007) or use the e-tax depreciation routine to work out your claim.

Telephone expenses

You can claim a deduction for the cost of work related telephone calls.

You can claim a deduction for your telephone rental if you can show that you were on call or were regularly required to telephone your employer or clients while you are away from your workplace. If you also use your telephone for private purposes you must apportion the cost of telephone rental between work related and private use.

Home office expenses

You can claim the additional running expenses of a home office – for example, the decline in value of and repairs to your home office furniture and fittings, heating, cooling, lighting and cleaning. You can keep a diary to work out how much of your running expenses relate to doing work in your home office. Alternatively, you can use a fixed rate of 26 cents per hour for home office expenses for heating, cooling, lighting and the decline in value of furniture instead of keeping details of actual costs. When you use your home office for work as an employee, note that time spent in your diary. Diary records are acceptable evidence of a connection between the use of a home office and your work. Keep diary records for a representative four week period.

There is a home office expenses calculator on our website you can use to work out your claim amount.

For further information refer to Practice Statement PS 2001/6 – Home office expenses. For a complete explanation of the limited circumstances in which you may claim for occupancy expenses of your home, such as rates, rent, mortgage interest and insurance, you should refer to Taxation Ruling TR 93/30.

Low value pooling

If you choose the low value pooling method to calculate the decline in value of low-cost and low-value depreciating assets, make your claim at item D6.

Other expenses

You can claim a deduction here for any other expenses you incurred in earning your salary or wages that you have not already claimed.

WHAT YOU MAY NEED

•	statements from your bank, building society or credit union

•	written evidence from your supplier or association

•	other written evidence or diary entries you made to record your expenses

•	your PAYG payment summary – individual non-business

•	Guide to depreciating assets 2007. This publication contains information about deductions for decline in value and balancing adjustments, and immediate deductions for certain depreciating assets whose cost (when added to the cost of other substantially identical assets or assets that make up a set) does not exceed $300. It also explains the option to pool low-value depreciating assets for which you cannot claim an immediate deduction. If you choose this option, see item D6 Low value pool deduction.

•	Taxation Ruling TR 93/30 – Income tax: Deductions for home office expenses

•	Practice Statement PS 2001/6 – Home office expenses.

•	Practice Statement PS LA 2005/7 – Substantiation of deductions claimed by individual taxpayers for work and car expenses incurred in the course of earning non-business and non-investment income

DO NOT SHOW AT THIS ITEM

Do not show at this item claims for:

•	expenses not related to your work

•	protective clothing items – show these at item D3 Work-related clothing, laundry and dry-cleaning expenses

•	expenses from carrying on a business – item 14

•	the cost of sickness and accident insurance premiums – item D15

•	tax costs – such as tax agent fees – item D10

•	decline in value of items included in a low-value pool – show these at item D6 Low value pool deduction

•	decline in value of work related items if you are in business and have elected to enter the Simplified Tax System (STS). Show these at item 14 Net income or loss from business.


 D5 Other work related expenses

Do not show at this item claims for:

•	expenses not related to your work

•	protective clothing items – show these at item D3 Work-related clothing, laundry and dry-cleaning expenses

•	expenses from carrying on a business – item 14

•	the cost of sickness and accident insurance premiums – item D15

•	tax costs – such as tax agent fees – item D10

•	decline in value of items included in a low-value pool – show these at item D6 Low value pool deduction

•	decline in value of work related items if you are in business and have elected to enter the Simplified Tax System (STS). Show these at item 14 Net income or loss from business.


Item D8 Gifts or donations
	Gifts or donations
This topic covers:

Who does this item apply to?

You need to know

What you may need

WHO DOES THIS ITEM APPLY TO?

Complete this item if you made any of the following:

•	a gift or donation of $2 or more to an eligible organisation (an organisation that is eligible to receive tax-deductible gifts)

•	a contribution to an eligible organisation of more than $250 in respect of a fund-raising event before 1 January 2007

•	a contribution to an eligible organisation of more than $150 in respect of a fund-raising event on or after 1 January 2007

•	a contribution of $2 or more to

o	a registered political party

o	an independent candidate in an election for parliament, or

o	an independent member of parliament

OR did you:

•	make an approved cultural bequest

•	enter into a conservation covenant

An eligible organisation is an organisation that is listed in the tax law, or has been endorsed by the Tax Office as a deductible gift recipient, such as:

•	certain organisations or charities which provide help in Australia

•	an approved overseas aid fund

•	a school building fund

•	an approved environmental or cultural organisation

YOU NEED TO KNOW

NOTE:
If you do not know whether you can claim a deduction, see if the information is on the receipt for your donation. If not, contact the organisation for confirmation. If you still do not know, you can check on www.abn.business.gov.au or phone the Personal Tax Infoline.

If you have been given with more than one receipt or form of advice (for example, the charity you donated to and your employer have both provided written confirmation of your donations) make sure you claim the deduction for your donations only once.

Generally, you cannot claim a deduction for a donation if you received something in return – for example, a pen, raffle ticket, dinner or a reduction in your child's school fees. See Deductions for contributions relating to fund-raising events.

If you made a donation to a school building fund and your receipt includes other payments, you can claim only that part that is the voluntary donation.

You can claim deductions for donations made to prescribed private funds.

Gifts of Money

You can claim a deduction for the amount of money you have donated to an eligible organisation. You can elect to spread your deduction for this donation over five income years or less. You need to make the election in writing before lodging your tax return, setting out the percentage of the deduction you will claim in each year. Click here to print a copy of the election form.

Workplace-giving program

If you made donations during the year to an eligible organisation through your employer’s payroll system (known as ‘workplace-giving’) you still need to record the total amount of your donations at this item. Your payment summary or other form of advice from your employer, showing the donated amount, is sufficient evidence to support your claim for the deduction. You do not need to have a receipt from the eligible organisation.

Donations and gifts to political parties and independent candidates and members

You can claim a deduction for political contributions or gifts to registered political parties, independent members of parliament (State or Commonwealth) or independent candidates in an election for parliament.  Contributions must be $2 or more.  The contribution or gift must be money, or property that you purchased during the 12 months before making the contribution or gift.

The maximum amount you can deduct in total for all your contributions or gifts to political parties during the year is $1,500.  A separate limit of $1,500 applies in respect of the total deduction for all your contributions or gifts to independent candidates or independent members of parliament for the year.

The contribution to a political party must be to a registered political party under Commonwealth State or Territory electoral laws.  A contribution to a political party can include membership fees.

The contribution to an independent candidate or independent member must be in respect of a candidate for election to, or member of the Commonwealth or State Parliament or the Legislative Assembly of the Northern Territory or the Australian Capital Territory.

An independent candidate is an individual whose candidature in an election for parliament is not endorsed by a registered political party.  An independent member is a member of parliament that is not a member of a registered political party.

NOTE:
On 22 June 2006 the maximum amount you can claim for a contribution or gift to political parties, and to independent members and candidates increased from $100 to $1,500.  If you contributed more than $100 between 22 and 30 June 2006 and did not claim the full amount, you may be entitled to an amendment of your 2006 assessment.  For more information on how to request an amendment, see If you made a mistake on your tax return.

Deductions for contributions relating to fund-raising events

You can claim a deduction for contributions to eligible organisations that relate to certain fund-raising events where you receive a minor benefit for your contribution, provided that:

•	the contribution meets certain conditions, and

•	the benefit you received does not exceed a specified limit.

A fund-raising event includes a fete, ball, gala show, dinner, performance or similar event.

Subject to the conditions listed below, you can claim a deduction if you made:

•	a contribution of money or property to attend or participate in a fund-raising event (or for the right to attend or participate) in a fund-raising event.

•	a contribution of money to purchase goods or services at a charitable auction at the fund-raising event (or the charitable auction was itself the fund-raising event)

If your contribution was made before 1 January 2007, it must meet the following conditions:

•	it must have been made to an eligible organisation

•	it must have been worth more than $250

•	if it was property, you must have either:

o	purchased it within 12 months of making the contribution, or

o	owned it for more than 12 months and the Australian Valuation Office (AVO) valued it at more than $5,000

•	the fund-raising event was held in Australia, and

•	the market value of the minor benefit you received for your contribution was worth no more than $100 or 10% of the value of the contribution (whichever is the less)

The receipt from the eligible organisation will show the market value of the minor benefit your received.

If your contribution was made on or after 1 January 2007, it must meet the following conditions:

•	it must have been made to an eligible organisation

•	it must have been worth more than $150

•	if it was property, you must have either:

o	purchased it within 12 months of making the contribution, or

o	owned it for more than 12 months and the Australian Valuation Office (AVO) valued it at more than $5,000

•	the fund-raising event was held in Australia, and

•	the market value of the minor benefit you received for your contribution was worth no more than $150 or 20% of the value of the contribution (whichever is the less). The receipt from the eligible organisation will show the market value of the minor benefit you received.

Your deduction is limited to the part of the contribution in excess of the market value of the minor benefit you received.

You can claim a deduction for up to two contributions that you make to attend or participate in the same fund-raising event.

Each successful bid at a fund raising event is a single contribution. Provided the conditions are met there is no limit to the number of deductions you can claim for the purchase of goods or services by way of successful bids.

NOTE:
The contribution is the goods and services tax (GST) inclusive amount

EXAMPLE

Steve and his partner attended a fund raising event in August 2006. He contributed $600 for the opportunity to attend the dinner and auction ($300 each). The minor benefit (the dinner) he and his partner received was valued by the eligible organisation at $30 per head ($60 in total).

In the auction, Steve made four successful bids at $70 each ($280 in total). Steve cannot claim a deduction for these items because each contribution was not more than $250. Steve also made two successful bids at $290 each ($580 in total). Each item was valued at $5 each ($10 in total).

Steve can claim deductions for:

$540 ($600 less the minor benefit [the dinner] of $60)

$570 ($580 for the two successful bids at $290 each less the minor benefit of $10)

Steve’s total claim is $1,110.

If the eligible organisation issues a receipt, it should state:

•	the name and Australian business number (ABN) of the organisation

•	that your contribution was made to attend the fund-raising event or for your purchases as a successful bidder at the charitable auction

•	the amount of the contribution (if money), and

•	the GST inclusive market value of the minor benefit.

Gifts of property

Under the general gift provisions you can claim a deduction for a donation of property to an eligible organisation if

•	the property was purchased within 12 months of donating it, or

•	the property was purchased more than 12 months before you donated it and the Australian Valuation Office (AVO) has valued it at more than $5,000.

The amount deductible is the lesser of the market value of the property at the time of the donation and the amount you paid for the property.

You cannot claim a deduction for a donation of property if you did not purchase it (for example, you inherited or won the property) unless the AVO has valued at more than $5,000.

You can elect to spread the deduction for a donation of property which is valued by the AVO at more than $5,000, over five income years or less. You need to make the election in writing before lodging your tax return for the income year in which you made the donation, setting out the percentage of the deduction you will claim in each year. Click here to print a copy of the election form.

For more information about property valuations phone the Australian Valuation Office (AVO) on (08) 8198 1900, or by fax on (08) 8296 3398 or visit the AVO’s website at www.avo.gov.au

Cultural and environmental property gifts

You can elect to spread the deduction for donations made under the Cultural Gifts Program and for environmental and heritage gifts valued by the AVO, over five income years or less. You must lodge your election with the relevant department before you lodge your tax return.

For more information about:

•	the Cultural Gifts Program and the election process phone the Department of Communications, Information Technology and the Arts on (02) 6271 1643, email cgp.mail@dcita.gov.au or visit the department’s website http://www.dcita.gov.au/arts_culture/funding_programs_and_support/cultural_gifts_program.

•	making donations to environmental and heritage organisations and the election process phone Department of the Environment and Water Resources on (02) 6274 2436, email reo@environment.gov.au or visit the department’s website at http://www.environment .gov.au/tax/reo/index.html.

If, on or after 1 July 2002, you entered into a conservation covenant over land you owned you may be entitled to claim a deduction if certain conditions were met. You can elect to spread the deduction over five years or less. The covenant needs to be either approved in writing by the Minister for the Environment and Water Resources entered into under a program approved in writing by the Minister.

•	For more information phone the Department of the Environment and Water Resources on (02) 6274 1111 and ask to speak to the relevant officer in the Natural Resource Management Policy Branch, email tax@environment.gov.au or visit the department’s website at http://www.environment.gov.au/tax/reo/index.html.

If you are an executor or administrator of an estate, you can claim a deduction on the donor’s final individual tax return for a cultural bequest made under the Cultural Bequests Program. If the value of the bequest reduces the donor’s taxable income to nil, any excess value can be claimed on the first tax return of the estate. You need a certificate of approval issued to the donor by the Minister for Communications, Information Technology and the Arts during the 1998, 1999 or 2000 income years.

Spreading a deduction over 5 years

Click here to print a copy of the election form.

This section does not apply to cultural, environmental or heritage gifts.

You can only elect to spread your deduction over five years if it was a gift of property valued at more than $5,000 by the AVO, or a gift of cash.  The election is not available for donations and gifts to political parties and independent candidates and members.

You do not need to fill in the election if you wish to claim the full deduction in the year of donation.

Where you elect to spread your deduction you give up the right to claim the full deduction amount in the year of donation.

If you made a donation in conjunction with other donors, and you elect to spread your share of the deduction, you must complete your own separate election form and advise us of your percentage share in the donation.

You can vary your election at any time but only for years that you have not lodged a tax return.

Your election must:

•	be made in writing, signed and dated

•	be made before you lodge your tax return for the income year in which the donation was made

•	state the percentage of the deduction you will claim in the income year the donation was made and for each year up to five years – the total of which cannot exceed 100% of the original deduction.

You must keep your election for five years from the date you lodge your tax return with the claim for your last apportionment. Do not send it to us.

WHAT YOU MAY NEED

•	your receipts for donations or contributions

•	the purchase price and purchase date of any property donated

•	your valuations by two or more approved valuers for any donations of property under the Cultural Gifts Program or to a body of the National Trust

•	your valuation certificate from the Australian Valuation Office (AVO), if required, for your donation of property valued at more than $5,000

•	a certificate of approval from the Minister for Communications, Information Technology and the Arts for a cultural bequest

•	your PAYG payment summary – individual non-business (NAT-01.2005) or other form of advice from your employer showing the amount you have donated through a workplace-giving program

•	your valuation certificate from the AVO in relation to a conservation covenant you have entered into

•	written approval from the Minister for the Environment and Water Resources for a conservation covenant you have entered into.


Election to spread deduction
Election to spread deduction for a gift

Click on the Print button to print a copy of the election.

(Does not cover cultural, environmental or heritage gifts)

Name of donor:

Name of recipient fund, authority or institution:

Reference number from certificate of valuation (if property):

Percentage ownership share (if given in conjunction with other individuals):

Date of donation:

Apportionment election or variation:

(Note: ensure that your apportionment totals 100%)

  This is my first election for this gift (or donation).

  This is a variation to a previous election.

Tick the appropriate box.

Signature:	Date:


Item D9 Deductible amount of undeducted purchase price (UPP) of an Australian pension or annuity
	Deductible amount of UPP of an Australian pension or annuity
This topic covers:

Who does this item apply to?

You need to know

Further information

If you do not know how much of your UPP you can claim

Record keeping

WHO DOES THIS ITEM APPLY TO?

Complete this item if you received an Australian pension or annuity which has a deductible amount of undeducted purchase price (UPP).

If you showed income from an Australian pension or annuity at item 7, you may be able to claim a deduction against the taxable amount of your pension or annuity income.

The UPP is the amount you contributed towards the purchase price of the pension or annuity for which you did not claim, and were not eligible to claim, a tax deduction.

YOU NEED TO KNOW

Australian Government pensions including pensions from Centrelink and the Department of Veterans' Affairs (DVA) shown at item 6 do not have a deductible amount.

If you are entitled to a UPP deductible amount for a foreign pension or annuity then claim this at item D12.

If you have not shown income from an Australian pension at item 7, you are not able to claim this type of deduction. e-tax will display a message.

UPP of a pension or annuity

NOTE:
If you need information or assistance with this item, phone the Superannuation Infoline on 13 10 20.

If you showed income from an Australian pension or annuity at item 7, you may be able to reduce the taxable amount of the pension or annuity income if it has a UPP.

The UPP is the amount you contributed towards the purchase price of the pension or annuity for which you did not claim, and were not eligible to claim, a tax deduction.

Each year, you deduct the part of your pension or annuity that represents a return to you of your own personal contributions which were not claimed as a tax deduction from your taxable pension or annuity income. This tax free part is called the deductible amount of the UPP, and it is usually calculated by dividing the UPP of your pension or annuity by a life expectancy factor determined according to life expectancy statistics.

Your pension or annuity may have a UPP if:

•	you received a superannuation pension and you were not entitled to claim a tax deduction for some or all of the personal contributions you made to your superannuation fund or retirement savings account

•	you received a pension or annuity that reverted to you on the death of another person, or

•	you received a pension or annuity that you bought with your own capital.

NOTE:
If you have taken any part of your pension or annuity as a lump sum or if there are changes to your pension or annuity due to, for example commutation, divorce and re-marriage then the deductible amount of your UPP may need to be recalculated.

FURTHER INFORMATION

Schedule of additional information

If you do not know your deductible amount:

•	your payer may be able to tell you

•	the calculator on the Tax Office website at www.ato.gov.au/super can help you work it out if your pension or annuity commenced after 1 July 2004, or

•	you will need to complete a schedule of additional information by clicking on the Additional information schedule button on screen 4402. By answering the questions in the additional information schedule you will be completing a request for a determination of the deductible amount of UPP of an Australian pension or annuity. Your request will be addressed in the form of a Private Binding Ruling which is legally binding on the Commissioner. Your return will be processed once the Private Binding Ruling is finalised.  You can view all the questions in the interview screen by using the scroll bar on the right of the screen. If you need more help, read data entry.

NOTE:
If you received a Commonwealth Superannuation Administration Pension or if you would like to request a determination of the deductible amount of UPP for more than one Australian pension or annuity, then you cannot use the schedule of additional information. Instead you should leave this item blank and complete the form Request for a determination of the deductible amount of UPP of a Foreign pension or annuity (NAT 16543) Send the form with any additional documentation that is required to the Tax Office. Your request will be addressed in the form of a Private Binding Ruling which is legally binding on the Commissioner.

RECORD KEEPING

If you have prepared an Additional information schedule, sign and attach the printed copy to the printed copy of your tax return.


Item L1 Tax losses of earlier income years
	Tax losses of earlier income years
This topic covers:

Who does this item apply to?

You need to know

What you may need

Do not show at this item

Further information

Completing this item in e-tax

WHO DOES THIS ITEM APPLY TO?

Complete this item if you have any undeducted tax losses of earlier income years.

YOU NEED TO KNOW

This question only applies to losses incurred in relation to earning income from Australian sources.

A tax loss occurs when the total of your allowable deductions for an income year – excluding tax losses of earlier income years – is greater than the total of your assessable income and your net exempt income. However, some deductions, such as gifts or donations (see item D8) and personal superannuation contributions (see item D13) are limited for this purpose and cannot be used either to create or increase a loss.

You are entitled to claim a loss of an earlier year against taxable income in a subsequent year but you must claim the loss at your first opportunity to do so. If you had a taxable income last year and did not claim an earlier loss against it, you cannot claim that loss against your 2006-07 income. If you were able to claim a loss last year but did not, you can request an amendment. You must complete this item whether or not you are able to claim the losses against taxable income this year.

Net exempt income

If you were an Australian resident your net exempt income includes all your exempt income, including any exempt foreign employment income. To work out your net exempt income you deduct any non-capital expenses you incurred in earning your exempt income and any foreign tax payable on that income from your total exempt income.

If you were a non-resident your net exempt income includes all your exempt income from Australian sources and film income exempt under section 26AG of the Income Tax Assessment Act 1936 (ITAA 1936). To work out your net exempt income you deduct any non-capital expenses you incurred in earning your exempt Australian income and any foreign tax payable on film income exempt under section 26AG from your total exempt income.

Film losses

If you incur certain deductions in connection with Australian films, it may be necessary, in certain circumstances, to identify a film loss for an income year separately from other tax losses.

A film loss that has not been allowed as a deduction in the income year in which it is incurred can be carried forward for a deduction in a later year, but can only be offset against income derived from qualifying Australian films (firstly against exempt film income, if any, and then against assessable film income).

For general information on eligibility for Australian film industry deductions, see Australian film industry incentives.

When will a film loss exist?

You incur a film loss in an income year if:

•	your film deduction for that year exceeds the sum of assessable film income and net exempt film income for the year, and

•	you have made an overall tax loss for the year.

A film loss can only be equal to or less than the total of the tax loss claimed for the income year (as calculated under the general tax loss provisions). It cannot exist separately from, or exceed a tax loss.

When can a film loss be carried forward?

A film loss incurred in 1989-90 and subsequent income years can be carried forward indefinitely.

How is a film loss treated?

Film losses are separately identified because of a special rule that overrides the general rules. Film losses are separated from general tax losses so that they can only be used as an offset against net assessable film income (assessable film income less film deductions) or net exempt film income (exempt film income as reduced by foreign taxes and revenue expenses).

General tax losses may also be offset against assessable film income or exempt film income, because film income is still included with any other assessable or exempt income for this purpose. However, film losses are deducted against assessable film income before any general tax losses, in the order in which the film losses were incurred.

If you have a film loss and film income this year, you will need to complete the film loss worksheet.

Effect of bankruptcy

If you have been bankrupt, you generally cannot claim a deduction for tax losses relating to income years preceding the date you became bankrupt in an income year after that date. This rule also applies if you were released from the debts by the operation of an Act relating to bankruptcy. For more information, phone the Personal Tax Infoline.

Australian losses and foreign source income

You can choose to use some or all of your tax losses of earlier income years incurred in earning Australian source income to reduce your net foreign source income, as shown in the example below. You may choose not to reduce your net foreign source income and instead return some or all of the net foreign source income as assessable income. A reason could be the availability of foreign tax credits on some or all of the net foreign source income.

Net foreign source income is assessable foreign source income less those allowable expenses incurred in deriving the foreign source income.

EXAMPLE

Peter owns a smallgoods business and has accumulated non-primary production tax losses of earlier income years of $6,000. He made all his losses in 1989-90 and later years.

In 2006-07 Peter had no exempt income but he received $1,500 income from Germany. He has elected to use $500 of his tax losses of earlier income years to reduce this foreign income.

Peter's tax losses from earlier income years	(a)	$6,000
Peter's net exempt income for 2006-07	(b)	nil
Take (b) away from (a) – this is the amount of losses available to Peter for 2006-07.	(c)	$6,000
The amount of tax losses of earlier income years Peter used to reduce net foreign source income.	(d)	$500
Peter will show the balance of the foreign source income of $1,000 at item 19.
Take (d) away from (c) – The amount at (e) is the total tax losses of earlier income years available to Peter to reduce net Australian source income shown at SUBTOTAL on page 3 of his tax return. Peter will show this amount at R item L1 on page 3 of his tax return.	(e)	$5,500

Peter then needs to determine how much of these losses he can actually deduct from his net Australian source income. If Peter has at least $5,500 of net Australian source income at SUBTOTAL he will show $5,500 at Z item L1 on page 3 of his tax return.

e-tax and tax losses of earlier income years

e-tax has been designed to calculate your foreign tax credit entitlement, if you have one. If you have tax losses from earlier years, how you apply those losses may affect your foreign tax credit entitlement.

If you have assessable foreign income and you elect to apply your tax losses of earlier income years against that income, your foreign source income included at items 17, 18 and 19 on your tax return will be reduced by the losses applied. Only losses of earlier income years not directly applied against foreign source income but claimed this year against your income from Australian sources will be shown at item L1 on your tax return.

You must show the amount of your tax losses carried forward from earlier years, separated into primary production or non-primary production. We require this information even if you are not able to claim a loss from an earlier year against your income this year. Your prior year loss amounts can be provided at Q and R item L1 as follows:

•	Label Q on your tax return – Primary production losses carried forward from earlier income years

•	Label R on your tax return – Non-primary production losses carried forward from earlier income years.

e-tax will complete these labels from the information you provide.

If you have film losses of earlier years you also need to read Film losses as you may need to manually calculate your tax losses of earlier years to enter them in the table.

You can carry forward primary production losses incurred in any earlier income year. Your deductible non-primary production losses are limited to losses incurred in 1989-90 or a later year. Non-primary production losses incurred before 1989-90 can no longer be deducted from income.

If you had tax losses for more than one earlier income year you must, generally, deduct your losses in the order you incurred them, oldest first. You can only deduct a tax loss to the extent that you have not already deducted it.

Before you can deduct tax losses of earlier income years you must reduce them by your net exempt income for the current year and, if relevant, by any amount you elect to use to reduce your net foreign source income.

NOTE:
Your tax losses of earlier income years can only reduce your Australian source income to zero. If your tax losses of earlier income years were more than your Australian source income you will need to keep records of the losses to claim in future years. e-tax will calculate and display the loss that can be carried forward.

How e-tax deals with tax losses from earlier income years

e-tax will apply tax losses from earlier income years against your net Australian source income. Primary production losses will be applied first. If you have any net foreign source income and still have unused tax losses from earlier income years available, you will then be able, if you choose, to apply the unused losses against your foreign source income. In applying tax losses from earlier income years against your net foreign income you cannot claim more than the lesser of:

•	the amount of tax losses of earlier income years that you have available or

•	the net foreign source income amount

If you apply any tax losses from earlier income years against net foreign source income, an Additional information schedule will be prepared for inclusion with your tax return.

WHAT YOU MAY NEED

•	records of your tax losses of earlier income years.

•	your foreign source income statement.

DO NOT SHOW AT THIS ITEM

•	deferred non-commercial business losses from a prior year – these are shown at item 12 Partnerships and trusts for partnership activities or at item 15 Deferred non-commercial business losses for sole trader activities. e-tax will complete items P8 and P9 in your Business and professional items schedule using the information you enter at item 15

•	capital losses – capital losses are explained at item 17 Capital gains

•	expenses and losses in relation to earning foreign source income – these are taken into account at item 19 Foreign source income and foreign assets or property

FURTHER INFORMATION

Completing this item

STEP 1	If you have film losses from earlier years and film income this year print a copy of the worksheet and work out your available losses for this year. Enter the losses from the worksheet on the first line of the table. Proceed to Step 4.

STEP 2	Write the tax losses of earlier income years at the beginning of 2006-07 in the appropriate column(s) of the worksheet.

NOTE:
Do not include any non-primary production losses made in 1988-89 and earlier income years.

STEP 3	Write your net exempt income for 2006-07 in the appropriate column(s).

STEP 4	If you want to apply your tax losses of earlier income years against foreign source income do it now. You cannot claim more than the amount shown in that income category or the amount of losses still unapplied, whichever is the lesser amount.

STEP 5	Click on the Next button. e-tax will move to the next section of the interview.

NOTE:
If you apply tax losses of earlier income years against foreign source income e-tax will reduce the amounts of net foreign source income that would otherwise be shown on your income tax return at items 17, 18 and 19 by the amount of the losses applied.


Item L1 Worksheet

Click on the Print button to print a copy of this worksheet.

		Primary production loss	Non-primary production loss
Total tax losses (excluding film losses) of earlier income years at the beginning of 2006-07	(a)	$_____________	$_____________
Net exempt income for 2006-07	(b)	$_____________	$_____________
Take (b) away from (a) – this is the amount of losses (excluding film losses) available this year	(c)	$_____________	$_____________
Total film losses of earlier income years at the beginning of 2006-07	(d)	n/a
Net exempt film income for 2006-07	(e)	n/a
Take (e) away from (d) – this is the amount of film losses available this year	(f)	n/a	$_____________
Amount of net assessable film income for 2006-07	(g)	n/a	$_____________
If (f) is greater than (g), take (g) away from (f). Otherwise show the amount at (f) here. This is the amount of film losses used this year	(h)	n/a	$_____________
Add (c) and (h) – these are your total tax losses of earlier years to be included at item L1 of e-tax this year			$_____________
NOTE:
Do not include at (a) any non-primary production losses made in 1988-89 and earlier income years.


Taxable income or loss

If you had deductions, e-tax will take away your deductions amount at item TOTAL DEDUCTIONS on your tax return from the income amount at item TOTAL INCOME OR LOSS. The result will be written to SUBTOTAL.

IF YOU HAVE NOT COMPLETED F OR Z AT ITEM L1

e-tax will write the amount shown at SUBTOTAL at TAXABLE INCOME OR LOSS.

IF YOU HAVE COMPLETED F OR Z AT ITEM L1

Where the amount at SUBTOTAL is a loss, you have no taxable income this year against which you can claim a loss of an earlier year.

You cannot claim a loss of an earlier against taxable income this year and e-tax will not allow you to complete F or Z item L1.

e-tax will transfer the amount at SUBTOTAL to TAXABLE INCOME OR LOSS.

NOTE:
Although the amount of TAXABLE INCOME OR LOSS is less than zero this amount may not be your tax loss that can be carried forward for next year. Adjustments may have to be made to limit certain deductions – for example gifts or donations and personal superannuation contributions, to take into account any exempt income and to make other variations. Phone the Personal Tax Infoline for more information. Your tax losses carried forward from earlier years plus your tax loss from this income year can be carried forward to be deducted in future income years. You will need to keep a record of these losses.

Where the amount at SUBTOTAL is an income amount

e-tax will add the amounts at F and Z item L1 and take away the total from the amount at SUBTOTAL. e-tax will write the result at TAXABLE INCOME OR LOSS on your tax return.

TAX OFFSET FOR LOW INCOME TAXPAYER

If you are an Australian resident for tax purposes and your taxable income is less than $40,000, you may get a tax offset.

The maximum tax offset of $600 applies if your taxable income is $25,000 or less. This amount is reduced by 4 cents for each dollar over $25,000.

The Tax Office will work out your tax offset and make sure it comes off your tax. The tax offset will be shown on your notice of assessment. If you would like to see how e-tax works out your tax offset, see How to work out your low income tax offset. e-tax does not put anything about this tax offset on your tax return.

CHILD SUPPORT AGENCY CLIENTS

The Child Support Agency (CSA) may use your taxable income to make an assessment of child support.

The CSA will include your total reportable fringe benefits amounts, losses from rental properties and exempt foreign employment income when assessing child support liabilities.


HELP/SFSS

You do not have to provide Higher Education Loan Programme (HELP) or Student Financial Supplement Scheme (SFSS) information on your 2006-07 tax return. e-tax asks for your HELP and Financial Supplement (FS) assessment details so that your compulsory repayment amount can be included in your tax estimate.

If you had a HECS debt, it became part of your accumulated HELP debt on 1 June 2006.

Your HELP debt at 1 June 2007 may include HECS-HELP, FEE-HELP and OS-HELP debts incurred in 2006.

Only one compulsory HELP repayment will be calculated in this estimate based on your accumulated HELP debt.

WHERE IS MY HELP DEBT FOR THE SECOND HALF OF 2006?

If you incurred a HELP debt between July and December 2006 it may not be included on your 1 June 2007 statement.

Due to processing delays some HELP debts for the period July to December 2006 have not been reported to the Tax Office and therefore not included on your 1 June 2007 statement. These amounts, which are shown on your Commonwealth Assistance Notice (CAN), form part of your accumulated HELP debt and should be added to the balance of your 2007 statement.

This will not affect the calculation of your 2007 indexation amount.

The remaining HELP debts for the second half of 2006 are expected to be reported to the Tax Office in June 2007. If you would like an updated balance or statement of your account which includes these amounts please phone the Personal Tax Infoline in July.

IF YOU HAVE A HELP DEBT AND A FINANCIAL SUPPLEMENT DEBT

If you have a HELP debt and a Financial Supplement debt, separate compulsory repayments will be calculated for each debt, and they will be shown separately on your income tax notice of assessment.

IF YOU HAVE MORE THAN ONE FINANCIAL SUPPLEMENT LOAN

Your accumulated Financial Supplement debt on 1 June 2007 includes any loans taken out from 1993 to 2002. Only one compulsory Financial Supplement repayment is raised on an income tax notice of assessment based on the accumulated debt.


Business and professional items - introduction
Business and professional items instructions 2007

Part A – Introduction

NAT 2543-6.2007

ABOUT THESE INSTRUCTIONS

Please get help from the Tax Office – the Small Business Infoline number is 13 28 66 – or a tax adviser if you feel these instructions do not fully cover your circumstances.

FOR YOUR INFORMATION

e-tax completes the Business and professional items schedule 2007 using your answers to the interview at:

•	item 13 – Personal services income (item P1)

•	item 15 – Deferred non-commercial business losses (items P8 and P9)

•	item 14 – Net income or loss from business

If you have a net loss from a business activity carried on in a partnership with others, you may need to complete item 15. e-tax will use your answers to complete items P3 and P9 of the Business and professional items schedule 2007. Refer to the instructions for item 12. Do not include your partnership details at any other item on your schedule.

If you received any of these payment summaries:

•	Payment summary – withholding where ABN not quoted

•	Payment summary – voluntary agreement

•	Payment summary – labour hire and other specified payments

•	Payment summary – foreign resident withholding

e-tax will complete the PAYG payment summary schedule 2007 using the information you provide at item 14.

Refer to part B of these instructions for an explanation of how to complete the business and professional items using e-tax.

For a detailed contents list, refer to the navigator panel on the left of the Help window. If the navigator panel is not visible, click on the Help Topics button. Click on e-tax return – further reading then Income then Business and professional items 2007.

The Tax Office publishes its rulings and other material to help taxpayers comply with their taxation obligations. We refer to a number of these publications in e-tax Help. It may help you to read some of these.

WHAT’S NEW

Primary production and non-primary production deferred non-commercial business losses

The total amount of deferred non-commercial business losses has been divided into two separate totals for primary production deferred non-commercial business losses and non-primary production deferred non-commercial business losses. Refer to item 15 for more information.

Project Pool Deduction Rate

The percentage in the calculation of the deduction rate for project that started to operate on or after 10 May 2006 and contain only project amounts incurred on or after 10 May 2006 changed from 150% to 200%.

HOW MANY HOURS DID IT TAKE YOU TO PREPARE AND COMPLETE THIS SCHEDULE?

The Tax Office is committed to reducing the costs involved in complying with your taxation obligations. Your response to this item will help us monitor these costs as closely as possible.

Enter the number of hours taken to prepare and complete this schedule when asked by e-tax.

When completing this item consider the time, rounded up to the nearest hour that you spent:

•	reading the instructions

•	collecting the necessary information to complete this schedule

•	making any necessary calculations

•	completing the schedule, and

•	putting the tax affairs of your business in order so the information can be handed to your tax agent.

Your answer should reflect the time your business spent preparing and completing your schedule, and the time spent by your tax agent and any other person whose assistance you obtained.

YOU NEED TO KNOW

Records you need to keep

You must keep records of most transactions in English for five years after you prepared or obtained them or five years after you completed the transactions or acts to which they relate, whichever is the later. Taxation Ruling TR 96/7 – Income tax: record keeping – section 262A – general principles clarifies the record-keeping obligations of small businesses, particularly for cash transactions.

The Tax Office is helping small business operators meet their record-keeping obligations by reviewing their record-keeping practices. These reviews start with a telephone call or a brief visit to the business premises. The process is explained, you can ask questions and an interview is arranged for a later date.

Some of the more significant record-keeping problems identified by the Tax Office are failure to:

•	record cash income and expenditure

•	account for personal drawings

•	record goods for your own use

•	separate private expenses from business expenses

•	keep valid tax invoices for creditable acquisitions when registered for GST

•	keep adequate stock records, and

•	keep adequate records to substantiate motor vehicle claims.

For additional information, please refer to Record keeping for small business 2007 (NAT 3029-6.2007) or to get a CD-ROM of our electronic record keeping package e-Record, ring 1300 139 051.

Choice of superannuation fund

You must keep records that show you have met your choice of superannuation fund obligations. Please visit the website www.superchoice.gov.au for further information.

Hobby or business?

It is important to determine whether you are carrying on a business or pursuing a hobby, sport or recreational activity that does not produce assessable income.

In general, you are considered to carry on a business if the activity:

•	has commenced

•	has a significant commercial purpose or character

•	has a purpose of profit as well as a prospect of profit

•	is carried out in a manner that is characteristic of the industry

•	is repeated, regular or continuous, and

•	cannot be more accurately described as a hobby, recreation or sporting activity.

For additional information, please read Are you carrying on a business? Primary producers should also refer to Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production.


Business and professional items - intructions
Business and professional items instructions 2007

Part B – Instructions

NAT 2543-6.2007

If you have not already done so, read Part A – Introduction before completing this schedule.

S1 – SIMPLIFIED TAX SYSTEM (STS) ELECTION

e-tax completes item S1 in the Business and professional items schedule 2007 using your answers in the Simplified tax system screens – refer to the Personal details section of the e-tax interview.

P1 – PERSONAL SERVICES INCOME (PSI)

e-tax completes item P1 in the Business and professional items schedule 2007 using your answers to item 13 of the e-tax interview.

OTHER BUSINESS INCOME

This section of the Business and professional items schedule 2007 is completed at item 14 in e-tax.

DETAILS OF MAIN BUSINESS

P2 Description of your main business activity

Describe, as accurately as possible, the business or professional activity from which you derived the most gross income – for example, beef cattle breeder, vegetable growing, clothing manufacturing, confectionery manufacturing or electrical services.

Select the most appropriate description of your main business activity from the available choices.

e-tax will write the description to item P2 on your Business and professional items schedule 2007.

P3 Number of business activities

Enter the number of separate and distinct business activities you operated as a sole trader and in partnership during 2006-07. If you operated only one business activity, enter 1. The number of business activities entered should not be less than the number of business activities for which you show your business loss activity details at item 15.

P5 Name of your main business

This item refers to the business name of your main business. The business name does not have to be a registered name.

The business name of the main business activity should be consistent from year to year, except in the year of a name change or when it is no longer the main business.

If the business name is legally changed, advise the Tax Office in writing at the time the change is made. The current business name should be shown on your tax return.

Enter the business name of your main business in the Business Name field.

e-tax will write the name to item P5 on your Business and professional items schedule 2007.

P5 Australian business number (ABN)

Enter the ABN of your main business in the Australian business number (ABN) field.

e-tax will write the ABN to item P5 on your Business and professional items schedule 2007.

P6 Address of your main business

This item refers to the street address of the place where most of your business operations are conducted.

Enter the address in the Address fields. Complete the Street, Suburb or town, State and Postcode fields. Two (2) lines can be used for the Street description. The second line is optional.

e-tax will write the address to item P6 on your Business and professional items schedule 2007.

P4 Status of your business

Where more than one option applies, select the first applicable option:

•	You ceased your main business during 2006-07

•	You commenced a new business during 2006-07

•	None of the above apply.

Click on the appropriate option to select it. Note that e-tax will only let you select one item from the list.

e-tax will write your answer to item P4 on your Business and professional items schedule 2007.

P7 Did you sell any goods or services using the internet?

You must answer YES to this question if, in deriving income, one or more of the following applies:

•	You used the internet to receive orders for goods and/or services. For example, you received orders by email or a web page form (rather than by conventional post, telephone or facsimile)

•	You used the internet to receive payment for goods and/or services. For example, you received:

o	credit card or charge card details by email or web page form (rather than by conventional post, telephone or facsimile)

o	digital cash.

•	You used the internet to deliver goods and/or services. For example, you:

o	used email, the world wide web or FTP (file transfer protocol) to deliver digitised music, news articles or software (rather than using conventional post to deliver software on a disk)

o	used email in conjunction with a website, to give advice and received a payment in connection with this advice

o	advertised on the internet, goods or services of other businesses for a fee

o	hosted internet sites or provided access to the internet.

You must answer NO if none of the above applies – for example, if you only used the internet to:

•	advertise your goods and services.

•	give support to your customers.

•	buy your stock, or

•	do your banking online.

e-tax will write your answer to item P7 on your Business and professional items schedule 2007.

P8 BUSINESS INCOME AND EXPENSES

INCOME

The business income to be shown here is divided into:

•	income from which tax has been withheld because you did not quote your ABN to one of your payers

•	gross payments subject to foreign resident withholding

•	income that was subject to a PAYG voluntary agreement to withhold tax

•	income received under a labour hire arrangement or from a specified payment

•	assessable government industry payments, and

•	other business income

In e-tax, income and expenses are divided into a 2-column worksheet:

•	The first column is headed Primary production and must show relevant amounts from primary production income.

•	The second column is headed Non-primary production and must show relevant amounts from non-primary production income.

NOTE:
Except for:

  -  the values of opening stock and closing stock –
      which are to be shown at tax values
  -  depreciation expense for STS taxpayers only –
      which is to be shown at tax values

the amounts to be included in the Income and Expenses section of this item are amounts derived from your accounting system or financial statements. They should form part of your profit and loss statement, and the basis for calculating your net profit or loss. Any adjustments to these amounts for tax purposes should be dealt with in the Reconciliation items section. However, if you are an STS taxpayer also read the section STS taxpayers below for information on how to complete this item.

If you were registered or required to be registered for GST in 2006-07, the following apply:

•	For income tax purposes, you should exclude GST from assessable income, exempt income and amounts received or receivable that you take into account in calculating income and deductions

•	You should reduce deductible losses and outgoings by the amount of input tax credit entitlement

•	In certain circumstances, for example if there is a change in how much you used an asset for business purposes an adjustment for GST purposes results in an amount being included in assessable income (if the adjustment is a GST decreasing adjustment) or being deductible (if the adjustment is a GST increasing adjustment)

•	You should also exclude GST components under other specific rules including capital gains tax (cost base, reduced cost base, capital proceeds) and termination values.

If you are not registered or required to be registered for GST, you do not need to adjust your income and deductions for GST. You can claim the GST inclusive amount incurred on deductible outgoings.

STOP
Do not show the following types of income here:

  -  gross interest – show the amount of income at item 10 on your tax return
  -  dividends and franking credits  – show the amounts at item 11
  -  distributions from partnerships and trusts – show these at item 12
  -  gross rental or similar income, such as agistment or hire fees –
     show the amount at item 20
  -  net capital gains – show the amount at item 17
  -  personal services income (PSI) shown at item 13
  -  farm management withdrawals – show the amount at item 16
  -  attributed foreign income – show the amount at item 18
  -  foreign source income – show the amount at item 19

If you received PSI as a sole trader, you must complete item 13-Personal services income in the e-tax interview before completing this item. e-tax uses your answers to item 13 to complete item P1 in the Business and professional items schedule 2007. PSI is income that is mainly a reward for an individual’s personal efforts or skills. Where e-tax has written net PSI at A item P1 in your tax return form, do not include the PSI or claim deductions relating to that income here.

STOP
If you are eligible to enter or continue in the STS and have chosen to do so at item S1, read on. Otherwise go to Business income – other than PSI included at item 13 – from which you had amounts withheld below.

NOTE: STS taxpayers

Recent legislative changes, which apply from1 July 2005, have removed the requirement that an STS taxpayer use the STS accounting method. However, if you were an STS taxpayer in an income year that started prior to 1 July 2005, then while you continue to be an STS taxpayer (from the first income year that starts on or after 1 July 2005), you can choose to continue using the STS accounting method.

The STS accounting method recognises most income only when it is received. This type of income is called ordinary income (for example, sales of goods and/or services, professional fees and commissions).

If you are registered or required to be registered for GST, income amounts should exclude GST payable.

A continuing STS taxpayer using the STS accounting method can claim deductions for the following expenses only when they are paid:

•	general deductions (for example, stock purchases, wages and rent of business premises)

•	tax-related expenses, and

•	expenses for repairs.

If you are registered or required to be registered for GST, expense amounts should exclude input tax credit entitlements.

The STS accounting method does not apply to income or deductions that receive specific treatment in income tax law (for example, net capital gains, dividends, depreciation expenses, bad debts and borrowing expenses).

In addition, if another provision of income tax law apportions or alters the assessability or deductibility of a particular type of ordinary income or general deduction, the timing rule in that provision overrides the received or paid rule for STS taxpayers (for example, double wool clips or prepayment of a business expense for a period greater than 12 months). Because of these specific provisions you may need to make adjustments at the RECONCILIATION ITEMS section of the e-tax interview.

For more information about the STS accounting method, ring the Business Infoline on 13 28 66 or visit our website at www.ato.gov.au

If you are continuing in the STS this year and have chosen to continue using the STS accounting method, you should base the amounts you include at item P8 on the STS accounting method. If your accounting system or financial statements do not reflect the STS accounting rules, you may need to make additional reconciliation adjustments at the RECONCILIATION ITEMS section of the e-tax interview. For more information about these adjustments, see the section STS taxpayers under Working out your reconciliation adjustments.

In addition to the STS accounting method there are also specific STS rules for depreciation and trading stock. Read part C and part L in the EXPENSES section for instructions on how to calculate closing stock and depreciation expenses at item P8.

If you are continuing in the STS this year and have chosen to discontinue using the STS accounting method, business income and expenses that have not been accounted for (because they have not been received or paid) will be accounted for in this year. You may need to make additional reconciliation adjustments in the RECONCILIATION ITEMS section of the e-tax interview.

BUSINESS INCOME – OTHER THAN PERSONAL SERVICES INCOME INCLUDED AT ITEM 13 – FROM WHICH YOU HAD AMOUNTS WITHHELD

You must complete this section of the e-tax interview if you had amounts withheld from business income – other than personal services income included at item 13.

If tax has been withheld from business income you should have received a payment summary.

If you received any of these payment summaries:

•	Payment summary – withholding where ABN not quoted

•	Payment summary – voluntary agreement

•	Payment summary – labour hire and other specified payments

•	Payment summary – foreign resident withholding

you will need to provide details of the payments you have received. e-tax will use this information to complete the Individual PAYG payment summary schedule 2007

A payer may issue a receipt, remittance or similar document in place of the Tax Office’s Payment summary-withholding where ABN not quoted.

If you received a payment from which tax was withheld and you did not receive or have lost your payment summary, contact your payer and ask for a copy.

NOTE:
Where you have attributed personal services income (item 8), personal services income (items 13 and P1) and/or business income (items 14 and P8) from which amounts have been withheld e-tax will only complete one Individual PAYG payment summary schedule 2007. The Nature of income box on the schedule will be set to identify the source of the payments.

HOW TO COMPLETE THE PAYMENT SUMMARY TABLE IN e-tax

Complete the table using one row for each payment summary. If you need help using tables in e-tax, read data entry.

For each payment summary transfer the following information into the table:

•	the payer’s ABN or WPN and the payer’s name in the appropriate columns

•	look at your payment summary carefully to determine its type and complete the Type of payment, using the following key:

V = Voluntary agreement

S = Labour hire or other specified payments

N = Withholding where ABN not quoted

F = Foreign resident withholding

•	the gross payments in the Gross payments column. Note that the payments are divided into primary production (PP) and non-primary production (NPP) payments depending on the nature of your business

•	the total tax withheld at the Tax withheld column.

Check that you have recorded details from all relevant payment summaries in the table.

PRINTING THE SCHEDULE

e-tax will automatically print your Individual PAYG payment summary schedule 2007 when you have completed your return. If you want to print a copy of your schedule now follow these steps.

STEP 1	Click on [image] . You will be prompted for the items you want to print.

STEP 2	Select Attachments. (You may want to clear the Tax return box.). Click on the OK button.

STEP 3	The Print preview window will be displayed. Use the arrow buttons to locate the schedule.

STEP 4	Click on the Pages button at the top of the screen. Enter the page number(s) of the schedule.

STEP 5	Click on [image] to print the schedule.

You are required to retain these payment summaries together with a copy of your completed schedule for a period of five years.

Payers must report to the Tax Office details of payments where amounts of tax have been withheld. This information will be cross-checked with that on your tax return to ensure that you have declared the correct amount of income and the correct amount of tax withheld.

PART A	YOUR BUSINESS HAD AMOUNTS OF TAX WITHHELD FOR FAILURE TO QUOTE AN ABN

Gross payments where Australian business number not quoted in item P8 is the total income you received from which payers have withheld an amount because you did not quote your ABN. It includes the amounts of tax withheld. e-tax will calculate the gross amount when you have completed the payment summary table.

e-tax will add up all the amounts in the PP Gross payment column that have the Type of payment set to N and write the total to label C item P8 on your Business and professional items schedule 2007.

e-tax will add up all the amounts in the NPP Gross payment column that have the Type of payment set to N and write the total to label D item P8 on your Business and professional items schedule 2007.

e-tax will add up the amounts it has written at C and D item P8 and write this amount in the adjacent Total box item P8.

If these labels are completed e-tax will also complete label W item 14 on your tax return form.

PART B	YOUR BUSINESS RECEIVED PAYMENTS THAT WERE SUBJECT TO FOREIGN RESIDENT WITHHOLDING

Gross payments subject to foreign resident withholding in item P8 is the total income you received from your payers which is subject to foreign resident withholding. It includes any amounts of tax withheld.

e-tax will calculate the gross amount when you have completed the payment summary table. e-tax will add up all the amounts in the NPP Gross payment column that have the Type of payment set to F and write the total to label B item P8 on your Business and professional items schedule 2007.

e-tax will write this amount in the adjacent Total box item P8.

If these labels are completed e-tax will also complete label E item 14 on your tax return form.

NOTE:
You will not have any primary production amounts at this item. Label A will be left blank.

PART C	INCOME SUBJECT TO A PAYG VOLUNTARY AGREEMENT

Gross payments – voluntary agreement in item P8 is the total income you received that was subject to a voluntary agreement to withhold tax and includes the tax withheld. e-tax will calculate the gross amount when you have completed the payment summary table.

e-tax will add up all the amounts in the PP Gross payment column that have the Type of payment set to V and write the total to label E item P8 on your Business and professional items schedule.

e-tax will add up all the amounts in the NPP Gross payment column that have the Type of payment set to V and write the total to label F item P8 on your Business and professional items schedule 2007.

e-tax will add up the amounts it has written at E and F item P8 and write this amount in the adjacent Total box item P8.

If these labels are completed e-tax will also complete label D item 14 on your tax return form.

PART D	GROSS PAYMENTS – LABOUR HIRE AND OTHER SPECIFIED PAYMENTS

This applies to you if you received:

•	income under a labour hire arrangement or

•	a specified payment, including

o	income from tutorial services provided for the Indigenous Tutorial Assistance Scheme of the Department of Education, Science and Training

o	income from translation and interpretation services for the Translating and Interpreting Service of the Department of Immigration Citizenship.

o	income as a performing artist in a promotional activity.

Gross payments – labour hire or other specified payments in item P8 is the total income you received from labour hire or other specified payments and includes the tax withheld. e-tax will calculate the gross amount when you have completed the payment summary table.

Do not include income received as an employee of a labour hire business. These amounts will appear on a PAYG payment summary – individual non business and should be shown at item 1 on your tax return.

e-tax will add up all the amounts in the NPP Gross payment column that have the Type of payment set to S and write the total to label O item P8 on your Business and professional items schedule 2007.

e-tax will write this amount in the adjacent Total box item P8.

If these labels are completed e-tax will also complete label F item 14 on your tax return form.

NOTE:
You will not have any primary production amounts at this item. Label N will be left blank.

PART E	ASSESSABLE GOVERNMENT INDUSTRY PAYMENTS

Generally, government credits grants, rebates, bounties and subsidies are assessable income in the hands of the recipient if they are received in, or in relation to, the carrying on of a business. This generally includes amounts of a capital nature. However, payments relating to the commencement or cessation of a business may not be assessable income but may give rise to capital gain,

Examples of assessable government industry assistance include:

•	bounties

•	cleaner fuel grants

•	drought relief

•	employee subsidies

•	export incentive grants

•	fuel grant under the energy grants credits scheme

•	fuel tax credits

•	industry restructuring and adjustment payments

•	producer rebate (wine equalisation tax), and

•	product stewardship (oil) benefit.

NOTE:
Do not show Medicare payments received by medical practices at this label. Show them at Other business income.

For more information see Taxation Ruling TR 2006/3 – Income Tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business.

Completing this item

STEP 1	Enter your total primary production government industry payments received by each business at Assessable government industry payments in the Primary Production column.

STEP 2	If your assessable primary production government industry payments include a  fuel grant under the energy grants credits scheme, enter D in the TYPE box to the right of the amount.

STEP 3	Enter your total non-primary production government industry payments received by each business at Assessable government industry payments in the Non-Primary Production column.

STEP 4	If your assessable non-primary production government industry payments include a fuel grant under the energy grants credits scheme, enter D in the TYPE box to the right of the amount.

OTHER BUSINESS INCOME

PART F	OTHER BUSINESS INCOME

Other business income includes:

•	gross sales of trading stock

•	gross sales from produce

•	goods taken for own use from stock

•	value of livestock killed for rations

•	value of livestock exchanged for other goods or services

•	gross earnings from services

•	taxi driver earnings (income you earned as a non-employee taxi driver if it is not shown at item P1)

•	amounts received as recoupment of expenses

•	bad debts recovered

•	profit on sale of depreciating assets – to be shown separately in e-tax

•	royalties

•	insurance recoveries

•	subsidies

•	employee contributions for fringe benefits

•	assessable non-government assistance from all sources, and

•	foreign exchange gains – for more information about foreign exchange gains, visit our website www.ato.gov.au or see Item 22.

If you are a primary producer, you must add the amounts shown at PP1, PP2, PP6, PP7 and PP10 on your gross income from primary production worksheet. The total must be added to any other income from a business of primary production referred to above. The total of all other income from the business of primary production will be shown at I item P8 on your schedule.

Completing this item

Complete the table using one row for each type of other income you received. If you need help using tables in e-tax, read data entry.

STEP 1	Enter a Description of the other income.

STEP 2	Enter the amount of other income received in the appropriate column – Primary Production or Non-Primary Production. If you made a loss, enter a minus (-) sign.

STEP 3	If you have profit on the sale of depreciating assets in your accounts, click on the PP or NPP buttons beside Profit on sale of depreciating assets per accounts to enable you to complete this field.

PART G	TOTAL BUSINESS INCOME

e-tax will add up the primary production amounts entered and display the total amount in the Total business income – Primary Production box. If you made a loss, e-tax will display a minus sign.

e-tax will add up the non- primary production amounts entered and display the total amount in the Total business income – Non-Primary Production box. If you made a loss, e-tax will display a minus sign.

EXPENSES

STOP

Do not include the following expense items on your schedule:

 -  non-business interest and dividend income expenses –
    item D7
 -  farm management deposits – item 16
 -  non-business rental expenses – item 20
 -  expenses and losses relating to foreign source income –
    item 19 or item D15
 -  expenses relating to your personal services income – item P1
 -  low-value pool deduction where the pool contains assets used for
    work related, self-education or rental purposes – item D6.

You need to complete all items that relate to your business or businesses. You can deduct business expenses if the expenses were necessary to carry on your business for the purpose of earning assessable income.

If you are registered or required to be registered for GST, exclude from the deductions any input tax credit entitlements that arise in relation to outgoings. If you pay GST by instalments and incurred a penalty for underestimating a varied GST instalment, you can claim a deduction for the penalty at item D10 on your tax return. Do not show the penalty on your Business and professional items schedule 2007.

This section is divided into 2 columns on your schedule – Primary production and Non-primary production. If you are a primary producer you will need a primary production worksheet to help you work out some of the following. Complete this worksheet before proceeding. Refer to Information for primary producers 2007 (NAT 1712-6.2007).

NOTE:
Except for:
 -  the values of opening stock and closing stock –
    which are to be shown at tax values
 -  depreciation expense for STS taxpayers only –
    which is to be shown at tax values

the amounts to be included in the Income and Expenses section of this item are amounts derived from your accounting system or financial statements. They should form part of your profit and loss statement, and the basis for calculating your net profit or loss. Any adjustments to these amounts for tax purposes should be dealt with in the Reconciliation items section. However, if you are an STS taxpayer also read the section STS taxpayers below for information on how to complete this item.

Records you need to keep

You must keep your business expenses records for five years after you prepared or obtained them, or five years after you completed the transactions or acts to which they relate, whichever is the later.

Pre-payments of $1,000 or more

If you made a prepayment of $1,000 or more for something to be done (in whole or in part) in a future income year, the timing of your deduction may be affected by the rules relating to prepayments. Generally, you will need to apportion your deduction for prepaid business expenditure over the service period or 10 years, whichever is less.

There are some exceptions under the 12-month rule for STS taxpayers, the special rules relating to plantation forestry managed agreements. For more information, see the publication Deductions for prepaid expenses 2007 (NAT 4170 – 6.2007).

Where expense labels at item P8 include prepaid expenses which differ from the amounts allowable as deductions in the 2006-07 income year, make an expense reconciliation adjustment.

Thin capitalisation

The thin capitalisation provisions apply to entities (including individuals) to reduce certain deductions (called ‘debt deductions’) for costs incurred in obtaining and servicing debt finance where the debt applicable to Australian operations exceeds the limits set out in Division 820 of Income Tax Assessment Act 1997 (ITAA 1997).

Do the thin capitalisation provisions apply to you?

The thin capitalisation rules will apply to you if:

•	you are an Australian resident and you, or any of your associate entities are an Australian controller of a foreign entity or carry on business overseas at or through a permanent establishment, or

•	you are a foreign resident and you carry on business in Australia at or through a permanent establishment or otherwise have Australian income-producing assets.

•	The thin capitalisation rules will not apply to you if:

•	your debt deductions (combined with the debt deductions of your associate entities) do not exceed $250,000 in the income year or

•	you are an Australian resident and the combined value of your and your associates’ Australian assets is not less than 90% of the value of your and your associates’ total assets.

If the thin capitalisation rules apply to you, you must complete the Thin capitalisation schedule 2007 (NAT 6458-6.2007). The amount of any debt deductions you can claim may be reduced by these rules. For more information, see Thin capitalisation guide (NAT 4461), which is available on the Tax Office website at www.ato.gov.au

Complete the thin capitalisation schedule and post it to:

Australian Taxation Office
PO Box 1365
ALBURY NSW 2640

PART A	OPENING STOCK

This is the total value of all trading stock on hand at the start of the year.

The opening value of an item of stock must equal its closing value in the previous year. The total value of all stock on hand at the start of the year is equal to the amount shown as closing stock on your 2006 schedule.

If you are a primary producer, you must add the value of your opening stock from your livestock account at PP4 on your primary production worksheet to the value of your opening stock from your produce account at PP9 on your primary production worksheet. The total of these amounts is the total value of your primary production opening stock.

Do not include any amounts representing opening stock of a business which commenced operations during the year. Include the purchase costs of these items in the relevant Purchases and other costs box.

Completing this item

STEP 1	Enter the total value of your primary production opening stock in Opening stock – Primary Production box.

STEP 2	Enter the total value of your non-primary production opening stock in Opening stock – Non-Primary Production box.

PART B	PURCHASES AND OTHER COSTS

This represents the direct cost of materials used for the manufacture, sale or exchange in deriving the gross proceeds or earnings of the business. It includes inwards freight. It also includes the cost of stock acquired when starting or acquiring a business during the year. It may also include some costs for labour and services provided under contract if these are recorded in the cost of sales account in your business books of account. If so, do not also include this amount as Contractor, sub-contractor and commission expenses.

If you are a primary producer, you must include the value of your purchases from your livestock account at PP5 on your primary production worksheet.

Completing this item

STEP 1	Work out the value of your primary production purchases and other costs directly related to trading stock. If you have more than one business, add up all your primary production purchases and costs.

STEP 2	Enter the total value of your primary production purchases and other costs in the Purchases and other costs – Primary Production box.

STEP 3	Work out the value of your non-primary production purchases and other costs directly related to trading stock. If you have more than one business, add up all your non-primary production purchases and costs.

STEP 4	Enter the total value of your non-primary production purchases and other costs in the Purchases and other costs – Non-Primary Production box.

NOTE: STS taxpayers
If you are continuing in the STS this year and have chosen to continue using the STS accounting method, only show purchases and other costs that you have paid.

PART C	CLOSING STOCK

STOP
If you are eligible to enter or continue in the STS and have chosen to do so at item S1, read on. Otherwise go to the section Other businesses.

STS taxpayers

You need to account for changes in the value of your trading stock only if there is a difference of more than $5,000 in the value of all your stock on hand at the start of the income year and a reasonable estimate of the value of all your stock on hand at the end of the income year.

The value of your stock on hand at the start of the income year is the same value as the closing value shown on your schedule in the previous year. This may not necessarily reflect the actual value of your stock if you did not account for the change in value of your stock in the previous year. For more information on a reasonable estimate of the value of stock, refer to the publication Simplified tax system: simplified trading stock rules (NAT 4107) or phone the Business Infoline on 13 28 66 or visit the Tax Office website at www.ato.gov.au.

You can still choose to conduct a stocktake and account for changes in the value of trading stock, if you wish.

Is the difference between the value of your opening stock and a reasonable estimate of your closing stock more than $5,000?

YES	You must account for changes in the value of your trading stock. Go to step 2.

NO	If you choose not to account for changes in the value of your trading stock, go to step 1. Otherwise, go to step 2.

STEP 1	If the difference referred to above is $5,000 or less and you choose not to account for this difference, the closing stock values you put in both the primary production and non-primary production columns are the same as the values you put at Opening stock. Do not put your reasonable estimate.

e-tax will add up your primary production and non-primary production closing stock and write the total value at M item P8 on your schedule.

Insert in the TYPE box at the right of M the code letter you used last year to value closing stock:

C cost

M market selling value

R replacement price.

If this is your first year in business the value of your closing stock will be zero. Enter C in the TYPE box. Go to Part D Cost of sales.

STEP 2	If the difference referred to above is more than $5,000 or you choose to account for the difference in trading stock, the closing stock values must be brought to account under section 70-35 of the ITAA 1997. Read Other businesses below for instructions on how to complete this part.

NOTE:
You must include in your closing stock value, the value of all stock on hand, regardless of whether you have paid for the stock.

Other businesses

This is the total value of all trading stock on hand at the end of the year. The amount that is shown at Closing stock is the total value of each item of trading stock calculated for tax purposes under section 70-45 of ITAA 1997.

Trading stock is anything you have on hand which you produced, manufactured, acquired or purchased for the purpose of sale, manufacture or exchange. For example, trading stock includes livestock but not working animals (except those used by a primary producer), crops and timber when harvested, and wool after it is removed from the sheep.

Manufacturers must include as trading stock partly manufactured goods and materials on hand. However, closing stock excludes any amount that represented closing stock of a business that ceased operations during the year. This amount is included in Other business income. For more details about what constitutes trading stock, phone the Business Infoline on 13 28 66.

You can choose one of the following three methods to value your trading stock:

•	cost

•	market selling value

•	replacement price.

You may elect to value an item of trading stock below the lowest value calculated by any of these methods because of obsolescence or other special circumstances.

The value you elect must be reasonable. Where you elect to value an item of trading stock below cost, market selling value and replacement price, e-tax will ask you to record your election on screen 1729 and will write the election to label P19 on your tax return.

You may use different methods to calculate each item of trading stock in different years or for different items in the same year. However, the opening value of each item in a particular year must be the same as the closing value for that item in the previous year.

If you are registered for GST, the value of closing stock should not include an amount equal to the input tax credit that would arise if you had acquired the item solely for business purposes at the end of the income year. Input tax credits do not arise for some items of trading stock, such as shares.

If you are a primary producer, you must add the value of your closing stock from your livestock account at label PP3 on your primary production worksheet to the value of your closing stock from your produce account at label PP8 on your primary production worksheet. The total of these amounts is the total value of your primary production closing stock.

As the tax value of closing stock on hand are shown at label PP3 and at PP8 on your primary production worksheet, you cannot reduce their values by accounting entries. Keep records showing how each item was valued.

Completing this item

STEP 1	Work out the value of your primary production closing stock. If you have more than one business, add up all your primary production closing stock values.

STEP 2	Enter the total value of your primary production closing stock in the Closing stock – Primary Production box.

STEP 3	Work out the value of your non-primary production closing stock. If you have more than one business, add up all your non-primary production closing stock values.

STEP 4	Enter the total value of your non-primary production closing stock in the Closing stock – Non-Primary Production box.

STEP 5	From the list below, find the letter that matches the method you used to value closing stock. If more than one method was used, select the letter that applies to the largest value.

C cost

M market selling value

R replacement price

STEP 6	Enter the letter in the TYPE box to the right of the amount at Closing stock.

PART D	COST OF SALES

Goods taken for your own use should not be accounted for as stock on hand at 30 June 2007. Include at the Other business income section of this item:

•	livestock killed for rations

•	livestock exchanged for other good or services, and

•	goods taken for your own use.

e-tax will work out your cost of sales for you.

Cost of sales  = 	Stock at 1 July 2006
                       plus	Purchases at cost
                       plus	Freight inwards
                       plus	Other – for example, labour and services
                       less	Stock at 30 June 2007

If your cost of sales is a negative amount e-tax will display a minus (-) sign.

For further information on stock on hand at 1 July 2006, read Opening stock. For further information on stock on hand at 30 June 2007, read Closing stock.

PART E	FOREIGN RESIDENT WITHHOLDING EXPENSES

These are expenses directly relating to foreign resident withholding income.

Completing this item

STEP 1	Enter the total value of your non-primary production foreign resident withholding expenses in the Foreign resident withholding expenses – Non Primary Production box.

NOTE:
You will not have any primary production amounts at this item.

PART F	CONTRACTOR, SUB-CONTRACTOR OR COMMISSION EXPENSES IN YOUR BUSINESS

These are expenses for labour and services provided under contract – other than salaries and wages – for example:

•	payments to self-employed people such as consultants and contractors including payments subject to a PAYG voluntary agreement to withhold and payments made under a labour hire arrangement

•	commissions paid to people not receiving a retainer

•	agency fees – for example, advertising

•	service fees – for example, plant service

•	management fees, and

•	consultant fees.

Do not include the following at this item:

•	expenses for external labour which have been included in the business cost of sales account

•	expenses for accounting or legal services – include these at All other expenses.

Completing this item

STEP 1	Enter the total value of your primary production contractor, sub-contractor and commission expenses in the Contractors and commission – Primary Production box.

STEP 2	Enter the total value of your non-primary production contractor, sub-contractor and commission expenses in the Contractors and commission – Non-Primary Production box.

PART G	SUPERANNUATION CONTRIBUTIONS ON BEHALF OF ELIGIBLE EMPLOYEES OR THEIR DEPENDANTS AS A BUSINESS EXPENSE

Show superannuation expenses for the year of income. Do not include any amount that was a contribution for yourself. The deduction for your own superannuation contributions must be claimed at item D13 on your tax return.

Employers are entitled to a deduction for contributions made to a complying superannuation, provident, benefit or retirement fund, or retirement savings account (RSA) where the contribution is to provide superannuation benefits for eligible employees or to provide benefits to the employee’s dependants on the employee’s death. Superannuation benefits mean individual personal benefits, pensions or retiring allowances. A deduction is allowable in the income year in which the contributions are made.

Contributions made to a non-complying fund:

•	are not allowable as a deduction, and

•	do not count towards superannuation guarantee obligations. Under the superannuation guarantee an employer needs to provide a minimum level of superannuation for eligible employees or pay a tax called the superannuation charge to the Commissioner. The superannuation guarantee charge is not a superannuation contribution and is not tax deductible.  Any late contribution that is used to reduce the amount of superannuation guarantee charge employers have to pay under the superannustion guarantee late payment offset measures is also not deductible.

Contributions paid by an employer for eligible employees to a non-complying superannuation fund are fringe benefits – other than where the contributions are made for an exempt visitor – and may be subject to tax under the Fringe Benefits Tax Assessment Act 1986.

The amount of contributions that can be claimed as a deduction by an employer contributing to a resident complying superannuation fund or RSA in respect of eligible employees is limited by the age of each relevant employee.

Where an employee has reached the age of 70, there is a further restriction on the deduction that can be claimed for an employer contribution to a complying superannuation fund or RSA.

For the 2006-07 income year the age based limits are as follows:

EMPLOYEE'S DEDUCTION LIMIT

Age in years	Deduction limit
under 35	$15,260
35 to 49	$42,385
50 and over*	$105,113*
* For contributions made after the 28th day of the month following the employee’s 70th birthday, the deduction claimable is limited to the amount of the contribution required:

(i)	under a federal, state or territory award, or

(ii)	to meet the employer’s superannuation guarantee obligation on salary or wages paid to the employee before the employee’s 70th birthday.

The employee’s age limit is determined at the end of the day on which the last contribution for the income year was made by the employer or associate of the employer for the benefit of the employee.

Completing this item

STEP 1	Enter the total value of your primary production superannuation contributions in the Superannuation – Primary Production box.

STEP 2	Enter the total value of your non-primary production superannuation contributions in the Superannuation – Non-Primary Production box.

PART H	BAD DEBTS WRITTEN OFF IN YOUR BUSINESS

Include income from the recovery of bad debts at Other business income, Primary production column or Non-primary production column.

You are not allowed a deduction for bad debts unless you have previously included the amount of the bad debt in your assessable income or it is for money you lent in the ordinary course of a money lending business carried on by you.

Do not include accounting provisions for doubtful debts at this label. They can be shown under Expenses at All other expenses then added back at Reconciliation items.

Before you can claim a bad debt, it must be bad and not merely doubtful. The question of whether a debt is a bad debt will depend on the facts in each case and, where applicable, the action taken for recovery. For more information refer to Taxation Ruling TR 92/18 – Income tax: bad debts.

You can claim a deduction for:

•	partial debt write-offs – where only part of a debt is bad and is written off, you may claim a deduction for the amount written off.

•	losses incurred in debt-for-equity swaps for debt written off after 26 February 1992 – where under an arrangement you discharge, release or otherwise extinguish the whole or part of a debt owned to you in return for equity in the debtor. You can claim a deduction for the difference between the amount of the debt and the greater of the market value of the equity at the time of issue or the value at which the equity recorded in your books at the time of issue. The market value of the equity is the price quoted on the stock exchange or, if the equity is not listed, the net asset backing of the equity.

Where you are not in the business of lending money, the deduction is limited to the amount of the debt you have included in assessable income.

Records you need to keep

Keep a statement for all debtors whose bad debts you wrote off during the year, showing:

•	their name and address

•	the amount of the debt

•	the reason why the debt is regarded as bad, and

•	the year that the amount was returned as income.

Completing this item

STEP 1	Enter the total amount of your primary production bad debts in the Bad debts – Primary Production box.

STEP 2	Enter the total amount of your non-primary production bad debts in the Bad debts – Non-Primary Production box.

PART I	LEASE EXPENSES IN YOUR BUSINESS

This is expenditure incurred through both financial and operating leases on leasing assets such as motor vehicle and plant. Do not include the cost of leasing real estate (show this cost at Rent expenses) or capital expenditure incurred to terminate a lease or licence.  However, a five year straight–line write -off is allowed for certain capital expenditure incurred to terminate a lease or licence if the expenditure is incurred in the course of carrying on a business, or in connection with ceasing to carry on a business.For more information see the fact sheet Blackhole expenditure: business related expenses under Change 3 or phone the Business Infoline on 13 28 66 or visit the Tax Office website at www.ato.gov.au.

In some circumstances, lease expenses may be debt deductions for the purposes of the thin capitalisation rules. For information, see Thin capitalisation.

NOTE:
If you include an amount of lease expense which is not allowable as a deduction, such as amounts disallowed under the thin capitalisation rules, you will need to add back the amount at Expense reconciliation adjustments in the RECONCILIATION ITEMS section.

Expenses incurred under a hire purchase agreement are not lease expenses. Such expenses are dealt with in RECONCILIATION ITEMS Part F - Working out your reconciliation adjustments.

Special rules apply to leased cars if the cost of the car exceeds the car limit that applies for the financial year in which the lease commences. The car limit for 2006-07 is $57,009. If you lease a car that is subject to the special rules, the reconciliation between the lease expense and the tax treatment is carried out at Expense reconciliation adjustments. For more information, see Luxury car leasing.

Records you need to keep

List the assets leased and keep full details of leasing expenses for each item – including motor vehicles – and details of any private use. Leasing expenses of certain cars fall under the substantiation rules.

Completing this item

STEP 1	Enter the total amount of your primary production lease expenses in the Lease expenses – Primary Production box.

STEP 2	Enter the total amount of your non-primary production lease expenses in the Lease expenses – Non-Primary Production box.

PART J	RENT AS A BUSINESS EXPENSE

This is expenditure you incurred as a tenant for rental of land and buildings used in the production of income. Include the cost of leasing real estate.

Completing this item

STEP 1	Enter the total amount of your primary production rent expenses in the Rent expenses – Primary Production box.

STEP 2	Enter the total amount of your non-primary production rent expenses in the Rent expenses – Non-Primary Production box.

PART K	INTEREST AS A BUSINESS EXPENSE ON MONEY BORROWED WITHIN AUSTRALIA

Include interest you incurred on money borrowed within Australia to acquire income-producing assets used in your business, to finance business operations or to meet current business expenses.

Do not include interest expenses incurred in deriving rental income. Claim these expenses at item 20.

NOTE:
If you include an amount of interest expense which is not allowable as a deduction, such as amounts denied by the thin capitalisation rules, you will need to add back the amount at Expense reconciliation adjustments in the RECONCILIATION ITEMS section.

Completing this item

STEP 1	Enter the total amount of your primary production interest expenses within Australia in the Interest within Australia – Primary Production box.

STEP 2	Enter the total amount of your non-primary production interest expenses within Australia in the Interest within Australia – Non-Primary Production box.

PART L	OVERSEAS INTEREST AS A BUSINESS EXPENSES

Include any interest incurred on money borrowed from overseas sources to acquire income-producing assets used in your business, to finance business operations or to meet current business expenses.

Do not include interest expenses incurred in deriving rental income. Claim these expenses at item 20.

Generally, an amount of withholding tax is required to be withheld from interest paid or payable to non-residents and from interest derived by a resident through an overseas branch. These amounts must be sent to the Tax Office.

If you paid or credited any interest or amounts in the nature of interest to a non-resident of Australia or to a resident's overseas branch, you will need to provide additional information. Click on the Additional information button in the e-tax screen. Enter "SCHEDULE OF ADDITIONAL INFORMATION – item 14" on the schedule notepad. Show the name and address of each recipient, total amounts paid or credited to each non-resident or overseas branch of a resident and the amount of tax withheld. If no tax was withheld, please state the reason for this.

For more information on the tax treatment of interest and dividends paid to non-residents, phone the Business Infoline on 13 28 66.

NOTE:
If you include an amount of interest expense which is not allowable as a deduction, such as amounts denied by the thin capitalisation rules, you will need to add back the amount at Expense reconciliation adjustments in the RECONCILIATION ITEMS section.

Completing this item

STEP 1	Enter the total amount of your primary production overseas interest expenses in the Interest overseas – Primary Production box.

STEP 2	Enter the total amount of your non-primary production overseas interest expenses in the Interest overseas – Non-Primary Production box.

PART M	DEPRECIATION AS A BUSINESS EXPENSE

If you did not carry on a business in the income year, but in a prior year allocated assets to a general STS pool or longlife STS pool, do not include the STS pool deductions here. Show such deductions at item D15 on your tax return.

STOP
If you elected to enter or continue in the STS at item S1 read on. Otherwise go to the section on Other businesses.

STS taxpayers

You show at Depreciation expenses the total depreciation deductions being claimed under the STS capital allowance (depreciation) rules and for the business use of other assets under the uniform capital allowance (UCA) rules. This includes your deduction under the STS depreciation rules for depreciating assets used for work-related or self-education purposes. However, this excludes any amount included at part B of item P1. You do not need to complete a Capital allowances schedule 2007.

STS taxpayers can claim an immediate deduction for most depreciating assets costing less than $1,000 (excluding input tax credit entitlements) and can pool most of their other depreciating assets. There are two STS pools:

•	a general STS pool for depreciating assets with an effective life of less than 25 years

•	a longlife STS pool for depreciating assets with an effective life of 25 years or more.

Some depreciating assets are excluded from the STS rules but a deduction may be available under the UCA rules. For more information about the STS depreciation rules, refer to the publication The Simplified Tax System: A guide for tax agents and small businesses (NAT 6459) or phone the Business Infoline on 13 28 66 or visit the Tax Office website at www.ato.gov.au

You will have to click on the PP and NPP buttons to enter the calculated amounts. You may use the calculators supplied at the summary screen or enter your calculated amount. For more information refer to STS depreciation.

Calculating depreciation deductions manually

Before you begin, print a copy of the STS depreciation deductions table.

If your accounting system or financial statements provide you with the amounts to complete the depreciation deductions table, enter these amounts in the table. Otherwise, use calculations 1 to 5 below to calculate your depreciation deductions.

The amounts you write in the table must be tax values and not accounting values. For a brief explanation of the terms used see Definitions.

Calculation 1 Low-cost assets

A low-cost asset is an asset:

•	whose cost at the end of the year was less than $1,000 (excluding input tax credit entitlements) and

•	that qualifies for a deduction under the STS depreciation rules

Work out the taxable purpose proportion of each depreciating low-cost asset you acquired in 2006-07 and used or held ready for use for the purpose of producing assessable income. You calculate the deduction for each eligible asset as follows:

asset’s adjustable value    X    taxable purpose proportion.

The adjustable value of an depreciating low-cost asset, at the time you first used it (or held it ready for use) for a taxable purpose, will be its cost, unless you previously used or held the asset solely for private purposes. For example, a tool set bought on 1 December at a cost of $800 (excluding input tax credit entitlements) and used for producing assessable income from that date at an estimated 70% of the time, the immediate deduction would be $800 X 70% = $560.

Add up these results and write the total at (a) in the STS depreciation deductions table.

Do not include depreciating assets which cost less than $1,000 (excluding input tax credit entitlements) that you acquired before entering the STS. You allocate these assets to the general STS pool (see calculation 2).

Calculation 2 STS pool deductions

To calculate your deductions for both the general and longlife STS pools you must first calculate the opening pool balance of each pool.

If you are entering the STS, allocate each depreciating asset you hold at the start of the income year to the appropriate pool according to the asset’s effective life. Only include the taxable purpose proportion of the adjustable value of each depreciating asset. For example, for an asset with an adjustable value of $10,000, that is used only 50% for an income-producing purpose, you will only add $5,000 to the pool.

You can choose not to allocate an asset to your longlife STS pool if you first used it or installed it ready for use for a taxable purpose before 1 July 2001.

You calculate the opening pool balance for each STS pool by adding the value of all depreciating assets allocated to the relevant pool.

If you are continuing in the STS, the opening pool balance of each STS pool is the closing balance for the 2006-07 income year, except where you make an adjustment to reflect the changed business use of a pooled asset.

Calculate your deduction for each STS pool as follows:

General STS pool deduction:

Opening pool balance ($) X 30%

Longlife STS pool deduction:

Opening pool balance ($) X 5%

Where necessary make a reasonable apportionment for each STS pool deduction between primary production and non-primary production activities.

Write the result of your general STS pool deduction at (b) in the STS depreciation deductions table.

Write the result of your longlife STS pool deduction at (c) in the STS depreciation deductions table.

If either pool balance is below $1,000 (after taking into account additions and disposals but before working out the deductions in calculations 2 and 3), you work out the deduction for the pool using calculation 5(b).

Calculation 3 Depreciating assets first used for a taxable purpose during the income year and improvements made to assets already allocated to a pool

You calculate your deduction at half the relevant pool rate for:

•	depreciating assets that you first used or installed ready for use for a taxable purpose during the year, and

•	improvements made during the year to assets already allocated to an STS pool.

Calculate your deduction as follows:

•	the taxable purpose proportion of the adjustable value of each depreciating asset first used for a taxable purpose this year X 15% (general STS pool assets) or 2.5% (long life pool assets) plus

•	the taxable purpose proportion of the cost of the improvement X 15% (general STS pool assets) or 2.5% (long life pool assets).

Enter the total deduction for general STS pool assets at (d) in the STS depreciation deductions table.

Enter the total deduction for longlife STS pool assets at (e) in the STS depreciation deductions table.

If either pool balance (after taking into account additions and disposals but before calculating the deductions in calculations 2 and 3) is below $1,000, you work out your deduction for these assets using calculation 5(b).

Calculation 4 Other depreciating assets

Work out your deduction for the decline in value of all your other depreciating assets that are not included in calculations 1 to 3. See Guide to depreciating assets 2007 for information on how to calculate the decline in value of these assets.

Enter your total deduction at (f) in the STS depreciation deductions table.

Do not include at (f) in the table depreciating assets which qualify for a deduction under Subdivision 40-F or 40-G of ITAA 1997 as water facilities or landcare operations in your primary production business and for which you have chosen to claim a deduction under those Subdivisions and not the STS rules. Show these deductions at Landcare operations and business deduction for decline in value of water facility.

Calculation 5 Disposal of depreciating assets

(a) Low-cost assets

If you have disposed of a low-cost asset for which you have claimed an immediate deduction in calculation 1 this year or in a prior year, include the taxable purpose proportion of the termination value in the RECONCILIATION ITEMS section. For example, for a low-cost asset used only 50% for an income producing purpose which was sold for $200 (excluding GST), only $100 will be assessable and included as a reconciliation adjustment. Termination value includes money received as the result of the loss or destruction of an asset.

(b) Assets allocated to STS pools

Where you dispose of depreciating assets that have been allocated to either the general or long life STS pools, you deduct the taxable purpose proportion of the termination value from the closing pool balance. For example, for a pooled depreciating asset used only 50% for an income-producing purpose which was sold for $3,000 (excluding GST), only $1,500 will be deducted from the closing pool balance. If the balance of a pool (after taking into account any additions and disposals but before calculating the deductions in calculations 2 and 3) is below $1,000 but greater than zero you can claim an immediate deduction for this amount. Write this deduction against the appropriate pool at (b) or (c) in the STS depreciation deductions table.

If the closing pool balance is less than zero, you include the amount below zero in your assessable income in the RECONCILIATION ITEMS section. For more information about closing pool balances, see below.

If expenses are incurred in disposing of a depreciating asset, these expenses may be taken into account in calculation 3.

(c) Other depreciating assets

See the Guide to depreciating assets 2007 for information on how to calculate any balancing adjustment amounts on the disposal of other depreciating assets. Balancing adjustment amounts are included in the RECONCILIATION ITEMS section. Refer to What are reconciliation adjustments?

Closing pool balance

The closing balance of each STS pool for an income year is the:

•	opening pool balance (see calculation 2) plus

•	taxable purpose proportion of the adjustable value of assets that were first used or installed ready for use for a taxable purpose during the year (see calculation 3) plus

•	taxable purpose proportion of any cost addition amounts assets in the pool during the year (see calculation 3) less

•	taxable purpose proportion of the termination value of any pooled assets disposed of during the year [see calculation 5(b)] less

•	STS pool deduction (see calculation 2) less

•	deduction for assets first used by you during the year (see calculation 3) less

•	deduction for any cost addition amounts for pooled assets during the year (see calculation 3).

If your closing pool balance is less than zero, see calculation 5(b).

The closing pool balance for this year becomes the opening pool balance for the 2007-08 income year except where you made an adjustment to reflect the changed business use of a pooled asset.

You will need your opening pool balance to work out the pool deduction next year. Do not write your closing pool balance on your tax return.

Go to Part N – Motor vehicle expenses in your business.

Other businesses

You show at this item the depreciation claimed in your books of account other than for those assets allocated in a prior year to a general STS pool or a longlife STS pool. For assets allocated to such a pool, include here the amount of the pool deduction to be claimed for tax purposes. For information about STS depreciation deductions see above.

The depreciation amount shown here should not include profit or loss on the sale of depreciating assets. You should include profits on the sale of depreciable assets as Other business income for primary production assets and for non-primary production assets. You should include losses on sale of depreciating assets at All other expenses.

Accounting or book depreciation may differ from the deduction for the decline in value of depreciating assets.

You carry out the reconciliation between accounting depreciation and the deduction for decline in value at Expense reconciliation adjustments. See the Guide to depreciating assets 2007 for information on the deduction for decline in value.

Is expenditure revenue or capital?

Practice Statement PS LA 2003/8 provides guidance on two straightforward methods which can be used by taxpayers carrying on a business to help determine whether expenditure incurred to acquire certain low-cost items is to be treated as revenue or capital.

Subject to certain qualifications, the two methods cover expenditure below a threshold and the use of statistical sampling to estimate total revenue expenditure on low-cost items. The threshold rule allows an immediate deduction for qualifying low-cost business items costing $100 or less. The sampling rule allows taxpayers with a low-value pool to use statistical sampling to determine the proportion of the total purchases on qualifying low-cost business items that are revenue expenditure.

A deduction for expenditure incurred on low-cost assets calculated in accordance with this Practice Statement will be accepted by the Tax Office.

Completing this item

This item is completed by clicking on the PP/NPP buttons adjacent to Depreciation expenses and completing the fields on that screen manually or using the e-tax depreciation worksheets. You cannot use the worksheets and manually complete the fields. The PP button allows primary production depreciation to be entered. The NPP button allows non-primary production depreciation to be entered.

NOTE:

If you have included an amount greater than $15,000 at Depreciation expenses, you will need to complete a Capital allowances schedule 2007 (NAT 3424.6.2007) unless you:

 -  have chosen to enter or continue in the STS at item S1 or
 -  are exiting the STS or have previously exited the STS, and the amount relates entirely to
    STS depreciating assets.

For more information, refer to Capital allowances schedule instructions 2007 (NAT 4089-6.2007). e-tax will ask you to enter the required information at the end of the item 14 interview. If you have used the e-tax depreciation routine, e-tax will complete the schedule for you.

PART N	MOTOR VEHICLE EXPENSES IN YOUR BUSINESS

Item D1 and item D2 tell you more about the expenses you can claim.

Do not include depreciation, finance leasing charges or interest paid. These should be included at Depreciation expenses, Finance leasing charges, Interest expenses within Australia and Interest expenses overseas.

Completing this item

STEP 1	Enter the total amount of your primary production motor vehicle expenses in the Motor vehicle expenses – Primary Production box.

STEP 2	Enter the total amount of your non-primary production motor vehicle expenses in the Motor vehicle expenses – Non-Primary Production box.

STEP 3	If you are claiming motor vehicle expenses for a car under one of the four methods described at item D1, find the code letter that identifies the method you used to work out your expenses and enter it in the TYPE box to the right of the amount at Motor vehicle expenses on your schedule.

METHOD 1 – Cents per kilometre method – S

METHOD 2 – 12 per cent of original value method – T

METHOD 3 – One-third of actual expenses method – O

METHOD 4 – Logbook method – B

If you are claiming motor vehicle expenses other than for a car – see item D2 – enter the code letter N in the TYPE box to the right of the amount at Motor vehicle expenses on your schedule.

If you have more than one code, print only the code that applies to the largest claim.

PART O	REPAIRS AND MAINTENANCE AS A BUSINESS EXPENSE

This is expenditure shown in your accounts for repairs and maintenance of premises, plant, machinery, implements, utensils, rolling stock or articles associated with the production of income. Any non-deductible expenditure, such as items of a capital nature or amounts relating to private use of an item, included at this part should also be included at Expense reconciliation adjustments on your schedule. The following information on deductions for repairs will assist you to work out whether you need to make an expense reconciliation adjustment.

Repairs

You may deduct the cost of repairs – not being expenditure of a capital nature – to premises and depreciating assets such as plant, machinery or equipment used for producing assessable income, or in carrying on a business for that purpose.

Expenditure on repairs to property used partially for business or income-producing purposes – for example, where the property is also used for private purposes or in the production of exempt income – is deductible only to the extent that is reasonable, taking account of such use.

Where items are newly acquired, including by way of a legacy or gift, the cost of repairs to defects in existence at the time of acquisition is generally of a capital nature.

Expenditure incurred in making alterations, additions or improvements is of a capital nature and is not deductible.

For further information on deductions for repairs, refer to Taxation Ruling TR 97/23 – Income tax:deductions for repairs.

Records you need to keep

To support your claim for the cost of repairs, you must keep full details including source documents of the nature and cost of repairs to each item.

Completing this item

STEP 1	Enter the total amount of your primary production repairs and maintenance expenses in the Repairs and maintenance – Primary Production box.

STEP 2	Enter the total amount of your non-primary production repairs and maintenance expenses in the Repairs and maintenance – Non-Primary Production box.

PART P	OTHER BUSINESS EXPENSES

This is the total of all other expenses you incurred in deriving your profit or loss and which you have not already included elsewhere in this screen. Other expenses include wages, accounting and professional fees, advertising, office supplies, foreign exchange losses and any loss on the sale of a depreciating asset which is entered by completing the details on a depreciation summary screen – click on the PP/NPP buttons to access this screen.

For more information about foreign exchange losses, visit our website or see Item D15.

You should also include capital and other non-deductible items (including debt deductions denied by thin capitalisation rules) shown at this part at Expense reconciliation adjustments in the RECONCILIATION ITEMS section. See Part E – Working out your reconciliation adjustments for more information.

Home office expenses

If part of your home was specifically set aside as your place of business and used solely for the purpose of conducting your business affairs and you have no other place from where they were mainly carried on, the following expenses are partly deductible:

•	occupancy expenses – including rent, mortgage interest, rates and house and contents insurance

•	running expenses – including electricity, cleaning, depreciation, leasing charges and repairs to furniture and furnishings in the office.

In most cases, you can apportion expenses on a floor area basis and, if the area of your home was a place of business for only part of the year, on a time basis.

Where you used part of your home as a home office but it did not qualify as a place of business, only the additional running expenses you incurred may be deductible.

For further details, refer to Taxation Ruling TR 93/30 – Income tax: Deductions for home office expenses and Practice Statement PS 2001/6-Home office expenses: diaries of use and calculation of home office expenses.

You should keep records to show how you have calculated your home office expenses. The Tax Office may ask you for these at a later date.

Completing this item

Use the table to enter your other expenses. Enter one row for each expense. If you need help using tables in e-tax, read data entry.

STEP 1	Enter a description of the expense in the Other expenses column.

STEP 2	Enter the amount of the other expense in the appropriate column – Primary Production or Non-Primary Production. Do not show cents.

PART Q	TOTAL EXPENSES

e-tax will add up all the business expenses for Primary Production and Non-Primary Production. The total will be displayed at Total Business expenses in the appropriate column.

RECONCILIATION ITEMS

e-tax will carry forward the Total income and Total expenses from the previous screens.

PART A	BUSINESS EXPENSES FOR ENVIRONMENTAL PROTECTION ACTIVITIES

Show at this part the amount of allowable expenditure on environmental protection activities (EPA).

You can deduct expenditure to the extent that you incur it for the sole or dominant purpose of carrying on EPA. EPA are activities undertaken to prevent, fight or remedy pollution, or to treat, clean up, remove or store waste from your earning activity. Your earning activity is one you carried on, carry on or propose to carry on for the purpose of:

•	producing assessable income (other than a net capital gain)

•	exploration or prospecting, or

•	mining site rehabilitation.

You may also claim a deduction for cleaning up a site on which a predecessor carried on substantially the same business activity.

The deduction is not available for:

•	EPA bonds and security deposits

•	expenditure for acquiring land

•	expenditure for constructing or altering buildings, structures or structural improvements, or

•	expenditure to the extent that you can deduct an amount for it under another provision.

Accordingly, expenditure which forms part of the cost of a depreciating asset is not deductible as expenditure on EPA if a deduction is available for the decline in value of the asset – see the Guide to depreciating assets 2007 for information on the deduction for decline in value.

Expenditure incurred on or after 19 August 1992 on certain earthworks constructed as a result of carrying out EPA can be written off at the rate of 2.5% per annum under the provisions for capital works expenditure.

Expenditure on an environmental assessment of a project is not deductible as expenditure on EPA. If it is capital expenditure directly connected with a project, it could be a project amount for which a deduction would be available over the project life – see Business deduction for project pool. An example would be a study to determine the quantity and type of pollutants which will be produced from a process used in a proposed business.

If the deduction arises from a non-arm’s length transaction and the expenditure is more than the market value of what it was for, the amount of the expenditure is instead taken to be that market value.

Any recoupment of the expenditure would be assessable income.

Completing this item

STEP 1	Enter your total primary production EPA expenses in the Environment protection – Primary production box.

STEP 2	Enter your total non-primary production EPA expenses in the Environment protection – Non-Primary production box.

PART B	SECTION 40-880 DEDUCTION

You need to know

Section 40-880 provides a five-year write-off for certain capital expenditure incurred by you in relation to a past, present or prospective business if the expenditure is not already taken into account or not denied a deduction by another provision.

For expenditure incurred before 1 July 2005, there are seven specific types of business-related capital expenditure for which you may be able to claim a deduction. For expenditure incurred on or after 1 July 2005, the law has been changed so that a deduction can now also be claimed for capital expenditure:

•	in relation to your business

•	in relation to a business that used to be carried on – such as capital expenses incurred in order to cease the business

•	in relation to a business proposed to be carried on – such as the costs of feasibility studies, market research or setting up the business entity.

•	As a shareholder, beneficiary or partner to liquidate or deregister a company or to wind up a trust or partnership – the company, trust or partnership must have carried on a business.

If you incur expenditure in relation to your existing business, a business that you used to carry on or a business that you propose to carry on, the expenditure is deductible to the extent the business is, was or is proposed to be carried on for a taxable purpose.

You cannot deduct expenditure in relation to an existing business that is carried on by another entity. However, you can deduct expenditure you incur in relation to a business that used to, or is proposed to be carried on by another entity. The expenditure is only deductible to the extent that:

•	the business was, or is proposed to be, carried on for a taxable purpose.

•	the expenditure is in connection with the business that was or is proposed to be carried on and with your deriving assessable income from the business.

NOTE:
The deduction cannot be claimed for capital expenditure to the extent to which it:
 -  can be deducted under another provision
 -  forms part of the cost of a depreciating asset you hold, used to hold or will hold
 -  forms part of the cost of land
 -  relates to a lease or other legal or equitable right
 -  would be taken into account in working out an assessable profit or deductible loss
 -  would be taken into account when working out a capital gain or capital loss
 -  would be specifically not deductible under the income tax laws if the expenditure was not
    capital expenditure
 -  is specifically not deductible under the income tax  laws for a reason other than the
    expenditure is capital expenditure
 -  is of a private or domestic nature
 -  is incurred in relation to gaining or producing exempt income or non-assessable non
    exempt income
 -  is excluded from the cost or cost base of an asset because, under special rules in the UCA
    or capital gains tax regimes respectively, the cost or cost base of the asset was taken to be
    the market value
 -  is a return of or on capital or is a return of a non-assessable amount (for example,
    repayments of loan principal).

Generally, you can deduct 20% of the expenditure in the year you incur it and in each of the following four years. However, for some pre- and post-business expenditure you my have to defer your claim for a deduction because the non-commercial rules apply. For example, if you were carrying on a business during the year but your relevant capital expenditure relates to a new business that did not commence before 30 June 2007, you generally cannot claim a deduction for the expenses incurred on or after 1 July 2005 until the business activity commences. If you incur such expenditure in these circumstances you should not claim the deductible amount (20%) but note it in your business or taxation records and claim all the amounts deferred for this item in the year the business commences.

Claim the amount deductible under section 40-880 here if you carried on a business as an individual at any time during the year. If you stopped carrying on a business as an individual in an income year that ended before 1 July 2005 and you have not fully claimed your five-year write-off under section 40-880, claim the amount deductible this year at item D15..

If you have incurred relevant capital expenses on or after 1 July 2006 and the expenses relate to a business that ceased in a previous income year and you carried on the business as a sole trader or through a partnership, company or trust, you claim the amount deductible (20%) at item D15.

You must show any recoupment of the expenditure as assessable income, either at Other business income or as part of your Income reconciliation adjustments in the RECONCILIATION ITEMS section. See Part E – Working out your reconciliation adjustments for more information.

Completing this item

STEP 1	Enter your total primary production section 40-880 expenses in the Section 40-880 deduction – Primary production box.

STEP 2	Enter your total non-primary production section 40-880 expenses in the Section 40-880 deduction – Non-Primary production box.

PART C	CAPITAL EXPENDITURE DIRECTLY CONNECTED WITH A BUSINESS PROJECT

You must complete an e-tax project pool worksheet for each project for which you are claiming a deduction.

When you complete a project pool worksheet it will be listed in the Existing worksheets navigator on the left of the e-tax window. Click on a worksheet in the navigator to display it for viewing or changing.

Most of the details you need to provide are self-explanatory and will not be explained further here. The information provided below will help you complete the worksheet correctly.

Further information

Certain capital expenditure you incurred after 30 June 2001 which is directly connected with a project you carry on or propose to carry on for a taxable purpose can be allocated to a project pool and written off over the life of the project.  Each project has a separate project pool.  The project must be of sufficient substance and be sufficiently identified that it can be shown that the capital expenditure said to be a ‘project amount’ is directly connected with the project.

A project is carried on if it involves a continuity of activity and active participation. Merely holding a passive investment such as a rental property would not be regarded as carrying on a project.

Such capital expenditure, known as a project amount, is expenditure incurred on:

•	creating or upgrading community infrastructure associated with the project – this expenditure must be paid (not just incurred) to be a project amount

•	site preparation for depreciating assets (other than to drain swamp or low-lying land or to clear land for horticultural plants and grapevines)

•	feasibility studies for the project

•	environmental assessments for the project

•	obtaining information associated with the project

•	seeking to obtain a right to intellectual property

•	ornamental trees or shrubs.

Project amounts also include mining capital expenditure and expenditure on certain facilities used to transport minerals or quarry materials. For more information on these project amounts, refer to the Guide to depreciating assets 2007.

The expenditure must not be otherwise deductible or form part of the cost of a depreciating asset.  If the expenditure incurred arises from a non-arm’s length dealing and is more than the market value of what it was for, the amount of the expenditure is taken to be the market value.

Project amounts are allocated a ‘project pool’. Your deduction for project amounts allocated to a project pool is spread over the ‘project life’. The project life is the period from when the project will start to operate until when it will stop operating. The period must be limited by something inherent in the project. A deduction for project amounts would be available over that limited project life (or an earlier abandonment, sale or other disposal). If there is no limited project life, no deduction is available under these rules.

A deduction is available starting from the income year if you started to operate a project to gain or produce assessable income. The deduction is worked out on the value of the project pool at the end of the income year. For projects that started to operate on or after 10 May 2006 the calculation of the deduction changed.  You cannot use the higher rate if you abandon, sell or otherwise dispose of an existing project and then restart it on or after 10 May 2006 just so deductions can be calculated using the higher rate. The WORKSHEET A and B below shows you how e-tax works out your deduction. For projects which start to operate on or after 10 May 2006 the calculation is as follows

WORKSHEET A: Project pool deduction for projects which started on or after 10 May 2006

Value of project pool at 30 June 2007. This is the closing pool value for the 2005-06 income year (if any) plus the sum of the project amounts you allocated to the pool in 2006-07.	(a)	$_____________
Your estimate of the life of the project (in years)	(b)	_____________ years
Divide (a) by (b).	(c)	$_____________
Multiply (c) by 200% – this is your 2006-07 deduction for project pool.	(d)	$_____________
NOTE:
Your deduction at (d) must not be more than the amount at (a).
If a project operated in 2006-07 for purposes other than earning assessable business income, you must reduce your deduction at (d) by a reasonable amount for the extent to which the project operated for such purposes.

WORKSHEET B: Project pool deduction for projects which started before 10 May 2006

Value of project pool at 30 June 2007. This is the closing pool value for the 2005-06 income year (if any) plus the sum of the project amounts you allocated to the pool in 2006-07.	(a)	$_____________
Your estimate of the life of the project (in years)	(b)	_____________ years
Divide (a) by (b).	(c)	$_____________
Multiply (c) by 150% – this is your 2006-07 deduction for project pool.	(d)	$_____________
NOTE:
Your deduction at (d) must not be more than the amount at (a).
If a project operated in 2006-07 for purposes other than earning assessable business income, you must reduce your deduction at (d) by a reasonable amount for the extent to which the project operated for such purposes.

The pool value can be subject to adjustments. An adjustment could happen under specific rules that apply to transactions conducted in foreign currency (the foreign exchange, or forex rules). If during the income year you met an obligation to pay foreign currency incurred as a project amount which you allocated to a project pool, you might have derived a gain or incurred a loss under these rules. For more information about the forex rules visit our website.

Closing pool value for 2006-07

e-tax will display this amount on the screen. It is amount (a) minus (d) in the WORKSHEET above. Record the closing pool balance on a piece of paper and keep it with your records. You will need the closing pool value for 2006-07 to work out your deduction for project pool next year.

Any recoupment of the expenditure must be shown as assessable income either at Other business income or as part of your Income reconciliation adjustments in the RECONCILIATION ITEMS section. See Part E – Working out your reconciliation adjustments for more information.

Where a project is abandoned, sold or otherwise disposed of in 2006-07

In this case – whether or not the project had begun to operate – you can claim a deduction for the 2005-06 closing pool value (if any) plus any project amounts allocated to the pool in the 2006-07 year. You must show any proceeds from the abandonment, sale or disposal of the project as assessable income either at Other business income or as part of your Income reconciliation adjustments in the RECONCILIATION ITEMS section. See Part E – Working out your reconciliation adjustments for more information.

NOTE:
To the extent that the deduction is for amounts directly connected to a project you carry on in carrying on a business, show the amount here at Business deduction for project pool. To the extent that the deduction is for amounts directly connected to a project you carry on other than in carrying on business, show the deduction at item D14 on your tax return.

Completing this item

STEP 1	e-tax will write your total primary production project pool expenses from all PP worksheets completed in the Business deduction for project pool – Primary production box.

STEP 2	Enter your total non-primary production project pool expenses from all NPP worksheets completed in the Business deduction for project pool – Non-Primary production box.

NOTE:
If you have included an amount greater than $1,000 at Business deduction for project pool, you will need to complete and attach a Capital allowances schedule 2007 unless you are eligible to enter or continue in the STS and have chosen to do so at item S1. e-tax will ask you to enter the required information at the end of the item 14 interview. If you have used the e-tax depreciation routine, e-tax will complete the schedule for you.

PART D	LANDCARE OPERATIONS AND BUSINESS DEDUCTION FOR DECLINE IN VALUE OF WATER FACILITY

Landcare operations expenses

You can claim a deduction for capital expenditure you incur on a landcare operation for land in Australia in the year it is incurred.

Unless you are a rural land irrigation water provider the deduction is available to the extent you use the land for either:

•	a primary production business or

•	in the case of rural land, a business for the purpose of producing assessable income from the use of that land – except a business of mining or quarrying.

You may claim the deduction even if you are only a lessee of the land.

Rural land irrigation water providers can claim a deduction for certain expenditure they incur. A rural land irrigation water provider is an entity whose business is primarily and principally supplying water to entities for use in primary production businesses on land in Australia or businesses (except mining or quarrying businesses) using rural land in Australia. The supply of water by using a motor vehicle is excluded.

If you are a rural land irrigation water provider, you can claim a deduction for capital expenditure you incurred supplying water to a landcare operation on:

•	land in Australia being used for primary production businesses, or

•	rural land in Australia being used for a taxable purpose (except a business of mining or quarrying)

Your deduction is reduced by a reasonable amount to reflect an entity's use of the land for other than a taxable purpose after you incurred the expenditure.

A landcare operation is one of the following operations:

•	erecting fences to separate different land classes in accordance with an approved land management plan

•	erecting fences primarily and principally to keep out animals from areas affected by land degradation to prevent or limit further damage and assist in reclaiming the areas

•	constructing a levee or similar improvements

•	constructing drainage works – other than the draining of swamps or low-lying land – primarily and principally to control salinity or assist in drainage control

•	an operation primarily and principally for eradicating or exterminating animal pests from the land

•	an operation primarily and principally for eradicating, exterminating or destroying plant growth detrimental to the land

•	an operation primarily and principally for preventing or combating land degradation other than by the use of fences, or

•	an extension, alteration or addition to any of the assets described in the first four dot points or an extension of an operation described in the fifth to seventh dot points.

A landcare operation also excludes expenditure for:

•	a repair of a capital nature to an asset which is deductible under a landcare operation

•	constructing a structural improvement that is reasonably incidental to levees or drainage works deductible under a landcare operation

•	a repair of a capital nature, or an alteration, addition or extension to a structural improvement that is reasonably incidental to levees (or similar improvements) or drainage works deductible under a landcare operation.

An example or a structural improvement that may be reasonably incidental to drainage works is a fence constructed to prevent livestock entering a drain that was constructed to control salinity.

No deduction is available if the capital expenditure is on plant unless it is on certain fences, dams or other structural improvements. Where a levee is constructed primarily and principally for water conservation, it would be a water facility and no deduction would be allowable under these rules. Its decline in value would need to be worked out under the rules for water facilities – see Water conservation and conveyance facilities.

You may need to show any recoupment of the expenditure as assessable income either at Other business income or as part of your Income reconciliation adjustments in the RECONCILIATION ITEMS section. See Part E – Working out your reconciliation adjustments for more information. Phone the Business Infoline on 13 28 66 for further information.

These deductions are not available to a partnership. Expenses for landcare operations incurred by a partnership are allocated to each partner who can then claim the relevant deduction in respect of their share of the expenditure.

Water conservation and conveyance

You can claim a deduction for the decline in value of a water facility. A water facility includes plant or a structural improvement, or an alteration, addition or extension to plant or structural improvement, that is primarily or principally for the purpose of conserving or conveying water. The expenditure must be incurred primarily and principally for conserving or conveying water for use in a primary production business on land in Australia.

"Water facility" includes dams, tank stands, bores, wells, irrigation channels pipes, pumps, water towers and windmills. The meaning of water facility has been extended to include certain other expenditure incurred on or after 1 July 2004 for:

•	a repair of a capital nature to plant or a structural improvement that is primarily or principally for the purpose of conserving or conveying water – for example, if you purchase a pump that needs substantial work done to it before it can be used in your business, the cost of repairing the pump may be treated as a water facility

•	a structural improvement, or an alteration, addition or extension, to a structural improvement, that is reasonably incidental to conserving or conveying water

•	a repair of a capital nature to a structural improvement that is reasonably incidental to conserving or conveying water.

Examples of structural improvements that are reasonably incidental to conserving or conveying water include a bridge over an irrigation channel, a culvert (a length of pipe or multiple pipes that are laid under a road to allow the flow of water in a channel to pass under the road), or a fence preventing livestock entering an irrigation channel.

A deduction for the decline in value of a water facility can be claimed in equal instalments over three years.

Unless you are an irrigation water provider, the expenditure must be incurred primarily and principally for conserving or conveying water for use in a primary production business you conduct on land in Australia. You may claim the deduction even when you do not own the land. Therefore, if you are a lessee carrying on a business of primary production on the land, you can still claim the deduction. Your deduction is reduced where the facility is not wholly used for either:

•	carrying on a primary production business on land in Australia, or

•	a taxable purpose – for example, producing assessable income.

Irrigation water providers are entitled to a deduction for water facilities expenditure incurred on or after 1 July 2004. An irrigation water provider is an entity whose business is primarily and principally the supply of water to entities for use in primary production businesses on land in Australia. The supply of water by using a motor vehicle is excluded.

If you are an irrigation water provider, you must incur the expenditure primarily and principally for the purpose of conserving or conveying water for use in primary production businesses conducted by other entities on land in Australia – being entities supplied with water by you. The deduction is reduced if the facility is not used wholly for a taxable purpose. Any recoupment of the expenditure may be assessable income. Phone the Business Infoline on 13 28 66 for further information.

These deductions are not available to a partnership. Costs incurred by a partnership for facilities to conserve or convey water are allocated to each partner who can then claim the relevant deduction in respect of their share of the expenditure.

NOTE:
For STS taxpayers the amount to show at Landcare operations and business deduction for decline in value of water facility should not include any amount relating to a depreciating asset used in your primary production business if you have chosen to claim a deduction for it under the STS depreciation rules.

Completing this item

STEP 1	Enter the total deductions for primary production landcare operation expenses and for water facilities at Landcare operations and business deduction for decline in value of water facility – Primary production.

STEP 2	Enter the total deductions for non-primary production landcare operation expenses and for water facilities at Landcare operations and business deduction for decline in value of water facility – Non-primary production.

PART E	WORKING OUT YOUR RECONCILIATION ADJUSTMENTS

You may need to make income reconciliation adjustments or expense reconciliation adjustments. These adjustments reconcile your business operating profit or loss with the business taxable income.

Do not complete any income reconciliation adjustments or expense reconciliation adjustments if all the amounts you have entered at Gross payments where Australian business number not quoted to Landcare operations and business deduction for decline in value of water facility, in the e-tax interview, are assessable income or allowable tax deductions for income tax purposes.

If you have included any amounts such as exempt income or non-deductible expenses at these labels, or have not included amounts which are assessable income or expenditure that is deductible, you must work out your reconciliation adjustments.

If you have no reconciliation adjustments to make, go to Working out your net income or loss from business this year.

You may like to print a Reconciliation statement before you continue.

STOP
If you are eligible to enter or continue in the STS and you have chosen to do so at item S1, read on. Otherwise go to What are reconciliation adjustments? below.

STS taxpayers

If you are eligible to continue in the STS and have elected to do so at item S1 you may need to make additional adjustments.

Make adjustments in this section of item P8 on your schedule if you:

•	are continuing in the STS this year, have chosen to continue using the STS accounting method and the amounts you have shown at the INCOME and EXPENSE sections of item P8 are not based on the STS accounting method

•	are continuing in the STS this year and are changing from using the STS accounting method, or

•	you have disposed of depreciating assets during the year – if you are manually entering your decline in value amounts you will have to click on the PP/NPP buttons and enter the amount at the appropriate balancing adjustment labels.

The Reconciliation statement will assist you with your calculations.

Trade debtors and creditors as at 30 June 2007

If you are continuing in the STS this year, have chosen to continue using the STS accounting method and have included at Business income and expenses amounts of ordinary income that have been derived but not received in 2006-07, the amounts not received are not assessable under the STS rules this year, for example, money owed by trade debtors as at 30 June 2007.

These amounts form part of your Income reconciliation adjustments. Include these amounts at Other non-assessable income included in the PLS (f) on the Reconciliation statement.

If you are continuing in the STS this year, have chosen to continue using the STS accounting method and have included at Business income and expenses amounts for general deductions, repairs and tax-related expenses that have been incurred but not paid in 2006-07, the amounts not paid are not deductible under the STS rules this year, for example, trade creditors.

These amounts form part of your Expense reconciliation adjustments. Include these amounts at Items not allowable as deductions – other non-deductible items, including income tax (n) on the Reconciliation statement.

Adjustments when changing from the STS accounting method

If you are continuing in the STS this year and have chosen to discontinue using the STS accounting method read below.

If you have not included at Business income amounts of ordinary income that were derived but not received while using the STS accounting method, these amounts are assessable this year.

These amounts form part of your Income reconciliation adjustments. Include these amounts at Assessable business income not included in the PLS (b) on the Reconciliation statement.

If you have not included at Business expenses amounts of general deductions, repairs or tax-related expenses that were incurred but not paid while using the STS accounting method, these amounts are deductible this year.

These amounts (other than tax-related expenses) form part of your Expense reconciliation adjustments. Include these amounts at Other deductible items for tax purposes not included in the PLS (t) on the Reconciliation statement. Your deduction for tax-related expenses are recorded at D10 on your tax return.

Disposal of depreciating assets

If you disposed of any depreciating assets during the income year, the following amounts (if any) form part of your Income reconciliation adjustments:

•	the taxable purpose proportion of the termination value of low-cost assets disposed of for which an immediate deduction has been claimed

•	if the closing pool balance of an STS pool is less than zero, the amount below zero, and

•	assessable balancing adjustment amounts on the disposal of depreciating assets not allocated to STS pools.

If you are manually calculating your decline in value amounts include the balancing amounts at the appropriate labels on the screen accessed by clicking on the PP/NPP buttons adjacent to the Reconciliation adjustment – depreciation boxes.

Any deductible balancing adjustment amounts on the disposal of depreciating assets that you have not allocated to STS pools, form part of your Expense reconciliation adjustments. If you are manually calculating your decline in value amounts include these amounts at the appropriate labels on the screen accessed by clicking on the PP/NPP buttons adjacent to the Reconciliation adjustment – depreciation boxes.

For more information on assessable balancing adjustment amounts and deductible balancing adjustment amounts, see the Guide to depreciating assets 2007. For a brief explanation of the terms used see Definitions.

Read on to determine of you need to make any further reconciliation adjustments.

What are reconciliation adjustments?

Income reconciliation adjustments include:

•	income add backs – income not shown in the accounts which is assessable income for tax purposes, such as:

o	assessable balancing adjustment amounts on disposal of depreciating assets

o	other assessable income not included in the profit and loss statement

•	income subtractions – income shown in the accounts which is not assessable income, such as:

o	profit on sale of depreciating assets

o	other income that is not assessable for income tax purposes – for example, gross exempt income.

Your income reconciliation adjustment is:

your total income add back – your total income subtractions

The net total of the primary production and non-primary production income reconciliation adjustments are entered in the appropriate column at Income reconciliation adjustments. The Reconciliation statement will assist you with your calculations.

Where the net is a negative amount enter the figure with a minus (-) sign.

What are expense reconciliation adjustments?

Expense reconciliation adjustments include:

•	expense add backs – expenses shown in the accounts which are not tax deductible, including timing deductions such as:

o	prepaid expenses not deductible in this year

o	depreciation

o	loss on sale of a depreciating asset

o	other items not allowable as a deduction – for example, capital expenditure, additions to provisions and reserves, income tax expense, expenses relating to exempt income, debt deduction denied by the thin capitalisation rules, other non-deductible expenses.

•	expense subtractions – items not shown as expenses which are deductible for tax purposes, such as:

o	prepaid expenses deductible this year but not included at any other label

o	deduction for decline in value of depreciating assets

o	deductible balancing adjustment amounts on disposal of depreciating assets

o	other items deductible for tax purposes.

Your expense reconciliation adjustment is:

your total expense add backs – your total expense subtractions

The net total of the primary production and non-primary production expense reconciliation adjustments are entered in the appropriate column at Expense reconciliation adjustments. The Reconciliation statement will assist you with your calculations.

Where the net is a negative amount enter the figure with a minus (-) sign.

The following are examples of specific reconciliation adjustments that may apply to you.

Exiting from the STS this year

Prepaid expenses

Deduction for decline in value (non-STS taxpayers only)

Luxury car leasing

Hire purchase agreements

Termination of a limited recourse debt

If none of these apply to you, go to Reconciliation statement for instructions on how to complete the e-tax screen.

Exiting from the STS this year

If you have exited from the STS and have amounts of ordinary income that you derived but not receive while you were in the STS, these amounts are assessable in this year – for example, money owed by debtors at 30 June 2006.

Include these amounts at (b) on the Reconciliation statement, unless you have already included them at other income labels at Item P8.

Similarly, if you have exited the STS and have amounts of general deductions (including repairs and tax-related expenses) that you incurred but not paid while you were in the STS, these amounts are deductible this year – for example, money you owed to creditors as at 30 June 2006.

Include these amounts (other than tax-related expenses) at (t) on the Reconciliation statement, unless you have already included them at other deduction labels at item P8. Show your deduction for tax-related expenses at item D10 on your tax return.

Prepaid expenses

Special rules may affect the timing of deductions for prepaid expenditure. Under these rules you may need to apportion certain prepaid expenses over more than one income year. You must make an expense reconciliation adjustment to add back that part of the expense that is not deductible in the year it is incurred. Show the adjustment as an expense addition at (k) on the Reconciliation statement.

If you had a prepaid expense in a prior year which is to be apportioned over the service period and you are entitled to a deduction for part of the expense this year but have not included it at any other label, show the adjustment as an expense subtraction at (s) on your Reconciliation statement. For further information about the prepayment rules, see the publication Deductions for prepaid expenses 2007 (NAT 4170 – 6.2007).

Deduction for decline in value
(non-STS taxpayers only)

If you have completed e-tax depreciation worksheets read How the depreciation amounts are written to your return. Otherwise, read on.

A deduction for a decline in value of a depreciating asset calculated under the income tax law may differ from the accounting or book calculation of depreciation. Different rules regarding such things as effective life, the calculation of balancing adjustment amounts and the treatment of debt forgiveness amounts can produce a discrepancy between the two calculations.

Under the income tax law you can deduct an amount equal to the decline in value of a depreciating asset in the 2006-07 income year if you held the depreciating asset for any time during the year and used it (or installed it ready for use) for a taxable purpose, such as for producing assessable income.

The deduction is reduced to the extent the asset is not used for a taxable purpose.

To help you calculate your deduction for decline in value see Guide to depreciating assets 2007 which also provides explanations of relevant terms. The guide also explains the option to allocate to a low-value pool depreciating assets that cost less than $1,000 (excluding input tax credit entitlements) and depreciating assets that have an opening adjustable value of less than $1,000.

If you choose to use the low-value pool method to calculate the decline in value of low-cost or low-value depreciating assets you will need to use the Low-value pool worksheet accessed from the screen bought up by clicking on the PP/NPP buttons. Where necessary make a reasonable apportionment between primary production and non-primary production activities. If the pool contains assets used for work-related, self-education or rental purposes read Item D6. Unless the pool contains only assets used in business, when you have completed the low-value pool worksheet e-tax will include your deduction in Item D6.

The deduction for decline in value of depreciating assets not allocated to a pool should also be included at Deductible decline in value in the screen accessed by clicking on the PP/NPP buttons.

Luxury car leasing

A leased car, either new or second hand, is a luxury car if its cost exceeds the car limit that applies for the financial year in which the lease commences. The car limit for 2006-07 is $57,009.

Luxury car leases entered into after 7.30 p.m. (by legal time in the ACT) on 20 August 1996 (other than genuine short-term hire arrangements) are treated as a notional sale and loan transaction.

The cost or value of the car specified in the lease (or the market value if the parties were not dealing at arm’s length in connection with the lease) is taken to be the cost of the car for the lessee and the amount loaned by the lessor to the lessee to buy the car.

In relation to the notional loan, the actual lease payments are divided into notional principal and finance charge components. That part of the finance charge component for the notional loan applicable for the particular period (the accrual amount) is deductible to the lessee subject to any reduction required under the thin capitalisation rules.

The amount forms part of your Expense reconciliation adjustments. Include the amount at Accrual amount deduction for lessee of luxury cars (p) on the Reconciliation statement.

In relation to the notional sale, the lessee is treated as the holder of the luxury car and may be entitled to claim a deduction for the decline in value of the car. If the lessee is an STS taxpayer for the income year in which the lease is entered into, the lessee allocates the car to their general STS pool.

For the purpose of calculating the deduction, the cost of the car is limited to the car limit for the financial year in which the lease is granted. For more information on deductions for the decline in value of leased luxury cars, refer to the Guide to depreciating assets 2007.

In summary, the lessee is entitled to deductions equal to:

•	the accrual amount, and

•	the decline in value of the luxury car, based on the applicable car limit, unless the car is allocated to the general STS pool.

Both deductions are reduced to reflect any use of the car for other than a taxable purpose.

Where you allocate the car to the general STS pool with the cost based on the applicable car limit, see STS taxpayers to calculate the deduction under the STS depreciation rules.

If you have included the lease expense at Lease expenses in the Expenses section, the amount should also form part of your Expense reconciliation adjustments. Include the amount at expense addition Lease payments for luxury cars (i) on the Reconciliation statement. Include the deduction for the accrual amount at expense subtraction Accrual amount deduction for lessee of luxury cars (p).

If the lease terminates or is not extended or renewed and the lessee does not actually acquire the car from the lessor, the lessee is treated under the rules as disposing of the car by way of sale to the lessor. This constitutes a balancing adjustment event. If the car is not subject to the STS rules, any assessable or deductible balancing adjustment amount for the lessee must be determined. If the car has been allocated to the lessee's general STS pool, see Calculation 5 Disposal of depreciating assets for STS taxpayers.

Hire purchase agreements

Hire purchase and instalment sale agreements of goods are treated as a sale of the property by the financier (or hire purchase company) to the hirer (or instalment purchaser).

The sale is treated as being financed by a loan from the financier to the hirer at a sale price of either their agreed cost or value or the property’s arm’s length value.

The periodic hire purchase (or instalment) payments are treated as payments of principal and interest under the notional loan. The interest component is deductible to the hirer, subject to any reduction required under the thin capitalisation rules. This amount forms part of the Expense reconciliation adjustments. Include the amount at Other items deductible for tax purposes not included in the PLS (t) on the Reconciliation statement.

In relation to the notional sale, the hirer of a depreciating asset is treated as the holder of the asset and either allocates the asset to the appropriate STS pool if they are an STS taxpayer for the income year, or may be entitled to claim a deduction for the decline in value of the depreciating asset. The cost of the asset for this purpose is taken to be the agreed cost or value, or the arm’s length value if the dealing is not at arm’s length.

If you have included hire purchase charges at an expenses label, the amount should also form part of your Expense reconciliation adjustments. Include the amount at Items not allowable as deductions – other non-deductible items including income tax (n) on the Reconciliation statement.

Termination of a limited recourse debt

Excessive deductions for capital allowances are included in assessable income under the limited recourse debt rules contained in Division 243 of ITAA 1997.  This will occur where:

•	expenditure on property has been financed or re-financed wholly or patly by limited recourse debt.

•	the limited recourse debt is terminated after 27 February 1998 but has not been paid in full by the debtor and

•	because the debt has not been paid in full, the capital allowance deductions allowed for the expenditure exceed the deductions that would be allowable if the unpaid amount of the debt was not counted as capital expenditure of the debtor.  Special rules apply in working out whether the debt has been fully paid

A limited recourse debt is a debt where the rights of the creditor as against the debtor in the event of default in payment of the debt or of interest are limited wholly or predominantly to the property that has been financed by the debt, or is security for the debt, or rights in relation to such property.

A debt is also a limited recourse debt if, notwithstanding that theremay be no specific conditions to that effect, if it is reasonable to conclude that the creditors’ rights as against the debtor are capable of being so limited. Limited recourse debt includes a notional loan under a hire purchase or instalment sale agreement of goods to which Division 240 of ITAA 1997 applies. See section 243-20.

The amount that is included within assessable income as a result of these provisions forms part of your Income reconciliation adjustments. Include the amount at Assessable business income not included in the PLS (b) on the Reconciliation statement.

Reconciliation statement

STEP 1	If you have not already done so, print a Reconciliation statement

STEP 2	Complete the Reconciliation statement using the explanation provided above. This will give you your total income and expense reconciliation amounts (primary and non-primary production).

STEP 3	Enter your total primary production reconciliation adjustments in Income reconciliation adjustments and Expense reconciliation adjustments, Primary production column, on the e-tax screen. Where the net is a negative amount enter the figure with a minus (-) sign.

STEP 4	Enter your total non-primary production reconciliation adjustment in Income reconciliation adjustments and Expense reconciliation adjustments, Non-primary production column, on the e-tax screen. Where the net is a negative amount enter the figure with a minus (-) sign.

PART F	NET INCOME OR LOSS FROM BUSINESS THIS YEAR

e-tax will work out your net income or loss from business this year separately for primary production and non-primary production business. The amount will be displayed in the appropriate column at NET INCOME OR LOSS FROM BUSINESS THIS YEAR. The amount shown should not include any non-commercial business losses deferred from a prior year.

If the amount is negative you made a loss.

PART G	DEFERRED NON-COMMERCIAL BUSINESS LOSSES FROM A PRIOR YEAR

A deferred non-commercial business loss is a loss you incurred in a prior year which you were unable to claim against other income.

Item 15 explains how the non-commercial business loss rules work.

NOTE:
The non-commercial business loss may be reduced if:
 -  you earned net exempt income in this income year, or
 -  you became bankrupt or were released from any debts by
    the operation of an Act relating to bankruptcy.

Phone the Business Infoline on 13 28 66 for more information. For an explanation of net exempt income, see item L1.

Completing this item

STEP 1	Enter the amount of any primary production losses you deferred in a prior year from activities that are the same or similar to your current year activity at Deferred non-commercial business losses from a prior year – Primary production.

STEP 2	Enter the amount of any non-primary production losses you deferred in a prior year from activities that are the same or similar to your current year activity at Deferred non-commercial business losses from a prior year – Non-primary production.

PART H	NET INCOME OR LOSS FROM BUSINESS

This amount takes into account losses deferred from a prior year. e-tax will work out your net income or loss from business separately for primary production and non-primary production business. The amount will be displayed in the appropriate column at NET INCOME OR LOSS FROM BUSINESS.

If you made a loss you will also need to complete item 15. e-tax will use the information you provide at item 15 to complete item P3 Number of business activities and item P9 Business loss activity details in your Business and professional items schedule 2007.

Click on the Next button. e-tax will move to the Other business and professional items screen.

P9 BUSINESS LOSS ACTIVITY DETAILS

e-tax will complete item P9 – Business loss activity details in your Business and professional items schedule 2007 using the information you enter at item 15.

Refer to item 15 for more information.

You cannot claim losses arising from activities you conduct that are a private recreational pursuit or hobby if there is no likelihood of profit.

P10 STS DEPRECIATING ASSETS

This item is completed by e-tax from the information you have entered in the STS depreciation worksheet.

OTHER BUSINESS AND PROFESSIONAL ITEMS

You need to fill in all items relating to your business expenses. However, if you have chosen to enter or continue in the STS and have chosen to do so at item S1, you do not need to fill in items P11, P12 and P15 to P18.

If you have more than one business, you must add the figures for all businesses, irrespective of whether they are primary or non-primary production and write only one figure at each item.

If you are a primary producer you will need a primary production worksheet to help you work out some of the following. Complete this worksheet before proceeding. Refer to Information for primary producers 2007 (NAT 1712-6.2007).

P11  TRADE DEBTORS

This is the total amount owing to the business at the end of the year for goods and services provided during the income year, that is, current trade and other debtors.

Completing this item

STEP 1	Work out the total amount owing from trade and other debtors. If you have more than one business, add up all trade and other debtor amounts.

STEP 2	Enter the total amount owing from trade and other debtors at Trade debtors.

P12  TRADE CREDITORS

This is the total amount owed by the business at the end of the year for goods and services provided during the income year – that is, current trade and other creditors.

STEP 1	Work out the total amount owing to trade and other creditors. If you have more than one business, add up all trade and other creditor amounts.

STEP 2	Enter the total amount owing to trade and other creditors Trade creditors.

P13  SALARY AND WAGE EXPENSES

Salaries, wages and other labour costs actually paid or payable to persons employed in your business – excluding those forming part of capital expenditure or paid for private domestic assistance – usually are deductible. However, you cannot be an employee of your business. Payments to you of salary – we deem these payments to be an allocation of profits – are not allowable deductions in calculating your income or loss.

Include any salary and wage component of Cost of sales such as allowances, bonuses, casual labour, retainers and commissions paid to people who received a retainer, and worker's compensation paid through the payroll.

Also include direct and indirect labour, holiday pay, locums, long service leave, lump sum payments, other employee benefits, overtime, payments under an incentive or profit sharing scheme, retiring allowances and sick pay. Include any salary or wages paid to relatives and other related entities both here and at Payments to associated persons. Exclude agency fees, contract payments, sub-contract payments, service fees, superannuation, management fees and consultant fees.

Completing this item

STEP 1	Add up total salary and wage expenses from each business.

STEP 2	Enter this amount at Total salary and wages.

STEP 3	Select from the list below the letter that matches the description of the expense component where the salary and wage expenses have been wholly or predominantly reported.

C  All included in the expense component Cost of sales

A  All included in the expense component All other expenses

B  Included in the expense component of both Cost of sales and All other expenses

O  Included in expense components other than Cost of sales and/or All other expenses.

STEP 4	Enter the letter in the TYPE box at the right of the amount of salary and wage expenses.

P14  PAYMENTS TO ASSOCIATED PERSONS

These are amounts, including salary or wages, commissions, superannuation benefits or allowances paid or payable to your relatives or a partnership in which your relative is a partner. You must also include amounts of salary or wages paid to relatives and related partnerships at Total salary and wages.

You need to keep the following records:

•	full name of relative or related partnership

•	age, if under 18 years old

•	relationship

•	nature of duties performed

•	hours worked

•	total remuneration

•	salaries or wages claimed as deductions

•	other amounts paid – for example, retiring gratuities, bonuses and commissions.

Excessive or unreasonable payments paid to a relative or related partnership may not be deductible. The PSI rules also limit deductions for payments to associates.

Completing this item

STEP 1	Add up payments made to relatives and related partnerships from each business.

STEP 2	Enter the amount at Payments to associated persons.

P15  INTANGIBLE DEPRECIATING ASSETS FIRST DEDUCTED

STOP
If you are eligible to enter or continue in the STS and you have chosen to do so at item S1, do not complete this item.

If you have completed e-tax depreciating assets worksheets in the income and expenses section of the item 14 worksheet, e-tax will complete this item using the information entered in the worksheets.

The following intangible assets are regarded as depreciating assets (as long as they are not trading stock):

•	certain items of intellectual property

•	computer software (or a right to use computer software) that you acquire, develop or have someone else develop for your use for the purpose for which it is designed (in-house software)

•	mining, quarrying or prospecting rights and information

•	spectrum licences, and

•	datacasting transmitter licences.

A depreciating asset that you hold starts to decline in value from the time you use it (or install it ready for use) for any purpose, including a private purpose. However, you can only claim a deduction for the decline in value to the extent you use the asset for a taxable purpose, such as for producing assessable income.

At Intangible depreciating assets first deducted you need to show the cost of all intangible depreciating assets for which you are claiming a business deduction for decline in value for the first time. If you have allocated any intangible depreciating assets with a cost of less than $1,000 to a low-value pool for the income year, you also need to include the cost of those assets at item Intangible depreciating assets first deducted. Do not reduce the cost for estimated non-taxable use.

Expenditure on in-house software that you allocated to a software development pool is not shown at Intangible depreciating assets first deducted.

For more information on decline in value, cost, low-value pools, in-house software and software development pools, refer to Guide to depreciating assets 2007.

Completing this item

STEP 1	Add up the costs.

STEP 2	Enter the amount at Intangible depreciating assets first deducted.

NOTE:
If you have manually entered an amount of more than $75,000 at Intangible depreciating assets first deducted, you need to complete a Capital allowances schedule 2007. e-tax will ask you to enter the required information at the end of the item 14 interview. If you have used the e-tax depreciation routine, e-tax will complete the schedule for you.

P16  OTHER DEPRECIATING ASSETS FIRST DEDUCTED

STOP
If you are eligible to enter or continue in the STS and you have chosen to do so at item S1, do not complete this item.

If you have completed e-tax depreciating assets worksheets in the income and expenses section of the item 14 worksheet, e-tax will complete this item using the information entered in the worksheets.

A depreciating asset that you hold starts to decline in value from the time you use it (or install it ready for use) for any purpose, including a private purpose. However, you can only claim a deduction for the decline in value to the extent you use the asset for a taxable purpose, such as for producing assessable income.

At Other depreciating assets first deducted you need to include the cost of all depreciating assets (other than intangible depreciating assets) for which you are claiming a business deduction for the decline in value for the first time.

If you have allocated any depreciating assets with a cost of less than $1,000 to a low-value pool for the income year, you also need to include the cost of those assets at Other depreciating assets first deducted. Do not reduce the cost for estimated non-taxable use.

For more information on decline in value, cost and low-value pools, refer to the publication Guide to depreciating assets 2007.

Completing this item

STEP 1	Total the costs.

STEP 2	Enter the amount at Other depreciating assets first deducted.

NOTE:
If you have manually entered an amount of more than $75,000 at Other depreciating assets first deducted, you may need to complete a Capital allowances schedule 2007. e-tax will ask you to enter the required information at the end of the item 14 interview. If you have used the e-tax depreciation routine, e-tax will complete the schedule for you.

P17  TERMINATION VALUE OF INTANGIBLE DEPRECIATING ASSETS

STOP
If you are eligible to enter or continue in the STS and you have chosen to do so at item S1, do not complete this item.

See intangible depreciating assets for more information.

If you have completed e-tax depreciating assets worksheets in the income and expenses section of the item 14 worksheet, e-tax will complete this item using the information entered in the worksheets.

Include the termination values for intangible depreciating assets – including intangible assets allocated to a low-value pool – that you stopped holding or using during the year (for example, assets sold, lost or destroyed).

Generally, the termination value is the amount you receive or are deemed to receive in relation to the asset that you stopped holding or using. It includes the market value of any non-cash benefits such as goods and services you receive for the asset.

NOTE:
Do not show at this item any consideration you receive during the income year in relation to in-house software for which you have allocated expenditure to a software development pool. For more information on termination value, in-house software and software development pools, refer to the publication Guide to depreciating assets 2007.

Completing this item

STEP 1	Add up any amounts you received or are deemed to have received for all intangible depreciating assets that you stopped holding or using in your business, other than:

•	assets allocated to a general STS pool or a longlife STS pool in a prior year

•	low-cost assets for which an immediate deduction has been allowed under the STS rules

•	in-house software for which you allocated expenditure to a software development pool

•	assets falling within the provisions relating to investments in Australian films.

STEP 2	Enter the amount at Termination value of intangible depreciating assets.

P18  TERMINATION VALUE OF OTHER DEPRECIATING ASSETS

STOP
If you are eligible to enter or continue in the STS and you have chosen to do so at item S1, do not complete this item.

If you have completed e-tax depreciating assets worksheets in the income and expenses section of the item 14 worksheet, e-tax will complete this item using the information entered in the worksheets.

At Termination value of other depreciating assets you include the termination values for other depreciating assets – including assets allocated to a low-value pool – that you stopped holding or using during the year (for example, assets sold, lost or destroyed).

Generally, the termination value is the amount you receive or are deemed to receive in relation to the asset that you stopped holding or using. It includes the market value of any non-cash benefits such as goods and services you receive for the asset.

For more information on termination value, refer to the publication Guide to depreciating assets 2007.

Completing this item

STEP 1	Add up the amounts you received or are deemed to have received for all depreciating assets that you stopped holding or using in your business other than:

•	intangible depreciating assets

•	assets allocated to a general STS pool or a long-life STS pool in a prior year

•	low-cost assets for which an immediate deduction has been allowed under the STS rules

•	buildings or structures for which a deduction is available under the capital works provisions

•	assets falling within the provisions relating to investments in Australian films.

STEP 2	Enter the amount at Termination value of other depreciating assets.

P19  TRADING STOCK ELECTION

If you have valued trading stock on hand at the end of the year of income at an amount that is less than the lowest amount available using one of the valuation methods at PART C – Closing stock, the Commissioner must be notified by selecting Yes or No on screen 1729.

CHECK THAT YOU HAVE

•	entered the correct amount on the schedule for each item that applies to you

•	kept your records to prove your claims, where required

You can print the Business and professional items schedule and, if applicable, the PAYG payment summary schedule and/or the Capital allowances schedule 2007 when you have completed the interview. Attach your schedule(s) to the printed copy of your tax return.


Business and professional items - Reconciliation statement
Business and professional items

RECONCILIATION STATEMENT

Click on the Print button to print a copy of this statement.

Income reconciliation adjustments		Primary production	Non-primary production
Additions
Assessable balancing adjustment amounts on disposal of depreciating assets*	(a)	$______________	$______________
Assessable business income not included in the profit and loss statement	(b)	$______________	$______________
Subtotal – add amounts at (a) and (b)	(c)	$______________	$______________
Subtractions
Net exempt income – gross exempt income less expenses relating to that exempt income	(d)	$______________	$______________
Profit on sale of depreciating assets included in accounts*	(e)	$______________	$______________
Other non-assessable income included in the profit and loss statement	(f)	$______________	$______________
Subtotal – add amounts at (d), (e) and (f)	(g )	$______________	$______________
Income reconciliation adjustment –  take (g) away from (c)		$______________	$______________
Expense reconciliation adjustments		Primary production	Non-primary production
Additions
Depreciation charged in accounts (non-STS taxpayers only)*	(h)	$______________	$______________
Lease payments for luxury cars	(I )	$______________	$______________
Loss on sale of depreciating assets included in accounts*	(j )	$______________	$______________
Part of prepaid expenses not deductible this year	(k)	$______________	$______________
Items not allowable as deductions:
- capital expenditure	(l  )	$______________	$______________
- additions to provisions and reserves	(m)	$______________	$______________
- other non-deductible items – including income tax	(n)	$______________	$______________
Subtotal – add all amounts from (h) to (n)	(o)	$______________	$______________
Subtractions
Accrual amount deduction for lessee of luxury cars	(p)	$______________	$______________
Deductible balancing adjustment amounts on disposal of depreciating assets*	(q)	$______________	$______________
Deduction for decline in value of depreciating assets (non-STS taxpayers only)*	(r)	$______________	$______________
Part of prepaid expenses deductible this year, but not included at any other label	(s)	$______________	$______________
Other deductible items for tax purposes not included in the profit and loss statement**	(t)	$______________	$______________
Subtotal – add all amounts from (p) to (t)	(u)	$______________	$______________
Expense reconciliation adjustment  – take (u) away from (o)		$______________	$______________
*	These are to be left blank if you are using e-tax as these are input as part of the depreciation data collection procedure. If you enter them here you will be double counting.

**	Do not include in Subtractions – Other items deductible for tax purposes not included in the PLS (t):

•	environmental protection expenditure

•	section 40-880 deductions

•	business deductions for project pools

•	deductions for landcare operations and water facilities.

Reconciliation adjustments for these amounts are shown separately in the Reconciliation screen.

A separate reconciliation should be done for primary production and for non-primary production items.


Definitions

Depreciating asset is an asset with a limited effective life which declines in value over that life.

Decline in value (previously "depreciation") is the value that an asset loses over its effective life.

Adjustable value of a depreciating asset is its cost (excluding input tax credit entitlements) less its decline in value since you first used it or installed it ready for use for any purpose, including a private purpose.

Taxable purpose includes for the purpose of producing assessable income.

Taxable purpose proportion is the extent to which you use the asset for a taxable purpose, such as for the purpose of producing assessable income.

Termination value includes money received from the sale of an asset or insurance money received as the result of the loss or destruction of an asset. Exclude the GST component where the amount received is for a taxable supply.

Assessable balancing adjustment amount arises where the termination value of the depreciating asset is more than the adjustable value.

Deductible balancing adjustment amount arises where the termination value of the depreciating asset is less than the adjustable value.

Cost addition amounts include the cost of capital improvements to assets and costs reasonably attributable to disposing of or permanently ceasing to use an asset (this may include advertising and commission costs or the costs of demolishing the asset).


Depreciation deductions table (STS taxpayers only)

Click on the Print button to print a copy of this table.

	Primary production ($)	Non-primary production ($)		Total ($)
Low-cost assets	____________	____________	(a)	____________
General pool	____________	____________	(b)	____________
Longlife pool	____________	____________	(c)	____________
General pool (1/2 rate)	____________	____________	(d)	____________
Long                                                                                                                                                                                                                                                     life pool (1/2 rate)	____________	____________	(e)	____________
Other assets	____________	____________	(f)	____________
Depreciation expenses [add (a) to (f)]	____________	____________	(g)	____________
Transfer the amount at (g) to the appropriate labels on the PP/NPP Business Simplified Tax System (STS) depreciation summary screen:

•	STS $1000 immediate write-off

•	General STS pool

•	Long-life STS pool.


Item 10 Gross interest
	Gross interest
This topic covers:

Who does this item apply to?

You need to know

What you need

Show at this item

Do not show at this item

Further information

Account keeping fees, charges and Financial Institutions Duty

Total gross interest less than $1

Joint accounts

TFN amounts withheld

Non-resident withholding tax

Pre-filling your interest details

WHO DOES THIS ITEM APPLY TO?

Complete this item if you received or were credited with, interest from any source within Australia.

WHAT YOU NEED

•	your passbook, statement or other documentation from your financial institution or other source that shows 2006-07 interest income

•	any Tax Office notice of assessment or amended assessment you received during 2006-07 that shows interest on early payments or interest on overpayments.

SHOW AT THIS ITEM

Include interest earned from financial institution accounts and term deposits – unless you were a non-resident and have paid, or should have paid, non-resident withholding tax on that interest. See Non-residents below.

Include any interest the Tax Office gave you or credited you with. If you were a non-resident and we gave you or credited you with interest, see Non-residents below.

YOU NEED TO KNOW

Children's accounts

If you opened or operated an account for a child and the funds in that account belong to you, or you spent or used the funds in the account as if they belonged to you, you must include any interest from the account at this item. Taxation Ruling IT 2486 –Income tax: Children's savings accounts has more detail.

Non-residents

If you were a non-resident for tax purposes for all or part of the year and you received or were credited with interest during the period, do not include that interest at this item. If withholding tax was deducted from your interest you do not have to enter it anywhere on your tax return because withholding tax paid by non-residents is a final tax.

However, if withholding tax was not deducted from that interest, you must complete an Additional information schedule showing amounts of interest you received during any period(s) you were a non-resident, from which withholding tax was not deducted.  We will work out the amount of non-resident withholding tax you have to pay on this interest and advise you of the amount.

DO NOT SHOW AT THIS ITEM:

•	distributions of interest you received, or were entitled to receive, from a partnership or trust – including a cash management trust, money market trust, mortgage trust, property trust, unit trust or any similar trust investment product – item 12

•	interest from a foreign source – item 19

•	interest from the land transport facilities tax offset scheme or infrastructure borrowings scheme – item 22.

FURTHER INFORMATION

Account keeping fees, charges and Financial Institutions Duty

NOTE:
Do not deduct account keeping fees and charges from your gross interest amount. You may be able to claim these amounts at item D7 Interest and dividend deductions.

Total gross interest less than $1

You do not have to show an amount if the total gross interest you earned from all accounts during the year is less than $1.

Joint accounts

If you are not the sole holder of an account, show only your share of interest. For any account where the account holders do not share equally in the interest, keep a record to show how you worked out your share.

TFN amounts withheld

The gross interest amount you show at this item must include any tax file number (TFN) amounts. These are amounts of tax withheld by the financial institution because you did not quote your TFN or Australian business number (ABN) to the institution. They will be shown on your statement or other document as Commonwealth tax or TFN withholding tax.

Non-resident withholding tax

Do not show amounts that were or should have been subject to non-resident withholding tax.


Downloading your interest details
Pre-filling your interest details

You may be able to pre-fill your interest income details if:

•	the interest was from a participating financial institution

•	your tax file number was recorded against your investment, and

•	you have not claimed non-resident status.

You will view:

•	A list of interest-bearing accounts, including savings accounts and term deposits, and

•	details of your sole and joint accounts (as an individual). For example:

o	husband and wife joint accounts will be displayed, and

o	business partnership accounts will not be displayed.

The information will be used to pre-fill item 10 – Gross interest in the tax return.

NOTE:
If the system is unavailable, e-tax cannot pre-fill your tax return for you. You can either enter your details manually or try to use the pre-fill service later.

For details about participating financial institutions or when the service may be available again, see e-tax pre-filling information.

INTEREST FROM OTHER ACCOUNTS

Any interest received or credited from Australian sources that are not pre-filled must be manually entered into your interview.

JOINT ACCOUNTS

Accounts may be held in joint names. If you hold accounts jointly with another person, such as your spouse, it is assumed that ownership of the account is divided equally. e-tax will divide the interest income equally between the number of account holders.  Your share of the amounts will be displayed in the ‘Your share’ columns.

For any account where the account holders do not share equally in the interest, keep a record to show how you worked out your share.

VIEWING AND/OR CHANGING BANK INTEREST INFORMATION

You can manually change the description, your share of gross interest and your share of TFN amounts withheld (less any refunded) in the table provided.

VIEWING AND/OR PRINTING YOUR BANK INTEREST INFORMATION

You can view and/or print the details that are pre-filled into e-tax by selecting Printing in the e-tax Navigator when it appears on the left hand side of the screen. Select Interest Summary in the Downloaded Data section and select Preview or Print.

IF YOU DISAGREE WITH THE PRE-FILLED INTEREST INFORMATION

If you disagree with or have any questions about the pre-filled interest details, refer to the statements issued by your financial institution. If you have received a refund of your TFN amounts withheld after 30 June 2007, please ensure that the amounts are correct in e-tax.

VERIFICATION

You must provide information that allows the Tax Office to verify your identity before your data is pre-filled into e-tax. To do this

1.	Click on Pre-filling in the Navigator or the Pre-filling button on the relevant screens.

2.	e-tax will ask you for your password or information that will allow the Tax Office to verify your identity. When you have successfully matched your details against the Tax Office records, you will be issued with a password.

NOTE:
Keep your password as you will need it to lodge your tax return or claim form.

For more details about obtaining a Tax Office password using e-tax refer to Tax Office password.


Item 11 Dividends
	Dividends
This topic covers:

Who does this item apply to?

You need to know

What you need

Do not show at this item

Don't leave it too late!

Further information

Example of how to show unfranked and franked dividends

Record keeping

Pre-filling your dividend details

WHO DOES THIS ITEM APPLY TO?

Complete this item if an Australian company (including a listed investment company), corporate unit trust, public trading trust or corporate limited partnership paid or credited you with any dividends or distributions.

YOU NEED TO KNOW

You need to show at this item all your assessable dividends including:

•	those paid directly to you

•	dividends applied under a dividend reinvestment plan

•	dividends that were otherwise dealt with on your behalf

•	bonus shares that qualify as dividends.

Dividends include:

•	distributions made by a corporate limited partnership (a partnership taxed in accordance with Division 5A of Part III of the Income Tax Assessment Act 1936)

•	dividends paid to you by a listed investment company.

A dividend is assessable income in the year it was paid or credited to you. Your dividend statement should have the relevant date (generally referred to as the payment date or date paid).

EXAMPLE

Sally received a dividend statement notifying her of a final dividend for the year ended 30 June 2006. The payment date shown on the dividend statement was 30 July 2006. Sally must include the amount of the dividend as well as any franking credits, in her assessable income on her 2007 tax return.

Demerger dividends

Dividends paid under a demerger are generally not assessable dividends. Do not show demerger dividends at this item unless you are advised by the company that they are assessable. Find out more about demergers in You and your shares 2007 (NAT 2632-6.2007)..

Payments, loans and forgiven debts that are treated as dividends

If you were a shareholder (or an associate of a shareholder) of a private company and received payments or loans from the company or had debts forgiven by the company, the value of those payments, loans or forgiven debts are treated as dividends (unless specifically excluded by law).

You will also have an amount that is treated as a dividend (unless specifically excluded by law) if:

•	you are a shareholder (or an associate of a shareholder) of a private company that had (or was going to have by a certain time) an unpaid present entitlement from a trust estate AND

•	the trustee of the trust estate made a payment or loan, or forgave a debt, in your favour.

Combine your amounts that are treated as dividends with any unfranked dividends you received and include the total amount in your assessable income at item 11. For more information, read You and your shares 2007.

Returns on non-share equity interests

Dividends also include dividends paid on a non-share equity interest. To find out more about this read You and your shares 2007.

Non-residents

Withholding tax paid by non-residents is a final tax. If you are not an Australian resident for tax purposes for all or part of the year, include dividend income paid or credited to you during that period at this item unless:

•	the dividend was fully franked, or

•	the dividend was not fully franked but either:

o	withholding tax was (or should have been) withheld from the unfranked amount, or

o	the unfranked amount was declared to be conduit foreign income in the dividend statement.

You should complete an Additional Information Schedule providing details of any part of your dividends you received during any period(s) you were a non-resident that:

•	were not fully franked

•	were not declared to be conduit foreign income, and

•	you have not paid withholding tax on.

The Tax Office will work out the amount of withholding tax you have to pay on these dividends and advise you of this amount.

IMPUTATION SYSTEM

Dividends that Australian resident companies pay their shareholders are taxed under a system known as ‘imputation’. It is called an imputation system because the tax the company tax pays is imputed, or attributed, to the shareholders. The tax paid by the company is allocated to shareholders by way of franking credits attached to the dividends they receive.

You include an amount equal to the franking credits attached to the dividend in your assessable income. You are also entitled to a franking tax offset equal to the amount included in your income (there are some exceptions to this rule, refer to Franking credit trading – qualified persons.

The franking tax offset will be used to cover, or partly cover, the tax payable on the dividends. If the tax offset is more than the tax payable on the dividends, the excess tax offset will be used to cover, or partly cover, any tax payable on other taxable income received.

If there is any tax offset amount left over after that, we refund that amount to you.

NOTE:
If you have a franking credit but do not have to lodge a tax return, see franking credits. You can claim your refund on a shorter form included in the publication Refund of franking credits instructions and application for individuals 2007

Some situations are not covered by the imputation system and the tax paid by the company is not allocated to shareholders by way of franking credits. Franking credits do not attach to the following dividends:

•	the part of the dividend on which family trust distribution tax has been paid. These dividends are exempt income and you cannot claim the franking credit. (The company or corporate limited partnership that paid the dividend should tell you if family trust distribution tax has been paid on it.)

•	a dividend that is included in a trust distribution on which ultimate beneficiary non-disclosure tax has been paid. (The trustee will let you know if a distribution fits this category.)

•	dividends where you engaged in franking credit trading and failed to satisfy the ‘holding period’ rule or the ‘related payments’ rule

•	dividends to the extent that a franking tax offset is denied because you have exceeded the small shareholder franking tax offset limit contained in the franking credit trading rules

•	dividends from a non-equity share which, although a share in legal form, is not treated as an equity interest, and so the dividends are not frankable. You and your shares 2007 has more information on non-equity shares, or

•	demerger dividends.

Franking credit trading – qualified persons

Measures designed to curb the unintended usage of franking credits apply to people who do not effectively own the shares or who only briefly own the shares. Under these measures, known as the ‘holding period rule’ and the ‘related payments rule’, you must satisfy certain criteria before you qualify for franking tax offsets. In other words, only qualified people are able to have the benefit of the franking credit attached to their dividends. These measures address the issue of franking credit trading.

The holding period rule applies to shares bought on or after 1 July 1997. It will apply to you if you sell shares within 45 days of buying them. It also applies if you enter into a risk diminution arrangement, such as a derivative transaction, within that time. The holding period is 90 days for certain preference shares.

The related payments rule applies to arrangements entered into after 7.30pm (Australian Eastern Standard Time) on 13 May 1997. It applies to you if you were under an obligation to make a related payment for a dividend and you did not hold your shares ‘at risk’ during a specified qualifying period.

If you failed to satisfy the holding period rule, and the related payments rule does not apply to you, you may still be entitled to a franking tax offset if you qualify for the small shareholder exemption. The small shareholder exemption applies provided that you do not exceed the franking tax offset limit of $5,000 on all of your franking tax offset entitlements in a given year, whether received directly, or indirectly (such as through a trust or partnership).

If any of these measures are likely to affect you read You and your shares 2007.

Unfranked dividends

Unfranked dividends are paid by an Australian resident company that has not already paid Australian company tax. If your dividend is unfranked, you are not entitled to a franking tax offset. You must include the unfranked dividend in your assessable income at item 11.

If your unfranked dividend is declared to be paid out of conduit foreign income in your dividend statement, then you must still include this amount as unfranked dividend income.

If you did not quote your tax file number (TFN) to your investment body for the shares or units you held, tax may have been withheld from any unfranked dividends at the highest marginal rate plus the Medicare levy, a total of 46.5%.

TFN amounts withheld from your unfranked dividends will be shown on your dividend statement. You can claim a credit for any TFN amounts withheld at item 11. If you have received a refund of some or all of the TFN amounts withheld, you cannot claim a credit for these amounts.

Franked dividends

You must include the amount of any franked dividends you received from a resident company in your assessable income at item 11.

Franking credit

You must also include any franking credit in your assessable income at item 11, so the correct amount of tax and Medicare levy can be calculated. However, do not include any franking credit if you do not qualify for a franking tax offset because of the application of the holding period rule or the related payments rule or because you exceeded the small shareholder exemption limit (refer to the franking credit trading measures).

The franking credits attached to dividends are from dividends franked at the company tax rate of 30 cents in the dollar (that is, the company paid tax on its taxable income at the rate of 30%)

An amount equal to the franking credit will be automatically allowed as a tax offset to reduce any tax payable on your dividends and any other taxable income received.

For more information, read You and your shares 2007.

WHAT YOU NEED

Your statements from the company, corporate unit trust, public trading trust or corporate limited partnership that paid you the dividends or made the distributions.

These statements should show:

•	the amounts of unfranked and franked dividends you received

•	the amounts of franking credit you received (the company works this out and allocates it to the dividend or distribution), and

•	the TFN amounts withheld from unfranked dividends.

If you have not received your dividend or distribution statements, contact the company, corporate unit trust, public trading trust or corporate limited partnership that paid or credited you with the dividends or distributions.

NOTE:
Show only your share of any dividends that were paid or credited to you (for example, if you or another person owned the shares in your joint names, show only your portion of the dividend income on your tax return).

DO NOT SHOW AT THIS ITEM:

•	dividend distributions from other partnership or trust – including a cash management trust, money market trust, mortgage trust, unit trust or managed fund such as a property trust, share trust, equity trust, growth trust, imputation trust, balanced trust or similar trust investment product – item 12

•	dividends from foreign companies – item 19

•	that part of a dividend or distribution on which family trust distribution tax has been paid – item A3.

Do not claim dividend expenses here. Claim them at item D7.

If you carried on the business of trading in shares include any dividend income and franking credits at this item; if you have a profit or loss on the sale of shares, you must refer to item 14.

If you sold shares during the year and you did not carry on a business of trading in shares, you must read item 17 to see if you need to show a capital gain or loss.

If a New Zealand company had paid you a dividend with Australian franking credits attached, you may be eligible to claim the franking credits. You show the dividends and claim the Australian franking credits at item 19

DON'T LEAVE IT TOO LATE!

Did you:

•	purchase or inherit any shares

•	receive any shares as part of a divorce settlement or as a gift or donation

•	receive ownership interests under a demerger, or

•	participate in a dividend reinvestment plan?

If you did, start keeping or updating your records now. Incomplete records could mean paying more tax than you need to when you dispose of your shares. For further information about shares and other assets that attract capital gains tax, including the records you need to keep, see Capital gains tax (CGT) on-line documentation.

NOTE:
If your statement does not show the franked and unfranked portions of the dividend, include the total dividend amount at item 11.

EXAMPLE OF HOW TO SHOW UNFRANKED AND FRANKED DIVIDENDS

Ranjini has shares in Coals Tyre Ltd, Telsbra Ltd, JT Corporate Unit Trust and SYF Pty Ltd. She has not given her tax file number (TFN) to Telsbra or SYF.

For the 2006-07 year, Ranjini’s dividend statements from the companies she has shares in showed:

a)	Coals Tyres Ltd – fully franked dividends of $70 and a $30 franking credit.

b)	Telsbra – an unfranked dividend of $100. A TFN amount $46.50 was withheld from her payment, so she received $53.50. The unfranked dividend amount Ranjini must show on her tax return is $100 ($53.50 plus $46.50).

c)	JT Corporate Unit Trust – unfranked dividends of $50, franked dividends of $70 and a $30 franking credit.

d)	SYF Pty Ltd – a dividend of $240, made up of an unfranked dividend of $100 and a franked dividend of $140. A TFN withheld amount of $46.50 was withheld from the unfranked dividend amount, so Ranjini received $53.50. The unfranked dividend amount she must show on her tax return is $100 ($53.50 plus $46.50). For the franked dividend of $140 she had a franking credit of $60. No TFN amount is withheld from franked dividends.

	Company or trust	Unfranked amount *	Franked amount	Franking credit	TFN amounts withheld from dividends
a)	Coals Tyre Ltd	$0.00	$70.00	$30.00	$0.00
b)	Telsbra Ltd	$100.00	$0.00	$0.00	$46.50
c)	JT CU Trust	$50.00	$70.00	$30.00	$0.00
d)	SYF Pty Ltd	$100.00	$140.00	$60.00	$46.50
	Total	$250.00	$280.00	$120.00	$93.00
* 	Unfranked amount includes both the amount received or credited and the TFN amount withheld. For more examples, refer to You and your shares 2007.

RECORD KEEPING

Keep your dividend statements with your other records. Refer to Keeping copies of all your tax records.


Pre-filling your dividend details

You may be able to pre-fill your dividend income details if:

•	the dividends were from public corporations that used participating share registry agencies

•	your tax file number was recorded against your investment, and

•	you have not claimed non-resident status.

You will view:

•	a list of investment accounts that are issuer or CHESS sponsored, and

•	details of your sole and joint investments (as an individual). For example:

o	husband and wife joint accounts will be displayed, and

o	business partnership accounts will not be displayed.

This information will be used to pre-fill item 11 – Dividends in the tax return.

NOTE:
If the system is unavailable, e-tax cannot pre-fill your tax return for you. You can either enter your details manually or try to use the pre-fill service later.

For details about participating share registry agencies or when the service may be available again, see e-tax pre-filling information.

DIVIDENDS FROM OTHER INVESTMENTS

Any dividends paid or credited from Australian entities that are not pre-filled must be manually entered into your interview.

JOINT OWNERSHIP OF SHARES

Shares may be held in joint names. If you hold shares jointly with another person, such as your spouse, it is assumed that ownership of the shares is divided equally. e-tax will divide the dividend income equally between the number of account holders.  Your share of the amounts will be displayed in the ‘Your share’ columns.

Shares can also be owned in unequal proportions. You have to be able to demonstrate this – for example, with a record of the amount contributed by each party to the cost of acquiring the shares. Dividend income and franking credits are assessable in the same proportion as the shares are owned.

VIEWING AND/OR CHANGING DIVIDEND INFORMATION

You can manually change the description, your share unfranked amount, your share franked amount, your share franking credits and your share of TFN amounts withheld in the table provided.

VIEWING AND/OR PRINTING DIVIDEND INFORMATION

You can view and/or print the details that are pre-filled into e-tax by selecting Printing in the e-tax Navigator when it appears on the left hand side of the screen. Select Share Dividend Summary in the Downloaded Data section and select Preview or Print.

IF YOU DISAGREE WITH THE PRE-FILLED DIVIDEND INFORMATION

If you disagree with or you have any questions about the pre-filled dividend details, refer to your dividend statements.

VERIFICATION

You must provide information that allows the Tax Office to verify your identity before your data is pre-filled into e-tax. To do this

1.	Click on Pre-filling in the Navigator or the Pre-filling button on the relevant screens.

2.	e-tax will ask you for your password or information that will allow the Tax Office to verify your identity. When you have successfully matched your details against the Tax Office records, you will be issued with a password.

NOTE:
Keep your password as you will need it to lodge your tax return or claim form.

For more details about obtaining a Tax Office password using e-tax refer to Tax Office password.


Item 12 Partnerships and trusts
	Partnerships and trusts
This topic covers:

Who does this item apply to?

You need to know

What you may need

Do not show at this item

Partnership distribution

Partnership income or loss

Deductions that relate to the partnership distribution you have received

Non-commercial business losses deferred from a prior year

Share of credits from partnerships

Trust distribution

You need to know

Trust income or loss

Deductions that relate to the trust distribution you have received

Share of credits from trusts

Further information

Income from activities as a special professional

Franking credits

Record keeping

WHO DOES THIS ITEM APPLY TO?

Complete this item if, for 2006-07, you received or you were entitled to:

•	income or a loss from a partnership

•	income from a trust (including a managed fund)

•	a share of credit for tax paid on or withheld from partnership or trust income

•	a share of credit for amounts withheld from partnership and trust income subject to foreign resident withholding

or if you had an interest in a trust that made a loss from primary production activities.

YOU NEED TO KNOW

Do not show all categories of income distributed from a partnership or trust at this item. If your distribution includes the following categories of income show them at other items on your tax return:

•	net capital gains from trusts – show at item 17

•	attributed foreign income – show at item 18

•	other foreign source income – show at item 19

You should not receive a distribution of a net capital gain or a net capital loss from a partnership. For information about how a partner returns their share of a capital gain or capital loss, refer to the Capital gains tax (CGT) on-line documentation.

If you have received a distribution from a partnership or trust which includes a dividend with Australian franking credits attached from a New Zealand company, you may be eligible to claim the Australian franking credits. However, you cannot claim New Zealand imputation credits. Refer to item 19 for further instructions on how to claim Australian franking credits.

If you have deferred non-commercial business losses from a prior year, you may be able to claim them this year if you operate the same or a similar business.

WHAT YOU MAY NEED

•	details of any deductions you can claim against your partnership or trust distribution that have not already been claimed by the partnership or trust

•	a statement or advice from the partnership or trust showing the following details in relation to your share of any distribution:

o	the amount of any primary production income or loss and the amount of any non-primary production income or loss

o	the amount of attributed foreign income and other foreign source income

o	the amount of any income on which family trust distribution tax has not been paid

o	your share of entitlement to any of the following credits:

•	credit for amounts of tax withheld because the trust or partnership failed to quote its Australian business number

•	credit for amounts of tax withheld due to the operation of foreign resident withholding

•	allowable franking credits from franked dividends

•	credit for tax file number amounts withheld

•	credit for tax paid by the trustee.

NOTE:
If you think that any details are wrong, or are missing from the statement or advice you received from the partnership or trust, contact the managing partner or trustee.

DO NOT SHOW AT THIS ITEM

Do not show the following amounts at this item:

•	attributed foreign income – item 18 – and any other foreign source income from a partnership or trust – item 19

•	net capital gains from a trust – item 17

•	a capital gain or a capital loss in respect of your interest in a partnership or a partnership asset – item 17

•	income from a corporate limited partnership – item 11

•	income from a public trading trust or a corporate unit trust – item 11

•	interest you received, or were credited with, from a joint account, where you quoted your individual tax file number to the financial institution – item 10

•	that part of a distribution on which family trust distribution tax or ultimate beneficiary non-disclosure tax has been paid – item A3

PARTNERSHIP DISTRIBUTION

This section covers:

Partnership income or loss

Deductions that relate to the partnership distribution you have received

Share of credits from partnerships

PARTNERSHIP INCOME OR LOSS

Include your share of primary production partnership income or loss and your share of non-primary production partnership income or loss – excluding any attributed foreign income or other foreign source income.

If the partnership in which you were a partner paid you salary, wages or allowances you must show that income at this item.

If you conducted a business activity as a partner in a partnership that resulted in a loss – or resulted in a loss after deducting your expenses – you must complete item 15 in addition to item 12.

NOTE:
If you received a distribution from a partnership or trust that is in the simplified tax system (STS) you may be entitled to claim the entrepreneurs tax offset. Refer to T14 Entrepreneurs tax offset.

DEDUCTIONS THAT RELATE TO THE PARTNERSHIP DISTRIBUTION YOU HAVE RECEIVED

Remember, you cannot claim a deduction for amounts already claimed by the partnership, or for expenses incurred in deriving exempt income or non-assessable non-exempt income (for example, expenses incurred in deriving distributions on which family trust distribution tax or ultimate beneficiary non-disclosure tax has been paid).

If you made a prepayment of $1,000 or more for something to be done (in whole or in part) in a future income year, the amount you can deduct may be affected by the rules relating to prepayments. For more information on prepayments see the publication Deductions for prepaid expenses 2007 (NAT 4170-6.2007).

If you have incurred debt deductions, such as interest and borrowing costs, in relation to a distribution from a partnership, the amount that you can deduct may be affected by the thin capitalisation rules. If you were an Australian resident and you (or any associate entities) have certain overseas interests or you are a foreign resident, these rules may apply if all your debt deductions (combined with those of your associate entities) for the year were more than $250,000. More information about thin capitalisation is available on the Tax Office website www.ato.gov.au.

Primary production deductions

If you were a partner in a primary production partnership that incurred eligible expenditure on landcare operations or water facilities the expenditure cannot be claimed by the partnership. Costs incurred by the partnership are allocated to each partner who can then claim the deduction.

For further information on deductions for eligible expenditure on landcare operations and water facilities see the Guide to depreciating assets 2007 (NAT 1996-6.2007).

If you are a partner in a partnership and you can claim a deduction in relation to your share of eligible expenditure incurred by the partnership on horticultural plants, grapevines, electricity connections or phone lines, include any such deduction that relates to primary production income or loss at this label. For information about deductions for expenditure on horticultural plants, grapevines, electricity connections and telephone lines see the Guide to depreciating assets 2007.

NOTE:
Only include non-commercial business losses deferred from a prior year if they relate to a partnership activity which is the same or similar to your current year partnership activity. Refer to the example below.

Non-primary production deductions

If a partnership incurs eligible expenditure on landcare operations, the expenditure cannot be claimed by the partnership. Costs incurred by the partnership are allocated to each partner who can then claim the deduction.

If you were a partner in a partnership and you can claim a deduction in relation to your share of eligible expenditure incurred by the partnership on electricity connections, include any such deduction that relates to non-primary production income or loss from partnerships at this label. For information about deductions for expenditure on electricity connections see the Guide to depreciating assets 2007.

Non-commercial business losses deferred from a prior year

NOTE:

The deferred non-commercial business loss deduction you can claim in this year may be reduced if:
  -  you earned net exempt income in this income year, or
  -  you have become bankrupt or were released from any debts by
     the operation of an Act relating to bankruptcy.

Phone the Business Infoline on 13 28 66 for more information. For an explanation of net exempt income, see item L1.

Only include non-commercial business losses deferred from a prior year if they relate to a partnership activity which is the same or similar to your current year partnership activity. You will also have to show these deferred losses at item 15. Refer to the example below.

NOTE:
Partnership business losses deferred from a prior year which you are unable to claim this year are deferred until a year in which you have a partnership activity that is the same or similar.

EXAMPLE

Non-commercial business losses deferred from a prior year

In 2005-06 Lisa deferred total non-commercial business losses of $6,000 from her share of partnership activities made up of:

•	$5,000 from a furniture restoration business, and

•	$1,000 from a computer consultancy business.

The partnership did not carry on the computer consultancy business in 2006-07. Lisa cannot include her $1,000 loss from the computer consultancy business at item 12. This amount does not relate to an activity which is the same or similar to her current year activity.

In 2006-07 Lisa’s partnership distribution from the furniture restoration business is $2,000.

Lisa will include the $5,000 as a deferred loss relating to the furniture restoration business at item 12. Therefore, her net distribution from this business activity is a loss of $3,000.

NOTE:
Her $5,000 loss from the furniture restoration business must also be shown at item 15. e-tax will show the amount at item P9 in the Business and professional items schedule  2007 as the ‘Deferred non-commercial business loss from a prior year’. The net distribution of $3,000 loss from the furniture restoration business must also be entered at item 15. e-tax will show the amount at item P9 as the ‘Net loss’ for that activity.

Lisa should keep a record of her $1,000 deferred loss from the computer consultancy business, as she may be able to claim it in a later year if that business starts again or she starts a similar business.

SHARE OF CREDITS FROM PARTNERSHIPS

If the partnership income or loss you have entered at item 12 includes:

•	income from which an amount of tax was withheld because an Australian business number was not quoted, show your share of the distributed credit

•	interest, dividends and unit trust distributions from which tax file number (TFN) amounts have been withheld, show your share of credits for TFN amounts withheld

•	a share of a franked dividend paid to the partnership, show your share of any allowable franking credits.

•	income from which an amount of tax was withheld because of the operation of foreign resident withholding, show your share of the distributed credit.

TRUST DISTRIBUTION

This section covers:

You need to know

Trust income or loss

Deductions that relate to the trust distribution you have received

Share of credits from trusts

YOU NEED TO KNOW

Distributions of income from any trust investment product, including a cash management trust, money market trust, mortgage trust, unit trust, or managed fund such as a property trust, share trust, equity trust, growth trust, imputation trust or balanced trust, must be shown at this item. If you are unsure whether your trust investment product is one of these trusts, check with the trustee.

Some trust distributions paid after 30 June 2007 need to be included in your tax return for this year. This is because you were entitled to this income at 30 June 2007. You must make sure that you have included all of your trust income. If you have not been advised of all your trust distribution, contact your trustee.

If your trust distribution includes amounts described as tax-free, tax deferred, tax-exempted or capital gains tax (CGT) concession, you will need to read the information on non-assessable payments in the Capital gains tax (CGT) on-line documentation. While these amounts may not need to be included at this item (item 12), they may be relevant in determining the amount of net capital gains you show at item 17 or may affect the cost base of your unit or trust interest.

Trust losses

If, in an income year, a trust makes an overall loss for income tax law purposes, the loss is retained in the trust – there is no amount of net income available for distribution.

However, in some cases you are required to enter a loss at this item. This happens when your income is subject to the averaging provisions available to primary producers, and the trust has made a loss from its primary production activities but has an overall net income amount, which it distributes to you.

Your distribution advice or statement from the trust will separately disclose your share of the primary production loss – which is needed for averaging purposes – and your share of other income. You show your share of any primary production loss here at item 12 and your share of other income at the relevant item – either here at item 12, or at item 17, item 18 or item 19.

If you need help, phone the Personal Tax Infoline.

TRUST INCOME OR LOSS

Include your share of primary production trust income or loss and your share of non-primary production trust income or loss – excluding any net capital gain, attributed foreign income or other foreign source income. Include in this income any share of credit (including franking credit from franked dividends).

Exception for primary producers

If you are a beneficiary of a trust that carries on the business of primary production, you may still be eligible for tax liability averaging even where that trust makes an overall loss. If this applies to you and you have not already been required to enter an amount of primary production distribution from a trust, a partnership or a business as a sole trader, then enter 0 (zero) as your share of primary production income. This will ensure that you remain subject to the tax liability averaging provisions.

You may need to refer to Taxation Ruling TR95/29 – Applicability of averaging provisions to beneficiaries of trust estates carrying on a business of primary production.

NOTE:
If you received a distribution from a partnership or trust that is in the simplified tax system (STS) you may be entitled to claim the entrepreneurs tax offset. Refer to T14 Entrepreneurs tax offset.

DEDUCTIONS THAT RELATE TO THE TRUST DISTRIBUTION YOU HAVE RECEIVED

Remember, you cannot claim a deduction for amounts already claimed by the trust, or for expenses incurred in deriving non-assessable non-exempt income or exempt income, such as expenses incurred in deriving distributions on which family trust distribution tax or ultimate beneficiary non-disclosure tax has been paid.

If you made a prepayment of $1,000 or more for something to be done (in whole or in part) in a future income year, the amount you can deduct may be affected by the rules relating to prepayments. For more information see the publication Deductions for prepaid expenses 2007 (NAT 4170-6.2007).

If you have incurred debt deductions, such as interest and borrowing costs, in relation to a distribution from a trust, the amount that you can deduct may be affected by the thin capitalisation rules. If you were an Australian resident and you (or any associate entities) have certain overseas interests or you are a foreign resident, these rules may apply if all your debt deductions (combined with those of your associate entities) for the year are more than $250,000. More information about thin capitalisation is available on the Tax Office website www.ato.gov.au.

Primary production

If a trust incurred eligible expenditure on landcare operations or water facilities, only the trust can claim deductions for that expenditure, not a beneficiary of the trust. For further information on deductions for eligible expenditure on landcare operations and water facilities see the Guide to depreciating assets 2007 (NAT 1996-6.2007).

Non-primary production

If a trust incurred eligible expenditure on landcare operations or water facilities, only the trust can claim deductions for that expenditure, not a beneficiary of the trust. For further information on deductions for eligible expenditure on landcare operations and water facilities see the Guide to depreciating assets 2007.

SHARE OF CREDITS FROM TRUSTS

If the trust income you have entered at item 12 includes:

•	income from which an amount of tax was withheld because an Australian business number was not quoted show your share of the distributed credit

•	income from which an amount of tax was withheld because of the operation of foreign resident withholding

•	interest, dividends and unit trust distributions from which tax file number (TFN) amounts have been withheld show your share of credits for TFN amounts withheld

•	a share of a franked dividend paid to the trust show your share of any allowable franking credits.

You may also have other tax credits. These include:

•	Australian tax paid by the trustee on your share of the trust income because:

o	you were a non-resident – that is, you were not an Australian resident, or you were a resident beneficiary of a non-resident trust that received a distribution from a resident trust.

o	you were under a legal disability – you are considered to be under a legal disability if you are under 18 years of age as at 30 June 2007 or you are a person who is bankrupt or you have been declared legally incapable because of a mental condition

•	If you are an Australian resident, you may be able to claim a credit for Australian withholding tax you have borne on an Australian source dividend, interest or royalty included in your distribution from a non-resident trust. A non-resident trust is a trust which both (a) only has non-resident trustees during the current year and (b) has its central management and control outside Australia during the current year.

For each amount of Other tax credits you show, you will need to provide the following additional information:

•	the situation that applies to the tax credits – that is, the trust was a non-resident trust, you were under a legal disability or you were a non-resident beneficiary; and

•	your share of income from the trust – this will include foreign income and net capital gains that are required to be included at other items in e-tax.

e-tax will use this information to prepare an Additional information schedule for you.

Where appropriate, e-tax will include the other tax credit amounts in your tax estimate.

Situation	How e-tax includes the credits in your tax estimate
Legal disability	These credits are totalled and shown as a ‘tax offset’.
Non-resident beneficiary	These credits are totalled and shown as ‘share of credit for tax paid by trustee’.
Non-resident trust	These credits do not form part of your assessment.
FURTHER INFORMATION FOR PARTNERSHIP AND TRUST DISTRIBUTIONS

INCOME FROM ACTIVITIES AS A SPECIAL PROFESSIONAL

If your distribution includes income from activities as an author of a literary, dramatic, musical or artistic work, inventor, performing artist, production associate or active sportsperson, you must also enter the amount of this taxable professional income at item 22. You will not be taxed twice on this income. More information is available at item 22.

FRANKING CREDITS

Show the amount of your share of any allowable franking credits which you are entitled to claim as a franking tax offset through a partnership or trust at item 12. You and the partnership or trustee must be qualified persons in relation to the particular dividend – see Qualified person below.

You can only claim a share of a franking credit which relates to the share of a franked dividend paid to a partnership or trust which is indirectly included in the amount of partnership income or loss you show at item 12, or in the amount of trust income which you show at item 12. Therefore, you cannot claim a franking credit for a dividend paid to the partnership or trust which was exempt income or non-assessable non-exempt income (for example, a distribution on which family trust distribution tax or ultimate beneficiary non-disclosure tax has been paid).

You cannot claim a share of a franking credit through a trust in the following circumstances:

•	the trust has an overall loss for the income year

•	you did not show an amount of income from the trust item 12, or

•	the amount of income from the trust you have shown item 12 is not attributable to the franked dividend which has generated the franking credit.

In addition you cannot claim a franking credit in respect of your share of dividends received through a distribution from a partnership or trust unless both you and the partnership or trustee are qualified persons.

Qualified person

There are rules – known as franking credit trading rules – designed to curb the unintended use of franking credits by persons who do not effectively own their shares or who only briefly own their shares. Under these rules, known as the ‘holding period rule’ and the "’elated payments rule’, you must satisfy certain criteria before you are considered to be a qualified person and can claim franking credits. In other words, only qualified persons are able to have the benefit of the franking credit attached to their dividends.

If you derived dividends through a distribution from a partnership or trust – except a widely held trust – you need to determine what component of the trust or partnership distribution is attributable to a particular dividend, and then determine whether, in relation to that dividend, you have satisfied the holding period rule and the related payments rule.

In addition, the trustee or the partnership itself must also have satisfied these rules.

The holding period rule applies to shares bought on or after 1 July 1997. It applies to you if you or the partnership or trust sold shares within 45 days of buying them. It also applies if you (or the partnership or trust) entered into a risk diminution arrangement, such as a derivative transaction, within that time. The holding period is 90 days for certain preference shares.

The related payments rule applies to arrangements entered into after 7.30 (Australian Eastern Standard Time) on 13 May 1997. It applies to you, or the partnership or trust, if you were under an obligation to make a related payment for a dividend and you did not hold your shares ‘at risk’ during a specified qualifying period.

Special rules apply if you are the beneficiary of a trust and the trustee has made a family trust election.

However, by way of exception, if you are a beneficiary in a widely held trust you are treated as holding an interest in all the shares, or interests, held by the trust, as an undissected aggregate. You are only required to satisfy the 45-day rule in relation your interest in the trust as a whole, rather than in relation to each share in which you had an interest under the trust. The trustee should be able to advise if a particular trust qualifies as a widely held trust.

If you failed to satisfy the holding period rule and the related payments rule does not apply to you, you may still be entitled to a franking tax offset if you qualify for the small shareholder exemption. The small shareholder exemption applies provided that you do not exceed the franking tax offset ceiling of $5,000 on all your franking tax offset entitlements in a given year, whether received directly or indirectly through a partnership or trust.

If any of these measures are likely to affect you read the publication You and your shares 2007 (NAT 2632-6.2007).

RECORD KEEPING

Keep a record of each distribution with your other records. You need the following information – name and tax file number of the partnership or trust, amount and source of distribution, amount of any taxable professional income, amount and type of deductions claimed and amount and type of any share of credits.


 12 Partnerships and trusts

Do not show the following amounts at this item:

•	attributed foreign income – item 18 – and any other foreign source income from a partnership or trust – item 19

•	net capital gains from a trust – item 17

•	a capital gain or a capital loss in respect of your interest in a partnership or a partnership asset – item 17

•	income from a corporate limited partnership – item 11

•	income from a public trading trust or a corporate unit trust – item 11

•	interest you received, or were credited with, from a joint account which is not a trust investment, where you quoted your individual tax file number to the financial institution – item 10

•	that part of a distribution on which family trust distribution tax or ultimate beneficiary non-disclosure tax has been paid – item A3


 12 Distributions from trusts

If, in an income year, a trust makes an overall loss for income tax law purposes, the loss is retained in the trust – there is no amount of net income available for distribution.

However, in some cases you are required to enter a loss at this item. This happens when your income is subject to the averaging provisions available to primary producers, and the trust has made a loss from its primary production activities but has an overall net income amount, which it distributes to you.

Your distribution advice or statement from the trust will separately disclose your share of the primary production loss – which is needed for averaging purposes – and your share of other income. You show your share of any primary production loss here at item 12 and your share of other income at the relevant item – either here at item 12, or at item 17, item 18 or item 19.

If you need help, phone the Personal Tax Infoline.


Item 13 Personal services income
	Personal services
This topic covers:

Who does this item apply to?

You need to know

What you need

Completing part A of this item

Completing part B of this item

Personal services income deductions

WHO DOES THIS ITEM APPLY TO?

This item applies to you if you received personal services income as a SOLE TRADER that was not subject to foreign resident withholding including:

•	personal services income under a pay as you go (PAYG) voluntary agreement

•	personal services income from which an amount was withheld because you did not quote your Australian business number (ABN)

•	personal services income of an independent contractor working under a labour hire arrangement

•	personal services income from the following specified payments:

o	payment for tutorial services provided for the Indigenous Tutorial Assistance Scheme of the Department of Education, Science and Training,

o	payment for translation and interpretation services for the Translating and Interpreting Service of the Department of Immigration and Citizenship

o	income as a performing artist in a promotional activity

A specified payment is a payment specified in tax law for PAYG withholding tax purposes.

NOTE:
If you are a taxi driver operating under a standard bailment agreement with an owner/ operator, you will need to complete this question.

YOU NEED TO KNOW

Personal services income is income that is mainly a reward for an individual’s personal efforts or skills.

Examples of personal services income are:

•	income of a professional practitioner in a sole practice

•	income payable under a contract which is wholly or principally for the labour or services of a person

•	income derived by a professional sportsperson or entertainer from the exercise of professional skills

•	income derived by consultants from the exercise of personal expertise.

Personal services income does not include income that is mainly:

•	for supplying or selling goods – for example, from retailing, wholesaling or manufacturing

•	generated by an income-producing asset – for example, from operating a bulldozer

•	for granting a right to use property – for example, the copyright to a computer program, or

•	generated by a business structure – for example, a large accounting firm

There are special rules for the tax treatment of personal services income (PSI) earned by sole traders including contractors and consultants. If you had personal services income as a sole trader and you were subject to the special rules, you will not be able to claim certain deductions – for example, rent, mortgage interest, rates or land tax for your home, or payments to your spouse (or other associate) for support work such as secretarial duties.

You will be subject to the special rules if you were not conducting a personal services business.

NOTE:
If you need more information phone the Business Infoline on 13 28 66 or visit the Tax Office website at www.ato.gov.au.

IMPORTANT:
If you carried on a business as an author, dramatic artist, musician, artist, inventor, performing artist, production associate, or active sportsperson, you must ALSO enter the amount of income you received from these business activities at item 22. You will not be taxed twice on this income.

Do not include at this item personal services income:

•	you received as an employee

•	that was subject to foreign resident withholding. Include this income at item 14 . The rules for the tax treatment of personal services income will apply to the personal services income included at item 14.

WHAT YOU NEED

•	Personal services income – personal services business self-assessment guide and checklist (NAT 3416-04.2004). This publication will help you decide whether you were conducting a personal services business. It also tells you how to get more information about personal services income issues.

•	Taxation Ruling TR 2001/7 – Income tax: The meaning of personal services income

•	Taxation Ruling TR 2001/8 – Income tax: What is a personal services business.

•	Taxation Ruling TR 2003/6 – Income tax: Attribution of personal services income and

•	Taxation Ruling TR 2003/10 – Income tax: Deductions that relate to personal services income.

e-tax will complete the Business and professional items schedule 2007 using your answers at this item. e-tax will also complete the Individual PAYG payment summary schedule 2007 if you had tax withheld from your sole trader personal services income.

COMPLETING PART A OF THIS ITEM

Did you earn PSI as a sole trader?

You do not have to complete item 13 in e-tax if your personal services income is gained as an employee. Item 13 concerns sole traders only.

You also do not have to complete item 13 if your PSI was received through a company, partnership or trust.

If you earned PSI as a sole trader you need to answer one or more of the questions in Part A to determine whether your deductions in relation to your PSI are affected by the PSI measure. The questions concern the conditions stated above under What you need to know.

Did you satisfy the results test?

If you earn PSI, you will satisfy the results test in the income year if, in respect of at least 75 per cent of this income, you can answer YES to ALL the following three questions in relation to your work:

•	Under your contract or arrangement, was the PSI paid to achieve a specified result or outcome?

•	Do you have to provide the tools or equipment necessary (if any) to do your work? (If no tools or equipment are required, answer YES).

•	Were you liable for rectifying defects in your work?

We consider that you are paid to achieve a result under your contract when your contract requires the production of a specified result or outcome and payment is conditional upon that outcome being achieved. The essence of the contract is to achieve a result and not just do work as required.

e-tax will use your answer to this question to complete item P1 label P on your Business and professional items schedule 2007.

Have you received a personal services business determination from the Commissioner that was in force for the whole of the period you earned the PSI?

This is a notice from the Commissioner stating that you are conducting a personal services business. If you have a personal services business determination from the Commissioner, PSI rules do not apply to your PSI and deductions.

e-tax will use your answer to this question to complete item P1 label C on your Business and professional items schedule 2007.

Did you receive 80% or more of your PSI from one source?

If you don’t satisfy the results test and 80% or more of your PSI in the income year came from one client and its associates, you cannot self-assess whether you satisfy the other personal services business tests. The PSI rules apply to you unless you get a determination from the Tax Office.

If you don’t satisfy the results test, you can self-assess against the other tests only if less than 80% of your PSI came from each client.

You should consider PSI obtained by merely putting your name with a labour hire firm, placement agency or similar organisation only as income from one client.

NOTE:
Special rules apply to commission agents – for more information, ring the Business Infoline on 13 28 66.

e-tax will use your answer to this question to complete item P1 label Q on your Business and professional items schedule 2007.

Do the personal services business tests apply?

If you received less than 80% of your PSI from each source for the whole of the period you earned PSI and you satisfied any of the following personal services business tests, you must indicate which business test(s) you satisfied.

The tests are:

•	the unrelated clients test;

•	the employment test;

•	the business premises test.

During the year of income you must have satisfied one of the three personal services businesses tests if your personal services income is to be excluded from the PSI measures.

Did you satisfy the unrelated clients test?

You will satisfy the unrelated clients test in the income year if you can answer YES to the following question:

•	Did you receive PSI from two or more clients who are not associated with each other or with you?

You must also provide the personal services work as a direct result of making offers to the public (for example, by advertising or word of mouth). Do not count clients obtained by merely putting your name with a labour hire firm, placement agency or similar organisation.

NOTE:
Special rules apply to commission agents. For more information, ring the Business Infoline on 13 28 66.

e-tax will use your answer to this question to complete item P1 label D1 on your Business and professional items schedule 2007.

Did you satisfy the employment test?

You will satisfy the employment test in the income year if you can answer YES to either of the following questions:

•	Did you have one or more apprentices for at least half the income year?

•	Did you have employees or did you engage sub-contractors or entities who performed at least 20% (by market value) of the principal work?

Principal work is the main work that generates the PSI and does not usually include support work such as secretarial duties. You can count a spouse or family member who does principal work but not companies, partnerships or trusts associated with you.

e-tax will use your answer to this question to complete item P1 label E1 on your Business and professional items schedule 2007.

Did you satisfy the business premises test?

You will satisfy the business premises test if you can answer YES to ALL of the following questions:

For the whole period during which you earned PSI, were your business premises:

•	owned or leased by you

•	mainly used by you for work earning your PSI (for example, more than 50 per cent of the use)

•	used exclusively by you

•	physically separate from your private residence or the private residence of any of your associates and

•	physically separate from the business address of your clients or their associates?

e-tax will use your answer to this question to complete item P1 label F1 on your Business and professional items schedule 2007.

COMPLETING PART B OF THIS ITEM

IMPORTANT:
You must complete this section of the e-tax interview if you received PSI and you did not:
  -  receive a personal services business determination in respect to your PSI
  -  satisfy the results test, or
  -  satisfy at least one of the other three personal services business tests
     if less than 80 per cent of your PSI came from each client.

e-tax will use your answers to complete Part B of item P1 in your Business and professional items schedule 2007.

PSI is divided into:

•	income that was subject to a PAYG voluntary agreement to withhold tax

•	income from which tax has been withheld because you did not quote your Australian business number (ABN) to one of your payers

•	income received under a labour hire arrangement or from a specified payment

•	other PSI.

NOTE: STS taxpayers
If you are eligible to enter or continue in the STS and you have chosen to do so at item S1, you must complete the labels at item P1 using the STS rules. (This applies to amounts of income and deductions shown at these labels.) For information about these rules, read the section STS taxpayers under Business income and deductions and under Depreciation as a business expense.

NOTE:
If you are registered or required to register for goods and services tax (GST), do not include any GST amounts in your assessable income. Your deductions should not include any amounts that relate to input tax credit entitlements.

What you may need

If you received any of the payment summaries listed below in relation to PSI you will need to provide details of the payments you have received. e-tax will use this information to complete the Individual PAYG payment summary schedule 2007:

•	Payment summary – voluntary agreement (NAT 3223-06.2007)

•	Payment summary – labour hire and other specified payments (NAT 3282-06.2007)

•	Payment summary – withholding where ABN not quoted (NAT 3283-07.2005)

A payer may issue a receipt, remittance advice or similar document in place of the Tax Office’s Payment summary-withholding where ABN not quoted. This document must contain the same details as the payment summary and be signed by the payer.

If you received income from which tax was withheld and you did not receive or have lost your payment summary, contact the payer and ask for a copy.

NOTE:
Where you have attributed personal services income (item 8), personal services income (items 13 and P1) and/or business income (items 14 and P8) from which amounts have been withheld e-tax will only complete one Individual PAYG payment summary schedule. The Nature of income box on the schedule will be set to identify the source of the payments.

How to complete the payment summary table in e-tax

Complete the table using one row for each payment summary. If you need help using tables in e-tax, read data entry.

For each payment summary transfer the following information into the table:

•	The payer’s ABN or Withholding payer number (WPN) and the payer’s name in the appropriate columns.

•	Look at your payment summary carefully to determine its type and complete the Type of payment, using the following key:

V = Voluntary agreement

S = Labour hire or other specified payments

N = Withholding where ABN not quoted.

There is more information on each of these payments in the following sections.

•	The gross payments in the Gross payments column.

•	The total tax withheld at the Tax withheld column.

Check that you have recorded details from all relevant payment summaries in the table.

Printing the schedule

e-tax will automatically print your Individual PAYG payment summary schedule when you have completed your return. If you want to print a copy of your schedule now follow these steps.

STEP 1	Click on [image] . You will be prompted for the items you want to print.

STEP 2	Select Attachments. (You may want to clear the Tax return box.). Click on the OK button.

STEP 3	The Print preview window will be displayed. Use the arrow buttons to locate the schedule.

STEP 4	Click on the Pages button at the top of the screen. Enter the page number(s) of the schedule.

STEP 5	Click on [image] to print the schedule.

You are required to retain these payment summaries together with a copy of your completed schedule for a period of five years.

Payers must report to the Tax Office details of payments where amounts of tax have been withheld. This information will be cross-checked with your tax return to ensure that you have declared the correct amount of income and the correct amount of tax withheld.

Label M: PSI – voluntary agreement

PSI – voluntary agreement in item P1 is the total payments you received that were subject to a voluntary agreement. It includes amounts of tax withheld. e-tax will transfer this amount from your completed Individual PAYG payment summary schedule 2007.

e-tax will add up all amounts affected by the PSI measure from the payment summary schedule at ‘Gross payment’ boxes, with a corresponding V in the Type box. e-tax will write this amount at M item P1 in your Business and professional items schedule 2007.

If e-tax completes this label at item P1 it will also complete label G item 13 on your tax return form.

Label N: PSI – where Australian business number not quoted

PSI – where Australian business number not quoted in item P1 is the total payments you received for your PSI, from which an amount has been withheld because you did not quote your ABN. It includes amounts of tax withheld. e-tax will transfer this amount from your completed Individual PAYG payment summary schedule 2007.

e-tax will add up all amounts affected by the PSI measure from the payment summary schedule at ‘Gross payment’ boxes, with a corresponding N in the Type box. e-tax will write this amount at N item P1 in your Business and professional items schedule 2007.

If e-tax completes this label at item P1 it will also complete label H item 13 on your tax return form.

Label O: PSI – labour hire or other specified payments

PSI – labour hire or other specified payments in item P1 is the total of payments you received from labour hire or other specified payments. It includes amounts of tax withheld. e-tax will transfer this amount from your completed Individual PAYG payment summary schedule 2007.

Specified payments include:

•	income from tutorial services provided for the Indigenous Tutorial Assistance Scheme of the Department of Education, Science and Training

•	income from translation and interpretation services for the Translating and Interpreting Service of the Department of Immigration and Citizenship

•	income as a performing artist in a promotional activity

Do not include income received as an employee of a labour hire business. These amounts will appear on a PAYG payment summary-individual non business and should be shown at item 1 on your tax return.

e-tax will add up all amounts affected by the PSI measure from the payment summary schedule at the ‘Gross payment’ boxes with a corresponding S in the Type box. e-tax will write this amount at O item P1 in your Business and professional items schedule.

If e-tax completes this label at item P1 it will also complete label J item 13 on your tax return form.

Label J – Other personal services income

Enter the details of any other personal services income in the table. e-tax will write the total amount of other personal services income at label J item P1 in your Business and professional items schedule 2007.

NOTE:
If you are registered or required to register for goods and services tax (GST), do not include any GST amounts in your assessable income.

PERSONAL SERVICES INCOME DEDUCTIONS

Limited deductions against PSI

The PSI rules affect the deductions you can claim against your PSI. They do not affect your legal, contractual or workplace arrangements. You won’t be treated as an employee as a result of the PSI rules.

The information below is a guide only. You may need further information to determine whether a specific deduction is available to you in your circumstances. Taxation Ruling TR 2003/10 – Income tax: Deductions that relate to personal services income explains the PSI deduction limitation rules.

What  deductions you may be able to claim

Subject to specific exceptions, the general rule is that you may claim an amount that is incurred in gaining or producing your PSI if you could deduct that amount if the income was payable to you as an employee. The following are examples of items you may be able to deduct where they relate to gaining your PSI:

•	premiums for worker’s compensation, public liability and professional indemnity insurance

•	bank and other account-keeping fees and charges

•	tax-related expenses, such as the cost of preparing and lodging tax returns or Business activity statement (BAS)

•	registration or licensing fees

•	expenses for advertising, tendering and quoting for work

•	deduction for decline in value of depreciating assets

•	STS depreciation

•	running expenses for your home office such as heating and lighting for using a room in your house as a home office (not including rent, mortgage interest, rates or land taxes)

•	salary and wages for an arm’s length employee (not an associate)

•	contributions to a complying superannuation fund on behalf of an arm’s length employee (not an associate) up to the age based deduction limit

•	reasonable amounts paid to an associate for principal work

•	contributions to a complying superannuation fund or retirement savings account up to the superannuation guarantee amount for an associate doing solely principal work.

Do NOT include any amount that was a superannuation contribution for yourself. Any deduction for your own superannuation contributions must be claimed at item D13.

What you cannot claim

You cannot claim an amount for the following where it relates to gaining your PSI:

•	rent, mortgage interest, rates or land tax for your residence (or the residence of an associate)

•	amounts paid to an associate for non-principal work

•	contributions to a superannuation fund for an associate doing solely non-principal work

•	input tax credit entitlements (only relevant if you are registered or required to be registered for GST).

Label K – Deductions for payments to associates for principal work

e-tax will add up the total amount of payments made to associates. e-tax will write the amount at K item P1 on your Business and professional items schedule 2007.

Label L – Other allowable deductions incurred in earning your PSI

You need to know

In completing this label you only include non-commercial business losses deferred from a prior year if they relate to an activity which is the same as, or similar to, your current year activity. Item 15 explains how the non-commercial business loss rules work.

The non-commercial business loss deduction may be reduced if:

•	you earned net exempt income in this income year, or

•	you have become bankrupt or are released from any debts by the operation of an Act relating to bankruptcy.

Phone the Business Infoline on 13 28 66 for more information. For an explanation of net exempt income, see item L1.

e-tax will add up the total amount of all other expenses (including non-commercial business losses from a prior year) that you can deduct from your PSI. e-tax will write the amount at L item P1 on your Business and professional items schedule 2007.

Label A – Working out your net personal services income

e-tax will use the information you have entered in the previous screens to calculate and display the PSI income and deductions.

e-tax will add up the amounts shown at:

•	PSI – voluntary agreement

•	PSI – where Australian business number not quoted

•	PSI – labour hire or other specified payments

•	and write the total to Total PSI before deductions.

e-tax will subtract Total amount of deductions for payments to associates for principal work and Total amount of other allowable deductions against PSI from the Total PSI before deductions and write the result to Net PSI.

e-tax will write the Net PSI amount at A item P1 on your Business and professional items schedule 2007 and at A item 13 in your tax return form.


Item 14 Net income or loss from business
	Net income or loss from business
This topic covers:

Who does this item apply to?

You need to know

What you may need

WHO DOES THIS ITEM APPLY TO?

Complete this item if you derived income or incurred a loss from any business – other than personal services income included at item 13 – including:

•	a primary production business

•	income under a pay as you go (PAYG) voluntary agreement

•	income from which an amount was withheld because you did not quote your Australian business number (ABN)

•	income from which an amount was withheld due to the operation of foreign resident withholding (FRW)

•	income of an independent contractor working under a labour hire arrangement

•	income from the following specified payments:

o	payment for tutorial services provided for the Indigenous Tutorial Assistance Scheme of the Department of Education, Science and Training

o	payment for translation and interpretation services for the Translating and Interpreting Service of the Department of Immigration and Citizenship

o	income as a performing artist in a promotional activity

•	or any other business income, such as from being a sole trader.

A specified payment is a payment specified in tax law for PAYG withholding purposes.

Self-employed and taxi drivers

If you are self-employed, or driving a taxi under a standard bailment agreement with an owner/operator, you will need to complete this item.

YOU NEED TO KNOW

You need to read Business and professional items 2007 (NAT 2543-06.2007) before you can complete this item. It contains the instructions for completing the Business and professional items schedule 2007 using e-tax.

Business and professional items 2007 also contains the Individual PAYG payment summary schedule 2007. If you received business income from which tax was withheld, e-tax will complete this schedule using the information you provide at this item.

If you received personal services income as a sole trader, you must complete item 13 before attempting item 14. Personal services income is income that is mainly a reward for an individual’s personal efforts or skills. Where you have entered net personal services income at item 13, do not include the personal services income or claim deductions relating to that income at item 14.

You must show your net income or loss – gross business income less business deductions – for both primary production and non-primary production business income.

Primary production

You carry on a primary production business if you carry on a business in any of the following:

•	cultivating or propagating plants, fungi or their products or parts (including seeds, spores, bulbs and similar things) in any physical environment

•	maintaining animals for the purpose of selling them or their bodily produce (including natural increase)

•	manufacturing dairy produce from raw material you produced

•	conducting operations relating directly to taking or catching fish, turtles, dugong, bêche-de-mer, crustaceans or aquatic molluscs

•	conducting operations relating directly to taking or culturing pearls or pearl shell

•	planting or tending trees in a plantation or forest that are intended to be felled

•	felling trees in a plantation or forest

•	transporting trees that you felled in a plantation or forest to the place

o	where they are first to be milled or processed, or

o	from which they are to be transported to the place where they are first to be milled or processed.

If you are a primary producer, you also need to read the publication Information for primary producers 2007 (NAT 1712-6.2007).

Special professional income

IMPORTANT:
If you carried on a business as an author of a literary, dramatic, musical, or artistic work, or as an inventor, performing artist, production associate, or active sportsperson, you must ALSO enter the amount of income from these business activities at item 22.

You will not be taxed twice on this income.

NOTE:
If you derived income from business and you are in the Simplified tax system you may be eligible to claim the Entrepreneurs tax offset. Refer to item T14.

WHAT YOU MAY NEED

The following publications may help you to correctly complete this item:

•	Taxation Ruling TR 92/18 – Income tax: Bad debts

•	Taxation Ruling TR 93/30 – Income tax: Deductions for home office expenses

•	Taxation Ruling TR 96/7 - Income tax: Record keeping - section 262 A - general principles

•	Taxation Ruling TR 96/11 - Income tax: Record keeping - taxi industry - guidelines for recording taxi takings

•	Taxation Ruling TR 97/11 – Income tax: Am I carrying on a business of primary production?

•	Taxation Ruling TR 97/23 - Income tax: Deductions for repairs

•	Taxation Ruling TR 2005/9 –Income tax: Record keeping – electronic records

•	Guide to depreciating assets 2007 (NAT 1996-6.2007)

•	The Simplified Tax System: A guide for tax agents and small businesses (NAT 6459)


Non-primary production business

Non-primary production business includes income from trading stock, service fees, delivery charges and commissions.

IMPORTANT:
If you carried on a business as an author of a literary, dramatic, musical or artistic work, or as an inventor, performing artist, production associate or active sportsperson, you must ALSO write the amount of income from these business activities at Z item 22.

You will not be taxed twice on this income.


Primary production business

You carry on a primary production business if you carry on a business in any of the following:

•	cultivating or propagating plants, fungi or their products or parts (including seeds, spores, bulbs and similar things) in any physical environment

•	maintaining animals for the purpose of selling them or their bodily produce (including natural increase)

•	manufacturing dairy produce from raw material you produced

•	conducting operations relating directly to taking or catching fish, turtles, dugong, bêche-de-mer, crustaceans or aquatic molluscs

•	conducting operations relating directly to taking or culturing pearls or pearl shell

•	planting or tending trees in a plantation or forest that are intended to be felled

•	felling trees in a plantation or forest

•	transporting trees that you felled in a plantation or forest to the place

o	where they are first to be milled or processed or

o	from which they are to be transported to the place where they are first to be milled or processed.

If you are a primary producer, you also need to read Information for primary producers 2007.


Item 15 Deferred non-commercial business losses
	Deferred non-commercial business losses
This topic covers:

Who does this item apply to?

What you may need

You need to know

Keeping records

WHO DOES THIS ITEM APPLY TO?

Complete this item if you:

•	conducted a business activity as a partner in a partnership that resulted in a loss, or resulted in a loss after deducting your expenses, or

•	conducted a business activity as a sole trader that resulted in a loss.

This item does not apply to activities that do not constitute carrying on a business – for example, the receipt of passive investment income.

WHAT YOU MAY NEED

•	any written advice from the Tax Office that the Commissioner will exercise his discretion to allow you to deduct your loss from your business activity carried on either as a sole trader or in partnership with others

•	your completed Business and professional items schedule 2007– for you as a sole trader, or as a partner with a net loss from a business activity carried on in partnership with others.

•	Taxation Ruling TR 2001/14 – Income tax: Division 35 – non-commercial business losses

YOU NEED TO KNOW

This section covers:

Overview

Deferred loss

Partnerships

Similar business activities

The exception

The four tests

The income test

The profits test

The real property test

The other assets test

Commissioner's discretion

Deferred non-commercial business loss from a prior year

OVERVIEW

There are special rules relating to the deferral of non-commercial business losses.

You can use a 2006-07 loss from a business activity you conducted either as a sole trader or in a partnership in calculating your 2006-07 taxable income only where:

•	an exception applies OR

•	one of the four tests is satisfied OR

•	the Commissioner has exercised his discretion or ruled that it will be exercised to allow you to claim the loss.

If you are unable to claim your loss this year because of these rules, you must defer the loss.

This deferred loss is not disallowed. Instead, you take it into account for the next income year in which you carry on this business activity or one of a similar kind.

The deferred loss is a deduction when calculating any net profit or loss from the activity in that future year.

Whether any overall loss can be taken into account in your calculation of taxable income for that future year will depend on the application of the non-commercial business loss deferral rules in that year.

You must defer your loss by completing item 15.  You will need to split the amount into primary production and non-primary production deferred losses. The amount shown at item 15 cannot be used to reduce your 2006-07 taxable income.

IMPORTANT:
Keep records of the net losses deferred for all your separate business activities.

Completing this item in e-tax

e-tax will ask you to enter the details of all your business losses.

Any losses which must be deferred will be written to item 15 on your tax return form to ensure that your loss is not taken into account in calculating your 2006-07 taxable income.

e-tax will also write the details of your three highest loss-making activities to Business loss activity details item P9 in the Business and professional items schedule 2007, regardless of whether or not:

•	the net loss from your business activity came within an exception

•	 the net loss from your business activity satisfies one of the four tests

•	the Commissioner had advised he will exercise his discretion to allow the net loss from your business activity to be claimed this year

•	you had carried on the business activity in a partnership or as a sole trader.

The business loss activity code that e-tax writes to the tax return describes the loss-making activity:

0 - Passive investment – partnership

1 - Turnover test

2 - Profits test

3 - Real property test

4 - Other assets test

5 - Commissioner's discretion

6 - Arts business

7 - Primary production business

8 - Loss must be deferred

PASSIVE INVESTMENT INCOME

This item does not apply to activities that do not constitute carrying on a business – for example, the receipt of passive investment income (subsection 35-5(2) of ITAA 1997). The terms ‘business’ and ‘passive investment’ are used here in the sense of being mutually exclusive notions.

However, a taxpayer must declare all partnership losses at this item including income from passive investments – for example, income from a rental property.  Losses derived from passive income from partnerships will not need to be deferred.

DEFERRED LOSS

If an activity does not satisfy any of the tests and the Commissioner does not exercise the discretion, you cannot offset a loss from that activity against any of your other assessable income for that income year. The loss is deferred.

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 the deferred loss against income from 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.

EXAMPLE

Bruce has a salaried job but he also carries on a business activity making furniture. He starts the activity on 1 July 2003, and in the first year he makes a net loss of $3000. The activity does not pass any of the tests and the Commissioner does not exercise the discretion, so Bruce cannot deduct the loss from his assessable income. The loss is deferred.

In the next year Bruce makes a profit of $1,000. He offsets $1,000 of the $3,000 deferred loss against this profit. This leaves him with a loss of $2,000 to defer to the following year.

In the third year, Bruce makes another loss of $2,000, but this is offset against $1,000 of exempt income that he receives. His business activity still does not pass any of the tests and the Commissioner does not exercise the discretion, so the loss of $3,000 is deferred.

In the fourth year, Bruce makes a loss of $4,000, but this year his business activity passes one of the four tests. This means he can deduct the year’s loss (and the deferred loss) from his assessable income for that year.

Bruce deducts the loss of $7,000 ($3,000+$4,000) from the $34,000 he earns from his salaried job. He has no other deductions. His taxable income for that year is $27, 000.

In the fifth year, Bruce makes a net profit.

In the sixth year, he makes a loss but has to defer it, as his business does not pass a test or qualify for the discretion.

PARTNERSHIPS

If you are undertaking a business activity in partnership there are special rules to determine whether you, as an individual, pass any of the tests.

When are you in a partnership?

If you are undertaking a business activity with others and with a view to making a profit you are likely to be involved in a general law partnership. If you are in this type of partnership, you may be able to claim your loss from the business activity against other income.

If you are merely receiving joint income with another person you may be considered to be a member of a partnership for tax law purposes but that does not mean you are carrying on a business.

(Taxation ruling TR 94/8 Income tax: whether business is carried on in partnership outlines the different kinds of partnership [including husband and wife partnerships].)

Who can offset a loss?

This measure only applies to individuals undertaking a business activity whether alone or in partnership with other individuals or entities. In these situations only an individual can offset a loss.

In determining whether your business activity passes any of the four tests, you must exclude any of the activity’s assets that are owned by partners that are not individuals. You must also exclude any of the business activity’s income that goes to partners that are not individuals.

When you determine whether you can offset a loss from the activity, you must independently assess your interest in the business activity, both as a member of the partnership and as a separate individual. (For example, you may contribute assets to a business activity both as an individual and as a member of a partnership. In determining whether you are eligible to offset a loss, you will need to take both kinds of assets into consideration.)

How do you pass the income test?

If you are a member of a partnership and all the other partners are individuals, the assessable income of the whole partnership must be at least $20,000 before the individual members can deduct losses.

If an individual member earns assessable income from the business activity outside of the partnership that assessable income can be taken into account by that member only.

If you have partnership members that are companies or trusts, you must exclude their share of the assessable income.

EXAMPLE

John is in business in partnership with Ross and a company. The partnership earned $22,000 last year from the business activity. $4,000 of that income went to the company and $9,000 to each individual in the partnership. The partnership income would therefore not be sufficient to allow John to pass the income test.

However, John has an interest in the business activity outside the partnership. He received $4,000 in assessable income from this non-partnership interest, so that the total assessable income he can count for the purposes of this test is $22,000 ($4,000 + $9,000 + $9,000). He is therefore able to deduct a loss.

Ross also had income from the business activity outside of the partnership. However, John cannot count this income for the purposes of this test.

How do you pass the real property test?

If you are a member of a partnership and all the other partners are individuals, the value of the real property used in the whole partnership business must be at least $500,000 before the individual members can deduct losses.

If you have partnership members that are companies or trusts, you must exclude the value of any real property attributable to them.

You must also exclude the value of any of the property that is owned by individual partners in their own right. However, you can include the value of any property you own outside the partnership and that the business uses on a continuing basis.

EXAMPLE

John, Bill and George are equal partners in a real estate business. The business has five offices.

The partnership owns four of the offices, which have a property value of $450,000. Bill and George have no property interests in the business except as partners, so neither Bill nor George pass the real property test as the property value is less than $500,000.

However, John owns the fifth office in his own right. It is valued at $70,000. Adding the value of his individual, real property assets to the value of the real property assets held in partnership allows him to pass the real property test and claim a loss, that is $450,000 + $70,000 is greater than the $500,000 required by the real property test.

How do you pass the other assets test?

If you are a member of a partnership and all the other partners are individuals, the value of the other assets or the whole partnership must be at least $100,000 before the individual members can deduct losses.

If you have partnership members that are companies or trusts, you must exclude the value of any other assets attributable to them.

You must also exclude the value of any other assets that are owned by individual partners in their own right. However, you can include the value of any other assets you own outside the partnership that are used in the business activity on a continuing basis.

EXAMPLE

Jessica and Bill are in partnership with Steelco Pty Ltd. They are equal partners in a manufacturing enterprise that has plant, equipment and trading stock valued at $210,000.

Steelco owns $70,000 of these assets, and as Steelco is a company this amount must be ignored for the purposes of the other assets test. That leaves $140,000 in assets owned by individuals in the partnership (Jessica and Bill).

This amount is greater than the $100,000 required by the other assets test, so both Jessica and Bill are entitled to deduct losses.

How do you pass the profits test?

If you are carrying on a business activity in partnership, you will be able to claim a loss if your income from the activity has been greater than your tax deductions for the activity for at least three out of the past five years (including the current year).

In calculating your income and deductions, you must consider both your income from the partnership and any income you may have earnt in your own right from that activity.

Members of a partnership may be affected differently.

EXAMPLE

Anne and Emma operate a business activity as a partnership. This year, they each receive $5,000 in income from the partnership and have received the same amount for the past four years.

Anne does not have any tax deductions for her part in the business, so she has made a profit every year and therefore passes the test.

Emma took out a loan to finance her investment in the partnership and is paying $8,000 a year in interest. She has therefore made a net loss of $3,000 every year for the past four years. She does therefore not pass the profits test.

SIMILAR BUSINESS ACTIVITIES

If you are carrying on more than one business activity and they are similar, they can be grouped together when you need to establish whether you can deduct a loss.

When are two business activities similar?

To decide whether business activities are similar, you could consider:

•	the assets they use

•	the nature of their operations

•	their location

•	their funding basis

•	the goods and/or services provided

•	the economics of the market for those goods and services

•	any links between the activities of the two businesses

•	the time spent on these activities

•	the nature of expenses involved in each business activity

•	any applicable laws or regulations, and

•	any relevant professional associations.

For example, these activities may be similar:

•	grazing sheep and grazing cattle

•	growing grapes and growing olives, and

•	manufacturing shirts and manufacturing jeans.

In contrast, the following business activities may not be similar:

•	manufacturing goods and farming, and

•	repairing cars and making furniture.

NOTE:
Taxation Ruling TR 2001/14 Income tax: Division 35 - Non-Commercial business losses provides more details on when business activities are considered to be "of a similar kind".

When is an activity a business?

If you are not sure if your activity qualifies as a business, see Are you carrying on a business?.

You may also want to read Taxation Ruling TR 97/11 Income tax: Am I carrying on a business of primary production?.

What if businesses are not similar?

If you are carrying on two business activities that are not similar, they must independently pass a test for deducting a loss. This may mean, for example, that you can claim a tax deduction for a loss on one business activity but not for another.

EXAMPLE

Ron runs a four-wheel-drive driving school on his 40 hectare property (with a real property value of $550,000). This property is used only for business purposes.

On the same property, he grows dahlias for sale and exhibition. Thirty-seven hectares are devoted to the driving school and the remaining three to the dahlia business.

Although Ron grows flowers, he does not qualify for the exception for primary producers as his assessable income from other sources not related to the activity is more than $40,000. That is, he needs to consider whether his business activities pass one of the four tests.

The two business activities are not similar, so the value of the real property and other assets must be apportioned between them.

Ron must apportion the value of the real property between each business activity according to its use. The value of the real property used in the driving school is $508,750 and in the dahlia business is $41,250.

The loss from Ron’s driving school can be deducted because this business activity passes the real property test. Any loss from the driving school can therefore be offset against any other assessable income he has.

The dahlia business does not pass the real property test. Ron will have to see if it passes one of the other tests and, if it does not, investigate whether he should ask the Commissioner of Taxation to exercise the discretion and allow him to deduct this loss.

THE EXCEPTION

NOTE:
Your assessable income excludes any goods and services tax (GST) on a taxable supply you make. You must be registered or required to be registered for GST to make a taxable supply.

If you operate a primary production business or a professional arts business and your assessable income for 2006-07 (except any net capital gain) from other sources that do not relate to that activity is less than $40,000, you may claim your business loss this year.

A professional arts business is a business you carry on as an author of a literary, dramatic, musical or artistic work, a performing artist or a production associate.

THE FOUR TESTS

NOTE:
Special rules apply in respect of these four tests if you are undertaking a business activity in a partnership.

You will not have to defer your loss from your business activity if the activity satisfies at least one of the following four tests:

1.	There is at least $20,000 of assessable income from the business activity for this income year – the income test.

2.	The business activity has produced a profit for tax purposes in three out of the past five years, including the current year – the profits test.

3.	The value of real property assets (excluding any private dwelling) used on a continuing basis in carrying on the business activity is at least $500,000 – the real property test.

4.	The value of certain other assets (except cars, motor cycles and similar vehicles) used on a continuing basis in carrying on the business activity is at least $100,000 – the other assets test.

The other assets test

The value of certain business assets may determine whether you can deduct a loss from your business activity.

What assets are included and how do you calculate their value?

To pass the other assets test, the value of other assets that you use in your business on a continuing basis must be at least $100,000.

You can count the value of four types of asset. They are valued in different ways. When assessing the value of these assets for the test, you must use the same valuation method that you use for income tax purposes. (This does not apply if you are valuing leased assets.)

Asset type	Valued according to
Depreciable assets	the written-down value of the asset
Trading stock	the value of each item of trading stock on hand at the end of the income year, assessed by: • cost • market selling value, or • replacement price.
Leased assets	the amount of the future lease payments you are irrevocably committed to (minus any interest component to the payments)
Trademarks, patents, copyrights and similar rights	the reduced cost base of the asset
Are any assets excluded?

Yes. For the purposes of passing this test, exclude the value of:

•	real property assets you took into account for the real property test

•	interests in real property that you took into account for the real property test, and

•	cars, motorcycles and similar vehicles.

What is use on a continuing basis?

This will depend on your business circumstances.

However, you do not include the value of the asset in the total you use to pass the $100,000 threshold if you use an asset:

•	on a short-term basis

•	for a one-off task, or

•	through an agreement for intermittent use on an hourly, daily, weekly, monthly or other short-term basis

When should you value assets?

You should normally value your assets at the end of the income year.

However, if you ceased your business activity during the year, you should value the asset at the time the activity ceased or, if you sold or disposed of the asset before that time, you should value the asset at disposal.

What if you install assets in leased property?

If you lease property and install fixtures (such as shop fittings) you may count these assets among your other assets, provided that you retain ownership of them. You should value them at their written down value.

What if you use assets in more than one business activity?

If you use an asset in two or more business activities that are not similar, you must divide the value of the asset between the different activities. The proportion of the asset value that is assigned to each activity will then count towards the total value of the assets for the activity.

If you undertake similar business activities, you may combine the value of the assets you use in those activities to pass the $100,000 threshold.

What if you use assets for private purposes?

If you use an asset partly for business and partly for private purposes, you only include the value of that portion used for business purposes.

What if you are in partnership?

If you are a member of a partnership and all the other partners are individuals, the value of the other assets of the whole partnership must be at least $100,000 before the individual members can deduct losses. If you have partnership members that are companies or trusts, you must exclude the value of any assets attributable to them.

You must also ignore the value of any assets that your partners own in their own right. However, you can include the value of assets that you own outside the partnership, provided they are used on a continuing basis in the business activity.

What if the value of your assets does not pass the threshold?

If your asset value is less than $100,000, you can examine whether your business activity passes one of the three other tests.

If your business activity does not pass any of these tests, you can apply to the Commissioner, who can exercise a discretion in certain circumstances to allow you to offset your loss.

How many times do you have to value your assets?

In every year that your business activity makes a net loss, you must examine whether it passes a test. This includes years where the business has made a profit before deferred losses from previous years are taken into account.

The profits test

The profitability of your business activity over the current and previous years may determine whether you can deduct a loss.

When do you make a profit?

For the purposes of the profits test a business activity has a profit when the activity’s assessable income is greater than its tax deductions for the income year.

When you calculate the profit, you should exclude any loss from that activity that you have deferred from earlier years.

If your business activity has a profit in three out of the past five years (including the current year), it will pass the profits test.

What if you are in partnership?

If you are carrying on your business activity in partnership, you will pass the profits test if your deductions from the activity have been less than your income from that activity for at least three out of the past five years (including the current year).

This includes your share of income and deductions through the partnership, as well as any income and deductions that you have from the activity on an individual basis.

Members of a partnership may be affected differently.

EXAMPLE

Bob and Brendan are partners and they each receive $2,000 from their partnership.

Bob, who incurred no expenses in earning his share of the partnership income, has a simple $2,000 profit for the year.

Brendan, however, took out a loan to fund his contribution to the partnership. He pays $5,500 per year in interest, which is claimable as a tax deduction. This deduction exceeds his $2,000 in earnings, so he has made a net loss on the activity for that year.

If this pattern of income and expenses applied for three out of five years, Bob would pass the profits test and Brendan would not.

What about the years prior to 1 July 2000?

If your business activity made a profit in three out of the past five years (including the current year), it will pass the profits test, even though some of those years preceded 1 July 2000.

EXAMPLE

Estelle has a business. The following table gives her business profits and losses

Year ending  30 June	Profit /loss	Does she pass the profits test?
1997	loss	N/A
1998	profit	N/A
1999	loss	N/A
2000	profit	no
2001	loss	no
2002	profit	yes
2003	loss	no
In the year 2002 Estelle's business passes the profits test.

What if you have more than one business activity?

If you undertake two or more business activities that are not similar, you must assess each activity separately to see if it passes the profits test.

If you undertake similar business activities, you may combine the results of the two activities to see if they pass the profits test.

What if you do not pass the profits test?

If your business activity does not pass the profits test, you can examine whether your business activity passes one of the three other tests.

If your business activity does not pass any of these tests, you can apply to the Commissioner, who can exercise a discretion in certain circumstances to allow you to offset your loss.

How often do you need to consider the tests?

In every year that your business activity makes a net loss, you must examine whether it passes a test. This includes years where the business would have been profitable were it not for a deferred loss from previous years are taken into account.

The real property test

The value of real property assets may determine whether you can deduct a loss from a business activity.

What is real property

Real property includes:

•	land

•	interests in land such as leases, and

•	structures such as buildings, fixed to the land.

Real property, for the purposes of this test, does not include:

•	a dwelling and adjacent land that is used mainly for private purposes, and

•	fixtures owned by you as a tenant.

You will be able to claim a loss from a business activity if it uses real property of at least $500,000 in value on a continuing basis.

What is use on a continuing basis?

This will depend on your business circumstances.

However you cannot include the value of the asset in the total you use to meet the $500,000 threshold if you use an asset:

•	on a short-term basis

•	for a one-off task, or

•	through an agreement for intermittent use on an hourly, daily, weekly, monthly or other short-term basis

How do you value property assets?

You may value your real property assets at either their:

•	reduced cost base, or

•	market value.

If you need information on reduced cost base and how to calculate it, see the Capital gains tax (CGT) on-line documentation.

What if you lease business premises?

If you lease real property and you use it on a continuing basis in your business activity, you may include the market value or the reduced cost base of either:

•	the lease, or

•	the underlying real property

 in the total you use to meet the $500,000 threshold. In calculating the market value of the lease, you may take into account such things as:

•	the amount of your lease payments

•	the term of the lease, and

•	any premium payable.

In calculating the reduced cost base of the lease you may take into account any premium paid for entering the lease, but not the value of the periodical lease payments.

What if you lease property and install your own fixtures?

These fixtures are subject to the rules for other assets.

What if you use assets in more than one business activity?

If you use real property in two or more business activities that are not similar, you must divide the value of the property between the different activities. The proportion of the real property value that is assigned to each activity will then count towards the total real property value for that activity.

If you undertake similar business activities in the same year, you may combine the value of the real property you use in those activities to meet the $500,000 threshold.

What if you use real property for private purposes?

If you use real property partly for business and partly for private purposes, you only include the value of that portion used for business purposes.

When should you value real property?

You should normally value your real property at the end of the income year.

However, if you ceased your business activity during the year, you should value the property at the time the business ceased or, if you sold or disposed of the property before that time, you should value the property at disposal.

What if you are in partnership?

If you are a member of a partnership and all the other partners are individuals, the value of the real property used in the whole partnership business must be at least $500,000 before the individual members can deduct losses.

If you have partnership members that are companies or trusts, you must exclude the value of any real property attributable to them.

You must also ignore the value of any real property that your partners own in their own right. However, you can include the value of real property that you own outside the partnership, provided that it is used on a continuing basis in the business activity.

What if your property does not pass the threshold?

If the value of your real property is less than $500,000, you can examine whether your business activity passes one of the other three tests.

If your business activity does not pass any of these tests, you can apply to the Commissioner, who can exercise a discretion in certain circumstances to allow you to offset your loss.

How many times do you have to value your assets?

In every year that your business activity makes a net loss, you must examine whether it passes a test. This includes years where the business has made a profit before deferred losses from previous years and taken into account.

The income test

The assessable income generated by your business activity may determine whether you can deduct a loss.

How do you pass the assessable income test?

The assessable income of your business activity must be at least $20,000 in the income year. Assessable income includes:

•	ordinary income for example, the gross earnings of a business activity and

•	statutory income, for example capital gains.

What if you do not carry on your business activity for a full year?

If you have not carried on your business activity for a full year (because you started or ceased business part way through that year) you can make a reasonable estimate of what you would have made over a full year.

If either your actual or estimated income for the year is $20,000 or more, the measures will not apply.

How do you make a reasonable estimate?

There is no set formula. However, you should consider relevant factors such as:

•	any orders you have received

•	any forward contracts you have entered into

•	the size of your business activity

•	the amount you have invested in the business activity

•	the type of business activity you are engaged in, and the typical income patterns for that industry

•	how your actual income would translate into an annual income on a pro-rata basis, and

•	any cyclical or seasonal patterns in your business area, and the effect they would have on your annual income.

EXAMPLE 1

Sarah started her piano tuning business on 1 December. She earned $14,000 in assessable income for the income year (ending 30 June).

Sarah consistently earned $2,000 in assessable income each month. She could therefore reasonably estimate that, had she been in business for a full year, she would have earned $24,000.

Based on this reasonable estimate, Sarah’s business activity passes the assessable income test and losses can be deducted.

EXAMPLE 2

Gary started his manufacturing business on 27 March. By 30 June he has made $4,000 in assessable income.

Gary has unfilled orders valued at $17,000, for the next six months, and the real prospect of further orders.

Based on his unfilled orders, Gary estimates that his assessable income would exceed $20,000 in a full income year.

The estimate is a reasonable one and his business activity passes the income test.

What if your estimate is incorrect?

An estimate, that is a reasonable one when it was made, will continue to be regarded as reasonable, even if it later proves to be wrong. However, if after you receive you income tax assessment you realise it is based on an unreasonable estimate, and that your business activity did not meet the assessable income test, or any of the other tests, and your loss should have been deferred, you should request an amendment. You must make the request within four years of the date the original assessment became due and payable.

The Tax Office may review your estimate. If the review reveals that your estimate is not reasonable, your income tax liability may be reassessed. The Tax Office may impose penalties.

How do you treat income from partnerships?

If you are a member of a partnership and all the other partners are individuals, the assessable income of the whole partnership must be at least $20,000 before the individual members can deduct losses.

If you have partnership members that are companies or trusts, you must exclude their share of the assessable income.

You must also ignore any income that other partners earn outside the partnership.

You can count income that you earn from the business activity but which is not partnership income. For example, if you are a partner in a farming partnership and you receive income from the sale of produce in your own right, you can count this income, even though it is not partnership income.

What if you earn income from more than one activity?

If you earn assessable income from two or more separate business activities that are not similar, you must assess each activity separately to see if each passes the assessable income test.

If the business activities are similar, you can combine their assessable income to see if they pass the assessable income threshold.

What if you do not pass the assessable income test?

If the assessable income of your business activity is less than $20,000, you can examine whether it passes one of the other three tests.

If your business activity does not pass any of these tests, you can apply to the Commissioner, who can exercise a discretion in certain circumstances and allow you to offset your loss.

How many times do you have to pass the test?

In every year that your business activity makes a net loss, you must examine whether it passes a test. This includes years where the business has made a profit before deferred losses from previous years are taken into account.

THE COMMISSIONER’S DISCRETION

When will the Commissioner exercise the discretion?

The Commissioner will only exercise the discretion if:

•	your business activity would have passed one of the four tests except for special circumstances outside your control, or

•	you have just started your business activity and, because of the nature of the business, there is a lead time before your business activity passes one of the tests or a profit can be expected.

The expectation that your business will pass one of the tests or make a profit within a period that is commercially viable should be based on evidence from an independent source (provided that an appropriate source exists).

The commercially viable lead time will vary from industry to industry, according to factors such as anticipated income, expenses and seasonal variations.

What are the special circumstances?

In deciding whether to exercise the discretion, the Commissioner will take into account special circumstances that may have affected a business, such as:

•	bushfires

•	floods

•	hailstorms

•	droughts

•	diseases that destroy livestock and crops, and

•	pest plagues.

Special circumstances may also include events such as:

•	an oil spill

•	a gas plant explosion

•	a power plant shutdown, and

•	a water authority failure.

The circumstances need to be special. This means that they have stopped the activity being able to satisfy one of the four tests. Changes in the national economy and market fluctuations are unlikely to be considered special circumstances.

How long will the discretion apply?

This will be decided on a case by case basis.

The Commissioner may decide to exercise a discretion for more than one year (for example, for a primary production activity such as viticulture, where no profit can reasonably be expected for several years).

How do you apply for the discretion?

Complete the Application for a private ruling on the exercise of the Commissioner’s discretion for non-commercial business loss 2005 (NAT 5806). To find out how to get this publication, see publications.

You will need to provide comprehensive information about your business activity. Where it is available, you will need to provide independent evidence of the nature and extent of the investment required for your business to pass a test or make a profit.

Where the Commissioner has issued a product ruling or a private binding ruling allowing losses to be claimed from an activity you participate in, the Commissioner will notify you of the decision in writing. You will need to enter the private ruling or product ruling number from that decision into e-tax.

What if I disagree with the Commissioner’s decision?

If you disagree with the Commissioner’s decision you may lodge an objection to your assessment or to the decision in the private ruling.

DEFERRED NON-COMMERCIAL BUSINESS LOSS FROM A PRIOR YEAR

If you have a deferred non-commercial business loss from a prior year, you may be able to claim a deduction at item 12 or item P1 or item P8 in the Business and professional items schedule 2007. The non-commercial business loss may be reduced if:

•	you earned net exempt income in this income year, or

•	you became bankrupt or were released from any debts by the operation of an Act relating to bankruptcy.

Phone the Business Infoline on 13 28 66 for more information. For an explanation of net exempt income, read the information on net exempt income at item L1.

KEEPING RECORDS

IMPORTANT:
Keep records of each of the net losses deferred for your separate business activities.


Item 16 Net farm management deposits or withdrawals
	Net farm management deposits or withdrawals
This topic covers:

Who does this item apply to?

You need to know

What you may need

Record keeping

WHO DOES THIS ITEM APPLY TO?

This item is for primary producers only.

Complete this item if you made a deposit into or withdrew funds from your Farm Management Deposits Scheme account during 2006-07.

YOU NEED TO KNOW

You can claim a deduction for farm management deposits made during 2006-07 at this item unless:

•	your taxable non-primary production income was more than $65,000; or

•	you became a bankrupt, or

•	you ceased to be a primary producer for at least 120 days – the 120-day period does not have to fall entirely in 2006-07.

Any deduction you claim cannot be more than the deposits made or your total taxable primary production income from 2006-07, whichever is less.

The maximum amount that can be held at any one time as farm management deposits is $400,000.

NOTE:
Tax Laws Amendment (2006 Measures No 7) Act (No.55 of 2007) raised the total deposit limit from $300,000 to $400,000, and the non-primary production taxable income limit from $50,000 to $65,000,effective from 1 July 2006.

If you withdraw all or part of a farm management deposit on or after 1 July 2002, generally you cannot claim a deduction for any part of the deposit that is withdrawn within 12 months of the deposit except in situations outlined in the following paragraphs. Where this affects a deduction you claimed in the prior income year, you need to request an amendment of your assessment for that income year. You are still entitled to your deduction for the part of the deposit not withdrawn provided the original deposit was not reduced to less than $1,000 within 12 months of the deposit as a result of withdrawals.

If you operate your primary production business in an area covered by an exceptional circumstances declaration made by the Minister for Agriculture, Fisheries and Forestry, you can withdraw deposits made prior to the date of the exceptional circumstances declaration within 12 months and still retain the tax deduction in the year of income in which the deposit was made. However, the amount of the withdrawal is assessable in the year of the withdrawal and you cannot claim a deduction for any subsequent deposits made in the same income year in which the withdrawal is made. You will also need to get an exceptional circumstances certificate from Centrelink no later than three months after the end of the year of income in which the withdrawal was made.

To find out if your area is currently declared to be in exceptional circumstances, phone the Centrelink Drought Assistance Line on 13 23 16 or the Australian Government Regional Information Service on 1800 026 222. Alternatively, visit the website of the Department of Agriculture, Fisheries and Forestry at www.daff.gov.au/droughtassist.

If you need an exceptional circumstances certificate, phone the Centrelink Drought Assistance Line on 13 23 16.

If in 2006-07 you became bankrupt or ceased to be a primary producer for at least 120 days all remaining deposits are assessable income in 2006-07 to the extent you have previously claimed them as a deduction. Your deductions in earlier years are not affected even where such a repayment is within 12 months of making the deposit.

Where you have your farm management deposit electronically transferred to another financial institution which accepts it as a farm management deposit, the transfer is not treated as a withdrawal or the making of another deposit.

Any withdrawals of the deposits are assessable income to the extent you have previously claimed them as a deduction. If your farm management deposit contained both deductible and non-deductible deposits, only the withdrawals of deductible deposits are assessable income. When you make a withdrawal you are considered to have withdrawn any non-deductible amounts first.

If you have any questions about the taxation consequences of farm management deposits or withdrawals, visit out website www.ato.gov.au or phone the Business Infoline on 13 28 66.

NOTE: Deceased Estate
If you are looking after the estate of someone who died in 2006-07, you cannot claim a deduction for any deposits they made in 2006-07. Any farm management deposits held at the time of death become repayable at that time and are assessable income in 2006-07 to the extent they have previously been claimed as a deduction.
Deductions in earlier years are not affected even where the person dies within 12 months of making the deposit.

WHAT YOU MAY NEED

•	your account statement from your financial institution for the Farm Management Deposits Scheme

•	the publication Information for primary producers 2007.

RECORD KEEPING

Keep your statement of account with the printed copy of your tax return.


Item 17 Capital gains
	Capital gains
This topic covers:

Who does this item apply to?

You need to know

Completing this item in e-tax

Further information

Introduction to CGT

What is a CGT event?

Capital Gains Tax checklist

The e-tax CGT calculator

Net capital losses from an earlier year available to be carried forward

Keeping records from the start

WHO DOES THIS ITEM APPLY TO?

Complete this item if you have:

•	a capital gain this year,

•	a capital loss this year, or

•	a net capital loss before 2006-07 that you have not yet applied to reduce a capital gain.

NOTE:
Do not show at this item a ‘listed investment company capital gain amount’ included in a dividend paid by a listed investment company (LIC).  Refer to D7 Interest and dividend deductions.

YOU NEED TO KNOW

You may have made a capital gain or capital loss if a CGT event happened in 2006-07. You may have also made a capital gain for 2006-07 if you were a beneficiary of, or had money invested in, a trust or managed investment fund in 2006-07 and the trust or fund made a capital gain during the year.

For most CGT events you have made a capital gain if the amount of money and property you received – or were entitled to receive – from the CGT event was more than the cost base of your asset. You may have to pay tax on your capital gain.

For most CGT events you have made a capital loss if the amount of money and property you received – or were entitled to receive – from the CGT event was less than the reduced cost base of your asset. You cannot deduct a capital loss from your income, but in most cases it can be used to reduce any capital gain you made in 2006-07.

There is a wide range of CGT events. The most common CGT event happens when you sell or give away a CGT asset, such as:

•	real estate – including your family home, a holiday home, investment property, vacant block of land, hobby farm

•	shares

•	units in a unit trust or managed investment fund

•	collectables – for example, jewellery, and

•	personal use assets.

Examples of other CGT events are:

•	an asset you owned was lost or destroyed

•	you received an amount for entering into an agreement – for example, you agreed not to work in a particular industry for a set period of time

•	you entered into a conservation covenant over land that you owned

•	you received a non-assessable payment from a trust or company.

NOTE:
If you were an Australian resident for tax purposes, you show any capital gains or capital losses you made from foreign sources at this item.  Do not show them as foreign source income at item 19.

COMPLETING THIS ITEM IN e-tax

We provide you with a number of paths to complete this item in e-tax.

	You will follow this path if:
Path 1	you do not have a capital gain or capital loss to report for the year. You will still need to tell us whether you have a net capital loss made before 2006-07 that you have not yet applied to reduce a capital gain.
Path 2	you have a capital gain or capital loss to report and you have already calculated your net capital gain or net capital loss. You will have to tell us the amount of your net capital gains, total current year capital gains and any net capital losses available to be carried forward to later income years. No further on-line reading about CGT is available with this option.
Path 3	you want to use the e-tax CGT calculator to calculate your net capital gain or net capital loss.
Path 4	you would like to be taken through a series of questions to determine if you have a capital gain or capital loss that you may have to report. If you may have to report a capital gain or capital loss you will be required to use the e-tax CGT calculator.
e-tax will automatically take you through one of the four paths depending on how you answer the questions at each screen.

Did you receive a distribution from a managed fund?

Managed funds (unit trusts) include property trusts, share trust, equity trusts, growth trusts, imputation trusts and balanced trusts. Distributions from managed funds can include two components that have CGT consequences:

•	capital gains, and

•	non-assessable amounts.

You need to know whether you have received these amounts in your distribution - to find out check the year-end or annual statement from your managed fund. The statement should also show which method the fund used to calculate the capital gain. There are three methods of calculating capital gains: indexation, ‘other’ and discount. You must use the same method as the fund to calculate your capital gain. Fund managers may use different terms to describe the calculation methods they have used and they may refer to capital gains calculated using the indexation and ‘other’ methods as non-discount gains. If in doubt, check with your fund manager. For more information refer to the Capital gains tax (CGT) on-line documentation.

If you received a distribution from a managed fund that has a CGT component, you may find it easier to enter those details in the Managed Funds section of e-tax. You can go to that section by selecting Managed Funds in the Navigator at the left of this screen. To help you decide, please read the Instructions for Managed Funds. (Any amounts included in the Managed Funds section do not need to be included at item 17. If you choose not to use the Managed Funds option, all of your capital gains and losses must be shown at this item.)

If you previously entered amounts in the Managed Funds section

e-tax will automatically detect that you have previously entered capital gains through the Managed Funds section. Do not re-enter those details at this item as e-tax will automatically include them at item 17 on your tax return.

FURTHER INFORMATION

The following information may help you decide whether you need to complete this item. If you think you may have to report a capital gain or capital loss you should use the e-tax CGT calculator.

INTRODUCTION TO CAPITAL GAINS TAX

What is capital gains tax?

Capital gains tax (CGT) is the tax that you pay on any capital gain you make and include on your annual income tax return. There is no separate tax on capital gains; it is merely a component of your income tax. You are taxed on your net capital gain at your marginal tax rate.

Your net capital gain is:

	your total capital gains for the year
	minus
	your total capital losses (including any earlier year net capital losses)
	minus
	any CGT discount and small business CGT concessions to which you are entitled.
When does CGT apply?

You usually make a capital gain or a capital loss if a CGT event happens. You can also make a capital gain if a managed fund or other trust distributes a capital gain to you.

For most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset—for example, if you received more for an asset for more than you paid for it.

You make a capital loss if your reduced cost base is greater than your capital proceeds.

If your total capital losses for the year are more than your total capital gains, the difference is your net capital loss for the year. It can be carried forward to later income years to be deducted from future capital gains. (You cannot deduct capital losses or a net capital loss from your income). There is no time limit on how long you can carry forward a net capital loss. You apply your net capital losses in the order that you make them.

Generally, you can disregard any capital gain or capital loss you make on an asset you acquired before 20 September 1985 (pre-CGT). For details of some other exemptions, see Exemptions and exceptions.

There are special rules that apply when working out gains and losses from depreciating assets. To the extent that a depreciating asset is used for a taxable purpose (for example, in a business) any gain is treated as ordinary income and losses as deductions. A capital gain or capital loss may arise only to the extent that a depreciating asset has been used for a non-taxable purpose (for example, used privately). For details on the CGT treatment of depreciating assets, see Capital gains tax (CGT) on-line documentation.

Do you need to pay CGT?

To work out whether you have to pay tax on your capital gains, you need to know:

•	whether a CGT event has happened

•	the time of the CGT event

•	how to calculate the capital gain or capital loss

•	whether there is any exemption or rollover that allows you to reduce or disregard the capital gain or capital loss

•	how to apply any capital losses

•	whether the CGT discount applies, and

•	whether you are entitled to any of the CGT concessions for small business

What is a CGT asset?

Many capital gains tax (CGT) assets are easily recognisable – for example, land, shares in a company and units in a unit trust. Other CGT assets are not so well understood – for example, contractual rights, options, foreign currency and goodwill. All assets are subject to the CGT rules, unless they are specifically excluded.

Exemptions and exceptions

Generally speaking, you disregard a capital gain or capital loss on:

•	an asset you acquired before 20 September 1985

•	cars, motorcycles and similar vehicles

•	compensation you received for personal injury

•	disposing of your main residence. This can change depending on how you came to own the residence, whether it is on more than two hectares of land and what you have done with it – for example, if you have rented it out, you may be liable to some tax when you sell it

•	a collectable – for example, an antique or jewellery – if you acquired it for $500 or less

•	a personal use asset – for example, items such as boats, furniture, electrical goods and household items used or kept mainly for you or your associate’s personal use or enjoyment. If you acquired it for more than $10,000, you only disregard capital losses. If you acquired it for $10,000 or less, you disregard both capital gains and capital losses.

•	the exchange of shares and units you own in a company or trust that was taken over if certain conditions were met

•	shares in a company or interests in a trust where there had been a demerger and certain conditions had been met

•	disposing of an asset to which the small business 15-year exemption applies.

What is a CGT event?

CGT events are the different types of transactions or events that may result in a capital gain or capital loss. Many CGT events involve a CGT asset, for example, a sale of shares.

The most common CGT event happens when you dispose of an asset to someone else – for example, if you sell or give away an asset, including to a relative. Subdividing land does not result in a CGT event if you retain ownership of the subdivided blocks. Therefore, you do not make a capital gain or a capital loss at the time of the subdivision.

Some other CGT events from which you may make a capital gain or capital loss include when:

•	an asset you own is lost or destroyed (the destruction may be voluntary or involuntary)

•	you give an asset away

•	shares you own are cancelled, surrendered or redeemed

•	you enter into an agreement not to work in a particular industry for a set period of time

•	a trustee makes a non-assessable payment to you from a managed fund or other unit trusts

•	a company makes a payment (not a dividend) to you as a shareholder

•	a liquidator or administrator declares that shares or financial instruments you own are worthless

•	you receive an amount from a local council for disruption to your business assets by road works

•	you stop being an Australian resident

•	you enter into a conservation covenant, or

•	you dispose of a depreciating asset that you used for private purposes.

You can use the capital gains tax checklist to help you to determine whether a CGT event has occurred.

Did you dispose of shares, stapled securities or rights acquired under an employee share scheme?

Employee share schemes enable you to acquire shares or stapled securities, or obtain rights (including options) to acquire shares or stapled securities, in your employer’s company at a discount.

The amount of the capital gain may be reduced if your shares, stapled securities, rights or options were acquired under an employee share scheme. For more information refer to the Capital gains tax (CGT) on-line documentation.

Did you make a capital gain or loss on your shares?

You may make a capital gain or capital loss by selling or giving away your shares, including by selling them to the company under a share buy-back arrangement.  Even if you didn’t pay for your shares – for example, you received them under a demutualisation – you may make a capital gain or capital loss when you sell or give them away.

Also, if you use dividends to acquire additional shares in a company – for example, through a dividend reinvestment plan – the additional shares are subject to CGT.

There are other ways of making a capital gain or capital loss on shares.  These include:

•	if you held shares in a company and during 2006-07 a liquidator or administrator declared the shares worthless, you can choose to claim a capital loss equal to the reduced cost base of the shares (otherwise you may have to wait until the company is dissolved to claim the capital loss).

•	if you received a non-assessable payment – also known as a return of capital – you may have to reduce the cost base and reduced cost base of your shares.  If the amount of the non-assessable payment is more than the cost base of the shares, the difference is a capital gain.

Fact sheets on some major share transactions affecting shareholders are available in Capital gains tax (CGT) on-line documentation or on our website www.ato.gov.au.

Did you sell a property you inherited?

Capital gains tax applies when you dispose of CGT assets that you inherited. However, if you inherited real estate, you may not have to pay CGT if you sold it within two years of the person’s death – for example, if the property was the deceased person’s main residence just before they died and they weren’t renting part of it out or using part of it for business purposes. For more information refer to the Capital gains tax (CGT) on-line documentation.

Your home may be subject to capital gains tax

Under the ‘main residence’ exemption you generally do not have to pay CGT on the disposal of your main residence. However, you may have to pay tax on some of your capital gain if:

•	the property was not your main residence for the whole period you owned it

•	you used the property, or part of it, to produce assessable income, for example, you rented it out

•	the land area was greater than two hectares.

For more information refer to the Capital gains tax (CGT) on-line documentation.

Asset transfer on marriage breakdown

If you transferred an asset to your spouse as a result of a marriage breakdown, in certain cases there are no immediate CGT consequences. In these cases there is automatic rollover (you cannot choose whether or not it applies).

However, the one who receives the asset (the transferee spouse) will usually make a capital gain or capital loss when they dispose of the asset. If you were the transferee spouse and rollover applies, you may need to get cost base information from your former spouse or their tax adviser.

For more information refer to the Capital gains tax (CGT) on-line documentation.

Foreign residents

Generally, for CGT events that happened before 12 December 2006, foreign residents have been subject to CGT on assets that have ‘necessary connection with Australia’.

The law has been changed so that, for CGT events that happen on or after 12 December 2006, foreign residents who are individuals are subject to CGT on:

•	direct interests in real estate located in Australia

•	an interest in an entity where they and their associates hold 10% or more of the entity and the value of their interest is principally attributable to Australian real property

•	an asset they have used in carrying on a business through a permanent establishment in Australia

•	an option or right over one of the above..

For more information refer to the Capital gains tax (CGT) on-line documentation.

Temporary residents

The law has been changed so that, for CGT events that happen on or after 1 July 2006, temporary residents are subject to CGT in the same way as foreign residents.

There are special rules for shares and rights acquired under an employee share scheme.

For more information refer to the Capital gains tax (CGT) on-line documentation.

How to calculate your capital gain or capital loss

For most CGT events you have made a capital gain if the amount of money and value of any property you received – or were entitled to receive – from the CGT event is more than the cost base of the asset. You may have to pay tax on your capital gain.

For most CGT events you have made a capital loss if the amount of money and value of any property you received – or were entitled to receive – from a CGT event is less than the reduced cost base of your asset.

You cannot deduct a capital loss from your income, but it can be used to reduce any capital gain you made in the same financial year.

You can only use capital losses from collectables to reduce capital gains from collectables.

You must disregard capital losses from personal use assets.

If your capital losses in a financial year exceeded your capital gains for that year, you have made a net capital loss for that year. You can carry forward this net capital loss to reduce any capital gains you make in future years.

There are three methods you can use to calculate your capital gain or capital loss. They are the:

•	indexation method

•	discount method, and

•	other method (for all CGT events where the asset has been owned for less than 12 months).

How much tax is payable on a capital gain?

CGT is not a separate tax, but a component of income tax. This means that the rate of tax you pay on a capital gain depends on your other income (see Individual resident income tax rates).

EXAMPLE

Fran’s taxable income of $56,000 in 2006-07 included a net capital gain of $1,000. The tax rate which applies to income between $25,001 and $75,000 for 2006-07 is 30 cents per dollar plus Medicare levy of 1.5 cents per dollar.

The tax and Medicare levy which applies to Fran’s capital gain is $315 (31.5 cents x $1,000).

CAPITAL GAINS TAX CHECKLIST

The following questions will help you determine whether you have a capital gain or capital loss for the year.

If you answer ‘yes’ to any of these questions, CGT may apply to you.

NOTE:
This list of questions is not exhaustive.

1. Real estate

1.1	Have you sold or given away any real estate in the past financial year (including your main residence)?
1.2	Has there been a change to the title of real estate that you owned (or partially owned) at the start of the year?
1.3	Have you granted an option, conservation covenant or other right (for example, an easement over real estate) in the year?
1.4	Have you granted, changed or varied a lease over your real estate in the past year?
1.5	Has any building or capital improvement on your land been destroyed in the past year?
1.6	Did you receive compensation in the past year in respect of real estate you own?
1.7	In the past year, have you sold any rights you held in real estate – such as contractual rights relating to an off-the-plan purchase?

2. Real estate – future year CGT impacts

2.1	Do you own real estate (including an inheritance) that is not your main residence (for example, land, investment property or holiday house)?
2.2	Do you own real estate that is your main residence and it is: • used as a place of business or to derive rent or has not been your main residence the whole time you owned it • situated on more than 2 hectares (4.94 acres) of land, or • a different home to your spouse or dependent child (under 18 years old)?
2.3	Have you made any capital improvements to any real estate that you own?
2.4	Have you subdivided or amalgamated any real estate that you own?

3. Shares & investment units

3.1	Do you own any shares, units in a unit trust or other investments (for example, convertible notes)?
3.2	If so, did your interests change during the year (that is, because they were sold, transferred, cancelled or ended)?
3.3	Did your interests in an employee share scheme change?
3.4	Did you receive compensation in the past year in respect of any investments you own?
3.5	Did you receive a non-assessable payment from a company or trust in which you have an investment?
3.6	Did you receive a distribution from a trust that includes a capital gain?
3.7	Has the trustee provided you with a statement indicating how they calculated the trust’s capital gain?
3.8	Has the entity in which you own an investment: • been involved in a takeover, demerger, demutualisation or merger • gone into liquidation, or • conducted a share buy-back?
3.9	Did you acquire any of your shares or units: • under a dividend or distribution re-investment plan • under a bonus issue, or • as the result of the exercise of a right or option to acquire additional shares/units?

4. Trust distributions

4.1	Are you a beneficiary of any other trust (that is, other than one in which you hold units as an investment)?
4.2	Have you received a distribution from the trust that includes a capital gain?
4.3	If so, has the trustee provided you with a statement indicating how they calculated the trust’s capital gain?
4.4	Have you received a distribution from the trust that includes a non-assessable payment?
4.5	If so, has the trustee provided you with a statement indicating the nature of the distribution? (for example tax-free amounts, CGT concession amounts, tax exempted amounts, tax-deferred amounts)

5. Business

5.1	Do you own a small business or have an interest in one?
5.2	Did you dispose of all or some of the assets of a business during the year?
5.3	If you did dispose of any business assets, did you account for GST on those assets?
5.4	Did you acquire a business or business assets during the year?

6. Marriage breakdown

6.1	Have you acquired an asset, or an interest in one, from your former spouse after the breakdown of your marriage?
6.2	Was the asset transferred because of a court order, including a consent order made under the Family law Act 1975 or a similar law of a foreign country, or a court order under a state, territory or foreign law relating to de facto marriage breakdowns? Was the asset transferred under a CGT event that happened after 12 December 2006 because of: • a binding financial agreement or corresponding written agreement that is binding because of a corresponding foreign law • an arbitral award or corresponding award (under a corresponding state, territory or foreign law) • a binding financial agreement (or a written agreement that is binding because of a State, Territory or foreign law relating to de facto marriage breakdowns)?

7. Deceased estates

7.1	Are you the legal personal representative (LPR) or beneficiary of a deceased person’s estate?
7.2	Have you distributed (LPR) or received a distribution of (beneficiary) an asset from the deceased estate?

8. Other CGT events

8.1	Has your interest in a collectable acquired for more than $500 changed (including items such as art, antiques, valuable metals, jewellery, coins or medallions, rare books and manuscripts and postage stamps)?
8.2	Has your interest in a personal use asset acquired for more than $10,000 changed (including items such as boats, furniture, electrical goods and household items)?
8.3	Have you received or become entitled to a capital payment (including compensation, restrictive covenants, contingent payments, or other consideration for an act, transaction or event)?
THE e-tax CGT CALCULATOR

You can complete this item using the e-tax CGT calculator.

The e-tax CGT calculator is a separate module. Before you can access the calculator, the program and related help files must be downloaded from the e-tax website www.ato.gov.au/etax.

The objects of the e-tax CGT calculator are:

•	To correctly complete item 17 in your Income tax return 2007.

•	To use a series of questions rather than have you consider more than 50 CGT events in order to answer the question ‘Did you have a CGT event during the year?’

•	To use examples to guide you through the completion of the data entry screens.

•	To use help links so that you can quickly find the information relevant to your needs rather than having to read text that is not relevant.

•	To alert you to key dates which can affect the calculations.

•	To determine if a particular capital gain or capital loss can be disregarded due to an exemption. Examples of capital gains and capital losses that can be disregarded include:

o	personal injury compensation receipts

o	those resulting from disposal of a car

o	those relating to your main residence, if it qualifies for full exemption.

•	To calculate a capital gain or capital loss and inform you about the choices that may be available to you. The choices may include:

o	the method of calculating the capital gain or capital loss, and

o	where rollover applies, disregarding the capital gain or capital loss until a later CGT event occurs – if you choose to disregard a capital gain or capital loss you will be advised of the information to be used in respect of the next CGT event.

•	To provide you with the lowest net capital gain where choices are available to you.

•	To provide you with a printout of the information you have entered in a form suitable for record keeping purposes.

•	To provide you with a printed worksheet that shows the calculations.

•	To prepare a Capital gains tax schedule – this will only be transmitted to the Tax Office with your tax return if you are required to lodge a schedule.

Refer to the Capital gains tax (CGT) on-line documentation for instructions on how to use the e-tax CGT calculator.

NET CAPITAL LOSSES FROM AN EARLIER YEAR AVAILABLE TO BE CARRIED FORWARD

If you have a net capital loss (including a net capital loss from collectables) from an earlier year that is available to be carried forward to reduce your capital gains in this year or a later year you are required to advise us of that amount. It may not affect your assessment this year because a net capital loss cannot be used to reduce your other income.

You can only use capital losses from collectables to reduce capital gains from collectables.

Remember when working out your net capital loss from an earlier year that losses from personal use assets are disregarded. Personal use assets are those assets (other than land or buildings) used or kept mainly for your personal use or enjoyment.

Any prior year net capital losses that cannot be applied in this income year can be carried forward to a later income year.

EXAMPLE

You have capital gains for the income year of $1,000 and capital losses for the income year of $600. Your capital losses are subtracted from your capital gains to leave a balance of $400.

You have available net capital losses of $300 (for last year) and $200 (for the year before that).

The $400 is reduced to zero by applying the available net capital losses in the order in which you made them. This leaves $100 of the $300 to be carried forward and extinguishes the $200.

For more information, refer to the Capital gains tax (CGT) on-line documentation for instructions on how to use the e-tax CGT calculator.

KEEPING RECORDS FROM THE START

You must keep records of every act, transaction, event or circumstances that may be relevant to working out your capital gain or capital loss, regardless of whether the CGT event has already happened, is about to happen or will happen in the future.

You must keep those records for five years from the time when no CGT event or further CGT event can happen.  The records for these CGT events may be relevant to working out whether you have made a capital gain or capital loss from the event.


Item 18 Foreign entities
	Foreign entities
This topic covers:

Who does this item apply to?

Direct or indirect interest in a controlled foreign company (CFC)

You need to know

What you need

Transfer of property – including money – or services to a non-resident trust

You need to know

What you need

Record keeping

Interest in a foreign investment fund or a foreign life assurance policy

You need to know

What you need

Record keeping

WHO DOES THIS ITEM APPLY TO?

Complete this item if you are an Australian resident for tax purposes who:

•	had either a direct or an indirect interest in a controlled foreign company

•	at any time, directly or indirectly caused the transfer of property – including money – or services to a non-resident trust, or

•	had, an interest in a foreign investment fund or a foreign life assurance policy.

NOTE:
If you are a temporary resident you will not need to show your foreign investment income at this item.  Refer to details of the exemption.

DIRECT OR INDIRECT INTEREST IN A CONTROLLED FOREIGN COMPANY (CFC)

YOU NEED TO KNOW

The controlled foreign company (CFC) measures may apply to income or gains of foreign companies in which you have a direct or indirect controlling interest, or which you effectively controlled.  Read chapter 1 in the Foreign income return form guide for more information.

WHAT YOU NEED

The Foreign income return form guide 2007 (NAT 1840) and The Foreign investment funds guide (NAT 2130) will help you to complete this item. These publications can be obtained from our website at www.ato.gov.au.

TRANSFER OF PROPERTY – INCLUDING MONEY – OR SERVICES TO A NON-RESIDENT TRUST

YOU NEED TO KNOW

The transferor trust measures may apply if, at any time, you directly or indirectly caused the transfer of property – including money – or services to a non-resident trust. A non-resident trust is a trust where the trustee was not an Australian resident, and the trust was not managed or controlled from Australia for all of the income year.

WHAT YOU NEED

Chapter 2 of The Foreign income return form guide 2007 will help you to complete this item. This publication can be obtained from our website at www.ato.gov.au.

RECORD KEEPING

e-tax will use the information you have entered to prepare an Additional information schedule. Sign and attach your schedule to the printed copy of your tax return.

INTEREST IN A FOREIGN INVESTMENT FUND (FIF) OR A FOREIGN LIFE ASSURANCE POLICY (FLP)

YOU NEED TO KNOW

An FLP is a policy issued by a non-resident insurer.

The FIF measurers may apply to income and gains of foreign companies or trusts in which you have an interest, but which you do not control.

A non-resident superannuation fund that is not employer-maintained is treated as a foreign investment fund. A foreign life assurance policy is a policy issued by a non-resident insurer.

WHAT YOU NEED

The Foreign investment funds guide 2007 (NAT 2130-6.2007) will help you complete this item. This publication can be obtained from our website at www.ato.gov.au.

RECORD KEEPING

e-tax will use the information you have entered to prepare an Additional information schedule. Sign and attach your schedule to the printed copy of your tax return.


Item 19 Foreign source income and foreign assets or property
	Foreign source income and foreign assets or property
This topic covers:

Who does this item apply to?

You need to know

What you may need

Further information

Part A: Foreign pension or annuity

Part B: Foreign employment income while working overseas or a lump sum payment on termination of foreign employment or from a non-resident superannuation fund that is exempt from tax

Part C: A taxable lump sum payment from a non-resident superannuation fund, a taxable lump sum payment on termination of your foreign employment, or an amount transferred from a non-resident superannuation fund to resident superannuation fund

Part D: Other foreign income

Part E: Working out your assessable foreign source income

Part F: Working out your Australian franking credits from a New Zealand company

Part G: Foreign tax credit

Part H: Excess foreign tax credits carried forward from earlier income years

Part I: Net foreign capital gain

Part J: Gifts and donations

Part K: Interest in assets – located outside Australia – that had a total value of A$50,000 or more

Part L: Australian tax losses of earlier income years

Record keeping

WHO DOES THIS ITEM APPLY TO?

Complete this item if you:

•	received income from a foreign pension or annuity

•	received income from foreign employment

•	received a lump sum payment on termination of foreign employment

•	received a lump sum payment from a non-resident superannuation fund

•	transfer money from a non-resident superannuation fund to a resident fund

•	received any other foreign source income including interest, dividends, royalties or rent

•	at any time during 2006-07, own or have an interest in assets located outside Australia that had a total value of A$50,000 or more?

You receive income even if it is held overseas for you.

YOU NEED TO KNOW

If you were an Australian resident and you received income from overseas, you must show your assessable foreign income here even if tax was taken out in the country from which the income came. Foreign income that is exempt from Australian tax may still be taken into account to work out the amount of tax you have to pay on your other income.

If you received a lump sum payment either on termination of your foreign employment or from a non-resident superannuation fund, phone the Superannuation Infoline on 13 10 20 for advice. Some of these payments are taxable and some are exempt from Australian tax.

If you were an Australian resident you must show the following amount(s) at this item:

•	an assessable dividend (or non-share dividend) from a New Zealand company and any attached Australian franking credits

•	a supplementary dividend from a New Zealand company and any attached Australian franking credits

•	an assessable distribution from a trust or partnership (or share of a partnership loss) that includes Australian franking credits attached to a dividend (or non-share dividend) from a New Zealand company.

For more information see Parts D and F of this item.

NOTE:
A dividend from a New Zealand company may also carry New Zealand imputation credits.
An Australian resident cannot claim any New Zealand imputation credits.

NOTE:
If you are a temporary resident the only foreign income you will need to show at this item is income that you earned from foreign employment while a temporary resident. Follow Part B of this item to determine how much of this foreign employment income should be reported. Refer to temporary resident and the details of the exemption for more information.

All foreign income, deductions and foreign tax paid must be converted to Australian dollars before you complete this item. More information on how to convert your foreign income, deductions and foreign tax paid is available on the Tax Office website at www.ato.gov.au. Phone the Personal Tax Infoline to get information about the exchange rates.

e-tax calculates your foreign tax credit entitlement.

WHAT YOU MAY NEED

•	payslips; foreign tax assessments; and company, partnership and trust distribution advices

•	details of any expenses you incurred in earning your foreign income

•	details of any allowable foreign losses from previous years

•	How to claim a foreign tax credit 2007 (NAT 2338-6.2007)

•	Tax Ruling TR 96/15 – Income tax: Foreign tax credit system (together with its addendum TR96/15A2) – if you received income from foreign employment, you may need this to work out whether you have been continuously employed if you took a break in foreign employment. This is important in working out whether the income is exempt from tax.

•	You and your shares 2007 (NAT 2632-6.2007)

If you received income for work or services performed in the Joint Petroleum Development Area (JPDA), you will need a copy of the JPDA Fact Sheet to work out how to deal with your JPDA income at this item.

FURTHER INFORMATION

PART A:	FOREIGN PENSION OR ANNUITY

Most foreign pensions and annuities are taxable in Australia, even if tax was withheld from your payment by the country that paid you. Examples of foreign pensions and annuities that fall into this category are age and superannuation pensions paid from the United Kingdom, Italy, Germany, the Netherlands and Austria. If you are unsure whether foreign your pension or annuity is taxable, phone the Personal Tax Infoline.

If the country paying your foreign pension or annuity took tax from your payment, and the pension or annuity was also taxable in Australia, you may claim a foreign tax credit at this item if you were not entitled to seek a refund of the foreign tax from the country that paid you. This refund may follow under the terms of an agreement between Australia and that country to prevent double taxation. If you are unsure whether your foreign pension or annuity is subject to an agreement phone the Personal Tax Infoline.

For the future, if your foreign pension or annuity is paid from a country with which Australia has a double tax agreement you may be able to make arrangements not to have tax withheld from your pension income in the country of origin. Phone the Personal Tax Infoline for more information.

NOTE:
The Tax Office regularly receives information from foreign tax authorities under our tax treaties regarding foreign source income paid to (and the tax withheld from) Australian resident taxpayers. We are making increasing use of information matching technology to verify the correctness of tax returns. Ensure that all information is fully and correctly declared on your tax return.

If your foreign pension or annuity is not taxable in Australia, do not show this income anywhere on your tax return.

Foreign tax credit

If you are not going to claim a refund of foreign tax from the country which paid your foreign pension or annuity, you will need to claim a foreign tax credit at this item.

NOTE:
Debt deductions such as interest and borrowing costs are not deductible for the purpose of this calculation. If you have incurred debt deductions in earning your foreign pension or annuity see item D15.

Deductible amount of undeducted purchase price of foreign pension or annuity

If your foreign pension or annuity has a deductible amount of undeducted purchase price, you claim a deduction for this amount at item D12.

PART B:	FOREIGN EMPLOYMENT INCOME WHILE WORKING OVERSEAS OR A LUMP SUM PAYMENT ON TERMINATION OF FOREIGN EMPLOYMENT OR FROM A NON-RESIDENT SUPERANNUATION FUND THAT IS EXEMPT FROM TAX

Foreign employment income is income from working overseas as an employee such as salary, wages, commissions, bonuses or allowances. If you received only:

•	a lump sum payment that was exempt from tax on termination of your foreign employment, or

•	a lump sum payment that was exempt from tax from a non-resident superannuation fund

these are discussed at Parts B and C. Otherwise, read on.

Foreign employment income exempt from Australian tax

Find out whether your income is exempt from Australian tax because of:

•	a privileges and immunities agreement or a law covering persons connected with international organisations

•	specific exemptions for the pay and allowances of members of the Australian Defence Force related to your qualifying service in a declared operational zone.

Your employer should be able to tell you if either of these applies. If you need further help, phone the Personal Tax Infoline.

If all your foreign employment income is exempt for either of these reasons, do not include this income anywhere in e-tax.

If you had any foreign employment income which is not exempt for either of the reasons outlined above it may still be exempt from tax. Work through the e-tax interview to find out whether your foreign employment income is exempt from tax. Even if it is exempt, it may still be taken into account to work out the tax on your other assessable income.

How the net taxable amount of your foreign employment income is worked out

Work out your assessable foreign employment income which is not exempt for either of the reasons outlined above. If foreign tax has been taken from your foreign employment income, add it back to the amount you received to find the assessable amount of your foreign employment income.

e-tax will work out the net taxable amount of your foreign employment income by taking away any deductible expenses from your gross foreign employment income.

NOTE:
Debt deductions, such as interest and borrowing costs, are not deductible for the purpose of this calculation. If you have incurred debt deductions in earning your foreign employment income, see item D15.

The types of expenses that you may be able to deduct are discussed at items D1 to D5.

EXAMPLE

Lachlan was employed in a foreign country from 15 October 2006 until 23 April 2007. During this period Lachlan earned A$11,250 after he paid A$3,750 in foreign tax and incurred deductible work related expenses of A$500 in relation to his foreign employment. After adding back the foreign taxes, Lachlan would have assessable foreign employment income of A$15,000. After deducting his expenses, Lachlan would have net foreign employment income of A$14,500.

Taxable net foreign employment income

Did you:

•	work on a project approved by Austrade

•	pay, or are liable to pay, foreign tax on your foreign employment income

•	receive income that was exempt from tax in the country where you worked because of:

o	a specific agreement or memorandum of understanding with the government of that country AND

o	the operation of a double tax agreement?

If you have answered NO to all the questions your net foreign employment income is not exempt from tax and is called taxable net foreign employment income. If you answered YES to any of these questions your net foreign employment may be exempt from tax depending upon the period of employment in the overseas country.

Period you were continuously employed in a foreign country

Work out the period that you were continuously employed in the foreign country.

If you were absent from the foreign country at any time during this period, read the fact sheet, Exempt foreign employment income, to find out whether we consider you to have been continuously employed. If you were working on a project approved by Austrade, read the fact sheet, Foreign income while working on an approved overseas project. You can find the fact sheets and other information on foreign employment income on our website www.ato.gov.au

If your period of continuous employment in a foreign country was more than 90 days, e-tax will treat your foreign employment income as exempt from tax. If your period of continuous employment in a foreign country was 90 days or less, your foreign employment income is not exempt from tax. If you are unsure, phone the Personal Tax Infoline.

If you received:

•	a lump sum payment that was exempt from tax on termination of foreign employment,

•	a lump sum payment that was exempt from tax from a non-resident superannuation fund.

In which the entitlement to the lump sum payment accrued entirely while you were a resident of Australia e-tax will add this amount to any exempt foreign employment income you entered in above. You cannot claim a foreign tax credit on this income.

Foreign employment income paid in arrears

If your net foreign employment income that is exempt from tax includes an amount paid in arrears and you are liable for the Medicare levy surcharge you will need to use the additional information button on screen 2307 to include an Additional information statement showing details of the payment in arrears.  Show the amount of the payment in arrears for each income year involved.
If you did not need to lodge a tax return for the two most recent years that the payment related to, you will need to follow the instructions in the last paragraph under Lump sum payment in arrears (item 22).

PART C	A TAXABLE LUMP SUM PAYMENT FROM A NON-RESIDENT SUPERANNUATION FUND THAT YOU HAVE NOT ALREADY INCLUDED AT ITEM 4, A TAXABLE LUMP SUM PAYMENT ON TERMINATION OF YOUR FOREIGN EMPLOYMENT, OR AN AMOUNT TRANSFERRED OUT OF A NON-RESIDENT SUPERANNUATION FUND TO A RESIDENT SUPERANNUATION FUND

Certain lump sum payments received by Australian residents from non-resident superannuation funds are taxable. This can include a direct transfer of benefits from a non-resident superannuation fund to a superannuation fund in Australia when you have not made an election that the amount be treated as a taxable contribution to the superannuation fund in Australia. This part does not apply to the transfer of amounts from one non-resident superannuation fund to another non-resident superannuation fund.

Determine the taxable amount(s) of any lump sum payment(s) you received from a foreign superannuation fund that has not been included at item 4 on your tax return. Also, determine the taxable amount(s) of any amount(s) transferred out of a non-resident superannuation fund to a resident superannuation fund (for which you have not made an election) and any lump sum payments on termination of employment that is taxable and not already included at item 4 on your tax return. Enter the taxable amounts in the table at screen 2312 in e-tax. These amounts will be included (with any other amount from Part D) at item 19, label M.

For more information about payments from non-resident superannuation funds phone the Superannuation Infoline on 13 10 20.

PART D	OTHER FOREIGN INCOME

This section refers to the following types of income from overseas:

•	interest

•	modified passive income such as royalties, dividends or rent

•	any other foreign income.

Foreign income by category

You will need to work through an e-tax interview screen for each category of foreign income you received, other than a lump sum payment on termination of foreign employment or from a non-resident superannuation fund. This is because you can only deduct expenses you incurred in relation to a category of foreign income against foreign income of the same category. The categories are used in calculating the foreign tax credit.

e-tax will display a screen for each of the following four categories of foreign income:

•	interest income

•	modified passive income – such as royalties, dividends or rent

•	offshore banking income

•	all other assessable foreign income.

If you have received dividends (including non-share dividends) from a New Zealand company, include those amounts in the modified passive income table.

Also include any amounts of supplementary dividends and any income that you received or became entitled to during the income year from a partnership or a trust that is attributable to dividend income (or non-share dividends) from a New Zealand company.

Do not include any amount referable to Australian franking credits from a New Zealand company that you received directly or indirectly through a trust or partnership. Reduce the income you received or became entitled to by that amount. If you had foreign tax (including New Zealand non-resident withholding tax) taken away from this income, add it back to the amount you received.

If you do not have any foreign income for a category, click on the Next button to move to the next screen. For each category, follow these steps to complete the table.

STEP 1	Complete the table. Use one row for each source of foreign income in this category.

Description – Enter a description of the foreign income received. e-tax does not send it to the Tax Office.

Gross amount received – Work out the gross amount of this category of foreign income. If you had foreign tax taken away from this income, add it back to the amount you received.

Enter the amount you have worked out in the Gross amount received column. This is the assessable amount of your foreign income.

Allowable deductions/deductible expenses – Enter any allowable deductions incurred in relation to earning this category of foreign income. The types of expenses you may be able to claim are discussed elsewhere in e-tax Help

•	against your foreign interest income or your foreign dividend income at item D7

•	against your rental income at item 20

•	against your other foreign income at item D15.

NOTE:
Debt deductions, such as interest and borrowing costs, are not deductible for the purposes of this calculation unless they are related to income earned through a permanent establishment in an overseas country. If you have incurred debt deductions in earning your foreign income under any of the four categories and the deductions are not attributable to an overseas permanent establishment, see item D15.

If you had allowable foreign losses in previous years for this category of income that you have not already offset, include them in your allowable deductions.

Foreign tax paid – If you had foreign tax taken away from this income enter the amount of foreign tax deducted.

e-tax will work out the net taxable amount of foreign income for this category by taking away any deductible expenses from your gross foreign income.

STEP 2	When the table is complete, click on the Next button. e-tax will move to the next table.

Foreign losses

If, after working through the above steps for a table, your deductible expenses incurred in relation to a category of foreign income exceed your foreign income for that category, you have made a foreign loss in that category equal to the excess. You will need to keep a record of any losses you have incurred in each category. These foreign income losses cannot be deducted from Australian source assessable income and can only be carried forward to offset assessable foreign income in the same category derived in a later income year.

EXAMPLE

After working through steps 1 and 2, Colin had the following:

•	foreign interest income A$1,000

•	foreign rent income of A$2,000 and deductible expenses of A$4,000, creating a loss of A$2,000.

e-tax will write $1,000 at M item 19 on Colin's tax return. Colin will need to keep a record of the $2,000 rental loss. This loss can only be used to offset modified passive income (including foreign rental income) derived in later years.

If, after working through the above steps, you have not made a loss in a particular category of foreign income, then you may choose to use any tax losses of earlier income years incurred in deriving Australian income against that foreign income. This is explained further in Part L.

PART E	WORKING OUT YOUR ASSESSABLE FOREIGN SOURCE INCOME

Assessable foreign income is the total amount of any foreign income you earned which is not exempt from tax in Australia. If any foreign tax has been paid on this income it should have been added back to get the assessable amount.

e-tax will write your total assessable income to label E item 19 on your tax return.

PART F	AUSTRALIAN FRANKING CREDITS FROM A NEW ZEALAND COMPANY

Include all amounts of Australian franking credits from a New Zealand company that you are entitled to whether directly by way of franked dividends (or franked non-share dividends) paid to you by the company or indirectly through a trust or partnership.

Do not include here Australian franking credits you are not entitled to (for example, because the dividend or non-share dividend, or income from the trust or partnership is exempt or you fail the holding period rule or trigger the related payments rule). For more information see You and Your Shares 2007.

Under Part E above you will have worked out supplementary dividends that are paid in connection with dividends paid by a New Zealand company with Australian franking credits attached (franked dividends). If you are entitled to a foreign tax credit because of the franked dividends, or because of their inclusion in your assessable income, the amount of Australian franking credits you would otherwise be entitled to is reduced. The amount of the reduction is the amount of the supplementary dividends (or your share of the supplementary dividends if you receive them through a trust or partnership).

NOTE:
Do not include in these amounts
  -  any Australian franking credits that you received from an Australian company.
     These amounts are included at either item 11 or item 12.
  -  any New Zealand imputation credits

PART G	FOREIGN TAX CREDIT

If you receive foreign income that is taxable in Australia, and you paid foreign tax for which you were personally liable in respect of that income, you will be entitled to a foreign tax credit if Australian tax is payable on that foreign income. Australian tax will not be payable if your taxable income is below the tax-free threshold or your net foreign source income is nil.

e-tax will work out your foreign tax credit when you have completed all the interview questions. e-tax will write the amount of foreign tax credit to your return at label O item 19.

If you want to know how your foreign tax credit is calculated, read the publication How to claim a foreign tax credit 2007 (NAT 2338-6.2007).

PART H	EXCESS FOREIGN TAX CREDITS CARRIED FORWARD FROM EARLIER INCOME YEARS

If you have excess foreign tax credits from earlier income years you will need to enter these in e-tax.

You will have an excess foreign tax credit for an income year if the amount of foreign tax you have paid in respect of a class of foreign income exceeds the Australian tax payable on that class of foreign income.

You may carry forward an excess foreign tax credit for the five years immediately following the income year when it arose. You may only use the excess credit for a class of foreign income if there is a credit shortfall for the same class of income in a later year. A credit shortfall occurs if the credit allowed for a class of income is less than the Australian tax payable on that class of income.

You cannot claim a foreign tax credit in the year that you incur a loss for a class of foreign income because the Australian tax payable for that class of income is nil. You may, however, carry forward the foreign tax credit to a later year to apply to the same class of income.

You will need to keep your own records of your excess foreign tax credits if you are carrying the credits forward to a later date.

PART I	NET FOREIGN CAPITAL GAIN

If you have a net foreign capital gain upon which foreign tax has been paid and e-tax is calculating your foreign tax credit entitlement, you will need to advise e-tax of the amount of that net foreign capital gain and the foreign tax paid.

Your net foreign capital gain is the amount included in item 17 label A on your tax return. If you used the calculator at item 17 you can get the net foreign gain for each asset from the last column – headed ‘Net gain’ – in the Application of choice table.

PART J	GIFTS AND DONATIONS

The foreign tax credit calculation requires some gifts and donations – referred to as apportionable deductions – to have a special place in the calculation. If you are claiming a deduction for gifts and donations at item D8 you will need to enter in e-tax the amount of the gifts or donations that are not apportionable deductions.

PART K	INTEREST IN ASSETS – LOCATED OUTSIDE AUSTRALIA – THAT HAD A TOTAL VALUE OF A$50,000 OR MORE

If your only asset or assets held overseas are covered under item 18, this section does not apply to you.

Your assets include any interest whether legal or beneficial and whether it was held directly or indirectly through one or more interposed entities.

Assets includes real estate, shares in companies or other entities, interests in partnerships or trusts, businesses, debentures, bonds, money or funds held in accounts or by other parties, loans to other parties and deposits. They also include intangible property such as trademarks, copyrights, patents, debtors or equitable choses in action.

Determine the value of your overseas assets by historical cost or market value, whichever was greater. Use the exchange rate at 30 June 2007 to convert the value of the assets to Australian dollars or, if you disposed of the assets during the year, use the exchange rate at the time of disposal.

This section of the e-tax interview applies to you if your overseas assets – tangible or intangible – were valued at A$50,000 or more, even if you did not receive any income from that property or funds this year.

PART L	AUSTRALIAN TAX LOSSES OF EARLIER INCOME YEARS

You can choose to use Australian tax losses of earlier income years to reduce your foreign source income.

If this choice is available and e-tax is calculating your foreign tax credit entitlement you get to make the choice at item L1.

RECORD KEEPING

Keep your records with your other documents.

If you have claimed a foreign tax credit, e-tax may use the information you have entered to prepare an Additional information schedule. If a schedule is prepared, sign and attach your schedule to the printed copy of your tax return.


Item 20 Rent
	Rent
This topic covers:

Who does this item apply to?

You need to know

What you may need

Do not show at this item

Completing this item in e-tax

Record keeping

WHO DOES THIS ITEM APPLY TO?

Complete this item if you earned rental income or your property was available for rent.

YOU NEED TO KNOW

Show only Australian rental income and expenses at this item.

If you sold your property in 2006-07, capital gains tax may apply and you must read item 17.

Rental income

This is the full amount of money you earn when you rent out your property. You must include any bond money retained in place of rent or kept because of damage to the property requiring repairs. An insurance payout for lost rent or a reimbursement of any rental expenses you claim in 2006-07 or claimed in an earlier year must also be included as income.

Rental expenses

You can claim expenses relating to your rental property, but only for the period your property was rented or available for rent – for example, advertised for rent.

Expenses could include advertising for tenants, bank charges, body corporate fees, borrowing expenses, council rates, decline in value of depreciating assets, gardening and lawn mowing, insurance, land tax, pest control, property agent fees or commissions, repairs and maintenance, stationery, telephone, water charges and travel undertaken to inspect the property or to collect rent.

If part of your property is used to earn rent, you can claim expenses relating to that part only. You will need to work out a reasonable basis to apportion the claim.

EXAMPLE

Gerard’s private residence includes a second storey which he rents out. The second storey represents 30% of the total floor area of the house. Gerard also shared the laundry with his tenants. The laundry takes up 10% of the total floor area of the house. If half is a reasonable figure for use of the laundry by tenants, Gerard can claim 35% of the expenses for the property – that is, 30% + (½ x 10%) = 35%.

Taxation Ruling IT 2167 – Income tax: Rental properties will give you more details about apportionment.

Prepaid expenses

If you prepay a rental property expense – such as insurance or interest on money borrowed that covers a period of 12 months or less AND the period ends on or before 30 June 2008, you can claim an immediate deduction. Otherwise, your deduction may have to be spread over two or more years under the prepayment rules if the expense is $1,000 or more – see Deductions for prepaid expenses 2007 (NAT 4170-6.2007).

Thin capitalisation

If you were an Australian resident and you (or any associate entities) had certain overseas interests or you are a foreign resident, the thin capitalisation rules may apply if your debt deductions, such as interest (combined with those of your associate entities) for 2006-07 were more than $250,000. More information about thin capitalisation is available on the Tax Office website at www.ato.gov.au

Co-ownership

If the title deed shows that you were a part owner of the property, include only your share of the rent and expenses in your tax return. For example, if you owned half of the property, you should show half of the rent and claim half of the deductible expenses for the property. Rental properties 2007 (NAT 1729-6.2007) provides further information on how to work out your share of rent and expenses that you can claim.

Capital works deductions

You may be able to claim a deduction for the construction costs of your property over a 25-year or 40-year period – called a capital works deduction.

You can claim a deduction if:

•	construction began after 17 July 1985 and the property is used for residential accommodation

•	construction began after 19 July 1982 and the property is not used for residential accommodation (for example, a shop), or

•	construction began after 21 August 1979, the property is used to provide short-term accommodation for travellers and it meets certain other criteria.

A deduction may also be available for structural improvements made to parts of the property other than the building if work began after 26 February 1992. Examples include sealed driveways, fences and retaining walls.

The deduction does not apply until completion of the construction. The deduction is at the rate of 2.5% or 4% (adjusted for part-year claims) depending on the date the capital works began. Rental properties 2007 will help you determine if you qualify and the appropriate rate.

Deductions for decline in value of depreciating assets

You can claim a deduction for the decline in value of certain items, known as depreciating assets, that you acquired as part of the purchase of your property or that you subsequently purchased for your property.

NOTE:
Depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Examples of depreciating assets are freestanding furniture, stoves, washing machines and television sets. The publication Rental properties 2007 contain a comprehensive list of depreciating assets found in residential rental properties.

The publications Guide to depreciating assets 2007 (NAT 1996-6.2007) and Rental properties 2007 will help you understand the rules for working out your deduction for decline in value and other aspects of rental property ownership. Guide to depreciating assets 2007 also contains details of the immediate deductions for assets whose cost (when added to the cost of other substantially identical assets or assets that make up a set) does not exceed $300. It explains the low-value pool, to which you can allocate depreciating assets costing less than $1,000 (low-cost assets) and depreciating assets written down to less than $1,000 under the diminishing value method (low-value assets).

NOTE:
If you choose the low-value pooling method to calculate the decline in value of low-cost and low-value assets, read item D6 and claim your low-value pool deduction there.

You can use the e-tax depreciation routine to assist with your depreciation calculations.

WHAT YOU NEED

You need to read the publication Rental properties 2007 (NAT 1729-6.2006) before you can answer this item.

WHAT YOU MAY NEED

•	details of all rental income earned

•	details of interest charged on money you borrowed for the rental property

•	details of other expenses relating to your rental property

•	details of any expenditure on capital works to your rental property

•	the publications Guide to depreciating assets 2007, Deductions for prepaid expenses  2007 and Taxation Ruling IT 2167 – Income tax: Rental properties.

DO NOT SHOW AT THIS ITEM:

•	a deduction for the decline in value of a low-value pool – item D6

•	foreign source rental income – that is, rental income from properties located outside Australia

•	expenses incurred in earning rental income from properties located outside Australia

Item 19 Foreign source income and foreign assets or property tells you about income such as rent from properties located outside Australia and how to take related expenses into account.

COMPLETING THE ITEM IN e-tax

You must complete a rental property worksheet for each property that you own. Refer to e-tax rental property worksheet.

When you complete a rental property worksheet it will be listed in the Existing worksheets navigator on the left of the e-tax window. Click on a worksheet in the navigator to display it for viewing or changing.

RECORD KEEPING

Keep the information to support your claims with the printed copy of your tax return.


Item 21 Bonuses from life insurance companies and friendly societies
	Bonuses from Life Insurance Companies and Friendly Societies
This topic covers:

Who does this item apply to?

You need to know

What you may need

Further information

Tax offset

Record keeping

WHO DOES THIS ITEM APPLY TO?

Complete this item if you received a bonus because your life insurance policy or friendly society insurance bond matured, was partly or fully surrendered, terminated or forfeited.

YOU NEED TO KNOW

Life insurance policies are issued by life insurance companies and friendly societies.

You need to include a bonus amount at this item if all of the following conditions apply:

•	within 10 years from when the policy started, you have actually received the bonus amount or have directed how it is to be dealt with

•	your life insurance policy or friendly society insurance bond matured, was partly or fully surrendered, terminated or forfeited

•	the bonus amount is in addition to the capital amount that you have paid to the life insurance company or friendly society.

Enter the following amounts:

•	the whole bonus amount you received in 2006-07 if you received it during the first eight years of the policy

•	two-thirds of the bonus amount you received in 2006-07 if you received it during the ninth year of the policy, or

•	one-third of the bonus amount you received in 2006-07 if you received it during the tenth year of the policy.

Do not include any bonus amount received after the tenth year of the policy.

Do not declare as income:

•	any life insurance bonuses from policies that:

o	you started before 28 August 1982

o	matured due to the death of the person insured

o	you surrendered due to an accident, illness or other disability of the person insured

o	you surrendered due to severe financial hardship

o	are retirement savings accounts.

•	any benefits you received from a friendly society that are bonuses from income bonds. Include these amounts at item 22 Other income.

If you received a statement detailing the bonus amount allocated to your continuing life insurance policy or friendly society bond but you have not actually received the bonus or directed how it is to be dealt with, do not include the bonus amount as income.

IMPORTANT:
If, during the term of your life insurance policy or bond you increased the amount of your premiums by more than 25% of the amount of premiums you paid in the previous policy year, your policy is taken to start at the beginning of the policy year in which you paid the increased premiums. This means that some or all of a bonus amount may need to be included in your assessable income.

You cannot claim a loss if your life insurance policy or friendly society insurance bond matured or was partly or fully surrendered, terminated or forfeited.

NOTE:
Different rules apply to a bonus received from a policy that started on or after 28 August 1982 and before 8 December 1983. Generally such a bonus does not need to be included in assessable income unless the policy has been taken to start at a later date and the rules apply. If you are not sure if you need to include your bonus phone Personal Tax Infoline.

WHAT YOU MAY NEED

•	your life insurance policy

•	your friendly society policy

•	your life insurance bonus advice

•	your friendly society bonus advice

FURTHER INFORMATION

Tax offset

You will get a tax offset equal to 30% of any bonus amounts included in your income.

e-tax will not write your tax offset amount anywhere on your tax return.

RECORD KEEPING

Keep a copy of your policy document and bonus advice with your other records.


Item 21: Tax offset

You will get a tax offset equal to 30% of any bonus amounts
included in your income.

Tax offsets are explained at the start of the Tax offsets section.


Item 22 Other Income
	Other income
This topic covers:

Income from activities as a special professional

Other income

INCOME FROM ACTIVITIES AS A SPECIAL PROFESSIONAL

This section covers:

Who does this apply to?

You need to know

WHO DOES THIS APPLY TO?

If you are a special professional you must include your taxable professional income at this item.

Complete this item if you received income from activities as a special professional – author of a literary, dramatic, musical or artistic work, inventor, performing artist, production associate or active sportsperson.

An amount you have already included at item 1, item 2, item 12, item 13 or item 14 may also have to be shown here as you may be entitled to a concessional rate of tax if you have certain amounts of professional income. You will not be taxed twice on this amount.

YOU NEED TO KNOW

Income from activities as a special professional

A special professional is an author of a literary, dramatic, musical or artistic work, an inventor, a performing artist, a production associate or an active sportsperson.

As a special professional, you may be entitled to a concessional rate of tax where your taxable income includes certain amounts of professional income which, when added to your other income, moves you into a higher tax bracket.

You are entitled to this concession in 2006-07 if:

•	you were an Australian resident and

•	you were a special professional and

•	your taxable professional income was at least $2,500 in the first year that this concession applies.

You will need to read Income averaging for special professionals 2007 (NAT 2475-6.2007). This publication explains how you work out your taxable professional income.

OTHER INCOME

This section covers:

Who does this item apply to?

You need to know

Do not show at this item

Further information

Types of income

Record keeping

WHO DOES THIS ITEM APPLY TO?

Complete this item if you received other income. Other income includes:

•	a non-qualifying component of an eligible termination payment (ETP)

•	discounts on shares, stapled securities or rights to acquire them  under an employee share scheme

•	lump sum payments in arrears

•	foreign exchange gains

•	royalties

•	bonus amounts distributed from friendly society income bonds

•	taxable scholarships, bursaries, grants or other educational awards

•	benefits or prizes from investment-related lotteries and some game-show winnings

•	gains from the disposal or redemption of traditional securities

•	reimbursements of tax-related expenses (including amounts imposed by the Tax Office as an interest charge) or election expenses which you have claimed as a deduction

•	any assessable balancing adjustment when you stop holding a depreciating asset (for example, because of its disposal, loss or destruction), for which you have claimed a deduction for depreciation or decline in value in previous years. Your car is a depreciating asset.

•	income protection, sickness and accident policy payments made to you where premiums were deductible and the payment replaced income – for example, income protection policies. Do not include payments made under a policy held by your employer which you have already shown at item 1 or item 2

•	interest from infrastructure borrowings if you intend to claim a tax offset at item T15

•	interest derived under the land transport facilities tax offset scheme

•	allowances or payments you received as a member of a local government council that you have not already shown at item 1 or item 2

•	other taxable allowances or payments you received from Centrelink that are not shown at item 5 or item 6

•	Work-in-progress amounts assessable under section 15-50 of the Income Tax assessment Act 1997 (ITAA97) that you received and have not included at item 14.

Call the Personal Tax Infoline if you are unsure about what counts as other income.

NOTE:
Depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.

YOU NEED TO KNOW

Non-qualifying component of an eligible termination payment (ETP)

If there is an amount on your ETP payment summary that is called a non-qualifying component of an ETP, it is subject to tax at ordinary rates and must be included at this item.

Discounts on shares, stapled securities or rights acquired under an employee share scheme

You may need to include as income at this item discounts – the difference between the market and acquisition prices – on shares, stapled securities or rights to acquire them (including options) that you received under an employee share scheme, whether issued in Australia or overseas. You can acquire a right at a discount even though its exercise price is the market value of the share or stapled security at the time the right was granted.

If your scheme meets certain conditions, tax may be deferred on the discount until a later year of income unless you elect to include the discount in the year you acquired the shares, stapled securities or rights. The prospectus for the share scheme or a letter from your employer should advise you of the Australian taxation implications of your employee shares, stapled securities or rights.

If you qualify as a temporary resident and acquire shares, stapled securities or rights under an employee share scheme special rules may apply to calculate your discount. Refer to Foreign income exemption for temporary residents - employee share schemes.

Refer to Who is a temporary resident for further information.

If you disposed of your employee share scheme shares, stapled securities or rights because of a corporate restructure or 100% takeover and received replacement shares, stapled securities or rights – special provisions may apply.

Refer to Employee Share Schemes – Rollover relief on a corporate restructure for further information.

If a relative or other associate has acquired shares, stapled securities or obtained rights to acquire either as a result of your involvement in an employee share scheme, phone the Personal Tax Infoline

Refer to Employee Share Schemes – answers to frequently asked questions by employees contains more information about calculating employee share scheme discounts.

RECORD KEEPING

For shares, stapled securities or rights to acquire either, it is important to keep a record of:

•	the date you acquired them and the date you sold them (or the date you  exercised the rights)

•	the total number you purchased, exercised or sold

•	the amount you paid or received

•	the amount or percentage of the discount you received or other proof of the market price, and

•	details of any election you have made to include any discount in the year of acquisition.

Lump sum payments in arrears (LSPA)

These payments relate to an earlier income year or years and should normally be shown at label ‘E’ on your PAYG payment summary – individual non-business.

The lump sum payments you received could be one of the following:

•	back payments of salary or wages that accrued in a period more than 12 months before the date of payment

•	salary or wages that accrued during a period of suspension and were paid to you on resuming duty

•	superannuation, repatriation and social welfare pensions, allowances or payments, including those paid by foreign governments

•	periodical worker's and accident compensation payments but not payments made to the owner of the policy

•	Commonwealth education or training payments.

Include any of these payments in the amount you show at this item.

You may get a tax offset if you received certain lump sum payments in 2006-07. We will calculate the tax offset for you. Using the Additional information button, include an Additional information statement in your tax return showing details of the lump sum. Show the amount of the payment in arrears for each income year involved.

If you did not need to lodge a tax return for the two most recent years that the payment related to, you will need to provide additional information. Using the Additional information button, include an Additional information statement in your tax return showing details of what your taxable income – including your lump sum payment in arrears – would have been had you lodged tax returns in those two years.

Foreign exchange gains

Unless you carried on a business and have included all your foreign exchange gain (‘forex gains’) in calculating your business net income or loss for item 14, your forex gains must be shown at this item (except any foreign source forex gains that have been included at item 19).

Under the forex measures gains attributable to a fluctuation in a currency exchange rate or to an agreed exchange rate differing from an actual exchange rate are included in assessable income when they are realised. This is when you:

•	disposes of foreign currency, or a right thereto

•	cease to have a right to receive or pay foreign currency, or

•	cease to have an obligation to receive or pay or receive foreign currency

Some forex gains are not assessable, for example forex gains of a private or domestic nature, or relating to exempt income. In some cases, forex gains on the acquisition of capital or depreciating assets, or on the disposal of capital assets are also not assessable. In these cases the gains are integrated into or matched with the taxation treatment of the underlying asset.

In some circumstances, you may make an election that affects the realisation or treatment of a forex gain. More information about the forex measures and how to calculate your foreign exchange is available on the Tax Office website at www.ato.gov.au

If you had a deductible foreign exchange loss, go to Item D15.

Royalties

If you were an Australian resident for tax purposes in 2006-07, include income from royalties that has not been included at either item 14 or item 19 at this item.

Bonus amounts distributed from friendly society income bonds

You must include at this item any bonus amounts distributed from a friendly society income bond. Your friendly society income bond distribution statement will advise you of the amount to include.

Taxable scholarships, bursaries, grants and other educational awards

Some scholarships, bursaries, grants and awards – including education benefits provided under a friendly society scholarship plan – are taxable. If you are not sure about a payment, contact the organisation that paid you. If you then need more information, phone the Personal Tax Infoline.

Include any income from a scholarship, bursary, grant or other award that you have to pay tax on at this item, unless you have already shown it at item 1, item 2 or in calculating your business net income or loss shown at item 14.

Benefits or prizes from investment-related lotteries and some game-show winnings

You must include at this item the value of benefits or prizes you received from an investment-related lottery offered by an investment body such as a bank, building society or credit union. Prizes may include cash, low-interest or interest-free loans, holidays or cars.

Do not include prizes won in ordinary lotteries – for example, lotto draws, caskets and raffles. Do not include prizes won in game shows unless you regularly receive appearance fees or game-show winnings.

Reimbursements and recoupments of tax-related expenses or election expenses which you have claimed as a deduction

If you received a reimbursement or refund in 2006-07 of any tax-related expenses or election expenses which you have claimed, you must include the amount at this item – for example, if you claimed a deduction for filing fees for an Administrative Appeals Tribunal application in relation to a tax-related matter in 2005-06 and recouped those fees in 2006-07.

This item also applies to any remission of a Tax Office interest change. If you claimed a deduction for an interest charge incurred in 2005-06 or earlier years and received a remission (a partial or full reduction) of that charge in 2006-07, you must include the amount of the remission at this item. Similarly, if you are claiming at item D10 a deduction for an interest charge incurred during 2006-07 and some or all of it was also remitted during the 2006-07 year, you must include the amount of the remission at this item. The same position applies to remissions of goods and services tax (GST) and pay as you go (PAYG) instalment underestimation charges.

Assessable balancing adjustment

You must include at this item any assessable balancing adjustment when you stop holding a depreciating asset (for example when it is sold, lost or destroyed) for which you have claimed a deduction for depreciation or decline in value in previous years.

Only include here any balancing adjustment relating to a depreciating asset that you have not created an e-tax depreciation worksheet for. If you have completed an e-tax worksheet for a depreciating asset you no longer hold, e-tax will automatically include any balancing adjustment in the amount written to item 22 on your tax return. Refer to Guide to depreciating assets 2007 (NAT 1966-6.2007) for instructions on how to calculate a balancing adjustment.

A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.

Refer to balancing adjustment to calculate any assessable balancing adjustment in respect of your car for which you have claimed car expenses. Include any assessable balancing adjustment at this item.

Gains derived on disposal or redemption of traditional securities

The gains derived on disposal or redemption of traditional securities are assessable under section 26BB of the Income Tax Assessment Act 1936, see the section on Sale or disposal of company bonds and convertible notes in You and your shares 2007 (NAT 2632.6.2007).

Other allowances and payments from Centrelink

You must include at this item any taxable allowances and payments from Centrelink that you have not already shown at item 5 or item 6 or in calculating your business net income or loss shown at item 14.

DO NOT SHOW AT THIS ITEM

•	foreign exchange losses – item D15

•	rental income or losses – item 20

•	business income or losses – item 14

•	partnership income or losses – item 12

•	capital gains or losses – item 17.

FURTHER INFORMATION

Types of income

This information is used in working out whether you have to pay PAYG instalments, and if so, your instalment rate.

Category 1

•	reimbursements of tax-related expenses or election expenses

•	the non-qualifying component of an eligible termination payment (ETP)

•	benefits or prizes from investment-related lotteries and some game-show winnings

•	a gain on the disposal or the redemption of traditional securities that is assessable under section 26BB of the Income Tax Assessment Act 1936

•	any assessable balancing adjustment when you stop holding a depreciating asset

•	foreign exchange gains

•	lump sum payments in arrears

•	discounts on shares stapled securities or rights acquired under an employee share scheme except where the shares stapled securities or rights were issued to you this year. (This exception is category 2 income if you are assessed on the discount this year)

•	Work-in-progress amounts assessable under section 15-50 of the Income Tax assessment Act 1997 (ITAA97)

Category 2

•	Any income not described in category 1

This information is used in working out whether you have to pay PAYG instalments and, if so, your instalment rate.

If you received more than one type of either category of income, e-tax will prepare an Additional information schedule for you with the information you provide at this item. Sign and attach your schedule to page 3 of the printed copy of your tax return.

Additional information schedule(s)

If you have prepared an Additional information schedule, sign and attach your schedule to the printed copy of your tax return.


 22 Other income

DO NOT SHOW AT THIS ITEM:

•	foreign exchange losses – item D15

•	rental income or losses – item 20

•	business income or losses – item 14

•	partnership income or losses – item 12

•	capital gains or losses – item 17


Item 2 Allowances, earnings, tips, director's fees, etc.
	Allowances, earnings, tips, director’s fees etc.
This topic covers:

Who does this item apply to?

You need to know

What you need

Show at this item

Do not show at this item

Record keeping

See also: Exempt income

WHO DOES THIS ITEM APPLY TO?

Complete this item if you received any income from working – whether or not it is shown on a PAYG payment summary – individual non business – such as:

•	allowances

•	payments of salary, wages, commissions, bonuses etc., including income earned from part-time and casual jobs, from which tax was NOT withheld

•	tips, gratuities and payments for your services

•	consultation fees and honoraria – payments for voluntary services

•	jury attendance fees – except where you have to pay the fees to your employer because you received your normal employment income while you were on jury duty.

NOTE:
 -  Employers are payers.
 -  Employees are payees.

YOU NEED TO KNOW

Allowances and earnings from your payer

Allowances and earnings from your payer may include:

•	car, travel or transport allowances

•	award transport payments – these are allowances covering either transport or car expenses which are paid under an industrial law or award that was in force on 29 October 1986

•	allowances for tools, clothing or laundry

•	dirt, height, site, risk, meal or entertainment allowances

•	allowances for qualifications – for example, a first aid certificate

•	any reimbursement of car expenses – calculated by reference to the distance travelled by the car – which is an exempt car expense payment benefit for fringe benefits tax purposes.

Jury fees can include attendance fees and travel and meal allowances. Only the attendance fees shown on your payment summary are assessable for tax.

Reasonable travel allowances and overtime meal allowances not shown on a payment summary.

Payers do not have to show bona fide travel allowances paid for travel away from your home in the course of your duties as an employee or bona fide overtime meal allowances paid under an industrial law, award or agreement on payment summaries unless the allowances exceed the Commissioner’s reasonable allowance amounts. The reasonable overtime meal allowance for the 2006-07 year is $21.90.  If you have received such an allowance and it is not shown on your payment summary, you do not have to include it as income at this question providing you have spent all the allowance on deductible expenses and you are not making a claim for expenses relating to the allowance in your tax return (see item D2 for travel expenses and item D5 for overtime meal expenses).

Deductions

You cannot automatically claim a deduction just because you got an allowance.

Carefully read the Deductions section.

WHAT YOU NEED

•	your PAYG payment summary – individual non business

•	other details of your income.

If you do not have all of your documents contact the person who paid you.

SHOW AT THIS ITEM

Show at this item income from sickness and accident insurance policies shown on a payment summary where no tax has been withheld.

Include all allowances and earnings you received, whether or not they are shown on a payment summary, signed copy, letter or statement from your payer.

Make sure you include any reimbursements of car expenses you received that were worked out by reference to the distance travelled by the car.

DO NOT SHOW AT THIS ITEM:

•	salary or wages shown at item 1

•	amounts shown on any payment summary other than the PAYG payment summary – individual non business – item 8, item 13 and item 14

•	Australian Government pensions, allowances and payments – item 5 and item 6

•	lump sum payments in arrears shown at label ‘E’ in the Lump sum payments box on your payment summary – item 22

•	reportable fringe benefits amounts – item 9

•	amounts in the ‘Other income’ box on your payment summary. If this is exempt income you will not need to show that amount in your tax return. If this is foreign employment income – item 19

•	income from sickness and accident insurance policies NOT shown on a payment summary – item 22

•	foreign employment income (including working overseas) – item 19

•	income paid to you as a partner in a partnership – item 12

•	income – including commission income – you earned because you were self-employed – item 14

•	income you earned as a non-employee taxi driver – for example, a driver operating under a standard bailment agreement with an owner/operator – item 13.

Otherwise you may be taxed incorrectly.

Other items deal with these matters.

RECORD KEEPING

Attach to page 3 of the printed copy of your tax return  all of your payment summaries, signed copies, letters or statements from your payers or the statutory declarations you have completed. Refer to Keeping copies of all your tax records.


 2	Allowances, earnings, tips, director’s fees, etc.

Do not show at this item:

•	salary or wages shown at item 1

•	amounts shown on any payment summary other than the PAYG payment summary – individual non business – item 8, item 13 and item 14

•	Australian Government pensions, allowances and payments – item 5 and item 6

•	lump sum payments in arrears shown at label ‘E’ in the Lump sum payments box on your payment summary – item 22

•	reportable fringe benefits amounts – item 9

•	amounts in the 'Other income' box on your payment summary. If this is exempt income you will not need to show that amount in your tax return. If this is foreign employment income – item 19

•	income from sickness and accident insurance policies NOT shown on a payment summary – item 22

•	foreign employment income (including working overseas) – item 19

•	income paid to you as a partner in a partnership – item 12

•	income – including commission income – you earned because you were self-employed – item 14

•	income you earned as a non-employee taxi driver – for example, a driver operating under a standard bailment agreement with an owner/operator – item 13.


Item 4 Eligible termination payments
	Eligible termination payments
This topic covers:

Who does this item apply to?

You need to know

What you need

Do not show at this item

Further information

Part A – Did you receive a RBL determination notice for your ETP?

Part B - You received a death benefit ETP - that is, a lump sum you received because of the death of another person

Completing this item in e-tax

Record keeping

How your tax is worked out

Tax rates on post-June 1983 elements

Taxation of an ETP when you are aged 55 years or older

Definitions

WHO DOES THIS ITEM APPLY TO?

Complete this item if you received an eligible termination payment (ETP).

If you have received a lump sum payment on termination of foreign employment or from a non-resident superannuation fund, you need to read item 19.

YOU NEED TO KNOW

An ETP can be any of the following:

•	a lump sum payment from your employer when you retired or ceased employment,

•	a lump sum payment from a superannuation fund, approved deposit fund, retirement savings account or life insurance company,

•	a similar payment to those above, paid to you as the beneficiary of a person who has died. We call this a death benefit ETP. However, if the payments were made to you as the trustee of a deceased estate they must be shown in a trust tax return, not in your personal tax return

•	a payment from the Tax Office of amounts collected from an employer either by way of Superannuation Guarantee Charge payments or payments to the Superannuation Holding Accounts Special Account

Examples of a lump sum paid to you by your employer when you retired or ceased employment are:

•	a payment in lieu of notice or a ‘golden handshake’

•	a payment for unused sick leave or unused rostered days off

•	compensation for loss of a job or wrongful dismissal

•	a bona fide redundancy payment or an approved early retirement scheme payment that exceeded the tax-free threshold for such payments – currently $6,783 plus $3,392 for each complete year of service

•	a payment received because of invalidity.

Examples of a lump sum payment from a superannuation fund, approved deposit fund, retired savings account or life insurance company include:

•	payments received when you changed your superannuation pension or annuity into a lump sum

•	payments you received when you made a withdrawal from an approved deposit fund

•	other payments from a superannuation fund, excluding a pension or annuity or a departing Australia superannuation payment.

NOTE:
If you are still unsure whether the payment you received is an ETP, visit the Tax Office superannuation website at www.ato.gov.au/super or phone the Superannuation Infoline on 13 10 20 for assistance.

You can also find more information in the publications Eligible termination payments: an employees guide to lump sum payments from your employer (NAT 2700) and Eligible termination payments: an individuals guide to lump sum superannuation payments (NAT 2701).

If you have received an ETP then you should have received an ETP payment summary from your employer or superannuation fund. Information on your ETP payment summary includes the assessable amount of the ETP and the amount of tax that has been withheld. If you did not receive an ETP payment summary, contact the person who paid your ETP to obtain one.

WHAT YOU NEED

•	your ETP payment summary. If you have lost it, you will need a signed copy of the summary, or a letter or statement from the payer that shows all the details of your ETP. If you think the details on your ETP payment summary are wrong, contact the person who prepared it. You need the details of your ETP payment summary to complete your tax return unless you have received a Reasonable benefit limit (RBL) determination notice.

•	your RBL determination notice. We would have sent you a RBL determination notice, if your ETP exceeded your RBL. If you received a RBL determination notice, you will also need this to complete your tax return.

Your RBL is the maximum amount of retirement and termination of employment benefits you can receive over your lifetime at concessional (reduced) tax rates. In most cases, your employer or superannuation fund will have reported the payment to the Tax Office. Using this payment information we work out whether your ETP was within your RBL.

For further information see the publication Reasonable benefit limits (NAT 5256).

DO NOT SHOW AT THIS ITEM

Do not show at this item a lump sum payment you received:

•	on termination of foreign employment – item 19

•	from a non-resident superannuation fund – item 19

•	as the trustee of a deceased estate – This ETP must be shown in the trust tax return, not in your personal return

Do not show at this item the amount of your rolled over ETP.

If you entered Australia on a temporary resident’s visa and have permanently departed Australia, you may have received a departing Australia superannuation payment from your superannuation fund. This payment is not an ETP and does not form part of your assessable income. Do not show it anywhere on your tax return.

FURTHER INFORMATION

PART A -	 DID YOU RECEIVE A RBL DETERMINATION NOTICE FOR YOUR ETP?

The Tax Office would have sent you a RBL determination notice if your ETP exceeded your RBL. Your RBL determination notice provides the adjusted ETP components that you use to recalculate the assessable amount and the excessive component amount.

PART B -	DID YOU RECEIVED A DEATH BENEFIT ETP – THAT IS, A LUMP SUM YOU RECEIVED BECAUSE OF THE DEATH OF ANOTHER PERSON

You will find the necessary ETP components at (Section3- ETP cash payment details’ on your ETP payment summary or on your RBL determination notice if your ETP exceeded your RBL.

If you received a payment as trustee of a deceased estate, the following instructions do not apply to you. The trustee must lodge a trust tax return for the deceased estate and follow the instructions for that tax return. The obligation to pay tax, if any is with the trustee.

If you received a payment and you were a dependant of the deceased the death benefit ETP is not taxable. Do not show it anywhere on your tax return unless you have received a RBL determination notice for this ETP. If you have received a RBL determination notice, you only pay tax on the excessive component of the death benefit ETP.

If you received a payment and you were not a dependant of the deceased, you must show all of the assessable amount of this payment in your tax return. If you have received a RBL determination notice showing an excessive component, you must show the excessive component amount from your RBL determination notice and recalculate a new assessable amount to complete your tax return.

COMPLETING THIS ITEM IN e-tax

The e-tax ETP worksheet

You must complete an e-tax ETP worksheet for each ETP you have received. e-tax will use the information from these worksheets to work out your assessable amount.

If an RBL determination notice has been issued for any of your ETPs, do not use the assessable amount shown on that ETP payment summary.   Instead, you must recalculate the assessable amount by applying the following percentages in the table below to the adjusted ETP components shown on your RBL determination notice. e-tax will calculate the assessable amounts using the percentages in the  table below.

The percentage of each ETP component to be included in your Assessable amount

ETP component	Assessable amount of component
Pre 1 July 1983	5%
Post-June 1983 taxed	100%
Post-June 1983 untaxed	100%
Undeducted contributions	Nil
Post-June 1994 invalidity component	Nil
CGT-exempt component	Nil
Concessional component	5%
e-tax will calculate and total the assessable amount other than excessive component across all ETP worksheets and write the result to label I item 4 on your tax return. Undeducted contributions, post-June 1994 invalidity components and CGT exempt components are exempt from tax and are not included in your assessable amount.

e-tax will total the excessive component across all worksheets and write the result to label N item 4 on your tax return.

Any non-qualifying amounts shown on an ETP worksheet will automatically be included at label V item 22 – Other income on your tax return.

What documents do you need?

You will find all the information required to complete the ETP worksheet on your ETP payment summary or any RBL determination notice.

Completing the worksheet

Complete one worksheet for each of your ETP payment summaries. If a RBL determination has been issued in respect of any of your ETPs, use the amended ETP component amounts in the RBL determination notice, not the amounts on the ETP payment summary. e-tax calculates a new assessable amount for the ETP based on the information in the RBL determination notice.

When you complete an ETP worksheet it will be listed in the Existing worksheets navigator on the left of the e-tax window. Click on a worksheet in the navigator to display it for viewing or changing.

STEP 1	Is the payment a death benefit?

This information can be found at ‘Section 3 ETP cash payment details’ on your ETP payment summary OR any RBL determination notice.

Answer the question Are the payments to be shown on this worksheet death benefits? If you answer Yes, click on the box to tick it.

When you answer Yes to the first question, the second question – Were you a dependent of the deceased either at the time of death, or at the time of payment? – must also be answered. If you were a dependent of the deceased, click on the box to tick it.

We will not be able to work out your tax on your payments if you do not answer these questions.

STEP 2	Payment details

Enter the payer's name in the Payer box. The payer's name can be found at ‘Section 1 Payer details’ on your ETP payment summary OR any RBL determination notice.

Enter the Date Paid. The date of payment can be found at ‘Section 3 ETP cash payment details’ on your ETP payment summary OR any RBL determination notice.

STEP 3	Tax withheld

Enter the amount of tax withheld as shown in section 3 of your ETP payment summary. If an RBL determination notice was issued in respect of an ETP payment summary that shows tax withheld, you should also include these amounts.

However, if you have already included these withheld amounts at item 1&3 on your tax return, do not include them again here.

The amount of tax withheld should be shown in whole dollars only. If your payment summary, letter or statement shows cents, round the amount to the nearest whole dollar.

STEP 4	Payer type

This indicator was added to the ETP Worksheet because incorrect Superannuation ETP payments summaries have been issued from the Tax Office which carry Type of ETP codes A – Employer payments excluding death benefit payments and B – Death benefit. To combat this the indicator is used to ensure that correct ETP type codes are entered if a Superannuation ETP payment summary is input.

STEP 5	Type of ETP

You will need to tell us the type of ETP – click on the appropriate box to select one of the following categories:

•	an employer payment but not a death benefit payment from an employer

•	a death benefit

•	a payment – with no untaxed element – from a superannuation fund

•	a payment – with an untaxed element – from a superannuation fund

This information can be found at ‘Section 3 ETP cash payment details’ on your ETP payment summary OR any RBL determination.

STEP 6	Eligible service period

Enter the number of days in each period. This information can be found at ‘Section 3 ETP cash payment details’ on your ETP payment summary OR any RBL determination.

STEP 7	ETP components

Copy the components from section 3 of your ETP payment summary. Remember, if an RBL determination form has been issued in respect of any of your ETP payment summaries, use the amounts in the RBL determination form, not the amounts on the ETP payment summary.

STEP 8	Click on the Next button. You will be asked if you have another ETP. If you have more ETPs click on the Yes button. A blank ETP worksheet will be displayed. Go back to step 1 to fill in the worksheet for your next ETP.

Printing the worksheet

e-tax will allow you to print your ETP worksheet(s) when you have completed your return. If you want to print a copy of your ETP worksheet(s) now follow these steps.

STEP 1	Click on Printing in the Navigator. You will be prompted for the items you want to print.

STEP 2	Select Attachments. (You may want to clear the Tax return box).

STEP 3	Click on the Preview or Print button and use the arrow buttons to locate the ETP worksheet(s) you want to print.

STEP 4	Click on the Pages button at the top of the screen. Enter the page number(s) of the ETP worksheet(s) you want to print.

STEP 5	Click on [image] to print the selected worksheets.

RECORD KEEPING

Check that you have:

•	attached to the printed copy of your tax return the ‘Payee's Tax Return Copy’ of any ETP payment summaries, signed copies of these documents, or letters or statements from your employer and any RBL determinations notices from the Tax Office.

•	kept a copy of your ETP payment summaries, signed copies, or letters or statements from your employer. You need to keep these records as evidence. See Keeping copies of all your tax records.

HOW YOUR TAX IS WORKED OUT

The amount of tax payable on your ETP depends on the following:

•	the percentage of each ETP component to be included in your assessable amount and the tax rates that apply for each of those components

•	whether you were aged 55 years or older when you received the ETP and the amount of the low rate threshold available to you

•	whether you have exceeded your RBL, and

•	whether your ETP is a death benefit ETP.

Taxation of ETP components

We will work out your tax based on the individual components of your ETP. The tax rates that apply for each of the ETP components are explained below.

Concessional component and pre-July 1983 component – 5% of each of these components is included in your assessable income and taxed at your usual rate.

Undeducted contributions, post-June 1994 invalidity components and CGT exempt components are exempt from tax and are not included in your assessable amount.

Non-qualifying component – 100% of this amount is included in your assessable income and taxed at your usual rate. e-tax will automatically include any amounts at label V item 22 – Other income on your tax return.

Post-June 1983 component – may be either a ‘taxed element’ or an ‘untaxed element’. Some payments will have both elements present. ‘Taxed element’ means that the payer – usually a superannuation fund – has already paid a contributions tax on this element. ‘Untaxed element’ means that the payment has not been subject to contributions tax. For this reason the elements are taxed differently as shown in the table below.

TAX RATES ON POST-JUNE 1983 ELEMENTS

These rates and thresholds do not apply to death benefit ETPs.

Age when  received	Taxed element	Untaxed element
Under 55 years	20%	30%
55 years or over
- up to $135,590	0%	15%
- excess over $135,590	15%	30%
Any Medicare levy is added to these rates. A Medicare levy will not apply to a taxed element where the tax rate is zero.

Your post-June 1983 component is included in full in your assessable income on your tax return even where it is subject to a nil tax rate. Where applicable we give you a tax offset to ensure that the correct tax rates are applied.

The inclusion of the post-June 1983 component in full in your assessable income may affect your entitlement to other tax offsets – for example, the senior Australians, beneficiary and low income tax offsets.

The assessable amounts of the other ETP components may similarly affect these tax offsets.

Excessive component – this component is taxed at a higher rate than the other ETP components. The tax rate is 45% plus Medicare levy if the ETP was paid by an employer and either, 38% or 45% plus Medicare levy if the ETP was paid by superannuation fund. We will calculate the tax on the excessive component for you.

TAXATION OF AN ETP WHEN YOU ARE AGED 55 YEARS OR OLDER

If you were aged 55 or older when you received your ETP and have a post-June 1983 component shown on your ETP payment summary, some or all of this portion of the ETP may be taxed at a lower rate. There is a limit to the amount of the post-June 1983 components that are taxed at the lower rate. This is called the low rate threshold. The limit is indexed each year.

The low rate threshold applies to the total of all your post-June 1983 components (taxed and untaxed), that you have received since 1 July 1988 provided you were 55 years or older at the time you received the ETP. The Tax Office keeps a record of the post-June 1983 components of ETPs paid to you and calculate whether the current ETP is below this limit.

Once the limit has been reached, you cannot use it in future years, though you may use any amounts added for annual indexation. If you exceed this limit you will pay tax on the amount in excess of the threshold at the rates set out in the table in the section How your tax is worked out.

If you turned age 55 on or after 1 July 1988 and you did not receive the benefit of the low rate threshold increased by indexation, write to the Tax Office. In the letter state your age at the time you received the ETP, the amount of the eligible termination  payment (ETP), the amount of the post-June 1983 component and the name and address of the payer. Enclose copies of any ETP group certificates or payment summaries you received from the payer. We will work out whether you are entitled to have the amount of tax on your ETP recalculated.

Low rate thresholds for 1988-1989 to 2006-2007

1988–89	$60,000		1998–99	$94,189
1989–90	$64,500		1999–2000	$97,109
1990–91	$68,628		2000–01	$101,188
1991–92	$73,776		2001–02	$105, 843
1992–93	$76,949		2002–03	$112,405
1993–94	$77,796		2003–04	$117,576
1994–95	$79,975		2004–05	$123,808
1995–96	$83,574		2005–06	$129,751
1996–97	$86,917		2006-07	$135,590
1997–98	$90,916
Taxation of an ETP that exceeded your RBL

Refer to Excessive component information in Taxation of ETP components.

Taxation of death benefit ETPs

Death benefit ETPs are taxed differently depending on who the payment has been made to.

A payment to a dependant of the deceased that has not exceeded the RBL is not taxable. If you received an RBL determination notice, the excessive component must be shown on your  tax return. The taxation of the excessive component is explained in Taxation of ETPs components.

A payment to a person who is not a dependant is taxed the same as other ETPs with the exception of the tax rates applicable to the post-June 1983 component. Refer to the information in Taxation of ETP components above.

A payment to the trustee of the deceased estate must be declared in the deceased estate’s trust tax return.

DEFINITIONS

Dependant

You were a dependant of the deceased if, at the time of death or the time the payment was made, you were:

•	the surviving spouse (including de facto)

•	a former spouse

•	a child of the deceased who was under 18 years old

•	financially dependent on the deceased or

•	in an interdependency relationship with the deceased.

DEFINITION:
Your spouse is your husband or wife to whom you are legally married, or a person who lives with you on a genuine domestic basis as your husband or wife. Under Australian law your husband or wife cannot be the same sex as you.

Excessive component

An excessive component is the amount by which your ETP has exceeded your RBL.

Interdependency relationship

An interdependency relationship exists if there is a close personal relationship between two people who live together and one or both provide for the financial, domestic and personal support of the other. An interdependency relationship can also exist if there is a close personal relationship but the other conditions are not satisfied because of the physical, intellectual or psychiatric disability of one of the people.

Non-qualifying component

This component is very rare. It relates to the earnings on annuities that were purchased with non-superannuation money and does not qualify for concessional tax rates.

Reasonable benefit limits

In 2006-07 the lump sum RBL is $678,149 and the pension RBL is $1,356,291. You may be entitled to the pension RBL if you take more than half of the value (for RBL purposes) of your benefits, or use more than half of your pension RBL as a pension or annuity which meets the pension annuity standards.

Death benefit ETPs are always measured against the pension RBL of the deceased person.

Rolled over ETP

You have rolled over your ETP if you transferred a part or all of it to a complying superannuation fund, retirement savings account or an approved deposit fund; or used a part or all of it to buy an annuity. If you rolled some or all of your ETP, you should have received an ETP roll-over statement from the payer. You do not need to declare the rolled over component of your ETP in your tax return at this stage. The tax payable on the rolled over component is deferred until you receive the benefit.


Item 6 Australian government pensions and allowances
	Australian Government pension and allowances
This topic covers:

Who does this item apply to?

You need to know

What you may need

Do not show at this item

Record keeping

Pre-filling your government payment details

WHO DOES THIS ITEM APPLY TO?

Complete this item if you received any of the following from Centrelink or the Department of Veterans' Affairs:

•	Age pension

•	Bereavement allowance

•	Carer payment

•	Disability support pension and you have reached age pension age

•	Education entry payment

•	Parenting payment (single)

•	Widow B pension

•	Wife pension and either you or your partner is of age pension age

•	Age service pension

•	Income support supplement

•	Defence Force Income Support Allowance (DFISA) where the pension, payment or allowance to which it relates is taxable

•	DFISA-like payment from the Department of Veterans’ affairs (DVA)

•	Invalidity service pension and you have reached age pension age

•	Partner service pension.

Show your income from these payments here unless your payment was exempt. Check exempt income if you are not sure.

YOU NEED TO KNOW

You may be entitled to a tax offset on this income.

Tax offsets reduce the amount of tax you have to pay.

You must work through item T2 Senior Australians tax offset and T3 pensioner tax offset to see if you are entitled to a tax offset. We work out your tax offset entitlement based on the tax offset code and veteran code (if applicable) that you enter on your tax return at these items.

Make sure you select the correct code letter(s) otherwise you may not receive your correct entitlement.

WHAT YOU MAY NEED

•	your PAYG payment summary – individual non-business or

•	a letter from the agency that paid your pension, allowance or payment stating the amount that you received

If you have not received this information, or you have lost it, contact the agency that paid you.

DO NOT SHOW AT THIS ITEM

•	exempt payments

•	Superannuation Act and Defence Forces Retirement Benefits Act pensions and payments – item 7

•	eligible termination payments – item 4

•	foreign pensions – item 19.

RECORD KEEPING

Attach your letter and/or your ‘Payees Tax Return Copy’ of your payment summary to page 3 of the printed copy of your tax return


’Had to live apart due to illness’ is a term that relates to the
payment of pensions. This would apply to you if you were paid
the pension at a higher rate because you were separated due to
illness. If you are unsure check with Centrelink or the Department
of Veterans' Affairs.


Item 7 Other Australian pensions or annuities
	Other Australian pensions or annuities
This topic covers:

Who does this item apply to?

You need to know

What you need

Do not show at this item

Further information

Undeducted purchase price

Superannuation tax offset

Senior Australians tax offset

Record keeping

WHO DOES THIS ITEM APPLY TO?

Complete this item if you received any income from an Australian

•	annuity

•	superannuation pension

•	pension not shown at item 6.

YOU NEED TO KNOW

Australian annuities and pensions include:

•	superannuation and similar pensions and annuities paid to you by an Australian superannuation fund, retirement savings account (RSA) provider or life assurance company, and

•	pensions paid by a fund established for the benefit of Commonwealth, state or territory employees and their dependants – for example, funds managed by ComSuper and VicSuper.

Also show at this item Australian annuities and pensions paid to you while you were still working.

WHAT YOU NEED

•	your PAYG payment summary – individual non-business or

•	a statement from your Australian annuity, superannuation, other pension fund or RSA provider.

If you have not received your payment summary or statement, or you have lost it, contact your payer to obtain a copy.

DO NOT SHOW AT THIS ITEM

Do not show foreign pensions or foreign annuities at this item. These amounts are dealt with at item 19.

FURTHER INFORMATION

Quoting your tax file number

NOTE:
If you have not given your tax file number (TFN) to your fund or RSA provider, they may withhold a greater rate of tax from your benefit than if you had provided it. You can phone or write to your fund or RSA provider and quote your TFN.
Superannuation funds and RSA providers also use TFNs to keep track of superannuation benefits.

Undeducted purchase price

If your annuity or pension has an undeducted purchase price, you can claim the deductible amount. See item D9.

Senior Australians tax offset

You may be entitled to the senior Australians tax offset – read item T2 to find out more about this tax offset.

Superannuation annuity and pension tax offset

You may be entitled to a tax offset for your annuity or pension. Read item T4 to find out more about this tax offset.

RECORD KEEPING

Attach all statements and/or all your payment summaries to page 3 of the printed copy of your tax return.


Item 8 Attributed personal services income
	Attributed personal services income
This topic covers:

Who does this item apply to?

What you need

Do not show at this item

You need to know

Record keeping

WHO DOES THIS ITEM APPLY TO

Complete this item if you have personal services income attributed to you from a company, partnership or trust.

If you have received a PAYG Payment summary – personal services attributed income, you must complete this item.

WHAT YOU NEED

•	your PAYG Payment summary – personal services attributed income showing the amount of personal services income attributed to you and the total amount of tax paid or withheld

•	details of any other personal services income attributed to you.

If you do not have all your documents, contact the person who paid you.

DO NOT SHOW AT THIS ITEM

Where you have provided personal services for reward and the payment for your services was made to you as a sole trader, you should not show these amounts here. In that case you must answer item 13 and complete the e-tax Business and professional items schedule.

Do not show at this item amounts shown on a PAYG payment summary – individual non business. You should have already shown these amounts at item 1 Salary or wages or, item 2 Allowances, earnings, tips, director's fees etc..

YOU NEED TO KNOW

There are special rules for the income tax treatment of certain personal services income.

Personal services income is income that is mainly a reward for your personal efforts or skills and is generally paid either to you or to a personal services entity (a company, partnership or trust).

Where the payment has been made to a personal services entity, the income (less any deductions allowable to the personal services entity in gaining or producing the personal services income) will be attributed to you unless:

•	the personal services entity gained the income in the course of conducting a personal services business; or

•	the income has been promptly paid to you by the entity as salary.

You can find an explanation of the rules relating to the attribution of personal services income in Taxation Ruling TR2003/6: attribution of personal services income.

Where the personal services entity has a net personal services income loss relating to your personal services income there is no amount attributed to you. You are entitled to a deduction for the loss and you must answer question D15 Deferred non-commercial business losses.

If you need help in relation to these rules phone the Business Infoline on 13 28 66 or visit the Tax Office website – www.ato.gov.au.

RECORD KEEPING

Attach the ‘Payee's Tax Return Copy’ of your payment summary to the printed copy of your tax return.


Items 1 and 3 Salary, wages or lump sum payments
	Salary, wages or lump sum payments
This topic covers:

Who does this item apply to?

Salary or wages

You need to know

What you may need

Show at this item

Do not show at this item

Lump sum payments

What you may need

Do not show at this item

Further information

What are the amounts at A or B?

Type code

Record keeping

See also: Exempt income

WHO DOES THIS ITEM APPLY TO?

Complete this item if:

•	you received payments of salary, wages, commissions, bonuses etc., including income earned from part-time and casual jobs, from which tax was withheld OR

•	you received any lump sum payments for unused annual leave or unused long service leave.

NOTE:
 -  Employers are payers.
 -  Employees are payees.

SALARY OR WAGES

YOU NEED TO KNOW

Late, lost or wrong payment summaries, letters or signed statements from your payer

If you do not have all of your documents, or any documents is wrong, contact your payer. Ask your payer to give you a signed copy of your payment summary, or a letter or signed statement showing the correct details.

If you are unable to obtain these documents from your payer you will need to complete the Statutory Declaration for PAYG payment summary – individual non-business and ETP payment summary (NAT 4135) and retain it with a printed copy of your tax return for your taxation records. You will need a separate statutory declaration for each payer for whom you have no documents.

This statutory declaration identifies the categories of information you need to show on your tax return, such as the period or periods covered by your missing documents during which payments were made, the names of your payers, the amounts of tax withheld and the amount of gross payments you earned.

NOTE:
You no longer need to attach payment summaries (or statutory declarations for missing payment summaries) to your tax return, other than those for eligible termination payments if you are sending a printed copy of your e-tax return. Generally you must keep your payment summaries and statutory declarations for five years see Record Keeping below.

WHAT YOU MAY NEED

To complete this item you need your PAYG payment summary – individual non business which shows:

•	your gross income (in the ‘Gross payments’ box on your payment summary),

•	total tax withheld, and

•	your payer’s Australian business number (ABN) or withholding payer number (WPN).

SHOW AT THIS ITEM

Include payments for lost salary or wages paid under an accident or insurance policy or worker's compensation scheme if tax was withheld from the payment.

If you received income for work or services performed in the Joint Petroleum Development Area (JPDA), you will need a copy of the JPDA Fact Sheet to work out how to deal with your JPDA income at this item.

DO NOT SHOW AT THIS ITEM:

•	amounts shown on any payment summary other than the PAYG payment summary – individual non business – item 8, item 13 and item 14

•	Australian Government pensions, allowances and payments – item 5 and item 6

•	amounts paid from a Community Development Employment Project (CDEP) – item 5

•	amounts in the ‘Allowances’ and ‘Lump sum payments’ boxes on your payment summary – item 2

•	amounts in the ‘Other income’ box on your payment summary – if this is exempt income you will not need to show that amount on your tax return; if this is foreign employment income – item 19

•	foreign employment income (including working overseas) – item 19

•	reportable fringe benefits amounts – item 9

•	income from an Australian annuity or superannuation pension – item 7

•	income paid to you as a partner in a partnership – item 12

Otherwise you may be taxed incorrectly.

LUMP SUM PAYMENTS

WHAT YOU MAY NEED

•	your PAYG payment summary – individual non business showing an amount at ‘A’ or ‘B’ in the lump sum payments box or

•	a signed copy, letter or statement from your payer

DO NOT SHOW AT THIS ITEM

•	approved early retirement scheme payments and bona fide redundancy payments shown as lump sum ‘D’ on your payment summary. These amounts are often paid at the same time as an eligible termination payment (ETP). Lump sum D amounts are not taxed and are not shown as income at any item on your tax return. If you received an ETP, you should complete item 4 Eligible termination payments; or

•	lump sum payments in arrears shown as lump sum ‘E’ on your payment summary. These amounts are dealt with at item 22 Other income.

FURTHER INFORMATION

Lump sum payments are amounts paid for unused annual leave or unused long service leave. If you have received a lump sum payment it will appear at either label ‘A’ or ‘B’ on the payment summary or statement you received.

Lump sum payment A

The amount at ‘A’ was paid to you:

•	for unused long service leave that accrued after 15 August 1978 if you left your job because of bona fide redundancy, invalidity or under an approved early retirement scheme

•	for unused annual leave if you left your job because of bona fide redundancy, invalidity or under an approved early retirement scheme

•	for unused long service leave that accrued after 15 August 1978 and before 18 August 1993 if you did not leave your job because of bona fide redundancy, invalidity or under an approved early retirement scheme, or

•	for unused annual leave that accrued before 18 August 1993 if you did not leave your job because of bona fide redundancy, invalidity or under an approved early retirement scheme.

Lump sum payment B

The amount at ‘B’ was paid to you for unused long service leave which you accumulated before 16 August 1978.

Type code

If you left your job because of bona fide redundancy, invalidity or under an approved early retirement scheme, enter R in the Type column. Check with your payer if you are not sure. Otherwise enter T in the Type column.

RECORD KEEPING

You need to keep these records for five years from the date you lodge your tax return, or if the Commissioner has determined that you are subject to shorter period of review, for that period.


 1&3 Salary or wages

Do not show at this item:

•	amounts shown on any payment summary other than the PAYG payment summary – individual non business – item 8, item 13 and item 14

•	Australian Government pensions, allowances and payments – item 5 and item 6

•	amounts paid from a Community Development Employment Project (CDEP) – item 5

•	amounts in the ‘Allowances’ box on your payment summary – item 2

•	amounts in the ‘Other income’ box on your payment summary. If this is exempt income you will not need to show that amount in your tax return. If this is foreign employment income – item 19.

•	foreign employment income – item 19

•	reportable fringe benefits amounts – item 9

•	income from an Australian annuity or superannuation pension – item 7

•	income paid to you as a partner in a partnership – item 12

•	approved early retirement scheme payments and bona fide redundancy payments shown as lump sum D on your payment summary. These amounts are often paid at the same time as an eligible termination payment (ETP). Lump sum D amounts are not taxed and are not shown as income at any item on your tax return. If you received an ETP, you should complete item 4

•	lump sum payments in arrears shown as lump sum E on your payment summary – item 22.


Total income or loss

e-tax will calculate your total income or loss.

Please note the following.

•	Refer to exempt income for a list of the most common types of exempt income. Generally your exempt income is not included in your tax return.

•	You must have shown all of your income for tax purposes – the Taxpayer's declaration in your electronic tax return will require you to sign that this is true. If you still have income that you have not put at any item and it is not exempt income, you will need to go back through the income section and include it.

If you are in any doubt, phone the Personal Tax Infoline.

Our audit activities include checking the income details you provide in your tax return with other sources – for example, your employer, your bank or the Australian Government agency that pays your pension, allowance or payment.

If you have not been able to complete one or more of items 1 to 22 because you do not have all the documents you need to work out the right amount – for example, you are missing a payment summary – do not complete this section yet.

Remember that you have until 31 October 2007 to lodge your tax return, unless prepared by a registered tax agent. Registered tax agents are the only people who can prepare and lodge your tax return for a fee. You should not lodge your tax return early if it is incomplete. If you think you will still be missing information at 31 October, ask the Tax Office if you can lodge at a later date. When should you lodge your tax return? tells you how.


ATO password
Tax Office password

Prior to lodging electronically, you will need to verify your identity over the internet. To verify your identity, you will be asked to provide information that will be matched against information held on the Tax Office’s database.

When you have successfully matched your details you will be issued with a password. You will then be asked to use that password to lodge electronically.

STEP 1	Eligibility
	You are eligible to obtain a password from the Tax Office: • If you lodged either o a tax return, or o a refund of franking credits application, or o a baby bonus claim for any of the previous 5 years, you will need an original or amended Notices of Assessment from any of  those years provided it was issued before 2 June 2007. • If you have not lodged a tax return, refund of franking credits application or baby bonus claim before, you will need your Tax File Number. Your tax file number must have been notified to you before 2 June 2007.
STEP 2	Verify your identity
	If you are eligible to obtain a password, you will be asked to provide information that will allow the Tax Office to verify your identity over the internet. After entering the information, click on Next. You will need to be connected to the internet. The information you entered will be submitted to the Tax Office to be checked against the Tax Office’s records. If the data does not match, an error will be displayed advising you what details need correcting. You will not receive a password until you correct all errors. If the data does match, you will proceed to STEP 3.
STEP 3	Your Password
	When you have successfully verified your identity, your password will be displayed within the e-tax software. Please write down or print your password. The password displayed is required during the lodgment process. At this stage, your return is NOT YET LODGED.


Lodgment review

Your file has now passed all the Tax Office electronic lodgment validation checks.

e-tax will now check your file for consistency. e-tax will bring to your attention items that you may like to review before you lodge. For example:

If you want to review your answers to any of these items follow these steps:

STEP 1	Click on the item you want to review. It will be highlighted.

STEP 2	Click on the Next button. e-tax will move to the interview screen which includes your answer to this item.

STEP 3	Step through the e-tax interview questions to review your answers for this item. When you have finished, click on Lodgment in the navigator to return to this review screen.

When your review is complete, click on Yes. e-tax will move to the next screen in the lodgment process – the taxpayer's declaration.


Lodging electronically

Once you have verified your identity, you can proceed to lodge electronically.

STEP 1	Enter your password

You will need to enter your password.

After entering your password, click on Lodge to the Tax Office. You will need to be connected to the internet.

The password you entered will be checked to ensure that it is your password.

If the password you entered is not your password, an error will be displayed. Your lodgment will not be successful until you enter your password.

If you enter your correct password, your lodgment will be sent to the e-tax Web Server using a secure link (SSL). A status bar will be displayed showing the progress of this step.

STEP 2	Lodgment confirmation

Upon receiving your lodgment, the e-tax Web Server will allocate a unique number (Lodgment reference number) and record its receipt in the Tax Office’s lodgment database. The lodgment is then copied to the Tax Office’s Lodgment Server ready for decryption (the reverse of encryption).

Your Lodgment reference number will be displayed within the e-tax software. Please write down or print your lodgment details as you may have to quote your lodgment reference number if you contact the e-tax help desk.


Post lodgment

Upon successful lodgment, your e-tax 2007 file has now been locked to preserve your lodgment details. You will not be able to change the information contained in this file. However, you can continue to view the details of your tax return and baby bonus claim (if you completed a baby bonus claim).

WHEN WILL YOU RECEIVE YOUR REFUND?

The Tax Office’s standard for processing e-tax returns is two weeks. However, please wait three weeks before calling the Tax Office to check the progress of your return.

If you owe tax, your tax is payable 21 days after your tax return is due for lodgment. This means that even if you receive your notice of assessment before 31 October 2007, your tax will not be payable until at least 21 November 2007.

WHAT DO YOU DO WITH YOUR TAX RECORDS (FOR EXAMPLE, PAYMENT SUMMARIES)?

You do not need to send any documentation to the Tax Office. However, you will need to keep your tax return and all documents supporting your claims. Refer to Keeping copies of all your tax records.

DO YOU WANT TO MAKE YOUR 2008 TAX RETURN PREPARATION EASIER?

Use e-tax to prepare your 2008 tax return and you may be able to roll over information from your 2007 e-tax return. Roll over is a feature which automatically transfers information from your 2007 tax return, that is stored on your computer, into your 2008 tax return.

The roll over function will transfer details such as names and addresses, descriptions from tables, rental property details and capital allowance asset worksheets.

To utilise the roll over function in e-tax 2008, you will need to keep your e-tax 2007 file (for example, your ‘Michaelstax.tax’ file).


Taxpayer's declaration

Read the declaration displayed in the e-tax screen. If you want to continue with the lodgment process, click on the Yes button.

I declare that:

•	all the information I have given on this tax return, including any attachments and additional information, is true and correct

•	I have shown all my income – including net capital gains – for tax purposes for 2006-07

•	I have completed and attached the supplementary section, schedules and other attachments – as appropriate – that e-tax has asked me to provide

•	I have completed item M2 – Medicare levy surcharge

•	I have the necessary receipts and/or other records – or expect to obtain the necessary written evidence within a reasonable time of lodging this tax return – to support my claims for deductions, tax offsets and family tax benefit AND

•	I have obtained spouse's written consent to quote their tax file number and to transfer the child care tax rebate to them.

Baby Bonus Claim (if you needed to complete one)

•	I have determined that I am eligible to claim the Baby bonus

•	if transfer details are completed I have also completed the 2007 baby bonus transfer agreement and I understand this cannot be changed or revoked.

The Tax Office will issue your assessment based on your tax return. However, the Tax Office has some time to review your tax return, and issue an amended assessment if a review shows inaccuracies that change the assessment. The standard review period is two years, but for some taxpayers it is four years.

The tax law imposes heavy penalties for giving false or misleading information.


Non-lodgement advice
Non-lodgment advice

If you do not need to lodge a tax return, e-tax will generate a Non-lodgment advice form for you. You may need to print and send this form to the Tax Office.

Do not send us this form if one of the following applied to you:

•	You have previously sent The Tax Office  a tax return or non-lodgment advice, a form or a letter telling the Tax Office that you do not need to lodge a tax return for all future years.

•	You are lodging a baby bonus claim and/or applying for a refund of franking credits for 2007.

•	Your only income was from an allowance or payment listed at item 5 OR you received a pension, allowance or payment listed at item 6 and your taxable income was less than the relevant amount in REASON 2 (if you are eligible for the senior Australians tax offset) or REASON 3. (The agencies that pay these have provided information for us to determine that you do not need to lodge a tax return.)

PRINTING YOUR NON-LODGMENT ADVICE FORM

STEP 1	Click on the grey Print Non-Lodgment Advice form button in the centre of the screen.

e-tax will display the form in the Print preview screen. Click on the Print button to begin printing.

STEP 2	When you have successfully printed the form, click on the Close button to exit e-tax.

STEP 3	Sign and date the form and send it to the Tax Office.


 Non-lodgment advice

Do not send us this form if one of the following applied to you:

•	You have previously sent The Tax Office  a tax return or non-lodgment advice, a form or a letter telling the Tax Office that you do not need to lodge a tax return for all future years.

•	You are lodging a baby bonus claim and/or applying for a refund of franking credits for 2007.

•	Your only income was from an allowance or payment listed at item 5 OR you received a pension, allowance or payment listed at item 6 and your taxable income was less than the relevant amount in REASON 2 (if you are eligible for the senior Australians tax offset) or REASON 3. (The agencies that pay these have provided information for us to determine that you do not need to lodge a tax return.)


Item A1 Under 18
	Under 18
This topic covers:

Who does this item apply to?

You need to know

Further information

Completing this item in e-tax

WHO DOES THIS ITEM APPLY TO?

If you were under 18 years of age on 30 June 2007 you must complete this item or you will be taxed at a higher rate than necessary.

You will only be able to access this item in e-tax if you have told us you were under 18 years of age on 30 June 2007.

YOU NEED TO KNOW

There are different rates of tax for different types of income. To make sure you are paying the right rate, complete this item.

Did any of the following apply to you as at 30 June 2007?

•	You:

o	were working full-time or had worked full-time for three months or more in 2006-07 (ignoring full-time work that was followed by full-time study)

AND

o	were intending to work full-time for most or all of 2007-08, and not study full-time

•	You were entitled to a disability support pension or a rehabilitation allowance, or someone was entitled to a carer allowance to care for you.

•	You were permanently blind.

•	You were disabled and were likely to suffer from that disability permanently or for an extended period.

•	You were entitled to a double orphan pension and you received little or no financial support from your relatives.

•	You were unable to work full time because of permanent mental or physical disability and you received little or no financial support from your relatives.

If you were in any of the above categories on 30 June 2007, all of your income will be taxed at normal rates. This is all you need to read at this item. Otherwise read on.

Excepted net income is taxed at normal rates

‘Excepted net income’ is the sum of specified types of income after relevant deductions are taken into account. Excepted net income is taxed at normal rates.

Excepted income could include:

•	employment income

•	taxable pensions or payments from Centrelink or the Department of Veterans' Affairs

•	a compensation, superannuation or pension fund benefit

•	income from a deceased person's estate

•	income from property transferred to you as a result of another's death or family breakdown, or to satisfy a claim for damages for an injury you suffered

•	income from your own business

•	income from a partnership, in which you were an active partner

•	net capital gains from the disposal of any of the property or investments referred to above

•	income from investment of amounts referred to above.

NOTE:
If you received a distribution from a trust, read item 12.

FURTHER INFORMATION

Completing this item in e-tax

Add up all your excepted income that you have shown on your tax return and enter it in the box in the e-tax screen. (Although you will be showing this income twice, you will not be taxed twice.)

Enter the total of the deductions that relate to this income in the box provided. e-tax will take away the total deductions from the income to work out the net income. This income will be taxed at normal rates. A higher rate of tax will apply for your other income. For more information, phone the Personal Tax Infoline.

e-tax will print the code letter M to your return at item A1.

EXAMPLE

Joshua is a school student who works part time at a supermarket.  He earned $2,200 in 2006-07 and is entitled to a deduction of $100 for protective clothing.  At step 1 he enters $2,200 and at step 2 he enters $100.  e-tax works out the excepted net income to be $2,100 and writes that amount at J item A1 and puts M in the TYPE box.


Item A2 Part-year tax-free threshold
	Part-year tax-free threshold
This topic covers:

Who does this apply to

You need to know:

Adjusting the tax-free threshold

Becoming or ceasing to be an Australian resident

WHO DOES THIS APPLY TO

Complete this item if, in 2006-07 you:

•	become an Australian resident, or

•	stop being an Australian resident.

YOU NEED TO KNOW

Adjusting the tax-free threshold

To work out the tax on your taxable income you need to know your tax-free threshold. This is the amount of income you can earn before tax must be paid.

The full year tax-free threshold is $6,000. The tax-free threshold may apply to you for only part of the year and is therefore a proportion of the full-year tax-free threshold.  If this item applies to you, your tax-free threshold may need to be adjusted.

e-tax will use the information you enter at this item to determine the number of months for which you are entitled to the tax-free threshold. e-tax writes the number of months to label N item A2 on your tax return. e-tax will also calculate and display your threshold.

Becoming or ceasing to be an Australian resident

If you are unsure read Are you an Australian resident?.

Residents are entitled to a tax-free threshold (currently $6,000 per year). Non-residents are not entitled to a threshold. Where a person changes their residency during the year they are entitled to a pro-rated threshold (currently $500 for each part or full month of residency). If your residency changed, you must tell e-tax whether you were in receipt of certain Australian Government pensions or allowances as you may be excluded from the pro-rating based on change of residency.

If you want to know how your tax-free threshold is worked out, read What you need to know before you can work out your tax refund or tax debt.


Item A3 Amount on which family trust distribution tax has been paid
	Amount on which family trust distribution tax has been paid
This topic covers:

Who does this item apply to?

You need to know

WHO DOES THIS ITEM APPLY TO?

Complete this item if a trust, company or partnership distributed anything to you for 2006-07 on which family trust distribution tax has been paid.

Distributions on which family trust distribution tax is payable may include:

•	income or property from a trust or partnership

•	dividends or property from a company

•	the use of property owned by the trust, partnership or company for which you have not paid full value, such as the free use of a holiday house.

The trust, partnership or company should be able to tell you if family trust distribution tax has been paid on a distribution to you.

YOU NEED TO KNOW

Family trust distribution tax is payable on any distribution made to a person outside a ‘family group’ by a trust which has elected to be a family trust; or by a trust, partnership or company which has elected to be included in the family group of a family trust.

To the extent that family trust distribution tax has been paid on a distribution to you, the part of that distribution that is included in your assessable income is reduced proportionately. However, any part of the distribution that would have been included in your assessable income if family trust distribution tax had not been paid – reduced by any expenses that would have been deductible against it – is taken into account in determining your liability for the Medicare levy surcharge. This is the amount that should be shown at this item.

EXAMPLE

During 2006-07 the Jones family trust distributed income of $1,000 to Anne-Marie. The Jones family trust had elected to be a family trust from before the time the distribution was made but, because Anne-Marie is not a member of the family group of the Jones family trust, family trust distribution tax is payable on the $1,000 distribution. This was paid in full by the trustee of the Jones family trust.

As a result, Anne-Marie does not include in her assessable income any part of the $1,000 distribution. Anne-Marie shows at this item the $1,000 distribution from the Jones family trust less any expenses that would have been deductible against it.

However, had family trust distribution tax not been paid, Anne-Marie would have had to include in her assessable income any part of the distribution that was assessable.


Item C1 Credit for interest on early payments
	Credit for interest on early payments – amount of interest
This topic covers:

Who does this item apply to?

You need to know

What you need

Further information

How your interest is worked out

WHO DOES THIS ITEM APPLY TO?

Complete this item if, during 2006-07, you made any of the following payments to the Tax Office more than 14 days before the due date - that is, an early payment of:

•	income tax (including Medicare levy) shown on your notice of assessment

•	Higher Education Contribution Scheme (HECS) assessment debt shown on your notice of assessment

•	Higher Education Loan Programme (HELP)  compulsory repayment amount shown on your notice of assessment

•	Student Financial Supplement Scheme (SFSS)  assessment debt shown on your notice of assessment

•	interest on distributions from non-resident trust estates

•	an income tax penalty for the 1999-2000 and earlier income years

•	a general interest charge for lodging a late income tax return for income years up to and including 1999-2000

•	a general interest charge on the shortfall of tax relating to an amended assessment for income years up to and including 1999-2000, or

•	a shortfall interest charge

YOU NEED TO KNOW

You can claim for the interest on early payment either by writing to the Tax Office for a direct payment or by completing this item. If you have already requested the direct payment of interest on your early payment, do not claim interest at this item.

The following are not early payments:

•	pay as you go (PAYG) withholding amounts including :

o	amounts withheld from interest, dividends and royalties

o	amounts withheld by payers, including those withheld for HECS, HELP and SFSS

•	PAYG instalments.

For more information, read Interest on early payments and overpayments of tax 2007 (NAT 2277-6.2007) or chapter 82 of the ATO Receivables Policy 'Interest on Early Payments’.

The interest you receive will need to be shown as income on your tax return for the year in which the Tax Office paid or credited the interest to you.

The interest period starts on the date you made your payment or the issue date of your notice informing you of the amount of tax, debt, interest or instalment, whichever is the later. The interest period ends on the due date for payment. For example, a notice of assessment issued to you on 19 September 2006, showed an amount of tax payable. If the amount was due on 21 November 2006 but you paid early, on 1 November 2006, the interest period would be 21 days - 1 November to 21 November.

The interest rate applying for each quarter of 2006-07 is shown below:

Interest rates for early payments calculation

Period	Interest rate (% p.a.)
1 July 2006 to 30 September 2006	5.87
I October 2006 to 31 December 2006	6.19
I January 2007 to 31 March 2007	6.37
1 April 2007 to 30 June 2007	6.37
WHAT YOU NEED

•	notification from the Tax Office showing the date of the notice, the amount owing and the due date

•	details of your date of payment - shown on your bank statement or receipt from the post office or the Tax Office. Allow three extra days if you posted your payment.

FURTHER INFORMATION

e-tax will work out the amount of interest you are entitled to. If you want to know how this is done read How your interest is worked out.

If the amount is less than 50 cents, you cannot claim.


C1 How your interest is worked out

If the early payment extends over two or more interest periods, you will need to do steps 1 to 4 for the number of days in each period.

Follow these steps to work out the amount of interest you can claim for early payments:

STEP 1	Work out by how many days your payment was early. This is the number of days from either the date you paid the amount or the issue date on your notice informing you of the amount of tax, debt, interest or instalment - whichever is the later - up to and including the date when the payment was due.

STEP 2	Divide the number of days from step 1 by 365.

STEP 3	Multiply the answer you got at step 2 by the amount of the payment.

STEP 4	Multiply the answer from step 3 by the rate of interest for the period and divide by 100. For example, for the period 1 July 2006 to 30 September 2006, multiply by 5.68 and divide by 100.

STEP 5	Add up the amounts for each period in step 4.

STEP 6	If the amount from step 5 is equal to or greater than 50 cents, this is your claim. If the amount is less than 50 cents, you cannot claim.


Are you an Australian resident?

The tax rates that apply to your taxable income depend on whether or not you are an Australian resident. A higher rate of tax is applied to a non-resident's taxable income and non-residents are not entitled to a tax-free threshold.

The standards the Tax Office uses to determine your residency status are not the same as those used by the Department of Immigration and Citizenship or Centrelink.

Generally, the Tax Office considers you to be an Australian resident for tax purposes if:

•	you have always lived in Australia or you have come to Australia and live here permanently or

•	you have been in Australia continuously for six months or more and for most of that time you worked in the one job and lived at the same place, or

•	you have been in Australia for more than half of the income year 2006-07 – unless your usual home is overseas and you do not intend to live in Australia.

If you go overseas temporarily and you do not set up a permanent home in another country, we may continue to treat you as an Australian resident for tax purposes.

Overseas students who come to Australia to study and are enrolled in a course that is more than six months long are generally treated as Australian residents for tax purposes.

If you need help in deciding whether or not you are an Australian resident for tax purposes, you can go to our Are you a resident? tool on our website or phone the Personal Tax Infoline.

IMPORTANT:
If your residency status for tax purposes has changed during 2006-07, you will need to complete item A2. We need this information to work out your tax-free threshold.


Electronic funds transfer (EFT)

DIRECT REFUND

Using electronic funds transfer (EFT) the Tax Office can deposit your tax refund, family tax benefit payment and/or baby bonus directly into an Australian bank, credit union or building society account of your choice. An EFT deposit will give you quicker access to your money. Direct deposit of your refund is not available on the full range of accounts. If you are in doubt, check with your financial institution.

IMPORTANT:
Make sure your account details are correct – if you give another person’s account details, your refund will be sent to that account. If you used a tax agent last year but are preparing your own tax return this year, remember to provide the account details of your chosen account.

If you do not want to use EFT this year, click on No to move to the next screen in e-tax. Otherwise, read on.

STEP 1	Enter the bank state branch (BSB) number. This is a six-digit number that identifies the financial institution. The BSB number can be found on an account statement or a cheque form. See the example below.

If you do not know the BSB number, or it has less than six digits, or is for a credit union account, check with the financial institution. Do not include spaces, dashes or hyphens in the BSB number.

STEP 2	Enter the account number as shown on the account records. See the example below. An account statement, cheque book or other document from the financial institution will show this information. You cannot use an account number longer than nine characters (numbers or letters). Contact your financial institution if you need to check that an account is suitable for direct refund. Do not include spaces in the account number.

STEP 3	Enter the account name – also called account title – as shown on the account records.

Do not enter the account type – for example, savings, cheque, mortgage offset.

See the Account name instructions and the example below.

Account name instructions

If your name was John Q Citizen, you might have an account with the account name shown as JQ Citizen or John Q and Mary Citizen or another variation. Quote the account name as it is shown on the account records. Include a space between each word and between any initials in the account name.

STEP 4	Click on the Next button to move to the next screen in e-tax.

NOTE:
If you need any more information on using EFT for direct refund, phone the EFT helpline 1800 802 308.

DIRECT DEBIT

If you have a tax debt, your notice of assessment will show a due date for payment. If you want to pay using EFT direct debit from your account, phone the EFT infoline on 1800 802 308.

If you have provided us with a Direct debit request, but your notice of assessment does not state that the payment will be debited from your account, phone the EFT infoline.

Finding BSB number, account number and account name details on a bank or building society cheque (not credit union cheques)


Personal details

Hint	Press the <Tab> key to move to the next box (entry field) in the screen. To move backwards between boxes press and hold down the <Shift> key and then press the <Tab> key.

To delete an entry that was loaded from a list you must first highlight the field and then press <Backspace>.

Please carefully complete the personal information items in the Getting Started section of e-tax. These include questions about your name, address, date of birth and contact telephone number.

e-tax will use the information you enter in this section to complete the personal details section of the tax return and/or any other documents you may have to lodge with the Tax Office; for example, a Non-lodgment advice. You will not be asked to re-enter this information anywhere else in e-tax.

POSTAL ADDRESS

This is the address that your mail is sent to.

HOME ADDRESS

This is the address that you live at.

These addresses may be different, for example, where you have a Post Office Box for mail delivery.

For Overseas address delete the State information. To delete an entry that was loaded from a list you must first highlight the fields and then press <Backspace>.

 	Refer to data entry for more information on how to use these data entry screens.


Simplified tax system
Simplified tax system (STS) elections

This topic covers:

Who does this item apply to?

You need to know

Eligibility

Look back method

Look forward method

Exiting from the STS

WHO DOES THIS ITEM APPLY TO?

Only complete this item if you are eligible to enter or continue in the STS and want to do so, or are exiting from the STS.

e-tax will use your answers to complete item S1 Simplified tax system (STS) election in the Business and professional items schedule 2007.

YOU NEED TO KNOW

The STS provides an alternative method of determining taxable income for eligible small businesses. The STS has two key elements:

•	simplified capital allowances (depreciation) rules, and

•	simplified trading stock rules.

In addition, the STS 12-month rule allows an immediate deduction for prepaid expenses where the payment is incurred for a period of service not exceeding 12 months AND the period of service ends in the next income year.

Entry to the STS is optional if you satisfy the eligibility tests.

NOTE:
When the STS began on 1 July 2001, an STS taxpayer was required to account for most business income when it was received, and most business expenses when they were paid. This is referred to as the STS accounting method.

From the first income year starting on or after 1 July 2005, you are no longer required to use the STS accounting method. You are now able to calculate your taxable income using the most appropriate method for your circumstances. However, if you were an STS taxpayer in an income year that started before 1 July 2005 then while you continue to be an STS taxpayer (from the first income year that starts on or after 1 July 2005), you can choose to continue using the STS accounting method.

If you choose not to continue using the STS accounting method, you will be able to calculate your taxable income using either:

 -  the accruals (earnings) method, that is ordinary income is recognised when it is derived
     and general deductions are recognised when they are incurred, or
 -  the cash (receipts) method, that is ordinary income is recognised when it is received and
     general deductions are recognised when they are paid or alternatively, when incurred

whichever is the most appropriate method for your circumstances.

Where you choose not to continue using the STS accounting method, business income and expenses that have not been accounted for (because they have not been received or paid) will be accounted for in the year you change to the accruals or cash method.

If you choose to enter the STS, you must apply both the simplified capital allowances (depreciation) rules and the simplified trading stock rules, if they apply to you.  As an STS taxpayer if you have non-business income, such as salary and wages, you can also claim a deduction for depreciating assets used in earning your employment income under the STS depreciation rules. The simplified capital allowances rules apply to your non-business income and deductions as well as to your business income and deductions. However, the STS capital allowances (depreciation) rules do not apply to depreciating assets used in rental properties.

If you choose to leave the STS, you cannot re-enter the STS again until at least five years after the income year for which you were last an STS taxpayer. If you must leave the STS because you are no longer eligible, you can become an STS taxpayer again for an income year as soon as you are eligible.

For more information about the STS, refer to The Simplified Tax System: A guide for tax agents and small businesses (NAT 6459) or phone the Business Infoline on 13 28 66 or visit the Tax Office website on www.ato.gov.au.

If you want to enter the STS and are eligible to do so, e-tax will use your answers to complete G, H and I item S1 in the Business and professional items schedule 2007. If you want to continue in the STS and are eligible to do so, e-tax will use your answers to complete G, R and I item S1.

If you are exiting from the STS, e-tax will use your answers to complete S or T item S1. Go to Exiting from the STS below.

If you are not eligible to enter the STS or are eligible but do not want to enter the STS this section of the e-tax interview does not apply to you.

NOTE:
If you are a partner in a partnership and the partnership is eligible and wants to enter the STS, the election to enter must be made at item 3 in the partnership’s tax return. You do not complete item S1. If you carry on a business separate to the partnership and you are eligible to enter the STS, you can also elect to enter the STS by completing item S1.

Eligibility

Are you eligible to enter the STS?

To be eligible to be an STS taxpayer for an income year, a taxpayer must satisfy three tests. They must:

•	carry on a business in that year

•	have an STS average turnover for that year of less than $1 million (including the turnover of any entities that they are ‘grouped with’ and

•	together with any grouped entities, hold depreciating assets with a total adjustable value at the end of the year of less than $3 million.

Proposed changes to the STS

In the 2006 Federal Budget the government announced changes to the STS which will apply from the start of the 2007-08 income year.

These proposed changes will increase the STS average turnover threshold to $2 million and remove the $3 million depreciating asset test from the STS eligibility requirements.

Grouping rules

Special rules called the STS grouping rules will determine who the taxpayer is ‘grouped with’. These rules prevent larger businesses from structuring or restructuring their affairs to take advantage of the STS. For more information on the grouping rules, see Taxation Ruling TR 2002/6 – Income tax: Simplified Tax System: eligibility – grouping rules (STS affiliate, control of non fixed trusts) or phone the Business Tax Infoline on 13 28 66.

Test 1:	Were you carrying on a business during the year?

If you carried on a business at any time during the year you satisfy this test. Go to test 2.

Test 2:	Is your STS average turnover less than $1 million?

You work out your STS average turnover for an income year either by looking back to actual turnover in previous years, or by looking forward to estimated future turnover.

Before you can work out your STS average turnover you need to know your STS group turnover.

Your STS group turnover is the value of business supplies you make in the ordinary course of your business and the value of business supplies any businesses you are grouped with make in the ordinary course of their business.

It does not include any business supplies made between you and businesses you are grouped with. For more information, phone the Business Infoline on 13 28 66 or see Taxation Ruling TR 2002/11 – Income tax: Simplified Tax System eligibility – STS average turnover.

Look back method

Under the look back method, you calculate your STS average turnover using the average of your STS group turnovers of any three years out of the previous four income years (excluding the current year).

If you have been in business for fewer than three years, you will need to calculate your STS average turnover for the number of years you have been in business (excluding the current year).

If your business has operated for only part of any of those years, you must use a reasonable estimate of what your turnover would have been if you were in business for the full year.

Use the following table to assist you with your calculation.

Income year	STS group turnover
2002-03	$________________
2003-04	$________________
2004-05	$________________
2005-06	$________________
Cross out the largest turnover amount if you have been in business for each of the four income years.

Total of the three* years	$________________
	Divide by 3*
STS average turnover	$________________
*or the number of years you have been in business if less than three years

If your STS average turnover is less than $1 million you satisfy this test. Go to test 3. Otherwise read on.

Look forward method

Under the look forward method you calculate your STS average turnover using a reasonable estimate of STS group turnovers for the current year and the following two years (ignoring any of those years for which you do not expect to be carrying on a business at any time in that year). Alternatively, you can use your actual STS group turnover for the current year and a reasonable estimate of your STS group turnover for each of the following two income years (ignoring any of those years for which you do not expect to be carrying on a business at any time that year).

If your business (or a grouped entity) has operated for only part of the current year, you must use a reasonable estimate of what your STS group turnover for this year would have been if you (or the grouped entity) had carried on a business throughout this year.

Use the following table to assist you with your calculation.

Income year	STS group turnover
2006-07	$________________
2007-08	$________________
2008-09	$________________
Total of the three* years	$________________
	Divide by 3*
STS average turnover	$________________
*or the number of years you expect to be in business if less than three years

If your STS average turnover is less than $1 million you satisfy this test. Go to test 3.

Test 3:	 Did you and any businesses you were grouped with have depreciating assets with a total adjustable value of less than $3 million at 30 June 2007?

This test only includes depreciating assets for which a deduction has been allowed or is allowable under the STS or uniform capital allowance (UCA) rules.

Broadly, the adjustable value of a depreciating asset is its cost less its decline in value since it was first used or installed ready for use for any purpose whether business or private. It is the value at the end of the year of income year that is relevant.

If the total adjustable value of your depreciating assets and those of entities you are grouped with for the 2006-07 was less than $3 million at this time, you satisfy this test.

Exiting from the STS

If you do satisfy all three eligibility tests but want to exit from the STS, you can choose to do so.

If you do not satisfy all three eligibility tests you must exit from the STS.

If you choose to leave the STS, you cannot re-enter the STS until at least five years after the income year for which you were last an STS taxpayer.

However, if you must leave the STS because you are no longer eligible, you can become an STS taxpayer again for an income year as soon as you are eligible.

There are transitional arrangements, which provide that if you previously chose to exit the STS for an income year beginning before 1 July 2005, you will be able to re-enter the STS during the period of five years starting on 1 July 2005 (if you are eligible) without having to wait five years.


Will you need to lodge an Australian tax return in the future?

This may be your last tax return if:

•	your annual taxable income in the future will be below the tax-free threshold, $6,000 for 2007-08, or

•	your only source of income in the future will be an Australian Government pension,

•	you will become eligible for the senior Australians tax offset in the income year 2007-08, and your taxable income is below the threshold for lodging a tax return – for eligibility and threshold levels for 2006-07 see Do you have to lodge a tax return?, or

•	you are moving overseas permanently, or

•	you are aged 60 years and over and your only source of income is from superannuation benefits (both lump sum and income streams) that have already been subject to tax in the fund. This covers the great majority of superannuation members. You may be required to lodge a tax return in the future where your superannuation benefit contains an amount (other that tax-free component) that has not been subject to tax in the fund (an untaxed element). This amount is subject to tax but at concessional rates. This generally applies to members of superannuation funds established by the Australian Government or a state government.

e-tax will write your answer to the front page of your tax return.

See also:

Deceased estate – are you lodging a tax return for someone who died during the year?


Spouse details - married or de facto
Spouse details – married or de facto

If you have a spouse, enter their personal details.

DEFINITION:
Your spouse is your husband or wife to whom you are legally married, or a person who lives with you on a genuine domestic basis as your husband or wife. Under Australian law your husband or wife cannot be the same sex as you.

If you complete any of the following items, you may need to provide further information in the corresponding e-tax Spouse details screen:

•	Personal details – consent to repay your spouse’s Family Assistance Office (FAO) debt

•	item T1 – Spouse (without dependent child or student) tax offset

•	item T2 – Senior Australians tax offset

•	item T3 – Pensioner tax offset

•	item T6 – 30% Child care tax rebate

•	item T8 – Superannuation contributions on behalf of your spouse tax offset

•	item T9 – Zone or Overseas forces

•	item M1 – Medicare levy reduction or exemption

•	item M2 – Medicare levy surcharge and for the whole period 1/07/06 to 30/06/07 you and all of your dependants (including your spouse) – If you had any – were not covered by private patient hospital cover

If you have provided the required information at an earlier item, e-tax will display this information on the screen. When you have entered all the required information click on the Next button to move to the next e-tax screen.


Spouse details – married or de facto

Refer to item 6 – Australian Government pensions and allowances

DEFINITION:
Your spouse is your husband or wife to whom you are legally married, or a person who lives with you on a genuine domestic basis as your husband or wife. Under Australian law your husband or wife cannot be the same sex as you.

COMPLETING THIS SCREEN

If you did not have a spouse at any time during 2006-07 leave this screen blank. Click on the Next button to continue. Otherwise, read on.

If you have provided information about spouse's name, date of birth, period for which you had a spouse or spouse's taxable income at an earlier item, e-tax will display this information on the screen.

Read data entry if you need help using this screen.

STEP 1	If this information has not already been entered, enter your spouse's name and the period for which you had a spouse during 2006-07.

STEP 2	Enter your spouse's date of birth. This is used to work out whether your spouse is below age pension age.

STEP 3	If you had a spouse for any time during 2006-07; enter your spouse's taxable income. Taxable income is assessable income less deductions. If deductions equal or exceed the assessable income, the taxable income is zero. If your spouse's taxable income is zero, you must enter 0 (zero).

STEP 4	Enter the amount of any exempt pension income received by your spouse in 2006-07. If your spouse did not have any exempt pension income, you must enter 0 (zero).

STEP 5	Enter the amount of any Australian Government pensions and allowances listed at item 6 received by your spouse in 2006-07. If your spouse did not receive any pensions or allowances, you must enter 0 (zero).

STEP 6	Enter your spouse's share of any trust income on which the trustee is assessed under section 98 and which has not been included in your spouse's taxable income. This amount is taken into account for the purposes of the tax offset.

STEP 7	When you have entered all the required information, click on the Next button.


Spouse details – married or de facto

Refer to item M1 – Medicare levy reduction or exemption

DEFINITION:
Your spouse is your husband or wife to whom you are legally married, or a person who lives with you on a genuine domestic basis as your husband or wife. Under Australian law your husband or wife cannot be the same sex as you.

COMPLETING THIS SCREEN

If you did not have a spouse at any time during 2006-07 leave this screen blank. Click on the Next button to continue. Otherwise, read on.

If you have provided information about spouse's name, date of birth, period for which you had a spouse or spouse's taxable income at an earlier item e-tax will display this information on the screen.

Note the scroll bar at the right of the screen. You must use this to access all the information you have to enter. Read data entry if you need help using this screen.

STEP 1	If this information has not already been entered, enter your spouse's name and the period for which you had a spouse during 2006-07.

You are deemed not to have a spouse if you are living separately and apart from your spouse.

If your spouse died during 2006-07 you and you did not have another spouse before the end of the year, you are considered to have had a spouse on 30 June 2007 for the purposes of calculating any Medicare levy reductions based on family income. Tick the box to indicate you had a spouse for the full year.

STEP 2	If you did not have, or were not deemed to have, a spouse on 30 June 2007 you have completed this item. Go to step 4. Otherwise, read on.

STEP 3	Enter your spouse's taxable income. Taxable income is assessable income less deductions. If deductions equal or exceed the assessable income, the taxable income is zero.

If your spouse's taxable income is zero, you must enter 0 (zero).

STEP 4	When you have entered all the required information, click on the Next button. e-tax will move to the next interview screen in item M1.


Spouse details – married or de facto

Refer to item M2 – Medicare levy surcharge

DEFINITION:
Your spouse is your husband or wife to whom you are legally married, or a person who lives with you on a genuine domestic basis as your husband or wife. Under Australian law your husband or wife cannot be the same sex as you.

COMPLETING THIS SCREEN

If you did not have a spouse at any time during 2006-07 leave this screen blank. Click on the Next button to continue. Otherwise, read on.

If you have provided information about spouse's name, date of birth, period for which you had a spouse, spouse's taxable income or spouse's section 98 trust income at an earlier item e-tax will display this information on the screen.

Note the scroll bar at the right of the screen. You must use this to access all the information you have to enter. Read data entry if you need help using this screen.

STEP 1	If this information has not already been entered, enter your spouse's name and the period for which you had a spouse during 2006-07.

You are deemed not to have a spouse if you are living separately and apart from your spouse.

If your spouse died during 2006-07 and you did not have another spouse before the end of the year, you are deemed to have had a spouse for the full year. Tick the box to indicate you had a spouse for the full year.

STEP 2	If you did not have, or were not deemed to have, a spouse for the full year, you have completed this item. Go to step 6. Otherwise, read on.

STEP 3	Enter your spouse's taxable income. Taxable income is assessable income less deductions. If deductions equal or exceed the assessable income, the taxable income is zero. If your spouse had any post-June 1983 elements of an ETP where the maximum tax rate is zero you will need to complete an Additional Information Schedule.

If your spouse's taxable income is zero, you must enter 0 (zero).

STEP 4	Enter your spouse's share of any trust income on which the trustee is assessed under section 98 and which has not been included in your spouse's taxable income. This amount is taken into account for the purposes of the family surcharge threshold.

STEP 5	Enter the net amount of any distributions to your spouse on which family trust distribution tax has been paid which your spouse would have had to show as assessable income if that tax had not been paid. This amount is taken into account for the purposes of the family surcharge threshold.

STEP 6	Enter your spouse's total reportable fringe benefits amounts.

If your spouse's total reportable fringe benefits amounts are zero, you must enter 0 (zero).

STEP 7	When you have entered all the required information, click on the Next button. e-tax will move to the next interview screen in item M2.


Spouse details – married or de facto

Refer to item T1 – spouse tax offset

DEFINITION:
Your spouse is your husband or wife to whom you are legally married, or a person who lives with you on a genuine domestic basis as your husband or wife. Under Australian law your husband or wife cannot be the same sex as you.

COMPLETING THIS SCREEN

If you did not have a spouse at any time during 2006-07 leave this screen blank. Click on the Next button to continue. Otherwise, read on.

If you have provided information about spouse's name, date of birth, period for which you had a spouse or spouse's taxable income at an earlier item e-tax will display this information on the screen.

Read data entry if you need help using this screen.

STEP 1	If this information has not already been entered, enter your spouse's name and the period for which you had a spouse during 2006-07.

STEP 2	If you had a spouse for any time during 2006-07, enter your spouse's taxable income. Taxable income is assessable income less deductions. If deductions equal or exceed the assessable income, the taxable income is zero. If your spouse's taxable income is zero, you must enter 0 (zero).

STEP 3	Enter your spouse's separate net income. This amount could be different to your spouse's taxable income. If your spouse did not have any separate net income, you must enter 0 (zero).

STEP 4	When you have entered all the required information, click on the Next button. e-tax will move to the next screen in item T1.


Spouse details – married or de facto

Refer to item T2 – Senior Australians tax offset

DEFINITION:
Your spouse is your husband or wife to whom you are legally married, or a person who lives with you on a genuine domestic basis as your husband or wife. Under Australian law your husband or wife cannot be the same sex as you.

COMPLETING THIS SCREEN

If you did not have a spouse at any time during 2006-07 leave this screen blank. Click on the Next button to continue. Otherwise, read on.

If you have provided information about spouse's name, date of birth, period for which you had a spouse, spouse's taxable income or spouse's section 98 trust income at an earlier item e-tax will display this information on the screen.

Note the scroll bar at the right of the screen. You must use this to access all the information you have to enter. Read data entry if you need help using this screen.

STEP 1	If this information has not already been entered, enter your spouse's name and the period for which you had a spouse during 2006-07.

STEP 2	Enter your spouse's date of birth. This is used to work out whether your spouse is below age pension age.

STEP 3	If you had a spouse for any time during 2006-07, enter your spouse's taxable income. Taxable income is assessable income less deductions. If deductions equal or exceed the assessable income, the taxable income is zero.

If your spouse's taxable income is zero, you must enter 0 (zero).

STEP 4	Enter the amount of any exempt pension income received by your spouse in 2006-07. If your spouse did not have any exempt pension income, you must enter 0 (zero).

STEP 5	Enter the amount of any Australian Government pensions and allowances listed at item 6 received by your spouse in 2006-07. If your spouse did not receive any pensions or allowances, you must enter 0 (zero).

STEP 6	Enter your spouse's share of any trust income on which the trustee is assessed under section 98 and which has not been included in your spouse's taxable income. This amount is taken into account for the purposes of the tax offset.

STEP 7	If you and your spouse – married or de facto – had to live apart due to illness or either of you were in a nursing home during 2006-07, click on the box to enter a tick.

STEP 8	When you have entered all the required information, click on the Next button. e-tax will move to the next screen in item T2.


Spouse details – married or de facto

Refer to item T6 – 30% child care tax rebate.

DEFINITION:
Your spouse is your husband or wife to whom you are legally married, or a person who lives with you on a genuine domestic basis as your husband or wife. Under Australian law your husband or wife cannot be the same sex as you.

COMPLETING THIS SCREEN

If you did not have a spouse at 30 June 2007 you cannot transfer the unused portion of your rebate. Click on the Next button to continue. Otherwise, read on.

STEP 1	Enter your spouse's tax file number. You must have obtained their signed consent to quote their tax file number and to transfer the rebate to them.

STEP 2	Enter the sex of your spouse.

STEP 3	When you have entered all the required information, click on the Next button. e-tax will move to the next screen in item T7.


Spouse details – married or de facto

Refer to item T8 – superannuation contributions on behalf of your spouse tax offset

DEFINITION:
Your spouse is your husband or wife to whom you are legally married, or a person who lives with you on a genuine domestic basis as your husband or wife. Under Australian law your husband or wife cannot be the same sex as you.

COMPLETING THIS SCREEN

If you did not have a spouse at any time during 2006-07 leave this screen blank. Click on the Next button to continue. Otherwise, read on.

If you have provided information about spouse's name, date of birth, period for which you had a spouse or spouse's taxable income at an earlier item e-tax will display this information on the screen.

Read data entry if you need help using this screen.

STEP 1	If this information has not already been entered, enter your spouse's name and the period for which you had a spouse during 2006-07.

STEP 2	Enter your spouse's taxable income. Taxable income is assessable income less deductions. If deductions equal or exceed the assessable income, the taxable income is zero.

If your spouse's taxable income is zero, you must enter 0 (zero).

STEP 3	Enter your spouse's total reportable fringe benefits amounts.

If your spouse's total reportable fringe benefits amounts are zero, you must enter 0 (zero).

STEP 4	Enter the assessable income of any spouse for which you are claiming this tax offset.

If the assessable income is zero, you must enter 0 (zero).

STEP 5	When you have entered all the required information, click on the Next button. e-tax will move to the next screen in item T8.


Spouse details – married or de facto

Refer to Personal Details – Consent to repay your spouse’s Family Assistance Office (FAO) debt?

DEFINITION:
Your spouse is your husband or wife to whom you are legally married, or a person who lives with you on a genuine domestic basis as your husband or wife. Under Australian law your husband or wife cannot be the same sex as you.

COMPLETING THIS SCREEN

If you did not have a spouse at any time during 2006-07 leave this screen blank. Click on the Next button to continue. Otherwise, read on.

STEP 1	Enter your spouse’s customer reference number. You must have obtained your spouse’s permission to quote their CRN.

STEP 2	Enter the sex of your spouse

STEP 3	Enter your spouse’s family name.

STEP 4	Enter your spouse’s given name.

STEP 5	Enter your spouse’s other names.

STEP 6	Enter your spouse’s date of birth.

STEP 7	When you have entered all the required information, click on the Next button. e-tax will move to the next screen.


Spouse details – married or de facto

Refer to item T3 – Pensioner's tax offset

DEFINITION:
Your spouse is your husband or wife to whom you are legally married, or a person who lives with you on a genuine domestic basis as your husband or wife. Under Australian law your husband or wife cannot be the same sex as you.

COMPLETING THIS SCREEN

If you did not have a spouse at any time during 2006-07 leave this screen blank. Click on the Next button to continue. Otherwise, read on.

If you have provided information about spouse's name, date of birth, period for which you had a spouse or spouse's taxable income at an earlier item e-tax will display this information on the screen.

Read data entry if you need help using this screen.

STEP 1	If this information has not already been entered, enter your spouse's name and the period for which you had a spouse during 2006-07.

STEP 2	If you had a spouse for any time during 2006-07, enter your spouse's taxable income. Taxable income is assessable income less deductions. If deductions equal or exceed the assessable income, the taxable income is zero. If your spouse’s taxable income is zero, you must enter 0 (zero)

STEP 3	Enter the amount of any exempt pension income received by your spouse in 2006-07.

STEP 4	Enter any amount of Australian government pensions and allowances received by your spouse in 2006-07.

STEP 5	Enter your spouse’s share of trust income on which the trustee is assessed under section 98 which has not been included in your spouse’s taxable income.

STEP 6	When you have entered all the required information, click on the Next button. e-tax will move to the next screen in item T3.


Spouse details – married or de facto

Refer to item T9 – Zone or Overseas Forces tax offset

DEFINITION:
Your spouse is your husband or wife to whom you are legally married, or a person who lives with you on a genuine domestic basis as your husband or wife. Under Australian law your husband or wife cannot be the same sex as you.

COMPLETING THIS SCREEN

If you did not have a spouse at any time during 2006-07 leave this screen blank. Click on the Next button to continue. Otherwise, read on.

If you have provided information about spouse's name, date of birth, period for which you had a spouse or spouse's taxable income at an earlier item e-tax will display this information on the screen.

Read data entry if you need help using this screen.

STEP 1	If this information has not already been entered, enter your spouse's name and the period for which you had a spouse during 2006-07.

STEP 2	If you had a spouse for any time during 2006-07, enter your spouse's taxable income. Taxable income is assessable income less deductions. If deductions equal or exceed the assessable income, the taxable income is zero. If your spouse’s taxable income is zero, you must enter 0 (zero)

STEP 3	Enter your spouse’s seperate net income. This amount could be different to your spouse’s taxable income. If your spouse did not have any separate net income, you must enter 0 (zero).

STEP 4	When you have entered all the required information, click on the Next button. e-tax will move to the next screen in item T9.


Tax estimate

The Tax estimate section of the e-tax interview is used to display the tax assessment estimates which e-tax has made. These estimates are based on the interview screens completed at the time you access the Tax estimate screen. If you have not completed all the interview screens e-tax will still display estimates based on the information you have entered.

Note that this screen displays estimates for your interest only – it is NOT your final tax assessment.

Use the scroll bar at the right of the screen to view all the tax estimate details.

Click on the Next button to move to the Validation screen.

TAX OFFSETS

If you have claimed any tax offsets, click on the Tax offsets available in the centre of the screen. A list of all allowable tax offsets is displayed along with any tax offset amounts which you can claim. Click on the Next button to move to the Validation screen or click on the Prev button to return to the Tax estimate screen.

See also: How your tax is worked out


Tax estimate

The Tax estimate section of the e-tax interview is used to display the tax assessment estimates which e-tax has made. These estimates are based on the interview screens completed at the time you access the Tax estimate screen. If you have not completed all the interview screens e-tax will still display estimates based on the information you have entered.

The e-tax calculation is an estimate only and is not intended to apply where the actual estimate:

•	is dependent on data held on your file with the Tax Office,

•	you have requested the Tax Office to apply discretion, or

•	very complicated calculations are involved

These include situations where you:

•	lodged an Instalment Activity Statement under the pay as you go (PAYG) system

•	are entitled to use your spouse’s unused pensioner or senior Australians tax offset

•	had a lump sum payment in arrears

•	had income that was subject to averaging (income of primary producers and special professionals)

•	were a non-resident and withholding tax was not deducted on your interest or dividends

•	had film industry investment deductions

•	are over 55, received an eligible termination payment (ETP) this year and received ETPs in prior years after turning 55

•	changed your residency status during the year

•	are seeking a housekeeper rebate because of special circumstances

•	have requested the Tax Office to calculate the deductible amount of your undeducted purchase price of an annuity or pension

•	have exempt foreign employment income and total reportable fringe benefits amounts and/or an amount on which family trust distribution tax has been paid

•	already have a credit or debit balance with the Tax Office

•	have a debt with the Child Support Agency

•	are claiming family tax benefit (FTB)

•	have an income tax refund due and an FAO debt

•	have an income tax refund due and have consented to use all or part of your refund to repay your spouse's FAO debt

•	are claiming baby bonus

•	are lodging the return late

•	have a Higher Education Loan Programme (HELP) repayment and have not provided details of your HELP debt

•	have a Student Financial Supplement Scheme (SFSS) repayment and have not provided details of your Financial Supplement debt

•	had an unused amount of the 30% child care tax rebate transferred to you.


Dependants and separate net income

This topic covers:

Who is a dependant?

What is maintaining a dependant?

What is separate net income?

How much SNI can your dependant earn?

The purpose of this section is to give you important information about dependants and ‘separate net income’. Various questions in e-tax will refer you to this information when you need it.

NOTE:
You can only claim a tax offset for a dependant if you were an Australian resident for tax purposes.

DEFINITION:
Your spouse is your husband or wife to whom you are legally married, or a person who lives with you on a genuine domestic basis as your husband or wife. Under Australian law your husband or wife cannot be the same sex as you.

WHO IS A DEPENDANT?

A dependant can be:

•	your spouse - married or de facto

•	your parents or spouse’s parents.

•	a student who is under 25 years old who, is studying full time at school, college or university

•	a child - including your stepchild or adopted child who is under 21 years old and not a student

•	a child-housekeeper - your child of any age who works full time keeping house for you

•	an invalid relative - your child, brother or sister who is 16 years or older - who:

o	receives a disability support pension or a special needs disability support pension, or

o	has a certificate from a Commonwealth-approved doctor certifying a continuing inability to work

A dependant needs to be an Australian resident for tax purposes. For a spouse, student or child only, they will be treated as a resident if they have always lived in Australia or they came to live in Australia permanently - unless they have set up a permanent home outside Australia.

Did you have dependants waiting to migrate to Australia?

If your spouse and dependent children were overseas in 2006-07 we will consider them to be your dependants for tax offset purposes if you were taking the steps necessary for their migration in a timely manner.

WHAT IS MAINTAINING A DEPENDANT?

You maintained a dependant if any of the following apply:

•	you and your dependant lived in the same house,

•	you gave your dependant food, clothing and lodging, or

•	you helped them to pay for their living, medical and educational costs.

If you had a spouse for the whole income year and your spouse worked at any time during the year, we still consider you to have maintained your spouse - as a dependant - for the whole income year.

We consider you to have maintained a dependant even if the two of you were temporarily separated - for example, due to holidays or because they were overseas.

If you maintained a dependant for only part of the year, you may need to adjust your claim.

WHAT IS SEPARATE NET INCOME?

Separate net income (SNI) includes income and other specified amounts that your dependant earned or received in 2006-07 while you maintained them. SNI also specifically includes some amounts which are not included in the recipient’s assessable income.  There are also some amounts that are specifically excluded from SNI. SNI earned by your dependant may affect any claim you are entitled to.

Income included in SNI:

SNI includes:

•	salary and wages

•	termination payments representing unused annual leave and long service leave

•	pensions, including Australian annuities and superannuation pensions and exempt pensions

•	interest and dividend income - but not the franking credit attached to franked dividends

•	business, trust and rental income

•	Veterans' Affairs payments and most Centrelink payments including parenting payment (partnered), carer payment, remote area allowance and the language, literacy and numeracy supplement

•	any net capital gain for the income year

•	any maintenance payments your spouse received for their own support after divorce or separation - even though your spouse may not need to declare such income for tax purposes

•	the maintenance or accommodation component of a scholarship paid by the Commonwealth or State except where that component is paid for helping to educate isolated children aged under 16 years.

Income not included in SNI:

SNI does not include:

•	The following Centrelink payments:

o	Child care benefit

o	Family tax benefit (FTB)

o	The one-off payment to families and carers under the Family Assistance (One-off Payment to Families and Carers) Scheme 2004

o	The 2006 one-off payment to carers (carer payment related, wife pension related,  partner service pension related, carer service pension related or carer allowance related) paid under the Social Security Act 1991

o	Payments to carers under the scheme determined under Schedule 4 to the Social Security and Veterans’ Entitlements Legislation Amendment (One-Off Payments to Increase Assistance for Older Australians and Carers and Other Measures) Act 2006

o	The 2006 one-off payment to older Australians under the Social Security Act 1991 or the Veterans’ Entitlements Act

o	Payment to older Australians under the scheme determined under Schedule 2 to the Social Security and Veterans’ Entitlements Legislation Amendment ( One-Off Payments to Increase Assistance for Older Australians and Carers and Other Measures) Act 2006

o	maternity immunisation allowance

o	maternity payment

o	carer allowance (but note that carer payments ARE included in SNI)

•	Baby bonus

•	Franking credits attached to franked dividends

•	The Japanese internment compensation payments made under the Compensation (Japanese) Internment Act 2001 or the Veterans’ Entitlement Act 1986

•	Compensation payments received under the German Forced Labour Compensation Payments Programme (GFLCP)

•	The value or amount of any non-government scholarship received in connection with the education of a dependent child or student

•	The value or amount of any Commonwealth or state assistance provided for school fees, the purchase of textbooks or travelling expenses

•	Lump sum severance or retirement payments of a capital nature or amounts paid as compensation for losing a job

•	Any maintenance payments your spouse received for support of their dependent children;

•	Amounts received under the incentive payments scheme relating to certain private health insurance policies.

What can reduce SNI?

In calculating separate net income (SNI) your dependant’s income can be reduced by:

•	any expenses they incurred in 2006-07 in earning their income and which they could claim as a deduction

•	any amount they could claim in 2006-07 for the deductible amount of undeducted purchase price of their pension or annuity at item D9, or item D12

•	net child care expenses incurred in 2006-07 by your dependant because they were working - that is, the amount paid by the dependant less any cash rebates - for example, child care benefit and rebates provided by an employer or union

•	their expenses for travel during 2006-07 to and from child care - because they were working

•	their expenses for travel during 2006-07 to and from work

•	expenses they incurred in 2006-07 in conducting a business activity that resulted in a deferred non-commercial business loss, even if they did not lodge a tax return.

Where any of the above expenses include car expenses, we accept a calculation of the expense based on a rate per kilometre multiplied by the actual number of kilometres travelled. See the cents per kilometre method . If this method is used the 5,000 kilometre limit does not apply for the purpose of calculating your dependant’s SNI.

Your dependant must be able to demonstrate that they actually incurred the relevant expenses which reduce the SNI.

What doesn’t reduce SNI?

Your dependant’s SNI cannot be reduced by:

•	amounts they paid for gifts, donations or tax agent fees

•	tax withheld, superannuation contributions, or losses brought forward from 2005-06 or earlier years

•	self-education expenses that would not be tax-deductible because their only income was from austudy, youth allowance or work that was not connected with self-education.

HOW MUCH SNI CAN YOUR DEPENDANT EARN?

For some of your claims relating to dependants, the amount you may be entitled to will be affected by their SNI. For example, tax offsets are reduced by $1 for every $4 of SNI over $282 which your dependants earned in 2006-07. We explain at each item the amount of SNI your dependants can earn before your claim is affected.

NOTE: Tax offsets and your tax withheld
If your tax offset or family tax benefit entitlements have changed since you last filled in a Withholding declaration (NAT 3093) authorising your payer to vary the amount of tax withheld, you may need to fill in a new declaration. If your family tax benefit entitlements have changed, you will also need to complete the Withholding declaration Family tax benefit (FTB) worksheet (NAT 7089-07.2006). Contact your payer for more information. Failure to fill in a new declaration may result in a tax debt. In the e-tax Help Contents panel, click in e-tax return - further reading and then click on Tax offsets to access the topics that tell you about tax offsets. For more information about family tax benefit, see Family tax benefit.


Eligibility for Senior Australians tax offset

You must meet the following four conditions to be eligible for the senior Australians tax offset.  These conditions relate to such factors as age, income and eligibility for Australian Government pensions and similar payments.

CONDITION 1 – AGE

You meet this condition if, on 30 June 2007 you were:

•	a male aged 65 years or more,

•	a male veteran or war widower aged 60 years or more who met the veteran pension age test

•	a female aged 63 years or more, or

•	a female veteran or war widow aged 58 years or more who met the veteran pension age test.

NOTE:
You met the veteran pension age test if one of the following applied to you and you were eligible for a pension, allowance or benefit under the Veterans’ Entitlements Act 1986:

  -  you have eligible war service, that is, service in World War I or World War II or
     operational service as a member of the Australian Defence Forces
  -  you are a Commonwealth or allied veteran who served in a conflict in which the Australian
     Defence force was engaged during a period of hostilities, that is, World War I or World         War II, or in Korea, Malaya, Indonesia or Vietnam.
  -  you are an Australian or allied mariner who served during World War II
  -  you are the war widow or widower of a former member of the Australian Defence Force.

‘Pension, allowance or benefit’ includes:
  -  disability pension
  -  service pension, and
  -  white or gold Repatriation health cards for treatment entitlement.

If you are unsure if you met the veteran pension age test, visit the Department of Veterans’ Affairs (DVA) website at www.dva.gov.au or phone Veterans’ Affairs on 13 32 54.

CONDITION 2 – ELIGIBILITY FOR AUSTRALIAN GOVERNMENT PENSIONS AND SIMILAR PAYMENTS

There are three ways of meeting this condition:

1.	You meet this condition if:

o	you received an Australian Government age pension or a pension, allowance or benefit from Veterans’ Affairs at any time during the 2006-07 income year

2.	You also meet this condition if:

o	you were eligible for an Australian Government age pension but did not receive it because you did not make a claim or because of the application of the income test or the assets test

AND

o	you satisfy one of the following:

•	you have been an Australian resident for age pension purposes for either 10 continuous years, or for more than 10 years, of which five years were continuous

•	you have a qualifying residence exemption (because you arrived in Australia as a refugee or under a special humanitarian program)

•	you are a woman who was widowed in Australia (at a time when both you and your late partner were Australian residents), you have made a claim for the age pension and you have had two years’ residence immediately prior to your claim

•	you received a widow B pension, widow allowance, mature age allowance or partner allowance immediately before turning age pension age, or

•	you would qualify under an international social security agreement.

(If you need assistance in determining your eligibility for a social security or Centrelink pension only, phone Centrelink on 13 23 00; for all other enquiries relating to the senior Australians tax offset phone our Personal Tax Infoline.)

3.	You also meet this condition if:

o	you are a veteran with eligible war service or

o	you are a Commonwealth veteran, allied veteran or allied mariner with qualifying service

AND

o	you were eligible for a pension, allowance or benefit from Veterans’ Affairs but did not receive it because you did not make a claim or because of the application of the income test or the assets test.

If you are not sure if you were eligible for a payment you can get further information from the DVA website at www.dva.gov.au or by phoning Veterans’ Affairs on 13 32 54.

CONDITION 3 – THE TAXABLE INCOME THRESHOLD

You meet this condition by satisfying the income threshold that applies to you, from the following:

•	You did not have a spouse – married or de facto – and your taxable income was less than $42,707.

•	You did have a spouse – married or de facto – and you and your spouse’s combined taxable income* was less than $66,992.

•	You did have a spouse – married or de facto – and for some or all of 2006-07 you ‘had to live apart due to illness’ or because one of you was in a nursing home and you and your spouse’s combined taxable income* was less than $79,840.

*Combined taxable income includes your spouse’s share for 2006-07 of any net income of a trust estate to which they are presently entitled and on which the trustee is assessed under section 98 of the Income Tax Assessment Act 1936.

The threshold amounts shown here relate to determining your eligibility for the senior Australians tax offset.  They are not tax-free thresholds.

NOTE:
Had to live apart due to illness is a term used to describe a situation where the living expenses of you and your spouse – married or de facto – are increased because you are unable to live together in your home due to the indefinitely continuing illness or infirmity of either or both of you.

CONDITION 4 – NOT IN JAIL

You meet this condition unless you were in jail for the whole income year.

Are you eligible?

If you meet conditions 1, 2, 3 and 4 described above, you are eligible for the senior Australians tax offset.

Being eligible means that you are entitled to the senior Australians tax offset but it does not mean you will automatically get an amount of senior Australian tax offset.  We use your taxable income to work out the amount if any of your senior Australians tax offset. The combined income amounts in condition 3 are used for eligibility purposes and not for working out the amount of your entitlement.

Do you have to lodge a tax return?

So we can work out whether you are entitled to a senior Australians tax offset amount, you must also complete item T2.


Family tax benefit

This topic covers:

What is family tax benefit (FTB)?

Are you eligible for FTB?

Do you have an eligible dependent child?

Do you want to claim your FTB through the tax system?

How does your income affect your FTB entitlement?

Part A

Part B

Explanation of terms

DID YOU HAVE CARE OF A DEPENDENT CHILD AGED UNDER 21 YEARS (OR UNDER 25 YEARS IF THEY WERE STUDYING FULL TIME) AT ANY TIME BETWEEN 1 JULY 2006 AND 30 JUNE 2007?

NOTE:
’Care’ means the day-to-day responsibility for the care, welfare and development of the child. Generally, day-to-day care includes physical care.

NO	You cannot claim family tax benefit (FTB), and do not need to continue reading this information section.

YES	Read on.

DID YOU OR YOUR SPOUSE RECEIVE FTB PAYMENTS DIRECTLY FROM THE FAMILY ASSISTANCE OFFICE (FAO) FOR THE FULL INCOME YEAR?

YES	You do not need to lodge a claim for FTB. You only need to read Part B to find out if you are eligible to claim a tax offset at item T1. Your FTB payments would have included Part B if you satisfy the Part B eligibility tests. If you or your spouse is required to lodge a tax return you must do so by the due date. If you lodge after this date you may incur penalties for late lodgment. If you have been paid too much FTB, the FAO will recover any amount you should not have received. Your tax refund – or your spouse’s if they gave consent – can be used to recover these amounts directly. For more information on reconciliation of FTB see the Family tax benefit (FTB) on-line documentation which provides instructions on how to complete the family tax benefit claim in e-tax. Go to Part B.

NO	Read on.

WHAT IS FAMILY TAX BENEFIT (FTB)?

FTB has two parts, Part A and Part B. Part A is designed to help with the cost of raising children. Part B is designed to give extra help to families with one main income, including single parent families. You may be eligible for Part A or Part B or both.

Part A- helps with the cost of raising children.  You receive it for:

•	each dependent child  aged under 21 years for whom you provide care, and

•	older dependent children aged 21 years to 24 years who are in full-time study

Part B- gives extra help to families with one main income, including single parent families.  It is a family payment, that is, it is not per child. You can receive it until:

•	your youngest dependent child turns 16 years or

•	31 December of the calendar year in which the youngest child turns 18 years – if that child is a full-time student.

 If you were eligible for FTB for a child who has died, you may be entitled to a bereavement payment. For more information visit the FAO or phone 13 61 50.

WERE YOU ELIGIBLE FOR FTB?

NOTE: FTB calculator
The FTB calculator on our website can help you work out whether you were eligible for FTB. If you were, it can also work out the amount you are entitled to claim.

To be eligible to claim FTB you must satisfy the following three criteria:

•	you must have provided care to a dependent child

•	if you shared the care of the dependent child with another person who is not your current spouse, you must have cared for the child for a minimum of 10% of the assessment period. For example, if you shared the care over the whole 2006-07 income year you must have cared for the dependent child for at least 37 nights of the income year

•	you must have satisfied the residency requirements for family assistance purposes. These differ from those for tax purposes.

Residency requirements for family assistance purposes

To be an Australian resident for Family Assistance purposes, you must:

•	reside in Australia on a permanent basis, and

•	satisfy one of the following:

o	you are an Australian citizen, or

o	you hold a permanent visa, or

o	you are a New Zealand citizen who entered Australia under a special category visa,

o	You hold a certain class of temporary visa

If you are unsure of your residency status, contact the FAO.

In deciding whether you reside in Australia on a permanent basis, the FAO may need to look at:

•	the nature of your accommodation

•	the nature and extent of family relationships in Australia

•	the nature and extent of employment, business or financial ties with Australia

•	the frequency and duration of travel outside Australia

•	and any other relevant matters.

Having a tax file number does not necessarily mean you meet the residency requirement for family assistance.

If you are unsure of your residency status, contact the FAO or visit the FAO website at www.familyassist.gov.au.

NOTE:
Temporary absences from Australia

Your eligibility for Family Tax Benefit may be affected by temporary absence from Australia.
For more information, see Dates of Periods you were overseas and Dates of periods your child was overseas.

DO YOU HAVE AN ELIGIBLE DEPENDENT CHILD?

To be eligible for family tax benefit (FTB), your dependent child must:

•	have been in your care and you must be responsible (whether alone or jointly with someone else) for their day-to-day care, welfare and development

•	be aged under 21 years or be a full-time student aged 21 to 24 years

•	have been an Australian resident (for family assistance purposes) or live with you

•	not have been your spouse

•	have resided in Australia for some of the period 1 July 2003 to 30 June 2007.

A child is not a dependent child if:

•	they (or someone on their behalf, for example, a parent) received any payments listed at item 5 or item 6

•	they are 16 years or older and received payments under a prescribed educational scheme, or

•	they had an adjusted taxable income of more than the income limit in the table below.

Age of child	Income limits
Under 5 years	No limit
5 to 15 years studying full time	No limit
5 to 15 years not studying full time	$11,548
Aged 16 to under 24 years	$11,548
Do you satisfy the eligibility criteria AND does at least one dependent child or full-time student that you provide care for satisfy the dependent child eligibility criteria?

YES	Read on.

NO	You are not eligible to claim family tax benefit. You do not need to continue reading this information section.

DO YOU WANT TO CLAIM YOUR FTB THROUGH THE TAX SYSTEM?

There are two ways to claim FTB – from the Tax Office or from the FAO. Work through the following steps to find out which way is best for you.

STEP 1	Did you receive an income support payment from Centrelink for the whole income year? (Income support payments are listed at item 5 and item 6.) YES You should not lodge an FTB tax claim. If you would like further information visit the FAO or phone 13 61 50. You do not need to continue reading this information section. NO Go to step 2.
STEP 2	Were you entitled to a Health Care Card and/or Rent Assistance from the FAO? For further information regarding Health Care Cards and Rent Assistance, phone the FAO on 13 61 50 or visit the website at www.familyassist.gov.au. YES Health Care Cards and Rent Assistance are not available through the tax system. To receive your Health Care Card you should claim your FTB directly from the FAO. You do not need to continue reading this information section. NO You can choose how you would like to receive your FTB – from the Tax Office or from FAO. If you reduced the amount of tax that was withheld from your pay in anticipation of your FTB entitlement by lodging a Withholding declaration (NAT 3093), you should claim your FTB from the Tax Office or you may incur a tax debt.
STEP 3	Did you or your spouse receive child support for all or part of the 2006-07 income year that was registered for collection by the Child Support Agency (CSA)? YES Go to step 4 NO You can choose how you would like to receive your FTB – from the Tax Office or from FAO. If you reduced the amount of tax that was withheld from your pay in anticipation of your FTB entitlement by lodging a Withholding declaration (NAT 3093), you should claim your FTB from the Tax Office or you may incur a tax debt.
STEP 4	Did you or your spouse receive arrears of child support in the 2006-07 income year?  ‘Arrears of child support’ means an amount in excess of the child support entitlement amount for 2006-07 as worked out by the CSA. YES Go to step 5 NO You can choose how you would like to receive your FTB – from the Tax Office or from FAO. If you reduced the amount of tax that was withheld from your pay in anticipation of your FTB entitlement by lodging a Withholding declaration (NAT 3093), you should claim your FTB from the Tax Office or you may incur a tax debt. NOTE: The following question relates to previous income years
STEP 5	During the period 1 July 2000 to 30 June 2006: • did you or your spouse receive child support that was less than the maintenance income-free area for any of the income years, and the amount of child support received in that year was also less than the amount due for that year, and • were you or your spouse eligible for family tax benefit (FTB) for all or part of that period? YES You may have a maintenance income credit that can be used to offset the child support arrears you received in the 2006-07 income year.  To access this credit you should claim your FTB directly from the FAO. The maintenance income credit may in some cases, increase the amount of FTB you will receive in 2006-07.  For further information, contact the FAO. NO You can choose how you would like to receive your FTB – from the Tax Office or from FAO. If you reduced the amount of tax that was withheld from your pay in anticipation of your FTB entitlement by lodging a Withholding declaration (NAT 3093), you should claim your FTB from the Tax Office or you may incur a tax debt. If you would like to claim your FTB through the FAO – either as a lump sum or as fortnightly payments – contact the FAO on 13 61 50 to get the appropriate FAO claim form. If you would like to claim your FTB through the Tax Office you will need to complete the Family Tax Benefit item in the e-tax interview. e-tax will prepare the 2007 family tax benefit (FTB) tax claim form for you. This form will be lodged electronically with your tax return. NOTE: An FTB tax claim for the 2006-07 financial year can be accepted until 30 June 2009. However, to avoid penalties for late lodgement of your tax return you must lodge by the due date – Lodge your tax return by 31 October 2007. If you have a 2005-06 family tax benefit (FTB) tax claim that you have not lodged with the Tax Office you must do so by 30 June 2008.
HOW DOES YOUR INCOME AFFECT YOUR FTB ENTITLEMENT?

Part A

The amount of Part A you receive depends on your family adjusted taxable income (ATI) and the age and the number of children you have. Your family ATI is the total of you and your spouse’s ATI.

Use the table below to determine if you are entitled to any Part A. When using the table, use the age of your dependent child or children at 30 June 2007. If your dependent child turned 25 during the income year count the child in the NUMBER OF DEPENDENT CHILDREN AGED 18 TO UNDER 24 years’ row.

A rate estimator is also available on the online services page of the FAO website at www.familyassist.gov.au

In the table below:

If all your children were aged under 18 years at 30 June 2007, find the row that shows the number of your dependent children you have. Your income limit is the amount shaded blue in your row

If all your children were aged 18 to 24 years, find the column that shows the number of dependent children you had. Your income limit is the amount shaded pink in your column.

If you had children in both age groups, find the row that shows the number of your dependent children you had aged under 18 years and the column that shows the number of your dependent children you had aged 18 to 24 years. Your income limit is the unshaded amount where your row and your column meet.

If your family adjusted taxable income is equal to or more than the income limits in the table you are not entitled to Part A, but you may be entitled to Part B. Read on.

NOTE:
You may have become or ceased to be eligible for Part A during the income year if
 -  your marital status changed
 -  any of  your dependent children aged 21 to 24 years stopped studying full time, or
 -  you gained the care of, or ceased to care for, a dependent child.

FTB Part A family adjustable taxable income limits (including Part A supplement)

Number  of dependent children aged 0-17 years	No of dependentchildren 18 – 24 years
	0	1	2	3
0	Not eligible	$96,081	$107,043	$118,857
1	$94,718	$105,680	$117,494	$129,308
2	$104,317	$116,131	$127,945	$139,759
3	$114,769*	$126,582*	$138,396*	$150,210*
*	Income limit is higher that stated if you have three children aged 13-15 years.  Contact the FAO if you have further queries.

NOTE:
You cannot use this table if:
 -  you had more than three children in either age group
 -  you shared care for any of your children
 -  you had triplets or quadruplets (or children from a larger multiple birth) who were under six
    years old, or
 -  you received government rent assistance payments.

If any of these apply to you, use the family assistance estimator available on the FAO website at www.familyassist.gov.au or phone the FAO on 13 61 50.

EXAMPLE

If you had one dependent child aged 0 to 17 years and no dependent children aged 18 to 24 years, your income limit is $94,718. If you had no dependent children aged 0 to17 years and three dependent children aged 18 to 24 years, your income limit is $118,857. If you have three dependent children aged 0 to17 years and two dependent children aged 18 to 24 years, your income limit is $138,396.

Were you entitled to family tax benefit (FTB) Part A?

NO	You may still be entitled to Part B. Read on.

YES	You will need to complete the Family tax benefit item in the e-tax interview.

Unsure? – visit the Family Assistance Office (FAO) or phone 13 61 50.

HOW DOES INCOME AFFECT YOUR FTB PART B

If you were a single parent at any time during the claim period your income will not affect your Part B entitlement for that time.

If you were a member of a couple, only the lower earner’s adjusted taxable income (ATI) is taken into account when determining entitlement to Part B. Use the table below to work out if you are entitled to Part B.

Age of dependent child	Lower earner’s income limit at which Part B stops being paid
Under 5 years	$21,572
5 to 18 years*	$16,790
*	If your youngest child was aged 16 to 18 years at any time during the claim period you can only be entitled to Part B for that child if they were studying full time. If the child was 18 years you will be entitled to Part B until 31 December of the year they turned 18 years.

If you have a shared-care arrangement for any of your children, Part B is calculated for each eligible child and payment is based on the child with the highest rate.

Return to Work

If you were a parent who returned to work for the first time after 1 July 2006:

•	after the birth of your child or

•	after caring for a child who has come into your care

you may be entitled to the maximum rate of FTB Part B for the period that you were not at work  during the year. Eligibility for this extra assistance will be calculated after the end of the income year when FTB payments are reconciled.

Starting a new job may be considered a return to work.

 For further information refer to the Family tax benefit (FTB) on-line documentation which provides instructions on how to complete the family tax benefit claim in e-tax.

Were you entitled to Part B?

NO	You do not need to continue reading this information section.

YES	You will need to complete the Family tax benefit item in the e-tax interview.

Unsure? – visit the FAO website at www.familyassist.gov.au or phone 13 61 50.

NOTE:
If your entitlement to Part B was:
 -  for only part of the year – you may be able to claim a spouse tax offset at
    item T1 for the rest of the year, or
 -  at a rate based on a child you or your spouse shared the care of with someone else, for
    example, an ex-spouse – you may be able to claim a spouse tax offset at item T1
    for the periods when the child was not in the care of you or your spouse.

EXPLANATION OF TERMS

Below is an explanation of terms used in this information section. If you are still unsure about a term after reading the explanation, visit the FAO or phone 13 61 50.

Adjusted taxable income (ATI)

The components of adjusted taxable income are as follows:

•	taxable income

•	adjusted fringe benefit

•	net rental property losses

•	tax-free pensions or benefits and

•	target foreign income

•	deductible child maintenance expenditure.

Each of these components is described in detail below.

Taxable income

This is the amount that e-tax has written at TAXABLE INCOME OR LOSS on your 2007 tax return for individuals. If you have a taxable loss the amount to be included in your calculation of adjusted taxable income is zero.

If you are completing your FTB tax claim separately from your tax return, taxable income is also shown on your income tax notice of assessment issued by the Tax Office.

Adjusted fringe benefit

This is the reportable fringe benefit amount ‘grossed down’.

Any reportable fringe benefit will appear on your payment summary. Enter the reportable amount on your FTB tax claim or on your tax return. The Family Assistance Office will automatically reduce any amounts that appear on your payment summary to the adjusted amount.

To ‘gross down’ your adjusted fringe benefit amount use the following formula:

 reportable fringe benefit amount X 53.5%

Net rental property losses

Net rental property losses are shown at Net rent item 20 on your tax return. Only include this amount if you have shown a rental loss – e-tax will have printed L in the small box at the right of Net rent. The value of any net property loss is counted as income for ATI purposes.

Tax-free pensions or benefits

These are listed under Exempt pensions. For FTB purposes double orphan pension is not included.

Tax-free pensions or benefits do not include bereavement payment, pharmaceutical allowance, rent assistance or remote area allowance or language, literacy and numeracy supplement.

Target foreign income

Target foreign income is income, calculated in Australian dollars, from sources outside Australia. Do not include any amounts you have already included in your taxable income and any foreign income received in the form of a fringe benefit.

If you received amounts of target foreign income throughout the income year, use the exchange rate applicable on 1 July 2007 to convert foreign amounts to Australian dollars. You will find the applicable exchange rates on the website at www.familyassist.gov.au under ‘How to calculate income’ or you can visit the FAO or phone 13 61 50.

Deductible child maintenance expenditure

Deductible child maintenance expenditure is the amount of child maintenance (also known as child support) you are required to pay to another person to maintain your natural or adopted child. To work out your adjusted taxable income (ATI) deduct this amount from the total of all the other ATI amounts.

Assessment period

An assessment period is used to calculate your shared care percentage.

An assessment period BEGINS on the latest of:

•	the day on which the care of  dependent child starts to be shared OR

•	the day on which care arrangements for the dependent child changed OR

•	1 July in the income year of the claim.

An assessment period ENDS on the earlier of:

•	30 June of the income year in which the period began

•	The day before the day on which the care arrangements of the dependent child changed or

•	The day on which the care of the dependent child stopped.

The assessment period is not affected if there are short-term absences or minor variations to your shared-care arrangements – for example, if a child who normally stays with your ex-spouse for a weekend does not do so because of illness.

Care

Care means that you had responsibility for the day-to-day care, welfare and development of the child. Generally, day-to-day care includes physical care.

You can still care for your dependent child if they are being educated away from your home – for example, at university.

Full care

You had full care of your children if you and/or your current spouse cared for your children for the whole assessment period and you are claiming family tax benefit (FTB) on behalf of your family.

Maintenance Income-Free Area

The maintenance income-free area is the amount of child support (maintenance) you can receive before your Family Tax Benefit Part A payment is reduced.  Maintenance income above the free area reduces your Family Tax Benefit Part A payment by 50 cents in the dollar until the base rate of Family Tax Benefit Part A is reached.

The maintenance income free area is made up of a basic amount for the first child and a supplementary amount for each subsequent child. The maintenance income-free area for 2006-07 is:

Individual’s situation	Basic amount (one child)	For each additional child add
Single	$1,215.45	$405.15
A couple, and both have maintenance income	$2,430.90	$405.15
A couple but only one has maintenance income	$1,215.45	$405.15
If you need the maintenance income-free areas for a previous financial year/s, contact the FAO on 13 61 50 or visit www.familyassist.gov.au.

Prescribed educational scheme

A prescribed educational scheme is the:

•	ABSTUDY schooling scheme, or

•	ABSTUDY tertiary scheme, or

•	Student Financial Supplement Scheme, or

•	Veterans’ Children Education Scheme, or

•	Post-graduate Awards Scheme.

Shared care

Shared care is where you and/or your spouse cared for a child for some of the time during the assessment period and someone else – for example, your ex-spouse – cared for the child for the rest of the time such as weekends or school holidays. You can work out your shared care percentage as follows:

Number of nights you and/or your spouse cared     for the child in an assessment period                                                                                        Number of nights in the assessment period	X    100
You will need accurate records to claim your correct percentage of FTB, particularly if your care arrangements changed during the year. The percentage can be different for different periods if your pattern of care changed during the year. If you need help to work out your shared care percentage visit the FAO or phone 13 61 50.

Spouse

Your spouse is a person of the opposite sex to whom you were legally married, or with whom you lived in a marriage-like relationship at any time during the claim period, provided you were not living separately and apart on a permanent or indefinite basis. You may have had more than one spouse during the claim period. For example, if you were married at the beginning of the claim period, then separated, then lived with a new spouse at the end of the claim period.


You do not have to pay tax on this exempt income
Exempt income - income you do not pay tax on

You may have received income that is exempt from tax and you do not need to include it in your tax return as income. The most common types of exempt income you may have received are listed here. However, some questions in e-tax ask you to show your or your spouse's exempt income.

For information on the type of payment you received, contact the agency or person that paid you.

EXEMPT AUSTRALIAN GOVERNMENT PENSIONS, ALLOWANCES AND PAYMENTS

Pensions

•	Carer payment where:

o	both the carer and either the care receiver or all of the care receivers are under age- pension age, or

o	the carer is under age-pension age and any of the care receivers has died

•	Defence Force income support allowance (DFISA) where the pension, payment or allowance to which it relates is exempt

•	Disability support pension paid by Centrelink to a person who is under age-pension age

•	Double orphan pension

•	Invalidity service pension where the veteran is under age-pension age

•	Partner service pension where either:

o	the partner (excluding the non-illness separated spouse of a veteran) and the veteran are under age-pension age and the veteran receives an invalidity service pension, or

o	the partner is under age-pension age and the veteran has died and was receiving an invalidity service pension at the time of death

•	Veterans' Affairs disability pension and allowances, war widows and war widowers pension

•	Wife pension where both the recipient and partner are under age-pension age or the recipient is under age-pension age and the partner has died

NOTE:

Superannuation Act 1976 and Defence Forces Retirement Benefits Act 1948 pensions and payments are taxable. Show them at item 7.

Lump sum bereavement payments received as part of any of the above payments are exempt only up to the tax-free amount. Phone the Personal Tax Infoline to find out how much of your payment is exempt.

Education payments

•	Supplementary allowances for students paid under the Assistance for Isolated Children Scheme

•	Allowances for students under 16 years of age including those paid under ABSTUDY, Austudy payment, youth allowance, Assistance for Isolated Children Scheme, Commonwealth secondary education assistance and the Veterans' Children Education Scheme

•	Australian-American Educational Foundation grant

•	Commonwealth scholarships or bursaries provided to foreign students

•	Commonwealth secondary education assistance other than that already referred to

•	Pensioner education supplement and fares allowance paid by Centrelink

•	Commonwealth Trade Learning Scholarship

•	Some scholarships and bursaries received by full-time students

•	Language, literacy and numeracy supplement

•	Payments under the Military Rehabilitation and Compensation Act Education and Training Scheme 2004 for eligible young persons whose eligibility was determined under:

o	paragraph 258 (1)(a) of the Military Rehabilitation and Compensation Act 2004 and the eligible young person was under 16 years of age, or

o	paragraph 258 (1)(b) of the Military Rehabilitation and Compensation Act 2004

Other payments

•	Australian Government Disaster Recovery Payments

•	Carer allowance paid under the Social Security Act 1991

•	Child care benefit

•	Commonwealth trade learning scholarship

•	The 2006 one-off payment to older Australians under the Social Security Act 1991 or the Veterans’ Entitlements Act 1986

•	The 2006 one-off payments to carers (carer payment related, wife pension related, partner service pension related, carer service pension related and carer allowance related) under the Social Security Act 1991

•	DFISA bonus

•	Disaster relief payment

•	Employment entry payment

•	Family tax benefit

•	The one-off payment to families and carers under the Family Assistance (One-off Payment to Families and Carers) Scheme 2004

•	Farm household support payments that have been converted to a grant

•	F-111 deseal/reseal ex-gratia lump sum payments

•	Super Co-contributions

•	Lump sum pension bonus paid under the Social Security Act 1991 or the Veterans' Entitlements Act 1986

•	Maternity immunisation allowance

•	Maternity payment

•	Mobility allowance paid under the Social Security Act 1991

•	Open employment incentive bonus paid under the Handicapped Persons Assistance Act 1974

•	Payments from the Australian Government under the incentives payments scheme relating to certain private health insurance policies

•	Payments to older Australians under the scheme determined under Schedule 2 to the Social Security and Veterans’ Entitlements Legislation Amendment (One-off Payments to Increase Assistance for Older Australians and Carers and Other Measures) Act 2006

•	Payments to carers under the scheme determined under Schedule 4 to the Social Security and Veterans’ Entitlements Legislation Amendment (One-off Payments to Increase Assistance for Older Australians and Carers and Other Measures) Act 2006

•	Pharmaceutical allowances paid under the Social Security Act 1991 or the Veterans' Entitlements Act 1986

•	Remote area allowance

•	Rent assistance

•	Seniors concession allowance paid under the Social Security Act 1991 or the Veterans’ Entitlement Act 1986

•	Sugar industry exit grant where you complied with a condition of the grant not to own or operate any agricultural business within 5 years after receiving the grant

•	Telephone allowance paid under the Social Security Act 1991 or Veterans' Entitlements Act 1986

•	Utilities allowance paid under the Social Security Act 1991 or the Veterans’ Entitlements Act 1986

•	Loss of earnings allowance paid under the Veterans’ Entitlement Act 1986.

EXEMPT DEFENCE FORCE AND UNITED NATIONS PAYMENTS

•	Certain pay and allowances for Defence Force personnel – your employer will advise you if an amount is exempt

•	Compensation payments for impairment or incapacity resulting from service with a United Nations armed force

•	Compensation payments made under the Military Rehabilitation and Compensation Act 2004, except those that are income-related payments

•	Pay and allowances for part-time service in the Australian Naval, Army or Air Force Reserve

•	Some allowances paid to Defence Force personnel who served in prescribed overseas areas – your employer will advise you if an allowance is exempt

NON-ASSESSABLE NON-EXEMPT INCOME FOR TEMPORARY RESIDENTS

If you are a temporary resident:

•	your foreign income is non-assessable non-exempt income, except income you earn from your employment overseas for short periods while you are a temporary resident

•	capital gains and capital losses you made from the disposal of assets from 1 July 2006 until 11 December 2006 that do not have the necessary connection with Australia are disregarded, except certain gains on shares and rights acquired under employee share schemes

•	capital gains and capital losses you made from the disposal of assets other than taxable  Australian property on or after 12 December 2006 are disregarded, except certain gains on shares and rights acquired under employee share schemes.

Any income that is non-assessable non-exempt because you are a temporary resident should not be shown on your income tax return.

For further information, see the electronic publication Foreign income exemption for temporary residents.

WHO IS A TEMPORARY RESIDENT?

You are a temporary resident if:

•	you hold a temporary visa granted under the Migration Act 1958

•	you are not an Australian resident within the meaning of the Social Security Act 1991, and

•	your spouse (if applicable) is not an Australian resident within the meaning of the Social Security Act 1991.

If you are an Australian resident for tax purposes but not a temporary resident on or after 6 April 2006 you will not be entitled to the temporary resident exemptions from that time, even if you later hold a temporary visa.

For further information, see Foreign income exemption for temporary residents.

OTHER EXEMPT PAYMENTS

•	Amounts on which family trust distribution tax has been paid (see item A3)

•	Japanese internment compensation payments made under the Compensation (Japanese Internment) Act 2001 or Veterans' Entitlements Act 1986

•	Certain payments relating to persecution during the Second World War

•	Compensation payments received under the German Forced Labour Compensation Programme (GFLCP)

•	Certain annuities and lump sums which are paid to an injured person under a structured settlement

•	Most child support or spouse maintenance payments

•	Mortgage and Rent Relief Scheme payments

NOTE:
For information on the type of payment you received, contact the person or agency that paid you. If you received a payment during 2006-07 and are unsure if it is exempt income, phone the Personal Tax Infoline.


Item T1 Spouse - married or de facto - child-housekeeper or housekeeper
	Spouse(without dependent child or student), child housekeeper or housekeeper
This topic covers:

Who does this apply to?

Dependent spouse – married or de facto

Child-housekeeper

Housekeeper

WHO DOES THIS ITEM APPLY TO?

NOTE:
You will need to read Dependants and separate net income before completing this item.

Complete this item if you had a spouse – married or de facto (without dependent child or student), child-housekeeper or a housekeeper.

DEFINITION:
Your spouse is your husband or wife to whom you are legally married, or a person who lives with you on a genuine domestic basis as your husband or wife. Under Australian law your husband or wife cannot be the same sex as you.

Did you have a dependent child or student for any part of the year?

NO	Go to Dependent spouse – married or de facto below.

YES	Read on.

NOTE:
You cannot claim a spouse tax offset for any period that you or your spouse (during any period they were your spouse) was entitled to family tax benefit (FTB) Part B at a rate based on having full care of a child (full care rate). This rule applies even if neither you nor your spouse claimed FTB Part B when eligible to do so. To find out if you or your spouse was eligible for FTB Part B, you will need to read Family tax benefit. Then click on the Back button above to return to this topic and read on.

Were you or your spouse (during any period they were your spouse) entitled to FTB Part B for the whole year?

NO	Go to Dependent spouse – married or de facto below.

YES	Read on.

Were you or your spouse (during any period they were your spouse) entitled to FTB Part B for any part of the year at a rate based on sharing care of the child with someone else, such as a former spouse (shared care rate)?

NO	You cannot claim a dependent spouse tax offset or a child- housekeeper tax offset – go to Housekeeper.

YES	Read on.

Dependant for tax offset purposes

A dependant needs to be an Australian resident for tax purposes. For a spouse, student or child only, they will be treated as a resident if they have always lived in Australia or they came to live in Australia permanently – unless they have set up a permanent home outside Australia.

Overseas dependants

Your spouse and dependent children who are currently overseas will be considered to be your dependants for tax offset purposes if you were taking the steps necessary for their migration in a timely manner.

DEPENDENT SPOUSE – MARRIED OR DE FACTO ELIGIBILITY CHECKLIST

This section covers:

You need to know

Further information

DEFINITION:
Your spouse is your husband or wife to whom you are legally married, or a person who lives with you on a genuine domestic basis as your husband or wife. Under Australian law your husband or wife cannot be the same sex as you.

YOU NEED TO KNOW

You are eligible to claim a dependent spouse tax offset for any period in 2006-07 that you had a spouse and you met ALL these tests:

•	you maintained your spouse – see What is maintaining a dependant?.

•	your spouse was a resident – if you are unsure read Are you an Australian resident?.

•	you were a resident at any time in 2006-07.

•	neither, your spouse (if they were your spouse during that period) nor you were entitled to FTB Part B or were only entitled to it at the shared care rate (for more information on FTB, read Family tax benefit).

Spouse – married or de facto

If you are claiming the spouse tax offset you also need to complete Spouse details – married or de facto.

Separate net income

NOTE:
Your spouse’s separate net income (SNI) may reduce your claim.

Your spouse’s SNI for the period(s) you are claiming a spouse tax offset reduces your claim by $1 for every $4 by which the SNI exceeds $282. You cannot claim a spouse tax offset if you had a dependent spouse for the whole year and your spouse’s SNI was more than $6,901. Read What is separate net income?.

How much can you claim?

The maximum spouse tax offset you may be able to claim is $1,655.

If you are not eligible for a dependent spouse tax offset, go to Child housekeeper. Otherwise, read on.

Partial tax offset

You may be entitled to claim a partial tax offset if during 2006-07:

•	your had a spouse for only part of the year, or

•	you met all of the eligibility conditions for only part of the income year – for example, if your spouse ceased to be a resident during 2006-07 or neither your spouse nor you were entitled to FTB Part B based for part of the year.

Family tax benefit

You may be entitled to a spouse tax offset for any period during the year that you, or your spouse during any period they were your partner, were NOT entitled to FTB part B and/or any period during the year that you, or your spouse during any period they were your partner, were entitled to FTB Part B which was based on a shared care rate.

EXAMPLE 1

Eligible for family tax benefit (FTB) Part B at any time during the year

Sam re-married on 1 October 2006, so he had a spouse for 273 days during 2006-07.

From 1 October 2006 Sam had full care of Ella, his daughter from his previous relationship.

Ella left school at the end of the 2006 school year and she turned 16 years old on 1 May 2007.

Sam is only entitled to FTB Part B for Ella from 1 October 2006 until 30 April 2007 (212 days).

Sam can claim a dependent spouse tax offset for 61 days (273 days he had a dependent spouse less the 212 days he was entitled to claim FTB Part B for Ella).

EXAMPLE 2

Whole year spouse with part year shared care rate of FTB Part B

Koby had a dependent spouse for the whole year.

Koby and his former spouse shared the care of their son, Aiodan, for the whole year. Koby’s share of the care was 146 nights: Koby’s shared care percentage for the year is 40% (146 nights divided by 365, multiplied by 100).

This means that Koby works out his dependent spouse tax offset for the period they were entitled to FTB Part B at a shared care rate – 365 days at the daily rate multiplied by 60 per cent (100 per cent minus the 40 per cent shared care percentage).

FURTHER INFORMATION

e-tax will display the amount of dependent spouse tax offset you are entitled to. If you want to know how the spouse tax offset is worked out read How your dependent spouse tax offset is worked out.

CHILD HOUSEKEEPER

This section covers:

You need to know

Further information

YOU NEED TO KNOW

A child-housekeeper is your child, adopted child or stepchild who kept house for you full-time. A child who is a full-time student or a full time employee is not considered to keep house full-time. Keeping house means more than just child minding or performing domestic duties. It includes having some responsibility for the general running of the household.

You are eligible to claim a child-housekeeper tax offset for any period in 2006-07 that you had a child-housekeeper and you met ALL these conditions:

•	you maintained your child-housekeeper – see What is maintaining a dependant?.

•	your child-housekeeper was a resident – if you are unsure read Are you an Australian resident?.

•	you were a resident at any time in 2006-07.

•	you were NOT eligible for a dependent spouse tax offset.

•	you were NOT entitled to family tax benefit (FTB) Part B or were only entitled to it at the shared care rate – for more information on FTB, read Family tax benefit.

Separate net income

Your child-housekeeper’s separate net income (SNI) for the period you are claiming a child housekeeper tax offset reduces your claim by $1 for every $4 by which the SNI exceeds $282.

You cannot claim a child-housekeeper tax offset if you had a child-housekeeper for the whole year and your child-housekeeper’s SNI was over $6,901 (or $8,217 if you had an eligible dependent child or student). Read What is separate net income?.

How much can you claim?

The maximum child-housekeeper tax offset you may be able to claim is $1,655 (or $1,984 if you had another eligible dependent child or student). A partial tax offset may apply if you had a child-housekeeper for only part of the year or if you met all the above eligibility tests for only part of the income year.

FURTHER INFORMATION

If you want to know how your tax offset was calculated read How your child-housekeeper tax offset is worked out.

HOUSEKEEPER

This section covers:

You need to know

Further information

YOU NEED TO KNOW

A housekeeper is a person who worked full-time in keeping house for you and cared for:

•	a child of yours aged under 21 years, irrespective of the child’s separate net income (SNI), or

•	any other child aged under 21 years (including a student aged under 21 years) who was your dependant and whose SNI was less than $1,786, or

•	your invalid relative who was your dependant and for whom you can claim a dependant tax offset – if you are unsure you will need to read item T11, or

•	your spouse who received a disability support pension.

Keeping house means more than just child minding or performing domestic duties. It includes having some responsibility for the general running of the household.

Eligibility criteria

If you were an Australian resident at any time in 2006-07, you are eligible to claim a housekeeper tax offset for any period in 2006-07 that you had a housekeeper and you met ALL the tests below for the category which applied to you:

YOU DID NOT HAVE A SPOUSE

•	you were not entitled to claim a child-housekeeper tax offset.

•	you were not entitled to family tax benefit (FTB) Part B or were only entitled to it at the shared care rate – for more information on FTB read Family tax benefit.

YOU HAD A SPOUSE WHO RECEIVED A DISABILITY SUPPORT PENSION

•	you were not entitled to claim a child-housekeeper tax offset.

YOU HAD A SPOUSE WHO DID NOT RECEIVE A DISABILITY SUPPORT PENSION

•	you were NOT entitled to claim a dependent spouse tax offset or a child-housekeeper tax offset.

•	neither your spouse nor you were entitled to FTB Part B or were only entitled to it at the shared care rate – for more information on FTB, read Family tax benefit.

•	special circumstances apply – see Where special circumstances apply below.

Where special circumstances apply

Examples of special circumstances include:

•	your spouse deserted you and your children – and you do not enter a de facto relationship

•	you had a child with a severe mental disability who required constant attention, or

•	your spouse suffers from an extended mental illness and was medically certified as being unable to take part in the care of your children.

If you tell e-tax you think you qualify for the housekeeper tax offset, e-tax will ask you to describe your special circumstances. e-tax will use the information you have entered to prepare an Additional information schedule. Attach your schedule to page 3 of the printed copy of your tax return.

If the Commissioner does not consider that special circumstances applied the Tax Office will advise you

How much can you claim?

The maximum housekeeper tax offset you can claim is:

•	$1,655, or

•	$1,984 if you had an eligible dependent child or student.

A partial tax offset may apply if you had a housekeeper for only part of the income year or if you met all of the eligibility tests (for the category which applied to you) for only part of the income year.

FURTHER INFORMATION

If you want to know how your tax offset was calculated, read How your housekeeper tax offset is worked out.


Item T1 How your child-housekeeper tax offset is worked out
T1	How your child-housekeeper tax offset is worked out

Click on the Print button to get a copy of this worksheet.

Use COLUMN 1 if you had a child-housekeeper and did not have another dependent child under 21 years or student under 25 years.

Use COLUMN 2 if you had a child-housekeeper and another dependent child under 21 years old or student under 25 years old and the separate net income (SNI) of the dependent child or student was less than $1,786.

If the additional child or student was your dependant for only part of 2006-07, use the COLUMN 2 daily rate if their SNI was less than $282 plus $28.92 for each week you maintained them. Otherwise use the COLUMN 1 daily rate.

		COLUMN 1 No other dependent child or student	COLUMN 2 Another dependent child or student
		$1,655 for the whole year (maximum) or $4.53 a day	$1,984 for the whole year (maximum) or $5.44 a day
STEP 1	If you had a child-housekeeper for the whole year and you were NOT entitled to family tax benefit (FTB) Part B at ANY time during the year: 1. Write at (a): • $1,655 in COLUMN 1 if you had no other dependent child or student, or • $1,984 in COLUMN 2 if you had another dependent child or student. 2. Go to step 5.	(a) $_________	(a) $_________
STEP 2	If you had a child-housekeeper for only part of the year and you were NOT entitled to FTB Part B at ANY time during that period: 1. Work out how many days during the year you had a child-housekeeper. 2. Multiply the number of days that you worked out in 1. by the following daily rate: • $4.53 if you had no other dependent child or student (write the answer at (b) in COLUMN 1), or • $5.44 if you had another dependent child or student (write the answer at (b) in COLUMN 2). 3. Go to step 5.	(b) $_________	(b) $_________
STEP 3	If you were entitled to FTB Part B at any time during the year: 1. Work out how many days during the year you had a child-housekeeper and you were NOT entitled to FTB Part B. 2. Multiply the number of days worked out in 1. by the following daily rate: • $4.53 if you had no other dependent child or student (write the answer at (c) in COLUMN 1), or • $5.44 if you had another dependent child or student (write the answer at (c) in COLUMN 2).	(c) $_________	(c) $_________
STEP 4	If you were entitled to FTB Part B at the shared care rate at any time during the year: 1. Work out how many days during the year you had a child-housekeeper and you were entitled to FTB Part B at the shared care rate. 2. Multiply the number of the days you worked out in 1. by the following daily rate: • $4.53 (or use $1,655 if you had a child-housekeeper for the whole year) if you had no other dependent child or student, or • $5.44 (or use $1,984 if you had a child-housekeeper for the whole year) if you had another dependent child or student. 3. Work out your shared care percentage and Example 2. 4. Deduct your shared care percentage from 100%. 5. Multiply the amount you worked out in 2. by the percentage you worked out in 4. 6. Write the amount you worked out in 5. at (d) COLUMN 1 if you used $4.53 or (d) COLUMN 2 if you used $5.44.  NOTE: If the shared care percentage changed during the year you will need to repeat this calculation for each of those periods, then add up these amounts.	(d) $_________	(d) $_________
STEP 5	Add up any amounts at (a), (b), (c) and (d) and write the total at (e). This is your maximum available tax offset. The amount cannot be more than $1,655 (if COLUMN 1) or $1,984 (if COLUMN 2).	(e) $_________	(e) $_________
STEP 6	If your child-housekeeper’s SNI was less than $286, you will receive the full tax offset shown at (e) in your column. This is your allowable tax offset. Otherwise, go to step 7.
STEP 7	If your child-housekeeper’s separate net income (SNI) was $286 or more, write at (f) their SNI for the year (or for the period you are claiming a child-housekeeper tax offset, if this is not for the whole year).	(f) $__________	(f) $__________
STEP 8	SNI at which the tax offset begins to reduce Take (g) away from (f) and write the amount at (h).	(g) $282 (h) $_________	(g) $282 (h) $_________
STEP 9	Divide (h) by 4 and write the amount at (i).	(i)  $_________	(i)  $_________
STEP 10	Take (i) away from (e) at step 5 and write the amount at (j). If the amount at (j) is equal to or less than $0 you cannot claim a child-housekeeper tax offset. If the amount at (j) is more than $0, this is your allowable tax offset.	(i)  $_________	(i)  $_________


Item T1 How your dependent spouse tax offset is worked out
T1	How your dependent spouse tax offset is worked out

Click on the Print button to get a copy of this worksheet.

STEP 1	If you had a dependent spouse for the whole year and neither of you were entitled to family tax benefit (FTB) Part B at ANY time during the year: 1.  Write $1,655 at (a). 2. Go to step 5.	(a)	$____________
STEP 2	If you had a dependent spouse for only part of the year and neither of you were entitled to FTB Part B during that period: 1. Work out the number of days you had a spouse and multiply this number by $4.53 (the daily rate). Write the amount at (b). 2. Go to step 5.	(b)	$____________
STEP 3	If you or your spouse were entitled to FTB Part B at any time during the year (see Example 1): 1. For the period you had a dependent spouse, work out the number of days that neither of you were entitled to FTB Part B. 2. Multiply by $4.53 (the daily rate) the number of those days you worked out in 1.  Write the amount at (c).	(c)	$____________
STEP 4	If you or your spouse were entitled to FTB Part B at the shared care rate at any time during the year (see Example 2): 1. For the period you had a dependent spouse, work out the number of days that you or your spouse were entitled to FTB Part B at the shared care rate. 2. Multiply the number of the days worked out in 1. by $4.53 (or use $1,655 if you had a dependent spouse for the whole year). 3. Work out your shared care percentage (see Example 2). 4. Deduct your shared care percentage from 100%. 5. Multiply the amount you worked out in 2. by the percentage you worked out in 4. Write the amount at (d).	(d)	$____________
STEP 5	Add up any amounts at (a), (b), (c) and (d) and write the total at (e). This is your maximum available tax offset (it cannot be more than $1,655).	(e )	$____________
STEP 6	If your spouse’s SNI for the year (or for the period you are claiming a spouse tax offset if this is not for the whole year) was less than $286, you will receive the tax offset shown at (e) in your column. This is your allowable tax offset. Otherwise, go to step 7.
STEP 7	If your spouse’s SNI was $286 or more, write at (f) their SNI for the year (or for the period you are claiming a spouse tax offset if this is not for the whole year).	(f)	$____________
STEP 8	SNI at which the tax offset begins to reduce  Take (g) away from (f) and write the amount at (h).	(g) (h)	$ 282 $____________
STEP 9	Divide (h) by 4 and write the amount at (i).	(i)	$____________
STEP 10	Take (i) away from (e) and write the amount at (j).	(j)	$____________
STEP 11	If the amount at (j) is equal to or less than $0, you cannot claim a dependent spouse tax offset. If the amount at (j) is more than $0, this is your allowable tax offset.


Item T1 How your housekeeper tax offset is worked out
T1	How your housekeeper tax offset is worked out

Click on the Print button to get a copy of this worksheet.

		COLUMN 1 Nodependent child or student	COLUMN 2 With a dependent child aged under 21 years or a student aged under 25 years
STEP 1	If you are eligible for a housekeeper tax offset for the whole year AND: • neither you, nor your spouse during any period they were your spouse, were entitled to family tax benefit (FTB) Part B at ANY time during the year, or • your spouse received a disability support pension for the whole year Write the appropriate amount from COLUMN 1 ($1,655) or COLUMN 2 ($1,984) at (d) step 5.	$1,655 for the whole year (maximum) or $4.53 a day	$1,984 for the whole year (maximum) or $5.44 a day
STEP 2	If you are eligible for a housekeeper tax offset for the whole year: 1. Work out the number of days that: • neither you nor your spouse (during any period they were your spouse) were entitled to FTB Part B, or • either you or your spouse (during any period they were your spouse) were entitled to FTB Part B, but your spouse was receiving a disability support pension. 2. Multiply the number of days you worked out in 1. by the daily rate ($4.53 or $5.44). Write the amount you calculated at (a), then go to step 4.	(a) $_________	(a) $_________
STEP 3	If you are eligible for a housekeeper tax offset for only part of the year: 1. Work out the number of days during that part year that: • neither you nor your spouse (during any period they were your spouse) were entitled to FTB Part B, or • either you or your spouse (during any period they were your spouse) were entitled to FTB Part B, but your spouse was receiving a disability support pension. 2. Multiply the number of days you worked out in 1. by the daily rate ($4.53 or $5.44) and write the amount you calculated at (b).	(b) $_________	(b) $_________
STEP 4	If – for any period during the year – you did NOT have a spouse receiving a disability support pension and you are eligible for a housekeeper tax offset: 1. Work out the number of days during that period that you, or your spouse during any period they were your spouse, were entitled to FTB Part B based on a shared care rate. 2. Multiply the number of days by the daily rate ($4.53 or $5.44) 3. Multiply the amount you worked out in 2. by 100% minus the shared care percentage (see Example 2) and write the amount you calculated at (c). NOTE: If the shared care percentage changes during the year you will need to do this step for each period during the year that the percentage was different.	(c) $_________	(c) $_________
STEP 5	Add up any amounts at (a), (b) and (c) and write the total at (d). This is your allowable tax offset.	(d) $_________	(d) $_________


Item T2 Senior Australians tax offset
	Senior Australians
This topic covers:

Who does this item apply to?

You need to know

Further information

Spouse details – married or de facto

Veteran code letter

Your tax offset code letter

Do you want to work out your tax offset?

WHO DOES THIS ITEM APPLY TO?

Complete this item if you are eligible for the senior Australians tax offset.

YOU NEED TO KNOW

Eligibility for senior Australians tax offset provides information on eligibility for this tax offset. If you have a spouse, you will also need to work out if your spouse is eligible.

e-tax will decide whether you may be eligible for this tax offset using answers you have already given to questions in this interview. You will not be asked to complete this item if you are not eligible.

Before you answer this item, make sure you have entered your correct date of birth in the Personal details screen. You can use the Navigator to return to the Personal details section of the interview to review the date of birth you have entered.

FURTHER INFORMATION

Spouse details – married or de facto

DEFINITION:
Your spouse is your husband or wife to whom you are legally married, or a person who lives with you on a genuine domestic basis as your husband or wife. Under Australian law your husband or wife cannot be the same sex as you.

If you had a spouse at any time during 2006-07, you will need to complete the Spouse details – married or de facto screen before e-tax continues.

Provide relevant details including:

•	your spouse’s date of birth

•	your spouse’s taxable income – if this amount is zero, enter ‘0’

•	your spouse’s share of trust income on which the trustee is assessed under section 98, if it is not already included in your spouse's taxable income – if this amount is zero, enter ‘0’

•	your spouse’s Australian Government pension income, if this amount is zero, enter ‘0’

•	your spouse’s exempt pension income – if this amount is zero, enter ‘0’

If you do not see the Spouse details – married or de facto screen and you did have a spouse at any time during 2006-07, use the Navigator to return to the Personal details – Did you have a spouse at any time during 2006-07 section of the interview. Re-answer the question and provide your spouse’s details.

Veteran code letters

This section of the e-tax interview only applies to you if, on 30 June 2007 you were:

•	a male aged between 60 and 65 years or

•	a female aged between 58 and 63 years.

If the Yes button is not enabled and you think this question applies to you, use the Navigator to return to the Personal details section of the interview. Re-enter your date of birth.

If you or your spouse is a veteran, war widow or war widower, select the veteran code that applies to your circumstances:

VETERAN CODE LETTERS

you were a veteran, war widow or war widower	V
your spouse was a veteran, war widow or war widower	W
Both V and W apply to you	X
If you answer Yes – you were a veteran – AND you did not have a spouse at any time during 2006-07, e-tax will automatically select Veteran Code V and move you to the next screen.

Your tax offset code letter

Find the tax offset code letter that applies to your circumstances from the Tax offset code letters table below. This code letter tells us the amount of tax offset your entitlement will be based on.

SENIOR AUSTRALIAN TAX OFFSET CODE LETTERS

If at any time during 2006-07, you were single, separated or widowed	A
If you and your spouse – married or de facto – ‘had to live apart due to illness’or because one of you was in a nursing home at any time in 2006-07 and you are both eligible for the senior Australians tax offset	B
If you and your spouse – married or de facto – ‘had to live apart due to illness’ or because one of you was in a nursing home at any time in 2006-07 but your spouse is not eligible for the senior Australians tax offset	C
If you and your spouse – married or de facto – were living together and you are both eligible for the senior Australians tax offset	D
If you and your spouse – married or de facto – were living together but your spouse is not eligible for the senior Australians tax offset	E
If more than one code letter applies to you, e-tax will write the letter that appears first in the following order: A, B, C, D, E to your tax return. For example, if both B and D apply to you, e-tax will use B.

Exceptions to this rule:

•	If both A and B apply to you and your spouse’s taxable income was less than $18,334, e-tax will use B as this gives you the correct tax offset. Included in e-tax’s calculation of your spouse’s taxable income will be any net income of a trust estate to which your spouse is presently entitled and on which the trustee is assessed under section 98 of the Income Tax Assessment Act 1936. (ITAA 1936)

•	If both A and C apply to you, and your spouse received an Australian Government pension or allowance as listed at item 6 and their taxable income was less than $17,260, e-tax will use C as this gives you the correct tax offset.

•	If both A and D apply to you, and your spouse’s taxable income was less than $12,494, e-tax will use D as this gives you the correct tax offset. (Included in e-tax’s calculation of your spouse’s taxable income will be any net income of a trust estate to which your spouse is presently entitled and on which the trustee is assessed under section 98 of the ITAA 1936.)

•	If both A and E apply to you, and your spouse received an Australian Government pension or allowance as listed at item 6 and your spouse’s taxable income was less than $11,960, e-tax will use E as this gives you the correct tax offset.

If you did not have a spouse at any time during 2006-07, e-tax will automatically select Tax Offset A and move you to the next screen.

NOTE:
If you enter an incorrect code letter you may not receive your correct entitlement.

Unused tax offset available for transfer

If you were eligible for the senior Australians tax offset and your spouse was eligible for the senior Australians or pensioner tax offset, and one of you does not fully use your tax offset, the unused portion may be available for transfer to the other person. By using the amounts you enter on the spouse details section of your tax return The Tax Office will work out if you are entitled to have the unused portion of your spouse's tax offset transferred to you. If an unused amount is available, The Tax Office will make sure it is taken into account in working out your tax offset.

NOTE:
In working out if there is any unused spouse’s senior Australians or pensioner tax offset available for transfer, we do not take your spouse’s other credits and tax offsets into account.

EXAMPLE

Sonya is married to Russell and they have lived together for the whole 2006-07 income year. Russell – who is a veteran – received a service pension. Sonya and Russell were both over pension age and their combined taxable income was less than $66, 992. They were both eligible for the senior Australians tax offset. Sonya’s taxable income was $20,800 and Russell’s was $10,200.

Sonya selects tax offset code letter D at item T2.

Sonya also selects veteran code letter W at item T2.

Sonya completes Spouse details – married or de facto screen, so any tax offset that Russell does not use will be automatically transferred to Sonya to be taken into account when her tax offset is calculated.

DO YOU WANT TO WORK OUT YOUR TAX OFFSET?

You do not have to work out your tax offset. We will work it out for you from your taxable income details and your tax offset code letter and your veteran code letter (if applicable).

If you do want to work out your tax offset, go to How your senior Australians tax offset is worked out, or you can use the senior Australians and pensioner tax offset calculator on our website.

If you have entered a tax offset code letter and a veteran code letter (if applicable) at item T2, go to item T4. DO NOT complete item T3 pensioner tax offset.


Item T2 Australian resident for aged pension purposes

If you have been an Australian resident for less than 10 years you may be considered to have been a resident for age pension purposes if you have special circumstances – some examples are refugees and people covered by Social Security International Agreements. If this applies to you, phone the Personal Tax Infoline.


Item T2 Definition

‘Had to live apart due to illness’ is a term used to describe a situation where the living expenses of you and your spouse – married or de facto – were increased because you are unable to live together in your home due to the indefinitely continuing illness or infirmity of either or both of you.


Item T3 Pensioner tax offset
	Pensioners
This topic covers:

Who does this item apply to?

You need to know

Further information

Tax offset code letters

Spouse details

Veteran code letters

Do you want to work out your tax offset?

WHO DOES THIS ITEM APPLY TO?

Complete this item if:

•	you received income – shown at item 6 – from an Australian Government pension or allowance

AND

•	you are NOT eligible for the senior Australians tax offset for the 2006-07 income year.

YOU NEED TO KNOW

e-tax will decide whether you may be eligible for this tax offset using answers you have already given to questions in this interview. You will not be asked to complete this item if you are not eligible.

FURTHER INFORMATION

Tax offset code letter

Find the tax offset code letters that applies to your circumstances in the Tax offset code letters table below. This code letter tells us the amount of tax offset your entitlement will be based on.

TAX OFFSET CODE LETTERS

Standard circumstances

If at any time during 2006-07 while you were receiving an  Australian Government pension or allowance:
you were single, widowed or separated	S
you and your spouse – married or de facto – lived together	P
you and your spouse – married or de facto – had to live apart due to illness or because one of you was in a nursing home	I
NOTE:
Had to live apart due to illness is a term that relates to the payment of pensions. This would apply to you if you were paid the pension at a higher rate because Centrelink or the Department of Veterans’ Affairs ( DVA) determined that you and your spouse were separated due to illness. If you are unsure check with Centrelink or DVA.

Where more than one code letter applies, click on each applicable code. e-tax will apply the following rules:

If both I and P apply to you, e-tax will use	I
If S, I and P all apply to you, e-tax will use	J*
If both S and I apply to you, e-tax will use	J*
If both S and P apply to you, e-tax will use	Q*
*	Tax offset codes J and Q are used to calculate correct entitlements in certain situations if more than one tax offset code applies.

If you did not have a spouse at any time during 2006-07, e-tax will automatically select Tax Offset Code S and move you to the next screen.

NOTE:
If you enter an incorrect code letter you may not receive your correct entitlement

SPOUSE DETAILS

DEFINITION:
Your spouse is your husband or wife to whom you are legally married, or a person who lives with you on a genuine domestic basis as your husband or wife. Under Australian law your husband or wife cannot be the same sex as you.

If your tax offset code is P, Q, I, or J you must complete the Spouse's details – married or de facto section.

Provide relevant details including:

•	your spouse's date of birth

•	your spouse’s taxable income – if this amount is zero, enter ‘0’

•	your spouse's share of trust income on which the trustee is assessed under section 98 of the Income Tax Assessment Act 1936, if it is not already included in your spouse's taxable income – if this amount is zero, enter ‘0’

•	your spouse’s Australian Government pension income – if this amount is zero, enter ‘0’

•	your spouse’s exempt pension income – if this amount is zero, enter ‘0’.

If you do not see the Spouse details – married or de facto screen and you did have a spouse at any time during 2006-07, use the Navigator to return to the Personal details – Did you have a spouse at any time during 2006-07? section of the interview. Re-answer the question and provide your spouse’s details.

VETERAN CODE LETTERS

This section of the e-tax interview only applies to you if, on 30 June 2007 you were:

•	a male aged between 60 and 65 years or

•	a female aged between 58 and 63 years.

If the Yes button is not enabled and you think this question applies to you, use the Navigator to return to the Personal details section of the interview. Re-enter your date of birth.

If your spouse or you were a veteran, war widow or war widower, select the veteran code that applies to your circumstances:

Veteran code letters

you were a veteran, war widow or war widower	V
your spouse was a veteran, war widow or war widower	W
if both V and W apply to you	X
If you answer Yes – you are a veteran – AND you did not have a spouse at any time during 2006-07, e-tax will automatically select Veteran Code V and move you to the next screen.

Unused senior Australians or pensioner tax offset available for transfer

If both you and your spouse were eligible for the senior Australians tax offset or pensioner tax offset and one of you does not fully use your tax offset, the unused portion may be available for transfer to the other person. By using the amounts you enter on the spouse details section of your tax return we will work out if you are entitled to have the unused portion of your spouse's tax offset transferred to you. If an unused amount is available, we will make sure it is taken into account in working out your tax offset.

NOTE:
In working out if there is any unused spouse’s senior Australians or pensioner tax offset available for transfer to you, we do not take your spouse’s other credits and tax offsets into account.

DO YOU WANT TO WORK OUT YOUR TAX OFFSET?

You do not have to work out your tax offset. We will work it out for you from your taxable income details and your tax offset code letter and your veteran code letter (if applicable).

If you do want to work out your tax offset, read How to work out your pensioner or senior Australians tax offset.or you can use the senior Australians and pensioner tax offset calculator on our website.


Item T4 Superannuation annuity and pension
	Superannuation Annuity and pension
This topic covers:

Who does this item apply to?

WHO DOES THIS ITEM APPLY TO?

Complete this item if you:

•	received income – shown at item 7 – from an Australian superannuation annuity or pension.

If you showed income from an Australian annuity or pension at item 7 on your tax return, you may be entitled to a tax offset equal to 15% of all or part of your taxable pension or annuity income.

Your superannuation annuity or pension statement or original superannuation fund documents will tell you if your annuity or pension qualifies for a tax offset. Your statement or documents will show you how much of your annuity or pension is eligible for the tax offset. If you cannot find your documents, or are not sure whether you can claim a tax offset contact your superannuation provider.

Before working out your Australian annuity or pension tax offset, you will need to know:

•	any deductible amount from item D9 on your tax return

•	the rebatable proportion. This is the part of your pension or annuity that may be eligible for the pension tax offset. It may be one, less than one or zero, depending on the type and amount of your pension or annuity. The Tax Office determines the rebatable proportion by measuring your pension or annuity against your reasonable benefit limit (RBL). Your rebatable proportion will be one unless:

o	you were issued with an RBL determination stating otherwise or

o	you were receiving a pension that was previously payable to someone who has died and an RBL determination has been issued for the pension when it originally commenced showing a rebatable proportion of less than one.

If you need assistance, phone the Superannuation Infoline on 13 10 20

If you want to know how e-tax works out your tax offset, read How your pension or annuity tax offset is worked out.


Item T4 How your pension or annuity tax offset is worked out
T4	How your pension or annuity tax offset is worked out

a)	Work through steps 1 to 3 if:

o	you were 55 years of age before 1 July 2006

o	you turned 55 years old on or after 1 July 2006 and your pension started on or after your 55th birthday, or

o	you were receiving a death or disability pension regardless of your age.

b)	Work through steps 4 to 11 if:

o	you turned 55 years of age on or after 1 July 2006 and your pension started before your 55th birthday.

STEP   1	Take away any deductible amount at item D9 from that part of your annuity or pension which is eligible for a tax offset.

STEP   2	Multiply the answer from step 1 by the rebatable proportion of your annuity or pension.

STEP   3	Work out 15% of the answer you got at step 2. This is your tax offset.

STEP   4	Work out the amount of your annuity or pension that was paid to you on or after your 55th birthday.

STEP   5	Work out the number of days from your 55th birthday to 30 June 2007.

STEP   6	Work out the number of days from the day your annuity or pension started, to 30 June 2007. If it started before 1 July 2006, use 365 days.

STEP   7	Divide the number of days at step 5 by the number of days at step 6.

STEP   8	Multiply any deductible amount (at item D9) by the answer you got at step 7.

STEP   9	Take away the answer you got at step 8 from the answer at step 4.

STEP 10	Multiply the answer you got at step 9 by the rebatable proportion of your annuity or pension. Your rebatable proportion will be 1 unless you were issued with an RBL determination stating otherwise.

STEP 11	Work out 15% of the answer you got at step 10. This is your annuity or pension tax offset.


Item T5  Private health insurance rebate
	Private health insurance rebate
This topic covers:

Who does this item apply to?

You need to know

What you may need

Further information

The old incentive scheme

WHO DOES THIS ITEM APPLY TO?

Complete this item if you:

•	paid the premium, or your employer paid the premium for you, for an appropriate private health insurance policy

AND

•	you did not receive your full entitlement to a private health insurance rebate from your health fund or Medicare.

NOTE:
An appropriate private health insurance policy is one provided by a registered health fund for hospital, ancillary – also known as ‘extras’ – or combined hospital and ancillary cover where every person covered by the policy is a person who is eligible to claim benefits under the Medicare system. To find out if your health fund is a registered health fund visit the Private Health Insurance Administration Council website at www.phiac.gov.au or refer to private health insurance funds.

YOU NEED TO KNOW

The private health insurance rebate is worked out as a percentage of the premium paid to a registered health fund for appropriate private health insurance cover. The percentage of rebate you may be entitled to claim is determined by the age of the oldest person covered by the policy. The rebate is not affected by your level of income. Refer to How the rebate works. Your fund should have sent you your private health insurance statement showing the details of your rebate level.

If you have statements from all of the health funds you paid a premium to and the amount(s) at ‘G’ on your statement(s) are 0 you have already received your full entitlement and you do not need to read any further in this item.

Claiming the rebate

The rebate can be claimed as:

•	a reduction in your private health insurance premium through the health fund or

•	a cash or cheque rebate from Medicare or

•	a refundable tax offset at the end of the income year through your tax return, or

•	a combination of all options – each for a different period during the year.

You can only claim the rebate under one method for each period, that is, if you have already received the rebate by way of a reduction in your premium through the health fund or a rebate from Medicare you cannot also claim a tax offset for premiums paid for the same period.

How the rebate works

The rebate is based on the premium you paid, or your employer has paid for you, for appropriate health insurance cover. You work out your entitlement at 30%, 35% or 40% of the premium paid, depending on the age of the oldest person covered by the policy and the number of days this person was in this age category.

Age of the oldest person covered by the policy*	Amount of rebate
Less than 65 years	30% of the amount of premium paid
65 years to under 70 years	35% of the amount of premium paid
70 years or over	40% of the amount of premium paid

*	If the oldest person moves into the next age groups during the year the rebate is based on the number of days that person was in each group. Your health fund will calculate this automatically.

Once the policy becomes eligible for the higher rebate, it will retain this eligibility even if the person who established the eligibility comes off the policy. Additionally, the eligibility continues even if the policy holder changes funds or policies after this. However this ongoing eligibility for the higher rate will be affected if a new person is added to the policy after the person established the eligibility leaves the policy. In this circumstance you should contact your health fund for more information on how your rebate level will be determined.

If the policy was in operation before 1 January 1999, you may be entitled to a higher amount under the Private Health Insurance Incentive Scheme – the old incentive scheme – If you have an eligible policy under the old incentive scheme the statement you receive from your health fund will show the amount you may be able to claim.

If your health fund statement shows an amount in a box for ‘Maximum Private Health Insurance Incentive amount – label G’ – this is the amount under the old incentive scheme. If you have this box and the amount shown is greater than the amount in the box for ‘Maximum claimable rebate on Private Health Insurance – label G’, then you may be eligible to claim the higher amount if you meet certain eligibility and income tests.

Read The old incentive scheme for an explanation of the eligibility tests that applied for registration under the old incentive scheme.

NOTE:
If two people make payments for the same policy – for example, you make payments from a joint bank account – each person can claim the relevant percentage for the proportion of the premium they paid.

Did you receive a private health insurance statement from your health fund?

Your health fund should have sent you a statement showing the premium you have paid. If you paid a premium for more than one policy, you should have received a statement for each policy.

If you did not receive a statement for one or more of the policies you have paid for you should contact your health fund and request one.

WHAT YOU WILL NEED

•	a private health insurance statement and

•	the amount of any cash or cheque rebate received from Medicare for your private health insurance.

It is better if you complete this item using the annual statement which health funds give all policy holders.

However, if you cannot get a statement, or if your statement shows a total amount expected to be paid during the year which is different to the total amount actually paid (for example, you did not make one of the expected payments) you can use the following worksheet to help you calculate your tax offset.

Use Worksheet 1, if your rebate percentage did not change during the period the payments cover

Use Worksheet 2 if your rebate percentage changed during the period the payments cover – for example, a person covered by the policy turned 65 0r 70.

Worksheet 1 – Use if your rebate percentage did not change during the period your payments cover.

Total premiums paid during 2006-07 for the policy before any premium reduction from your health fund or rebate from Medicare	(a)	$___________
Your rebate percentage	(b)	___________%
Multiply (a) by the percentage shown at (b)	(c)	___________
Amount, if any, of premium reduction from your health fund or rebate from Medicare	(d)	___________
Take (d) away from (c)	(e)	___________
The amount at (e) is what you are entitled to claim. If (e) is ‘0’ or a negative amount you have already received your full entitlement.  Go to item T6

Worksheet 2 – Use only if your rebate percentage changed during the period your payments cover.  Add another column if the percentage changed more than once

Total premiums paid during 2006-2007 for the policy before any premium reduction from your Health Fund or rebate from Medicare	(a)	$___________
Number of days the amount shown in (a) covers	(b)	___________
	Column 1		Column 2
	Rebate for first period		Rebate for second period
Your rebate percentages for the days shown in (b)	(c)	______%		(c)	______%
Number of days to which the rebate percentages in (c) apply	(d)	________		(d)	________
Multiply (a) by (d)	(e)	$_______		(e)	$_______
Divide (e) by (b)	(f)	$_______		(f)	$_______
Multiply (f) by the percentage shown at (c)	(g)	$_______		(g)	$_______
Add Column 1 (g) to Column 2 (g)	(h)	$
Amount, if any, of premium reduction from your Health Fund or of rebate from Medicare	(i)	$___________
Take (i) away from (h)	(j)	$___________
The amount at (j) is what you are entitled to claim. If (j) is ‘0’ or a negative amount you have already received your full entitlement. Go to item T6.

FURTHER INFORMATION

If you want to know how e-tax works out your rebate, read How your private health insurance tax offset is worked out.

THE OLD INCENTIVE SCHEME

The Private Health Insurance Incentive Scheme (PHIIS) ceased on 31 December 1998 and was replaced by the 30% private health insurance rebate. If you had a policy before 1 January 1999 and were eligible to claim a rebate for the policy under PHIIS, you are entitled to compare the PHIIS amount you would have been entitled to with the private health insurance rebate amount and claim whichever is higher.

Eligibility for PHIIS

To be entitled to claim the PHIIS amount, your current private health insurance policy needs to have:

•	been in existence before 1 January 1999 and provide appropriate private health insurance cover for 1998-1999, and

•	had an annual premium for 1998-1999 above the minimum premium threshold amount.

You must also have satisfied certain income tests for the 1998-99 income year.

Appropriate private health insurance cover

A policy provided appropriate private health insurance cover if it provided hospital cover or ancillary cover or both and the health fund premium was not less than the minimum premium showing in the table below.

MINIMUM PREMIUM

Hospital cover	Ancillary cover
1 person $250	1 person $125
2 or more $500	2 or more $250
Income Tests

If the policy covered…	The income test was satisfied if the…
1 person (single policy) without a spouse	taxable income was less than $35,000
1 person (single policy) with a spouse	combined taxable income was less than $70,000
2 adults (couple policy)
3 or more adults (family policy)
1 or more adults and at least 1 related child (family policy)	combined taxable income was less than $70,000 plus $3,000 for each dependent child after the first
2 or more dependent children only (family policy)
Combined taxable income

For the purposes of the income test – (if a policy was held at any time during the year) – combined taxable income is:

•	the sum of the taxable income of each adult covered by the policy and their spouse – married or de facto – if they had a spouse on 30 June 1999 or

•	if the only person(s) covered by the policy is a dependent child or children, the sum of the taxable income of each parent or guardian and their spouses – married or de facto – if they had a spouse on 30 June 1999. This applies only to a parent or guardian who paid premiums for the policy, or arranged for a third party, such as an employer, to pay the premiums.

Trust income

Your taxable income includes any share of net income of a trust estate to which you were entitled and on which a trustee of the trust estate is assessed under section 98 of the Income Tax Assessment Act 1936 .

Dependent child

A child was regarded as a dependant for PHIIS if:

•	they were under 18 or a full-time student under 25, and

•	they were covered by the policy and the health fund that issued the policy accepted the child as a dependent child for the purposes of the policy, and

•	they did not have a spouse (married or de facto)

Income derived by any dependent children is not included in the combined taxable income amount. If you had a child who was not a dependent child (for example, an employed 19 year old son or daughter who lived with you) and they were covered by the policy, you must include their 1998-1999 income in the combined taxable income amount.

If a person was eligible to apply for registration under the old incentive scheme e-tax will ask you to calculate and enter an old incentive scheme amount. Read How to calculate the old incentive scheme (PHIIS) amount for e-tax.


Item T5 Definition
T5 Definition

An ‘appropriate private health insurance policy’ is one provided by a registered health fund for hospital, ancillary – also known as ‘extras’ – or combined hospital and ancillary cover where every person covered by the policy is a person who is eligible to claim benefits under the Medicare system.

To find out if your health fund is a registered health fund, visit the Private Health Insurance Administration Council website at www.phiac.gov.au


Item T5 How to calculate the rebate under the old incentive scheme
Item T5	How to calculate the old incentive (PHIIS) amount for e-tax

If a person was eligible to apply for registration under the old incentive scheme, e-tax will ask you to complete the worksheet below to find out the old incentive (PHIIS) amount. e-tax will use this amount to work out if the rebate that would have been available under the old incentive scheme would have resulted in a higher rebate. Use the table below to work out the maximum annual rebate under the old incentive scheme. You can claim the maximum rebate from the table below if your policy type remained the same for the full year, and your premium provided cover for the full year.

MAXIMUM ANNUAL INCENTIVE AMOUNT

Policy type	Hospital cover only	Ancillary cover only	Hospital and ancillary cover
Single	$100	$25	$125
Couple	$200	$50	$250
Family	$350	$100	$450

WORKSHEET – CALCULATING THE OLD INCENTIVE AMOUNT

Where you had only one type of cover during the year, write the maximum annual rebate for the type of cover under the old incentive scheme.	(k)	$___________
Multiply (k) by the number of days the premium provided this type of cover for.*	(l)	$___________
Divide (l) by 365.	(m)	$___________
If your type of cover changed during the year, repeat steps (k), (l) and (m) for each type of cover and add the answers together for a total figure at (m).
Your premium reduction amount from your health fund – if any.	(n)	$___________
Take (n) away from the total at (m). Round this amount up to the nearest dollar.	(o)	$___________
* 	The number of days you use here relates to the policy, not the calendar or income years

Enter the amount at (o) in the e-tax screen. e-tax will use this amount to work out the rebate that would have been available under the old incentive scheme.


Item T5 How your 30% private health insurance tax offset is worked out
T5 How your private health insurance rebate is worked out

Amount shown at G on your statement	(a)	$___________
Amount of any cash or cheque rebate you have received from Medicare for your private health insurance premium	(b)	$___________
Take (b) away from (a)	(c)	$___________
Multiply (c) by the relevant percentage for the proportion of the premium paid.	(d)	$___________
The amount at (d) is the tax offset you are eligible to claim. If you had more than one policy add up the (d) amounts. The total is the tax offset that you are eligible to claim.


Tax offsets

Tax offsets directly reduce the amount of tax you must pay. They are not the same as deductions which are taken off your income before your tax is worked out. With a tax offset, we work out the tax due on your taxable income then reduce it by the total amount of your tax offsets.

Tax offsets can only reduce the amount of tax you pay to zero, that is, if your tax offsets are greater than your tax due, you do not get a refund of the excess amount – with three exceptions. The three refundable tax offsets are:

•	the private health insurance rebate (see item T5)

•	the franking tax offset (see item 11)

•	the baby bonus (see item T7).

Tax offsets, in general, do not reduce your Medicare levy, however, where you have excess refundable tax offsets you can use them to reduce your tax, including your Medicare levy.

Generally, there are three types of tax offsets. They:

•	provide tax relief for personal circumstances (for example, tax offsets for senior Australians and people living in remote areas)

•	give you a credit for an amount of tax that has effectively already been paid (for example, credits for franked dividends and foreign tax)

•	provide an incentive (for example,  the tax offset for mature age workers and the private health insurance rebate).


Auto-update e-tax

From time to time, the Tax Office may place updates of e-tax on the internet. You can check for updates at any time.  Alternatively, e-tax will check for updates when you are verifying your identity, pre-filling or lodging.

Installing an updated version of e-tax will not affect any e-tax files you may already have created.

To check for updates at any time, follows these steps:

1.	Run e-tax. Click Check for updates in the opening screen.

2.	If you are not currently logged on to the internet, you will need to establish your connection in the normal manner.  e-tax will check version information.

If you are running the latest version of e-tax, e-tax will alert you that no updates are available.

If you are not running the latest version of e-tax, e-tax will alert you that updates are available.

If you want to download the updates, click Yes.

If you do not want to download the updates, click No. e-tax will advise you that you will not be able to verify your identity, pre-fill or lodge until you have downloaded the updates.

3.	If you indicate you want to download the updates, e-tax will commence to download the updates.  Note that some e-tax updates are patches and some are full versions.  Patch files apply changes to installed software and are much smaller than full versions.

Each step of the download will be displayed in the status section of the screen.

The time it takes to download the update will depend on the size of the update file(s) and the speed of your internet connection.

If the connection to the internet is broken for any reason it does not matter. Just run e-tax and begin the auto update process again.

e-tax writes the downloaded file(s) to your "etax2007" folder.

NOTE:
If you cancel the download of updates, e-tax will advise you that you will not be able to verify your identity, pre-fill or lodge until you have downloaded the updates.

4.	When the download is complete, e-tax will close and the installation/update program will run automatically.  Follow the on-screen instructions.

NOTE:
The update file that e-tax has downloaded and automatically executed will also be written to your disk in the "etax2007" folder. If you have more than one computer running e-tax in your household, you can copy the update file to the other computer. Double click on the update file to run it.

5.	When the installation of the update has finished, re-open e-tax in the normal manner.

The e-tax software will check for updates when you verify your identity, pre-fill or lodge.  The e-tax software will follows these steps:

1.	When you initiate a transaction that requires a connection to the internet, the e-tax software will check for updates.  This could occur when you are verifying your identity, pre-filling or lodging,

2.	If you are not currently logged on to the internet, you will need to establish your connection in the normal manner.  e-tax will check version information.

If you are not running the latest version of e-tax, e-tax will alert you that updates are available.  Click Next.

NOTE:
If you are running the latest version of e-tax, you will be able to continue to verify your identity, pre-fill or lodge.

3.	e-tax will commence to download the updates.  Note that some e-tax updates are patches and some are full versions.  Patch files apply changes to installed software and are much smaller than full versions.

Each step of the download will be displayed in the status section of the screen.

The time it takes to download the update will depend on the size of the update file(s) and the speed of your internet connection.

If the connection to the internet is broken for any reason it does not matter.  Just run e-tax and repeat the process again.

e-tax writes the downloaded file(s) to your "etax2007" folder.

NOTE:
If you cancel the download of updates, e-tax will advise you that you will not be able to verify your identify, pre-fill or lodge until you have downloaded the updates.

4.	When the download is complete, e-tax will close and the installation/update program will run automatically.  Follow the on-screen instructions.

NOTE:
The update file that e-tax has downloaded and automatically executed will also be written to your disk in the "etax2007" folder.  If you have more than one computer running e-tax in your household, you can copy the update file to the other computer. Double click on the update file to run it.

5.	When the installation of the update has finished, re-open e-tax in the normal manner.  When you re-access your file, e-tax should take you to the section you were at immediately before you were verifying your identity, pre-filling or lodging.


Validation

Validation is the first step in the Lodgment process.

Whenever you click on the Lodgment button in the navigator e-tax will check your file to make sure you have entered all the required information. e-tax will also check that your answers to questions – as well as any amounts you have entered – are consistent with the information you have given us. We refer to this process as validation. Your file must pass all the validation tests before it can be lodged electronically.

VALIDATION ERRORS

If your file fails any of the validation tests the errors will be displayed in the box in the centre of the screen. For example:

Follow these steps to locate and correct each error.

STEP 1	Click on (highlight) the error you want to locate. The error V17 is selected in the example above.

STEP 2	If you do not understand the error message or you want to read more about it, click on the More button.

STEP 3	Click on the Next button. e-tax will move to the interview screen on which the error was made.

STEP 4	Correct the error and then click on the Lodgment button in the e-tax navigator. e-tax will pass control back to the Validation screen. The error message will no longer appear on the screen if the error has been corrected.

Repeat steps 1 to 4 until there are no more error messages. Click on the Next button. e-tax will move to the Review screen.


    Closing e-tax

You can stop using e-tax at any time. You do not need to complete your tax return and baby bonus claim in one go.

NOTE:
e-tax may require you to complete a particular section within an item before you can close the file.

When you want to exit e-tax, click on the Close button. If you have made changes since the last time you saved the file, e-tax will ask you whether you want to save the current file. Click on:

•	Yes to save the file; or

•	No to exit the file without saving any of the changes you have made; or

•	Cancel to continue working on the file.

e-tax will remember the last interview screen you were in. The next time you run e-tax and open this file, you can continue working where you left off.

See also:

Existing files


Close e-tax

Click on this button to exit e-tax.

 More information


Depreciating assets in e-tax

This topic covers:

Who does this topic apply to?

What you may need

You need to know

STS taxpayer for capital allowance purposes

Using e-tax to work out your deduction for decline in value

Getting started

Choosing to use a low-value pool

Depreciating asset worksheets

Low-value pool worksheet

STS pool worksheets

Completing the Capital allowances schedule 2007

Navigating e-tax and depreciation worksheets

Printing your depreciation worksheets

How the decline in value amounts are written to your return

Total assessable adjustments

Total deductible amounts

Total depreciation

Record keeping

WHO DOES THIS TOPIC APPLY TO?

The information provided here applies to you if you are entering an amount of decline in value expenses at any of the following items in e-tax:

•	Item 14 – Net income or loss from business (PP and NPP),

•	Item 20 – Rent and

•	Item D5 – Other work-related expenses.

WHAT YOU MAY NEED

•	the Guide to depreciating assets 2007 (NAT 1996-6.2007)

•	Taxation Ruling TR2006/15 – Income tax: effective life of depreciating assets

•	Taxation Ruling IT 2685 – Income tax: depreciation.

YOU NEED TO KNOW

STS taxpayer for capital allowance purposes

If you complete item 14, you will need to tell e-tax whether or not you are an STS taxpayer. e-tax needs to know this so that you can correctly complete your claim(s) for depreciation expenses at item 14. If you are an STS taxpayer, in addition to the depreciating assets worksheets and low-value pool worksheet, you will be presented with STS worksheets in item 14 wherever you are asked to provide information about depreciating assets.

NOTE:
If you did not elect to enter the STS and have never elected to enter the STS, you should only use the general depreciating assets worksheet and low value pool worksheet.  You should not use the STS worksheets nor manually enter deductible decline in value or assessable amounts to the right of the STS worksheets.  If you have exited the STS and have previously allocated assets to either or both of the STS pools, these pools continue to operate.  For further information refer to exiting and re-entering the STS.

USING E-TAX TO WORK OUT YOUR DECLINE IN VALUE

Getting started

The PP Depreciation and NPP Depreciation buttons in item 14 beside items relating to depreciating assets allows you to complete depreciation worksheets, STS worksheets (if an STS taxpayer) and a low-value pool worksheet using e-tax. If you are required to lodge a Capital allowances schedule 2007 it will be created for you. See below for more information.

If you have decline in value deductions at items 20 or D5, you can click on the Depreciation button in the e-tax screen. This will allow you to complete a depreciation worksheet for depreciating assets that are not included in an STS pool or a low value pool.

If you choose not to complete the depreciation items using e-tax, you must read the Guide to depreciating assets 2007.

Choosing to use a low-value pool

From 1 July 2000, an optional low-value pooling arrangement for plant has been introduced. It will apply to plant costing less than $1,000 or having an undeducted cost of less than $1,000 at the start of the income year provided it has been depreciated using the diminishing value method. From 1 July 2000, such low-value plant can be allocated to a low-value pool and depreciated at statutory rates as a single item of plant.

When you choose to complete the e-tax low-value pool worksheet you are creating the low-value pool. All low-cost plant acquired during the income year (and later years) must be allocated to the low-value pool.

Additionally, once you allocate an item of low-cost plant to the low-value pool, it must remain in the pool. This means the initial choice to use the low-value pooling arrangement for low-cost plant is a once-and-for-all choice.

Depreciating asset worksheet

You must complete a depreciating asset worksheet for each depreciating asset for which a deduction for decline in value is being claimed.

When you complete a depreciating asset worksheet, e-tax will enable the Existing worksheets navigator at the left of the screen. Use the worksheet navigator to open worksheets for viewing or changing, or to remove (delete) a worksheet.

For more information refer to Instructions for completing the depreciating assets worksheet in e-tax.

Low-value pool worksheet

If you have chosen to use a low-value pool, you must complete the low-value pool worksheet.

For more information refer to Creating a low-value pool in e-tax.

STS pool worksheets

There are two STS worksheets:

•	General STS pool – for depreciating assets with an effective life of less than 25 years

•	Long life STS pool – for depreciating assets with an effective life of 25 or more years

For more information refer to STS depreciation.

Completing the Capital allowances schedule 2006

If, based on your answers at item 14:

•	you are not an STS taxpayer and

•	you are carrying on a business and

•	you have depreciation expenses of more than $15,000 at item P8 label M on your Business and professional items schedule 2007

•	you have more than $75,000 included at items P15 and/or P16 on your Business and professional items schedule 2007

•	you have a project pool deduction of more than $1,000 at item P8 Reconciliation items label L on your Business and professional items schedule 2007 and/or

•	you have an individual project pool deduction of more than $1,000 at item D14.

e-tax will complete a Capital allowance schedule 2007 for you.

NOTE:
If you have to complete a schedule based on your answers at item 14, e-tax will include details of all your depreciating assets. This includes assets used to provide business income – item 14, rental income – item 20 and salary and wages income – item D5.

If you want, you can read more about the schedule in Capital allowances schedule 2007 instructions (NAT 4089-6.2007).

Navigating e-tax and depreciation worksheets

e-tax will enable the Existing worksheets navigator on the left of the screen.

Accessing the depreciating assets worksheet

Enter a new depreciating asset by completing the worksheet. Remember, you can use the navigator to open an existing worksheet for viewing or changing, or to delete a worksheet.

When you have completed the worksheet, click Next. If you have disposed of the depreciating asset and you have an assessable adjustment amount that may be able to be reduced further because of indexation, e-tax will prompt you for the information required. Otherwise, you will be asked if you have more depreciating assets you want to depreciate.

Accessing depreciating asset worksheets once the item has been completed

If you use the Prev button to step back through an item for which you have completed depreciating asset worksheet, the depreciating asset worksheets will not be displayed. You must access the worksheet(s) by clicking on the Depreciation button.

Operating restrictions

While you are completing a depreciating asset worksheet, the Prev and Close buttons will be disabled. This is done to make sure the information that e-tax uses to calculate decline in value is complete.

If you want to delete a worksheet that has been partially completed, you can delete all the information you have entered and then click on the Next button.

Printing the depreciation worksheet(s)

e-tax will automatically print your depreciation worksheet(s) when you have completed your return. If you want to print a copy of your depreciation worksheet(s) now follow these steps.

STEP 1	Click on Printing in the Navigator. You will be prompted for the items you want to print.

STEP 2	Select Depreciation worksheets. (You may want to clear the Tax return box.). Click on the Print Preview button.

STEP 3	The Print preview window will display the worksheets you have completed.

STEP 4	If you only want to print one worksheet, use the arrow buttons to locate the depreciation worksheet you want to print. Click on the Pages button at the top of the screen. Enter the page number(s) of the depreciation worksheet you want to print.

STEP 5	Click on [image] to begin printing.

HOW THE DEPRECIATION AMOUNTS ARE WRITTEN TO YOUR RETURN

When you have completed the depreciation worksheet(s), e-tax will display the following amounts:

Total assessable adjustments

This is the total – across all depreciation worksheets completed for this item – of assessable income resulting from any balancing adjustments you may have made. This amount represents the profit on the sale of depreciable assets. e-tax will write this amount to the appropriate item in your tax return as follows:

Item 14	Shown separately on the e-tax screen at Income reconciliation adjustments – Depreciation before being entered on your return in the Business and professional items schedule at Label X – Income reconciliation adjustments

Item 20	e-tax will add the amount to any amount you have entered in the Rental property schedule at Label B – Other rental related income.

Item D5	e-tax will add the amount to any amount you have entered at item 22 – Other income.

Total deductible adjustments

This is the total – across all depreciation worksheets completed for this item – of deductible adjustments resulting from any balancing adjustments you may have made. This represents the loss on sale of depreciable assets. The total deductible adjustments displayed here will be included as follows:

Item 14	Shown separately on the e-tax screen at Expense reconciliation adjustments – Depreciation before being entered on your return in the Business and professional items schedule 2007 at Label H – Expense reconciliation adjustments.

Item 20	In the Rental property schedule at Label I – Capital allowances deductions.

Item D5	As another expense in the Depreciation box at item D5.

Total depreciation

This is the total – across all depreciation worksheets completed for this item – of decline in value expense. The total will be included as follows:

Item 14	Shown separately on the e-tax screen in Depreciation expenses if you are a STS taxpayer or at Expense reconciliation adjustments – Depreciation if you are not a STS taxpayer before it is written to your return. It will then be entered in your return in the Business and professional items schedule at Label M – Depreciation expenses if you are a STS taxpayer or at Label M – Expense reconciliation adjustments if you are not a STS taxpayer.

Item 20	In the Rental property schedule at Label I – Capital allowances deductions.

Item D5	As another expense in the Depreciation box at item D5.

RECORD KEEPING

You must keep the following information for a depreciating asset:

•	the first and second elements of cost

•	the opening adjustable value for the income year

•	any adjustments made to cost or adjustable value

•	the date you started holding the asset and its start time

•	the rate or effective life used to work out the decline in value

•	the method used to work out the decline in value

•	the amount of your deduction for the decline in value and any reduction for use of the asset other than for a taxable purpose

•	the adjustable value at the end of the income year

•	any recoupment of cost you have included in assessable income, and

•	if a balancing adjustment event occurs in relation to the asset during the year—the date of the balancing adjustment event, termination value, adjustable value at that time, the balancing adjustment amount, any reduction of the balancing adjustment amount and details of any rollover or balancing adjustment relief.

You must also keep:

•	details of how you worked out the effective life of a depreciating asset where you have not adopted the effective life determined by the Commissioner

•	if you have recalculated the effective life of an asset— the date of the recalculation, the recalculated effective life, the reason for the recalculation and details of how you worked out the recalculated effective life, and

•	original documents such as suppliers’ invoices and receipts for expenditure on the depreciating asset.

Additional record keeping requirements apply if you acquire an asset from an associate or if you acquire a depreciating asset but the user is the same or is an associate of the former user

To help you keep this information, e-tax will print copies of the depreciating asset worksheet(s) you have prepared when you print your tax return. If you create a low-value pool, e-tax will print the low-value pool worksheet. If you have to lodge a Capital allowances schedule 2007, e-tax will create and print it for you as well.


Entering information

e-tax has three types of interview screens:

•	information only

•	question

•	data entry

Read the help on each screen type for instructions on how to communicate with e-tax.


Information only screens
Information only

Some e-tax screens only contain information. That is, you only have to read the screen; e-tax does not require any input from you.

IMPORTANT:
Do not skip over these screens. We assume you have read the information contained in them.

These information screens may contain links to further reading. These links will appear as blue text. Click on the link to display the information.

When you have finished reading the screen click on the Next button to move to the next screen.


Answering an e-tax question

When e-tax is asking you to answer a question Yes or No, the Yes and No buttons will appear at the base of the screen. You answer the question by clicking on the appropriate button. When you have answered the question e-tax will move to the next screen in the interview process.

Make sure you read all the information presented on the e-tax screen before you answer the question. This may include links to further reading. These links will appear as blue text. Click on the link to display the information.


 Data entry

Contents:

Introduction

Completing a table

Completing forms

Selecting possible entry values from lists

Entering a Yes/No answer

Choosing one answer from a set of possible answers

Selecting more than one answer from a list

e-tax status codes

Entering dates

INTRODUCTION

The data entry screens in e-tax will vary according to the type of information you have to enter.

NOTE:
The information you type in is not stored in e-tax until you press the Next button. If you click on the Close or Prev buttons you will lose the information you have entered.

Remember, we have designed the e-tax screens so that you only have to enter data once. If e-tax has already got the required information from a previous interview screen, it won't ask you to enter it again.

Data entry screens may contain links to further reading. These links will appear as blue text. Click on the link to display the information.

If you are not familiar with the methods used to enter data into a Windows program browse this topic. We have included some brief instructions on how to use the different data entry methods encountered in e-tax.

COMPLETING A TABLE

Whenever you have to enter more than one row of information OR you are required to write a total to your tax return e-tax will display a table. The example above is used to enter the information from a payment summary. You would complete a row for each payment summary you have received. Enter the data in the appropriate columns.

Press the <Tab> key to move to the next field and to create a new row in a table that appears to be full. If you want to move back to a previous field, hold down the <Shift> key and press the <Tab> key.

If you want to insert a row in the table, hold down the <Ctrl> key and press the <Insert> key.

If you want to delete a row in the table, hold down the <Ctrl> key and press the <Delete> key.

Use the scroll bar [image] at the right of the table if you have more rows than can be displayed. You can:

•	click on the arrow buttons to move the table up or down one row, or

•	click on the scroll box [image] and then hold the mouse button down while you drag the box to view more rows.

If you use the <Tab> key to locate a field, the contents of the field will be highlighted. To replace the entire contents of the field, just type in the new entry. If you want to change the contents of a field, you must first press <F2> or click on the field.

COMPLETING FORMS

In this example you have to complete four fields. The current field is highlighted. Type in the required information. Press the <Tab> key to move to the next field. If you want to move back to a previous field hold down the <Shift> key and press the <Tab> key.

SELECTING POSSIBLE ENTRY VALUES FROM LISTS

Notice that the Title field in the example above has a list button [image] at the right. You can type data into this field or you can click on the list button to display a list of valid entries. You may need to use the scroll bar to view the whole list. Double click on the appropriate entry in the list. e-tax will write the entry to the field for you.

To delete an entry that was loaded from a list, you must first highlight the field and then press <Backspace>.

ENTERING A YES/NO ANSWER

To answer Yes to a question in a data entry screen, click on the box. A tick will appear. If you want to clear the tick (answer No), click on the box again.

CHOOSING ONE ANSWER FROM A SET OF POSSIBLE ANSWERS

Sometimes e-tax will ask you to select one answer from a list of possible answers. Click on the button beside the correct answer. In the example above Male is the selected answer. You can only select one button at a time.

SELECTING MORE THAN ONE ANSWER FROM A LIST

You may be asked whether one or more conditions in a list apply to you. e-tax will display the list of conditions on the screen. There will be a button displayed beside each condition. Read the conditions carefully. Select the option by ticking on a box. A tick will appear. If you want to clear the tick (answer No), click on the box again.

E-TAX STATUS CODES

	To select a code from a list, for example a rebate code, the button must be in. Note that when a code is selected the button changes from grey to coloured.
ENTERING DATES

When you have to enter a date, type it in as ddmmyyyy. For example, to enter 3rd April 2007, you would type ‘03042007’. e-tax will insert the slashes if they are not already displayed in the entry field.


How the e-tax interview works

e-tax is the tool that lets you use your computer and the internet to complete and lodge your tax return and baby bonus claim.

THE INTERVIEW PROCESS

e-tax asks a series of questions – interviews you – to gather the data needed to complete your tax return and baby bonus claim. The interview screens make sure you do not have to enter any data if it is not relevant to your situation. We also remember your answers, so that you do not have to answer the same question twice.

e-tax has three types of interview screens:

•	information only

•	question

•	data entry.

Read each screen carefully and then follow e-tax's instructions.

ALL IMPORTANT INFORMATION IS ACCESSIBLE FROM THE SCREEN

e-tax provides easy access to all the information you need to complete an item. You MUST read each screen carefully.

We use a number of ways of bringing information to your attention:

Blue text	These are links to topics in e-tax Help. Click on the link to read more about the topic.

NO MORE FLIPPING THROUGH THE BOOKLETS TO FIND THE RIGHT INFORMATION!

If you have used the TaxPack and TaxPack supplement booklets to help you prepare your tax return in previous years, you will notice that we include all the same information in e-tax Help. The only difference is the instructions tell you how to complete your return using e-tax. We have also included the full text of all the reference documents and taxation rulings that we refer to.

If you want to read about a particular concept, click on the blue text whenever it appears in an e-tax screen. Again, you will move straight to the correct place in the e-tax help. Click on the More button to read more help on the current item.

GETTING IT RIGHT THE FIRST TIME

The easiest way to use e-tax is to start at the beginning (Commissioner's guarantee) and work through the interview screens until you have completed the return (validation and lodgment).

Of course this isn't how it really works. You may be interrupted and have to come back to e-tax some other time, or you may realise you have made a mistake or forgotten to include some information.

INTERRUPTING AN e-tax SESSION

Each time you need to stop working on e-tax, but want to come back to it later, just click on the Close button. e-tax will automatically save your work and re-open the file where you left off.

CHANGING YOUR FILE

e-tax allows you to move back through completed interview screens by clicking on the Prev (Previous) button. We recommend you use the Prev button because it makes sure you do not skip over any screens in the interview process.

If you are familiar with the tax return and baby bonus claim you can move quickly to a particular item by using the e-tax navigator.


Existing or incomplete files

Each time you end an e-tax session by clicking on the Close button e-tax remembers where you left off.

The next time you run e-tax the Existing files screen will be displayed.

e-tax asks you whether you want to open an existing file. Click on:

YES	to open an existing file. The Open file window will be displayed. Select the file you are working on. You must now enter the tax file number that corresponds to this file. e-tax will open the file and then move to the interview screen you were on when you last closed the program.

If you cannot enter the correct tax file number, you will not be able to access the file. If this is the case, click on Cancel and either open another file or start a new one.

NO	to start a new file.

See also:

Closing e-tax


Lodgment

Lodging electronically using e-tax involves the following steps. Each step must be completed successfully before you can move to the next step.

Validation

Review

Taxpayer's declaration

Tax Office password

Lodging electronically


e-tax summary screens

As each item in the section is completed, e-tax will write the appropriate total(s) for the item to the summary screen. Any item that has been completed is displayed in a different colour.

The summary screen also provides access to all the items in the section. Click on

•	the description of the item to move to that item in the e-tax interview, or

•	the item number to read the help on that item.


Navigator
The navigator

	The e-tax navigator is on the left the interview screen. The section you are working on in the e-tax interview is highlighted. If you want to move to another section, click on its entry in the navigator list. You may have to 'open' some sections to locate the e-tax screen you want - to do this, click on the down arrow. NOTE: e-tax will not allow you to use the navigator when in the middle of completing some sections of this interview. This ensures the data written to your claim form will be correct.


Navigator

	The e-tax navigator is on the left the interview screen. The section you are working on in the e-tax interview is highlighted. If you want to move to another section, click on its entry in the navigator list. You may have to 'open' some sections to locate the e-tax screen you want - to do this, click on the down arrow. NOTE: e-tax will not allow you to use the navigator when in the middle of completing some sections of this interview. This ensures the data written to your claim form will be correct.


Print/preview return documents
    Preview or print return documents

The Preview or Print function lets you view or print your tax return documents at any time. You do not have to have completed the e-tax interview to use this function.

When you click on Printing in the Navigator, the Preview or Print screen is displayed. Use this screen to tell e-tax which documents you want to print (or preview) and which printer you are using.

STEP 1	The documents will be printed to the printer displayed as the Currently selected printer. To change the printer, click on the Printer Setup button.

STEP 2	Click on the appropriate boxes to check the items you want to print.

STEP 3	Click on the Preview or Print button. e-tax will format the documents for printing and then display them in the Preview window. If you want to cancel the print and return to e-tax, click on Cancel.


Printer Setup window
Printer setup

The Print Setup window is a standard Windows function.

The Print Setup option provides a list of installed printers, sets the default printer, and provides access to other printing options for the printer you select.

Before you can print on any device for the first time, you must:

•	Connect the printer to your computer or a network by using the instructions in your printer manual.

•	Install a printer driver by using Windows Setup or the Windows Control Panel.

•	For more information, see your Windows documentation particularly Getting Started with Microsoft Windows.

NOTE:
Whenever you print you can alter the printer you will use by accessing the Print Setup dialogue box.

Move the mouse pointer over the image below. When the pointer changes to hand [image], click on the mouse to read more about the options available.


Preview return documents

The Preview window is displayed whenever you use the e-tax print function. Use this window to view the documents on screen. This is a good way to see what the documents look like without having to waste time and paper printing them.

When you are in the Preview window click on the left mouse button to make the document image larger. Click on the right mouse button to make the document image smaller.

Browse the diagram below for a description of the functions available.


Printer setup - printer name
Printer setup – printer name

The name of the default printer is displayed.

If you want to change the printer for this print job (for example, to
print labels or send a fax) select a different printer from the list of
printers.

Only printers installed on your system are listed. For information
about installing printers, see your Windows documentation.


Printer setup - properties
Printer setup – properties

This function controls printer settings for the specific printer you
select in the Printer Name list. The available options vary depending
on the printer driver.

To get Windows Help for the selected printer, choose the Properties
button, and then choose the Help button.


Printer setup - orientation
Printer setup – orientation

The user can normally choose between Portrait (upright) and
Landscape (sideways) paper orientation.

This may vary depending on the printer you are using.


Printer setup - paper
Printer setup – paper

The size of the paper you are using can be selected from the
drop down list. The sizes available depend on the printer you are
using.

Some printers support a number of different paper feeds (like a
photocopier) This allows you to set the printer up with a number
of paper sizes. Select the source to correspond to the paper size
you are using.

The sources available will depend on the printer you are using.


Print/preview your tax return

Use this function to preview on the screen, and/or print, your tax
return and any other supporting documents e-tax has created
for you.

 More information


    Save the file

Use this function to write the changes you have made to the tax return and baby bonus claim to file. If your computer fails for some reason; such as power failure, all the work you have done since the last time you saved will be lost. To guard against this use the save function regularly.

SAVING YOUR WORK

e-tax will write the current file to the file displayed in the File name box when you click on the Save button. You will be asked whether you want to overwrite the file. Click on "yes" to continue with the save. If you need more help read Save the file.

SAVE AS

You can also use the save function to save the contents of the current file to a different file. All further work you do in this e-tax session will be written to the new file.

AUTOMATIC SAVE

e-tax will automatically save your file every five minutes. You cannot disable or change this function.

See also:

Open a new file

Opening an existing file

Closing e-tax


Save File window
Save the file

If you need more help with using the Save file functions, move your mouse over the picture below. When the pointer changes to a hand [image], click on the mouse. A window will pop up telling you more about that part of the screen you are pointing to.


Save file - Cancel
Save file – Cancel

If you have changed your mind, click on the Cancel button. Control
will return to the e-tax interview screen.


Save file - Current Directory
Save file – Current directory

This is the directory where e-tax will save the file.

By default, the current directory is the directory where you
installed e-tax.


Save file - File List
Save file – File list

These are the files that e-tax can find in your current directory.


Save file - File Name
Save file – File name

This is the file that e-tax will write to when you click on the Save
button.

You can set this field by double clicking on an entry in the list of files
on the left or by typing in the file name.

Overwriting an existing file

If you type in the name of a file that already exists, e-tax will ask you
whether you want to overwrite the existing file. If you click on "yes",
the existing file will be overwritten and control will return to the e-tax
interview.


Save file - Save
Save file – Save

Click on the Save button to write the current file to the file displayed
in the File name box in the directory displayed as the Current
directory.


Save file - Change dir
Save file – Change dir

If you want to save your file in another directory, click on the
Change Dir button. A directory list will appear on the right of the
Save file window.

Open the folders in the usual manner. When you open a folder any
files it already contains will be displayed on the left of the window.


Save file - Directory list
Save file – Directory list

The list of directories will only appear if you have clicked on the
Change Dir button.

Open folders by double clicking on the folder name. The files
contained in the folder will be displayed on the left of the window.


    Starting a new file

Whenever you start a new file in e-tax, you need to name this file so you can save and re-open it on your computer. All your answers to the questions in e-tax will be stored in this file.

We also ask you to enter the tax file number (TFN) corresponding to this file. Whenever you want to access this file in the future, you must enter the TFN. This guards against other persons accessing your file.

NOTE: Privacy
The Tax Office is authorised by the Taxation Administration Act 1953 to ask you for your TFN. It is not an offence not to provide a TFN. However, for technical reasons, it is not possible to lodge electronically without a TFN. If you do not have a TFN, or do not wish to provide a TFN, you will need to lodge on paper and you cannot use e-tax. Not providing a TFN may result in administrative delays in processing your lodgment.

To start a new file, follow these steps:

STEP 1	Enter a name for this file; for example, MICHAELSTAX.

STEP 2	Enter the tax file number corresponding to this file.

STEP 3	You are now ready to continue.

Click the Next button.

NAME FOR THIS FILE

When naming your e-tax file, use a name that you will easily recognise. For example, if your name is Michael you could call your file MICHAELSTAX.

e-tax files are created with a file type of ".TAX". Using the example above, the file would be MICHAELSTAX.TAX. The file is saved to the folder/directory that you installed e-tax in.

See also:

Open an file

Save the file

Closing e-tax


    Open an existing file

You can open another file while you are working in e-tax. An existing file is one you have created using e-tax and then written to your disk either when you closed e-tax or during the interview using the save function.

Click on the Open button [image].

e-tax will ask you whether you want to save the current file. Click on:

•	Yes to save the current file to file; or

•	No to exit the current file without saving any of the changes you have made; or

•	Cancel to continue working on the current file.

If you answered Yes or No the Open file window will appear. Use this window to locate and open the file.

You MUST enter the tax file number corresponding to this file before e-tax will allow you to open it.

See also:

Opening a file

Save the file


Open File window
Opening a file

If you need more help with using the Open file functions, move your mouse over the picture below. When the pointer changes to a hand [image], click on the mouse. A window will pop up telling you more about that part of the screen you are pointing to.


Open file - Cancel

If you have changed your mind and want to enter a new file, click
on the Cancel button. Control will return to the e-tax interview screen.
Click on the No button, to start a new file.


Open file - Change Directory
Open file - Change Dir

If you have saved your files in another directory, click on the
Change Dir button. A directory list will appear on the right of the
Open file window.

Open the folders in the usual manner. When you open a folder
any files it contains will be displayed on the left of the window.


Open file - Current directory

This is the directory where e-tax is looking for the file.

The current directory is the directory where you installed e-tax.


Open file - Directory list

The list of directories will only appear if you have clicked on the
Change Dir button.

Open folders by double clicking on the folder name. The files
contained in the folder will be displayed on the left of the window.


Open File - Existing files

These are the files that e-tax can find in your current directory.

If there are no files listed, click on Cancel and start a new file.


Open File - File name

This is the file that e-tax will open when you click on the Open
button.

You can set this field by double clicking on an entry in the list of
files on the left or by typing in the file name.

Note: If you type in the name of a file that does not exist, e-tax
will tell you. You must delete the contents of the File name box
before you can continue.


Open File - Open

Click on the Open button to open the file displayed in the File name
box.

e-tax will not open the file unless you can enter its corresponding tax
file number when asked.


    Calculator

The Calculator button provides access to the standard Windows calculator. You use the calculator in just the same way as you use a hand held one. Instead of pressing the keys you click on them with your mouse.

Hint: You can leave the Calculator window open when you return to e-tax.

To get more help, click on Help in the Calculator window.


Calculator

The Calculator button provides access to the standard Windows
calculator. You use the calculator in just the same way as you use
a hand held one. Instead of pressing the keys you click on them
with your mouse.

Hint: You can leave the Calculator window open when you return
to e-tax.

To get more help, click on Help in the Calculator window.


The e-tax screen

This topic introduces you to all the buttons and icons you will see on the e-tax interview screens.

The picture of the e-tax interview screen that you see below has help links (hyperlinks) to other help topics embedded into it. These allow you to browse for more information about the e-tax functions.

Move your mouse over the picture. When the pointer changes to a hand [image], click on the mouse. A window will pop up telling you more about that part of the screen you are pointing to.

When you have finished browsing this help topic, you can:

•	press the <Esc> key to close the Help file, or

•	click anywhere within the e-tax screen – the help file will remain open while you use e-tax.

See also:

How the e-tax interview works


Additional information schedule

An Additional information schedule is used to give the Tax Office extra information. If you are required to complete a schedule we will tell you what information you have to give us.

 More details


View your tax return

You can view your tax return during an e-tax interview by clicking
on the View tax return button.

Note: This button will be disabled when the navigator is disabled.

 More information


e-tax help

Click on this Help button to access the contents of e-tax Help. If
you click on the Help button in the bottom left hand corner of the
screen, it will display help specific to the current screen.


Further information

e-tax uses this section of the screen to draw your attention to
further information you may require. Read it carefully.


Open a new file

Click on this button to open another file. You will be asked what you
want to do with the file that is already open.

 More information


Open an existing file

Use this function to open an existing e-tax file.

 More information


Previous/Next buttons

The Prev(ious) button is always enabled. Click on Prev to return
to the last interview screen you accessed.

The Next button is only enabled for information and data entry
screens. Click on Next to move to the next interview screen.

Note: The information you type into a data entry screen is not
stored in e-tax until you press the Next button.

 Entering information


Save the current file

Use this function to write the current file to disk.

 More information


Screen title and number

The screen title describes the function of this interview screen.

Each screen in e-tax is identified by a number in the bottom left
hand corner. If you ring the e-tax helpline they may ask you to
quote this number.


More information on this item

Click on this button to view the help available on this item.


Yes/No buttons

These two buttons are only enabled when e-tax is asking a question.
You must answer the question by clicking on the appropriate button
before you can move to the next screen in the interview.


 	Open a new file

If you want to close the file you are working on and start a new one, click on [image].

e-tax will ask you whether you want to save the current file. Click on:

•	Yes to save the file; or

•	No to exit the current file without saving any of the changes you have made; or

•	Cancel to continue working on the current file.

If you answer Yes the Save file window will open, allowing you to save the current file to file.

If you answered Yes or No, control will pass to the Starting a new file screen.

See also:

Open an existing file

Save the file


Data entry

The data entry screens in e-tax will vary according to the type of
information you have to enter. Remember, we have designed the
e-tax screens so that you only have to enter data once. If e-tax has
already got the required information from a previous interview
screen it won't ask you to enter it again.

Note: The information you type in is not stored in the e-tax
data file until you press the Next button.

 More information


About e-tax

This function provides details about the version of e-tax that you
are running.

If you ring the e-tax Helpline, they may ask you to click on the
About button and tell them these version details.


Using e-tax Help

BROWSING e-tax HELP

Move the mouse pointer around. When a hand [image] appears there is more help on the topic it points to. Left click the mouse to move to this next level (page). Topic links are normally blue text or symbols e.g. .

CONTENTS

Use the Contents in the Help navigator panel to access topics via logical groups (chapters). This is always accessible by clicking on the Help Topics button in the Help file (as above), and then clicking on the Contents tab in the Help navigator. Help can always be opened by clicking on [image] in the e-tax toolbar.

INDEX

Click on the Index tab in the Help navigator panel to access a full alphabetical index.

FOLLOW YOUR NOSE...

We suggest you simply jump in and follow your nose! Don’t forget this is a document – you cannot alter anything.

More on help


This is a ‘pop-up’ topic. It is used to display important information from within the current help topic.

To close this topic, click your mouse.


Using e-tax help

You did it!

Now click on the Back button above to return to the previous topic.


Using the Help index
The e-tax Help index

To access the index, you must first check that the navigator is open on the left of your Help window. If it isn't, click on the Help Topics button at the top of the Help window.

Click on the Index tab in the navigator panel. The e-tax index will be displayed.

Type in the first few letters of the topic you are looking for, or click the index entry you require. To find the topic you may need to use the scroll bars [image] at the right of the index. You can:

•	click on the arrow buttons to move the index up or down one entry, or

•	click on the scroll box [image] and then hold the mouse button down while you drag the box to view more index entries.

Click the Display button to view the highlighted topic. If the item you are searching for appears in more than one topic, a list of the topics will be displayed. Click on the topic you require.


More on using e-tax Help
More on help

e-tax 2007 on-line documentation is a standard Windows Help product. We will outline a few basic functions. If you want more information you can refer to your Microsoft Windows Users Guide.

READ THE WHOLE TOPIC!

Make sure you read the whole topic! Not all the information we provide can fit in one screen. If there is more information, scroll bars [image] will appear at the right of the screen or along the bottom of the screen (this screen is an example).You can:

•	click on the arrow buttons to move the screen up or down one line, or

•	click on the scroll box [image] and then hold the mouse button down while you drag the box to view more information.

CONTENTS

If you get stuck just click on the Help Topics button above. The e-tax help navigator will be opened. Click on the Contents tab to display the e-tax Help contents.

There is more Help on this topic. Click on the closed book to display its contents.

This book is open with its contents displayed. Click on the open book to close it.

Double click on the page to read the Help on this topic.

SEARCH FOR A TOPIC

The Index feature is an efficient way to find the information you need.

If you get stuck just click on the Help Topics button above The e-tax help navigator will be opened. Click on the Index button above to display an index of all topics available. Type in the first few letters of the topic you are looking for or click the index entry you require. Click the Display button to view the highlighted topic. If the item you are searching for appears in more than one topic, a list of the topics will be displayed. Click on the topic you require.

BACK

Clicking on the Back button above will return you to the previous help topic.

PAGING – << / >>

These two buttons will not always be available. They are used to allow you to read groups of help topics in a logical order. We use them to allow you to step through the help on each item in your tax return and baby bonus claim and also for some of the large reference documents.

WHERE TO NOW?

We suggest you close this Help window by clicking on the [image] button at the top of the window. Start using e-tax. If you get stuck, just click on the Help button [image].


    Notepad

e-tax provides a simple word processor that allows you to jot down notes while you are preparing your file. These notes are for your use only and are not transmitted to the Tax Office when you lodge electronically.

WRITING A NOTE

When you open the notepad the cursor will be at a new line. Just type in your new note and press Close.

PRINTING YOUR NOTES

To print your notes you must select Notes as one of the items you want to print when you are in the Print window.


Notepad

e-tax provides a simple word processor that allows you to jot
down notes while you are preparing your file. These notes are
for your use only and are not transmitted to the Tax Office when
you lodge electronically.

Writing a note

When you open the notepad the cursor will be at a new line. Just
type in your new note and press Close.

Printing your notes

To print your notes you must select Notes as one of the items
you want to print when you are in the Print window.


    Viewing your tax return form

You can view your tax return during an e-tax interview by clicking on the View Tax Return button.

NOTE:
This button will be disabled when the navigator is disabled.

In the View form screen, each page of the tax return is displayed in the format of the tax return form for individuals. This means that at any stage during an e-tax interview you can see how e-tax is filling in your return with the information you are giving it.

Each screen only displays one page of the tax return form. Use the scroll bar [image] at the left of the table to view the whole page. You can:

•	click on the arrow buttons to move up or down one line, or

•	click on the scroll box [image] and then hold the mouse button down while you drag the box to view more.

Click on the tabs at the base of the screen to view the different pages in the return form.

NOTE:
This screen only allows you to view the tax return form, the supplementary tax return and the business and professional items schedule. If you want to view any other forms or attachments that you have prepared using e-tax, use the print preview function.

 RETURNING TO THE e-tax INTERVIEW

When you are in the View form screen the Return to Interview button is enabled. Click on the Return to Interview button to return to the e-tax interview. If you want to move directly to another item, double click on the item in the tax return form.


What computer settings should I use?

RECOMMENDED COMPUTER REQUIREMENTS

Component	Specification
Computer processor	PC with Intel Pentium or equivalent
Operating system	Windows 2000 or XP. For other operating systems please see information about other operating systems and browsers.
Browser	To lodge a tax return, or 30% Child care tax rebate transfer advice: Because Windows uses security components of Internet Explorer, we recommend you have any version of Internet Explorer 6 installed. To lodge an online baby bonus claim: Any version of Internet Explorer 6 or any version of Netscape 7. To download e-tax: Most browsers will enable you to download e-tax, including any version of Internet Explorer 6 or any version of Netscape 7.
Vision impaired	Screen reader:  Jaws (5.0, 6.0, 7.0) or Window-Eyes Professional (4.5, 5.0, 5.5) and select the vision impaired option during installation. Magnification software:  Most commercial versions of screen magnification software should work with the standard installation of e-tax.
Other	Internet access (not via a proxy server) Full administration rights on your PC
INFORMATION ABOUT OTHER OPERATING SYSTEMS AND BROWSERS

•	The downloadable versions of e-tax may not work on other operating systems from those recommended.

•	The online version of baby bonus may not work on other browsers from those recommended.

•	If you choose to use an operating system or browser that is unsupported by its vendor, you may experience problems using e-tax software.

•	e-tax has been successfully tested on an Apple computer running OS X v10.4.3 with Virtual PC 7, running a recommended Windows operating system.

•	e-tax should work with Windows Vista, however to access the help files you will need to go to the Microsoft website, download WinHlp32.exe (search for winhelp Vista) and install. You may get an error message when accessing the help files but you will still be able to view them.

We are redeveloping e-tax to make it compatible with any computer system that has internet access. We will test this with a small group of users in 2008, aiming to make it available more broadly in future years - pending the success of the trials.

SECURE NETWORKS

e-tax works with firewalls and uses encryption to secure your communications with the Tax Office. The firewall must be configured to allow communication between the Tax Office and your computer. If your network or your firewall does not allow this communication, you will not be able to use e-tax. More technical information is available in the e-tax help file under Troubleshooting.

SCREEN RESOLUTION

e-tax is designed to work best with a screen resolution of greater than 800 x 600 pixels.

If you are running e-tax with your resolution set to 800 x 600, the windows task bar will cover the bottom of the e-tax window. For optimal use of e-tax, you should either:

•	set your task bar to appear behind e-tax; or

•	set your task bar to auto-hide.

e-tax is designed to work with normal size (96 dpi) fonts not large fonts. To change the font size in Windows, go to Control Panel>Display>Settings>Advanced then change the font size to Normal size (96 dpi).

INSTRUCTIONS FOR SETTING YOUR TASK BAR TO APPEAR BEHIND E-TAX

Windows 2000

Right click on the task bar and click properties. Uncheck Always on top and click OK.

WinXP

Right click on the task bar and click properties. Uncheck Keep the task bar on top of other windows and click OK.

INSTRUCTIONS FOR SETTING YOUR TASK BAR TO AUTO HIDE

Windows 2000

Right click on the task bar and click properties. Check Auto hide and click OK.

WinXP

Right click on the task bar and click properties. Check Auto Hide the task bar and click OK.


Worksheets navigator

e-tax displays the Existing worksheets navigator whenever you have to complete more than one worksheet at an item - for example, at item 4 a taxpayer must complete a separate worksheet for each eligible termination payment that they received during the income year.

CREATING A NEW WORKSHEET

		A blank worksheet is displayed When you enter the first interview screen that forms part of a worksheet, e-tax will display a blank worksheet. When you enter the information that identifies the worksheet, e-tax will automatically create the worksheet for you. For example, if you only enter the Payer name in a blank eligible termination payment (ETP) worksheet and then you click Next, you have created a worksheet. An existing worksheet is displayed If an existing worksheet is displayed and you want to create a new one, click on the **Create new worksheet** entry in the navigator. A blank worksheet will be displayed.
DISPLAYING AN EXISTING WORKSHEET

If you want to display an existing worksheet so that you can review and/or change it, click on the worksheet entry in the Existing worksheets navigator.

DELETING A WORKSHEET

To delete a worksheet, first click on its entry in the existing worksheets navigator and then click on the Delete button at the bottom of the Existing worksheets navigator.


Item M1 Medicare levy reduction or exemption
	Medicare levy reduction or exemption
This topic covers:

Who does this item apply to?

You need to know

What you may need

Further information:

Part A: Low income earner

Part B: Medicare levy reductions based on family income

Medicare levy exemption categories

Meaning of "dependant" for Medicare levy exemption purposes

Part C: Full levy exemption for all or part of 2006-07

Part D: Half levy exemption for all or part of 2006-07

Family agreement

WHO DOES THIS ITEM APPLY TO?

Complete this item if you were a low income earner or in one of the Medicare levy reduction or exemption categories.

Information to help you decide whether you are eligible for a Medicare levy reduction or exemption is given below.

YOU NEED TO KNOW

Medicare is the scheme that gives Australian residents access to health care.

To help fund the scheme, resident taxpayers are subject to a Medicare levy. Normally, we calculate your Medicare levy at that rate of 1.5% of your taxable income. A variation to this calculation may occur in certain circumstances.

Generally, tax offsets do not reduce your Medicare levy. However, if you have excess refundable tax offsets, we use them to reduce your tax, including your Medicare levy. (For more information on refundable tax offsets - for example, the private health insurance rebate - see Tax offsets.)

In some cases you may be exempt from the levy or it may be reduced. This is the subject of item M1. You only need to complete this item if you belong to an exemption category or you are able to claim a reduction based on family income. e-tax will help you work out if you are eligible for the exemption or the reduction based on family income.

Individuals and families on higher incomes who do not have private patient hospital cover may have to pay the Medicare levy surcharge. This is the subject of item M2.

This surcharge is in addition to the Medicare levy. We calculate it at the rate of 1% of your taxable income (including your total reportable fringe benefits). Refer to item M2 to see if you have to pay the surcharge.

ITEM M2 IS COMPULSORY FOR ALL TAXPAYERS. You will not be able to lodge e-tax until you have completed it.

Most Australians are liable to pay the Medicare levy.

The standard Medicare levy is 1.5% of your taxable income. However, this may vary according to your circumstances. Your taxable income is the amount e-tax wrote at TAXABLE INCOME OR LOSS on page 3 of your tax return. Click on [image] in the e-tax toolbar to view your return.

The Tax Office will work out your Medicare levy, including any Medicare levy reduction, from the information you provide on your tax return.

NOTE:
The amounts in the tables in this item reflect proposed changes to Medicare levy thresholds for 2006-07. At the time of production of e-tax 2007 these changes had not become law.

The Tax Office will work out your Medicare levy, including any Medicare levy reduction, from the information you provide on your tax return.

WHAT YOU MAY NEED

•	your 2006-07 taxable income. e-tax will calculate this for you based on your answers in the income and deductions sections of the interview. If you have not completed these sections, you must do so now

•	the 2006-07 taxable income of your spouse, married or de facto, if you had a spouse on 30 June 2007. If your spouse died during 2006-07 and you did not have another spouse before the end of the year, you are considered to have had a spouse on 30 June 2007 for the purposes of calculating any Medicare levy reductions based on family income

•	the number of dependent children and students you had during 2006-07

•	the number of days you, your spouse and dependent children and students were in an exemption category.

DEFINITION:
Your spouse is your husband or wife to whom you are legally married, or a person who lives with you on a genuine domestic basis as your husband or wife. Under Australian law your husband or wife cannot be the same sex as you.

PART A: LOW INCOME EARNER

	Relevant threshold amount	Phase-in limit
If you are eligible for the senior Australians tax offset	$24,867	$29,255
If you are eligible for the pensioner tax offset	$21,637	$25,455
All other taxpayers	$16,740	$19,694
You do not need to complete this item if your taxable income was:

•	Equal to or less than the relevant threshold amount. You do not have to pay the Medicare levy.

•	More than the relevant threshold amount but equal to or less than the phase-in limit and you were not in:

o	a Medicare levy reduction category based on family income, or

o	one of the exemption categories.

•	Your Medicare levy is reduced. It is calculated at 10 cents for every dollar above the relevant threshold amount but equal to or less than the phase-in limit. e-tax will work out how much Medicare levy you have to pay.

If you change, add or remove any Income or Deduction amounts you must complete the Medicare levy section again to ensure that e-tax does not incorrectly determine your eligibility for a Medicare levy reduction or exemption or the Medicare levy surcharge.

PART B: MEDICARE LEVY REDUCTIONS BASED ON FAMILY INCOME

YOU NEED TO KNOW

Dependent children and students

In Part B, ‘dependent children and students’ means:

•	any child under 21 years old you maintained who was not a full-time student and whose separate net income was less than $1,786 (for the first child) and $1,410 for any additional child

•	any full-time student under 25 years old you maintained whose separate net income was less than $1,786.

NOTE:
See What is maintaining a dependant? and What is separate net income?

If you were single or separated on 30 June 2007, you must have been eligible for family tax benefit for the whole or part of 2006-07 for any child or student you want to include under the term ‘dependent children and students’.

Part B categories

If your taxable income was above the relevant threshold amount in Part A, you may still be eligible for a reduced Medicare levy based on your family income.

To be eligible for a reduced levy based on family income, you must have been in one of the following categories:

•	You had a spouse – married or de facto – on 30 June 2007.

•	Your spouse died during 2006-07 and you did not have another spouse before the end of the year.

•	You are entitled to a child-housekeeper tax offset or a housekeeper tax offset  at item T1 or would be entitled if you were not eligible for the family tax benefit.

•	You were a sole parent at any time during the 2006-07 year. That is, you had sole care of any dependant children or students. This includes any child for whom you had sole care, not just your own child.

Sole care means that you alone had full responsibility, on a day-to-day basis, for the upbringing, welfare and maintenance of a child or student. You are not considered to have sole care if you are living with a spouse – married or de facto – unless special circumstances exist. Generally, for special circumstances to exist, you must be financially responsible for the dependent child or student and have sole care, without the support a spouse normally provides.

Examples of situations where special circumstances may arise:

o	You were married at any time during 2006-07, but during the year you separated from or were deserted by your spouse, and for that period you were not in a de facto relationship.

o	Your spouse was in prison for a sentence of at least 12 months.

o	Your spouse is medically certified as being permanently mentally incapable of taking part in caring for the child or student.

If you are unsure of whether special circumstances apply phone the Personal Tax Infoline.

If you had a spouse on 30 June 2007 or your spouse died during the year, your family income is you and your spouse’s combined taxable income for Medicare levy purposes. Otherwise, it is your taxable income.

NOTE:
For Medicare levy purposes, taxable income excludes any post-June 1983 elements of an eligible termination payment where the maximum tax rate is zero (see item 4). If you are unsure of the tax rate, phone the Superannuation Infoline on 13 10 20 for assistance.

You do not pay the Medicare levy if you were in one of the Part B categories and your family income was equal to or less than the relevant "lower income limit". Find the limit that applies to your circumstances in the Family income tables below.

If your family income was greater than the relevant lower income limit but equal to or less than the relevant upper income limit, you pay a reduced Medicare levy.

If your family income was above the relevant upper income limit you do not qualify for a reduced Medicare levy.

There are two family income tables shown below. Use family income table 1 if you are eligible for the senior Australians tax offset. Use family income table 2 in all other circumstances.

FAMILY INCOME TABLE 1

for taxpayers who are eligible for the senior Australians tax offset

Number of dependent children and students during 2006-07	Lower income limit	Upper income limit
0	$33,500	$39,411
1	$36,094	$42,463
2	$38,688	$45,515
3	$41,282	$48,567
4	$43,876	$51,618
If you had more than four dependent children or students, you can extend this table. The lower income limit increases by $2,594 for each additional child or student and the upper income limit increases by $3,051 for each additional child or student.

FAMILY INCOME TABLE 2

for taxpayers other than those eligible for the senior Australians tax offset

Number of dependent children and students during 2006-07	Lower income limit	Upper income limit
0	$28,247	$33,231
1	$30,841	$36,283
2	$33,435	$39,335
3	$36,029	$42,387
4	$38,623	$45,438
If you have more than four dependent children or students, you can extend this table. The lower income limit increases by $2,594 for each additional child or student and the upper income limit increases by $3,051 for each additional child or student.

e-tax will work out your reduced levy based on the information you provide at this item. If you wish to calculate the levy yourself, refer to How to work out your Medicare levy.

NOTE:
If you received any exempt foreign employment income a special formula is used to work out the amount of tax – including Medicare levy – you have to pay on your taxable income. You will not be able to work out your Medicare levy. We will work it out for you.

MEDICARE LEVY EXEMPTION CATEGORIES

YOU NEED TO KNOW

You were in one of the exemption categories if:

1.	you were a blind pensioner or you received the sickness allowance from Centrelink

2.	you were entitled to full free medical treatment for all conditions under defence force arrangements or Veterans' Affairs Repatriation health card (gold card) or repatriation arrangements

3.	you were not an Australian resident for tax purposes

4.	you were a resident of Norfolk Island

5.	you were a member of a diplomatic mission or consular post in Australia – or a member of such a person's family and you were living with them – and you were not an Australian citizen and you do not ordinarily live in Australia, or

6.	you have a certificate from the Medicare Levy Exemption Certification Unit of Medicare Australia showing that you are not entitled to Medicare benefits. A letter from Medicare is not sufficient. For more information on how to apply for an exemption certificate, contact Medicare Australia on 1300 300 271 or visit their website www.medicareaustralia.gov.au

If you were not in one of these exemption categories, you are not entitled to an exemption. You do not need to read any further.

If you were in exemption category 3 or 4 above for the whole income year you qualify for a full Medicare levy exemption regardless of whether or not you had dependants.

If you were in any other exemption category, or were in exemption category 3 or 4 for only part of 2006-07, you will need to keep reading.

Dependant

For parts C and D, ’dependant’ means an Australian resident you maintained who was:

•	your spouse

•	your child was less than 21 years, or

•	your child aged 21 years or over but less than 25 years who was receiving full-time education at a school, college or university and whose separate net income was less than $1,786.

See What is maintaining a dependant? and What is separate net income?

If the parents of a child lived separately or apart for all or part of the income year and the child was a dependant of each of them, the child is treated as a dependant of each parent. We base the Medicare levy calculation on the percentage of family tax benefit Part A that was paid or is payable for that child for that period.

EXAMPLE

Leanne was a member of the defence forces for the whole income year. She shared the care of Daniel with her ex-spouse and received 14% family tax benefit Part A based on the shared-care arrangement. This means that Daniel is considered to be Leanne’s dependant for 51 days (14% of 365) for the purposes of the Medicare levy exemption purposes for the year.

PART C: FULL LEVY EXEMPTION FOR ALL OR PART OF 2006-07

CATEGORY 1 OR 2

You will qualify for a full exemption from the Medicare levy for a period in 2006-07 if you were in exemption category 1 or 2 and you satisfied one or more of the following conditions during the whole of that period:

•	You had no dependants for that period.

•	All your dependants (including your spouse if you had one) were also in one of the exemption categories, or they had to pay the Medicare levy. For example, your only dependant was your spouse who was not in an exemption category and had to pay the Medicare levy.

•	You had dependent children who were not in an exemption category but they were also dependants of your spouse, who either

o	has to pay the Medicare levy, or

o	was in exemption category 1 or 2 and you have completed a Family agreement declaring that your spouse will pay the half levy for your joint dependants.

To be eligible to complete a Family agreement it is a condition that both you and your spouse would, apart from your exempt category status, have to pay the Medicare levy.

CATEGORY 3 OR 4 FOR ONLY PART OF THE INCOME YEAR OR CATEGORY 5 OR 6 FOR ANY PERIOD OF THE INCOME YEAR

If you were in exemption category 3 or 4 for part only of 2006-07 or exemption category 5 or 6 for any period of 2006-07, you will qualify for a full Medicare levy exemption category for that period if one of the following conditions applied:

•	you had no dependants for that period, or

•	all your dependants were also in an exemption category for that period.

If you do not meet any of the conditions for any exemption category you were in and you were not in exemption category 1 or 2 for a period in 2006-07 you are not entitled to an exemption.

PART D – HALF LEVY EXEMPTION FOR ALL OR PART OF 2006-07

You may qualify for a half exemption from the Medicare levy for a period in 2006-07 if you were in exemption category 1 or 2 and you satisfied either of the following conditions during the whole of that period:

•	you had at least one dependant – for example, a spouse – who was not in one of the exemption categories and who did not have to pay the Medicare levy (for example, because they were a low income earner)

•	your spouse was in exemption category 1 or 2 and you and your spouse had a child who was a dependant of both of you and was not in an exemption category. In this case, either you or your spouse can claim a full levy exemption at Part C and the other can claim a half levy exemption at Part D by completing a Family agreement.

We will work out your exemption based upon the information on your tax return. If you wish to calculate the exemption yourself, see How to work out your Medicare levy.


Item M1 Family agreement
M1 Family agreement

If you had a child who was a dependant of both you and your spouse and you or your spouse was claiming a half levy exemption under part D, both you and your spouse will need to complete a Family agreement declaring which one of you will pay the half levy for your joint dependants.

If you tell e-tax you have to complete a family agreement, the agreement will be printed at the end of the e-tax interview. Both you and your spouse must sign it.

A sample agreement is displayed below:

FAMILY AGREEMENT

We           Your name___________________________

   Your spouse's name___________________________

hereby agree that the half Medicare levy
payable in respect of our dependant or
dependants for 2006-07 will be paid by

           Name of person
claiming half exemption__________________________

      Spouse's signature_____________________/__/__

            Your signature_____________________/__/__

NOTE:
If you are the one claiming a full exemption from the Medicare levy at Part C, you will need to keep this Family Agreement with your tax records:
 -  for five years from the date you lodge your tax return, or
 -  if the Commissioner has determined that you are subject to a shorter period, that shorter
    period.


Messages

This topic covers:

Self-assessment – it’s your responsibility

Amendment period/Review period

Keep your records

Lodge your tax return by 31 October 2007

Failure to lodge on time penalty

Family Tax Benefit

e-tax 2007 is a program designed to help you complete your  Tax return for individuals 2007 for the income year 1 July 2006 to 30 June 2007 online.

e-tax will help you work out if you have to lodge a tax return this year in the interview section Do you have to lodge a tax return?.

SELF-ASSESSMENT – IT’S YOUR RESPONSIBILITY

Under our system of self-assessment the Tax Office prepares e-tax, e-tax Help and our other tax time publications included with e-tax Help annually to provide you with the information and guidance you need to complete your tax return. It is your responsibility to lodge a tax return that is complete and correct. We then use the information on your tax return to issue your notice of assessment.

When you receive your notice of assessment, you may find that we have made some adjustments – for example, you may have made an error adding up your figures. However, we do not check everything on your tax return before issuing your notice of assessment.

The Tax Office may not initially adjust any claims you make on your tax return. We do not take responsibility for checking that details on your tax return are correct – that is your responsibility.

At a later date we may check some of the details on your tax return more thoroughly. Under the law, the Tax Office is generally allowed two years (depending on your circumstances – see Amendment period) to review your tax return and if necessary increase or decrease the amount of tax payable.

Please remember, even if someone else helps you to complete your tax return, you have to electronically sign the Taxpayer’s declaration in e-tax and you are responsible for the information provided on your tax return. Another person may sign your tax return on your behalf if they have authority to do so under a power of attorney. A certified copy of the current power of attorney must be registered with the Tax Office.

If, after lodging your tax return, you believe you have made a mistake see If you have made a mistake on your tax return.

AMENDMENT PERIOD/REVIEW PERIOD

If you are among the majority of taxpayers, your income tax affairs for a particular income year will be considered finalised two years after the Commissioner issues your notice of assessment. For more information refer to www.ato.gov.au/notices. However, some taxpayers will have a four-year amendment period.

Generally, you will have a four-year amendment period if:

•	you carried on a business and you are not a simplified tax system (STS) taxpayer for that year

•	you were a partner in a partnership that was carrying on a business and the partnership was not an STS taxpayer for that year

•	you received  a trust distribution and the trust was not an STS taxpayer for that year

•	any person entered into or carried out a scheme with the dominant purpose of obtaining for you a tax benefit in relation to income tax.

KEEP YOUR RECORDS

You need to keep records:

•	to provide written evidence of your income and expenses

•	to help you or your tax agent prepare your tax return

•	to ensure that you are able to claim all your entitlements, and

•	in case we ask you to prove the information you provided on your tax return.

You must keep most of your written evidence for five years from the date you lodge your tax return. If you have claimed a deduction for decline in value, have acquired or disposed of an asset, applied a loss or a net capital loss, or are in dispute with the Tax Office, you must keep the records longer, as follows:

•	decline in value deductions: five years from the date of your last claim for decline in value

•	assets: five years after the capital gains tax event happened for which those records will be needed to work out a capital gain or capital loss

•	losses: generally four years from the year of income when the tax loss is fully deducted or a net capital loss is fully applied

•	dispute with the Tax Office: five years from the date you lodged your tax return, or when the dispute is settled, whichever is later.

For more information refer to Taxation Determination TD 2007/2-Income tax: should a taxpayer who has incurred a tax loss or made a net capital loss for an income year retain records relevant to the ascertainment of that loss only for the record retention period prescribed under income tax law?

You only need to keep your payment summary and your family agreement (see item M1) for two years if you are an Australian resident and have simple tax affairs. To check whether you qualify for this short record-keeping period, refer to our website www.ato.gov.au.

LODGE YOUR TAX RETURN BY 31 OCTOBER 2007

You have from 1 July to 31 October 2007 to lodge your tax return, unless it is prepared by a registered tax agent.

Don't delay sending your tax return, even if you think you will owe tax. The earliest due date for payment of any 2006-07 personal income tax liability is 21 November 2007. If you lodge your own tax return by 31 October 2007, your tax is payable by the date specified on your notice of assessment.

If you lodge your income tax return late, or not at all, any tax will be payable on 21 November 2007 and a general interest charge will be calculated from that date until full payment is received. In addition a penalty for failure to lodge on time may apply.

If you cannot lodge your tax return by 31 October 2007 due to circumstances beyond your control, contact us as soon as possible – and certainly before 31 October 2007 – to find out if you can lodge at a later date. Phone the Personal Tax Infoline or send a written request to the address that appeared on your notice of assessment for the year ending 30 June 2006, if you have one, or to your nearest Tax Office. Explain why you need to lodge late and suggest another date. We will consider your request and contact you.

The following explanations will not normally be accepted as reasons for allowing a late lodgment: a delay in receiving your payment summary, losing your payment summary, or being absent from Australia.

If you have not received your payment summary or you have lost it, see You need to know for information on late or lost payment summaries.

FAILURE TO LODGE ON TIME PENALTY

We may impose a failure to lodge on time penalty if you lodge your tax return late.

If your tax return is incomplete – for example, if it is not signed or does not include a required attachment – we may send it back to you asking you to complete it and return it to us. We consider that your tax return has not been lodged until it is returned to us complete.

Generally, we apply a penalty of $110 for every 28 days (or part thereof) your tax return is overdue, to a maximum of $550. We may apply the penalty even where there is no tax payable. However, our policy is not to apply a penalty where:

•	you lodge your tax return voluntarily, and

•	no tax is payable.

We are likely to apply the penalty if:

•	you have more than one tax return outstanding OR

•	you have a poor lodgment history OR

•	you have not complied with a request to lodge your tax return.

The penalty is in addition to any general interest charge that may apply if you have any tax amount outstanding after the due date.

FAMILY TAX BENEFIT

If you are a family tax benefit (FTB) tax claimant, for you to have any entitlement to FTB:

•	you must lodge your 2007 FTB claim by 30 June 2009 AND

•	you must lodge your 2007 tax return AND

•	your spouse (if you have one) must also lodge their 2007 tax return, if they are required to do so.

If your spouse or you are not required to lodge a tax return for 2007 you must inform the Family Assistance Office by 30 June 2008

If you are not required to lodge a tax return for 2007 you must inform the Family Assistance Office (FAO)

For FTB purposes, you have until 30 June 2009 to lodge your 2007 FTB claim. If you have not already done so, you have until 30 June 2008 to lodge your 2006 FTB tax claim or inform the FAO you are not required to lodge.

If you and/or your spouse (if you had one) received FTB, you need to lodge your 2007 tax returns before 1 July 2008 – if you do not, the full FTB amount you received in the 2006-07 income year may be treated as a debt. If you lodge these tax returns after 30 June 2009, you will not be entitled to any top-up or supplements that may otherwise have been due to you.

Remember that we may impose a penalty if you lodge your tax return after the due date for tax returns – see Lodge your tax return by 31 October 2007.


Tax Office Publications

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How to keep your business records
Record keeping for new small business

NAT 3029

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Complete tax guide for small business
Are you carrying on a business?

NAT 1908

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Australian film industry incentives
Australian film industry incentives 2006-07

NAT 0954-6.2007

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Deductions for prepaid expenses
Deductions for prepaid expenses 2006-07

NAT 4170-6.2006

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Eligible termination payments:
An individuals guide to lump sum superannuation payments

NAT 2701-04.2006

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Eligible termination payments:
An employees guide to lump sum payments from your employer

NAT 2700-04.2006

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Employee share schemes - answers to frequently asked questions by employees
Employee share schemes – answers to frequently asked questions by employees

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Reportable fringe benefits - facts for employees
Reportable fringe benefits – facts for employees

NAT 2836-06.2006

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Reportable fringe benefits - impacts on income tests for employees 2003 - 04
Reportable fringe benefits – impacts on income tests for employees

NAT 2836

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Foreign income return form guide
Foreign income return form guide 2007

NAT 1840-5.2007

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Foreign income return form guide 2007

NAT 1840-5.2007

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Foreign income return form guide 2007

NAT 1840-5.2007

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Foreign investment funds guide
Foreign investment funds guide 2007

for taxpayers with foreign investments

NAT 2130-6.2007

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Foreign investment funds guide 2007

for taxpayers with foreign investments

NAT 2130-6.2007

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Guide to depreciating assets
Guide to depreciating assets 2007

NAT 1996-6.2007

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How to claim a foreign tax credit
How to claim a foreign tax credit 2007

NAT 2338-6.2007

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Repaying your Financial Supplement loan
Repaying your Financial Supplement loan 2006-07

NAT 2789-06.2006

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Income averaging for special professionals
Income averaging for special professionals 2006-07

NAT 2475-6.2007

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Income averaging for special professionals 2006-07

NAT 2475-6.2007

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Income averaging for special professionals 2006-07

NAT 2475-6.2007

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Information for primary producers
Information for primary producers 2006-07

NAT 1712-6.2007

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Information for primary producers 2006-07

NAT 1712-6.2007

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Information for primary producers 2006-07

NAT 1712-6.2007

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Primary production worksheet
Information for primary producers 2006-07

NAT 1712-6.2007

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Interest on early payments and overpayments of income tax
Interest on early payments and overpayments of tax 2006-07

NAT 2277-6.2007

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Airline employees: Special tax information
Airline employees 2006-07

To help airline employees (flight attendants, flight engineers, pilots and ground engineers) complete their tax return for 1 July 2006 – 30 June 2007

NAT 2331-6.2007

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Australian Defence Force members: Special tax information
Australian Defence Force members 2006-07

To help ADF members complete their tax return for 1 July 2006 – 30 June 2007

NAT 2321-6.2007

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Building workers: Special tax information
Building workers 2006-07

To help building workers complete their tax return for 1 July 2006 – 30 June 2007

NAT 2324-6.2007

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Cleaners: Special tax information
Cleaners 2006-07

To help employees in the cleaning industry complete their tax return for 1 July 2006 – 30 June 2007

NAT 2328-6.2007

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Factory workers: Special tax information
Factory workers 2006-07

To help employee factory workers complete their tax return for 1 July 2006 – 30 June 2007

NAT 2329-6.2007

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Hairdressers: Special tax information
Hairdressers 2006-07

To help employee hairdressers complete their tax return for 1 July 2006 – 30 June 2007

NAT 2320-6.2007

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Hospitality industry employees: Special tax information
Hospitality industry employees 2006-07

To help hospitality industry employees (chefs, waiters, waitresses and bartenders) complete their tax return for 1 July 2006 – 30 June 2007

NAT 2326-6.2007

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Journalists: Special tax information
Journalists 2006-07

To help journalists employed in the print, radio and television industry, including radio and television presenters, complete their tax return for 1 July 2006 – 30 June 2007

NAT 2782-6.2007

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Lawyers: Special tax information
Lawyers 2006-07

To help solicitors, articled clerks and other paralegals who are employees in the public and private sectors complete their tax return for 1 July 2006 – 30 June 2007

NAT 2327-6.2007

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Nurses: Special tax information
Nurses 2006-07

To Help nurses complete their tax return for 1 July 2006 – 30 June 2007

NAT 2319-6.2007

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Performing artists: Special tax information
Performing artists 2006-07

To help employee performing artists complete their tax return for 1 July 2006 – 30 June 2007

NAT 2325-6.2007

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Police officers: Special tax information
Police officers 2006-07

To help police officers complete their tax return for 1 July 2006 – 30 June 2007

NAT 2316-6.2007

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Real estate employees: Special tax information
Real estate employees 2006-07

To help salespeople and property managers who are employees in the real estate industry complete their tax return for 1 July 2006 – 30 June 2007

NAT 2323-6.2007

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Shop assistants: Special tax information
Shop assistants 2006-07

To help shop assistants employed in department stores, supermarkets and other retail outlets to complete their tax return for 1 July 2006 – 30 June 2007

NAT 2322-6.2007

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Teachers: Special tax information
Teachers 2006-07

To help teachers complete their tax return for 1 July 2006 – 30 June 2007

NAT 2317-6.2007

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Truck drivers: Special tax information
Truck drivers 2006-07

To help employee truck drivers complete their tax return for 1 July 2006 – 30 June 2007

NAT 2318-6.2007

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Personal services income: Self assessment guide
Personal services business self assessment checklist

NAT 3416-04.2004

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Reasonable benefit limits - which RBL will apply?
Reasonable benefit limits – How these may affect you.

NAT 5256-05.2006

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Rental properties
Rental properties 2007

NAT 1729-6.2007

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Repaying your HECS debt
Repaying your HELP debt 2006-07

NAT 3913-06.2006

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Statutory declaration

NAT 4135-04.2007

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The Simplified Tax System: A guide for tax agents and small businesses
The simplified tax system - a guide for tax agents and small businesses

NAT 6459

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You and your shares
You and your shares 2007

NAT 2632-6.2007

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Capital gains tax (CGT) on-line documentation

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Family tax benefit (FTB) on-line documentation

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How to claim Australian franking credits attached to New Zealand dividends
Trans-Tasman Imputation: How to claim Australian franking credits attached to New Zealand dividends

NAT 10851-06.2004

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Joint Petroleum Development Area Instruction sheet
Timor Sea Treaty Joint Petroleum Development Area instruction 2007

NAT 8277-6.2007

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Joint Petroleum Development Area Instruction sheet - Worksheet 1
Joint Petroleum Development Area Instruction sheet – Worksheet 1

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Joint Petroleum Development Area Instruction sheet - Worksheet 2
Joint Petroleum Development Area Instruction sheet – Worksheet 2

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Simplified tax system: what is in it for my business?

NAT 4590-07.2005

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Trust distribution statement

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Request for a determination of the deductible amount of UPP of an Australian pension or annuity

NAT 16544

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Request for a determination of the deductible amount of UPP of a foreign pension or annuity

NAT 1653

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Auto completing Centrelink details
Pre-filling your government payment details

You may be able to pre-fill your income details from the following participating agencies:

•	Centrelink

•	Department of Education, Science and Training (DEST), and

•	Department of Veterans’ Affairs (DVA).

You will view a list of:

•	taxable payments (pensions, allowances and so on), and

•	tax exempt payments which can be used to calculate some tax offsets.

The information will be used to pre-fill the following items in the tax return:

•	item 5 – Australian Government allowances and payments, and

•	item 6 – Australian Government pensions and allowances.

Emergency and general assistance payments, remote area allowances and tax exempt payments will be shown in the summary that you can print.

NOTE:
If you received an emergency and general assistance payment, you will need to manually enter the income details at item 5 – Australian Government allowances and payments and/ or item 22 – Other income.  For more details, see emergency and general assistance payment.

If the system is unavailable, e-tax cannot pre-fill your tax return for you. You can either enter your details manually or try to use the pre-fill service later.

NOTE:
For details about when the service may be available again, see e-tax pre-filling information.

VIEWING AND/OR PRINTING YOUR PAYMENT DETAILS

You can view and/or print the details of your government payments by selecting Printing in the e-tax Navigator when it appears on the left hand side of the screen. Select Centrelink/DEST/DVA Payment Summary in the Downloaded Data section and select Preview or Print.

EDITING THE PAYMENT DETAILS

You can manually change the Description, Gross Amount and Tax Withheld fields in the table provided.

EMERGENCY AND GENERAL ASSISTANCE PAYMENT

If you pre-filled your tax return and received emergency and general assistance payments, you must manually enter the taxable amounts of these payments at item 5 – Australian Government allowances and payments and/or item 22 – Other income. These amounts will not be automatically pre-filled into your tax return.

You can view details of these payments on the Centrelink/DEST/DVA payment summary by selecting Printing in the Navigator when it appears on the left hand side of the screen. Select Centrelink/DEST/DVA Payment Summary in the Downloaded Data section and select Preview or Print. An emergency and general assistance payment will appear as Emergency Payment on the Centrelink/DEST/DVA payment summary.

Interim income support payments and Cyclone Larry or Cyclone Monica income support payments are not reported as separate amounts on Centrelink PAYG payment summaries, but are included in the total amount reported for emergency and general assistance payments. If you received these payments you will need a letter from Centrelink notifying you of the amount you have received. Manually enter interim income support payments and Cyclone Larry or Cyclone Monica income support payments at item 5 – Australian Government allowances and payments in order to get the correct tax offset.

Manually enter the balance of the taxable amount of Emergency Payment shown on the Centrelink/DEST/DVA payment summary at item 22 – Other income.

REMOTE AREA ALLOWANCE

If you received a remote area allowance or an equivalent amount was included in an exceptional circumstances relief payment or a payment of farm help income support (previously known as restart income support), you must reduce the amount of your zone tax offset that is claimed at item T9 by this allowance.

TAX EXEMPT AMOUNT

If you received income that is exempt from tax, you do not need to include it on your tax return as income. However, you may need details of your tax exempt amounts as some items in e-tax ask you to show your exempt income.

IF YOU DISAGREE WITH THE PRE-FILLED INFORMATION

If you disagree with or have any questions about the pre-filled government payments, refer to your PAYG payment summary or contact your payer.

VERIFICATION

You must provide information that allows the Tax Office to verify your identity before your data is pre-filled into e-tax. To do this

1.	Click on Pre-filling in the Navigator or the Pre-filling button on the relevant screens.

2.	e-tax will ask you for your password or information that will allow the Tax Office to verify your identity. When you have successfully matched your details against the Tax Office records, you will be issued with a password.

NOTE:
Keep your password as you will need it to lodge your tax return or claim form.

For more details about obtaining a Tax Office password using e-tax refer to Tax Office password.


Centrelink - Contact Details
Centrelink, Department of Veterans’ Affairs and Department of Education, Science and Training – Contact Details

CENTRELINK - CONTACT DETAILS

The Centrelink Call Centre is open between Monday and Friday from 8.00am to 5.00pm.  The Family Assistance Office line is open from 8.00am to 8.00pm.

Employment Services – 13 28 50

Use this number for looking for work enquiries including Newstart Allowance, Widow Allowance, Mature Age Allowance, Farm Help, Change, Exceptional Circumstances Relief Payment, Partner Allowance, Special Benefit and Job Network employment services

Retirement Services – 13 23 00

Use this number for retirement enquiries including Age Pension, Pensioner Concession Cards, Widow B pension, Wife Pension, Commonwealth Seniors Health Card and Financial Information Service

Disability, Sickness and Carers – 13 27 17

Use this number for disability, sickness and carer enquiries including Disability Support Pension, Mobility Allowance, Carer Payment, Carer Allowance and Sickness Allowance

Family Assistance Office – 13 61 50

Use this number for family enquiries including Family Tax Benefit (Parts A and B), Child Care Benefit, Parenting Payment, Double Orphan Pension, Health Care Cards, Maternity Payment, Maternity Immunisation Allowance and Jobs, Education and Training (JET).

Youth and Student Services – 13 24 90

Use this number for study and training enquiries including Youth Allowance, Austudy payment and Pensioner Education Supplement

ABSTUDY – 13 23 17

Use this number for ABSTUDY enquiries.

DEPARTMENT OF VETERANS’ AFFAIRS

General enquiries – 13 32 54

Use this number for general enquiries any where in Australia.  Country callers use 1800 555 254 (freecall).

DEPARTMENT OF EDUCATION, SCIENCE AND TRAINING

General enquiries– 1300 363 079

Use this number for general enquiries.


Additional information schedule

An Additional information schedule is not a separate tax office form. It is simply a note from you to the Tax Office providing further information which may be required.

There are two ways an Additional information schedule may be created in e-tax.

1. e-tax creates a schedule for you

e-tax may determine that an Additional information schedule is necessary based on the information you have entered. You will be asked to provide the additional information in the e-tax interview screen.

2. You create the schedule yourself

There may be times when e-tax Help instructs you to complete an Additional information schedule. To do this, click on the Additional Information button in the e-tax interview screen. A blank notepad will be displayed. This notepad works just the same as any basic word processor. Enter the information you have been asked to provide, including the item number the information refers to.

If you are asked to complete more than one Additional information schedule, add the extra information to the bottom of the schedule. Don't forget to include the item number with the new information.

The information you enter will be transmitted to the Tax Office as part of your electronic return.

e-tax will automatically print the schedule(s) for you. Attach your schedule(s) to the printed copy of your tax return.

If you have completed an Additional information schedule the 14 day processing time may not apply.


STS depreciation worksheet

Contents:

STS depreciation expenses

Calculating depreciation deductions

STS $1000 immediate write-off

STS pool deductions – general and long-life

Other depreciating assets

Disposal of depreciating assets

Closing pool balance

DEPRECIATION EXPENSES

The amount shown at Depreciation expenses is the total depreciation deductions being claimed under the STS depreciation (capital allowance) rules and for the business use of other assets under the uniform capital allowance (UCA) rules. This includes your deduction under the STS depreciation rules for depreciating assets used for work related or self-education purposes. You do not need to complete a Capital allowances schedule 2007.

STS taxpayers can claim an immediate deduction for depreciating assets costing less than $1,000 (excluding input tax credit entitlements) and pool most of their other depreciating assets. There are two STS pools:

•	a general STS pool for depreciating assets with an effective life of less than 25 years

•	a long-life STS pool for depreciating assets with an effective life of 25 years or more.

Some depreciating assets are excluded from the STS rules but a deduction may be available under the UCA rules. For more information about the STS depreciation rules, ring the Business infoline on 13 28 66 or visit our Internet site at www.ato.gov.au.

PP and NPP low-value business pools

If the pool is used in a primary production business and non-primary production activity, a reasonable apportionment of the total shown must be made between primary production and non-primary production activities. e-tax will prompt you for the percentage PP and NPP business use.

Low-value pool worksheet

If the taxpayer has a low-value pool worksheet that has been rolled over from last year's tax return, click on the button to include the pool in the depreciation calculation.

Definitions

Depreciating asset is an asset with a limited effective life and can reasonably be expected to decline in value over the time it is used.

Decline in value. Deductions for the cost of a depreciating asset are based on the decline in value. For most depreciating assets, you have the choice of two methods to work out the decline in value of a depreciating asset: the prime cost method or the diminishing value method.

Adjustable value A depreciating asset’s adjustable value at a particular time is its cost (first and second elements) less any decline in value up to that time. The opening adjustable value of an asset for an income year is generally the same as its adjustable value at the end of the previous income year.

Taxable purpose A taxable purpose is the purpose of producing assessable income, the purpose of exploration or prospecting, the purpose of mining site rehabilitation, or environmental protection activities.

Taxable purpose proportion is the extent to which you use the asset for a taxable purpose (expressed as a percentage), such as for producing assessable income.

Termination value Generally the termination value is what you receive or are taken to receive for an asset as a result of a balancing adjustment event, such as the proceeds of selling an asset.

Assessable balancing adjustment amount arises where the termination value of the depreciating asset is more than the adjustable value.

Deductible balancing adjustment amount arises where the termination value of the depreciating asset is less than the adjustable value.

CALCULATING DEPRECIATION DEDUCTIONS

You can only complete the STS depreciation worksheet if you are eligible to enter the STS and you have elected to do so at item S1.

If your accounting system or financial statements provide you with the amounts to complete the labels in the worksheet, enter them directly. Otherwise, click on the WS buttons to access worksheets that will calculate the amounts for you. See below.

The amounts you enter in the worksheets must be tax and not accounting values.

If you need to calculate the deduction for the decline in value of any other depreciating assets that are not included in any of the STS worksheets, click on the Use General Depreciation Method Worksheet button to access the Depreciating assets worksheet.

If you have a low-value pool worksheet that has been rolled over from last year’s tax return, click on the Use Low-value Pool Method Worksheet button to include the pool in the depreciation calculation.

STS $1000 IMMEDIATE WRITE-OFF

Create one row in the e-tax worksheet table for each depreciating asset you acquired this income year and used or held ready for use this year for the purpose of producing assessable income

•	whose cost at the end of this year is less than $1,000 (excluding input tax credit entitlements) and

•	which qualifies for a deduction under the STS depreciation (capital allowance) rules.

Description – enter a description of the asset.

Business use % – enter the extent the asset is used for the purpose of producing assessable income (taxable purpose proportion).

Adjustable value or 2nd element cost – enter the asset's adjustable value or 2nd element cost. The adjustable value of an asset is its cost less its decline in value since you first used it (or installed it ready for use) for any purpose, including a private purpose. The adjustable value of an asset, at the time you first used it (or held it ready for use) for a taxable purpose, will be its cost unless you previously used or held the asset solely for private purposes. The 2nd element of cost is, broadly, the amount paid (money and/or the market value of property given) or the amount taken to have paid to bring the asset to its present condition and location at any time, such as a cost of improving the asset.

e-tax will work out the deductible amount for each asset as follows:

asset’s adjustable value or 2nd element cost  X  taxable purpose proportion

For example, a tool set bought on 1 December 2006 at a cost of $800 (excluding input tax credit entitlements) and used for producing assessable income from that date at an estimated 70 per cent of the time, the immediate deduction would be $800 X 70% = $560.

Termination value – enter the termination value of the asset. Termination value includes money received from the sale of an asset or insurance money received as the result of the loss or destruction of an asset. Exclude the GST component where the amount received is for a taxable supply.

e-tax will work out the assessable amount for each asset as follows:

asset’s termination value  X  taxable purpose proportion

Do not include in this table amounts for depreciating assets you acquired prior to entering the STS and that cost less than $1,000 (excluding input tax credit entitlements). These assets are allocated to the general STS pool (see below).

If the assets entered in the table are used in a primary production (PP) business and non-primary production (NPP) activity, a reasonable apportionment of the total shown must be made between primary production and non-primary production activities. Enter the percentage PP and NPP business use.

e-tax will transfer the total deduction to the STS immediate write-off box in the STS depreciation worksheet.

STS POOL DEDUCTIONS – GENERAL AND LONG-LIFE

The general and long-life pool tables are identical. Complete one row in the table for each depreciating asset you are adding to the pool.

Description – enter a description of the depreciating asset for your records.

Opening general/long life STS pool balance for current year – If you are entering the STS for the first time, the opening general/long life STS pool balance is the taxable purpose proportion of the adjusted values of all the depreciating assets allocated to the pool. For a later income year the opening general/long life STS pool balance is the closing general/long life STS pool balance from the previous year except where an adjustment is made to reflect the changed business use of a pooled asset.

Category – Select one of the following categories:

1.	New asset

2.	Existing asset added to pool

3.	2nd element expense (e.g. improvement) to asset in opening pool

4.	2nd element expense (e.g. improvement) to existing asset added to pool this year

5.	2nd element expense (e.g. improvement) of $1,000 or more to a STS asset that has had an immediate write-off

6.	Second 2nd element expense (e.g. improvement) less than $1,000 to a STS asset that has had an immediate write-off and a first 2nd element expense while an STS taxpayer

7.	Asset in opening pool that has been disposed of

You cannot select a category when you enter the opening general/long life STS pool balance for the current year.

Business use % – the extent to which you use the asset for a taxable purpose, such as for the purpose of producing assessable income.

You cannot enter a business use percentage when you enter the opening general/long life STS pool balance for the current year.

Amount – enter the amount of the opening general/long life pool balance for the current year or the amount relating to one of the categories listed above.

Taxable purpose amount – e-tax will calculate the taxable purpose amount.

Deduction – e-tax will calculate the deduction. See the section How e-tax calculates the deductions for each pool below.

Termination value – this includes money received from the sale of an asset or insurance money received as the result of the loss or destruction of an asset. See Disposal of depreciating assets below.

Reduced termination value – e-tax will calculate the reduced termination value.

Closing general – e-tax will calculate the closing general/long life STS pool balance.

If the pool is used in a primary production (PP) business and non-primary production (NPP) activity, a reasonable apportionment of the total shown must be made between primary production and non-primary production activities. Enter the percentage PP and NPP business use.

How e-tax calculates the deductions for each pool

To calculate the deductions for both the general and long-life STS pools e-tax must first calculate the opening pool balance of each pool.

For the first year you enter the STS, allocate each depreciating asset you hold at the start of the income year to the appropriate pool according to the asset’s effective life. The opening pool balance for each STS pool is calculated by adding the value of all depreciating assets allocated to the relevant pool.

Calculate the deduction for each STS pool as follows:

General STS pool deduction:
Opening pool balance ($) X 30%

Long-life STS pool deduction:
Opening pool balance ($) X 5%

NOTE:
You can choose not to allocate an asset to the long-life STS pool if it was first used or installed ready for use for a taxable purpose before 1 July 2001. If either pool balance (after taking into account additions and disposals but before calculating the deductions) is below $1,000, you calculate the deduction for the pool using the method outlined in Disposal of depreciating assets – assets allocated to STS pools below.

Depreciating assets first used for a taxable purpose during the income year and improvements made to assets already allocated to a pool

e-tax calculates the deduction at half the relevant pool rate for:

•	depreciating assets first used or installed ready for use for a taxable purpose during the year

•	improvements made during the year to assets already allocated to an STS pool.

e-tax calculates the deduction as follows:

•	the taxable purpose proportion of the adjustable value of each depreciating asset first used for a taxable purpose this year X 15 per cent (general STS pool assets) or 5 per cent (long-life pool assets) plus

•	the taxable purpose proportion of the cost of the improvement X 15 per cent (general STS pool assets) or 5 per cent (long-life pool assets).

NOTE:
If either pool balance (after taking into account additions and disposals but before calculating the deductions) is below $1,000, e-tax calculates the deduction for these assets using the method in Disposal of depreciating assets – assets allocated to STS pools below.

OTHER DEPRECIATING ASSETS

Calculate the deduction for the decline in value of all your other depreciating assets that are not included in any of the STS worksheets. Click on the Use general depreciation worksheet button to access the Depreciating assets worksheet.

Otherwise, see Guide to depreciating assets 2007 (NAT 1996-6.2007) for information on how to calculate the decline in value of these assets.

Do not include depreciating assets which qualify for a deduction under Subdivision 40-F or 40-G as water facilities or landcare operations in a primary production business and for which the taxpayer has chosen to claim a deduction under those subdivisions and not the STS rules. Show these deductions at Landcare operations and business deduction for decline in value of water facility in the Reconciliation items section.

DISPOSAL OF DEPRECIATING ASSETS

(a) Low-cost assets

If you have disposed of a low-cost asset, for which you have claimed an immediate deduction in step 1 this year or in the prior year, you include the taxable purpose proportion of the termination value at the RECONCILIATION ITEMS section of the business worksheet. Termination value includes money received from the sale of an asset or insurance money received as the result of the loss or destruction of an asset.

 (b) Assets allocated to STS pools

Where you dispose of depreciating assets that have been allocated to either the general or long-life STS pools, the taxable purpose proportion of the termination value is deducted from the closing pool balance. If the balance of a pool (after taking into account any additions and disposals but before calculating the deductions) is below $1,000, you can claim an immediate deduction for this amount.

If the closing pool balance is less than zero, the amount below zero is included in your assessable income at the RECONCILIATION ITEMS section of the business worksheet. For more information about closing pool balances, see below.

(c) Other depreciating assets

If you have used the Depreciating assets worksheet, e-tax will calculate any balancing adjustments.

Otherwise, see the Guide to depreciating assets 2007 for information on how to calculate any balancing adjustment amounts on the disposal of other depreciating assets. Balancing adjustment amounts are included at the RECONCILIATION ITEMS section of the business worksheet.

CLOSING POOL BALANCE

The closing balance of each STS pool for an income year is the:

•	opening pool balance plus

•	taxable purpose proportion of the adjustable value of assets that were first used or installed ready for use for a taxable purpose during the year plus

•	taxable purpose proportion of the cost of any improvements made to assets in the pool during the year less

•	taxable purpose proportion of the termination value of any pooled assets disposed of during the year less

•	STS pool deduction less

•	deduction for assets first used by the taxpayer during the year less

•	deduction for the cost of improvements made to the pooled assets during the year.

If the closing pool balance is less than zero, see Disposal of depreciating assets – assets allocated to STS pools above.

The closing pool balance for this year becomes the opening pool balance for the 2007-08 income year except where an adjustment is made to reflect the changed business use of a pooled asset.

The opening pool balance will be needed to work out the pool deduction next year.


Depreciating assets worksheet
Depreciation
Depreciating assets worksheet instructions

This topic covers:

Getting started

Completing the depreciation worksheet in e-tax

Description and cost

Effective life/Depreciation rate and method

Calculation

Disposal and balancing adjustments

GETTING STARTED

If you claim a deduction for depreciation in your tax return, you must keep certain records. To help you keep the information, we have provided a depreciation worksheet. The worksheets are not transmitted to the Tax Office. Keep the printed copies with your other tax records.

These instructions provide help links to the Guide to depreciating assets 2007. When you have finished reading the link, click on Back to return to this e-tax Help file. You may prefer to open the Guide to depreciating assets 2007 in a separate help window.

In addition to this depreciating assets worksheet, there are also depreciation worksheets for the low-value pool (accessible from within item 14 or at item D6) and the STS worksheets (accessible from within item 14 if you are an STS taxpayer).

For an overview of how non-STS depreciation deductions are entered in e-tax read Depreciation in e-tax.

COMPLETING THE WORKSHEET IN e-tax

NOTE: Once you begin to enter data into the decline in value worksheet, e-tax will prompt you to complete all the mandatory fields.

If you wish to:

•	exit without completing all mandatory fields, or

•	delete all entries in the worksheet

click the Delete button in the Existing worksheets navigator on the screen. Once the worksheet has been deleted, click on the Next button to exit the decline in value worksheet.

The following instructions will help you complete all relevant fields in the worksheet. Note that you do not have to complete the shaded fields. e-tax works out the amounts displayed in these fields. When you have completed a worksheet click on the Next button.

DESCRIPTION AND COST

Description of depreciating asset (mandatory)

Enter a description of the asset.

Non-business/rental property/other work related use % (if applicable)

There is a worksheet in item 14 for assets used in business, a worksheet in item 20 for assets used to produce rental income and a worksheet in item D5 for assets used for work related purposes. Each worksheet works out the decline in value and any adjustments upon disposal related to the use of the asset at that item. For instance, you might use a motor car partially for business purposes and partially for private purposes. In this case, you are allowed only a partial deduction for decline in value in the business item, based on the percentage of business use.

For such an asset, enter the percentage of Non-business/rental property/other work related use. Otherwise leave this field blank.

For more details read the section Decline in value of depreciating asset used for non-taxable purpose in the Guide to depreciating assets 2007.

Date acquired (mandatory)

Enter the date you first used the asset, or installed ready to use.

NOTE:
If this asset was acquired before 21 September 1999, enter the date acquired. However, if this asset was acquired ON 21 September 1999 but before 11:45am enter 20 September 1999.

This date determines which fields have to be completed and is also relevant to the calculation of balancing adjustments on disposal.

Cost

The cost of a depreciating asset includes first and second elements of cost. The first element is, broadly, amounts you are taken to have paid to hold the asset, such as the purchase price. It is worked out at the time you begin to hold the asset. The second element is capital expenditure incurred after that time, such as the cost of improving the asset.

If the asset is a car and the first element of a car’s cost exceeds the car limit – see Car limit in the Guide to depreciating assets 2007, the first element of the cost will be the car limit.

If this asset was acquired during the year, the Opening written down value and the Opening adjustable value will be set to the Cost less adjustments.

Adjustments (if applicable)

The cost of an asset can be adjusted if the asset is a replacement for a depreciating asset that was lost or destroyed – see Involuntary disposal of a depreciating asset in the Guide to depreciating assets 2007.

Adjustments to the cost can only be made if the depreciating asset is used wholly in producing assessable income. If a value other than zero (blank) is entered in the Non-business/rental property/other work related use % field, e-tax will disable the adjustment fields. Any entries you may have made to the adjustment fields will be deleted.

Refer to the section The cost of a depreciating asset in the Guide to depreciating assets 2007.

Details	If you are going to offset the cost of the depreciating asset by an assessable balancing adjustment, enter a description of the adjustment in the Details field.

Date	Enter the date of the adjustment. If this is a new depreciating asset enter the date you first used, or installed ready to use, the depreciating asset you acquired during the year. Otherwise, enter the start date of the year that this return relates to. For example, ‘01/07/2006’.

Amount	Enter the Amount of the adjustment.

Cost less adjustments (e-tax calculation)

e-tax will work out the cost of the depreciating asset less any adjustments.

Asset type

Select the asset type from the list.

If you are completing this depreciating asset worksheet at item 14, e-tax uses the information entered in the depreciating assets worksheets to complete the following items in the item 14 worksheet. For more information, you must read the help on each item:

•	Intangible depreciating assets first deducted (P15)

•	Other depreciating assets first deducted (P16)

•	Termination value of intangible depreciating assets (P17)

•	Termination value of other depreciating assets (P18)

e-tax also needs to distinguish between the tangible assets that are buildings, motor vehicles and ‘other’ so that the Capital allowances schedule 2007 can be completed if it required. The schedule distinguishes between Depreciating assets (excluding motor vehicles) and Motor vehicles. Details of buildings are not written to the schedule this year. For more information, refer to Capital allowances schedule 2007 (NAT 4089-6.2007).

EFFECTIVE LIFE/DEPRECIATION RATE AND METHOD

Method (mandatory)

Select the method you are going to use to calculate your decline in value by clicking on (ticking) the required box.

There are two methods of working out the decline in value of a depreciating asset:

•	the diminishing value method and

•	the prime cost method.

You choose the method of calculating decline in value in the first year you are allowed a deduction for decline in value of the asset. Once you have chosen a method you cannot change to the other method for that item.

The diminishing value method assumes the decline in value each year is a constant proportion of the remaining value and produces a progressively smaller decline over time.

The prime cost method assumes that the value of a depreciating asset decreases uniformly over its effective life.

See Methods of working out decline in value in the Guide to depreciating assets 2007.

Effective life or Depreciation rate %

Depending upon the date you acquired the asset you may have to complete the Effective life field or the Depreciation rate % field. If you acquired the asset after 11.45 a.m. (by legal time in the ACT) on 21 September 1999 you must complete the Effective life. If you acquired the asset on or before 11.45 a.m. (by legal time in the ACT) on 21 September 1999 you should complete the Depreciation rate % if you are using or required to use accelerated rates of depreciation.

Both the prime cost and diminishing value methods are based on a depreciating asset's effective life. However, if you used accelerated rates of depreciation for an item of plant before 1 July 2001 or could have had you used the plant for producing assessable income, you continue to use accelerated rates to work out the decline in value rather than the effective life – see Accelerated depreciation. A list of accelerated rates is provided – see Accelerated rates of depreciation.

Refer to Effective life in the Guide to depreciating assets 2007.

Have you self-assessed the effective life for this asset?

e-tax will only enable the question if the asset was acquired during the income year.

For most depreciating assets, you have a choice to either work out the effective life yourself or use an effective life determined by the Commissioner. For a list of effective lives for the more common depreciating assets, refer to Examples of effective lives .

The choice must be made for the income year in which the asset’s start time occurs. Generally, the choice must be made by the time you lodge your income tax return for that year.

Have you re-calculated the effective life for this asset?

e-tax will only enable this question if the asset was not acquired during the income year and you have entered an effective life for the asset. Refer to Effect of recalculating effective life.

CALCULATION

Opening written down value (mandatory)

The opening written down value is the Cost less adjustments less decline in value deductions allowed in previous years. If you used e-tax last year and had no second element costs this year, it will be the closing written down value from last year.

If this asset was acquired during the year, the Opening written down value will be set to the Cost less adjustments.

Opening adjustable value (mandatory)

The adjustable value of a depreciating asset at any time is its cost (first and second elements) less adjustments (if applicable) reduced by the decline in value up to that time.

The opening adjustable value of an asset for an income year is the same as its adjustable value at the end of the previous income year unless there have been second elements costs during the year.

Decline in value and Deductible decline in value amounts (e-tax calculation)

If you are using the diminishing value method to work out decline in value, e-tax will first work out the Decline in value amount by applying the depreciation rate to the opening adjustable value. The deduction for decline in value you are allowed is the decline in value reduced by the Non-business/rental property/other work related use %. e-tax will display this adjusted amount in the Deductible decline in value field.

If you are using the prime cost method, the deduction for decline in value allowable is the Decline in value amount worked out in the usual way, reduced by the Non-business/rental property/other work related use %. You are not allowed any further deductions once the adjustable value of the asset reaches zero. e-tax will display this adjusted amount in the Deductible decline in value field.

Closing written down value (e-tax calculation)

The Closing written down value of the depreciating asset is its cost less adjustments less the sum of your allowable deductions for decline in value. e-tax subtracts the Deductible decline in value from the Opening written down value to work out the Closing written down value.

For a depreciating asset that has no private or non-income producing use since acquisition, the written down value will equal the Closing adjustable value.

Closing adjustable value (e-tax calculation)

The Closing adjustable value is the cost (first and second elements) of the depreciating asset less the sum of the deductions for decline in value up to that time.

e-tax subtracts the deduction for decline in value from the Opening adjustable value to work out the Closing adjustable value.

DISPOSALS & BALANCING ADJUSTMENTS

A balancing adjustment event occurs for a depreciating asset if you stop holding it or you stop using it – see What happens if you no longer hold or use a depreciating asset?. The most common balancing adjustment event is the sale of a depreciating asset.

Date of disposal – Enter the date you disposed of the depreciating asset, such as the date you sold it.

Termination value – Generally, the termination value is what you receive for the asset under the balancing adjustment event, such as the proceeds of selling the asset – see Termination value.

Assessable balancing adjustment amount

e-tax calculation

e-tax will compare the termination value with the Closing adjustable value of the depreciating asset.

If the termination value on disposal is more than the Closing adjustable value, the difference (adjusted for any non-business/rental property/other work related expense use) is to be included in your assessable income. However, the assessable amount included here will not be more than the sum of deductions actually allowed for decline in value on the asset.

Deductible balancing adjustment amount

e-tax calculation

Where the termination value is less than the Closing adjustable value, the difference between the Termination value and the Closing adjustable value (adjusted for any non-business/rental property/other work related expense use) can be claimed as a deduction.

Balancing adjustment relief

This field will only be enabled if there is an assessable balancing adjustment.

Balancing adjustment relief is a reference to the offsetting of otherwise assessable balancing adjustment amounts, such as for involuntary disposals – see Involuntary disposal of a depreciating asset in the Guide to depreciating assets 2007.

To offset the assessable balancing adjustment amount, the replacement asset must be wholly used for a taxable purpose and you must be able to deduct an amount for it.

Are capital gains and capital losses disregarded for this asset?

The Further balancing adjustment section of the worksheet will be activated if capital gains and capital losses are not disregarded for this asset. Capital gains and capital losses will be disregarded for the following assets:

•	cars that are designed to carry a load of less than one tonne and fewer than nine passengers

•	motor cycles

•	valour decorations

•	collectables (such as a painting or an antique) if the first element of its cost is $500 or less

•	assets for which you can deduct an amount under the STS rules for the income year in which the balancing adjustment event occurred

•	assets used to produce exempt income

•	assets acquired before 20 September 1985.

In addition, a capital gain arising from the disposal of a personal use asset (an asset used or kept mainly for personal use and enjoyment) of which the first element of cost is $10,000 or less and a capital loss arising from disposal of any personal use asset are disregarded for capital gains tax purposes.

Further balancing adjustment – assessable

The further balancing adjustment arises where the termination value of the asset exceeds its cost.

Assets acquired after 11.45 a.m. on 21 September 1999

When an asset is acquired after 11.45 a.m. (by legal time in the ACT) on 21 September 1999, the further balancing adjustment is the difference between the termination value of the asset and its cost, as adjusted for the non-business/rental property/other work related expense use.

Assets acquired before 11.45 a.m. on 21 September 1999 but disposed of after this time

For assets disposed of after 11.45 a.m. (by legal time in the ACT) on 21 September 1999 but acquired before this time, the further balancing adjustment is the difference between the termination value of the asset and the cost base of the plant indexed up to 30 September 1999, as adjusted for the non-business/rental property/other work related expense use. When you click on the Next button e-tax will ask you to provide the additional information required to work out the indexed cost base of the asset. Refer to Preserving the benefit of indexation below.

Further balancing adjustment – deductible

e-tax will only enable this field if you have a deductible balancing adjustment. You must calculate and enter any further deductible balancing adjustment if it applies to this asset.

If you dispose of an asset after 11.45 a.m. (by legal time in the ACT) on 21 September 1999, you may be able to claim a further deduction. Where the adjustable value of the asset immediately prior to its disposal is also less than its reduced cost base (as calculated under the CGT regime), you can claim a further deduction for the difference. This further deduction will not be reduced even if you have used the plant for any non-taxable use.

CGT event K7 – Balancing adjustment events for depreciating assets and section 73BA depreciating assets

CGT event K7 happens if a balancing adjustment event occurs for a depreciating asset that you held and at some time during the period it was held it was used for a purpose other than a taxable purpose.

The amount of the capital gain or capital loss is the difference between the asset’s termination value and its cost that is attributable to the non-taxable use. For some depreciating assets, any capital gain or capital loss will be disregarded even though the asset is used for a non-taxable purposes – see Are capital gains and capital losses disregarded for this asset?

If CGT event K7 has happened you will need to complete item 17. For more information, refer to the Capital gains tax (CGT) on-line documentation. In the Contents click on Step 1 Did a CGT event happen? and then click on Depreciating assets.

PRESERVING THE BENEFIT OF INDEXATION

Plant acquired before 11.45 am on 21 September 1999 and other depreciating assets acquired before 1 July 2001

If a balancing adjustment event occurs to an item of plant that was acquired before 11.45 a.m. (by legal time in the ACT) on 21 September 1999 or any other depreciating asset acquired before 1 July 2001, any assessable balancing adjustment amount or capital gain (if the plant was used for non-taxable purposes) can be reduced to take account of the amount by which the capital gains tax cost base of the asset exceeds its cost.

The purpose of this reduction is to preserve cost base advantages for assets acquired before the dates mentioned (for example, indexation benefits). The reduction is worked out having regard to the capital gains tax concepts of cost base and indexation.

e-tax carries forward the cost of the asset from the previous screen. If the taxpayer has other costs associated with this asset that have not already been included in the depreciation worksheet, enter them in the table. For an explanation of costs that are allowable refer to the Capital gains tax (CGT) on-line documentation. e-tax will adjust your further balancing adjustment to allow for the effects of indexation.


Creating a low-value pool
Depreciation
Creating a low-value pool in e-tax

This topic covers:

Introduction

You need to know

Adding an item of plant to the low-value pool

Low-value pool depreciation calculation

INTRODUCTION

The deduction for depreciating assets allocated to a low-value pool is to be shown at item D6 Low-value pool deduction unless the pool contains only assets used in a business and not for any other income-producing purpose. In that case show the amount at Depreciation expenses at item 14.

Assets for which you can deduct amounts under the STS – see STS taxpayers – cannot be added to a low-value pool.

YOU NEED TO KNOW

From 1 July 2000, an optional low-value pooling arrangement for plant was introduced. It applied to certain plant costing less than $1000 or having an undeducted cost of less than $1000. This plant could be allocated to a low-value pool and depreciated at statutory rates.

The UCA adopts most of the former rules for low-value pools. From 1 July 2001, the decline in value of certain depreciating assets can be calculated through a low-value pool.

Transitional rules apply so that a low-value pool created before 1 July 2001 continues and is treated as if it were created under the UCA. The closing balance of the pool worked out under the former rules is used to start working out the decline in value of the depreciating assets in the pool under the UCA rules.

Assets that can be allocated to a low-value pool

Under the UCA, you can allocate low-cost assets and low-value assets to a low-value pool.

Low-value asset (LVA)

A low-value asset is a depreciating asset:

•	that is not a low-cost asset

•	that has an opening adjustable value for the current year of less than $1000, and

•	for which you have used the diminishing value method to work out any deductions for decline in value for a previous income year.

The decline in value of an asset you hold jointly with others is worked out on the cost of your interest in the asset. This means if you hold an asset jointly and the cost of your interest in the asset or the opening adjustable value of your interest is less than $1,000, you can allocate your interest in the asset to your low-value pool.

The adjustable value of a depreciating asset at any time is its cost (first and second elements) reduced by any decline in value up to that time. The opening adjustable value (OAV) of an asset for an income year is the adjustable value at the end of the previous income year.

Low-cost asset (LCA)

A low-cost asset is a depreciating asset whose cost is less than $1000 (after GST credits or adjustments) as at the end of the income year in which you started to use it, or have it installed ready for use, for a taxable purpose.

The cost of a depreciating asset for income tax depreciation purposes may differ from its cost to you – see The cost of a depreciating asset.

Assets that cannot be allocated to a low-value pool

The following depreciating assets cannot be allocated to a low-value pool:

•	assets for which you used the prime cost method to work out any deductions for decline in value for a previous income year

•	horticultural plants

•	assets for which you can deduct amounts under the STS – see STS taxpayers

•	assets that cost $300 or less for which you can claim an immediate deduction – see Immediate deduction for depreciating assets costing $300 or less

•	certain depreciating assets used in carrying on research and development activities. See the Research and development tax concession schedule and instructions 2007 (NAT 6709-6.2007) for more information.

Working out the decline in value of depreciating assets in a low-value pool

Once an asset is allocated to a low-value pool, it is not necessary to work out its adjustable value or decline in value separately. Only one annual calculation for the decline in value for all of the depreciating assets in the pool is required.

The deduction for the decline in value of depreciating assets in a low-value pool is worked out using a diminishing value rate of 37.5 per cent.

For the income year you allocate a low-cost asset to the pool its decline in value is worked out at a rate of 18.75 per cent or half the pool rate. Halving the rate recognises that assets may be allocated to the pool throughout the income year and eliminates the need to make separate calculations for each asset based on the date it was allocated to the pool.

For more information and an example, see Working out the decline in value of depreciating assets in a low-value pool in the Guide to depreciating assets 2007.

Assets that must be allocated once a low-value pool is created

Once you choose to create a low-value pool and a low-cost asset is allocated to the pool, you must pool all other low-cost assets you start to hold in that income year and in later income years. However, this rule does not apply to low-value assets. You can decide whether to allocate low-value assets to the pool on an asset-by-asset basis.

Once you have allocated an asset to the pool, it remains in the pool.

Allocating items to the low-value pool

A low-value pool is created when you first choose to allocate a low-cost or low-value asset to the pool.

Asset used partly for non-income-producing purposes

When you allocate an asset to the pool, you must make a reasonable estimate of the percentage of your taxable use of the asset that will be for a taxable purpose over its effective life (for a low-cost asset) or the effective life remaining at the start of the income year for which it was allocated to the pool (for a low-value asset). This percentage is known as the asset’s taxable use percentage.

It is this taxable use percentage of the cost or opening adjustable value that is written off through the low-value pool.

Once you have allocated an asset to the pool, you cannot vary your estimate of the taxable use percentage even if the actual use of the asset turns out to be different from your estimate.

Second element cost of asset in pool

The second element of cost is broadly, the amount paid (money and/or the market value of property given) or the amount taken to have been paid to bring the asset to its present condition and location at any time, such as a cost of improving the asset – see The cost of a depreciating asset.

Termination value

Generally, the termination value is what you receive or are taken to receive for an asset as a result of a balancing adjustment event, such as the proceeds from selling an asset – see Termination value

Disposal of an item of plant from a low-value pool

If a balancing adjustment event occurs – see Balancing adjustment event – for a depreciating asset in a low-value pool, the amount of the closing pool balance for that income year is reduced by the taxable use percentage of the asset’s termination value. If that amount exceeds the closing pool balance, reduce the closing pool balance to zero and include the excess in assessable income. e-tax writes the amount to item 22 Other income in the Individual tax return.

A capital gain or capital loss may also arise if the asset is not used wholly for a taxable purpose. The difference between the asset’s cost and its termination value that is attributable to the estimated use for other than a taxable purpose is treated as a capital gain or capital loss.

ADDING A DEPRECIATING ASSET TO THE LOW-VALUE POOL

Use the table in the e-tax screen to add items of plant to the low-value pool. Complete one row for each item of plant to be added. The information you need to enter in each of the columns is described below.

Description	In this column include a brief description of any • low-value assets you allocated to the pool for the current year. A low-value asset is a depreciating asset (other than a horticultural plant) that is not a low-cost asset but has an opening adjustable value of less than $1000 worked out using the diminishing value method, or • low-cost assets you allocated to the pool for the income year. A low-cost asset is a depreciating asset (other than a horticultural plant) whose cost as at the end of the year in which the start time occurred is less than $1000, or • amounts included in the second element of cost of assets in the pool at the end of the previous year and of any low-value assets allocated for this year. The second element of an asset's cost is capital expenditure on the asset which is incurred after you start to hold it, such as a cost of improving the asset – see The cost of a depreciating asset.  See also: • Plant that can be allocated to a low-value pool • Plant that cannot be allocated to a low-value pool • Plant that must be allocated once a low-value pool is created
Opening adjustable value of low-value asset	The adjustable value of a depreciating asset at any time is its cost (first and second elements) reduced by any decline in value up to that time. The opening adjustable value of an asset for an income year is generally the adjustable value at the end of the previous income year. If you enter an Opening adjustable value in the e-tax table, enter the Taxable use %.  If the asset was disposed of, you should also enter the Termination value.
Cost of low-cost asset	Include the cost after you have made any adjustments, such as for GST input tax credits – see The cost of a depreciating asset. If you enter a Cost of low-cost asset in the e-tax table, enter the Taxable use %.  If the asset was disposed of, you should also enter the Termination value.
Second element of cost	Include the cost after you have made any adjustments, such as for GST input tax credits – The cost of a depreciating asset. If you enter a Second element cost in the e-tax table, enter the Taxable use %.  If the asset was disposed of, you should also enter the Termination value.
Taxable use %	When you allocate an asset to the pool you must make a reasonable estimate of the percentage of your taxable use of the asset over its effective life (for a low-cost asset) or its effective life remaining at the start of the income year it was allocated to the pool (for a low-value asset).
Reduced OAV of LVA	Reduced opening adjustable value of low-value asset – This is the taxable use percentage of the opening adjustable value of a low-value asset you have allocated to the pool for the income year.
Reduced cost of LCA	Reduced cost of low-cost asset or second element cost – This is the taxable use percentage of the cost of low-cost assets you allocated to the pool for the income year or the taxable use percentage of any amounts included in the second element of cost of assets in the pool at the end of the previous year and of low value assets allocated to the pool for this year.
Termination value	Generally, the termination value is what you receive or are taken to have received for the asset under a balancing adjustment event, such as the proceeds of selling the asset – see Termination value.
Reduced termination value	This is the taxable use percentage of the asset's termination value. You use the taxable use percentage you estimated when the asset was allocated to the pool. This reduced termination value reduces the amount of the closing pool balance. If it exceeds the amount of the closing pool balance, e-tax will reduce that balance to zero and include the excess in assessable income. If you use the asset for other than taxable a purpose, a capital gain or capital loss may arise when a balancing adjustment event occurs for the asset – see Balancing adjustment event for a depreciating asset in a low-value pool.
Closing pool balance – 2006-07

The closing balance may be reduced if an asset in the pool is disposed of.

You will need to use the closing pool balance to calculate the low-value pool deduction for next year.

LOW-VALUE POOL WORKSHEET SUMMARY

The letters L, M, N, O, P and Q on the worksheet correspond to labels on the Capital allowances schedule 2007.

If, based on your answers at item 14:

•	you are not an STS taxpayer and

•	you are carrying on a business and

•	you have depreciation expenses of more than $15,000 at item P8 label M on you Business and professional items schedule 2007 (NAT 2543-6.2007)

•	you have a project pool deduction of more than $1,000 at item P8 Reconciliation items label L and/or

•	you have more than $75,000 included at items P15 and/or P16.

e-tax will complete a Capital allowance schedule 2007 (NAT 3424-6.2007) for you.

If you want, you can read more about the schedule in Capital allowances schedule instructions 2007 (NAT 4089-6.2007).

RECORD KEEPING REQUIREMENTS

For depreciating assets in a low-value pool, you need to keep the following details—some details relate to the assets and some to the pool:

•	the start time of assets in the pool and the date you started holding them

•	the closing pool balance at the end of the previous income year

•	any second elements of cost incurred for the income year for assets in the pool at the end of the previous income year

•	the opening adjustable value of any low-value assets you have allocated to the pool for the income year

•	the first element of cost of any low-cost assets allocated to the pool for the income year

•	the second element of cost of low-cost assets and low-value assets allocated to the pool for the income year

•	the taxable use percentage of each amount added to the pool for the income year

•	the termination value and taxable use percentage for any assets in the pool in respect of which a balancing adjustment event occurred during the income year and the date of the balancing adjustment event

•	the closing pool balance

•	the decline in value

•	any amount included in assessable income because the taxable use percentage of the termination value exceeds the closing pool balance, and

•	any recoupment of cost you have included in assessable income.

Because a capital gain or capital loss may arise when a balancing adjustment event occurs in relation to a depreciating asset you expect to use for other than a taxable purpose or in relation to a depreciating asset you have allocated to a low-value pool and expect to use for other than a taxable purpose, you must keep the following information:

•	the first and second elements of cost

•	termination value, and

•	the taxable use percentage.

e-tax will ask you to provide information when you create a low-value pool. A Low-value pool worksheet can be printed for your records.


Capital allowance schedule instructions
Capital allowances schedule 2007 instructions

NAT 4089-06.2007

Contents:

Do you need to complete a Capital allowances schedule 2007?

Taxpayer information

Part A Depreciating assets first deducted in the 2007 income year

Part B For all depreciating assets

Part C Project pools

Part D Entities engaged in exploration and prospecting

NOTE:
If you have used the e-tax Depreciating assets function, e-tax will prepare the schedule for you. It will be printed as an attachment when you print your tax return at the end of the e-tax interview.

DO YOU NEED TO COMPLETE A CAPITAL ALLOWANCES SCHEDULE 2007?

Simplified tax system (STS) taxpayers and individual taxpayers not carrying on a business do not need to complete a schedule. Other taxpayers need to answer the following questions. If you answered ‘yes’ to any of the following questions, you need to complete a Capital allowances schedule 2007.

Question 1: Did you have more than $15,000 at any of the following labels on your income tax return?

•	Item 8 label M Depreciation expenses (see Note below)

•	item D6 Low value pool deduction

Question 2: Did you have more than $75,000 at either of the following labels on your income tax return?

•	item P15 Intangible assets first deducted, or

•	item P16 Other depreciating assets first deducted.

Question 3: Did you have more than $1,000 shown at either of the following labels on your income tax return?

•	Item D14 Deduction for project pool or

•	Business deduction for project pool in the reconciliation section of item P8.

NOTE:

Do not include information in this schedule for any depreciating assets that are subject to STS capital allowances rules – see the publication The Simplified Tax System: A guide for tax agents and small businesses (NAT 6459) for information about the STS capital allowances rules.

Accordingly, if you are exiting the STS or have previously exited the STS and are claiming a deduction in respect of an STS item at the Depreciation expenses label (for example, in relation to a continuing STS pool), you do not need to complete the schedule if the amount at the label relates entirely to STS items. If the amount relates to both STS items and uniform capital allowances (UCA) items, you will need to complete the schedule but, in doing so, assets subject to the STS rules are to be disregarded.

TAXPAYER INFORMATION

At the top of the schedule e-tax will include your:

o	tax file number (TFN)

o	Australian business number (ABN), if any, and

o	name.

PART A	DEPRECIATING ASSETS FIRST DEDUCTED IN THE 2007 INCOME YEAR

This part requires information about any depreciating assets – tangible or intangible – whose decline in value you are claiming for the first time this income year – for example, assets you start to use for a taxable purpose this income year. You can only include assets that:

•	are covered by the UCA system, and

•	you have used for a taxable purpose.

A taxable purpose is:

•	the purpose of producing assessable income

•	the purpose of exploration or prospecting

•	the purpose of mining site rehabilitation, or

•	environmental protection activities.

If you did not complete the items  Intangible depreciating assets first deducted or Other depreciating assets first deducted on your tax return or on the Business and professional items schedule for individuals 2007, you do not need to complete this part of the schedule. Go to part B.

See the Guide to depreciating assets 2007 for information about the UCA system and for more information on any of the terms referred to in this part.

NOTE:

1.	Do not include assets you acquired this year for which you are not claiming a deduction for decline in value. You will include those assets in the year you begin to claim deductions for them.

2.	For labels A, B and C, include the cost of assets that the UCA system provides a specific treatment for. For example, include the cost of:

•	low-cost assets that have been allocated to a low-value pool

•	primary production assets, and

•	assets used in exploration or prospecting.

3.	For labels A and B, do not include capital expenditure you have allocated to a software development pool for the income year.

4.	The cost of an asset may not be the same as its purchase price. The purchase price may be adjusted in certain circumstances – for example, to the car limit (which then becomes the first element of its cost).

5.	The cost shown in Part A should include any amounts included in the second element of cost.

Item 1	Total cost of depreciating assets (excluding motor vehicles)
Assets each costing less than $1,000

At A, enter the total cost of all depreciating assets:

•	that cost less than $1,000 each, and

•	for which you are claiming a deduction for decline in value for the first time this income year.

NOTE:
Do not include motor vehicles; these are included at Item 3.

Item 2	Total cost of depreciating assets (excluding motor vehicles)
Assets each costing $1,000 or more

At B, write the total cost of all depreciating assets:

•	that cost $1,000 or more each, and

•	for which you are claiming a deduction for decline in value for the first time this income year.

NOTE:
Do not include motor vehicles; these are included at Item 3.

Item 3	Total cost of motor vehicles

At C, enter the total cost of all motor vehicles for which you are claiming a deduction for decline in value for the first time this income year.

NOTE:
Do not include the cost of cars for which you have calculated car expenses using the cents–per-kilometre or 12% of original value method as you cannot deduct an amount for the decline in value of these cars under the UCA system.

Item 4	Self-assessed effective life

For most depreciating assets, you can choose to either

•	work out the effective life yourself (self-assess), or

•	use an effective life determined by the Commissioner.

If you have adopted the Commissioner’s effective life determination for all your depreciating assets included at A, B or C, answer ‘No’ at D. Go to part B of this schedule.

If you have self-assessed the effective life of any of your depreciating assets included at A, B or C, answer ‘Yes’ at D. Go to label E and F.

At E, enter the total cost of all your depreciating assets (excluding motor vehicles) for which you:

•	self-assessed the effective life, and

•	claimed a deduction for decline in value for the first time this income year.

At F, enter the total cost of all your motor vehicles for which you:

•	self-assessed the effective life, and

•	claimed a deduction for decline in value for the first time this income year (see note to item 3 above).

PART B	FOR ALL DEPRECIATING ASSETS

This part requires information about all your depreciating assets. You can only include assets that:

•	are covered by the UCA system, and

•	you have used for a taxable purpose.

For more information on any of the terms referred to in this part, see the Guide to depreciating assets 2007.

Item 1	Information from depreciating assets worksheet

Refer to the Depreciating assets worksheet. The letters G, H, I, J and K on the worksheet correspond to the same labels on the Capital allowances schedule 2007. Transfer the amounts from the worksheet labels to the corresponding labels on the schedule.

At J on both the worksheet and the schedule do not include any amounts from a low-value pool.

In some cases you may need two copies of the worksheet – for example, if you have both primary production and non-primary production assets. If you are using more than one worksheet, add up the amounts at each label on both worksheets and transfer the total to the corresponding label on the schedule.

Do not include information about the decline in value of the following depreciating assets:

•	Assets that are deductible under the specific primary production provisions of the UCA system, such as water facilities, horticultural plants and grapevines. (Some of the concepts used to work out the decline in value of these assets are different from those used in the worksheet)

•	Assets allocated to a low-value pool. (These assets require a different worksheet and are dealt with at Item 2.)

For more information on any of the terms referred to in this part, see the Guide to depreciating assets 2007.

At G, enter the total assessable income you have from balancing adjustment events occurring for your depreciating assets (this type of assessable income may arise if, for example, you disposed of a depreciating asset for more than its adjustable value). The total assessable income from balancing adjustment events is the amount at G on the depreciating assets worksheet. If you do not have any balancing adjustment events for depreciating assets this income year, leave this label blank.

At H, enter the total deductible amount you have from balancing adjustment events occurring for your depreciating assets (this type of deduction may arise if, for example, you disposed of a depreciating asset for less than its adjustable value). The total deduction is the amount at H on the depreciating assets worksheet. If you do not have any balancing adjustment events for depreciating assets this income year, leave this label blank.

At I, enter the total amount of your deductions for decline in value calculated using the prime cost method. This amount can be found at I on your depreciating assets worksheet. If you have not calculated any of your deductions for decline in value using the prime cost method, leave this label blank.

At J, enter the total amount of your deductions for decline in value calculated using the diminishing value method. This amount can be found at J on your depreciating assets worksheet. Do not include amounts from a low-value pool as these are included at item 2. If you have not calculated any of your deductions for decline in value using the diminishing value method, leave this label blank.

At K, enter the total adjustable values of your depreciating assets as at the end of this income year. This amount can be found at K on your depreciating assets worksheet.

Item 2	Information from low-value pool worksheet

Refer to the Low-value pool worksheet. The labels L, M, N, O, P and Q on the worksheet correspond to the same labels on the Capital allowances schedule 2007. Transfer the amounts from the worksheet labels to the corresponding labels on the schedule.

At L, enter the closing pool balance of your low-value pool for the previous income year. This amount is found at L on the low-value pool worksheet.

At M, enter the total cost (as at the end of this income year) of all the low-cost assets allocated to your low-value pool this income year. Show the cost before any adjustment for taxable use percentage. This amount can be found at M on the low-value pool worksheet.

At N, enter the total of the opening adjustable values of all low-value assets allocated to the low-value pool in this income year. This amount can be found at N on the low-value pool worksheet.

At O, enter the total of any amounts included in the second element of cost of assets in the low-value pool at the start of this income year and of low-value assets added to the pool in this income year. Amounts spent on improving an asset are an example of a second element of cost. Show the second element of cost before any adjustment for taxable use percentage. This amount can be found at O on the low-value pool worksheet.

At P, enter the closing pool balance of the low-value pool for this income year. This amount can be found at P on the low-value pool worksheet.

At Q, enter the total termination values of assets in the low-value pool for which a balancing adjustment event occurred. Generally, the termination value is what you receive or are taken to have received for the asset as a result of a balancing adjustment event, such as the proceeds from selling the asset. Show the termination value before any adjustment for taxable use percentage. This amount is found at Q on the low-value pool worksheet.

Item 3	Recalculation of effective life

You may recalculate the effective life of assets in certain circumstances if the effective life you have been using is no longer accurate. There are also circumstances where you must recalculate the effective life of a depreciating asset.

If you have not recalculated the effective life of any of your depreciating assets in this income year, answer ‘No’ at R. Go to part C.

If you have recalculated the effective life of any of your depreciating assets this income year, answer ‘Yes’ at R. You will need to complete label S and T.

At S, enter the total opening adjustable value of any depreciating assets (excluding motor vehicles) for which you recalculated the effective life this income year.

At T, enter the total opening adjustable value of any motor vehicles for which you recalculated the effective life this income year.

PART C	PROJECT POOLS

This part requires information on project amounts. You can deduct amounts over the project life of a project for project amounts allocated to a project pool. If you do not have any project pools, you do not need to complete this section. Go to part D.

See the Guide to depreciating assets 2007 for information on project amounts and how to work out your deductions.

Item 1	Project pools

At U, enter the number of project pools you have. A separate project pool is required for each project.

At V, enter the total closing pool values of all your project pools for the previous income year.

At W, enter the total closing pool value of all your project pools for this income year. The closing pool value of a project pool is:

•	the closing pool value for the previous year (if any) plus

•	any project amounts allocated for the year less

•	the deduction for project amounts for the year  (worked out assuming the project operates wholly for a taxable purpose).

Item 2	Amounts allocated this income year

At X, enter the total of any amounts allocated to a project pool this income year which were incurred for environmental assessments for the project. If you have not allocated any such amounts to a project pool, leave this label blank.

At Y, enter the total of any amounts you have allocated to a project pool for mining capital expenditure or transport capital expenditure incurred this income year. If you have not allocated any such amounts to a project pool, leave this label blank.

At Z, enter the total of all other project amounts you have allocated to a project pool this income year. If there were no other project amounts, leave this label blank.

PART D	ENTITIES ENGAGED IN EXPLORATION OR PROSPECTING

This part requires information on your deductions for the decline in value of depreciating assets used in exploration or prospecting.

If you did not claim any deductions for depreciating assets used in exploration or prospecting, you do not need to complete this part.

At A, enter the total of your deductions for the decline in value of intangible depreciating assets used in exploration or prospecting.

At B, enter the total of your deductions for the decline in value of other depreciating assets used in exploration or prospecting.

You have now completed the schedule.


Rental property worksheet: Instructions for completing the worksheet
e-tax rental property worksheet

This topic covers:

You need to know

Completing the worksheet

Income – labels A and B

Expenses – labels D to V

Creating more than one rental property worksheet in e-tax

Keeping records

Rental property worksheet

YOU NEED TO KNOW

These instructions and the worksheet will help you complete your e-tax rental property worksheet(s). e-tax will prepare a Rental property schedule for each worksheet you complete.

If you have an interest in a foreign rental property, you do not need to fill out an e-tax worksheet for it, because all your income from such a property is treated as foreign income, not rental income.

If you have an interest in a rental property in Australia you need to fill out an e-tax worksheet.

You need to complete a separate e-tax worksheet for each rental property you own or have an interest in, unless you have multiple rental properties on one title – for example, a number of flats in an apartment complex that is not under strata title. In such instances, show the details of all those properties on one schedule.

If you are a part-owner of a property, enter on the e-tax worksheet only information concerning your share of total rental income and total rental expenses. Before you begin, print a copy of the rental property worksheet for each property that you have a share in.

Joint tenants who are not carrying on a business of property rental need to divide the total rental income and expenses for the property equally, as each tenant holds an equal share of the property.

Tenants in common may hold unequal shares in the property. If they are not carrying on a business of property rental, they divide the total rental income and expenses in line with their legal interest in the property.

For further assistance in completing your schedule, please refer to the publication Rental properties 2007 (NAT 1729-6.2007). The following publications may also be useful:

•	Deductions for prepaid expenses 2007 (NAT 4170-6.2007)

•	Guide to depreciating assets 2007 (NAT 1996-6.2006)

•	Taxation Determination TD 1999/42 – Income tax: do the principles set out in TR 98/22 apply to line of credit facilities?

•	Taxation Ruling IT 2167 – Income tax: rental properties—non-economic rental, holiday home, share of residence etc. cases, family trust cases

•	Taxation Ruling TR 93/7 – Income tax: whether penalty interest payments are deductible

•	Taxation Ruling TR 93/32 – Income tax: rental property – division of net income or loss between co-owners

•	Taxation Ruling TR 97/23 – Income tax: deductions for repairs

•	Taxation Ruling TR 97/25 – Property development: deduction for capital expenditure on construction of income producing capital works, including buildings

•	Taxation Ruling TR 98/22 – Income tax: the taxation consequences for taxpayers entering into certain linked or split loan facilities

•	Taxation Ruling TR 2000/2 – Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities

•	Taxation Ruling TR 2000/18 – Income tax: depreciation effective life – to get a copy of this publication, see Getting publications from the Tax Office.

COMPLETING THE E-TAX WORKSHEET

The following instructions take you through the e-tax worksheet step-by-step.

Relevant period

e-tax will print the year to which this worksheet relates in the space provided near the top of the Rental property schedule. If the worksheet is for the 2006-07 income year, it would read, For the period 1 July 2006 to 30 June 2007.

Your tax file number (TFN), name and date of birth

e-tax will enter these details on the Rental property schedule for you.

Address of property

Enter the address of your rental property in the boxes provided on the screen.

Date property first earned rental income

The date the property first began to earn you rental income does not have to be in the income year to which this worksheet relates. For example:

•	If you purchased your property on 1 September 1999 but did not derive any rental income until 20 January 2000, enter 20012000 in the box at this question.

•	If your property was first available for rent on 11 June 2000 but did not derive rental income until 1 September 2000, enter 01092000 in the box at this question.

Number of weeks the property was rented this year

Enter the total number of weeks your rental property was rented during the income year to which this worksheet relates.

Taxpayer's declaration

Please sign and date the Taxpayer's declaration when you have completed the e-tax interview and e-tax prints your Rental property schedule(s). Keep the schedule(s) with your other tax records.

INCOME – LABELS A AND B

Label A – Rental income

Rental income is the full amount of all rent paid by your tenants. Do not reduce this figure by deducting agent's commission or other costs.

Calculate your rental income and enter the total amount at A in the e-tax worksheet.

Label B – Other rental-related income

Other rental-related income includes:

•	compensation for lost rent (for example, an insurance payment)

•	rental bond money you retain to cover outstanding rent or because of damage to the property

•	letting or booking fees

•	reimbursements and recoupments, such as reimbursements by tenants for the cost of repairs to the property.

Calculate your other rental-related income and enter the amount at B in the e-tax worksheet.

Label B – Profit on sale of assets

e-tax calculation

If you use the e-tax depreciation routine to work out your capital allowance deductions, e-tax will total any assessable adjustment resulting from the disposal of a depreciating asset across all the depreciating asset worksheets you complete and display the result here.

Label C – Gross rent

e-tax will add up the amounts shown at A and B on your worksheet and write the total amount at C Gross rent.

EXPENSES – LABELS D TO V

You can claim a deduction for most expenses relating to your rental property which you incur in respect of the period it is rented or available for rent in the income year. However, unless specified, you cannot claim expenses of a capital or private nature.

For each of the labels D to V on the schedule you need to work out the deductible expense. To do this you subtract any non-deductible expenses from the total amount you have for each category of expense. Enter the deductible amount in the relevant box. If you do not have any expenses for a particular label, leave the box blank.

Use the worksheet to do your calculations. If you have not already done so, print a copy of the rental worksheet now. See example 1. See examples 2 – 4 for some typical situations where a portion only of the expenses may be deductible. You will find more information and helpful examples in Rental properties.

EXAMPLE 1

Using the worksheet: how to work out your deductible expense for label L – Interest on loans

Louise took out a loan of $500,000. She used $300,000 (60% of the loan) to purchase a rental property and the remainder, $200,000 (40%), to pay for renovations to her private residence. The interest charged on her loan for the income year was $2500.

Louise would use the worksheet to help fill out label L of her e-tax worksheet, Interest on loan(s), as follows:

Step 1

Louise would write the total interest charged on the loan during the income year – $2,500 – in the Total expenses column of the worksheet at row L.

Step 2

Louise would calculate the non-deductible portion of the interest, that is, the portion of interest that relates to the part of the loan she used for private purposes. She used 40% of the loan for private purposes, so 40% of the $2,500 interest is non-deductible, that is, $1,000. Louise would write $1,000 in the Non-deductible expense column on the worksheet at row L.

Step 3

Louise would subtract her non-deductible interest from her total interest (that is, $2,500-$1,000) and write the resulting amount, $1,500, in the Deductible expense column.

Louise’s worksheet for row L would look like this:

Expense categories	Total expense $	Non-deductible expense $	Deductible expense $	Label
Interest on loan(s)	2,500	1,000	1,500	L
Step 4

Louise would write $1,500 – the figure in the Deductible expense column of row L of the worksheet – at label L on her e-tax worksheet.

(See the apportionment examples in the booklet Rental properties for further guidance on how to work out your deductible expenses.)

EXAMPLE 2

You have a property which you use for both private and rental purposes

You own a house that contains a granny flat. For the whole of the year, you rent out the granny flat and live in the other part of the house yourself. You can claim deductions only for expenses that relate to the granny flat. For expenses that relate to the property as a whole – such as interest charged on a loan to acquire the property – you can claim the proportion that reasonably relates to the granny flat.

EXAMPLE 3

You rent out your property for part of the year

You can claim deductions only for expenses that relate to the period you rented the property out or had it available to rent. You cannot claim deductions for expenses for the whole of the year.

EXAMPLE 4

You combine private travel with travel relating to your rental property

You fly to have a holiday and also to inspect your rental property at the same place. You spend one day on matters relating to the rental property and nine days holidaying. Because the main purpose of the trip is the holiday, and the inspection of the property is incidental to that purpose, you cannot claim a deduction for the airfare. But you can claim expenses directly relating to the property inspection, such as taxi fares to get to the property and back to your hotel, and one-tenth of your accommodation expenses.

Label D – Expenses relating to advertising for tenants

Calculate your deductible advertising expenses and enter the amount at D in the e-tax worksheet.

Label E – Body corporate fees

Payments to a special purpose sinking fund are usually to cover the cost of capital improvements or capital repairs and are therefore not deductible. (You may be able to claim a capital works (special building write-off) deduction for the cost of capital improvements or capital repairs once the cost has been charged to the sinking fund – see label R).

You can only claim expenses once. If body corporate fees cover expenses that can be shown elsewhere on the schedule – for example, maintenance of the gardens and insurance on the building – enter the total of the fees at E. Do not show these amounts twice by including them here and also at labels J or K.

Calculate your deductible body corporate fees and enter the amount at E in the e-tax worksheet.

Label F – Borrowing expenses

These are expenses directly incurred in taking out a loan for the property. They include establishment fees, title search fees and costs for preparing and filing mortgage documents – including mortgage broker fees and stamp duty charged on the mortgage. Borrowing expenses also include other costs that the lender requires you to incur as a condition of them lending you the money for the property, such as the costs of obtaining a valuation or lenders mortgage insurance if you borrow more than a certain percentage of the purchase price of the property.

If your total for these items is greater than $100, apportion the cost over five years or the term of the loan, whichever is shorter.

If your total is $100 or less, deduct the entire amount in the year you incur the cost.

If you obtained the loan part-way through the income year, apportion the deduction for the first year according to the number of days you had the loan.

Calculate your deductible borrowing expenses and enter the amount at F in the e-tax worksheet.

Label G – Cleaning expenses

Calculate your deductible cleaning expenses and enter the amount at G in the e-tax worksheet.

Label H – Council rates

Calculate your deductible council rates and enter the amount at H in the e-tax worksheet.

Label I – Capital allowance deductions/depreciation on plant

You can claim a deduction here for the decline in value of a depreciating asset. The asset must have been used, or installed ready for use, for income-producing purposes during the income year.

If you have allocated an asset to a low-value pool and have used the asset to produce your rental income, you do not show your deduction for its decline in value as a rental expense on this schedule or on your tax return.

(You claim low-value pool deductions at item D6.)

You may need to read Guide to depreciating assets 2007 (NAT 1996-6.2007) to help calculate your capital allowance deductions.

Calculate your deductible capital allowances and enter the amount at I in the e-tax worksheet.

e-tax depreciation

Alternatively, you can use the Depreciating assets worksheet routine to complete this field. Click on the Depreciation button. You can complete multiple depreciating assets worksheets. See Worksheets navigator for help on maintaining the worksheets.

If an amount has already been entered in this field manually in the e-tax rental property worksheet – that is without completing any depreciating asset worksheet(s) – you must first delete this amount before you can access the Depreciation button.

Complete a depreciating asset worksheet for each depreciating asset for which you are claiming a decline in value for this rental property. e-tax will total the decline in value and any deductible adjustment resulting from the disposal of a depreciating asset across all the depreciating asset worksheets you complete at this item. The total is written to I in the e-tax worksheet.

NOTE:
Any assessable adjustment resulting from the disposal of depreciating asset is written to Profit on sale of assets.

Label J – Gardening or lawn mowing expenses

Include ongoing garden maintenance and lawn mowing expenses here. Do not include garden improvements or new landscaping works.

Do not include gardening fees if they were part of body corporate fees you have claimed at label E.

Calculate your deductible gardening and mowing expenses and enter the amount at J in the e-tax worksheet.

Label K – Insurance expenses

If you have paid insurance premiums relating to your rental property, you can claim these as a deduction.

Do not include any insurance premiums that were paid as part of body corporate fees you have already claimed at label E.

Calculate your deductible insurance expenses and enter the amount at K in the e-tax worksheet.

Label L – Interest on loans

If you took out a loan to purchase your rental property or to finance the cost of repairs or renovations to your rental property, you may claim the interest on that loan as a deduction for the period during the year the property was used or held for income-producing purposes (for example, when it is rented or available for rent or undergoing repair or renovation for the purpose of making it available for rent).

If you cease to use the property for income-producing purposes, the interest on the loan will no longer be deductible.

If only part of your loan was for your rental property, you can only claim the interest for that part – see example 1 above. You can also refer to the apportionment examples in Rental properties for further guidance.

Do not include the following in this category:

•	interest on loans taken out to purchase depreciating assets for your rental property – for example, a refrigerator (include such amounts at label V Sundry rental expenses)

•	borrowing expenses which are directly incurred in taking out a loan for the property (see label F Borrowing expenses, above, and include such amounts there).

NOTE: Claiming prepaid interest
If you prepay interest covering a period of 12 months or less AND the period ends on or before 30 June in the income year following the payment, you can claim an immediate deduction. Prepaid interest that doesn’t meet these criteria AND is $1,000 or more may have to be spread over two or more years – see the publication Deductions for prepaid expenses.

Calculate your deductible interest expenses and enter the amount at L in the e-tax worksheet.

Label M – Land tax expenses

Calculate your deductible land tax expenses and enter the amount at M in the e-tax worksheet.

Label N – Legal expenses

Some legal expenses incurred in producing your rental income are deductible, for example, the cost of evicting a non-paying tenant or recovering unpaid rent.

Most legal expenses, however, are of a capital nature and are therefore not deductible – including costs of:

•	resisting land resumption

•	purchasing or disposing of your property, and

•	defending your title to the property.

Calculate your deductible legal expenses and enter the amount at N in the e-tax worksheet.

Label O – Pest control expenses

Calculate your deductible pest control expenses and enter the amount at O in the e-tax worksheet.

Label P – Property agent fees or commission

These are expenses paid to your property agent for managing and inspecting your rental property.

Calculate your deductible property agent fees or commission and enter the amount at P in the e-tax worksheet.

Label Q – Repairs and maintenance expenses

Claim here for expenditure you incurred for repairs to and maintenance of the property or depreciating assets, for example, a washing machine used in the rental property.

Repairs must relate to wear and tear or other damage which occurred as a result of renting the property.

The costs of improving, adding to or altering a rental property are of a capital nature and are not deductible. You may be able to claim a deduction for these costs as part of your capital works deductions (special building write-off) – see label R.

Calculate your deductible repairs and maintenance expenses and enter the amount at Q in the e-tax worksheet.

Label R – Capital works deductions (special building write-off)

You may be entitled to deduct a percentage of the construction expenditure and the cost of structural improvements to your residential rental property.

Rental properties will help you determine the amount of your entitlement, if any.

Calculate your deductible capital works deductions and enter the amount at R in the e-tax worksheet.

e-tax depreciation

Alternatively, you can use the Depreciating assets worksheet routine to complete this field. Click on the Depreciation button. You can complete multiple depreciating assets worksheets. See Worksheets navigator for help on maintaining the worksheets.

If an amount has already been entered in this field manually in the e-tax rental property worksheet – that is without completing any depreciating asset worksheet(s) – you must first delete this amount before you can access the Depreciation button.

Complete a depreciating asset worksheet for each depreciating asset for which you are claiming a decline in value for this rental property. e-tax will total the decline in value and any deductible adjustment resulting from the disposal of a depreciating asset across all the depreciating asset worksheets you complete at this item. The total is written to R in the e-tax worksheet.

NOTE:
Any assessable adjustment resulting from the disposal of depreciating asset is written to Profit on sale of assets.

Label S – Stationery, telephone and postage expenses

Telephone connection fees are not deductible.

Calculate your deductible stationery, telephone and postage expenses and enter the amount at S in the e-tax worksheet.

Label T – Travel expenses

If you travel to inspect or maintain the property or to collect the rent, you may be able to claim the costs of travelling as a deduction. If you combine this travel with travel for private purposes you may need to apportion your expenses – see example 4 above.

If you are claiming car expenses, item D1 contains further information about the deduction you can claim.

Calculate your deductible travel expenses and enter the amount at T in the e-tax worksheet.

Label U – Water charges

Calculate your deductible water charges and enter the amount at U in the e-tax worksheet.

Label V – Sundry rental expenses

Include here all sundry rental expenses you incurred in deriving your rental income that you have not already included at labels D to U.

If you have allocated an asset to a low-value pool and used the asset to produce your rental income, you do not show your deduction for its decline in value as a rental expense on this schedule or your tax return. You claim low-value pool deductions at item D6.

Sundry rental expenses may include electricity or gas charges; interest on loans used to purchase depreciating assets such as a refrigerator or hot water system; secretarial and bookkeeping fees; and bank charges on any account used to receive rental income or pay deductible rental expenses.

Other sundry rental expenses you include at this label are such items as mortgage discharge expenses and lease document expenses. These expenses are discussed in Rental properties.

If you use a general operating account, you apportion account keeping fees and debits tax between your rental and other expenditure. You can claim a deduction only for the rental portion of those fees and taxes. You cannot claim a deduction for the portion relating to private expenditure. See examples 1 and 2 above and the apportionment examples in Rental properties.

Label W – Total expenses

e-tax will add up all your total expenses from labels D to V and display the total of your expenses at W in the worksheet.

Label X – Net rent

e-tax will take away the total expenses at W from the gross rent at C.

e-tax will display this amount at X in the worksheet. If your total expenses are greater than your gross rent, you have made a rental loss. If you have made a rental loss the Net rent amount will be negative.

NOTE:
Low-value pool deductions for assets used to produce your rental income are not taken into account in the amount you show as net rent – see label I, Capital allowance deductions.

CREATING MORE THAN ONE RENTAL PROPERTY WORKSHEET IN e-tax

When you have completed the e-tax rental property worksheet, click on the Next button.

e-tax will ask you whether you have another rental property. If you have more rental properties, click on the Yes button. e-tax will display a blank rental property worksheet screen. Otherwise, click on the No button and e-tax will proceed to the next item.

When you complete an e-tax rental property worksheet, it will appear in the Existing worksheets navigator list. To display a worksheet for viewing or editing, click on the worksheet entry in the navigator list.

CHECK THAT YOU HAVE

•	completed an e-tax rental property worksheet for each property

•	entered the correct amounts in the e-tax worksheet for each item that applies to you

•	kept records to prove your claims, where required.

KEEPING RECORDS

You need to keep records of both income and deductions relating to your rental property for five years from the date you lodge your tax return.

You must keep records relating to your acquisition and disposal of the property and to depreciating assets for five years after you dispose of them. Keep them in case the Tax Office asks to see them.


Rental property worksheet

Click on the Print button to print a copy of this worksheet.

	Total expenses $	Non-deductible expenses $	Deductible expenses $
Advertising for tenants
Body corporate fees  and charges
Borrowing  expenses
Cleaning
Council rates
Capital allowances (depreciation on plant)
Gardening / lawn mowing
Insurance
Interest  on loan(s)
Land tax
Legal fees
Pest control
Property agent fees / commission
Repairs and  maintenance
Capital works deductions (special building write-off)
Stationery, telephone  and postage
Travel  expenses
Water  charges
Sundry rental  expenses


What is a notice of assessment?

A notice of assessment is sent to you by the Tax Office when your tax return has been assessed.

•	It is an itemised account of the amount of tax that you owe on your taxable income, taking into account any tax offsets you are entitled to.

•	It contains other information such as the amount of credit for tax you have already paid throughout the year.


How e-tax works out your assessable income

If you would like to know how e-tax works out your assessable income read below.

Assessable income is the amount e-tax wrote at TOTAL INCOME OR LOSS on page 2 of your tax return unless:

•	you have a distribution from a partnership or trust, business or rental income or losses or

•	you claimed a deductible amount for an annuity at item D9 and/or item D12 on your tax return.

If you have one or more of these types of income, or you claimed a deductible amount read below to see how your assessable income is worked out.

You may like to click on [image] to see what e-tax has written to your return.

Your assessable income is calculated by e-tax as follows:

The sum of the following items:

Item	Description	Label(s)	Label description
1	Salary and wages	CDEFG	Gross salary and wages
2	Allowances, earnings, tips, directors fees, etc	K
3	Lump sum payments	R	Amounts marked A
		H	5% of amounts marked B
4	Eligible Termination Payment	I	Taxable amount other than excessive component
		N	Excessive component
5	Australian Government allowances and payments	A
6	Australian Government pensions and allowances	B
7	Other Australian pensions or annuities – including superannuation pensions	J
8	Attributed personal services income	O
9	Total reportable fringe benefits amounts (only $1943 or more)	W
10	Gross interest	L
11	Dividends	S	Unfranked amount
		T	Franked amount
		U	Franking credit
17	Capital gains	A	Net capital gains
18	Foreign entities	K	CFC income
		B	Transferor trust income
		C	FIF and FLP income
19	Foreign source income and foreign assets or property	E	Assessable foreign source income
21	Bonuses from life insurance companies and friendly societies	W
22	Other income	Y	Category 1 income
		V	Category 2 income
plus only the positive amounts of the following, that is, if any item showed a loss (negative amount) then add zero for that item:

Item	Description	Label(s)	Label description
12	Partnerships and trusts	N	Primary production distribution from partnerships
		L	Primary production distribution from trusts
		O	Non-primary production distribution from partnerships less foreign income
		U	Non-primary production distribution from trusts less net capital gains and foreign income
16	Net farm management deposits or withdrawals	E
20	Rent		Amount shown at Net rent
plus:

Item	Description	Label(s)	Label description
P1	Personal services income (PSI)	M	PSI – voluntary agreement
		N	PSI – where Australian Business Number not quoted
		O	PSI – labour hire or other specified payment
		J	PSI – other
P8	Business income	C	Gross Payment where Australian Business Number not quoted – primary production
		D	Gross Payment where Australian Business Number not quoted – non primary production
		A	Gross Payment subject to foreign resident withholding – primary production
		B	Gross Payment subject to foreign resident withholding – non primary production
		E	Gross Payments – voluntary agreement – primary production
		F	Gross Payments – voluntary agreement – non primary production
		N	Gross Payments – labour hire or other specified payments – primary production
		O	Gross Payments – labour hire or other specified payments – non primary production
		G	Assessable government industry payments –  primary production
		H	Assessable government industry payments – non primary production
		I	Other business income – primary production
		J	Other business income – non primary production
less:

Item	Description	Label(s)	Label description
D9	Undeducted purchase price of Australian pension or annuity	L
D12	Undeducted purchase price of foreign pension or annuity	Y


What do I do with my payment summaries?

You are not required to send your payment summaries to the Tax Office, but remember to keep them:

•	for five years from the date you lodge your tax return or

•	if the Commissioner has determined that you are subject to a shorter period, that shorter period.


Can I create more than one file in e-tax?

More than one person in a household may use the e-tax downloadable software to prepare and lodge their tax return or baby bonus claim.


Total tax withheld

e-tax uses your answers to items 1 to 8 to calculate the TOTAL TAX WITHHELD.

TAX OFFSETS AND YOUR TAX WITHHELD

If your tax offset or family tax benefit entitlements have changed since you last filled in a Withholding declaration (NAT 3093-07.2007) authorising your payer to vary the amount of tax withheld, you may need to fill in a new declaration. If your family tax benefit entitlements have changed, you will also need to complete the Withholding declaration - family tax benefit  worksheet (NAT 7089-07.2007). Contact your payer for more information. Failure to fill in a new declaration may result in a tax debt. Tax offsets will tell you more. See also Family tax benefit.

Additional tax withheld for the Higher Education Contribution Scheme, Higher Education Loan Programme and the Student Financial Supplement Scheme

If you have:

•	an accumulated Higher Education Loan Programme debt, or

•	an accumulated Student Financial Supplement Scheme debt

the additional tax withheld from your pay forms part of your normal tax withheld – shown on your payment summary – and is therefore already included in the total amount shown at $ item TOTAL TAX WITHHELD on your tax return.

See also How your tax is worked out

NOTE: Pay as you go (PAYG) instalments
You do not need to show instalments made under the PAYG instalments system anywhere on your tax return. The amounts are credited automatically in your assessment.  To ensure you are credited with the correct amount, make sure you lodge all your activity statements even if you have paid your instalments or have nothing to pay.


Privacy

The Tax Office is authorised by the Taxation Administration Act 1953 to request you to quote your tax file number (TFN). It is not an offence not to quote your TFN. However, your assessment may be delayed if you do not quote your TFN.

The Tax Office is authorised by the Income Tax Assessment Act 1936, the Income Tax Assessment Act 1997 and the A New Tax System (Family Assistance) (Administration) Act 1999 to ask for other information on this tax return. We need this information to help us to administer the taxation laws.

We may give this information to other government agencies as authorised in taxation law – for example, benefit payment agencies such as Centrelink, the Department of Education, Science and Training and the Department of Families, Community Services and Indigenous Affairs; law enforcement agencies such as state and federal police; and other agencies such as the Child Support Agency, the Australian Bureau of Statistics and the Reserve Bank of Australia.  The Commissioner of Taxation, as Registrar of the Australian Business Register, may use the ABN and business details which you provide on this tax return to maintain the integrity of the register.

See also Tax file number (TFN).


Completing a baby bonus claim for somebody else

e-tax has directed you to complete the baby bonus claim for another person.

If the other person needs to lodge a tax return and they choose to use e-tax to complete their tax return with an attached baby bonus claim, they do not need to download another copy of the program. However, before they can lodge their tax return over the internet, they will have to verify their identity and receive their password.

If the other person does not need to lodge a tax return, they can download the e-tax Baby bonus claim from our website.


Why should I lodge my tax return before 31 October?

By law you must lodge your tax return no later than 31 October. However, we strongly suggest that you lodge your return as early as possible to avoid the delays that may occur at the end of October. Even if you have a tax debt, you can lodge at any time prior to 31 October – your tax assessment will not be due for payment until 21 November 2007.

Although e-tax will remain open after 31 October 2007, failure to lodge your tax return on or before 31 October 2007 means you may be subject to failure to lodge penalty.


Sorry! There is no help linked to this topic.


Locating your 2006 tax return file

If you believe your e-tax 2006 tax file is on this computer, you may be able to locate it by using the Windows search function. This can be found normally be selecting ‘Search’ from the Windows ‘Start’ menu. Select ‘All files and folders’ when asked ‘What do you want to search for?’ In the ‘All or part of the file name’ field enter ‘tax’ and click on the ‘Search’ option to begin your search. Please note the above example is based on Windows XP and your computer may have different options. If using ‘Windows 98’ the Windows search function can be found by selecting ‘Find’ from the ‘Start’ menu. For further information refer to ‘Windows Help’ normally found as an option to the start menu.

If you are able to find your e-tax 2006 file, take a note of the folder it is located in, select ‘Yes’ and use the Browse button on the next screen to select the file.


 Using the e-tax navigator

It is strongly recommended that you do NOT use the e-tax navigator when in the middle of completing a return item. If you use the navigator before an item has been completed we cannot guarantee that the data written to your file will be correct.


Warning!

You have not downloaded the e-tax2007_2.EXE file from the Tax Office Internet site. If you attempt to read any of the Tax Office reference documents located in this file an error message will be displayed.

Click here to continue


Child support (child maintenance)
Child support

Where an employee has to make child and/or spouse maintenance payments to the Child Support Agency, his or her employer may be required to withhold the payments from the employee's salary or wages in much the same way as PAYG tax is withheld (Child Support (Registration and Collection) Act 1988). The payments are then placed in a Child Support Trust Account from which payments will be later made by Centrelink to the custodial parent.

YOU ARE LIABLE TO PAY CHILD SUPPORT UNDER THE CHILD SUPPORT (ASSESSMENT) ACT 1989

If you are liable to pay child support you must lodge a tax return.

You are not entitled to a tax deduction for any child support payments you make. The Child Support Agency may use your taxable income to make an assessment of child support.

YOU RECEIVE CHILD SUPPORT UNDER THE CHILD SUPPORT (ASSESSMENT) ACT 1989

Child support or spouse maintenance payments received by the taxpayer are exempt income.


Don't leave it too late!

Will your total claims for work related expenses exceed $300 next year?

If you are unsure, you may want to keep written evidence for your expenses – you will need it if you want to claim more than $300.


Uniform capital allowances (UCA) rules

Contents:

Overview

Where to claim a deduction

Where to claim a deduction for assets in a low-value pool

Where to claim a deduction for assets in an STS pool

e-tax and decline in value calculations

OVERVIEW

The UCA provides a set of general rules that applies across a variety of depreciating assets and certain other capital expenditure. It does this by consolidating a range of former capital allowance regimes. These regimes were complex and inconsistent, and involved significant replication of parallel but not identical provisions and concepts. Most of these deficiencies are overcome by the consolidation of the capital allowance provisions. The UCA replaces provisions relating to:

•	Plant

•	Software

•	Mining and quarrying

•	Intellectual property

•	Forestry roads and timber mill buildings, and

•	Spectrum licences

The UCA maintains the pre -1 July 2001 treatment of some depreciating assets and capital expenditure such as certain primary production depreciating assets and capital expenditure.

It also introduces new deductions for types of capital expenditure that did not previously attract a deduction, such as certain business and project related costs.

You use the UCA rules to work out deductions for the cost of your depreciating assets, including those acquired before 1 July 2001. You can generally deduct an amount for the decline in value of a depreciating asset you held to the extent you used it for a taxable purpose.

However, eligible taxpayers who elect to enter the Simplified Tax System (STS) will generally work out deductions for their depreciating assets under the special STS rules.

The STS is an alternative method of determining taxable income for eligible small businesses with straightforward financial affairs. It began on 1 July 2001. STS taxpayers can claim an immediate deduction for most depreciating assets costing less than $1000 and can pool most of their other depreciating assets. There are two STS pools:

•	a general STS pool for depreciating assets with an effective life of less than 25 years; and

•	a long life STS pool for depreciating assets with an effective life of 25 years or more.

Some depreciating assets are excluded from the STS rules but a deduction may be available under the UCA rules.

WHERE TO CLAIM A DEDUCTION

If a depreciating asset is used for more than one income producing purpose the deduction for its decline in value that relates to each purpose may need to be shown at different items. The decline in value must be apportioned between the appropriate items according to the extent of use for each income producing purpose. This does not apply to the deduction for depreciating assets allocated to a pool (see later).

The following list sets out items where the decline in value for depreciating assets may need to be shown. It also describes the type of depreciating assets that may need to be shown at the item.

•	Item 12 – assets used in producing partnership and trust income

•	item 13 – assets used in producing personal services income

•	item 14 – assets used in producing business income

•	item 19 – assets used in producing foreign income

•	item 20 – assets used in producing rental income

•	item 22 – assets used to produce special professional income that are not shown at another item

•	item D1 – work related motor vehicle

•	item D2 – work related vehicle other than a car

•	item D3 – washing machines, clothes dryers, ironing presses

•	item D4 – computers, motor vehicles and textbooks for self-education

•	item D5 – work related computers and tools of trade

•	item D7 – computer used to produce investment income

•	item D10 – computer used for tax related purposes

•	item D15 – computer, motor car and other assets used for electioneering

WHERE TO CLAIM A DEDUCTION FOR ASSETS IN A LOW-VALUE POOL

Refer to item D6 Low-value pool deduction.

The deduction for depreciating assets allocated to a low-value pool is to be shown at item D6 unless the pool contains only assets used in a business and not for any other income-producing purpose. In that case show the amount at item P8 on the Business and professional items schedule 2007 (NAT 2543-6.2007).

If the pool consists only of depreciating assets used in a business and not for any other income producing purpose, and some of those depreciating assets are used in a primary production business, a reasonable apportionment of the total shown at item P8 must be made between primary production and non-primary production activities.

WHERE TO CLAIM A DEDUCTION FOR ASSETS IN AN STS POOL

Refer to item P8 label L Depreciation expense – STS taxpayers.

The deduction for the general STS pool and the long-life STS pool is shown at item P8 label M in the Business and professional items schedule 2007.

If an STS pool includes:

1.	both primary production and non primary production depreciating assets; and/or

2.	depreciating assets which are used for both primary production and non primary production activities,

a reasonable apportionment for each STS pool deduction must be made between primary production and non-primary production activities. Separate pool worksheets for primary production and non-primary production depreciating assets may be used to assist in determining the apportionment.

e-tax AND DECLINE IN VALUE CALCULATIONS

e-tax has calculators for the different decline in value options. All of the calculators can be accessed at item 14 Net income or loss from business. The low-value pool calculator can also be accessed at item D6 Low-value pool deduction. For work related expenses you can access the calculator at D5 Other work related expenses.

The decline in value worked out by the pool calculators will be shown on the income tax return using the rules mentioned above. The decline in value using a general calculator will be shown on the income tax return at that item.

You can either use the calculators or manually work out your decline in value amount at the items where the calculators are available, but not have a mix. This is because the calculators share information with the capital allowances schedule. If you manually work out your decline in value amount and you need to complete the capital allowances schedule you will need to complete all items in the schedule. If you use the calculators, the items in the schedule will be automatically completed for you.


Capital gains tax concessions for small business

NAT 3359

Please refer to the Capital gains tax (CGT) on-line documentation

To get a copy of the publication Capital gains tax concessions for small business, you can contact the Tax Office.


CGT Asset register - New record keeping assistance for capital gains tax
CGT asset register

Please refer to the Capital gains tax (CGT) on-line documentation

To get a copy of the publication CGT asset register, you can contact the Tax Office.


Guide to capital gains tax

NAT 4151-6.2007

Please refer to the Capital gains tax (CGT) on-line documentation

To get a copy of the publication Guide to capital gains tax, you can contact the Tax Office.


Australian resident

Generally, the Tax Office considers you to be an Australian resident if:

•	you have always lived in Australia or you have come to
Australia and live here, or

•	you have been in Australia for more than half of the income
year – unless your usual home is overseas and you do not
intend to live in Australia.


Base year

A base year is the year which acts as a basis to compare taxable
income in your claim year. This base year stays the same for all
future claim years for the baby bonus for an eligible child. Once a
base year is chosen, it cannot be changed or revoked.

If you have claimed the baby bonus before for your child, your base
year is shown on the notice you received from the Tax Office.

For an eligible person their base year will be the year before legal
responsibility for the eligible child started, unless they choose the
year that legal responsibility started.

For an eligible person who is an adoptive parent, their base year
can also be the year before, or the year that, the child entered their
care if this will give them more baby bonus. However, a base year
cannot be earlier than the 2001 income year. For more information
to help you choose your base year see Base year and taxable
income.

For a transferee if this is the first year they will claim the baby
bonus for the eligible child, their base year is 2006.

For an eligible person who was not an Australian resident in
the year immediately prior to gaining legal responsibility for the
eligible child, their base year is the year they gained legal
responsibility for the child.


Care

For a child to be in your care, it is not a requirement for the child
to be living with you on a daily basis. For example, parents who
place their child in a creche or home-based day care would still
be considered to have care of the child. This is because the
parents are ultimately responsible for making decisions in relation
to that child and continue to make those decisions.

Where parents share the legal responsibility for and care of a child
(for example, where a child spends alternate weeks with their
separated parents), the child is considered to be in the care of
both parents at all times. Where there is shared care, usually
the mother will be the eligible person (see the Selection list).

A parent who has ceased to be involved in the child’s daily life and
has ceased to provide for the day-to-day care, welfare and
development of the child would not be considered to have care
of that child.


Claim period

A claim period is the period within the claim year for which you
are eligible to claim the baby bonus.


Claim year

A claim year is the year in which you make a claim. You may
make a claim each year until your eligible child turns five.


Eligible child

The eligible child is the child for whom you first satisfy steps 1 and 2.
It is usually the first child you gave birth to or the first child who
you gained legal responsibility for and care of, on or after 1 July 2001
and before 1 July 2004. It is not necessarily your oldest or first born
child.

A stillborn child cannot be an eligible child.


Gross tax

Your gross tax is the amount shown as Tax on taxable income
on your notice of assessment. If you are unsure of how to calculate
your gross tax, you can get more information:

•	on the Tax Office website at www.ato.gov.au

•	by phoning the Personal Tax Infoline


Legal responsibility

You have legal responsibility for a child if:

•	you are responsible (whether alone or with someone else) for
the day-to-day care, welfare and development of the child

AND

•	you are their birth mother or natural father OR

•	giving you legal responsibility (for example, through adoption).


Spouse

Your spouse is your husband or wife to whom you are legally
married, or a person who lives with you on a genuine domestic
basis as your husband or wife. Under Australian law your husband
or wife cannot be the same sex as you.


Taxable income

Your taxable income can be found on your notice of assessment
from the Tax Office or on your tax return.

Taxable income is your assessable income – for example, salary
or wages, most Centrelink payments, interest, dividends – less
any allowable deductions that you have incurred in earning that
income.

Centrelink payments such as maternity allowance and family tax
benefit are not assessable income.

If you are unsure of how to calculate your taxable income, more
information can be found:

•	at How we work out your tax

•	on the Tax Office website at www.ato.gov.au or

•	you can phone the Personal Tax Infoline.


Transferee

When a person who is the eligible person for baby bonus transfers
their eligibility to their spouse, their spouse is referred to as the
transferee.


ATO Publications
Tax Office Publications 2007

ATOPublications2007.hlp is a help file that contains Tax Office publications referred to by e-tax. e-tax may direct you read a publication before completing an item.

To access the help file you must first download the e-tax Publications module from the Tax Office web site.

Click here to go to download the Publications module.

If you have already downloaded and installed the Tax Office Publications help file, click here to run it and view the contents

NOTE:
When you access the help file from e-tax Help, only the topic you have linked to may be displayed. This allows you to return to the topic you were reading in the e-tax help file when you click on the Back button in the Help toolbar. Some of the publication topics are very long. To view the contents of a publication topic, press the <Home> key on you keyboard.

You can always run a separate copy of the Tax Office Publications help file by double clicking on it in the e-tax program folder.


Troubleshooting - Common Messages
e-tax internet troubleshooting guide

e-tax connects to the e-tax servers to validate your identity and lodge your tax return (return) and 30% child care tax rebate transfer advice (transfer advice). Unfortunately there are a number of things that can prevent this working.

The following topics may help you:

•	What computer settings should I use?

•	Read the Windows configuration check list

•	Are you at work?

•	Are you using a proxy server?

•	Are you running firewall software?

•	Have you tried the Quick connection test?

•	Press the Check for updates button.

•	Technical specifications

•	Connection error codes

•	Phone the e-tax IT help desk on 1300 130 017.

THE QUICK CONNECTION TEST

e-tax connects to the internet just like your browser does. The best way to check for problems is to view the test page https://verification.etax.ato.gov.au/test.asp in your browser.

If you see the words "Test successful, your computer can connect to the e-tax servers" you should be able to lodge a return or transfer advice through the e-tax application.

Related topics

•	Are you at work?

•	Are you using a proxy server?

•	Are you running firewall software?

•	Technical specifications

ARE YOU AT WORK?

Ask your system administrator if SSL (secure socket layer on port 443) is allowed through your company’s firewall. If your company does not allow this or it uses a proxy server, then you will not be able to lodge a return or transfer advice using e-tax while you are at work. You can take a copy of your file home on a floppy disk (or email it to your home email account) and submit it from there.

It may help if you send the test page link (https://verification.etax.ato.gov.au/test.asp) to your administrator.

Related topics

•	Are you using a proxy server?

•	Are you running firewall software?

•	Technical specifications

CHECK FOR UPDATES

The Check for updates button appears on the first e-tax screen.  Pressing this button will check the Tax Office website for updated versions of e-tax.

Alternatively, when you initiate a transaction that requires a connection to the internet, the e-tax software will check for updates.  This could occur when you are verifying your identity, pre-filling or lodging.

For more information, refer to Auto-update e-tax.

WINDOWS CONFIGURATION CHECKLIST

Is Your Date Correct

Make sure the date on your computer is correct (especially the year, which should be at least 2007) and in the Australian format (Day/Month/Year). You can change the system date in the Control Panel.

Are you using English (Australia) language settings

Some problems have been reported in past years with Windows using a non-English language setting. Try temporarily setting Windows to use English (Australian). You can change the language settings in the Control Panel.

ARE YOU USING A PROXY SERVER?

If you connect to the internet via a dial-up modem this section does not apply to you.

If your connection to the internet is via a network at home or at work you will need to ask your network administrator.

e-tax attempts to connect directly to the internet bypassing your browser’s proxy settings. If you are using a proxy server, you will be unable to lodge your return or transfer advice over the internet. You can use e-tax to print your tax return or transfer advice and mail it to the Tax Office, using the following address, for processing within 7 weeks.

Australian Taxation Office

GPO Box 9845

IN YOUR CAPITAL CITY

(Do not replace the words IN YOUR CAPITAL CITY with the name of your capital city. Because of a special agreement with Australia Post there is no need to include the name of your capital city or a postcode).

If you still have problems, phone the e-tax IT help desk on 1300 130 017.

Related topics

•	Are you at work?

•	Are you running firewall software?

•	Technical specifications

ARE YOU RUNNING FIREWALL SOFTWARE ON YOUR MACHINE SUCH AS BLACK ICE DEFENDER, NORTON PERSONAL FIREWALL OR ZONE ALARM?

e-tax works with firewalls and uses encryption to secure your communications with the Tax Office.

In general, most personal firewalls have a setting which will prompt you to decide if you want to allow e-tax to connect to the internet. It is safe for you to give e-tax this access.

Alternatively, you may be able to configure your personal firewall to allow communication between the Tax Office and your computer. The required configuration is shown in the technical specifications that are listed below.

If your personal firewall cannot be configured correctly, you could choose to temporarily close or disable any firewall software when e-tax asks you to connect to the internet. Most e-tax functions that require a connection to the internet do not take long to complete (typically less than one minute). Remember to re-enable your firewall software after you have submitted your tax return or transfer advice.

Corporate firewalls will generally not prompt you to decide if you want to allow e-tax to connect to the internet. If you are experiencing problems connecting e-tax to the internet, you may need the support of your system administrator. They will need the technical specifications detailed below so they can configure the corporate firewall to allow e-tax the access it requires.

If you cannot configure your firewall and you are unwilling to have your computer without a firewall for this short period of time, you can use e-tax to print your tax return or transfer advice and mail it to the Tax Office, using the following address, for processing within 7 weeks.

Australian Taxation Office
GPO Box 9845
IN YOUR CAPITAL CITY

(Do not replace the words IN YOUR CAPITAL CITY with the name of your capital city. Because of a special agreement with Australia Post there is no need to include the name of your capital city or a postcode).

Related topics

•	Are you at work?

•	Are you using a proxy server?

•	Technical specifications

I DON’T HAVE A PC, I HAVE A MACINTOSH (OR LINUX, OR…)

Sorry, e-tax 2007 is only available for a PC. e-tax has been successfully tested on an Apple computer running OS X v10.4.3 with Virtual PC 7, running a recommended Windows operating systems.

TECHNICAL SPECIFICATIONS

To download the e-tax software, access to http port 80 has to be allowed to

http://www.ato.gov.au IP 203.202.41.1

For verification and lodgment – https via port 443 has to be allowed to

https://verification.etax.ato.gov.au IP 203.202.41.156

https://lodgement.etax.ato.gov.au IP 203.202.41.155

Data is transmitted using 128 bit SSL encryption.

CONNECTION ERROR CODES

If your error code starts with a TE, V or W look in validation errors.

Otherwise, if not listed below, refer to the information contained in the error message.  If the problem persists, phone the e-tax IT help desk on 1300 130 017.

1010	A problem has occurred reading the response from the e-tax servers.  Save your work and try again.   If the problem persists phone the e-tax IT help desk on 1300 130 017.
1020	Your machine may be running low on memory.  Save your work, close other applications and then try again.  Rebooting may also help.   If the problem persists phone the e-tax IT help desk on 1300 130 017.
1030	A problem has occurred attempting to connect to the e-tax servers.  There are a number of reasons this error can occur.   See Are you using a proxy server? See Are you running firewall software? See Are you at work? If the problem persists, phone the e-tax IT help desk on 1300 130 017.
1200	e-tax has received a response that it wasn't expecting.  Try connecting to https://verification.etax.ato.gov.au/test.asp.  If you see "Test successful, your computer has connected to the e-tax servers" you may be using a proxy.   See Are you using a proxy server?   If you are at work see Are you running firewall software?
1501	You must disable Work Offline so e-tax can communicate with the internet.  To connect start Internet Explorer and select Work Offline on the File menu.
1502	e-tax was unable to switch off Work Offline mode.  You can try this yourself by selecting the Work Offline item on Internet Explorer's File menu. If the problem persists phone the e-tax IT help desk on 1300 130 017.
2073	Error 2073 - The e-tax service is temporarily unavailable. Save your work and try again later.  If the problem persists phone the e-tax IT help desk on 1300 130 017.
99998	Your machine may be low on resources.  Please save your work, close all applications and try again.  Rebooting may also help resolve this problem.  If the problem persists phone the e-tax IT help desk on 1300 130 017.
99999	Your machine may be low on resources.  Please save your work, close all applications and try again.  Rebooting may also help resolve this problem.  If the problem persists phone the e-tax IT help desk on 1300 130 017.


Commissioner's guarantee
Our commitment to you

e-tax 2007 provides advice and information to help you correctly complete your 2007 tax return for individuals online.

I do not expect you to know more than what we have put in e-tax 2007 and its related Help files. However, I do ask you to take care in completing your tax return online and make sure that the information you provide to us is complete and accurate.

There have been some changes since e-tax 2006.  To see if any apply to you, check What's new this year?

We also have a range of advice and information services that can assist you when completing your tax return.  Refer to details about how you can access our information services and how you can contact us.

OUR COMMITMENT TO YOU

We are committed to providing you with advice and information you can rely on and we make every effort to ensure that our advice and information is correct.

Part of e-tax 2007 is a public ruling for individuals who use it reasonably and in good faith to complete and lodge their 2007 personal tax return online.  The public ruling protection applies to the questions and associated Help files in e-tax 2007, subject to the exceptions. This means that if we state the law incorrectly in these parts of e-tax 2007 and as a result you do not pay enough tax, we will not ask you to pay the extra tax.

If any other information in e-tax 2007 is incorrect and as a result you do not pay enough tax, we may ask you to pay the extra tax. However we will not charge you a penalty or interest if you acted reasonably and in good faith.

If our advice is correct but you make an honest mistake when you try to follow our advice and you owe us money as a result, we will not charge you a penalty. However, we will ask you to pay the money, and we may also charge you interest.

If correcting the mistake means we owe you money, we will pay it to you.  We will also pay you any interest you are entitled to.

HOW TO USE e-tax 2007:

•	Have on hand all your necessary documentation and records for the 2006-07 income year (1 July 2006 to 30 June 2007).

•	Check for updates each time you open e-tax to ensure you have the current version.

•	Read all the preliminary screens and related help topics marked by blue text – they provide valuable information ranging from whether you need to lodge a tax return to how you can get a faster refund.

•	Read each item's introductory screen carefully and:

o	if it  applies to you, read the screen and the related help topics carefully and click the Yes button so that you can provide the required details for e-tax to enter on your tax return.

o	if it does not apply to you, click the No button.

•	The Index option within the e-tax Help files can help you to find information that is relevant to your circumstances.

•	Make sure you complete the Medicare levy surcharge item (M2) – it applies to all taxpayers.

•	Use the checklist on screen 8203 in the Lodgment section of e-tax before you lodge your tax return.

Part of e-tax 2007 is a public ruling in accordance with Division 358 of Schedule 1 to the Taxation Administration Act 1953.  However, it is a public ruling only for individuals acting reasonably and in good faith while using e-tax 2007 to complete their 2007 personal tax return online.

PUBLIC RULING EXCEPTIONS

The public ruling protection does not apply to the following:

•	amounts of any pre-filled data

•	amounts of any calculations stated to be estimates

•	Publications 2007 module

•	Capital gains tax 2007 module

•	e-tax Medicare Tax Statement online 2007 program


Front Page
e-tax user help and on-line documentation

© Commonwealth of Australia 2007
This work is copyright. You may download, display, print and reproduce this material in unaltered form only (retaining this notice) for your personal, non-commercial use or use within your organisation. Apart from any use as permitted under the Copyright Act 1968, all other rights are reserved. Requests and enquiries concerning reproduction and rights should be addressed to the Commonwealth Copyright Administration, Copyright Law Branch, Attorney-General's Department, Robert Garran Offices, National Circuit, Barton ACT 2600 or posted at http://www.ag.gov.au/cca.

Click here for instructions on how to use e-tax help


How to lodge your tax return

A return prepared using e-tax can be lodged electronically via the internet.

e-tax lodges your return for you. Refer to the Lodgment section.

Unless you are specifically told otherwise, there is no need for you to post or deliver any documents to the Tax Office.

See also:

Keeping copies of all your tax records


Keeping copies of all tax records
Keeping copies of all your tax records

As you work through e-tax you will be asked to keep copies of specific records, for example your payment summaries, with your tax return.

When you have completed your tax return using e-tax, you must either:

•	print a copy of the tax return and all related documents for your own records or

•	retain your return electronically.

You need to keep these records:

•	work related expenses

•	payment summaries

•	fringe benefits

•	gifts and donations

•	home office

•	logbook method

•	travel expenses

•	business and professional items


What records do I need to keep if I choose to retain my return electronically?

If you want to keep your tax return electronically, you must also retain the e-tax 2007 software so that you can open it (Section 12 of the Electronic Transactions Act 1999.)

To see how to save your tax return electronically, go to Save the file.

For general record keeping requirements, see Keeping copies of all your tax records.


What's new this year?

This topic covers:

Superannuation changes

Electronic funds transfer of refunds

Gifts to political parties and independents

Do not attach your payment summaries unless you have an eligible termination payment

Full-year tax-free threshold when ceasing full-time education

Foreign income exemption for temporary residents

Medicare levy surcharge lump sum tax offset

Primary production and non-primary production deferred non-commercial business losses

Employee share schemes and stapled securities

Non-commercial loans and private companies

Tax Office e-tax pre-filling initiatives

SUPERANNUATION CHANGES

If you are aged 60 years and over and your only source of income is from superannuation benefits (both lump sum and income streams) that have already been subject to tax in the superannuation fund you may not have to lodge a tax return in the future.  For further information refer to Will you need to lodge an Australian income tax return in the future?.

ELECTRONIC FUNDS TRANSFER OF REFUNDS

If you want your tax refund, family tax benefit or any baby bonus deposited directly into an Australian bank, credit union or building society account of your choice, you must provide your account details.  For further information refer to Electronic funds transfer (EFT).

GIFTS TO POLITICAL PARTIES AND INDEPENDENTS (ITEM D8)

The rules on deductibility for contributions and gifts made on or after 22 June 2006 to registered political parties and to independent member of (or candidates for) an Australian parliament or legislative assembly have changed.

Refer to item D8 for more information.

DO NOT ATTACH YOUR PAYMENT SUMMARIES UNLESS YOU HAVE AN ELIGIBLE TERMINATION PAYMENT

If you are lodging a paper tax return you no longer need to attach your payment summaries (or statutory declarations in respect of missing payment summaries), other than those for eligible termination payments.  Generally you must keep your payment summaries and statutory declarations with your tax records for five years.

FULL-YEAR TAX-FREE THRESHOLD WHEN CEASING FULL-TIME EDUCATION

From 1 July 2006 the part-year tax-free threshold that applied when you ceased full-time education for the first time has been abolished.  If you ceased full-time education for the first time at any time during the income year you will receive the full-year tax-free threshold of $6,000 with no pro-rating.  A part-year tax-free threshold still applies if you became, or ceased to be, an Australian resident.

FOREIGN INCOME EXEMPTION FOR TEMPORARY RESIDENTS

From 1 July 2006 if you meet the temporary resident you not pay tax on most of your foreign income and can disregard some capital gains.  For further information, refer to Exempt income or refer to the publication Foreign income exemption for temporary residents.

MEDICARE LEVY SURCHARGE LUMP SUM TAX OFFSET (ITEM M2)

You may be entitled to claim a tax offset if you have to pay the Medicare levy surcharge as a result of you or your spouse receiving a lump sum payment in arrears.

Refer to item M2 for more information

PRIMARY PRODUCTION AND NON-PRIMARY PRODUCTION DEFERRED NON-COMMERCIAL BUSINESS LOSSES

The total amount of deferred non-commercial business losses has been divided into two separate totals for primary production deferred non-commercial business losses and non-primary production deferred non-commercial business losses.

Refer to item 15 for more information.

EMPLOYEE SHARE SCHEMES AND STAPLED SECURITIES (ITEM 17 AND 22)

From 12 April 2007 stapled securities and rights to acquire them can be acquired under employee share scheme.

Refer to item 17 and item 22 for more information.

NON-COMMERCIAL LOANS AND PRIVATE COMPANIES

In December 2006 the Government announced amendments to the integrity rules which apply to distributions by private companies.  The Commissioner of Taxation will have the discretion to not treat amounts as dividends where a taxpayer has attempted to comply with Division 7A but made an honest mistake. This discretion is expected to be backdated to 1 July 2006 in most cases. At the time of production of e-tax these amendments had not become law. The information on our website www.ato.gov.au will be updated once the new law is enacted.

TAX OFFICE e-tax PRE-FILLING INITIATIVES

e-tax provides you with the opportunity to pre-fill your tax return with data held by other organisations. Instructions on how to pre-fill your data is contained in the e-tax software.

This year the verification and download process has been streamlined by bringing it forward to the start of the interview process.  This reduces the number of times you need to verify your identity and download data.  It reduces the amount of manual data entry making it easier for you to complete your tax return

What information can be pre-filled into e-tax?

•	Centrelink, Department of Education, Science and Training (DEST), Department of Veterans’ Affairs (DVA) payments.

•	Child care benefit details from Family Assistance Office (FAO)

•	Bank interest

•	Share dividends

•	Distributions from managed funds

•	Baby bonus details, and

•	Medicare financial tax statement (Refer to item T10 for further information)

For more details about the availability of this service, see e-tax pre-filling information.


WORKING OUT YOUR TAX - TABLE 1 OR 2
WORKING OUT YOUR TAX – TABLE 1 OR 2

Click on the Print button to get a copy of this worksheet.

Copy taxable income from TAXABLE INCOME OR LOSS on your tax return	$	___________	(a)
Amount in Taxable income column less than but nearest your taxable income	$	___________	(b)
		Tax on (b)			$___________	(c)
Tax on remaining              Take (b) away  from (a)	$	___________	(d)
income                Tax rate applied to (d)	$	___________	(e)
Multiply (d) by (e)	$___________	(f)
Tax on your taxable income Add (c) and (f)	$___________


WORKING OUT YOUR TAX - TABLE 3
WORKING OUT YOUR TAX – TABLE 3

Click on the Print button to get a copy of this worksheet.

Copy taxable income from TAXABLE INCOME OR LOSS on your tax return	$	__________	(a)
T	$	__________	(b)
Take (b) away from (a)	$	__________	(c)
Tax on your taxable income Multiply (c) by tax rate of 15 cents (0.15)	$__________


WORKING OUT YOUR TAX - TABLE 4
WORKING OUT YOUR TAX – TABLE 4

Click on the Print button to get a copy of this worksheet.

Copy taxable income from TAXABLE INCOME OR LOSS on your tax return	$	_________	(a)
Amount in Taxable Income column less than but nearest your taxable income	$	_________	(b)	S =	$_________	(c)
				Tax on (b)	$_________	(d)
Take (b) away from (a)	$	_________	(e)
Tax on remaining income
Tax rate applied to (e)	$	_________	(f)	=
Multiply (e) by (f)	$_________	(g)
Tax on your taxable income Add (c), (d) and (g)	$ ______


How to work out the tax on your taxable income
Working out your tax refund or tax debt

TAX ON TAXABLE INCOME

We provide a number of tables and worksheets below to help you work out the tax on your taxable income. The ones you use depend on your residency status. If you were:

•	an Australian resident for tax purposes for the full year and you are entitled to a $6,000 tax-free threshold, use TABLE 1.

•	a non-resident for the full year use TABLE 2.

•	A part-year resident for tax purposes and your tax free threshold is less than $6000, use TABLE 3 and worksheet 3 and 3.1.

Australian resident

To use TABLE 1 first find in column (a) the taxable income range to which your taxable income belongs, and then refer to the amounts in that row.

TABLE 1  Income tax rates - resident for full year

Taxable income	Tax on this income	Tax on threshold amount	Marginal tax rate on amount above threshold
(a)	(b)	(c)	(d)
$1-$6,000	$0	$0	Nil
$6,001-$25,000	$6,000	$0	0.15
$25,001-$75,000	$25,000	$2,850	0.30
$75,001-$150,000	$75,000	$17,850	0.40
$150,001 and over	$150,000	$47,850	0.45
Transfer the amounts at (b), (c) and (d) from the relevant row to (b), (c) and (d) in worksheet 1.1 and follow the steps in the worksheet.

In the example in worksheet 1.1.  Sam had a taxable income of $28,682. Sam looks up the row in table 1 which applies to his taxable income ($25,001 to $75,000 and works out his tax on taxable income using worksheet 1.1

WORKSHEET 1.1: Working out your tax on taxable income- resident for full year.

		Sam’s			Yours
Your Taxable income from TAXABLE INCOME OR LOSS on your tax return	$	28,682	(a)		$
your tax bracket threshold amount: (b) from table 1	$	25,000	(b)		$
Tax on that threshold amount: (c) from table 1	$	2,850	(c)	$
Marginal tax rate on amount above threshold: (d) from table 1		0.30	(d)
Amount of income above threshold: take (b) away from (a)	$	3,682	(e)		$
Tax on income above threshold: multiply (e) by (d)	$	1,104.60	(f)		$
Add (c) and (f)	$	$3,954.60	(g)		$
 The amount at (g) is your tax on taxable income

To work out your tax, print a blank copy of table 1 or 2.

Non-resident

To use table 2, first find the column (a) the taxable income range to which your taxable income belongs, and then refer to the amounts in that row.

TABLE 2 Income tax rates - non-resident for full year

Taxable income	Tax bracket threshold	Tax on threshold amount	Marginal tax rate on the amount above threshold
(a)	(b)	(c)	(d)
$1-$25,000	$0	$0	0.29
$25,001-$75,000	$25,000	$7,250	0.30
$75,001-$150,000	$75,000	$22,250	0.40
$150,001 and over	$150,000	$52,250	0.45
In example in worksheet 2.1. Jan’s taxable income was $28,682. Jan looks up the row in table 2 which applies to her taxable income ($25,001 to $75,000) and works out her tax on taxable income using worksheet 2.1 as shown.

Worksheet 2.1: working out your tax on taxable income-non-resident for full year

		Jan’s			Yours
Your taxable income from TAXABLE INCOME OR LOSS on your tax return	$	28,682	(a)		$
Your tax bracket threshold amount:(b) from table 2	$	25,000	(b)		$
Tax on that threshold amount: (c)from  table 2	$	7,250	(c)	$
Marginal tax rate on amount above threshold: (d) from table 2		0.30	(d)
Amount of income above threshold: take (b) away from (a)	$	3,682	(e)		$
Tax on income above threshold: multiply (e) by (d)	$	1,104.60	(f)		$
Add (c) and (f)		8,354.60	(g)		$
The amount at (g) is your tax on taxable income

To work out your tax, print a blank copy of table 1 or 2.

PART-YEAR RESIDENT

Use TABLE 3 if you have a part-year threshold. Your tax-free threshold (T) is the amount you worked out in How to work out your tax-free threshold.

Write your tax-free threshold (T) on a piece of paper. Write it at (b) in worksheet 3

If your taxable income is $25,000 or less, go to step 1.

If your taxable income is $25,000 or more go to step 2

Your tax rate is 15% (or 15 cents) for each $1 over your part-year tax-free threshold T

STEP 1: In the example in worksheet 3 Karen had a tax-free threshold T of $5,000 and a taxable income of $25,000.

Worksheet 3 Working out the tax on your taxable income of $25,000 or less with a part-year tax-free threshold

	Karen’s		Yours
Your taxable income from TAXABLE INCOME OR LOSS on your tax return	25,000	(a)	$
Your tax-free threshold T	$5,000	(b)	$
Amount of income above tax-free threshold: take (b) away from (a)	$20,000	(c)	$
Tax on income above threshold; multiply (c) by 0.15	$3,000	(d)	$
If your taxable income is $25,000 or less, the amount at (d) is your tax on your taxable income

To work out your tax, print a blank copy of Worksheet 3.

STEP2: If your taxable income is greater than $25,000 you first need to work out the tax you pay on the first $25,000 of your taxable income. Use worksheet 3 write $25,000 at (a) and so the calculation. The amount at (d) is the tax you pay on the first $25,000 of your taxable income. Transfer the amount at (d) from worksheet 3 to (s) in worksheet 3.1. We refer to this amount as S in Table 3

To use table 3 first find in column (a) the taxable income range to which your taxable income belongs, and then refer to the amounts in that row.

To work out your tax for the year, you will first need to work out the tax you would pay on $25,000, which we have called S.

TABLE 3 Income tax rates for part-year residents with part-year tax-free threshold

Taxable income	Tax bracket threshold	Tax on threshold amount	Marginal tax rate on amount above the threshold
(a)	(b)	(c)	(s)	(d)
$1 to $T	$0	$0	$0	Nil
$(T+1) to 25,000	$T	$0	$0	0.15
$25,001-$75,000	$25,000	$0	$S	0.30
$75,001-$150,000	$75,000	$15,000	$S	0.40
$150,001and over	$150,000	$45,000	$S	0.45
In the example in worksheet 3.1 Karen had a tax-free threshold T of $5,000 and a taxable income of $76,000.

Her tax S on the first $25,000 of her taxable income is $3,000 from (d) in worksheet 3

She looks up the row in table 3 which applies to her taxable income ($75,001 to $150,000), transfers the amounts at (b), (c) and (d) from the relevant row to (b), (c) and (d) in worksheet 3.1 and works out her tax as shown,

Worksheet 3.1: Working out the tax on your taxable income of over $25,000 with apart-year tax-free threshold

		Karen’s			Yours
Your taxable income from TAXABLE INCOME OR LOSS on your tax return	$	76,000	(a)		$
Your applicable tax bracket threshold amount (b) from table 3	$	75,000	(b)		$
Tax amounts due on the threshold amount (c) from table 3	$	15,000	(c)		$
S from (d) at worksheet 3	$	3,000	(s)		$
Marginal tax rate on amount above threshold: (d) from table 3		0.40	(d)
Amount of income above threshold: take (b) away from (a)	$	1,000	(e)		$
Tax on income above threshold: multiply (e) by (d)	$	400	(f)		$
Add (c), (s) and (f)	$	18,400	(g)		$
The amount at (g) is your tax on taxable income.

To work out your tax, print a blank copy of table 3


How to work out your beneficiary tax offset
Working out your tax refund or tax debt

BENEFICIARY TAX OFFSET

Click on the Print button to get a copy of this worksheet.

The tax offset is calculated as follows:

Total amount of allowance or payment you received –  from A item 5 on your tax return	(a)	$___________
Your tax-free threshold: $6,000 (or T if you are a part-year resident)	(b)	$___________
Take (b) away from (a)	(c) *	$___________
Your tax offset [Multiply (c) by 0.15.]	(d)	$___________
This is your tax offset on income up to $25,000.

Do not write your tax offset anywhere on your tax return.

*If (c) is ‘0’ or a negative amount you are not entitled to a tax offset.

For more information read Beneficiary tax offset.

If the amount you have shown at (a) is more than $25,000, you are entitled to an additional 15% tax offset on the excess.

Take $25,000 away from (a)	(e)	$___________
Multiply (e) by 0.15	(f) **	$___________
Add (d) and (f)	(g)	$___________
** the amount at (f) is an additional tax offset

The amount at (g) is your beneficiary tax offset


How to work out your HELP compulsory payment
Working out your tax refund or tax debt

COMPULSORY HIGHER EDUCATION LOAN PROGRAMME (HELP) REPAYMENT

 A compulsory HELP repayment will be included when:

•	you have an accumulated HELP debt,

your HELP repayment income is more than $38,148, we will work out and include your compulsory HELP repayment in your notice of assessment.

Your accumulated HELP debt may include HECS-HELP, FEE-HELP or OS-HELP debts. Only one compulsory HELP repayment will be calculated in this assessment based on your accumulated HELP debt.

NOTE:
You will not have to make a compulsory HELP repayment if you have a spouse or dependants and if, due to low family income you:
  - are entitled to a reduction of the Medicare levy, or
  - do not have to pay the Medicare levy.

Part B of item M1 shows you how to work out if you qualify for the Medicare levy reduction.

Your compulsory HELP repayment is a percentage of your HELP repayment income.  Follow the steps below to work out your compulsory repayment.

STEP 1	Work out your HELP repayment income

Your taxable income from TAXABLE INCOME OR LOSS on your tax return. If you had a loss please enter zero	(a)	$
Your total reportable fringe benefits amounts from item 9 on your tax return	(b)	$
Net rental loss amount from item 20 on your tax return	(c)	$
Your exempt foreign employment income amounts (from item 19 on your tax return)	(d)	$
Your HELP repayment income  [Add up a, b, c and d.]	(e)	$
NOTE:
Accumulated HELP debt: Your accumulated HELP debt may include, HECS- HELP, FEE-HELP or OS-HELP debts. Only one compulsory HELP repayment will be calculated in this assessment based on your accumulated HELP debt.

STEP 2	Find the repayment rate that applies to your HELP repayment income in the table.

HELP repayment rates as a percentage of HELP repayment income

Income	Rate
Below $38,149	Nil
$38,149 – $42,494	4%
$42,495 – $46,838	4.5%
$46,839 – $49,300	5%
$49,301 – $52,994	5.5%
$52,995 – $57,394	6%
$57,395 – $60,414	6.5%
$60,415 – $66,485	7%
$66,486 – $70,846	7.5%
$70,847 and above	8%
STEP 3	Multiply your HELP repayment income (e) from step 1 by the relevant rate from step 2. The result is your compulsory HELP repayment which will be shown on your notice of assessment at label ‘X’. If the balance of your accumulated HELP debt is less than the calculated repayment amount, you only pay the balance.

Use this amount when working out your tax refund or tax debt. e-tax does not write this amount anywhere on your tax return.

For more information about repaying your HELP debt, refer to the publication Repaying your HELP debts in 2006-07 (NAT 3913).


How to work out your low income tax offset
Working out your tax refund or tax debt

LOW INCOME TAX OFFSET

You are entitled to the low income tax offset if your taxable income is less than $40,000.

You get the maximum tax offset of $600 if your taxable income is $25,000 or less. The tax offset reduces by four cents for each dollar of taxable income over $25,000.

Use the worksheet or the calculator on our website www.ato.gov.au to work out your tax offset if your taxable income is more than $25,000 but less than $40,000.

The amount at (f), if more than zero (0), is the tax offset you are entitled to. You can use the amount at (f) when you work out your tax refund or tax debt.

e-tax does not write the amount at (f) anywhere on your tax return. The Tax Office will work out your low income taxpayer tax offset and make sure it reduces your tax.


Low income tax offset - worksheet

Click on the Print button to get a copy of the worksheet.

Maximum tax offset	(a)	$          600
Your Taxable income from TAXABLE INCOME OR LOSS on your tax return	(b)	$________
Threshold at which tax offset reduces	(c)	$     25,000
Take (c) away from (b).	(d)	$________
Multiply (d) by 0.04.	(e)	$________
Your tax offset [Take (e) away from (a).]	(f)	$________


How to work out your Medicare levy
Working out your tax refund or tax debt

MEDICARE LEVY (FROM ITEM M1)

If you want to work out your Medicare levy before you receive your notice of assessment you can follow the steps outlined in this topic.

For Medicare levy purposes, taxable income excludes the amount of any post-June 1983 component of an eligible termination payment on which the maximum tax rate is zero.

NOTE:
If you had exempt foreign employment income you will not be able to work out your Medicare levy. We will do this when working out the amount of tax (including Medicare levy) you have to pay on your other income.

STEP 1	Work out your basic levy

The basic Medicare Levy you pay depends on the amount of your taxable income and whether you are eligible for the senior Australians tax offset or the pensioner tax offset.

•	If you were eligible for the senior Australians tax offset use column 1

•	If you are eligible for the pensioner tax offset and your taxable income  use column 2

•	If you are not eligible for either of those tax offsets, use column 3

WORKSHEET: Working out your basic Medicare levy

	COLUMN 1	COLUMN 2	COLUMN 3
	Eligible for the senior Australians tax offset	Eligible for the pensioner tax offset	Not eligible for either of those tax offsets
When your taxable income (from TAXABLE INCOME OR LOSS on your tax return) is below a specified lower threshold, you pay no Medicare levy.

Lower taxable income threshold

	(a)	$	24,867	$	21,637	$	16,740
If your taxable income is equal to or less than your threshold at (a), you pay no Medicare levy

When your taxable income is above a specified upper threshold, you pay Medicare levy at the rate of 1.5% of your taxable income

Upper taxable income threshold

	(b)	$	29,256	$	25,455	$	19,694
If your taxable income is equal to or more than your threshold at (b), use the following to work out your basic Medicare levy:

Your taxable income	(c)	$		$		$
Multiply (c) by 0.015	(d)	$		$		$
The amount at (d) is your basic Medicare levy. Go to step 2

When your taxable income is between the lower and upper threshold at (a) and (b) above you pay Medicare levy at the rate of 10% on the part of your taxable income above the lower threshold.

Use the following to work out your basic Medicare levy:

Your taxable income	(e)	$		$		$
Your lower threshold	(f)	$	24,867	$	21,637	$	16,740
Take (f) away from (e)	(g)	$		$		$
Multiply (g) by 0.10	(h)	$		$		$
The amount at (h) is your basic Medicare levy. Go to step 2

EXAMPLE:

•	Cecilie is eligible for the senior Australian tax offset, so she uses column 1. Cecilie’s taxable income is $24,000. It is less than the $24,867 threshold in column 1. She pays no Medicare levy.

•	Joel is not eligible for the senior Australian tax offset nor the pensioner tax offset, so he uses column 3. Joel’s taxable income is $40,000. It is above the $16,740 threshold in column 3. His Medicare levy is

$40,000  X  1.5%  =  $600

•	Peter is eligible for the pensioner tax offset, so Peter uses column 2. Peter’s taxable income is $25,000. It is between the $21,637and $25,455 thresholds in column 2. His basic Medicare levy is:

($25,000– $21,637)  X 10% = $336.30

STEP 2	Did you claim for a reduction or exemption at item M1? If not, your Medicare levy is the amount you worked out at step 1 at (d) or (h). If you are claiming a reduction or exemption, read on.

STEP 3	If you only completed part B of item M1, go to step 4.

If you completed part B and either of or both parts C and D, go to step 4.

If you completed part C, part D or both, transfer your basic Medicare levy from (d) or (h) from step 1 directly to (q) at step7.

STEP 4	Work out whether you are entitled to the family reduction amount

If you had a spouse on 30 June 2007 or your spouse died during 2006-07, your family income is the combined taxable income of you and your spouse.

If you did not have a spouse on 30 June 2007 but you were eligible for a reduced Medicare levy based on family income, your family income is your taxable income (from TAXABLE INCOME OR LOSS on your tax return).

To complete step 4, find the lower and upper income limits that apply to your circumstances in the TABLE 1 below.

TABLE 1: Family income table for 2006-07

Number of dependent children and students	Lower income limit	Upper income limit

If you were eligible for the senior Australians tax offset

0	$33,500	$39,411
1	$36,094	$42,463
2	$38,688	$45,515
Increment	$2,594	$3,051
If you are not eligible for the senior Australians tax offset

0	$28,247	$33,231
1	$30,841	$36,283
2	$33,435	$39,335
Increment	$2,594	$3,051
If you had more than two children who were dependents or students, you can extend this table. Increase the relevant lower and upper income limit by the appropriate increment for each additional child or student.

If your family income was less than or equal to your lower income limit, you do not pay the Medicare levy

If your family income was greater than your lower income limit but less than or equal to your upper income limit, you pay a reduced Medicare levy.

The worksheets below show you how to work out the amount of Medicare levy you pay. An example is presented and there is space left for your own calculations.

EXAMPLE:

Trevor, who is not eligible for the senior Australians tax offset, has two dependent children and had a spouse on 30 June 2007. His taxable income was $21,000 and his spouse's taxable income was $17,000 – a family income of $38,000. His family income is between the lower and upper family income limits (refer FAMILY INCOME TABLE 1 above). His basic Medicare levy is $315.00 from Step 1 worksheet. Go to step 5 to see how Trevor works out his Medicare levy.

STEP 5	Work out your family reduction amount and your share of it. You need to do this in 2 parts.

PART 1: Calculating your family reduction amount

		Trevor’s		Yours
Family income	(a)	$38,000	(a)	$__________
Lower limit from table 1	(b)	$33,435	(b)	$__________
Take (b) away from (a)	(c)	$4,565	(c)	$__________
Multiply (b) by 0.015	(d)	$501.52	(d)	$__________
Multiply (c) by 0.085.	(e)	$388.02	(e)	$__________
Take (e) away from (d) to get your family reduction amount.	(f )	$113.50	(f )	$__________
If your spouse's taxable income is less than $16,741 go to step 6. If it is $16,741 or more, you will share the reduction amount as shown below.

PART 2: Calculating your share of the family reduction amount

		Trevor’s		Yours
Family reduction amount from (f ) from step 5	(g)	$113.50	(g)	$__________
Taxable income (from TAXABLE INCOME OR LOSS on your tax return)	(h)	$21,000	(h)	$__________
Multiply (g) by (h).	( i )	$2,383,500	( i )	$__________
Family income (a) from step 5	( j )	$38,000	(j)	$__________
Divide ( i ) by ( j ) to get your share of the family reduction amount.	(k)	$62.72	(k)	$__________
Your family reduction amount is unlikely to be more than your basic Medicare levy. If it is, your Medicare levy will be reduced to zero, and any excess family reduction amount may be transferred to reduce your spouse’s basic Medicare levy. If this applies to you, you will not pay any Medicare levy.

Similarly, it is possible that your spouse has an excess family reduction amount which can be transferred to you. To determine whether that is the case, proceed with the steps below.

Worksheet: Calculating your share of the family reduction amount after a transfer from your spouse

Calculating your spouse’s share of the family reduction amount

		Trevor’s		Yours
Your spouse’s basic Medicare levy using step 1		$26.00	(aa)	$
Your family reduction amount (f) from step 5		$113.50	(f)	$__________
Your share of the family reduction amount (k)from step 5		$62.72	(k)	$__________
Take (k) away from (f)		$50.78	(bb)	$
The amount at (bb) is your spouse’s share of the family reduction amount

Transfer of any excess family reduction amount from your spouse

Take (aa) away from (bb)	$24.78	(l)	$

If (l) is zero or less than zero (negative), your spouse does not have excess family reduction amount. Go to step 6 and use the amount at (k) above for that step

Otherwise the amount at (l) is the excess family reduction amount transferred to you from your spouse.

Add (k) and (l)		$87.50	(m)	$
The amount at (m) is your new share of the family reduction amount after transfer

STEP 6	Work out your reduced Medicare levy

		Trevor’s		Yours
Your basic Medicare levy from (d) or (h) step 1	(n)	$315.00	(n)	$__________
Family reduction amount if applicable –
from (f ), (k) or (m) from step 5	(o)	$87.50	(o)	$__________
Take (o) away from (n)	(p)	$227.50	(p)	$__________
The amount at (p) is your reduced Medicare levy

If you did not complete either part C or part D of item M1, the amount of levy you have to pay is (p). If you completed one or both of these parts, read on.

STEP 7	Work out your exemption amount and your Medicare levy

Your reduced Medicare levy (p) from step 6 or your basic Medicare levy (d) or (h) from step 1	(q)	$___________
Full exemption

Number of days at V item M1 on your tax return, if any	(r)	___________
Multiply (q) by (r).	(s)	$__________
Divide (s) by 365.	(t)	$__________
Half exemption

Number of days at W item M1 on your tax return, if any	(u)	___________
Multiply (u) by (q).	(v)	$__________
Divide (v) by 365.	(w)	$__________
Divide (w) by 2.	(x)	$__________
Add (t) and (x)	(y)	$__________
The amount at (y) is your exemption amount
Take (y) away from (q)	(z)	$___________
The amount at (z) is your Medicare levy, if any


How to work out your Medicare levy surcharge
Working out your tax refund or tax debt

MEDICARE LEVY SURCHARGE (FROM M2)

 The Medicare levy surcharge applies only if you answered No at item M2 on your tax return and the number you wrote at A item M2 is less than 365. To work out your Medicare levy surcharge, follow the steps below.

NOTE:
If you had exempt foreign employment income you will not be able to work out your Medicare levy surcharge. We will do this when working out the amount of tax (including the surcharge) you have to pay on your other income.

WORKING OUT YOUR MEDICARE LEVY SURCHARGE

Your taxable income from TAXABLE INCOME OR LOSS on your tax return	(a)	$______________
Your  total reportable fringe benefits amounts from item 9 on you tax return.	(b)	$______________
Any amount you have shown at item A3 on your tax return	(c)	$______________
Any post-June 1983 component of an eligible termination payment where the maximum tax rate is zero.	(d)	$______________
Add (a), (b) and (c), then take away (d)	(e)
Divide (e) by 100 to get 1%.	(f)	$______________
If amount at  (f) is the whole-year Medicare levy surcharge you have to pay.

If the surcharge applies for the whole year, the Medicare levy surcharge amount you have to pay is (f). If the surcharge applies for only for PART of the year, continue with the steps below.

Number of days at A item M2 on your tax return	(g)	$______________
Take (g) away from 365.	(h)	$______________
Multiply (f) by (h).	(i)	$______________
Divide (i) by 365	(j)	$______________
The amount at (j) is the part year Medicare levy surcharge you have to pay


How to work out your Senior Australians or pensioner tax offset
Working out your tax refund or tax debt

SENIOR AUSTRALIANS OR PENSIONER TAX OFFSET

Refer to item T2 or item T3. You will need to refer to the tax offset code letter you showed.

If you want to work out your senior Australian or pensioner tax offset, you need to know your taxable income. This is the amount e-tax shows at TAXABLE INCOME OR LOSS on page 3 of your tax return.

The Table shows the taxable income thresholds that apply for your tax offset code letter

You can work out your tax offset at step 1. However, if any of the following situations applies to you, you will no be able to work out your tax offset here.

If you are eligible for a pensioner tax offset you will not be able to work out your tax offset if:

•	you used tax offset code letter S, Q, I or J and you received more than $13,356 pension income

•	you used tax offset code letter P and you received more than $11,154 pension income.

Then your actual maximum tax offset may be higher than your maximum tax offset (d) and you may get a tax offset if your taxable income was more than the upper taxable income threshold (c)

If your taxable income is between the lower taxable income threshold (b) and the upper taxable income threshold(c) and an unused portion lf your spouse’s senior Australians or pensioner tax offset is available for transfer to you, you may receive a higher tax offset

If your taxable income is equal to or more that the upper taxable income threshold (c), you may still qualify for a tax offset from the transfer of any unused portion of your spouse’s senior Australian or pensioner tax offset to you, if applicable.

If these situations apply, you could use the calculators on our website to work out your tax offset.

Whether or not you can calculate your tax offset here, we will work out the optimum tax offset which applies for you, and show that on your notice of assessment.

e-tax will not write your tax offset amount anywhere on your tax return.

STEP 1	Find the tax offset code letter that applies to you in the relevant tax offset thresholds table (A or B) below. This is the code letter you showed at either item T2 or item T3.

STEP 2	You may get up to the full tax offset shown in column 3 if your taxable income is equal to or less than the amount in column 1 for your tax offset code letter. If your taxable income is more than the amount in column 1 and less than the amount in column 2, complete the WORKSHEET to work out your tax offset.

TABLE  – Senior Australians and pensioner tax offset thresholds

	COLUMN 1	COLUMN 2	COLUMN 3
Tax offset code letter	Lower taxable income threshold	Upper taxable income threshold	Maximum tax offset
(a)	(b)	(c)	(d)
A	$24,867	$42,707	$2,230
B,C	$23,600	$39,920	$2,040
D,E	$20,680	$33,496	$1,602
S, Q, J	$19,454	$35,598	$2,018
I	$18,527	$33,559	$1,879
P	$16,147	$28,323	$1,522


Senior Australians or pensioner tax offset – worksheet

Click on the Print button to get a copy of this worksheet to write on.

HOW TO WORK OUT YOUR TAX OFFSET

Your taxable income from TAXABLE INCOME OR LOSS on your tax return	(a)	$_______________
Lower taxable income threshold (b)	(b)	$_______________
Take (b) away from (a).	(c)	$_______________
Maximum tax offset: (d)	(d)	$_______________
Divide (c) by 8.	(e)	$_______________
Take (e) away from (d).	(f)	$_______________
		This is your tax offset.
If the amount at (f) is more than zero (0), this is your tax offset

The tax offset you work out here will not include any unused portion of your spouse's pensioner or senior Australians tax offset that The Tax Office may transfer to you. e-tax does not write your tax offset amount anywhere on your tax return.


How to work out your SFSS compulsory repayment
Working out your tax refund or tax debt

COMPULSORY STUDENT FINANCIAL SUPPLEMENT SCHEME (SFSS) REPAYMENT

A compulsory SFSS repayment will be included when:

•	you have an accumulated SFSS debt,

•	your SFSS repayment income is more than $38,148, we will work out and include your compulsory SFSS repayment in your notice of assessment.

Your accumulated Financial Supplement debt on 1 June 2007 includes all outstanding loans taken out from 1993 to 2002. Only one compulsory Financial Supplement repayment will be calculated in this assessment based on your accumulated debt.

NOTE:
You will not have to make a compulsory Financial Supplement repayment if you have a spouse or dependants and if, due to low family income you:
  - are entitled to a reduction of the Medicare levy, or
  - do no have to pay the Medicare levy.

Part B of item M1 shows you how to work out if you qualify for the Medicare levy reduction.

Your compulsory Financial Supplement repayment is a percentage of your Financial Supplement repayment income. Follow the steps below to work out your compulsory repayment.

STEP 1	Work out your Financial Supplement repayment income

Your taxable income from TAXABLE INCOME OR LOSS on your tax return. If you had a loss please enter zero	(a)	$
Your total reportable fringe benefits amounts from item 9 on your tax return	(b)	$
Net rental loss amount from item 20 on your tax return	(c)	$
Your exempt foreign employment income amounts (from item 19 on your tax return)	(d)	$
Your Financial Supplement repayment income  [Add up a, b, c and d.]	(e)	$
STEP 2	Find the repayment rate that applies to your Financial Supplement income in table J1 below.

TABLE J1

Financial Supplement repayment income	Repayment rate (% of Financial Supplement repayment  income)
Below $38,149	Nil
$38,149- $46,838	2%
$46,839- $66,485	3%
$66,486 and above	4%
STEP 3	Multiply your Financial Supplement repayment income (e)  by the relevant rate from Step 2.

The result is your compulsory Financial Supplement repayment which will be shown on your notice of assessment at label ‘R’. If the balance of your accumulated Financial Supplement debt is less than the calculated repayment amount, you only pay the balance.

Use this amount when working out your tax refund or tax debt. e-tax does not write this amount anywhere on your tax return.

For more information about repaying your Financial Supplement Loans taken out in any of the years from 1993 to 2002, refer to the publication Repaying your Financial Supplement loan 2006-07 (NAT 2789).


How to work out your tax-free threshold
Working out your tax refund or tax debt

TAX-FREE THRESHOLD

To work out the tax on your taxable income you need to know your tax-free threshold. This is the amount of income you can earn before you must start paying tax.

Australian resident

If you were an Australian resident for tax purposes for the full year, your tax-free threshold is $6,000.

Non-resident

If you were a non-resident for the full year you are not entitled to a tax-free threshold. See How to work out your tax on your taxable income.

Part-year resident

If you were an Australian resident for tax purposes for less than the full year, a lower threshold amount-the part-year tax-free threshold- may apply.

In this case you answered YES to item A2. item A2 applies if :

 (i)	you became an Australian resident during 2006-07

(ii)	you stopped being an Australian resident during 2006-07.

Working out your part-year tax-free threshold:

•	you showed income at item 5 or item 6, you might be entitled to a full tax-free threshold – phone the Personal Tax Infoline for help.

•	Otherwise, work out if you have a part-year tax-free threshold. The following steps will help you to do this.

(i) and (ii) – You became or stopped being an Australian resident during 2006-07

STEP 1	Work out the number of months in 2006-07 that you lived in Australia. Include the month that you started to live here or stopped living here.

STEP 2	Multiply the number of months by $500. The result is your part-year tax-free threshold.

If you were a non-resident for the full year you are not entitled to a tax-free threshold.


	Completing your baby bonus claim
COMPLETING THE e-tax INTERVIEW

e-tax will first ask a series of questions to determine whether you are eligible to claim the baby bonus. See Are you eligible for the baby bonus?.

If you are eligible to claim the baby bonus, you will then work through the following sections so that e-tax can complete the claim and calculate the amount of baby bonus you are entitled to.

Auto-completing your claim form

Base year and taxable income

Eligible child details

Variation to the claim period

How does the baby bonus work?

Do you want to transfer your eligibility for the baby bonus to your spouse?

If your spouse wants to transfer their eligibility to you, you will have to verify your spouse's eligibility for the baby bonus before you can complete the claim. See Baby bonus transfer – to you from your spouse.

BABY BONUS CALCULATION

e-tax will work out your baby bonus for you. Work through each screen in the interview. Click on the help links in the e-tax interview screen, for an explanation of the terms used.

There are a number of factors that determine the amount of baby bonus you will receive. This means that you may want to work through the e-tax interview a number of times to allow e-tax to re-calculate the baby bonus when these factors are varied. Use the Prev button in the e-tax screen to step back through the interview. Change your answers and then complete the interview. e-tax will re-calculate your baby bonus for you.

You may want to work through the calculation if:

•	you are considering transferring your eligibility for the baby bonus to your spouse

•	your taxable income, or that of your spouse, has been adjusted (because you have changed the information on the income tax return)

•	you want to work out how much baby bonus you will get.

If you want to know how e-tax calculates your baby bonus, you can read How e-tax calculates your baby bonus.


Item 9 Total reportable fringe benefits amounts
	Total reportable fringe benefits amounts
This topic covers:

Who does this item apply to?

You need to know

What you need

WHO DOES THIS ITEM APPLY TO?

You must complete this item if you have a reportable fringe benefits amount shown on a PAYG payment summary – individual non business.

YOU NEED TO KNOW

You need to complete this item if you and/or an associate received certain fringe benefits and any payment summaries provided by your employer showed a reportable fringe benefits amount.

Your employer has to keep records of the value of any fringe benefits given to you and/or your associate, but only needs to show the fringe benefits on your payment summary if their value exceeds $1,000 in the fringe benefits tax (FBT) year 1 April 2006 to 31 March 2007.

Additionally, for tax return purposes your employer has to gross-up the taxable value of the fringe benefits to ensure their value is comparable with other forms of income on your payment summary. As you do not pay income tax on fringe benefits, the grossed-up taxable value of a benefit reflects the gross salary you would have to earn to purchase the benefit from after-tax dollars. The highest marginal rate of income tax plus Medicare levy is used to gross up your fringe benefit amount, so that a fringe benefit having a taxable value of $1,001.01 becomes a reportable fringe benefits amount of $1,869.

If your payment summary shows a reportable fringe benefits amount of less than $1,869 you will need to check with your employer about the amount or the method of calculating the amount.

The total amount of reportable fringe benefits that you show on your tax return is not included in your total income or loss amount and you do not pay income tax or Medicare levy on it.

However, it will be used in determining your entitlement to or liability for:

•	Medicare levy surcharge

•	deductions for superannuation contributions

•	superannuation contributions tax offset

•	Super Co-contributions

•	mature age worker tax offset

•	Higher Education Loan Programme repayments

•	Student Financial Supplement Scheme repayments

•	child support obligations

•	certain government benefits.

NOTE:
You can also find more information in the fact sheet Reportable fringe benefits – facts for employees (NAT 2836)

WHAT YOU NEED

•	your PAYG payment summary – individual non business


Do I need to include my HECS or SFSS debt in e-tax?
Do I need to include my HELP or SFSS debt in e-tax?

If you have a HELP debt, or if you have a Financial Supplement debt under the Student Financial Supplement Scheme (SFSS) and want e-tax to calculate your compulsory repayment amount and include it in your tax estimate you will need to provide your HELP or SFSS information. If you do not provide your HELP or SFSS information, please be aware that the estimate of your expected refund or debt will not be accurate.


Dealing with the Australian Taxation Office
Dealing with the Tax Office

It is important that you are aware of both your rights and your obligations when dealing with the Tax Office.

When we make a decision about your tax affairs, we will tell you about your rights and obligations in relation to that decision. We will give you contact details in case you have any queries or need more information.

We also have a charter which sets out the way we conduct ourselves when dealing with you. There is information under ‘Your rights’ on our website at www.ato.gov.au or to find out how to get a printed copy of the Taxpayers’ Charter – what you need to know (NAT 2548), see Your helplines for further information.


Paying your tax debt

This topic covers:

How do you know how much you have to pay?

When do you pay your tax debt?

Where do you pay your tax debt?

What if you cannot pay your tax debt on time?

What if payment will cause you serious hardship?

HOW DO YOU KNOW HOW MUCH YOU HAVE TO PAY?

Your notice of assessment will tell you how much tax you have to pay, if any, and when you must pay to avoid being charged general interest charge (GIC) for late payment.

WHEN DO YOU PAY YOUR TAX DEBT?

You must lodge your income tax return by 31 October 2007, unless you have been given a deferral of time to lodge, or your tax return is being prepared by a registered tax agent. If you did not go to a tax agent last year but intend to do so this year – or you will be going to a different tax agent this year – make sure you contact them before 31 October 2007.

•	If you lodge your tax return on time, any tax payable will be due the later of the following:

o	21 days after you receive your notice of assessment, or

o	21 days after your tax return was due to be lodged.

•	If you prepare your own tax return and lodge it is lodged by 31 October 2007, any tax payable will be due no earlier than 21 November 2007.

•	If you have contacted the Tax Office and been given a deferral of time to lodge your tax return, any tax payable will be due no earlier than 21 days after the deferred date for lodgment.

If you do not lodge your tax return on time, the law treats any tax payable as being due for payment 21 days after your tax return was due for lodgment, irrespective of the date you lodged it or are advised of the debt.

General interest charge (GIC) will accrue on any amount that is not paid by the due date for payment.

WHAT IF YOUR TAX DEBT IS INCREASED BECAUSE YOUR ASSESSMENT IS AMENDED?

Where your assessment is amended and the tax payable increased, the due date for payment of the additional tax is 21 days after the Commissioner gives your notice of amended assessment to you.

You will also be liable to pay a shortfall interest charge (SIC) from the due date of your original assessment to the day before the issue of the notice of amended assessment. Where your original assessment did not have a due date because there was no tax payable the SIC is calculated from the day tax would have been payable if there had been any tax due. The SIC will also be due 21 days after the Commissioner gives your notice of amended assessment to you. GIC will continue to apply to any unpaid amount of the amended assessment and the SIC after the due date for the amended assessment.

WHERE DO YOU PAY YOUR TAX DEBT?

We do not accept payments over the counter at Tax Office shopfronts.  Information about payment options is on the back of your notice of assessment. If you need more information, phone 1800 815 886 (8.00am to 6.00pm Australian Eastern Standard or daylight-saving time).

The Tax Office does not accept payment by credit card.

DO YOU HAVE TO PAY YOUR TAX IF YOU DON’T AGREE WITH THE ASSESSMENT?

You must pay your tax on time even if you have lodged an objection or asked for an amendment. If the objection is decided in your favour, you will normally receive a refund of the amount you have overpaid plus interest.

WHAT IF YOU CANNOT PAY YOUR TAX DEBT ON TIME?

If you cannot pay your tax debt on time, contact us immediately on 13 11 42 to discuss your situation. Depending on your circumstances, you may be able to:

•	defer the payment, or

•	enter into an arrangement to pay by instalments.

In some circumstances you will need to provide written details of your financial position, including a statement of your assets and liabilities and details of your income and expenditure.

We also need to understand what steps you have taken to obtain funds to pay your debt and what steps you are taking to make sure you pay future tax debts on time.

If we agree to defer the time for payment, GIC will not apply until after the deferred date for payment. Alternatively, if we allow you to pay by instalments, we will charge you GIC on the outstanding balance from the original due date.

You can claim any interest we charge as a tax deduction in the income year in which it is incurred. In addition you can request a remission of all or part of the interest.  Phone us on 13 11 42 if you would like to request a remission.

WHAT IF PAYMENT WILL CAUSE YOU HARDSHIP?

Serious hardship is when you are unable to provide food, accommodation, clothing, medical treatment, education or other necessities for yourself, your family or other people for whom you are responsible. If you are suffering from hardship, you can apply for a release from payment of your tax debt. For more information and an application form, phone us on 13 11 42.

NOTE:
For all other general account enquiries phone the Personal Tax Infoline.


Your notice of assessment

This topic covers:

What is your notice of assessment?

Family tax benefit (FTB) and your notice of assessment

How long do you have to wait for your notice of assessment?

Can you get your refund faster?

What if you think your assessment is wrong?

What if you still think your assessment is wrong?

WHAT IS YOUR NOTICE OF ASSESSMENT?

The notice of assessment the Tax Office sends to you is an itemised account of the amount of tax you owe on your taxable income based on the information provided on your tax return. It also contains other details that are not part of the assessment such as the amount of credit for tax you have already paid through the income year.

When you receive your notice of assessment check it to make sure that everything appears correct.

For more information about the items on your notice of assessment, visit www.ato.gov.au or phone the Personal Tax Infoline

Unless you are using electronic funds transfer, the bottom section of your notice of assessment will be either your refund cheque or, if you owe tax, your payment advice.

Note that if you have any other outstanding tax debts, child support or Centrelink debts or family tax benefit debts, these may be deducted from any refund you are entitled to. If this happens, we will give you the relevant details.

NOTE:

You should receive your notice of assessment within six weeks of the date you lodged your tax return if you posted it. If you lodged an e-tax return over the internet our standard processing time is two weeks. However, under the law the Tax Office has some time during which we can review your tax return. During this time, we may increase or decrease the amount of tax payable (or refundable) as shown on your initial notice of assessment.

This review period is normally two years but in certain circumstances it can be extended to four years (see Self-assessment – it's your responsibility).

FAMILY TAX BENEFIT (FTB) AND YOUR NOTICE OF ASSESSMENT

If you lodged an FTB tax claim with your tax return your notice of assessment will include information about your FTB entitlement. If the Family Assistance Office (FAO) was unable to process your entitlement in time, it will be indicated on your notice of assessment. If you have a tax debt your FTB entitlement may be used towards paying that debt. If you have an FAO debt (which includes FTB and child care benefit debts), your tax refund (including FTB entitlement)may be used towards paying that debt.

If you received FTB directly from the FAO – for example, as a fortnightly payment – your notice of assessment may include information about your reconciliation result.

Reconciliation

When your actual family income is known the FAO will make sure you have been paid the correct amount of FTB. If you and your spouse (if you have one) are required to lodge a tax return the Tax Office will send your actual income details to the FAO for calculation of your correct FTB entitlement. The FAO will compare the amount of FTB you received throughout the year, with the amount you are entitled to, based on your and your spouse’s actual income. If your spouse (if you have one) is not required to lodge a tax return, you need to advise the FAO.

If you were paid less FTB than you are entitled to, your FTB payment may be topped up. The top-up will be included in your assessment or, if that is not possible, the FAO will pay it to you directly. Your top-up may be used to pay any tax debit you have.

If you have been paid too much FTB, the FAO will recover any amount you should not have received. At reconciliation, the FAO may also recover any debt you may have from an overpayment in respect of a previous year. Your tax refund – or spouse’s if they gave consent – can be used to recover these amounts directly.

If you received FTB directly from the FAO – for example, as a fortnightly payment – and your notice of assessment does not show an FTB reconciliation result, do not be concerned. The reason may be that the FAO was unable to reconcile your FTB payment by the time we issued your notice of assessment. If you have an FTB overpayment or are entitled to a top up the FAO will contact you directly.

NOTE:
The FAO will determine your final entitlement to FTB. If this payment is not shown on your notice of assessment, the FAO will pay you at a later time.

If you are unsure about an FTB amount or message that appears on your notice of assessment, visit the FAO or phone 13 61 50.

Child Support Agency

If you have outstanding liabilities to the Child Support Agency (CSA), your tax refund can be used to meet them; in certain circumstances your FTB entitlement can also be used.

HOW LONG DO YOU HAVE TO WAIT FOR YOUR NOTICE OF ASSESSMENT?

Our current standard for processing tax returns posted to the Tax Office is six weeks. If you lodged your tax return online e-tax, our standard processing time is two weeks.

However, if you receive an FTB payment from the FAO, or you claimed it from the Tax Office, your e-tax return may take longer to process. This additional time is necessary to make sure that you are paid the correct amount of FTB.

If you sent your tax return by ordinary post, wait seven weeks before phoning to check on our progress with your tax return. If you lodged online using e-tax, wait three weeks.

After that time you can use the automated self-help service on 13 28 65 (available 24 hours a day, every day) to check the progress of your tax return. You will need to key in your tax file number (TFN) using your phone keypad.

CAN YOU GET YOUR REFUND FASTER?

We may be able to help you get a quicker refund if you have serious financial hardship. Serious financial hardship means you are unable to provide food, accommodation, clothing, medical treatment, education or other necessities for you, your family or other people for whom you are responsible.

Phone the Personal Tax Infoline before you lodge your tax return, to find out if you are eligible for this faster service. Have on hand your tax return, TFN, pension or benefit statement, payment summaries, and other papers that show you are in serious financial hardship.

WHAT IF YOU THINK YOUR ASSESSMENT IS WRONG?

Check all the details from your notice of assessment with those in your tax return. If you think there is a problem, phone the Personal Tax Infoline for help. You will need your notice of assessment and, if possible, a copy of your tax return.

WHAT IF YOU STILL THINK YOUR ASSESSMENT IS WRONG?

You can write to the Tax Office and object to your assessment. If you want to object to your assessment, see the fact sheet on how to lodge an objection on our website www.ato.gov.au or to find out how to get a printed copy, see Getting publications from the Tax Office.

Generally, you must lodge your objection within the two-year for four-year amendment period, whichever applies to you.  For more information visit www.ato.gov.au


Privacy and access

This topic covers:

Collecting your tax information

Who else can we give your tax information to?

Reserve Bank of Australia

Child Support Agency clients

How do we protect your tax information?

Asking about your assessment

Who can ask you for your tax file number (TFN)?

Australian Business Register

Do you need more information?

Freedom of information

COLLECTING YOUR TAX INFORMATION

The Tax Office is authorised by the Taxation Administration Act 1953 to request you to quote your tax file number (TFN). It is not an offence not to quote your TFN. However, your assessment may be delayed if you do not quote your TFN.

The Tax Office is also authorised by the Income Tax Assessment Act 1936, the Income Tax Assessment Act 1997 and the A New Tax System (Family Assistance) (Administration) Act 1999 to ask for the other information on your tax return. We need this information to help us to administer the tax laws.

WHO ELSE CAN WE GIVE YOUR TAX INFORMATION TO?

We can give your tax information to some government agencies specified in tax law, for example:

•	benefit payment agencies such as Centrelink, the Department of Education, Science and Training, and the Department of Families, Community Services and Indigenous Affairs

•	law enforcement agencies such as state and federal police

•	other agencies such as the Child Support Agency (CSA) and the Australian Bureau of Statistics.

This disclosure is usually to check eligibility for government benefits, for law enforcement purposes or for collecting statistics. Any further use of your information by these agencies is also controlled by law. We can also disclose your information in performing our duties under the tax laws.

Otherwise, we can give your tax information only to you or to someone you have appointed to act for you.

RESERVE BANK OF AUSTRALIA

If you receive a refund cheque with your notice of assessment, we provide details of your refund to the Reserve Bank of Australia to assist in clearing your cheque.

WHAT ABOUT CHILD SUPPORT AGENCY (CSA) CLIENTS?

The CSA may use the information you give us to assess or collect child support.

HOW DO WE PROTECT YOUR TAX INFORMATION?

The tax laws contain secrecy provisions that prohibit any officer of the Tax Office (including employees and contractors) or any other government agency from improperly accessing, recording or disclosing anyone's tax information. These provisions allow officers to disclose information in performing their duties and in certain other specified circumstances. A person can be fined up to $11,000 and sentenced to two years in prison for breaking these provisions.

In addition, the Privacy Act 1988 protects personal information held by federal government agencies. It also protects tax file numbers (TFNs), no matter who holds them.

ASKING ABOUT YOUR ASSESSMENT

If you phone

When you phone we will ask you to provide your TFN and other information to confirm your identity – for example, details from a recent notice of assessment.

If you want a representative to phone us on your behalf, you must first authorise us, in writing, to discuss your information with them. When the person contacts us, they will need to quote your written authority and provide information to prove their identity.

This requirement is to protect your privacy.

If you write

Quote your TFN, your full name and your address. Provide your phone number if it is convenient. Remember to sign the letter.

WHO CAN ASK YOU FOR YOUR TFN?

Only certain people and organisations can ask you for your TFN. These include employers, some federal government agencies, trustees for superannuation funds, payers under the pay as you go (PAYG) system, higher education institutions, the CSA and investment bodies such as banks. You do not have to give your TFN but there may be consequences if you do not – for example, if you are applying for a government benefit and you do not give your TFN, you may not be paid the benefit.

AUSTRALIAN BUSINESS REGISTER

We are authorised by the A new Tax System (Australian Business Number) Act 1999 to collect certain information relating to your business. We may use the business details you provided on your tax return to update your trading name, industry classification, status of business, fund wind-up date, public officer (if a company) and main business address on the Australian Business Register (ABR).  Note that you must advise the Registrar of the ABR within 28 days of any changes to your registered details including your current postal address for the ABR.  We may also use the postal address details from your income tax return if we cannot contact you through your ABR postal address.

To help business and government interact more easily under certain circumstances, the Registrar may disclose information provided by the entity to other Commonwealth state, territory and local government agencies.

You can find details of the government agencies regularly receiving information from the Australian Business Register (ABR) on the internet at www.abr.gov.au or you can phone 13 28 66 between 8.00am and 8.00pm Monday to Friday and ask for a list of agencies to be emailed, faxed or posted to you.

These agencies may use ABR information for purpose authorised by their legislation or for carrying out their other functions, Examples of possible uses include registration, reporting, compliance, validation and updating of database.

The Registrar of the ABR requires all government agencies to detail their specific use of ABR information and sign a memorandum of understanding (MOU) before they can access ABR information or interact with the ABR.  The MOU sets out a common understanding between parties and ensures the Registrar has considered the appropriate use of ABR information under the A New Tax System (Australian Business Number) Act 1999.

In addition to the publicly available information, these agencies can also access the:

•	name of the entity’s associates, such as public officer, director or trustee

•	entity’s address for service of notices

•	entity’s principal place of business

•	entity’s email address, and

•	Australian and New Zealand Standard Industrial Classification (ANZSIC) code for the business conducted by the entity

DO YOU NEED MORE INFORMATION?

If you need more information about how the tax laws protect your personal information, or have any concerns about how the Tax Office has handled your personal information, phone the Personal Tax Infoline.

If you are unable to resolve your concerns with us about how we have handled your personal information, you can contact the Office of the Privacy Commissioner by visiting their website at www.privacy.gov.au or by phoning their privacy hotline on 1300 363 992.

FREEDOM OF INFORMATION

The Freedom of Information Act 1982 (FOA Act) gives you the right to see your tax return and other documents – for example, payment summaries and notices of assessment. In some circumstances this information may be provided free of charge, but usually there is a charge to cover the time and expense involved in getting the information for you. We suggest you phone the Personal Tax Infoline before you ask for information under the FOI Act.

Keep copies of your tax returns, as a request for a copy from us may involve a charge.


Your right to complain

If you are dissatisfied with a particular decision the Tax Office has made, or with one of our services or actions, you have the right to complain.

We recommend that you first try to resolve the issue with the tax officer you have been dealing with (or phone the number you have been given).

•	If you are not satisfied, talk to the tax officer’s manager.

•	If you are still not satisfied, phone our complaints line 13 28 70.

You can also make a complaint by:

•	writing to the Complaints, Australian Taxation Office, Locked Bag 40, Dandenong VIC 3175

•	lodging online at www.ato.gov.au

•	sending a FREEFAX on 1800 060 063.

THE COMMONWEALTH OMBUDSMAN

If you are not satisfied with the Tax Office’s decisions or actions, you can raise the matter with the Commonwealth Ombudsman. Before looking into a matter for you, the Commonwealth Ombudsman may ask you to go to the Tax Office’s complaints area if you have not already done so.

The Commonwealth Ombudsman’s office can investigate most complaints relating to tax administration and may recommend that the Tax Office provides a solution or remedy to your problem. Investigations are independent, private, informal and free of charge.

You can contact the Commonwealth Ombudsman’s office by:

•	phoning the National Complaints Line 1300 362 072

•	visiting the office nearest you (there are offices in all Australian capital cities)

•	visiting their website at www.ombudsman.gov.au

•	writing to The Commonwealth Ombudsman, GPO Box 442, Canberra ACT 2601

THE PRIVACY COMMISSIONER

The Privacy Commissioner receives complaints under the Privacy Act 1988 and tax file number guidelines. You can contact the Privacy Commissioner by:

•	visiting their website at www.privacy.gov.au

•	phoning the privacy hotline on 1300 363 992

•	writing to the Privacy Commissioner, GPO Box 5218, Sydney NSW 2001.


Do you have to lodge a tax return?

There are a number of reasons you may have to lodge a tax return for the 2006-07 income year (1 July 2006 to 30 June 2007). e-tax will ask a series of questions to see if you do or do not need to lodge. Each question presents a reason listed below why you may have to lodge a tax return. The e-tax screen also provides links (blue text) to further reading. Click on these links if you need more information to answer the question, then click on the More button to return to this topic.

NOTE:
You can use the Do I need to lodge a tax return? tool on our website to find out if you have to lodge a tax return for the 2006-07 income year

REASON 1	YOU PAID TAX DURING 2006-07

You need to lodge a tax return if you were an Australian resident for tax purposes and you:

•	had amounts of tax withheld from income you received or earned OR

•	paid an amount under the pay as you go (PAYG) instalment system during the year OR

•	had amounts withheld from interest, because you did not quote your tax file number (TFN) or Australian business number (ABN) to the investment body.

REASON 2	YOU WERE ELIGIBLE FOR THE SENIOR AUSTRALIAN TAX OFFSET – YOU MUST MEET ALL FOUR CONDITIONS GIVEN IN ELIGIBILITY FOR THE SENIOR AUSTRALIANS TAX OFFSET.

You need to lodge a tax return if your taxable income (not including your spouse) was more than the following relevant amount:

•	if you were single, widowed or separated at any time during the year – $24,867

•	if you had a spouse but one of you lived in a nursing home or you had to live apart due to illness – $23,600

•	if you lived with your spouse for the full year – $20,680.

REASON 3	YOU RECEIVED AN AUSTRALIAN GOVERNMENT PENSION, ALLOWANCE OR PAYMENT BUT YOU ARE NOT ELIGIBLE FOR THE SENIOR AUSTRALIAN TAX OFFSET.

You need to lodge a tax return if any of the following applied to you:

•	You received an allowance or payment listed at item 5 and you had other non exempt income which together made your taxable income more than $10,000.

•	You received a pension, allowance or payment listed at item 6 AND your taxable income was more than the following relevant amount:

o	$21,637 - if you were single, widowed, or separated at any time during the year –

o	$20,710 - if you had a spouse but one of you lived in a nursing home or had to live apart due to illness

o	$18,330 - if you lived with your spouse for the full year

REASON 4	YOU WERE NOT ELIGIBLE FOR THE SENIOR AUSTRALIANS TAX OFFSET AND YOU DID NOT RECEIVE AN AUSTRALIAN GOVERNMENT PENSION, ALLOWANCE OR PAYMENT LISTED AT ITEM 5 OR 6 BUT YOU RECEIVED OR EARNED INCOME.

You need to lodge a tax return if your taxable income exceeded the following amounts:

$6,000	if you were an Australian resident for tax purposes for the full year
$1,333	if you were under 18 years of age at 30 June 2007 and your income was not salary or wages
$1	if you were a non-resident and you had income taxable in Australia – excluding income that has non-resident withholding tax withheld from it
Part-year tax-free threshold amount	If you became or stopped being an Australian resident for tax purposes, you will have a part-year tax-free threshold which determines whether you have to lodge a tax return. See also: How to work out your part-year tax-free threshold amount
OTHER REASONS

You need to lodge a tax return if any of the following applied to you:

•	You are the liable parent under a child support assessment.

•	You have a reportable fringe benefits amount on your PAYG payment summary – individual non business.

•	You are entitled to a private health insurance tax offset.

•	You carried on a business.

•	You made a loss, or you can claim a loss you made in a previous year.

•	You were entitled to a distribution from a trust, or you had an interest in a partnership AND the trust or partnership carried on a business of primary production.

•	You were an Australian resident for tax purposes and you had exempt foreign employment income and $1 or more of other income.

•	You are a special professional covered by the income averaging provisions. These provisions apply to authors of literary, dramatic, musical or artistic works, inventors, performing artists, production associates and active sportspeople.

•	You made personal contributions to a complying superannuation fund or retirement savings account and will be eligible to receive a Super Co-contribution in relation to those contributions.

•	You received income from dividends or distributions exceeding $6,000 (or $416 if you were under 18 years of age at 30 June 2007) AND you had franking credits attached or amounts withheld because you did not quote your tax file number or Australian business number to the investment body.

IF YOU DO NOT HAVE TO LODGE A TAX RETURN

If none of the above reasons apply to you, you do not have to lodge a full tax return, but you may be entitled to claim for one or more of the following.

If you want to claim a refund of franking credits you can obtain the publication Refund of franking credits instructions and application for individuals 2007 (NAT 4105-6.2007) from our website www.ato.gov.au or from our publications number, and

•	mail the form to the Tax Office, or

•	lodge by telephone – the instructions will tell you how

If you want to claim the baby bonus you have two choices:

•	you can access the online baby bonus claim form OR

•	you can obtain the publication Baby bonus instructions and claim 2007 (NAT 6580-6.2007) from our website www.ato.gov.au or from our publications number and mail your claim to the Tax Office.

NOTE:
If you want to claim BOTH the refund of franking credits and baby bonus you will need to use the paper claim forms and lodge both claims in the one envelope.

If you received a letter from the Family Assistance Office telling you that you have an entitlement to the 30% child care tax rebate, the rebate will not assist you directly since you have no tax to pay.  But if you had a spouse on 30 June 2007 who does have to pay tax, you are able to transfer your entitlement to that spouse.  If you want to transfer your entitlement you have two choices:

•	You can use the separate 30% child care tax rebate transfer advice application OR

•	you can obtain the publication 30% child care tax rebate instructions and transfer advice for individuals 2007 (NAT 14719-06.2007) from our website www.ato.gov.au or from our publications number and mail the transfer advice to the Tax Office.

You will be eligible for the 30% child care tax rebate if in the period 1 July 2005 to 30 June 2006 you:

•	Had a child in approved child care

•	Were entitled to receive child care benefit, and

•	Passed the work/training/study test for the purposes of the rebate

Deceased estate

If you are looking after the estate of someone who died during 2006-07, see Are you lodging a return for someone who died during the year?.


If you made a mistake in your tax return
If you made a mistake on your tax return

If you realise that you did not include something on your tax return that you should have, or there is some other error on your tax return, you need to correct it as soon as possible by requesting an amendment.

To request an amendment write a letter to the Tax Office.

In your letter provide your name, address, telephone number, tax file number and information about what you want to amend. Include:

•	the year shown on the tax return you want to amend – for example, 2007

•	the tax return item number and description affected by the change

•	the amount of income or deductions to be added or taken away, if relevant

•	the amount of tax offsets to be increased or decreased, if relevant

•	the claim type code – if one applies to the item you are changing

•	an explanation of why you made the mistake, and

•	a declaration as follows: ‘I declare that all the information I have given in this letter, including any attachments, is true and correct.’

•	the date, and

•	your signature.

It is very important that your letter explains why you made the mistake so that we can assess any penalty or interest charge correctly. Make sure you attach any payment summaries or additional information that applies to the item being changed. Post your letter and attachments to the Tax Office that sent your notice of assessment. Keep a copy for your records. Do not send in another tax return unless we ask you to.

We will not impose a penalty if the amendment reduces the amount of tax you have to pay – for example, where you increase your deductions or tax offsets.

If you voluntarily tell us that you made a mistake and an amendment will result in paying more tax, the amount of any penalty will, in most cases be reduced.

If you made a mistake because we stated the law incorrectly in e-tax, we won’t charge you a penalty or interest, or ask you to pay the extra tax.

If any other information in e-tax is incorrect and as a result you do not pay enough tax, we may ask you to pay the extra tax. However, we will not charge you any penalty or interest.

If our advice in e-tax 2007 is misleading and you make a mistake as a result, we must still apply the law correctly. If that means you owe us money, we must ask you to pay it.  However, we will not charge you a penalty or interest if you acted reasonably and in good faith.

If you have used e-tax properly as explained on the screens and help file, and have made an honest mistake and you owe us money as a result, we will not charge you a penalty. However, we will ask you to pay the money, and we may also charge you interest.

If correcting the mistake means we owe you money, we will pay it to you. We will also pay you any interest you are entitled to.

IS THERE ANY TIME LIMIT FOR YOU TO REQUEST AN AMENDMENT?

If you are eligible for a two-year amended period, you must lodge your request for an amendment within two years of the date the Commissioner issued your notice of assessment. If a four-year amendment period applies to you, you must lodge your request for an amendment within four years.

Example of a letter requesting an amendment

For the example, Riley would send his letter and attachment to the Tax Office that sent his notice of assessment.

Riley Finn

3 Wood S
Collingville 1234

Tax file number: 123 456 789

Phone: (01) 2345 6789

Dear Deputy Commissioner of Taxation

Please amend my 2007 tax return. My employer sent me a letter advising me that my payment summary was incorrect. Please increase my income at item 1 by $1,450 and also increase my tax withheld by $368. A copy of the letter is attached.

I declare that all the information I have given in this letter, including any attachments, is true and correct.

Riley Finn
20 September 2007


How secure is my return when I lodge it over the internet?

The e-tax lodgment process uses encryption (including 128 bit SSL) to secure your communication with the Tax Office.


Item 5 Australian government allowances and payments
	Australian Government allowances and payments
This topic covers:

Who does this item apply to?

What you may need

Do not show at this item

Further information

Beneficiary tax offset

Record keeping

Pre-filling your government payment details

WHO DOES THIS ITEM APPLY TO?

Complete this item if you received:

•	Parenting payment (partnered)

•	Newstart allowance

•	Youth allowance

•	Mature age allowance

•	Partner allowance

•	Sickness allowance

•	Special benefit

•	Widow allowance

•	Austudy payment

•	Exceptional circumstances relief payment or farm help income support

•	Interim income support payment

•	Cyclone Larry or cyclone Monica income support payment

•	Education payment of any of the following and you were aged 16 years or older:

o	ABSTUDY living allowance

o	payment under the Veterans’ Children Education Scheme

o	payment under the Military Rehabilitation and Compensation Act Education and Training Scheme 2004 – shown as ‘MRCA Education Allowance’ on your PAYG payment summary – individual non business

•	Training for Employment Program allowance; New Enterprise Incentive Scheme allowance; textile, clothing and footwear special allowance; Green Corps training allowance; or other taxable Commonwealth education or training payments

•	Income support component from a Community Development Employment Project (CDEP) – shown as ‘CDEP Salary or Wages’ on your PAYG payment summary – individual non business

•	CDEP scheme participant supplement.

Show your income from these payments here unless your payment was exempt. Check exempt income if you are not sure.

NOTE:
Interim income support payments and Cyclone Larry or Cyclone Monica income support payments are not reported as separate amounts on Centrelink PAYG payment summaries, but are included in the total amount reported for emergency and general assistance payments. If you received these payments you will need a letter from Centrelink notifying you of the amount you have received. Show these amounts at this item in order to get the correct tax offset.

Show the balance of the amount for emergency and general assistance payments shown on your centrelink PAYG payment summary at item 22.

WHAT YOU MAY NEED

•	your PAYG Payment summary – individual non-business or

•	a letter from the agency that paid your allowance or payment stating the amount that you received.

If you have not received these, or you have lost them, contact the agency that paid you.

DO NOT SHOW AT THIS ITEM

Do not show any of these payments at this item:

•	Overseas Student Higher Education Loan Programme amounts from your higher education provider here – these payments should not be included anywhere on your tax return.

•	emergency and general assistance payment - these payments are shown at item 22.

•	Exempt payments

FURTHER INFORMATION

Beneficiary tax offset

You may be entitled to a tax offset on this income

Tax offsets reduce the amount of tax you have to pay

If you received one or more of the payments listed above, you may be entitled to a beneficiary tax offset. You do not have to work out your tax offset. We work it out for you from the answers you give at this item. If you want to see how we work out your beneficiary tax offset, read How to work out your beneficiary tax offset or you can use the beneficiary tax offset calculator on our website.

RECORD KEEPING

Attach your letter and/or your ‘Payees Tax Return Copy’ of your payment summary to page 3 of the printed copy of your tax return.


Total tax offsets

e-tax will add up all the tax offset amounts at items T1 to T15 and write the total amount at TOTAL TAX OFFSETS on your tax return. If you do not have any tax offset, e-tax will write 0 (zero).

TAX OFFSET FOR LOW INCOME TAXPAYERS

If you are an Australian resident for tax purposes and your taxable income is less than $27,475, you may get a tax offset.

The maximum tax offset of $600 applies if your taxable income is $25,000 or less. This amount is reduced by four cents for each dollar over $40,000.

We will work out your tax offset and make sure it comes off your tax. The tax offset will be shown on your notice of assessment. e-tax will not write anything about this tax offset on your tax return.


Tax file number
Your tax file number (TFN)

Privacy – Tax Office is authorised by the Taxation Administration Act 1953 to request you to quote your tax file number (TFN).  It is not an offence not to provide a tax file number (TFN). However, for technical reasons it is not possible for a return to be lodged electronically without a TFN. If you do not have, or you do not wish to provide a TFN, you will need to lodge your return on paper. However, your assessment may be delayed if you do not quote your TFN.

If you already have a tax file number (TFN), it will be shown on your last notice of assessment or the payment summary you received from your employer or other payer. If you cannot find your TFN, phone the Personal Tax Infoline. You will need to provide personal information to confirm your identity.

When you call, to confirm your identity you will need to quote your full name as well as some other personal details which may include:

•	your date of birth;

•	your current postal address;

•	your bank account details (as used for EFT in previous tax returns);

•	details from a Tax Office notice; or

•	details from a previous tax return.

When we have confirmed your identity, request the following information from your most recent notice of assessment (issued before 2 June 2007):

•	Your Tax File Number (if you cannot locate it);

•	Your full name (exactly as it appears on your notice of assessment);

•	Date of issue; and

•	Sequence number

If you have changed your postal address and you want to find out your TFN, you can advise your new address details by telephone if you can provide information that confirms your identity. If you are unable to confirm your identity, write to us with your request and your new address. We will then post your TFN to you.

If you do not have a TFN, and you are a permanent migrant or temporary visitor to Australia and have a visa that allows work rights, a visa that allows permanent migration, a valid overseas student visa or a valid visa to stay in Australia indefinitely, you may apply for a TFN online by visiting  the Tax Office website at www.ato.gov.au and selecting ‘For individuals’-‘Apply for tax file number’- ‘Online individual tax file number (TFN) registration (NAT 4153)’

If you do not have a TFN and you are not a permanent migrant or temporary visitor to Australia with a visa that allows work rights, you will need to complete the form a Tax file number application or enquiry (NAT 1432-12.2005) by:

•	 phoning the Personal Tax Infoline

•	Visit the Tax Office website at www.ato.gov.au and selecting ‘Forms& Services’-‘Online ordering’

•	Visiting a Tax Office shopfront.

You will need to provide original, unaltered documents that prove your identity with the application. You will find a list of acceptable proof-of-identity documents on the application.

From 1 July 2007, it has become more important to quote your TFN for taxation and superannuation purposes. To get the full benefit of the new superannuation rules, make sure all your superannuation funds have your TFN.

See also:

Starting a new tax return

Opening an existing tax return


Family tax benefit (FTB) tax claim
	Family tax benefit tax claim
We have provided an information section in e-tax help so that you can decide:

•	if you are eligible for FTB and

•	if you are eligible, whether you should claim your FTB entitlement as a direct payment through the Family Assistance Office (FAO) or through the tax system.

If you decide to claim your FTB entitlement through the tax system, you must complete an FTB tax claim.

The e-tax FTB tax claim is a separate program module. Before you can access the tax claim, the program and related help files must be downloaded from the e-tax website www.ato.gov.au/etax.

The Family tax benefit (FTB) on-line documentation provides instructions on how to complete the family tax benefit claim in e-tax.


Higher Education Loan Programme (HELP)

You do not have to provide HELP information on your 2006-07 tax return. e-tax asks for your HELP assessment details so that your compulsory repayment amount can be included in your tax estimate. Only one compulsory HELP repayment will be calculated in this estimate based on your accumulated HELP debt.

If you had a HECS debt, it became part of your accumulated HELP debt on 1 June 2006.

Your HELP debt may include HECS-HELP, FEE-HELP and OS-HELP debts incurred in 2006.

e-tax requires the following information to work out your accumulated HELP debt:

•	Accumulated HELP debt shown on your HELP information statement.

•	HELP debts for the second half of 2006 shown on your Commonwealth Assistance Notice (CAN) that do not appear on your HELP information statement issued in June 2007.

•	Voluntary repayments you have made to the Tax Office after 31 May 2007. Include bonuses on these payments. Individual voluntary repayments of $500 or more attract a 10% bonus on the payment. For example, if you paid $600 you would receive a $60 bonus (600 X 0.10 = 60). These payments and bonuses will not appear on your HELP information statement issued 1 June 2007.

•	HELP compulsory repayment advised by the Tax Office after 31 May 2007. These amounts are shown at label X on any income tax notice of assessment issued after 31 May 2007. If the notice is an amended notice – that is, it amends the compulsory repayment shown on your HELP information statement issued after 31 May 2007 – only enter the increase or decrease in the compulsory repayment as advised on the amendment notice. Enter a decrease as a negative amount.

If you want to know how e-tax works out your HELP compulsory repayment amount, read How to work out your HELP repayment amount.

For more information about repaying your HELP debt, refer to the publication Repaying your HELP debts 2006-07 (NAT 3913-06.2006).


HECS repayments and the new Higher Education Loan Programme t
An explanation of your higher education loan programme  (HELP) statement

NAT 11075


Student Financial Supplement Scheme (SFSS)

You do not have to provide Financial Supplement (FS) information on your 2006-07 tax return. e-tax asks for your FS assessment details so that your compulsory repayment amount can be included in your tax estimate. Only one compulsory FS repayment will be calculated in this estimate based on your accumulated FS debt.

e-tax requires the following information to work out your accumulated FS debt:

•	Accumulated FS debt shown on your SFSS information statement.

•	Debt shown on your statement issued by Centrelink on 1 June 2007 for loans taken out in 2002 only. This amount does not appear in your SFSS information statement issued 1 June 2007.

•	FS voluntary repayments made to the Tax Office after 31 May 2007.

•	FS assessment debt advised by the Tax Office after 31 May 2007. These amounts are shown at label R on any income tax notice of assessment issued after 31 May 2007. If the notice is an amended notice – that is, it amends the FS assessment debt shown on your SFSS information statement issued after 31 May 2007 – only enter the increase or decrease in the assessment debt as advised on the amendment notice. Enter a decrease as a negative amount.

If you want to know how e-tax works out your FS compulsory repayment amount, read How to work out your Financial Supplement repayment amount.

For more information on repaying your FS debt, refer to Repaying your Financial Supplement loan 2006-07 (NAT 2789-06.2007).


SFSS information statements
An explanation of your Student Financial Supplement Scheme (SFSS) statement

NAT 13248


Item M2 Medicare levy surcharge (MLS)
	Medicare levy surcharge
THIS ITEM IS COMPULSORY FOR ALL TAXPAYERS

This topic covers:

Who does this item apply to?

You need to know.

What you may need

Further information

e-tax has directed you to manually work out the number of days for which you are liable for the Medicare levy surcharge

Do you want to work out your surcharge?

WHO DOES THIS ITEM APPLY TO?

ALL taxpayers must answer the following question. If you do not answer this question in the e-tax interview, you will not be able to lodge your return electronically.

For the definitions of private patient hospital cover, dependants, family, taxable income for Medicare levy surcharge (MLS) purposes and other relevant terms refer to Explanation of terms.

For the whole of 2006-07 did you and all your dependants (this includes your spouse even if they have their own income) – if you had any – have private patient hospital cover?

If you answer Yes, e-tax will print an X in the YES box to the right of label E item M2 on your tax return. You will be asked to provide your Private health insurance policy details. If the policy – or policies – entered provided private patient hospital cover for the whole year, you do not have to pay the Medicare levy surcharge. You have completed this item.

If you answer No, you may have to pay the Medicare levy surcharge for the whole or part of the 2006-07. e-tax will ask for more details. You will not have to pay the surcharge for any of the 365 days during the year if for the whole of 2006-07 you were:

•	a single person – without a dependent child or children – with a taxable income for MLS purposes of $50,000 or less OR

•	a member of a family and the combined taxable income for MLS purposes of you and your spouse (if you had one) was $100,000 or less (plus $1,500 for each dependent child after the first, that is, for the second and subsequent child, if you had children) or less?

YOU NEED TO KNOW

NOTE:
If you change, add or remove any Income or Deduction amounts you must complete the Medicare levy surcharge section again to make sure e-tax correctly works out your liability for the Medicare levy surcharge.

Individuals and families on incomes above the MLS thresholds who do not have private patient hospital cover pay MLS for any period during 2006-07 they did not have this cover.

MLS is 1% of their taxable income. It is additional to the 1.5% Medicare levy.

Explanation of terms

For MLS purposes you will need to understand the following terms:

private patient hospital cover – is cover provided by an insurance policy issued by a registered fund for some or all hospital treatment provided in an Australian hospital or day hospital facility. However, if you take out an insurance policy for hospital cover after 24 May 2000 that contains an "annual front-end deductible" amount or excess of more than $500 in the case of a policy covering only one person and more than $1,000 for all other policies, you will not be considered to have private patient hospital cover. The same applies to an insurance policy for hospital cover with a high front-end deductible amount or excess taken out before 24 May 2000 that ceased to provide continuous cover after that date. If you made a payment to cover the shortfall in the cost of hospital treatment, other than the excess agreed in your policy, this is not a front-end deductible amount or excess. Your health fund may include details of the level of front-end deductible amount or excess that applied to your policy in the private health insurance statement that it sent you.

Your health fund statement will indicate the maximum number of days that your policy may have provided an appropriate level of private patient hospital cover at label A.

Travel insurance is not private patient hospital cover for MLS purposes. Private patient hospital cover does not include cover provided by an overseas or unregistered fund.

ancillary cover – is commonly known as ‘extras’. Ancillary cover is not private patient hospital cover. It covers items such as optical, dental, physiotherapy or chiropractic treatment.

spouse – married or de facto. If your spouse died during the year and you did not have another spouse before the end of the year, you are considered to have had a spouse until the end of 2006-07. You retain the benefit of the family surcharge threshold. If you are living separately and apart from your spouse you are treated as not being married.

DEFINITION:
Your spouse is your husband or wife to whom you are legally married, or a person who lives with you on a genuine domestic basis as your husband or wife. Under Australian law your husband or wife cannot be the same sex as you.

dependants – a dependant is an Australian resident, being:

•	your spouse – even if they worked during 2006-07 or had their own income

•	any of your children who were under 21 years of age

•	any of your children aged 21 years and older but under 25 years of age who were full-time students.

For MLS purposes you need to have contributed to your dependant's maintenance. See What is maintaining a dependant?

family – we consider you to be a member of a family during any period of 2006-07 that you contributed to the maintenance of a dependant. Any parent (including a sole parent) who contributed to the maintenance of a dependent child or children is considered to be a member of a family.

taxable income for MLS purposes – is the total of:

•	the amount shown on your tax return at TAXABLE INCOME OR LOSS

•	your total reportable fringe benefits amounts at W item 9 on your tax return

•	the amount on which family trust distribution tax has been paid which you have shown at X item A3 on your tax return

LESS

•	any post-June 1983 elements of an eligible termination payment (ETP) where the maximum tax rate is zero. If you are unsure of the tax rate, you can contact the Superannuation Infoline for assistance.

If you had any exempt foreign employment income and a taxable income of $1 or more, you need to complete this item as if the exempt income were added to your taxable income.

The taxable income of your spouse for MLS purposes is the total of:

•	your spouse's taxable income

•	your spouse's total reportable fringe benefits amounts

•	any share in the net income of a trust estate to which your spouse is presently entitled and on which the trustee of the trust is assessed under section 98 of the Income Tax Assessment Act 1936 and which has not been included in your spouse's taxable income

•	the amount on which family trust distribution tax has been paid which your spouse would have had to show as assessable income if that tax had not been paid

LESS

•	any post-June 1983 elements of an ETP where the maximum tax rate is zero. Complete an Additional Information Schedule to record this information.

A trustee is assessed under section 98 of the Income Tax Assessment Act 1936 in relation to a presently entitled beneficiary under a legal disability. A person is under a legal disability if they are:

•	under 18 years of age as at 30 June 2007

•	a bankrupt, or

•	a person who has been declared legally incapable because of a mental condition.

NOTE:
If you have shown a lump sum payment in arrears at item 19 or item 22 and you are liable to the MLS, you may be entitled to a tax offset up to the amount of the MLS you have to pay on the lump sum payment.
If you are liable for the MLS only because your spouse has shown a lump sum payment in arrears at item 19 or item 22, you may be entitled to a tax offset up to the amount of MLS you have to pay.  Using the Additional information button, include an Additional information statement in your tax return and explain that your spouse received a lump sum payment in arrears. Include your spouse’s name, address, tax file number and details. Sign and attach your schedule to the printed copy of your tax return.

When do you have to pay the Medicare levy surcharge?

You will have to pay the MLS for any period during 2006-07 that you or any of your dependants did NOT have private patient hospital cover AND you were:

•	a single person with no dependants and had a taxable income for MLS purposes greater than $50,000, or

•	a member of a family and the combined taxable income for MLS purposes of you and your spouse (if you had one for the whole of 2006-07) was above the relevant family surcharge threshold shown in the following table.

FAMILY SURCHARGE THRESHOLD

Number of dependent children	Income threshold
0-1	$100,000
2	$101,500
3	$103,000
4	$104,500
More than 4	$104,500 plus $1,500 for each additional child
NOTE:
If your spouse died during the income year and you did not have another spouse before the end of the year, we consider you to have had a spouse until the end of the income year and you retain the benefit of the family surcharge threshold.

NOTE:
If you or any of your dependants were in a Medicare levy exemption category for any period during 2006-07, this may affect whether or not you have to pay the surcharge for that period. Read What if you are exempt from the Medicare levy? below.

If you and your spouse’s combined taxable income for MLS purposes exceeded the family surcharge threshold but your own taxable income for MLS purposes did not exceed $16,740 you are not liable for the MLS for any part of the year. (This amount reflects a proposed change to the law for 2006-07 which at the time e-tax 2007 was prepared had not become law). However, your spouse may still be liable for MLS.

It is possible that both the single and family surcharge thresholds applied to you at different periods during 2006-07.

If only one of the surcharge thresholds – single or family – applied to you for the whole of 2006-07 and your taxable income or combined taxable income for MLS purposes did not exceed this relevant threshold – you are not liable for the surcharge, for any part of the year. Go to What you may need. Otherwise, read on.

If:

•	only one of the surcharge thresholds – single or family – applied to you for the whole of 2006-07 and your taxable income or combined taxable income for MLS purposes exceeded this threshold AND

•	for the whole of 2006-07 you or any of your dependants:

o	did not have private patient hospital cover AND

o	were not in one of the Medicare levy exemption category,

you will have to pay the surcharge for the whole of 2006-07. Go to What you may need. Otherwise, read on.

You will not be liable for the surcharge for any period during 2006-07 that you and all your dependants either had private patient hospital cover or were in a Medicare levy exemption category. Read on.

Which income threshold do you use if, during the year, you had a new spouse or separated from your spouse, or you became or ceased to be a sole parent?

To work out if you are liable for MLS for any period during 2006-07 that you were single – that is, you had no spouse and no dependent child or children – apply the single surcharge threshold of $50,000 to your own taxable income for MLS purposes.

To work out if you are liable for MLS for any period during 2006-07 that you had a spouse or a dependent child or children, apply the family surcharge threshold of $100,000 plus $1,500 for each dependent child after the first, to your own taxable income for MLS purposes. Example 2 may help you.

What if you are exempt from the Medicare levy?

Only read this section if you or any of your dependants were exempt or partially exempt from the Medicare levy at any time during 2006-07 – for example, you were a defence force member. For more information on the exemption categories for the Medicare levy, read Exemption categories.

If you were in an exemption category for the whole of 2006-07 and you did not have any dependants; or if you had dependants and they were also all in an exemption category and/or they all had private patient hospital cover for the whole of 2006-07, you do not have to pay the surcharge for the full year – 365 days.

If the taxable income for MLS purposes of you and your spouse – if you had one for the whole year – was above the relevant surcharge threshold, you are liable for the surcharge for any period during 2006-07 that:

•	you were not in an exemption category and did not have private patient hospital cover, or

•	one or more of your dependants were not in an exemption category and did not have private patient hospital cover.

Non-exempt dependants are any of your dependants for Medicare levy surcharge purposes who were not in a Medicare exemption category during 2006-07.

What if you had private patient hospital cover for only PART of the year?

Only read this section if you had private patient hospital cover for part of the year.

If you and your dependants – if any – were not in a Medicare levy exemption category at any time during 2006-07 and your taxable income or combined taxable income for MLS purposes was above the relevant threshold. However you must pay MLS for the number of days you or any of your dependants did not have private patient hospital cover during 2006-07.

EXAMPLE 1

Part-year private patient hospital cover

Jacinta is not married and had no dependants. In 2006-07 she had a taxable income for MLS purposes of $59,000. She was not in a Medicare levy exemption category at any time during the year.

Jacinta took out private patient hospital cover on 15 December 2006. Because Jacinta’s taxable income was above the single surcharge threshold of $50,000 and she did not have private patient hospital cover for the full year she will have to pay MLS for the part of the year that she did not have private patient hospital cover.

Jacinta will NOT have to pay the MLS for the time she had private patient hospital cover – 15 December 2006 to 30 June 2007 (198 days).

Jacinta will enter the number of days in 2006-07 that she is NOT liable for the MLS – 198 – in the e-tax screen and complete Private health insurance policy details.

EXAMPLE 2

Spouse for part of the year

Sally separated from Adrian on 12 October 2006 and stayed single. Neither Sally nor Adrian had any dependent children. Sally and Adrian were dependants of each other for Medicare levy surcharge (MLS) purposes only for the period they were together. For 2006-07, Adrian’s taxable income for MLS purposes was $45,000 and Sally’s taxable income for MLS purposes was $60,000. Sally and Adrian did not have private patient hospital cover at any time during 2006-07.

As they are considered to be a family for the period 1 July 2006 to 12 October 2006, they are each entitled to the family surcharge threshold of $100,000 for this period. For the period 1 July 2006 to 12 October 2006, Sally is not liable for the MLS as her taxable income for MLS purposes of $60,000 was under the family surcharge threshold. Adrian is also not liable for the MLS for this period as his taxable income for MLS purposes of $45,000 was also under the family surcharge threshold.

For the period 13 October 2006 to 30 June 2007 – 261 days – the single person surcharge threshold of $50,000 applies to both of them. For this period, Adrian is not liable for the MLS because he had a taxable income for MLS purposes of $45,000.

Adrian will enter 365 in the e-tax screen.

Sally is liable to pay the MLS for the period 13 October 2006 to 30 June 2007 – 261 days – because her taxable income for MLS purposes was $60,000. Sally will enter the number of days (104 days) in 2006-07 that she is NOT liable for the MLS in the e-tax screen.

EXAMPLE 3

Part-year liability

Kathy and Mark have been married for a number of years. They have three dependent children. Kathy, Mark and their children were not in a Medicare levy exemption category at any time during the year. Kathy and the children were covered by private patient hospital cover for the full income year. Mark had his name added to the policy on 10 December 2006.

Kathy and Mark had a combined taxable income for Medicare levy surcharge (MLS) purposes of $115,000. Because not everyone was covered for the full period 1 July 2006 to 9 December 2006, Kathy and Mark are both liable for the MLS for this period – 162 days.

Kathy and Mark would both enter the number of days in 2006-07 that they were not liable for the MLS – 203 – in the e-tax screen and complete Private health insurance policy details.

WHAT YOU MAY NEED:

•	your taxable income for MLS purposes

•	your spouse’s taxable income for MLS purposes, if you had a spouse for the whole of 2006-07 or your spouse died during the year. If you cannot find out your spouse’s exact taxable income for MLS purposes, you may make a reasonable estimate. Using the Additional information button, include an Additional information statement in your tax return showing your estimate of your spouse’s taxable income for MLS purposes. Sign and attach your schedule to the printed copy of your tax return.

•	the number of your dependent children during 2006-07

•	the number of days you and all your dependants had private patient hospital cover during 2006-07

•	your private health insurance policy details

•	the number of days you do NOT have to pay the MLS.

FURTHER INFORMATION

e-tax has directed you to manually work out the number of days for which you are NOT liable for the Medicare levy surcharge

If you or your dependants were in a Medicare levy exemption category for only part of the 2006-07 year or you had dependent children or students who were only your dependants for part of 2006-07, you will have to manually work out the number of days for which you are NOT liable for the Medicare levy surcharge. Work through How to calculate the number of days for which you are NOT liable for the Medicare levy surcharge to work out the number of days you are not liable for the surcharge.

Do you want to work out your surcharge?

e-tax will work out the amount of your Medicare levy surcharge based on the number of days you are liable for the surcharge. If you would like to work it out for your records, see How to work out your Medicare levy surcharge.

If you do not have to pay the Medicare levy surcharge because e-tax can work out that you satisfy all the relevant income tests or that you and all your dependants are in a Medicare exemption category at all relevant times, e-tax will display a message telling you so.

If you change, add or remove any Income or Deduction amounts you must complete the Medicare levy surcharge section again to make sure e-tax correctly works out your liability for the Medicare levy surcharge.

NOTE:
If you received any exempt foreign employment income, we use a special formula to work out the amount of tax – including MLS – you have to pay on your taxable income. You will not be able to calculate your MLS. The Tax Office will do this calculation for you.


 M2 Private patient hospital cover

Is cover provided by an insurance policy issued by a registered fund for some or all hospital treatment provided in an Australian hospital or day hospital facility. However, if you take out an insurance policy for hospital cover after 24 May 2000 that contains a high front-end deductible or excess of $500 in the case of a policy covering only one person and more than $1000 for all other policies, you will not be considered to have private patient hospital cover. The same applies to insurance policies for hospital cover with those high front-end deductibles or excess taken out before 24 May 2000 that cease to provide continuous cover after that date. If you make a payment to cover the shortfall in the cost of hospital treatment, other than the excess agreed in your policy, this is not a front-end deductible or excess. Your health fund may include details of the level of front-end deductible or excess that applies to your policy in the private health insurance statement that it sends you.

Your health fund statement will indicate the maximum number of days that your policy may have provided an appropriate level of private hospital cover at label A.

Travel insurance is not private patient hospital cover for Medicare levy surcharge (MLS) purposes. Private patient hospital cover does not include cover provided by an overseas or unregistered fund.


Item M2 How to calculate the number of days for which you are NOT liable for the Medicare levy surcharge
M2	How to calculate the number of days for which you are NOT liable for the Medicare levy surcharge

You must work out the number of days for which you are NOT liable for the Medicare levy surcharge based on the information we give you below.

If you and your dependants – if any – were not in a Medicare exemption category at any time during 2006-07, you will be liable for the surcharge for the number of days in 2006-07 you or your dependants did not have private patient hospital cover during 2006-07 while they were your dependants. Go to Part 1

If you or your dependants – if any – were in a Medicare exemption category for part of 2006-07, you will be liable for the surcharge for the number of days in 2006-07 you or your dependants were not in a Medicare exemption category and did not have private patient hospital cover during 2006-07. If you had a spouse or children who were in a Medicare exemption category and who were your dependants for only part of 2006-07, go to Part 1. Otherwise, go to Part 2.

PART 1:	IF YOU HAD DEPENDANTS FOR ONLY PART OF THE YEAR

You need to work out exactly which days in 2006-07 your spouse or your children were your dependants for the purpose of the Medicare levy surcharge.

Once you have worked out which days in 2006-07 they were your dependants, you need to know on which of those days your dependants had the required private patient hospital cover.

If you do not pass the relevant income test you will be liable for the surcharge for the number of days in 2006-07 when you or your dependants – when they were your dependants – did not have the required private patient hospital cover.

EXAMPLE

Of a taxpayer who had dependants for only part of the year

Tina had a child, Tony, who lived with her. Tony turned 17 on 3 August 2006 and was in full-time education until 29 November 2006. Tina gave birth to a child, Maggie, on 28 February 2007. Tina did not have a spouse at any time during 2006-07. Tina’s taxable income for 2006-07 was $120,000.

Tina had private patient hospital cover for herself for the whole year. Tony was covered under Tina’s policy only until 30 September 2006. Maggie was not covered by private health insurance at any time during 2006-07.

Tina failed the relevant income tests for 2006-07.

Tina is liable for the surcharge for the period from 1 October 2006 to 29 November 2006, and for the period from 28 February 2007 to 30 June 2007 – a total of 183 days. For the period from 1 October 2006 to 29 November 2006, Tony was Tina’s dependant since he was under 25 years of age and in full-time education. For the period from her birth on 28 February 2007 to 30 June 2007, Maggie was Tina’s dependent child. During those periods, neither Tony nor Maggie had private patient hospital cover. Tina will enter the number of days she is NOT liable (365-183) – 182 – in the box on the e-tax screen.

If Tina’s taxable income for 2006-07 was $70,000, Tina would not be liable for the surcharge for any period in 2006-07. Tina satisfies the $100,000 income threshold for the two separate periods she had a dependent child; the period from 1 July 2006 to 29 November 2006 when Tony was her dependent child and the period from 28 February 2007 to 30 June 2007 when Maggie was her dependent child. Even though Tina fails the $50,000 single income test for the period from 30 November 2006 to 27 February 2007, Tina had the required private patient hospital cover for herself for that period. If Tina did not have cover at any time during 2006-07, Tina would be liable for the surcharge for the period from 30 November 2006 to 27 February 2007 – 90 days – since she fails the single income test for the period in 2006-07 she was single, in which case Tina would enter the number of days she was NOT liable (365-90) – 275 – in the e-tax screen.

If you or your dependants were in a Medicare exemption category for part of the year, go to Part 2. If you had a spouse for only part of the year, more than one income test will apply to you. Go to Part 3. Otherwise, go back to the e-tax screen and enter in the box the number of days you are NOT liable to pay the Medicare levy surcharge.

PART 2:	IF YOU OR YOUR DEPENDANTS WERE EXEMPT FROM THE MEDICARE LEVY FOR PART OF THE YEAR

Only read this section if you or any of your dependants were in a Medicare exemption category for any period during 2006-07 – for example, you or your spouse were a defence force member.

If you were in an exemption category at all times during 2006-07 and you did not have any dependants, you are NOT liable for the surcharge.

You are liable for the surcharge for the period in 2006-07 you were in an exemption category if:

•	the combined taxable income of you and your spouse – if you had a spouse for the whole of 2006-07 – is more than your relevant income threshold and

•	during that period one or more of your dependants – if any – were not in an exemption category and did not have private patient hospital cover.

If you or your dependants were in an exemption category for part of 2006-07, then you will be liable for the surcharge for the number of days in 2006-07 when you or your dependants were not in an exemption category and did not have the required private patient hospital cover.

You need to work out exactly which days in 2006-07 your spouse or your children were your dependants for the purpose of the Medicare levy surcharge and were not in a Medicare exemption category.

Once you have worked out which days in 2006-07 they were your dependants and were not in an exemption category, you need to know on which of those days your dependants had the required private patient hospital cover.

If you do not pass the relevant income test you will be liable for the surcharge for the number of days in 2006-07 when you or your dependants – when they were your dependants – were not in a Medicare exemption category and did not have the required private patient hospital cover.

EXAMPLE 1

Of a taxpayer or their dependants who were in a Medicare exemption category for only part of the year

Tanya and Peter were married for the whole of 2006-07 and had a child, Harry, who was five years old. Peter began to be a full-time member of the Australian defence force on 1 January 2007 and from that time was entitled to full free medical treatment for all conditions. Tanya and Harry were not in a Medicare exemption category at any time during 2006-07 and Peter was not in a Medicare exemption category until 1 January 2007.

Tanya and Harry had private patient hospital cover for the whole of 2006-07. However, Peter did not have cover at any time during 2006-07. Tanya’s taxable income for 2006-07 was $20,000 and Peter’s taxable income for 2006-07 was $100,000.

Tanya is liable for the Medicare levy surcharge for the period from 1 July 2006 to 31 December 2006 – 184 days.

Tanya failed the relevant income threshold of $100,000 since the combined taxable income of Tanya and Peter was $120,000. For the period from 1 July 2006 to 31 December 2006, Peter was not in a Medicare exemption category and did not have the required cover. Since Peter is Tanya’s dependant, Tanya is liable for the surcharge for that period. Tanya is NOT liable for the surcharge for the period from 1 January 2007 until 30 June 2007 since at all times during that period Tanya and Harry had the required cover and Peter was in a Medicare exemption category. Tanya will enter the number of days she is NOT liable (365-184) – 181 – in the box on the e-tax screen.

Peter is liable for the surcharge for the period from 1 July 2006 until 31 December 2006 – a total of 184 days – since at all times he was not in a Medicare exemption category and did not have the required cover during that period.

Peter is NOT liable for the surcharge for the period from 1 January 2007 until 30 June 2007 – a total of 181 days – since at all times during that period his two dependants, Tanya and Harry, had the required cover and Peter was in a Medicare exemption category. Peter will enter (365-184) – 181 – in the box on the e-tax screen.

EXAMPLE 2

Of a taxpayer who was in a Medicare exemption category for only part of the year

Patrice had a spouse, Bob, during the whole of 2006-07. Patrice and Bob did not have any dependent children. Bob received the sickness allowance from Centrelink for the period from 1 August 2006 to 30 September 2006. Patrice was not in a Medicare exemption category at any time during 2006-07 and Bob was not in a Medicare exemption category at any time during 2006-07 except for the period he received the sickness allowance.

Patrice had private patient hospital cover for the whole of 2006-07, but Bob did not have cover at any time during 2006-07.

Patrice’s taxable income for 2006-07 was $90,000 and Bob’s taxable income for 2006-07 was $11,000.

Patrice is liable for the Medicare levy surcharge for the period from 1 July 2006 to 31 July 2006 and the period from 1 October 2006 to 30 June 2007 – 304 days.

Patrice failed the relevant income threshold of $100,000 since the combined taxable income of Patrice and Bob was $101,000. During the two periods for which Patrice is liable for the surcharge, Bob was not in a Medicare exemption category and did not have the required cover. Patrice is NOT liable for the surcharge for the period from 1 August 2006 to 30 September 2006 – 61 days – since at all times during that period, Patrice had the required cover and Bob was in a Medicare exemption category. Patrice will enter the number of days she is NOT liable – 61 – in the box on the e-tax screen.

Bob is NOT liable for the Medicare levy surcharge for any period during 2006-07 since his taxable income is below $15,902.

If you had a spouse for only part of the year, more than one income test will apply to you. Go to Part 3. Otherwise, go back to the e-tax screen and enter in the box the number of days you are NOT liable to pay the Medicare levy surcharge.

PART 3: SPOUSE FOR ONLY PART OF THE YEAR

Only read this section if you had a spouse for only part of 2006-07, for example, you married or separated permanently from your spouse during 2006-07.

To work out if you are liable for the surcharge, for the period you did not have a spouse, apply the applicable income threshold below:

•	if you were single with no dependent children during that period – the single income threshold – $50 000; or

•	if you were single with dependent children during that period – the relevant family income threshold.

For the period you had a spouse apply the relevant family income threshold to your own taxable income, without including your spouse's taxable income.

Summary table of scenarios where the taxpayer had a spouse for only part of 2006-07

Scenario	Taxpayer cover	Spouse cover	Other dependants cover (Note 3)	Without spouse period income test (Note 4)	With spouse period income test (Note 4)
Taxpayer with spouse only

1	none	none		$50,000	$100,000
2	all year	none		No liability	$100,000
3	none	all year		$50,000	$100,000
4	all year	all year		No liability	No liability
Taxpayer with at least one other dependant for the whole year

5	none	none	none	$100,000 +	$100,000 +
6	all year	none	none	$100,000 +	$100,000 +
7	none	all year	none	$100,000 +	$100,000 +
8	none	none	all year	$100,000 +	$100,000 +
9	all year	all year	none	$100,000 +	$100,000 +
10	all year	none	all year	No liability	$100,000 +
11	none	all year	all year	$100,000 +	$100,000 +
12	all year	all year	all year	No liability	No liability
NOTES:

1.	The table only deals with cases where the required cover was maintained for the full year, or not at all. Part year cover is not addressed.

2.	The table also only deals with cases where the taxpayer, their spouse and their other dependants were not in a Medicare levy exemption category at any time during the income year. For assistance on how to work out your liability for the surcharge if you or any of your dependants were in a Medicare exemption category at any time during 2006-07, read Part 2 above.

3.	‘All year’ cover for other dependants means the whole year that they were a dependant, for example, if they were born during the year, the period from birth to the end of the year. Note however that there must be at least one dependant for the whole year for this table to apply. For assistance on how to work out your liability for the surcharge if any of your children were your dependants for only part of 2006-07, read Part 1 above.

4.	References to $100,000 + mean that the income threshold is increased by $1,500 for each dependent child of the taxpayer after the first at any one time during the income year.

EXAMPLE 1

Example of a taxpayer who had a spouse for only part of the year

Beth separated from George on 12 October 2006 and stayed single. Neither Beth nor George had any dependent children. Beth and George are dependants of each other for Medicare levy surcharge purposes only for the period they were together. For 2006-07, George's taxable income for MLS purposes was $45,000 and Beth's taxable income for MLS purposes was $60,000. Beth and George did not have private patient hospital cover at any time during 2006-07.

As they are considered to be a family for the period 1 July 2006 to 12 October 2006, they are each entitled to the family surcharge threshold of $100,000 for this period. For the period 1 July 2006 to 12 October 2006, Beth is NOT liable for the surcharge as her taxable income of $60,000 was under the family surcharge threshold. George is also not liable for the surcharge for this period as his taxable income of $45,000 is also under the family surcharge threshold.

For the period 13 October 2006 to 30 June 2007 – 261 days – the single person surcharge threshold of $50,000 applies to both of them. For this period, George is NOT liable for the surcharge because he had a taxable income of $45,000.

George will enter 365 on the e-tax screen.

Beth is liable to pay the surcharge for the period 13 October 2006 to 30 June 2007 – 261 days – because her taxable income is $60,000.

Beth will enter the number of days in 2006-07 that she is NOT liable for the surcharge – 104 – in the box on the e-tax screen.

EXAMPLE 2

Example of a taxpayer who had a spouse for only part of the year

At the beginning of the 2006-07 income year, Rosemary did not have a spouse but had a dependent child, Harry, who was a full-time student. Harry turned 25 on 26 November 2007. Rosemary began to have a spouse, Bill, on 16 May 2007. Rosemary and Harry had the required private patient hospital cover from 1 July 2006 until 30 September 2006. Rosemary and Harry did not have the required private patient hospital cover at any time from 1 October until the end of the income year. Bill did not have the required private patient hospital cover at any time during 2006-07. Rosemary had a taxable income of $70,000 for 2006-07. Bill had a taxable income of $100,000 for 2006-07.

Even though Rosemary and Harry did not have the required private patient hospital cover from 1 October 2006 to 25 November 2006, Rosemary is NOT liable for the surcharge for the period from 1 July 2006 to 25 November 2006 since her taxable income was less than $100,000, which is the family income threshold for a taxpayer with one dependent child. (Harry ceased to be Rosemary’s dependant on 26 November 2006 when he turned 25.)

Rosemary is liable for the surcharge for the period from 26 November 2006 to 15 May 2007 – 171 days – since during that period she had no dependants and did not have the required private patient hospital cover, and her taxable income was more than $50,000. (For any period during 2006-07 in which the taxpayer had no dependants – including a spouse, the income threshold is $50,000.)

Rosemary is NOT liable for the surcharge for the period from 16 May 2007 until 30 June 2007 since her taxable income was less than $100,000, which is the income threshold which applies for the period when Rosemary had a spouse, without including Bill’s taxable income. Accordingly, she would enter the number of days she was NOT liable (365-171) – 194 – in the box on the e-tax screen.

If Rosemary’s taxable income for 2006-07 was $110,000, Rosemary would be liable for the surcharge for the whole period from 1 October 2006 until 30 June 2007 – 273 days – since she did not have the required private patient hospital cover during that period and she will fail all the relevant income tests which apply during that period. In that case, she would enter the number of days she was NOT liable (365-273) – 92 – in the box on the screen.

If Rosemary’s taxable income for 2006-07 was $110,000 and she had the required private patient hospital cover for herself at all times during 2006-07, Rosemary would be liable for the surcharge for the period from 1 October 2006 to 25 November 2006 – 56 days – and for the period from 16 May 2007 until 30 June 2007 – 46 days, since in both periods she had a dependant who did not have the required private patient hospital cover and she failed the relevant income test. In that case, she would enter the number of days she was NOT liable (365-102) – 263 – in the box on the e-tax screen.


Item Private health insurance policy details
Private health insurance policy details

YOU NEED TO KNOW

If you or your dependents made premium payments towards private health insurance to a registered fund, you must complete the Private health insurance policy details screen.

If you received a statement from your registered health fund your private health insurance policy details will be shown on the statement. If you did not receive a statement from your health fund use the tables below or contact your fund. If you do not have a statement because your employer paid the premium for you, contact your fund or speak to the person who paid the premium.

You may be covered under a family policy even though you or your employer may not have paid the premiums. You can complete this item showing the type of cover that you had under that family policy.

STEP 1	Complete the table.

The following rules apply:

•	Enter the details of each policy on a separate line, in date order.

•	If the kind of cover provided by a policy changes, complete a separate row for each type of cover.

•	If you and your dependants are covered by separate policies, use a separate row for each policy.

If you need more help using tables in e-tax, read data entry. Remember, if you want to insert a row in the table, press the <Insert> key.

Start date – Enter the date that this type of cover started for this private health insurance policy. If a policy started before 01/07/2006, enter ‘01/07/2006’.

End date – Enter the date that this type of cover ended for this private health insurance policy. If a policy was ongoing past 30/06/2007, enter ‘30/06/2007’.

Type of cover – Enter the code letter that describes the type of private health insurance cover you had.

Type of cover	Code letter
Hospital cover	H
Combined hospital and ancillary cover	C
NOTE:
If you have used code letter H or C your liability for the Medicare levy surcharge may be reduced. Make sure you carefully read item M2.

Health fund ID – Refer to the table of registered private health insurance funds. Enter the identification code of your health fund. If your registered private health insurance fund is not in the list use the identification code ‘OTH’.

Membership number – Enter your private health insurance membership number.

STEP 2	Click on the Next button. e-tax will verify that the policy dates that you have entered cover the whole period 1 July 2006 to 30 June 2007.

If the dates do not cover the whole period 1 July 2006 to 30 June 2007, you must either:

•	correct your policy details or

•	click on the Prev button and answer No to the question on the previous screen.

If the dates do cover the whole period 1 July 2006 to 30 June 2007, you have completed this item.

REGISTERED PRIVATE HEALTH INSURANCE FUNDS

NOTE:
If your health fund is not in the list below, you can find out if it is registered by visiting the Private Health Administration Council website at www.phiac.gov.au.

ACA	ACA Health Benefits Fund
AHB	Defence Health Limited
AHM	Australian Health Management Group
AMA	The Doctors Health Fund
AUF	Australian Unity Health Ltd
CBH	CBHS Health Fund Limited
CDH	Cessnock District Health Benefits Fund Limited
CPS	Credicare Health Fund Limited
FAI	Grand United Corporate Health Ltd
GMF	GMF Health Limited
GMH	GMHBA Limited
HBA	BUPA Australia Health Pty Ltd
HBF	HBF Health Funds Inc
HCI	Health Care Insurance Ltd
HCF	The Hospitals Contribution Fund of Australia, Ltd
HHB	Healthguard Health Benefits Fund Ltd
HIF	Health Insurance Fund of WA
LHM	Lysaght Peoplecare Limited
LHS	Latrobe Health Services Inc
MBF	MBF Australia Ltd
MBP	Medibank Private Ltd
MCL	BUPA Australia Health Pty Ltd
MDH	Mildura District Hospital Fund
MIM	Queensland Country Health Ltd
MUI	Manchester Unity Australian Ltd
NHB	Navy Health Limited
NIB	NIB Health Funds Limited
NTF	Teachers Federation Health Ltd
OTH	Other – Not listed
PWA	Phoenix Health Fund Ltd
QTU	Queensland Teachers Union Health Fund Ltd
RBH	Reserve Bank Health Society Ltd
RTE	Railway and Transport Health Fund
SGI	MBF  Alliances Pty Ltd
SLM	St Lukes Medical and Hospital Benefits Association Ltd
SPE	South Australian Police Employees Health Fund INC)
SPS	Health Partners Inc
TFS	Transport Health Pty Ltd
UAD	United Ancient Order of Druids Friendly Society Ltd
UAF	United Ancient Order of Druids Registered Friendly Society Grand Lodge of NSW)
WDH	Westfund Ltd
YMH	Federation Health (merged with Latrode in 2006)
If your registered private health insurance fund is not listed above use the identification code ‘OTH’. e-tax will ask you to enter the name of the fund in another screen. Read on.

ADDITIONAL INFORMATION SCHEDULE

You have entered a fund identification code of "OTH" when completing your private health insurance policy details. e-tax requires more information.

STEP 1	Enter the name of the private health insurance fund(s) with an identification code of ‘OTH’ in the Other fund details column of the table displayed on the screen. Only complete the table for funds with an identification code of ‘OTH’.

STEP 2	Click on the Next button. e-tax will move to the next screen in this item.

e-tax will use the information you have entered to complete an Additional information schedule.


 Medicare levy surcharge (M2)

This item is compulsory for all taxpayers. If you do not complete the item you may be charged the full Medicare levy surcharge.


Managed Funds

This topic covers:

Who does this item apply to?

You need to know

What you may need

When this item should not be used

Using the Managed Fund section of e-tax

You need to know

The e-tax managed fund worksheet

What to do if you rolled over data from a previous year

Using items 12, 17 and 19 to enter your details

You need to know

Item 12 – Trusts

Item 17 – Capital Gains

Item 19 – Foreign income

Pre-filling your managed fund details

WHO DOES THIS ITEM APPLY TO?

If you have received a statement from one or more Managed Funds – for example, a property trust, share trust, equity trust, growth trust, imputation trust or balanced trust – that shows income, deductions or credits that would normally appear in items 12 – Trusts, 17 – Capital Gains or 19 – Foreign income, you can choose to complete this section of e-tax instead of entering the details from the statement(s) at those items.

If your statements indicate the amounts that need to be shown against the labels on the income tax return, e-tax allows you to enter the amounts against each label. If you have more than one statement, e-tax allows you to complete a separate worksheet for each managed fund.

YOU NEED TO KNOW

This section of e-tax is designed primarily for those people whose only source of income from trusts, capital gains and foreign income is from one or more managed funds.

If you have these types of income from other sources (such as a family trust, capital gains from the sale of shares, or foreign employment income), the amounts must be entered at the correct item in e-tax.

There are a number of data entry methods available to you. You can:

•	use the managed fund section if you only have statements from managed funds. If you choose this option, you do not need to show these amounts at items 12, 17 or 19 as e-tax will automatically include them at the correct item.

•	use the managed fund section to record the amounts from your statements, and items 12, 17 and 19 to enter income from other sources.

•	use items 12, 17 and 19 to record all of the amounts to be shown at these items, including the amounts from your managed funds statements.

WHAT YOU MAY NEED

You will need the statement from your managed fund that shows amounts of income, deductions or credits that would normally be shown at items 12, 17 and 19 on the tax return.

WHEN THIS ITEM SHOULD NOT BE USED

The managed fund section of e-tax should not be used if any of the following circumstances apply to you:

•	your net capital gain from all sources exceeds $10,000 – if this applies, you are required to complete a Capital gains tax schedule 2007 (NAT 3423-6.2007) – all of your capital gains must be included at item 17;

•	you have current year or prior year capital losses that you want to offset against your current year capital gains. You should include all of your capital gains at item 17 to ensure that you offset all of your losses correctly;

•	you have unused foreign tax credits from a previous year. You should include all of your foreign income and foreign tax credits at item 19 to ensure that e-tax calculates your correct entitlement to foreign tax credit.

USING THE MANAGED FUND SECTION OF e-tax

This section covers:

You need to know

The e-tax managed fund worksheet

What to do if you rolled over data from a previous year

YOU NEED TO KNOW

These instructions will help you to complete the e-tax worksheets for managed funds. This section assumes that your only source of trust, capital gains or foreign income is from one or more managed funds.

It also assumes that the statements you have received comply with the standards set out in the  2007 Standard trust distribution statement for managed funds.

NOTE:
At the time of e-tax production the 2007 Standard trust distribution statement for managed funds had not been finalised.  For further information please refer to www.ato.gov.au.

You should complete a separate worksheet for each managed fund.

If you use the managed fund section to complete your tax return, the amounts shown here do NOT need to be shown again at items 12, 17 or 19, as e-tax will include the amounts at the correct item in your tax return.

If you need to amend or delete any amounts included in those items via this section, you can only do this by amending or deleting the worksheet within this section.

THE e-tax MANAGED FUND WORKSHEET

Each worksheet allows you to transpose the amounts of income, deductions and credits from a managed fund statement into your tax return.

As you complete a separate worksheet for each managed fund, e-tax will aggregate the amounts to be shown at the various labels on the tax return.

Completing the e-tax worksheet

Name of Fund

Enter the name of the fund as shown on the Managed Fund statement

Income, Deductions and Credits

The managed fund statement should show a summary of the 2007 tax return items at Part A.

This summary should include a description of each item, the amount to be included on the tax return, and the label against which it should be shown.

Enter the details in to each worksheet against the corresponding label:

Trusts	Tax return label
Non-primary production income	12U
Other deductions relating to distributions	12Y
Franking credits	12Q
Credit for TFN amounts withheld	12R
Credit for tax paid by trustee	12S
Credits from foreign resident withholding	12A
Capital Gains	Tax return label
Net capital gain	17A
Total current year capital gains	17H
Foreign Income	Tax return label
Assessable foreign source income	19E
Other net foreign source income	19M
Foreign tax credit*	19O
Franking credits from a NZ company	19F
* The foreign tax credit should be determined separately for each class of foreign income. The foreign tax credit for each class cannot be more than the Australian tax applicable to that class of foreign income.

You need to work out the amount of foreign tax credit you can claim by referring to How to claim a foreign tax credit 2007 (NAT 2338-6.2007).

To create a new worksheet, either click on the ‘Create New Worksheet’ item in the ‘Existing Worksheets’ Navigator at the left of screen 302, or click on Next and answer Yes to the question on the next screen.

WHAT TO DO IF YOU ROLLED OVER DATA FROM A PREVIOUS YEAR

If you have rolled over data from your 2006 e-tax return into the 2007 software, and it contains data from item 12 – Trusts, or Item 19 – Foreign Income, you will need to view those items before you can lodge your tax return.

If the data at those items is just the descriptions of your managed funds from 2006, and you have used the managed fund section to enter them in 2007, you can delete the descriptions and leave items 12 and 19 blank. e-tax will complete these items from the data entered at the managed fund section.

If there is additional data at items 12 or 19, you will need to review that data to determine whether or not you have income from other sources that needs to be included at those items in 2007.

USING ITEMS 12, 17 AND 19 TO ENTER YOUR DETAILS

This section covers:

You need to know

Item 12 – Trusts

Item 17 – Capital Gains

Item 19 – Foreign income

YOU NEED TO KNOW

If you have already entered amounts in items 12 – Trusts, 17 – Capital gains, and 19 – Foreign Income in the managed fund section of e-tax, you do NOT need to enter them again via these items.

However, if you choose not to use the managed fund section, this section will explain how to navigate through e-tax and show you how and where to include each item that is shown on your managed fund statement.

It is based on the assumption that the statement issued by your fund complies with the 2007 Standard trust distribution statement for managed funds.

ITEM 12 – TRUSTS

The following example shows how your fund statement may display the components of Australian income:

Australian income	Cash distribution	Tax paid /offsets	Taxable amount
Dividends – Franked amount	70	30.00	100
Dividends – Unfranked amount	60		60
Interest	20		20
Other income	15		15
Less other allowable trust deductions	-30		-30
Non-primary production income	135	30.00	165
and there may be a section that shows deductions and TFN amounts withheld

Less TFN amounts withheld	-10
Less other expenses	-4
1.	In e-tax, navigate to the start of item 12 – Trusts (screen 1506) and click Yes.

2.	At screen 1507, enter the name of the Managed Fund in the column headed ‘Trust Name’ and then tab to, or place your cursor in the column under the heading ‘Trust NPP Amount’. (You must enter a name to activate the remaining columns in the table.) This column is for Non-primary production income.

NOTE:
When your cursor is in this column, the text in the box on the bottom of the screen will change, and it will indicate which label of the return is completed by entering information at this column.
This is a feature of e-tax that is common to all of the tables in items 12, 17 and 19 that should assist you to complete the details from your Managed fund.

3.	Enter the amounts shown as ‘Taxable Amount’ above in this column, either as individual rows or a total of the amount in one row.

Please note that Franked Dividends need to be grossed up to include the amount of the franking credit as part of the taxable income. The credit is claimed separately at a later screen.

As indicated in the text at the bottom of the screen, the total amount of $165 will be written to Label 12 U on the return form.

(If you enter details in the ‘Trust PP Amount’ column, these will be written to return form label 12 L.)

4.	To confirm this, click on the ‘Return Form View’ icon at the top of e-tax, and then select the tab for page 2 of the Supplement.

The amounts entered should appear under the heading ‘Non-primary production’ – next to Label U.

5.	To return to e-tax, click on the ‘Return to Interview’ button.

6.	Once you have entered all amounts of income, click on the Next button to proceed.

At screen 1508, e-tax will automatically complete the name of the fund and description that you entered at screen 1507.

7.	Enter the amounts of any deductions shown on your statement. In the example shown above, you would enter the amount of $4 in the ‘NPP Other’ column.

Amounts entered in the "NPP Other" column will be written to label 12 Y.

As explained above, the text at the bottom of screen 1508 will change when the cursor is placed in the ‘NPP Other’ column to indicate label 12 Y.

Amounts entered in the PP Other column will be written to label 12 X.

8.	Once you have entered all deductions, click on the Next button to proceed.

9.	At screen 1509, enter details of any credits that relate to the Australian income shown on your statement. In the example shown above, you would enter the amount of the franking credit of $30 and the TFN amounts withheld of $10.

NOTE:
If your statement indicates that any of these credits are $0.00, you do not have to show these amounts on your return.

The text at the bottom of the screen will indicate the return form label as you go through each column, as follows:

ABN Credit	label 12 P
Franking Credits	label 12 Q
TFN Amt	label 12 R
Other tax credits	label 12 S
FRW credits	label 12 A
10.	Use the ‘View Tax Return’ button to confirm your entries.

11.	Click on the ‘Return to Interview’ button and then on the Next button to complete item 12.

12.	In the unlikely event that your statement indicates that you needed to complete the column ‘Other tax credits’ in order to complete label 12 S, and you have entered an amount in that column, clicking on the Next button will take you to screen 1510 where you need to complete some additional information about the situation that gave rise to the credit and the amount of income involved. When these details have been entered, click Next to complete item 12.

ITEM 17 – CAPITAL GAINS

The following example shows how your fund statement may display the components of any Capital gains

	Cash distribution	Tax paid /offsets	Taxable amount
Capital gains
Discounted capital gain	65	5	70
CGT concession amount	70		0
Capital gains – indexation method	60	5	65
Capital gains – other method	23	2	25
Distributed capital gains	218	12
Net capital gain			160
Additional capital gains information:
Capital gains – discount method	140	(grossed up amount)
Capital gains – indexation method	65
Capital gains – other method	25
Total current year capital gains	230
The only amounts you need to complete on your tax return are

Total current year capital gains	label 17 H
Net capital gain	label 17 A
1) The simple method

If the amount you received from your managed fund is your only capital gain for the year, there is a simple method for completing this item.

1.	Navigate to the start of item 17 – Capital gains (screen 2001) and click on Yes

2.	At screen 2122, click on Yes

3.	At screen 2123, enter the amounts from your statement. In the above example, the net capital gain is $160 (17A) and the total current year capital gain is $230 (17H).

Note that the text at the bottom of the screen indicates the relevant return form label as per your statement. This will change when a different cell is selected.

4.	If you have more than one managed fund, you must work out the total amounts to be shown at labels H and A and complete them in the same way.

5.	Click on the Next button to complete item 17, and then use the ‘View Tax Return’ button to confirm your entries.

2) Using the e-tax CGT calculator

If you need to use the e-tax capital gains tax calculator to enter multiple amounts, or because you have other capital gains, you must first ensure that you have downloaded the e-tax CGT module from our website.

The software will prompt you to do this and provide you with a link if necessary.

1.	Navigate to the start of item 17 – Capital gains (screen 2001) and click on Yes.

2.	At screen 2122, click on No.

3.	At screen 2004, click on the words ‘Trust information’ in the Navigator on the left hand side.

4.	This will take you to screen 2018, where you click on Yes.

5.	At screen 2019, enter the amounts from the ‘Taxable amount’ column from your statement into the relevant fields of the table. You may need to refer to additional information on your statement to determine the correct column to enter data.

In the example above, the amounts would be entered as follows:-

•	Under ‘Indexed Gain’ – $65

•	Under ‘Discount Gain’ – $70 (this amount should not be the grossed up amount of $140)

•	Under ‘Other Gain’ – $25

If you scroll across this screen, you will see that e-tax calculates the total of the net capital gain as $160 as per your statement.

You do not need to calculate the Total current year capital gain as e-tax will do this for you.

The CGT schedule at screen 2107 shows you how the Total current year capital gains and the Net capital gains are calculated.

6.	Use the ‘Tax Return View’ button to confirm that e-tax has completed labels H and A correctly.

ITEM 19 – FOREIGN INCOME

The following example shows how your fund statement may display the components of any Foreign income and Foreign tax credits

Foreign income	Cash distribution	Tax paid /offsets	Taxable amount
Interest income	90	10	100
Modified passive income	85	15	100
Other assessable foreign income	14	6	20
Assessable foreign income	189	31	220
1.	Navigate to the start of item 19 – Foreign income at screen 2301 and click on Yes.

2.	Assuming that you do not have income from the sources mentioned on screens 2302, 2304, 2306 and 2309, click on No to each of those screens.

3.	At screen 2311, click on Yes.

The following screens are separated into the various classes of foreign income as follows:

o	Screen 2312 – lump sum payments

o	Screen 2313 – interest

o	Screen 2314 – modified passive income

o	Screen 2315 – offshore banking

o	Screen 2316 – other foreign income

As explained in the previous examples, the text at the bottom of screens 2313, 2314 and 2316 will change when the cursor is placed in the income column to indicate that these amounts will be included in label 19 E.

Your statement should also have a section entitled Part B: Foreign Tax Credit Information – Additional Information for Schedule Q19.

The foreign tax credit should be determined separately for each class of foreign income. The foreign tax credit for each class cannot be more than the Australian tax applicable to that class of foreign income.

You need to work out the amount of foreign tax credit you can claim by referring to How to claim a foreign tax credit 2007 (NAT 2338-6.2007).

The following instructions assume that you can claim all of the foreign tax credits shown on the statement.

Foreign income categories	Amount	Foreign tax paid
passive income*	235	37.00
other income	14	6.00
* includes foreign net capital gains and attaching foreign tax as follows:
discount capital gains	16	5.00
Indexed capital gains	30	5.00
other capital gains	14	2.00
The capital gains shown in this section do not need to be included in item 19 as the fund has already included them in the amount shown at item 17 – Capital gains. However, e-tax needs to gather some information to ensure that the calculation of your foreign tax credit is correct.

Follow these steps to include the amounts shown in the above example.

1.	At screen 2312, click on Next.

2.	At screen 2313, enter the amounts of interest from the ‘Taxable amount’ column of your statement and the amount of foreign tax paid. You would enter $100 in the column ‘Gross Amount Received’ and $10 in the column ‘Foreign Tax Paid’. Click on Next to continue.

3.	At screen 2314, enter the amounts of the modified passive income from the ‘Taxable amount’ column of your statement and the amount of foreign tax paid. You would enter $100 in the column ‘Amount Received’ and $15 in the column ‘Foreign Tax Paid’. Click on Next to continue.

4.	At screen 2315, click on Next.

5.	At screen 2316, enter the amounts of other income from the ‘Taxable amount’ column of your statement and the amount of foreign tax paid. You would enter $20 in the column ‘Gross Amount Received’ and $6 in the column ‘Foreign Tax Paid’. Click on Next to continue.

6.	At screen 2317, enter the amounts of the net foreign capital gain and the foreign tax paid in to the relevant cell.  You would enter $60 in the field ‘Net foreign capital gain amount’ and $12 in the field ‘Foreign tax paid on net foreign capital gain’. These amounts will not be included in your assessable income, but will be taken in to account when e-tax calculates your foreign tax credit. Click on Next to continue.

7.	Click on Next at screens 2318 and 2319 and click on No to screen 2320 to complete item 19 (assuming that the circumstances described on those screen are not applicable).

8.	Click on the ‘View Tax Return’ button and select tab 3 of the Supplement section to confirm your entries.

Please note that e-tax may adjust the amount of foreign tax you enter to a different figure. This is because e-tax adjusts the foreign tax credit to the maximum amount allowable under the law.


Downloading your Managed Fund details
Pre-filling your managed fund details

You may be able to pre-fill your distribution income details if:

•	the distribution was from a participating fund manager

•	your tax file number was recorded against your investment, and

•	you have not claimed non-resident status.

You will view:

•	a list of managed fund accounts, and

•	details of your sole and joint investments (as an individual). For example:

o	husband and wife joint investments will be displayed, and

o	business partnership investments will not be displayed.

The information will be used to pre-fill some details in the following items in the tax return:

•	item 12 – Partnerships and trusts

•	item 17 – Capital gains, and

•	item 19 – Foreign source income and foreign assets or property

NOTE:
If the system is unavailable, e-tax cannot pre-fill your tax return for you. You can either enter your details manually or try to use the pre-fill service later.

For details about participating fund managers or when the service may be available again, see e-tax pre-filling information.

MANAGED FUND INFORMATION FROM OTHER ACCOUNTS

If your managed fund information is not pre-filled, you must manually enter these details into your interview.

You can manually enter managed fund details by using one of these methods:

•	select Managed Funds from the e-tax Navigator and complete the worksheet, or

•	complete items 12 – Partnerships and trusts, 17 – Capital gains and 19 – Foreign source income and foreign assets or property.

JOINT INVESTMENTS

Accounts may be held in joint names. If you hold an account jointly with another person, such as your spouse, it is assumed that ownership of the account is divided equally. e-tax will divide the distribution equally between the number of account holders.  Your share of the amounts will be displayed in the Your Share columns.

For any account where the account holders do not share equally in the distribution, keep a record to show how you worked out your share.

VIEWING AND/OR CHANGING MANAGED FUND INFORMATION

You can manually change any of the details in the Your Share column of the Managed Funds worksheet. You cannot edit details in the Total Income column as these details are for information purposes only.

IF YOU DISAGREE WITH THE PRE-FILLED MANAGED FUND INFORMATION

If you disagree with or have any questions about the pre-filled managed fund information, refer to the statements issued by your fund manager.

If your fund manager provides amended income, deduction or credit amounts, you will need to enter the details of these amended amounts manually into e-tax.

VIEWING AND/OR PRINTING YOUR MANAGED FUND INFORMATION

You can also view and/or the details that are pre-filled into e-tax by selecting Printing in the e-tax Navigator when it appears on the left hand side of the screen. Select Managed Fund Summary in the Downloaded Data section and select Preview or Print.

VERIFICATION

You must provide information that allows the Tax Office to verify your identity before your data is pre-filled into e-tax. To do this

1.	Click on Pre-filling in the Navigator or the Pre-filling button on the relevant screens.

2.	e-tax will ask you for your password or information that will allow the Tax Office to verify your identity. When you have successfully matched your details against the Tax Office records, you will be issued with a password.

NOTE:
Keep your password as you will need it to lodge your tax return or claim form.

For more details about obtaining a Tax Office password using e-tax refer to Tax Office password.


Item D1 Work related car expenses
	Work related car expenses
This topic covers:

Who does this item apply to?

You need to know

What you may need

Do not show at this item

Further information

METHOD 1 – Cents per kilometre method

METHOD 2 – 12 per cent of original value method

METHOD 3 – One-third of actual expenses method

METHOD 4 – Logbook method

Record keeping

WHO DOES THIS ITEM APPLY TO?

Complete this item if you have any car expenses relating to your work as an employee.

YOU NEED TO KNOW

Reimbursement or allowance for car expenses

Owned or leased cars

Using your car for work

Method(s) you can use to calculate car expenses

Jointly owned cars

Deductions for decline in value

Was your car disposed of, lost or destroyed?

Award transport payments

Reimbursement or allowance for car expenses

CAUTION:
If you received an allowance for car expenses or a reimbursement that was worked out by reference to the distance the car travelled, you must show the amount of the reimbursement or allowance as income at item 1 or item 2.

Owned or leased cars

You can claim at this item your work-related expenses for using a car that you owned, leased or hired (under a hire purchase agreement).

You cannot claim at this item any expenses relating to a car owned or leased by someone else, including your employer or another member of your family. However, we consider you to be the owner or lessee of a car and eligible to claim expenses where a family or private arrangement made you the owner or lessee even though you were not the registered owner. For example, we would allow you to claim for a family car that was given to you as a birthday present and which, although it was not registered in your name, you used as your own and for which you pay all expenses.

If you owned or leased a car or hired one under a hire purchase agreement, you can use one of the four methods explained in this item to claim your work-related car expenses.

Depending on the method you choose, you will need to know or estimate your business kilometres. Business kilometres are the kilometres you travelled in the car in the course of using it for work-related purposes.

Using your car for work

You cannot claim the cost of normal trips between home and work as that travel is private. You cannot claim it even if:

•	you did minor tasks – for example, picking up the mail on the way to work or home

•	you had to travel between home and work more than once a day

•	you were ‘on call’ – for example, you were on standby duty and your employer contacted you at home to come into work

•	there was no public transport near where you work

•	you worked outside normal business hours – for example, shift work or overtime or

•	your home was a place of business and you travelled directly to a place of employment.

You can claim the cost of trips between home and work if:

•	you used your car because you had to carry bulky tools or equipment that you used for work and could not leave at work – for example, an extension ladder or cello

•	your home was a base of employment – you started your work at home and travelled to a workplace to continue the work, or

•	you had shifting places of employment – you regularly worked at more than one site each day before returning home. Taxation Ruling TR 95/34 – Income tax: Employees carrying out itinerant work has more information on travel expenses for employees who have shifting places of employment.

You can claim the cost of using your car to travel directly between two separate places of employment – for example, when you have a second job.

EXAMPLE

Will is a clerk at a large department store. During 2006-07 he used his own car to travel from his normal place of employment to his second job as a waiter. After finishing work as a waiter, he went directly home. Will’s travel costs from his normal place of employment to his second job are an allowable deduction. However, he cannot claim the cost of travelling from his second job to his home.

You can claim the cost of using your car to travel:

•	from your normal workplace to an alternative workplace – for example, a client's premises – while still on duty and back to your normal workplace or directly home

•	from your home to an alternative workplace for work purposes and then to your normal workplace or directly home.

EXAMPLE

Bec is a clerk at a large department store in the city. In 2006-07 she was required to attend meetings at her employer’s other store in the suburbs. She used her own car to travel to the meetings. As the meetings finished late Bec went directly home after them.

Bec can claim the cost of each journey.

CALCULATING YOUR DEDUCTION

Method(s) you will use to claim car expenses

You can use one of the four methods summarised below to work out your car expenses. Choose the method that gives you the largest deduction and ensure you have the necessary evidence. The four methods are:

METHOD 1 – Cents per kilometre

•	Your claim is based on a set rate for each business kilometre.

•	You can claim a maximum of 5,000 business kilometres.

•	You do not need written evidence.

METHOD 2 – 12% of original value

•	Your claim is based on 12% of the original value of your car.

•	The value is subject to luxury car limits.

•	Your car must have (or would have) travelled more than 5,000 business kilometres in the income period.

•	You do not need written evidence.

METHOD 3 – One-third of actual expenses

•	You claim one-third of your car’s expenses.

•	Your car must have (or would have) travelled more than 5,000 business kilometres in the income period.

•	You need written evidence or odometer records for fuel and oil costs.

•	You need written evidence for all the other expenses for the car.

METHOD 4 – Logbook

•	Your claim is based on the business use percentage of each car expense.

•	You need a logbook so you can work out the percentage.

•	You need odometer readings for the start and end of the period you owned or leased the car.

•	You can claim fuel and oil costs based on odometer records.

•	You need written evidence for all the other expenses for the car.

You may choose to look at more than one method for each car for a given period to work out how much can be claimed under each method. IF YOU DO, make sure that you go back and remove the methods that you do not want to use.

Jointly owned cars

NOTE:
There are special rules for jointly owned cars. For example, if two people have equal shares in a car, under the ‘12% or original value’ method they would each claim 6% of the value as their deduction. Practice statement PS 1999/2 tells you more about these rules.

Deductions for decline in value

If you are claiming a deduction for the decline in value of a car you should refer to the publication Guide to depreciating assets 2007 (NAT 1996-6.2007) which contains details of how to work out deductions for decline in value and balancing adjustments for cars. (You may need to make a balancing adjustment if you disposed of your car. Refer to balancing adjustment)

You can only claim a deduction for decline in value if:

•	you owned the car or hired it under a hire purchase agreement and

•	you use METHOD 3 or METHOD 4 to calculate your car expenses.

If you leased a car you cannot claim a deduction for its decline in value (because you were not the owner of the car) unless it was a luxury car. Special rules apply to leased luxury cars. Refer to leased luxury cars.

Some important things to remember:

•	The decline in value is worked out from the day you first use the car for any purpose.

•	You can only claim a deduction for decline in value in a year you use the car for work-related purposes.

•	You will need to apportion your deduction for decline in value if you:

o	used the ‘logbook method’ and

o	owned the car for only part of the year.

•	When calculating a deduction for the decline in value the cost of the car is restricted to the luxury car limit. Luxury car limits are shown at METHOD 2.

Leased luxury cars

If you leased a luxury car you can claim a deduction for its decline in value. Special rules apply if you want to claim a deduction for the decline in the value of a luxury car:

•	you must use METHOD 3 or METHOD 4 to calculate your car expenses, and

•	the value of the car is restricted to the luxury car limit.

A car is considered to be a luxury car if the cost of the car – whether new or second-hand – at the time the lease begins is more than the luxury car limit applying for that year. Phone the Personal Tax Infoline to find out more about the special rules.

Decline in value and low-value pools

If you include a car you used for work in your low value pool, do not include an amount for the decline in value of that car in your car expenses at D1. You claim the deduction for decline in value of the low-value pool at D6. See Guide to depreciating assets 2007 on the low-value pooling method and how to calculate the decline in value of your low-cost and low-value depreciating assets.

Decline in value using the simplified tax system (STS)

If you are in the STS for 2006-07, do not claim an amount for the decline in value of your car at D1. You must calculate your work-related deduction for depreciating assets, including your car, using the STS rules. Make your claim for decline in value at item 14. e-tax will write the amount to P8 in the 2007 Business and professional items schedule.

If you did not carry on any business during 2006-07 but have STS pool deductions because you have allocated depreciating assets (such as a car) to an STS pool in a prior year, make your claim for STS pool deductions at item D15. Refer to The Simplified Tax System: A guide for tax agents and small businesses (NAT 6459).

NOTE:
To use the STS rules you must be in business and have elected to enter or continue in the simplified tax system at item S1.

Was your car disposed of, lost or destroyed?

You may need to make a balancing adjustment if you have disposed of your car and you have claimed a deduction for its decline in value. The balancing adjustment is necessary if you:

•	switched between:

o	the ‘one-third of actual expenses’ method or the ‘logbook methods’ AND

o	the ‘cents per kilometre’ method or the ‘12% of original value’ method

•	switched between the ‘one-third of actual expenses’ method and the ‘logbook’ method or

•	used only the ‘one-third of actual expenses’ method or logbook methods.

Guide to depreciating assets 2007 explains how to make these calculations.

If you have made a loss after making the adjustment, e-tax will claim the loss at this item on your tax return. If you have a profit, e-tax will include the amount as category 1 income at item 22.

IMPORTANT:
A balancing adjustment is not required if you have used only the ‘cents per kilometre’ or ‘12% of original value’ methods for calculating car expenses for the car.

Award transport payments

Award transport payments are allowances covering either transport expenses or car expense reimbursements that are paid under an industrial law or award that was in force on 29 October 1986. The car expense reimbursement is calculated in respect of a certain number of kilometres.

Changes made to the industrial law or award after that date are treated as if they had been made on that day. Your union or employer can tell you the ‘29 October 1986’ amount.

Award transport payments are assessable income and you must include any payments as income on your tax return. If you have incurred transport expenses or car expenses covered by these payments you may be able to claim a deduction:

•	for transport expenses – at item D2

•	for car expenses – at either this item or item D2.

If your claim for work-related transport or car expenses is no more than the award amount, make the claim at item D2. You do not need written evidence.

If you also have a claim for any additional business kilometres not covered by the award transport payment, you can make the claim at this item but you can only use METHOD 4 – the log book method – you will need written evidence or METHOD 1 – the cents per kilometre method.

Remember, kilometres that are covered by the award transport payment and claimed at item D2 are not counted as business kilometres under either the cents per kilometre or logbook methods but they are counted as part of the total kilometres travelled for the log book method. If you do not know how many business kilometres relate to your award transport payment you can make a reasonable estimate.

Alternatively, you may choose not to limit any part of your claim for work related car expenses to the award amount. If this is the case make your claim at this item and do not claim car expenses covered by your award transport payment at item D2. When making your claim at this item you can use any of the four methods to calculate your car expenses. Treat any work-related kilometres covered by the award transport payment as business kilometres. You will need to provide the written evidence required by the particular method you select.

The example which follows explains the different ways you can claim when you receive an award transport payment.

EXAMPLE

Emma travelled 22,000 kilometres in total during 2006-07. Half of these were work-related. She received an award transport payment of $2,000 which, under her award, covered travel of 5,000 work-related kilometres. This left her with 6,000 business kilometres not covered by the payment. The ‘29 October 1986’ award transport payment was $1,400.

Emma has to show the $2,000 at item 2. She can claim her car expenses in one of the following ways:

•	She can claim $1,400 at item D2 or

•	She can claim $1,400 at item D2 and then use 5,000 of her additional 6,000 business kilometres towards a claim for total car expenses at item D1 using the ‘cents per kilometre’ method. See METHOD 1 or

•	If she has written evidence of her expenses, she can claim $1,400 at item D2 and then use all the outstanding 6,000 business kilometres towards a claim for total car expenses using METHOD 4. She divides her 6,000 business kilometres by her 22,000 total kilometres to work out her business use percentage:

6,000
	X 100 = 27%
22,000
•	If she has written evidence of her expenses, she can ignore item D2 and treat the kilometres covered by the award transport payment as business kilometres and claim them at this item. This gives her a total of 11,000 business kilometres towards a claim for total car expenses using METHOD 4 She divides her 11,000 business kilometres by her 22,000 total kilometres to work out her business use percentage:

11,000
	X 100 = 50%
22,000
WHAT YOU MAY NEED

•	written evidence to show details of your car expenses – receipts, invoices or diary entries

•	car logbook and odometer records.

•	Guide to depreciating assets 2007 (NAT 1996-6.2007)

•	Practice statement PS 1999/2-Calculating car expense deductions where the car is jointly owned, jointly leased or jointly hired under a hire purchase agreement (but is not owned, leased or hired by a partnership)

•	Practice statement PS LA 2005/7 – Substantiation of deductions claimed by individual taxpayers for work and car expenses incurred in the course of earning non-business and non-investment income

DO NOT SHOW AT THIS ITEM

Do not include expenses for vehicles other than cars – for example, motorcycles, utility trucks or panel vans with a carrying capacity of one tonne or more, or vehicles with a carrying capacity of nine or more passengers. Show them at item D2.

Do not include travel expenses including short-term car hire, public transport fares, bridge and road tolls, parking fees, taxi fares or the work-related running costs of a car owned or leased by somebody else – a borrowed car. You may be able to claim these at item D2.

FURTHER INFORMATION

METHOD 1 – Cents per kilometre method

You can use this method to claim up to a maximum of 5,000 business kilometres per car even if you have travelled more than 5,000 business kilometres. For example, if you travelled 5,085 business kilometres, you can only claim the cost of travelling 5,000 kilometres with this method. You cannot claim for the extra 85 kilometres.

You do not need written evidence but you may need to be able to show how you worked out your business kilometres.

This table shows you the rate per business kilometre to use in working out how much you can claim.

Rates per business kilometre

Ordinary car - engine capacity	Rotary engine car - engine capacity	Cents per kilometre
1600cc (1.6 litre) or less	800cc (0.8 litre) or less	58 cents
1601cc -2600cc  (1.601 litre-2.6 litre)	801cc -1300cc  (0.801 litre-1.3 litre)	69 cents
2601cc (2.601 litre) and over	1301cc (1.301 litre) and over	70 cents
METHOD 2 – 12% of original value method

You can use this method if you used your car to travel more than 5,000 business kilometres in 2006-07. This method is also available if you would have used your car to travel more than 5,000 business kilometres had you used it for the whole of 2006-07.

You do not need written evidence to use this method but you may need to be able to show how you worked out your business kilometres.

If you bought the car, you can claim 12% of cost. If you leased the car, you can claim 12% of its market value at the time that you first leased it. The maximum deduction you can claim is 12% of the luxury car limit in the year in which you first used or leased the car, shown in the table below.

LUXURY CAR LIMITS FOR THE LAST 10 YEARS

2006-07	$57,009
2005-06	$57,009
2004-05	$57,009
2003-04	$57,009
2002-03	$57,009
2001-02	$55,134
2000-01	$55,134
1999-2000	$55,134
1998-99	$55,134
1997-98	$55,134
Working out the amount you can claim using method 2

A. How a whole year claim is worked out

e-tax will multiply the cost of the car or the luxury car limit, whichever is less, by 12 and divide the result by 100. This is the amount you can claim if you owned or leased your car for the whole of 2006-07 and used it for work during that year.

B. How a part-year claim is worked out

If you did not own or lease the car for the whole of 2006-07, e-tax will determine if you are entitled to use this method from the details you have entered. Read below to see how a part year claim is worked out. If you are unable to use this method use METHOD 1 or 4.

If you travelled 5,000 business kilometres or less, e-tax will multiply the number of business kilometres you travelled by 365 and then divide the result by the number of days you owned or leased the car during 2006-07. This is considered to be the number of kilometres you would have travelled if you had used the car for the whole year.

If the answer is more than 5,000 or you travelled more than 5,000 business kilometres, you can use this method to claim your expenses. e-tax will multiply the amount it worked out in part A by the number of days you owned or leased the car and then divide the result by 365.

EXAMPLE

Aaron bought a car on 1 March 2007 for $40,000 and he travelled 3,600 kilometres for work between 1 March 2007 and 30 June 2007 (122 days).

Because he did not own the car for the full year, Aaron needs to work out if he can use METHOD 2.

A	As he travelled less than 5,000 business kilometres, Aaron multiplies the business kilometres he travelled by 365 and divides the result by the number of days he owned the car.

3,600 X 365
	=10,770
122
Because this is more than 5,000 business kilometres, he is able to use this method.

B	Aaron calculates the following to get 12% of the cost of the car.

$40,000 X 12
	= $4,800
100
He multiplies this amount by the number of days he owned the car and divides the result by 365.

$4,800 X 122
	= $1,605
365
This is the amount Aaron can claim for car expenses.

METHOD 3 – One-third of actual expenses method

This method allows you to claim one-third of your expenses for each car. Car expenses do not include capital costs such as the initial cost of your car or improvements to it.

You can use this method if you used your car to travel more than 5,000 business kilometres in 2006-07. This method is also available if you would have used your car to travel more than 5,000 business kilometres had you used it for the whole of 2006-07.

You must have written evidence for all your car expenses except fuel and oil costs.

Fuel and oil costs

There are two ways to work out your fuel and oil costs:

•	Use your fuel and oil receipts, if you have them.

•	Keep odometer records and make a reasonable estimate based on those records.

Odometer records need to show the odometer readings of the car at the start and end of the period that you owned or leased the car during 2006-07. They should also show the car's engine capacity, make, model and registration number. You may also need to be able to show how you worked out your business kilometres and any reasonable estimate you made.

EXAMPLE

Sim has made a reasonable estimate that she travelled 7,000 business kilometres during 2006-07. She is able to use this method.

Her odometer records show she used the car to travel a total of 25,000 kilometres during 2006-07.

She also estimated that the car used 10 litres of fuel per 100 kilometres travelled, based on the manufacturer's guidelines and the average fuel price for the period in her area was $1.30 per litre.

Sim would work out her fuel claim like this:

25,000 x 10/100 = 2,500

2,500 x $1.30 = $3,250

This is the amount Sim would include for fuel.

METHOD 4 – Logbook method

Introduction

Business use percentage

Did your car use change during 2006-07?

Your logbook

Logbook entries for each journey

Odometer records

Working out your claim

Introduction

Using the ‘logbook’ method, you work out the business use percentage of your car. You can then claim this percentage of each car expense. Car expenses do not include capital costs such as the purchase price of your car or improvements to it.

You must keep:

•	a logbook

•	odometer records, and

•	written evidence for all your car expenses except for fuel and oil costs.

Business use percentage

You can claim the business use percentage of all your car expenses. To work out your business use percentage, use the details from your logbook and odometer records.

From your records, work out the total kilometres you travelled. Work out how many were business kilometres. Divide this number by the total number of kilometres travelled. Multiply the answer by 100.

EXAMPLE

At the end of the logbook period, Tim's logbook shows that he travelled a total of 11,000 kilometres of which 6,600 were business kilometres.

Tim would work out his business use percentage like this:

6,600/11,000 x 100 = 60%.

This is the business use percentage Tim would use to work out his car expenses claim.

It is in your interest to write in the logbook all journeys you make in your car for work activities. If a work-related journey is not recorded, the logbook will indicate a lower business use percentage than it could.

Did the pattern of use of your car change during 2006-07?

If the pattern of use of your car changed, make a reasonable estimate of what your business use percentage would have been for the whole of 2006-07, taking into account your logbook, odometer and other records, any variations in the pattern of use of your car and any changes in the number of cars you used in the course of earning your income.

Your logbook

Your logbook is valid for five years. If this is the first year you are using this method, you must have kept a logbook during 2006-07. The logbook must cover at least 12 continuous weeks. If you started to use your car for business purposes less than 12 weeks before the end of 2006-07, you are able to continue to keep a logbook into 2007-08 so that your logbook covers the required 12 weeks. If you want to use the logbook method for two or more cars, the logbook for each car must cover the same period.

If you have not kept a logbook since 2001-02, you must have kept a new logbook for 2006-07. If you did not keep a new logbook for 2006-07, you cannot use the ‘logbook’ method. You must use another method.

Where you have kept a logbook for 2006-07 it must contain the following information:

•	when the logbook period begins and ends

•	the car's odometer readings at the start and end of the logbook period

•	the total number of kilometres that the car travelled during the logbook period

•	the number of kilometres travelled for work activities based on journeys recorded in the logbook. If you made two or more in a row on the same day, you can record them as a single journey

•	the business use percentage for the logbook period.

If you established your business use percentage using a logbook from an earlier year you need to keep that logbook and maintain odometer records.

You also need a logbook if the Tax Office told you in writing to keep one. We do not supply logbooks. Pre-printed logbooks are available from stationery suppliers or you can draw up your own.

Logbook entries for each journey

Your logbook must show details of each business trip. You must write down:

•	the date the journey began and the date it ended

•	the car's odometer readings at the start and end of the journey

•	how many kilometres the car travelled on the journey, and

•	the reason for the journey.

The logbook entries must be made at the end of the journey, or as soon as possible afterwards, and they must be in English.

Odometer records

You must keep written odometer records for the period you owned or leased the car during 2006-07. You need to record:

•	the car's odometer readings at the start and end of the period, and

•	the make, model, engine capacity and registration number of the car.

Odometer records can be kept as part of your logbook if you kept one for 2006-07. If you did not keep a logbook in 2006-07, you need to have kept a separate record of the odometer readings and other details.

Working out your claim

Once you have worked out your business use percentage, you can apply it to your car expenses.

You need to keep written evidence of all your car expenses except for fuel and oil costs, for example, for registration, repairs, interest and insurance.

There are two ways to work out your fuel and oil costs:

•	use your fuel and oil receipts, if you have them

•	make a reasonable estimate based on your odometer records.

EXAMPLE

Bayden's odometer records show he used his car to travel a total of 7,000 kilometres during 2006-07.

Based on the manufacturer's guidelines, he estimated that the car used 10 litres of fuel per 100 kilometres travelled and the average fuel price for the period in his area was $1.20 per litre.

Bayden would work out his fuel claim like this:

7,000 x 10/100 = 700 litres

700 x $1.20 = $840

This is the amount Bayden would include for fuel.

RECORD KEEPING

Keep written evidence of your car expenses, where required. Keep this evidence for five years from the date you lodge your tax return. If at the end of this period you are in a dispute with the Tax Office that relates to this work expense, you must keep your records until the dispute is resolved.


Item D6 Low value pool deduction
	Low value pool deduction
This topic covers:

Who does this item apply to?

You need to know

What you may need

WHO DOES THIS ITEM APPLY TO?

Complete this item if you are claiming a deduction for the decline in value of low-cost assets and certain other depreciating assets which you have allocated to a low-value pool.

YOU NEED TO KNOW

NOTE:
Depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.
A taxable purpose is the purpose of producing assessable income, the purpose of exploration or prospecting, the purpose of mining site rehabilitation, or environmental protection activities.

You cannot allocate the following depreciating assets to a low-value pool:

•	assets for which you have previously claimed deductions worked out using the prime cost method

•	assets that cost $300 or less for which you can claim an immediate deduction

•	assets for which you deduct amounts under the simplified tax system (STS)

•	horticultural plants

You can allocate the following types of depreciating assets to a low-value pool for 2006-07:

•	low-cost assets – assets costing less than $1,000 and

•	low-value assets – assets that are not low-cost assets but which have, under the diminishing value method, been written off to less than $1,000 as at 1 July 2006.

You can only have one low-value pool.

Once you choose to allocate a low-cost asset to a low-value pool, all low-cost assets you start to hold in that and any subsequent income year must also be allocated to the pool.

Claiming your low-value pool deduction

You must claim your deduction:

•	at item 14 if your low-value pool contains only assets used in business and not for any other income-producing purpose. e-tax will write the amount to item P8 on the  Business and professional items schedule 2007.

•	at this item in all other cases – these include where your low-value pool contained assets used in relation to your work as an employee (items D1 to D5) or to gain rental income (item 20).

For more information, see Low-value pool worksheet.

Working out your deduction

The deduction for the decline in value of depreciating assets in a low-value pool is worked out using a diminishing value rate of 37.5%.

For the income year in which you first allocated one or more low-cost assets to a low-value pool, you work out your deduction at a rate of 18.75% or half the normal pool rate. Halving the rate recognises that assets may be allocated to the pool throughout the income year and eliminates the need to make separate calculations for each asset based on the date it is allocated  to the pool.

Taxable use percentage

When you allocate an asset to a low-value pool, you must make a reasonable estimate of the percentage of your use of the asset that will be for a taxable purpose over its effective life (for a low-cost asset) or its remaining effective life (for a low-value asset). This estimate is the taxable use percentage.

Only the taxable use percentage of the cost (of a low-cost asset) or the taxable use percentage of the opening adjustable value (of a low-value asset) is allocated to the pool and used to calculate the deduction for decline in value.

Your low-value pool deduction

e-tax will calculate your low-value pool deduction for you. If you want to know how the deduction is calculated, see How to calculate your low-value pool deduction.

Disposal of depreciating assets allocated to a low-value pool

If a ‘balancing adjustment event’ happens to an asset in a low-value pool in 2006-07 (such as the sale, loss or destruction of the asset), you need to reduce the closing pool balance for 2006-07 (see below) by the taxable use percentage of the asset’s termination value. (The asset’s termination value is usually the proceeds from the asset’s sale or the insurance payout for the asset’s loss or destruction.) If the taxable use percentage of the asset’s termination value is more than the closing pool balance, the closing pool balance is reduced to nil and e-tax includes the excess in your assessable income at item 22.

Closing pool balance for 2006-07

e-tax will display the closing balance of your low-value pool. You will need to use the closing pool balance to calculate your low-value pool deduction for next year. Record the closing pool balance on a piece of paper and keep it with your records.

WHAT YOU MAY NEED

The publication Guide to depreciating assets 2007 (NAT 1996-6.2007).


Item D6 How to calculate your low-value pool deduction
How to calculate your low-value pool deduction

Click on the Print button to get a copy of this worksheet.

The worksheet below shows you how to work out your low-value pool deduction. An example is presented and there is space left for your own calculations.

EXAMPLE

Edward bought a printer for $600 in 2006-07 and allocated it to a low-value pool. He estimated that the printer will be used 40% of the time for taxable purposes over its effective life. This the first year of Edward’s low-value pool.

In 2006-07 Edward also decided to allocate an existing laptop computer to the low-value pool. He has previously claimed deductions for the laptop worked out under the diminishing value method. The laptop's opening adjustable value at 1 July 2006 was $900 and Edward will use it only for taxable purposes over its remaining effective life.

WORKSHEET		Edward		You
The closing balance of the pool for 2005-06	(a)	$0	(a)	$______________
If you did not have a low-value pool in 2005-06, write "0" at (a).
For each low-value asset allocated to the pool in 2006-07, multiply the opening adjustable value (at 1 July 2006) by the taxable use percentage. Add up the amounts and write the total at (b).	(b)	$900	(b)	$______________
Add (a) and (b).	(c)	$900	(c)	$______________
Multiply (c) by 37.5%.	(d)	$337	(d)	$______________
For each low-cost asset allocated to the pool in 2006-07, multiply the cost (including additional capital costs incurred in 2006-07, such as costs of improvements) by the taxable use percentage.
Add up the amounts and (see example) write the total at (e).	(e)	(eg $600 X 40%) $240	(e)	$______________
For each (i) asset allocated to the pool in a prior year and (ii) low-value assets added this year for which you incurred additional capital costs (such as costs of  improvements) in 2006-07, multiply the costs by the taxable use percentage. Add up the amounts and write the total at (f).	(f)	$0	(f)	$______________
Add (e) and (f).	(g)	$240	(g)	$______________
Multiply (g) by 18.75%.	(h)	$45	(h)	$______________
Add up the amounts at (d) and (h).	(i)	$382	(i)	$______________
The amount at (i) is the total low-value pool deduction. Edward will show $382 at K item D6 on his tax return.

CLOSING POOL BALANCE FOR 2006-07

You will need the closing pool value for 2006-07 to calculate your low-value pool deduction for next year.

WORKSHEET	Edward	You
Closing pool balance for 2005-06 (from (a) on low-value pool deduction worksheet)	$0	$_______________
PLUS
Amounts allocated to the pool in 2006-07 for:
• low-value assets (from (b) on worksheet)	$900	$_______________
• low-cost assets (from (e) on worksheet)	$240	$_______________
• additional capital costs relating to pooled assets (from (f) on worksheet)	$0	$_______________
LESS
Total low-value pool deduction for decline in value (from (i) on worksheet)	$382	$_______________
SUBTOTAL	$758	$_______________
LESS
Taxable use percentage of termination value of each asset subject to a balancing adjustment event in 2006-07 (see Disposal of depreciating assets allocated to a low-value pool)	$0	$_______________
CLOSING POOL BALANCE 2006-07	$758	$_______________
Keep a record of your 2006-07 closing pool balance for next year’s tax return.


Item D7 Interest and dividend deductions
	Interest and dividend deductions
This topic covers:

Who does this item apply to?

You need to know

What you may need

Do not show at this item

WHO DOES THIS ITEM APPLY TO?

Complete this item if you had any expenses that you can claim as deductions against assessable interest and dividend income or a ‘listed investment company (LIC) capital gain amount’ included in a dividend received from an LIC.

Your expenses might include:

•	account keeping fees or management fees

•	interest charged on money borrowed to purchase shares

NOTE:
Dividends received from an LIC must be shown at item 11 Dividends.

YOU NEED TO KNOW

You can claim a deduction if you are able to show that the expenses were incurred in earning interest and dividend income.

You cannot claim a deduction for expenses incurred in deriving an exempt dividend or other exempt income.

e-tax will check whether or not you have shown any income from interest or dividends in the income section. If you haven't shown any interest or dividend income e-tax will need more information.

If you have been paid or credited interest or dividend income and have not entered it, use the navigator to return to item 10 – Gross interest or item 11 – Dividends.

If you have not been paid or credited interest or dividend income you may still be entitled to allowable deductions. For example, if you want to claim a deduction for interest incurred on money borrowed to purchase shares which did not generate any income in 2006-07. If this is the case, you must enter a value of zero at either interest or dividends in the income section.

Deductions you can claim against your assessable interest and dividend income

Account keeping fees

Some financial institutions charge account keeping fees. You can claim for these fees where the account was held for investment purposes – for example, a cash management account. You will find these fees listed on your statements or in your passbooks.

If you were not the sole holder of an account you can only claim your share of fees, charges or taxes on the account. For example, if you held an equal share in an account with your spouse, you can only claim half of any allowable account keeping fees paid on that account.

Other deductions

You can claim for interest incurred on money borrowed to purchase shares and other related investments from which you derived assessable interest or dividend income. If you used the money you borrowed for both private and income producing purposes, then you must apportion the interest between each purpose. Only that interest incurred for an income-producing purpose is deductible.

Under the Tax Laws Amendment (2006 Measures No.7) Act 2007 some interest on borrowings for shares, units in unit trusts, and stapled securities, which is attributable to capital protection under a capital protected borrowing is not deductible, and is treated as a payment for a put option.  For more information, visit our website at www.ato.gov.au.

You can claim for ongoing management fees, retainers and amounts paid for advice relating to changes in the mix of investment. However, you cannot claim a fee charged for drawing up an investment plan unless you were carrying on an investment business. You cannot claim a fee paid to an investment adviser for drawing up an initial investment plan which includes pre-existing investments.

You may also be able to claim a portion of other costs if they were incurred in managing your investments. Such costs would include travel expenses, the cost of specialist investment journals or subscriptions, borrowing costs, the cost of internet access and a capital allowance for the decline in value of your computer. For more information, read You and your shares 2007 (NAT 2632 – 6.2007).

Thin capitalisation

If you have debt deductions such as interest your claims may be affected by the thin capitalisation rules. These rules may apply if you are an Australian resident for tax purposes and you (or any associate entities) have certain overseas interests, or you are a foreign resident with operations or investments in Australia, and your debt deductions (combined with those of your associate entities) for 2006-07 were more than $250,000.  If you are a foreign resident the threshold applies in respect of debt deductions against Australian assessable income.  More information is available from our website at www.ato.gov.au.

Deduction for 50% of a listed investment company LIC capital gain amount

If you were an Australian resident when a LIC paid you a dividend, and the dividend included a LIC capital gain amount, you can claim a deduction of 50% of the LIC capital gain amount. The LIC capital gain amount will be shown separately on your dividend statement.

WHAT YOU MAY NEED

•	your bank or financial institution statements or passbooks

•	your dividend statements showing any LIC capital gain amount.

DO NOT SHOW AT THIS ITEM

Do not show at this item:

•	an amount for fees, charges or taxes relating to an account kept as an essential part of a business – item 14 Net income or loss from business

•	expenses incurred in earning foreign source interest or dividends. Take these expenses into account in working out the amount you show at item 19 Foreign source income and foreign assets or property or, in the case of debt deductions, claimed at item D15

•	expenses incurred in relation to:

o	a partnership or unit trust distribution – item 12

o	rental income – item 20

o	business income – item 14

o	tax costs item D10

o	the land transport facilities tax offset scheme or infrastructure borrowings scheme item D15.


 D7 Interest and dividend income deductions

Do not show at this item:

•	an amount for fees, charges or taxes relating to an account kept as an essential part of a business – item 14 Net income or loss from business

•	expenses incurred in earning foreign source interest or dividends. Take these expenses into account in working out the amount you show at item 19 Foreign source income and foreign assets or property or, in the case of debt deductions, claimed at item D15

•	expenses incurred in relation to:

o	a partnership or unit trust distribution – item 12

o	rental income – item 20

o	business income – item 14

o	tax costs item D10

o	the land transport facilities tax offset scheme or infrastructure borrowings scheme item D15.


Item D11 Australian film industry incentives
	Australian film industry incentives
This topic covers:

Who does this item apply to?

What you need

You need to know

WHO DOES THIS ITEM APPLY TO?

Complete this item if you are entitled to a deduction for investing in the Australian film industry.

You cannot claim the cost of cinema tickets or expenses associated with attending a film festival as an Australian film industry incentive.

WHAT YOU NEED

You need to read Australian film industry incentives 2007 (NAT 0954-6.2007) before you can complete this item.

YOU NEED TO KNOW

You cannot claim a deduction for investing in the Australian film industry unless you have invested in a film that has a certificate from the Minister for Communications, Information Technology and the Arts, stating that it is a qualifying film or a film certified as an Australian film.

Do not claim at this item subscriptions for shares in a Film Licensed Investment Company. Claim them at item D15.


Item D14 Individual - Deductions for project pool
	Deduction for project pool
This topic covers:

Who does this item apply to?

Completing this item in e-tax

You need to know

What you may need

Do not show at this item

WHO DOES THIS ITEM APPLY TO?

Complete this item if you had capital expenditure directly connected with a project.

COMPLETING THIS ITEM IN e-tax

You must complete a project pool worksheet for each project for which you are claiming a deduction.

When you complete a project pool worksheet it will be listed in the Existing worksheets navigator on the left of the e-tax window. Click on a worksheet in the navigator to display it for viewing or changing.

Most of the details you need to provide are self-explanatory and will not be explained further here. The information provided below will help you complete the worksheet correctly.

YOU NEED TO KNOW

You may be able to claim a deduction at this item for certain capital expenditure allocated to a project pool for:

•	a project which you operated in 2006-07 for a taxable purposes

•	a project carried on or proposed to be carried on for a taxable purpose which was abandoned, sold or otherwise disposed of in 2006-07, before or after it started to operate.

Certain capital expenditure you incurred after 30 June 2001 which was directly connected with a project that you carried on, or proposed to carry on, for a taxable purpose can be allocated to a project pool and written off over the ‘project life’. The expenditure must not otherwise be deductible or form part of the cost of a depreciating asset you hold or held.

Such capital expenditure – known as a ‘project amount’ – is expenditure incurred:

•	to create or upgrade community infrastructure for a community associated with the project – this expenditure must be paid (not just incurred) to be a project amount

•	for site preparation for depreciating assets (other than in draining swamp or low-lying land or for clearing land for horticultural plants)

•	for feasibility studies or environmental assessments for the project

•	to obtain information associated with the project

•	in seeking to obtain a right to intellectual property

•	for ornamental trees or shrubs.

NOTE:
If you are unsure if the capital expenditure you incurred qualifies as a project amount, see the publication Guide to depreciating assets 2007 (NAT 1996-6.2007).

If, in the 2006-07 income year you:

•	recouped an amount of expenditure allocated to the project pool or

•	derived a capital amount in relation to a project amount or something on which a project amount was expended

the amount is assessable income and must be shown at item 22.

If a project was abandoned, sold or otherwise disposed of in 2006-07 – whether or not the project had started to operate – you can claim a deduction for the 2005-06 closing pool value (if any) plus any project amounts allocated to the pool in the 2006-07 income year. Any amount you received for the abandonment, sale or other disposal is assessable income and must be shown at item 22.

Project amounts are allocated to a ‘project pool’.

You spread your deduction for project amounts allocated to a project pool over the project life. The project life is the period from when the project starts to operate until when it stops operating. The project life is not determined by how long you intend to carry on the project. Factors outside your control, such as something inherent in the project like a legislative or environmental restriction that limits the project’s operating period, are relevant to estimating the project life.

If there is no finite project life, there is no project and therefore no deduction is available under these rules.

You start to deduct amounts for a project pool for the income year when the project starts to operate.  So if you started to operate a project in the 2006-07 income year for a taxable purpose, a deduction is available for that year. The deduction is worked out on the value of the project pool at the end of 2006-07.

NOTE:
A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.
A taxable purpose is the purpose of producing assessable income, the purpose of exploration or prospecting, the purpose of mining site rehabilitation, or environmental protection activities.

If you want to know how e-tax calculates your deduction, see How the deduction for project pool is calculated.

Closing pool value for 2006-07

e-tax will display this amount on the screen. Record the closing pool balance on a piece of paper and keep it with your records. You will need the closing pool value for 2006-07 to work out your deduction for project pool next year.

Foreign exchange rules

The pool value can be subject to adjustments. An adjustment could happen under foreign exchange (forex) rules that apply to transactions conducted in foreign currency.

If during the income year you met or otherwise ceased to have an obligation to pay in a foreign currency incurred a project amount which you allocated to a project pool, you might have derived a gain or incurred a loss under these rules. If the foreign currency became due for payment within 12 months after the time you incurred it, usually the pool value will be reduced by any such gain (known as a forex gain) and it will be increased by any such loss (known as a forex loss).

If the forex gain exceeds the pool value, the pool value is reduced to zero and the residual gain is assessable income which you should include at item 22. If you had previously elected that this treatment (known as ‘the 12 month rule’) should not apply, any gain will be assessable and should be included at item 22 and any loss will be deductible and should be included at item D15.

For more information about the forex rules, see item 22 or item D15 or visit the Tax Office website at www.ato.gov.au.

Where a project is abandoned, sold or otherwise disposed of in 2006-07

If a project was abandoned, sold or otherwise disposed of in 2006-07—whether or not the project had started to operate—you can claim a deduction for the 2005-06 closing pool value (if any) plus any project amounts allocated to the pool in the 2006-07 income year. Any amount you receive for the abandonment, sale or other disposal is assessable income and e-tax will show this amount at item 22.

WHAT YOU MAY NEED

The publication Guide to depreciating assets 2007.

DO NOT SHOW AT THIS ITEM

You cannot claim a deduction at this item for:

•	private or domestic expenditure such as the cost of constructing a driveway at your home

•	capital expenditure directly connected with a project undertaken in carrying on a business. Show the amounts at the Reconciliation label Business deduction for project pool at item 14.


Item D14 How the deduction for project pool is calculated
How the deduction for project pool is calculated

Click on the Print button to get a copy of this worksheet.

The deduction is worked out on the value of the project pool at the end of 2006-07. The example given is based on a project amount of $30,000 allocated to a project with a project life of 35 years.

		Example	You
Value of project pool at 30 June 2007. This is the closing pool value for the 2005-06 income year (if any) plus the sum of any project amounts allocated to the pool in 2006-07.	(a)	$30,000	$_____________
Your estimate of the life of the project (in years including, fractions of years)	(b)	35 years	_____________
Divide (a) by (b).	(c)	$857	$_____________
Multiply (c) by 200%  This is your 2006-07 deduction	(d)	$1,714	$_____________
NOTE:
Your deduction at (d) cannot be more than the amount at (a).

If a project was operated in 2006-07 for purposes other than taxable purposes, your deduction at (d) must be reduced by a reasonable amount for the extent to which the project operated for such other purposes.

Where your project pool contains only project amounts incurred on or after 10 May 2006 and the project started to operate on or after that date, your deduction at (d) is calculated by multiplying (c) by 200%.  A rate of 150% is instead used for that calculation for a project that started to operate before that date or a project that started to operate on or after that date where the project pool contains project amounts incurred before that date.  You cannot use the higher rate if on or after the 10 May 2006 you abandon, sell or otherwise dispose of an existing project and then restart operating it on or after that date just so deductions can be calculated using the higher rate.

CLOSING POOL VALUE FOR 2006-07

This is amount (a) less amount (d) in the WORKSHEET (before any reduction in (d) for the extent to which the project was operated in 2006-07 for purposes other than taxable purposes. You will need this closing pool value to work out your deduction for project amounts next year.


Item D15 Other deductions
	Other deductions
This topic covers:

Who does this item apply to?

You need to know

Do not show at this item

WHO DOES THIS ITEM APPLY TO?

You need to complete this item if you have any other expenses that you have not been able to claim as deductions at items D1 to D14 or elsewhere on your tax return.

YOU NEED TO KNOW

Expenses you may be entitled to claim:

•	election expenses for local, territory, state or federal candidates

•	certain deductible capital expenditure not claimed in full prior to ceasing a primary production business where a deduction  can be  claimed in a subsequent year or years - for example, water conservation expenditure, which may be  deducted over a three-year period

•	deductions allowable for subscriptions for shares under the film licensed investment company (FLIC) scheme

•	non-capital losses incurred on the disposal or redemption of a traditional security which are deductible under section 70B of the Income Tax Assessment Act 1936 (ITAA 1936).  For more information, see the section on Sale or disposal of company bonds and convertible notes in You and your shares 2007 (NAT 2632 - 6.2007).

•	Income protection, sickness and accident insurance premiums

•	foreign exchange losses

•	interest incurred on money borrowed to invest under the land transport facilities tax offset scheme or infrastructure borrowings scheme

•	debt deductions incurred in earning certain foreign non-assessable non-exempt income that are not disallowed under the thin capitalisation rules

•	debt deductions incurred in earning assessable income that are not disallowed under the thin capitalisation rules and have not been claimed elsewhere

•	amounts deductible under section 40-880 of the Income Tax Assessment Act 1997 (ITAA 1997) (five-year write-off for certain business-related capital expenditure) not claimed in full before you ceased business or before you stopped carrying on your business as an individual (for example, if you started to carry on your business through a company or in a partnership)

•	Simplified Tax System (STS) pool deductions (for depreciating assets you allocated to an STS pool in a prior year) that you cannot claim at item P8 on the Business and professional items schedule for individuals 2007 because you did not carry on any business during 2006-07. For further information, see The simplified tax system - a guide for tax agents and small business (NAT 6459).

•	a deduction for the net personal services income loss of a personal services entity that related to your personal services income

•	United Medical Protection Limited (UMP) support payments.

Election expenses

Election expenses include a candidate’s costs of contesting an election at local, territory, state or federal levels of government. A deduction for local government body election expenses cannot exceed $1,000 for each election contested, even if the expenditure is incurred in more than one year of income. Entertainment expenses only qualify as deductible election expenses in very restricted circumstances.

For more information about deductions for election expenses see Taxation Ruling TR1999/10 – Income tax: members of parliament - allowances, reimbursements, donations and gifts, benefits, deductions and recoupments and Taxation Ruling IT 2258 – Income tax: election expenses: deductibility of expenditure incurred and effect of public funding of elections.

NOTE:
A reimbursement in 2006-07 of any election expenses which you have claimed as a deduction in 2006-07 or a previous year must be shown as income at item 22. If you perform services and receive a payment for work in progress, you must include that amount as income at item 22.

Income Protection, sickness and accident insurance premiums

You can claim the cost of any premiums you paid for insurance against the loss of your income. You must include any payment you received under the policy for loss of your income at item 22.

You cannot claim a deduction for a premium or any part of a premium which you paid under a policy to compensate you for such things as physical injury. If it cannot be determined which part of the premium was paid for insurance against the loss of your income, then you cannot claim any deduction for the premium.

Foreign exchange losses

You can claim your Australian foreign source exchange losses (forex losses) at this item unless you carried on a business and included your forex losses in calculating your business net income or loss at item 14.  Show any Australian assessable foreign exchange gains at item 22.

Forex losses are taken into account at item 19.

Losses attributable to a fluctuation in a currency exchange rate or to an agreed exchange rate differing from an actual exchange rate are brought to account when they are realised.  This is when you:

•	dispose of foreign currency, or a right thereto

•	cease to have a right to receive or pay foreign currency, or

•	cease to have an obligation to pay or receive foreign currency.

Some forex losses are not deductible – for example forex losses of a private or domestic nature or those relating to exempt income.  In some cases, forex losses on the acquisition of capital or depreciating assets, or on disposal of capital assets, are also not deductible.  In these cases the losses are integrated into or matched with the taxation treatment of the underlying asset.

In some circumstances, you may make an election that affects the realisation or treatment of a forex loss.  These together with more information about the measures and how to calculate your foreign exchange losses, are set out on the Tax Office website at www.ato.gov.au.

Film licensed investment company (FLIC) deductions

You can claim a deduction for the purchase of shares in a FLIC during the period the FLIC is licensed to raise concessional share capital.  The deduction is allowable for the income year in which the shares are fully paid and issued.

Deductions are available only for the income years ending 30 June 2006 and 30 June 2007.

Debt deductions

A debt deduction is, broadly, an expense incurred in obtaining or maintaining a loan or other form of debt finance. Examples include interest, establishment fees, legal costs for preparing loan documents and fees charged by lending institutions for drawing on a loan facility.

If you were an Australian resident, you can claim debt deductions incurred in earning certain types of foreign non-assessable non-exempt income that were payments out of attributed income and attributed foreign investment fund income. Debt deductions incurred in earning assessable income - for example, foreign source income that has been included at item 19 may be claimed at this item, if they have not been claimed elsewhere on your tax return.

You are not allowed to claim debt deductions disallowed under the thin capitalisation rules. Thin capitalisation rules may apply if:

(a)  you were an Australian resident and you (or any associate entities) had certain overseas interests, and your debt deductions combined with those of your associate entities were more than $250,000 for 2006-07, or

(b)  you were a foreign resident with operations or investments in Australia and your debt deductions against Australian assessable income combined with those of your associate entities were more than $250,000 for 2006-07.

More information about thin capitalisation is available on the Tax Office website at www.ato.gov.au.

Section 40-880 deductions

This section allows you to claim a deduction for certain business-related capital expenditure over five income years.  For expenditure incurred before 1 July 2005, there are seven specific types of capital expenditure which you may be able to deduct. These include costs incurred in ceasing to carry on your business and the cost of establishing your business structure or converting your business structure to another structure (for example, the cost of transferring the business assets to a partnership which continues the business).

For expenditure incurred on or after 1 July 2005, the law has been changed so that a deduction can now also be claimed for other types of capital expenditure, provided that a deduction for that expenditure is not denied, or the expenditure is not taken into account, under another provision in the tax law.

Claim a section 40-880 deduction at this item if:

•	You incurred the relevant capital expenses before 1 July 2005 and, in a previous income year, you ceased business or you stopped carrying on your business as an individual (for example if you started to carry on your business through a company or in a partnership) and you have not fully claimed your five–year write–off, or

•	You incurred the relevant capital expenses on or after 1 July 2005 and

o	the expenditure relates to a business that was proposed at the time the expense was incurred.

o	the business commenced before 30 June 2007, and

o	you are carrying on the business through a company or trust.

•	You incurred the relevant capital expense on or after 1 July 2005 and the expenditure relates to a business which ceased in a previous income year and you carried on the business through a company or trust.

If you incurred relevant section 40-880 expenses on or after 1 July 2005 and you carried on the business as a sole trader or through a partnership, claim the amount at P8 in the Business and professional items schedule for individuals 2007.

If you incurred relevant section 40-880 expenses on or after 1 July 2005 but had not commenced the business by 30 June 2007, your deduction for this amount will be deferred until the year in which the business activity commences.  The deferred amount(s) may be deducted in the year in which the activity commences.

NOTE:
Refer to the fact sheet Non-commercial losses:  overview (NAT 3379-5.2003) for more information on when you need to defer your section 40-880 section.

For more information about section 40-880 deductions see the Guide to depreciating assets 2007 (NAT 1996-6.2007).

Net personal services income loss of a personal services entity that related to your personal services income

There are special rules for the income tax treatment of certain personal services income.  Personal services income is income that is mainly a reward for your personal efforts or skills and is generally paid to you or to a personal services entity, (being a company, partnership or trust).

Where the payment was made to a personal services entity and that entity incurred a personal services income loss relating to your personal services income, you can claim a deduction for that loss.

For more information about net personal services income losses see Personal services income schedule 2007 (NAT 3421-6.2007)

If you need help in relation to these rules phone the Business Infoline on 13 28 66.

United Medical Protection Limited (UMP) support payments

You can claim a deduction for making UMP support payments.  This deduction applies to you if you would not otherwise be entitled to a deduction for your payments – for example, if you have retired.

DO NOT SHOW AT THIS ITEM:

•	expenses relating to your work as an employee - item D1, item D2, item D3, item D4, item D5

•	expenses relating to carrying on a business as a sole trader (including personal services income) - item 14

•	expenses relating to investment planning and advice involving shares, unit trusts and interest bearing deposits - item D7


Item T7 Ongoing baby bonus claim
	Baby bonus claim
e-tax completes item T7 with the information you provide in the Baby bonus claim section of the interview.

For more information, refer to Baby bonus claim.


Item T8 Superannuation contributions on behalf of your spouse
	Superannuation contributions  on behalf of your spouse
This topic covers:

Who does this item apply to?

You need to know

Further information

WHO DOES THIS ITEM APPLY TO?

Complete this item if you made contributions to a complying superannuation fund or a retirement savings account (RSA) on behalf of your ‘non-working’ or ‘low income-earning’ spouse, married or de facto.

DEFINITION:
Your spouse is your husband or wife to whom you are legally married, or a person who lives with you on a genuine domestic basis as your husband or wife. Under Australian law your husband or wife cannot be the same sex as you.

YOU NEED TO KNOW

An RSA is a special account offered by banks, building societies, credit unions, life insurance companies and prescribed financial institutions. It is used for retirement savings and is similar to a superannuation fund.

A tax offset of up to $540 per year is available where:

•	the contributions were not deductible to you AND

•	both you and your spouse were Australian residents when the contributions were made AND

•	at the time of making the contributions you and your spouse were not living separately and apart on a permanent basis AND

•	the sum of your spouse's assessable income and total reportable fringe benefits amounts was less than $13,800.

NOTE:
The tax offset for eligible spouse contributions can not be claimed for superannuation contributions that you made to your own fund then split to your spouse.

The tax offset is calculated as 18% of the lesser of:

(a)	$3,000, reduced by $1 for every $1 that the sum of your spouse's assessable income and total reportable fringe benefits amounts for the year was more than $10,800, or

(b)	the total of your contributions for your spouse for the year.

NOTE:
If you had more than one spouse during the income year and you satisfy the conditions for the tax offset in relation to more than one spouse, the tax offset is the lesser of the sum of the tax offset entitlements for each spouse, or $540.

FURTHER INFORMATION

e-tax will work out the tax offset you are entitled to and display it on the screen. If you want to know how the tax offset is worked out, read How your tax offset for superannuation contributions on behalf of your spouse is worked out.


Item T8 definition

For the purposes of this item, your spouse’s assessable income is the amount your spouse wrote at TOTAL INCOME OR LOSS on page 2 of their tax return, unless:

•	they had a distribution from a partnership or trust, income or losses from rent or business (including personal services income), a capital gain or foreign source income, or

•	they claimed a deductible amount for a pension or annuity at item D9 or item D12 on their tax return.

If either of these applied to your spouse, phone the Superannuation Infoline on 13 10 20 for help to work out your spouse's assessable income before completing this item.

Your spouse’s reportable fringe benefits amounts are recorded on their payment summaries.


Item T8 How your tax offset for superannuation contributions on behalf of your spouse is worked out

The tax offset is calculated as 18% of the lesser of:

(a)	$3,000, reduced by $1 for every $1 that the sum of your spouse's assessable income and total reportable fringe benefits amounts for the year was more than $10,800, or

(b)	the total of your contributions for your spouse for the year.

NOTE:
If you had more than one spouse during the income year and you satisfy the conditions for the tax offset in relation to more than one spouse, the tax offset is the lesser of the sum of the tax offset entitlements for each spouse, or $540.

If the sum of your spouse's assessable income and total reportable fringe benefits amounts is $10,800 or less, use WORKSHEET 1.

If the sum of your spouse's assessable income and total reportable fringe benefits amounts is more than $10,800 but less than $13,800, use WORKSHEET 2.

WORKSHEET 1

Maximum spouse contributions eligible for the tax offset	(a) $   3,000
Amount of contributions paid	(b) $_________
Write the lesser of (a) or (b).	(c) $_________
Multiply (c) by 18 and divide by 100.	(d) $_________

WORKSHEET 2

Maximum spouse contributions eligible for the tax offset	(a) $   3,000
The sum of your spouse's assessable income and total reportable fringe benefits amounts	(b) $_________
Base amount	(c) $  10,800
Take (c) away from (b).	(d) $_________
Take (d) away from (a).	(e) $_________
Amount of contributions paid	(f ) $_________
Write the lesser of (e) or (f ).	(g) $_________
Multiply (g) by 18 and divide by 100.	(h) $_________
The tax offset is the amount shown at (d) on WORKSHEET 1 or (h) on WORKSHEET 2.


Item T9  Zone or overseas forces tax offset
	Zone or overseas forces
This topic covers:

Who does this item apply to?

Zone tax offset

Overseas forces

Further information:

Days included in calculation of an overseas forces tax offset

What if I qualify for both tax offsets?

Working out your tax offset

Selected localities within zones and special areas

WHO DOES THIS ITEM APPLY TO?

Complete this item if you are entitled to claim a zone tax offset or an overseas forces tax offset.

YOU NEED TO KNOW

You may be able to claim a tax offset if you:

•	lived or worked in a remote or isolated area of Australia, not including an offshore oil or gas rig, or

•	served overseas as a member of the Australian Defence Force or a United Nations armed force

WHAT YOU MAY NEED

•	You will need to know when you arrived in or departed from a remote area and/or overseas forces area AND

•	if you have any of the following dependants during the year:

o	spouse

o	child under 21

o	student under 25

o	child-housekeeper

you will need to know the period they were a dependant during the year and their separate net income (SNI) AND

•	if you had a housekeeper during the year, you will need to know the period that you had the housekeeper.

ZONE TAX OFFSET

YOU NEED TO KNOW

Remote areas are classed as either zone A and zone B. There are also special areas within these zones.

Fishing trawlers and offshore oil and gas rigs are not a remote or isolated area for the purposes of the zone tax offset. Taxation Ruling TR 94/27 provides more information about what is meant by living in a remote area.

Conditions you need to meet for the zone tax offset - 183 day test

The 183 day test requires that you have lived or worked in a remote area for at least 183 days. As it is possible that you may have lived in a remote area for less than 183 days in a single income year but may have lived in a remote area for more than 183 days if two income years are treated as one income year, the test has three sub-tests:

•	the one year test

•	the two year test

•	the five year test.

You must satisfy one test to qualify. The tests are taken in order.

The one year test

To qualify for the tax offset under the one year test you must have lived or worked in a remote area - not necessarily continuously - for 183 days or more during 2006-07.

If you do not satisfy the one year test proceed to the two year test.

The two year test

To qualify for the tax offset under the two year test:

•	you must have lived or worked in a remote area - not necessarily continuously - for 183 days during the period 1 July 2005 to 30 June 2007 - including at least one day in this income year AND

•	if you are eligible for an overseas forces tax offset in 2005-06, the total number of days you lived or worked in the remote area excludes any days counted in the calculation of that overseas forces tax offset AND

•	you could not claim a zone tax offset in your 2006 tax return.

If you do not satisfy the two year test proceed to the five year test.

The five year test

To qualify for the tax offset under the five year test:

•	you must have lived in a remote area for a continuous period of less than five years after 1 July 2001 AND

•	the total of the days you were there in the first year and in 2006-07 is 183 or more excluding (if you are eligible for an overseas forces tax offset in the first year) any days counted in the calculation of an overseas forces tax offset AND

•	you could not claim a zone tax offset in that first year.

EXAMPLE

Gary lived in a remote area from 1 March 2002 to 30 September 2006, a continuous period of less than five years. He couldn’t claim a zone tax offset for the first year because he lived there for only 122 days. However, he could carry forward these unused days to 2006-07. He now adds the number of days from 1 March 2002 to 30 June 2002 (122 days) and the number of days from 1 July 2006 to 30 September 2006 (92 days). As the total (214 days) is 183 days or more over the two income years, Gary can claim the tax offset on his 2006-07 tax return.

If you qualify for a zone tax offset, e-tax will ask you to enter the number of days you lived in each of the zones that apply to you. The number of days you enter will depend upon which 183 day test you satisfied:

•	the one year test – use the days you were in the remote area during 2006-07

•	the two year test – use the days you were in the remote area during the period 1 July 2005 to 30 June 2007

•	the five year test – use the days you were in the remote area during 2006-07 and the first income year.

OVERSEAS FORCES TAX OFFSET

YOU NEED TO KNOW

You may be eligible for an overseas forces tax offset if you served in a specified overseas locality as a member of Australian Defence Force or a United Nations armed force in 2006-07 and income relating to that service was not specifically exempt from tax. Periods of service for which your income is exempt foreign employment income are excluded in working out your eligibility for the tax offset. Your employer will be able to advise you whether you served in a locality that qualifies for the overseas forces tax offset. You can also get the localities that qualify for the overseas forces tax offset by visiting the Tax Office website at www.ato.gov.au or phone the Personal Tax Infoline.

To claim the full tax offset, you must have served in the overseas locality for 183 days or more in 2006-07. Unlike the zone tax offset you cannot carry forward any unused days from previous years to make up 183 days. However, if your overseas service was less than 183 days, you may be able to claim part of the tax offset.

If you served in an overseas locality for less than 183 days but the total number of days served in the overseas locality, when added to the number of days spent in one or more zones, is 183 days or more, you may still be entitled to claim the full overseas forces tax offset. If you served as a member of the Australian Defence Force, days spent in a zone must be defence force service.

FURTHER INFORMATION

DAYS INCLUDED IN CALCULATION OF AN OVERSEAS FORCES TAX OFFSET

If the overseas forces tax offset was in respect of overseas service as a member of the Australian Defence Force, include the number of days spent in a remote area as a member of the Australian Defence Force during that year plus the number of days in the prescribed overseas locality, excluding those days that your overseas Australian Defence Force income was exempt from tax.

If the overseas forces tax offset was in respect of overseas service as a member of a United Nations armed force, include the number of days spent in a remote area during that year plus the number of days in the prescribed overseas locality, excluding those days that your overseas forces income was exempt from tax.

WHAT IF YOU QUALIFY FOR MORE THAN ONE TAX OFFSET?

This item deals with three interrelated tax offsets – the zone tax offset, the overseas forces tax offset for the Australian Defence Force and the overseas tax offset for the United Nations force. For most people there will be only one tax offset to consider but for some there may be two or three tax offsets to consider.

If you qualify for more than one tax offset, you can claim only one of them. You are entitled to the tax offset that will give you the highest amount. e-tax will calculate each tax offset and ensure you receive the highest amount.

WORKING OUT YOUR TAX OFFSET

You can either use our zone or overseas forces tax offset calculator on the Tax Office website at www.ato.gov.au or read below.

The zone and overseas forces tax offsets are made up of two amounts - the fixed amount and a percentage of a base amount.

Fixed amount

This is a prescribed amount available to all people in the zone or overseas area eligible for the tax offset.

Base amount

If you had a spouse or a dependent child or student or you are entitled to any dependant tax offset, you will have a base amount. The base amount is made up of tax offsets you may have claimed at other items in e-tax and notional tax offsets. A notional tax offset is an offset to which you would have been entitled if the tax offset was still allowable - it is used only for calculating the zone and overseas forces tax offset. Each of the following components will form part of your base amount - if applicable:

•	parent, spouse's parent or invalid relative tax offset component

•	notional dependent child or student tax offset

•	spouse tax offset component*

•	child-housekeeper tax offset component*

•	housekeeper tax offset*

•	notional sole parent tax offset component.

* These tax offsets may have two separate values – one for use in calculating the base amount for the zone and overseas forces tax offsets (a notional tax offset), and one as a tax offset elsewhere in e-tax. e-tax will ask questions to determine if the tax offset calculated elsewhere in e-tax needs adjusting for the purposes of calculating the base amount. FTB does not affect your entitlement to these notional tax offsets when calculating your zone or overseas tax offset.

Notional tax offsets for dependent children and students

Your base amount will increase for each student aged under 25 years on 30 June 2007 in full-time education at a school, college or university and for each child aged under 21 years on 30 June 2007 who, for the whole of 2006-07:

•	was treated as an Australian resident

•	was maintained by you and

•	had a separate net income (SNI) of less than $286.

Dependant	Notional tax offset
Each student aged under 25 years	$376
First non-student child aged under 21 years	$376
Other non-student children aged under 21 years	$282 for each child
If two or more people contributed to the maintenance of a dependent child, each person can only claim a proportion of the notional tax offset.

If the requirements were met for only part of the year, or your child or student’s SNI was $286 or more, you may be able to claim a partial notional tax offset. Read on.

Part-year claim

You can claim only part of the notional tax offset for dependent children or students if:

•	 the child or student was treated as an Australian resident for only part of 2006-07

•	 the student was aged 21 years or older and was in full-time education for only part of 2006-07

•	 the child or student was maintained by you for only part of 2006-07

•	 the child was 21 years old at 30 June 2007 and not in full-time education, or

•	 the student was 25 years old at 30 June 2007.

Remote area allowance

If you received a remote area allowance from Centrelink or the Department of Veterans' Affairs, or an equivalent amount was included in an exceptional circumstances relief payment or a payment of farm help income support (previously know as restart income support), your zone tax offset is reduced by this allowance.

If you want to know how to work out your zone or overseas forces tax offset read How your zone or overseas forces tax offset is worked out.

SELECTED LOCALITIES WITHIN THE ZONES AND SPECIAL AREAS

Refer to the following lists for the most common locations:

Zone A

Zone B

Special areas

If you are not sure which zone you can claim for, a list can be found on our website at www.ato.gov.au or you can ring the Personal Tax Infoline.


Item T9 How your zone or overseas forces tax offset is worked out

This topic covers:

Introduction

Working out the base amount

Parent, spouse's parent or invalid relative tax offset component

Notional dependent child or student tax offset component

Spouse tax offset component

Child-housekeeper tax offset component

Housekeeper tax offset component

Notional sole parent tax offset component

Base amount

Working out your tax offset

Zone tax offset

INTRODUCTION

The zone or overseas forces tax offset is made up of two amounts: the fixed amount and a percentage of a base amount. Use the information from table A when you complete either table J or table K.

TABLE A

	Fixed amount	Percentage of base amount
Zone A	$338	50%
Zone B	$57	20%
Special area	$1,173	50%
Overseas forces	$338	50%
If you had no spouse, no dependent child or student, and you are not claiming for dependants (such as parent, spouse's parent, invalid relative, child-housekeeper or housekeeper) at any other tax offset item, you will not have a base amount. Go straight to Working out your tax offset.

Otherwise, read on for instructions on how to work out your base amount.

WORKING OUT THE BASE AMOUNT

The base amount is made up of tax offsets you may have claimed at other items in e-tax and notional tax offsets. A notional tax offset is an offset to which you would have been entitled if the tax offset was still allowable. FTB does not affect your entitlement to these notional tax offsets when calculating your zone or overseas tax offset.

Each of the tax offset components you work out below will form part of your base amount - at table I. You will need to know the separate net income (SNI) for each dependant. If the person was not a dependant for the whole year you will need to know the period of dependency.

Parent, spouse's parent or invalid relative tax offset component

This is worked out by e-tax at item T11. Write the amount (if any) shown at item T11 on your tax return at (a) table I. Read on.

Notional tax offset for dependent children or students

Full-year claim

Your base amount will increase by the maximum amount shown in table B below for each student aged under 25 years on 30 June 2007 in full-time education at a school, college or university and for each child under 21 years on 30 June 2007 who, for the whole of 2006-07:

•	was treated as an Australian resident

•	was maintained by you, and

•	had a separate net income (SNI) of less than $286

If you did not have any dependent children or students go to the Spouse tax offset component below.

TABLE B – Notional dependent child/student tax offset

Dependant	Notional tax offset
Each student aged under 25 years	$376
First non-student child aged under 21 years	$376
Other non-student children aged under 21 years	$282 for each child
If all of these requirements were met, add up the notional tax offset amount for each child or student and write the total at (c) table I.

If two or more people contribute to the maintenance of a dependent child, each person can only claim a proportion of the notional tax offset.

If the requirements were met for only part of the year, or your child or student’s SNI was $286 or more, you may be able to claim a partial notional tax offset. Read on.

Part-year claim

You can claim only part of the notional tax offset for a dependent child or student if:

•	 the child or student was treated as an Australian resident for only part of 2006-07

•	 the student was aged 21 years or older and was in full-time education for only part of 2006-07

•	 the child or student was maintained by you for only part of 2006-07

•	 the child was 21 years old at 30 June 2007 and not in full-time education, or

•	 the student was 25 years old at 30 June 2007.

Use table C to work out the reduced notional tax offset for each child or student.

TABLE C – Reduced notional dependent child/student tax offset

Maximum notional tax offset for the child or student – from table B	(a)	$___________
Number of days you maintained your child or student and your child or student remained a dependant	(b)	___________
Number of days in 2006-07	(c)	365
Divide (b) by (c)	(d)	___________
Multiply (d) by (a)	(e)	$___________
If the separate net income (SNI) of your child or student was less than $286, write amount (e) at (c) table I.

If you have more than one eligible child or student and the SNI of each one was less than $286, work out the amount for each child, add up all of the amounts and write the total at (c) table I.

If SNI was $286 or more

If the child or student had an SNI equal to or greater than:

•	$1,786 for a student aged under 25 years or the first child aged under 21 years who is not a student, or

•	$1,410 for any other child aged under 21 years who is not a student

you cannot claim any amount of notional tax offset for that child or student.

If your child or student’s SNI was $286 or more but less than the limits shown, use table D to work out the notional tax offset.

TABLE D – Notional dependent child/student tax offset

Notional tax offset for the child or student – from table B or (e) table C for part-year claim	(a)	$___________
Your child’s or student’s separate net income (SNI) for the period you maintained them	(b)	$___________
Income at which the notional tax offset begins to reduce	(c)	$282
Take (c) away from (b)	(d)	$___________
Divide (d) by 4 because your tax offset is reduced by $1 for every $4 of SNI over $282.  Do not show cents.	(e)	$___________
Take (e) away from (a).  Do not show cents.	(f)	$___________
Write the amount at (f) at (c) table I. If you had more than one eligible child or student, work out the amount for each child or student, add up all of the amounts and write the total at (c) table I.

Spouse tax offset component

If you claimed a spouse (without dependent child or student) tax offset at item T1 write that amount at (b) table I. Go to Child-housekeeper tax offset component below.

If either of the following applies to you:

•	you had a spouse and you have written an amount of at least $1 at (c) table I – notional tax offset for dependent children or students, or

•	you were required to reduce your claim at item T1 because you, or your spouse during any period they were your spouse, received family tax benefit (FTB) Part B

use table E to work out your notional spouse tax offset.

TABLE E – Notional spouse tax offset

Write the maximum notional dependent spouse tax offset. If you had a spouse for only part of the year, multiply the number of days in that part of the year by the daily rate.	(a)	$1,984 for the full year or $5.44 per day  $____________
Your spouse's separate net income (SNI)	(b)	$____________
Income at which tax offset begins to reduce	(c)	$282
Take (c) away from (b).	(d)	$____________
Divide (d) by 4 because your tax offset is reduced by $1 for every $4 of SNI over $282. Do not show cents.	(e)	$____________
Take (e) away from (a). This is your notional spouse tax offset.	(f)	$____________
The amount at (f) is your notional spouse tax offset for zone or overseas forces tax offset purposes. Write this amount at (b) table I.

Child housekeeper tax offset component

Only read this section if you claimed a child-housekeeper tax offset at Item T1. If you claimed a child-housekeeper tax offset at Item T1 and you did not have to reduce your tax offset because you, or your spouse during any period they were your spouse, received family tax benefit (FTB) Part B, write your child-housekeeper tax offset at (d) table I.

If you were required to reduce your claim for child-housekeeper tax offset because of family tax benefit (FTB) Part B, use table F below to work out your notional child-housekeeper tax offset.

TABLE F – Notional child-housekeeper tax offset

		Column 1 No dependent child or student	Column 2 With dependent child or student*
Write the maximum tax offset allowable. If you had a child-housekeeper for only part of the year, multiply the number of days in that part of the year by the daily rate from your column.	(a)	$1,655 for the full year or $4.53 per day  $_______________	$1,984 for the full year or $5.44 per day  $_______________
Your child-housekeeper's SNI	(b)	$______________	$______________
Income at which tax offset begins to reduce	(c)	$282	$282
Take (c) away from (b) and divide by 4.	(d)	$______________	$______________
Take (d) away from (a). This is your notional child-housekeeper tax offset.	(e)	$______________	$______________
Transfer the amount at (e) to (d) table I.

Housekeeper tax offset component

Only read this section if you meet the eligibility test for a housekeeper tax offset at Item T1. Otherwise, go to Notional sole parent tax offset component.

If you claimed a housekeeper tax offset at Item T1 and you did not have to reduce your tax offset because you, or your spouse during any period they were your spouse, received family tax benefit (FTB) Part B, write your housekeeper tax offset at (e) table I.

If you were required to reduce your claim for a housekeeper tax offset because of FTB Part B read on.

Full-year claim

If you were entitled to the housekeeper tax offset for the full year (ignoring FTB Part B) write:

•	$1,984 at (e) table I if you had a dependent child or student or

•	$1,655 at (e) table I if you did NOT have a dependent child or student.

Go to Working out your tax offset.

Part-year claim

If you had a housekeeper for part of the year use table G below to calculate your notional housekeeper tax offset.

TABLE G - Part-year notional housekeeper tax offset

		No dependent child or student	With dependent child or student
Amount of daily tax offset	(a)	$4.53 per day	$5.44 per day
Number of days you qualify for the housekeeper tax offset	(b)	_____________	_____________
Multiply (a) by (b).	(c)	$_____________	$_____________
Write this amount at (e) table I. Read on.

Notional sole parent tax offset component

If you are not a sole parent go to Working out your tax offset.

If you had sole care of a dependent child or student AND you have written an amount of at least $1 at (c) in table I (notional tax offset for dependent children or students), then you may also be eligible for a notional sole parent tax offset. Read on.

Sole care

Sole care means that you alone had full responsibility, on a day-to-day basis, for the upbringing, welfare and maintenance of a child or student. We do not consider you to have had sole care if you are living with a spouse - married or de facto - unless special circumstances exist.

Special circumstances

If you had a spouse - married or de facto - at any time during 2006-07 you are entitled to a sole parent tax offset only in special circumstances. Generally, for special circumstances to exist, you must be financially responsible for the dependent child or student and have sole care, without the support a spouse normally provides.

Examples of situations where special circumstances may arise:

•	You were married at any time during 2006-07 but during the year you separated from or were deserted by your spouse, and for the period that you will claim the sole parent tax offset you were not in a de facto relationship.

•	Your spouse was in prison for a sentence of at least 12 months.

•	Your spouse was medically certified as being permanently mentally incapable of taking part in caring for the child or student.

If you are unsure whether special circumstances apply phone the Personal Tax Infoline.

Shared or joint custody after divorce or separation

There are times, after divorce or separation, where both parents share the custody of a child or student. If you can show that you had sole care of a dependent child or student for part of the year, you may be able to claim the notional tax offset for that part of the year. This means more than just having access visits with the child or student.

We consider you to have had sole care of the child for the part of the year up to the day the child turned 21 years of age or the student turned 25 years of age If the dependent child:

•	was not receiving full-time education and turned 21 years of age during 2006-07, or

•	was a full-time student and turned 25 years of age during 2006-07

You are only entitled to claim the tax offset for that part of the year before the birthday.

If you had sole care of a child or student for the whole of 2006-07 write $1, 554 at (f) table I and add up your base amount.

NOTE:
If you were entitled to a spouse, housekeeper or child-housekeeper tax offset for any period during the year, you cannot claim a notional sole parent tax offset for the same period. If your claim did not cover the whole year you will need to use the part-year claim table below.

TABLE H-Notional sole parent tax offset - part-year claim

Number of weeks you had sole care of a child and were not entitled to a tax offset at item T1	(a)	____________
Multiply (a) by $29.88	(b)	$___________
Transfer the amount at (b) to (f) table I.

Your base amount

Use this table to work out your base amount.

These are the tax offset components for your dependants, if any.

TABLE I Base amount

Parent, spouse's parent or invalid relative - from item T11	(a)	$_____________
Spouse – from item T1 or  table E	(b)	$_____________
Notional tax offset for dependent children or students - from table B, C, or D	(c)	$_____________
Child-housekeeper -  from item T1 or table F	(d)	$_____________
Housekeeper - from item T1 or table G	(e)	$_____________
Sole parent - from table H	(f)	$_____________
Add up all of these amounts. This is your base amount.	(g)	$_____________
WORKING OUT YOUR TAX OFFSET

Zone tax offset

Multiple locations

If you lived or worked in more than one zone, special area or specified overseas locality, and you were in one of them for 183 days or more, check table A. If the fixed amount for that zone is higher than for the other zones where you were, use that fixed amount and table J below to work out your tax offset. (This will give you the greatest benefit) Otherwise, go to category 2.

EXAMPLE

Neil lived in zone A for 190 days and in zone B for 40 days. Table A shows that the fixed amount for zone A is higher than the zone B amount. Neil simply uses the zone A amount because this will give him the greatest benefit. He ignores the time he spent in zone B.

Category 1

You were in only one zone, or served only in specified overseas localities for at least 183 days – use table J.

TABLE J

Your fixed amount - from table A	(a)	$_____________
Your base amount - from table I	(b)	$_____________
Multiply (b) by the percentage figure from table A	(c)	$_____________
Add (a) and (c).	(d)	$_____________
Any remote area allowance you received	(e)	$_____________
Take (e) away from (d).	(f)	$_____________
If you are claiming an overseas forces tax offset, the amount you can claim is (d). If you are claiming a zone tax offset, the amount you can claim is (f).

Category 2

You lived or worked in more than one zone or you served in a specified overseas locality for less than 183 days, OR you served in a specified overseas locality and you were in one or more zones, for at least 183 days.

You claim for the number of days in each eligible place divided by 183, to a maximum of 183 days for a year. Start with your zone that has the highest fixed amount in table A – this will give you the greatest benefit.

EXAMPLE 1

You spent 100 days in zone A and 120 days in zone B. You would claim 100 divided by 183 days for zone A and 83 divided by 183 days for zone B.

EXAMPLE 2

You served 100 days in a specified overseas locality. You would claim 100 divided by 183 days.

EXAMPLE 3

You served 100 days in an overseas locality as a member of the Defence Forces and served a further 83 days or more in a zone. You would claim the full overseas forces tax offset.

EXAMPLE 4

You served 100 days in an overseas locality and 185 days in a special area. As the special area in table A shows the highest fixed amount and you use up the maximum 183 days for this, you would simply claim the full special area amount and ignore the 100 days in an overseas locality.

Use table K to work this out for each zone, special area or overseas locality you were in (as in the examples above).

TABLE K

		Special area	Zone A	Zone B
Your fixed amount - from table A	(a)	$__________	$__________	$__________
Your base amount - from table I	(b)	$__________	$__________	$__________
Multiply (b) by the percentage figure - from table A	(c)	$__________	$__________	$__________
Add (a) and (c)	(d)	$__________	$__________	$__________
Number of days spent or served there	(e)	__________	__________	__________
Multiply (d) by (e)	(f)	$__________	$__________	$__________
Divide (f) by 183.  This is the amount you can claim.	(g)	$__________	$__________	$__________
Once you have worked out the amount you can claim for each place you were in, add up all amounts and then use table L below to work out your total tax offset.

TABLE L

Total of the amounts you have worked out for each zone – from (g) table K	(a)	$__________
Any remote area allowance you received	(b)	$__________
Take (b) away from (a). This is the amount you can claim	(c)	$__________
If you served in a specified overseas locality for less than 183 days, the amount from (g) table K is the overseas forces tax offset you can claim.

If you served in a specified overseas locality and you were in one or more zones for at least 183 days, the various amounts for each zone or locality are given at (g) table K. Add up all the amounts at (g) table K for each zone, special area or overseas locality. This is the overseas forces tax offset you can claim.


Item T9 Special areas

Western Australia

Balladonia

Deakin

Denham

Eucla

Exmouth

Fitzroy Crossing

Halls Creek

Kununurra

Laverton

Leinster

Madura

Meekatharra

Mount Magnet

Onslow

Rawlinna

Turkey Creek    (Bow River)

Wiluna

Wyndham

Northern Territory

Alyangula

Angurugu

Borroloola

Elliott

Galiwinku

Jabiru

Lajamanu/Hooker Creek

Maningrida

Milikapiti

Milingimbi

Nguiu

Ngukurr

Nhulunbuy (Gove)

Numbulwar

Oenpelli

Papunyah

Ramingining

Tennant Creek

Yirrkala

Yuendumu

Yulara

Queensland

Boulia

Burketown

Cooktown

Doomadgee

Georgetown

Helen Vale

Hughenden

Julia Creek

Karumba

Kowanyama

Normanton

Stamford

Thargomindah

Weipa

Windorah

New South Wales

White Cliffs

South Australia

Amata Aboriginal Community

Coober Pedy

Cook

Innamincka

Leigh Creek

Marree

Nullarbor

Oodnadatta

Penong

Roxby Downs

Tarcoola

Islands and Territories

Australian Antarctic Territory

Cocos (Keeling) Islands

Heard Island

Lord Howe Island

Macquarie Island

McDonald Islands

Norfolk Island

Palm Isles Group

Tasmania

Furneaux Group Islands

King Island

There are also other locations that may be a in a zone or special area.  If you are unsure, phone the Personal Tax Infoline.


Item T9 Zone A localities

Locations that are within 250 radial kilometres of the asterisked (*) locations are also in the relevant zone.

Western Australia

Bidyadanga (Lagrange)

Broome*

Carnarvon

Dampier

Derby

Goldsworthy

Karratha

Marble Bar

Newman*

Pannawonica

Paraburdoo

Port Hedland*

Roebourne

Shay Gap

Tom Price*

Wittenoom

Northern Territory

Alice Springs*

Batchelor

Darwin

Hermannsburg

Katherine*

Pine Creek

Santa Teresa

Tindal

Queensland

Camooweal

Cloncurry

Mount Isa*

There are also other locations that may be a in a zone or special area. If you are unsure, phone the Personal Tax Infoline.


Item T9 Zone B localities

Locations that are within 250 radial kilometres of the asterisked (*) locations are also in the relevant zone.

Western Australia

Boulder

Coolgardie

Esperance

Kalgoorlie*

Kambalda

Leonora

Mullewa

Norseman

Northampton

Ravensthorpe

Southern Cross

New South Wales

Bourke

Brewarrina

Broken Hill

Cobar

Collarenebri

Lightning Ridge

Menindee

Wilcannia

Tasmania

Queenstown

Rosebery

South Australia

Woomera

Queensland

Airlie Beach

Atherton

Augathella

Ayr

Barcaldine

Blackall

Bowen

Cairns

Cardwell

Charleville

Charters Towers

Clifton Beach

Collinsville

Cunnamulla

Greenvale

Home Hill

Ingham

Innisfail

Longreach

Mackay

Mareeba

Mossman

Port Douglas

Proserpine

Quilpie

Sarina

Tambo

Townsville

Tully

Winton

There are also other locations that may be a in a zone or special area. If you are unsure, phone the Personal Tax Infoline.


Item T10 20% tax offset on net medical expenses over $1,500
	20% tax offset on net medical expenses over the threshold amount
This topic covers:

Who does this item apply to?

You need to know

What you may need

WHO DOES THIS ITEM APPLY TO?

Complete this item if you had net medical expenses over $1,500 in 2006-07.

YOU NEED TO KNOW

Medical expenses do not include contributions to a private health fund, travel or accommodation expenses associated with medical treatment, or inoculations for overseas travel.

NOTE:
You can only claim medical expenses for your dependants who are Australian residents for tax purposes.

Net medical expenses are the medical expenses you have paid less any refunds you got, or could get, from Medicare or a private health fund.

You can claim a tax offset of 20% – 20 cents in the dollar – of your net medical expenses over $1,500. There is no upper limit on the amount you can claim.

DEFINITION:
Your spouse is your husband or wife to whom you are legally married, or a person who lives with you on a genuine domestic basis as your husband or wife. Under Australian law your husband or wife cannot be the same sex as you.

The medical expenses must be for:

•	you

•	your spouse – married or de facto – regardless of their income

•	your children who were aged under 21 years including adopted and stepchildren, regardless of their income

•	any other child aged under 21 years – not a student – who you maintained and whose separate net income (SNI) was less than $1,786 for the first child and less than $1,410 for the second child and any subsequent children

•	a student aged under 25 years who you maintained and whose SNI was less than $1,786

•	a child-housekeeper but only if you can claim a tax offset for them at item T1 on your tax return, or

•	an invalid relative, parent or spouse's parent but only if you can claim a dependant tax offset at item T11.

You and your dependants must be Australian residents for tax purposes but you can claim medical expenses paid while travelling overseas. You may also be able to include the medical expenses of certain dependants who are waiting to migrate to Australia – see Overseas dependants.

Medicare financial tax statement

You may need your Medicare financial tax statement to help you complete this question.

Your Medicare financial tax statement shows you how much you have paid for medical expenses and how much you have claimed back from Medicare.

e-tax provides you the opportunity to download your Medicare financial tax statement from Medicare Australia directly into your e-tax interview – see e-tax & Medicare Australia – financial tax statement frequently asked questions.

Your partner, anyone over 18 years of age, or family members on other cards will need to access their own Medicare financial tax statement details by accessing the Medicare Tax Statement online program, from the Tax Office website. You may also visit the Medicare Australia website to order a paper copy of your Medicare financial tax statement.

Medical expenses

You can claim expenses relating to an illness or operation paid to legally qualified doctors, nurses or chemists and public or private hospitals.  However expenses for some cosmetic operations are excluded – see below.

Medical expenses which qualify for the tax offset also include payments:

•	to dentists, orthodontists, or registered dental mechanics

•	to opticians or optometrists, including for the cost of prescription spectacles or contact lenses

•	 to a carer who looks after a person who is blind or permanently confined to a bed or wheelchair

•	for therapeutic treatment under the direction of a doctor

•	for medical aids prescribed by a doctor

•	for artificial limbs or eyes and hearing aids

•	for maintaining a properly trained dog for guiding or assisting people with a disability (but not for social therapy)

•	for laser eye surgery

•	for treatment under an in-vitro fertilisation program.

Expenses which DO NOT qualify for the tax offset include payments for:

•	cosmetic operations for which a Medicare benefit is not payable

•	dental services or treatment that are solely cosmetic

•	therapeutic treatment not formally referred by a doctor – a mere suggestion or recommendation by a doctor to the patient is not enough for the treatment to qualify; the patient must be referred to a particular person for specific treatment

•	chemist-type items – such as tablets for pain relief – purchased in retail outlets or health food stores

•	inoculations for overseas travel

•	non-prescribed vitamins or health foods

•	travel or accommodation expenses associated with medical treatment

•	contributions to a private health fund

•	purchases from a chemist that are not related to an illness or operation

•	life insurance medical examinations

•	ambulance charges and subscriptions

•	funeral expenses.

More on cosmetic operations, services and treatments

To find out which operations and dental services and treatment are cosmetic and whether you can claim your payments for them, visit our website www.ato.gov.au or phone the Personal Tax Infoline.

Nursing home (residential aged care facility) expenses

You can also claim some payments made to a nursing home or hostel (not a retirement home) if:

•	the payments were made to an approved care provider AND

•	the payments were made for residential aged care received by an approved recipient AND

•	the recipient was assessed as needing care at levels 1 to 7.

If the recipient was not assessed as needing care at levels 1 to 7 but is subsequently reassessed at one of these levels, you can claim a tax offset for payments made from the date the new classification took effect.

If you are not sure which level of care you (or the care recipient you are claiming the expense for) has been assessed as requiring, contact the nursing home or hostel.

The tax offset does not cover the following payments:

•	lump sum payments of accommodation bonds

•	interest derived by care providers from the investment of accommodation bonds (because these are not payments for residential aged care)

•	payments for people who were residents of a hostel before 1 October 1997 and who did not have a personal care subsidy or a respite care subsidy paid on their behalf at the personal care subsidy rate by the Commonwealth (unless they have subsequently been reassessed as requiring care at levels 1 to 7), or

•	payments for people assessed as requiring level 8 care.

Residential aged care payments can be for:

•	daily fees

•	income tested daily fees

•	extra service fees, and

•	accommodation charges, periodic payments of accommodation bonds or amounts drawn from accommodation bonds paid as a lump sum.

WHAT YOU MAY NEED

•	details of the medical expenses you can claim

•	details of refunds you received, or are entitled to receive, from Medicare or a private health fund

To help you work out what you can claim for medical expenses you have paid in 2006-07 you can ask for an itemised statement from:

•	Medicare

•	your private health fund

•	chemists where you had prescriptions filled

Some of the items shown on these statements may not qualify for the tax offset. You will need to exclude these items from your claim.


Item T10 e-tax & Medicare Australia - financial tax statement frequently asked questions
e-tax & Medicare Australia – financial tax statement frequently asked questions

What is the Medicare Australia and the Australian Taxation Office Medicare financial tax statement initiative?

The delivery of the Medicare financial tax statement into your e-tax return is a joint initiative between Medicare Australia and the Australian Taxation Office. It enables e-tax customers who are enrolled in Medicare to download their Medicare financial tax statement information into their e-tax claim for net medical expenses.

When should I get my Medicare financial tax statement?

We recommend that you retrieve your Medicare financial tax statement as early as possible to avoid undue delays at peak periods such as the end of October.

Can I get Medicare financial tax statement (MFTS) information about dependants for whom I will be claiming net medical expenses?

Yes, you can request the MFTS information for dependants on your card who are under 18 years of age if you are the dependant’s parent or legal guardian.

You cannot use e-tax to directly request the MFTS information of:

•	any individual on your Medicare card who is 18 years of age or over; or

•	any individual not listed on your Medicare card.

Why can’t I get information for individuals who are 18 years of age or over or on another Medicare card?

Medicare Australia is bound by Commonwealth law to protect the privacy and confidentiality of the personal health information it holds. Medicare financial tax statement information can only be given to the requesting individual and any individuals on the requestor’s Medicare card who are under 18 years of age.

Card members 18 years of age or over and individuals who are listed on another Medicare card must supply their own information to be included in your e-tax lodgment. These people can obtain their Medicare financial tax statement if they have a tax file number by accessing the Medicare Tax Statement online program from the Tax Office website.

How do I find out more about how Medicare Australia protects privacy?

For more information on how Medicare Australia ensures the privacy, security and confidentiality of your personal information, please visit the Medicare Australia website, www.medicareaustralia.gov.au, and click on the Privacy & Security link at the bottom of the page.

How do I request the MFTS of dependants under 18?

You will be asked to indicate the Individual Reference Number (IRN) of each dependant after you have entered your Medicare card details. When you request this information you will be making a declaration acknowledging that you are the parent or legal guardian of that child/ren.

What is a Medicare card number?

Your Medicare card number is located on your Medicare card above your name.

What is an IRN?

Your IRN is your Individual Reference Number located on your Medicare card to the left of your name.

How is the Medicare financial tax statement information provided to me electronically?

The Medicare financial tax statement information will be sent from Medicare Australia directly to the e-tax application on your computer. The information is sent by a secure transmission – the details cannot be stored or read by any other party at any time during the transmission process.

Will my tax file number be disclosed to Medicare Australia?

No.

Will my Medicare card number be recorded by the Tax Office?

No.

Can I add other medical expenses apart from the Medicare ones?

Yes, you will be able to add other medical expenses in addition to the Medicare financial tax statement details. Additional expense details need to be obtained from the relevant organisation(s).

What do I do if my Medicare financial tax statement was not downloaded to e-tax?

Please contact Medicare Australia. When you call, please ensure that you have the error code and error message that e-tax provided you with.

What do I do if not all the dependants on my Medicare card were downloaded to e-tax?

This may be because your dependants are over 18 or ineligible to Medicare or you are not authorised to access their details. If none of these reasons are applicable please contact Medicare Australia. When you call, please ensure that you have the error code and error message that e-tax provided you with.

What do I do if I can’t access details on my Medicare card?

Please contact Medicare Australia. When you call, please ensure that you have the error code and error message that e-tax provided you with.

How long will I be able to download my Medicare financial tax statement into e-tax?

It will be available from 1 July 2007 to 28 February 2008.

You are required to lodge your tax return by 31 October 2007.

Although you can download your Medicare financial tax statement and lodge electronically using e-tax after 31 October 2007, if you fail to lodge by 31 October 2007 you may be subject to failure to lodge penalty.

How can I find out more information or contact Medicare Australia about my Medicare financial tax statement?

Access more information including contact details via the ‘Frequently Asked Questions’ page on the Medicare Australia website.


Item T11 Parent, spouse's parent or invalid relative
	Parent, spouse’s parent or invalid relative
This topic covers:

Who does this item apply to?

You need to know

Further information:

Your dependant tax offset

WHO DOES THIS ITEM APPLY TO?

Complete this item if you maintained your parent, your spouse's parent or an invalid relative.

DEFINITION:
Your spouse is your husband or wife to whom you are legally married, or a person who lives with you on a genuine domestic basis as your husband or wife. Under Australian law your husband or wife cannot be the same sex as you.

YOU NEED TO KNOW

Your parent, spouse's parent or invalid relative must be a dependant who is maintained by you. This means:

•	you and the dependant lived in the same house,

•	you gave the dependant food, clothing and lodging, or

•	you helped them to pay for their living, medical and educational costs.

This is further explained in What you need to know to claim a dependant tax offset. You cannot claim a tax offset if your dependant did not reside in Australia or was only visiting you during a holiday in Australia. Read Are you an Australian resident? for information about whether your dependant is an Australian resident.

An invalid relative is a person 16 years old or older who is your child, brother or sister who;

•	receives a disability support pension or special needs disability support pension, or

•	has a certificate from a Commonwealth-approved doctor certifying a continuing inability to work.

The maximum tax offset is $745 for each dependent invalid relative and $1,489 for each dependent parent or spouse's parent.

To complete this item you need to know each dependant's separate net income (SNI). SNI is income earned in 2006-07 by your dependant while you maintained them and may reduce any tax offset you are entitled to claim. SNI includes both taxable amounts and amounts on which tax is not payable.

Your tax offset is reduced if:

•	your dependant’s SNI was $286 or more

•	you maintained your dependant for only part of the year

•	another person helped to maintain your dependant, or

•	your dependant lived in Australia for only part of the year.

Where another person or persons contributed to the maintenance of your dependant, you can claim part of the allowable tax offset, according to the extent of your contribution. For example, if you and another person contributed equally to the maintenance of your dependent parent, you can claim half of the allowable tax offset.

FURTHER INFORMATION

Your dependant tax offset

e-tax will calculate and display your dependant tax offset. Read How your dependant tax offset is worked out if you want to know how it is worked out.


Item T11 How your dependant tax offset is worked out

If you can claim a tax offset for more than one dependant, work through the steps for each dependant. Use a piece of notepaper to add up your tax offset amounts.

Your tax offset is reduced if:

•	your dependant's SNI was $286 or more

•	you maintained your dependant for only part of the year

•	another person helped to maintain your dependant, or

•	your dependant lived in Australia for only part of the year.

If none of these points applies to you in relation to your dependant, you can claim the maximum tax offset for that dependant.

Where another person or persons contributed to the maintenance of your dependant, you can claim part of the allowable tax offset, according to the extent of your contribution. For example, if you and another person contributed equally to the maintenance of your dependent parent, you can claim half of the allowable tax offset.

CLAIM FOR MAXIMUM TAX OFFSET

If your dependant's SNI was $285 or less and you maintained them for the whole year, you can claim the maximum tax offset – $745 for each dependent invalid relative and $1,489 for each dependent parent or spouse's parent.

CLAIM FOR TAX OFFSET IF YOUR DEPENDANT'S SEPARATE NET INCOME WAS $286 OR MORE AND YOU MAINTAINED YOUR DEPENDANT FOR THE FULL YEAR

STEP 1	Take away $282 from your dependant's SNI.

STEP 2	Divide the answer from step 1 by 4. If the resulting amount is $745 or more for an invalid relative or $1,489 or more for a parent or spouse's parent, you cannot claim a tax offset for your dependant. Go to item T12. If the amount is less than $745, go to step 3.

STEP 3	Take away the answer from step 2 from $745 for an invalid relative or $1,489 for a parent or spouse's parent. This is your dependant tax offset.

CLAIM FOR TAX OFFSET FOR PART OF THE YEAR

STEP 1	Work out the number of days in the year you maintained your dependant while they were an Australian resident.

STEP 2	Multiply the number of days by $2.04 for an invalid relative or by $4.08 for a parent or spouse's parent.

STEP 3	If your dependant's SNI was $286 or more during the period they were your dependant:

a)	take $282 away from your dependant's SNI

b)	divide the answer at (a) by 4

c)	take away the figure at (b) from the answer at step 2. This is your dependant tax offset.


Item T12 Landcare and water facility tax offset
	Landcare and water facility
This topics covers:

Who does this item apply to?

Landcare and water facility tax offset brought forward

You need to know

What you may need

WHO DOES THIS ITEM APPLY TO?

Complete this item if you have available this year:

•	a landcare and water facility tax offset brought forward from an earlier year.

NOTE:
You cannot claim both a deduction and a tax offset for the same expenditure.

LANDCARE AND WATER FACILITY TAX OFFSET BROUGHT FORWARD FROM AN EARLIER YEAR THAT YOU CAN USE THIS YEAR

YOU NEED TO KNOW

This item only applies if your income tax liabilities from earlier years have not absorbed all of the excess or unused landcare and water facility tax offset available to you. The amount of your excess or unused tax offset is shown on your notice of assessment for the year ending 30 June 2006.

There is no limit to the number of years you can carry forward any balance of landcare and water facility tax offset.

Unused net exempt income

Your brought forward landcare and water facility tax offset has to be successively reduced by any unused net exempt income derived in the year the tax offset arose and any subsequent year – provided you had a taxable income in that year.

Unused net exempt income is any net exempt income left after deducting any tax losses of earlier income years from that year’s net exempt income.

If you have unused net exempt income and you had taxable income this year you must reduce your brought forward landcare and water facility tax offset by 30 cents for every dollar of unused net exempt income.

If you do not have any unused net exempt income enter the amount of landcare and water facility tax offset brought forward – (shown on your 2005-06 notice of assessment) in the e-tax screen.

If you have unused net exempt income, phone the Business Infoline on 13 28 66 for more information on how to calculate the brought forward landcare and water facility tax offset.

WHAT YOU MAY NEED

Your notice of assessment for the year ending 30 June 2006.


Item T13 Net income from working
	Net income from working –  Supplementary Section
This topic covers:

Who does this item apply to?

How your net income from working in relation to the supplement section is worked out

How do you calculate your net income from working from partnerships when using e-tax?

Do you want to work out your tax offset?

WHO DOES THIS ITEM APPLY TO?

To be eligible for the mature age worker tax offset of up to $500 you must:

•	have had net income from working within certain limits

•	have been an Australian resident as at 30 June 2007, and

•	have been aged 55 years or older as at 30 June 2007.

NOTE:
Your mature age worker tax offset is based on your net income from working which is:
 -  income that is mainly a reward for your personal effort or skills less any related
    deductions, and
 -  income from a business that you carry on, less any related deductions.

You do not have to work out your tax offset. From the information you have entered into e-tax, the amount of your net income from working will be automatically calculated and your tax offset amount will be shown in your tax estimate. If you want to work out your tax offset read How your mature age worker tax offset is worked out.

HOW YOUR NET INCOME FROM WORKING IN RELATION TO THE SUPPLEMENT SECTION IS WORKED OUT

STEP 1	Transfer the income amounts from the relevant items you have shown in your tax return to the boxes below. If you have a loss, print L at the loss box to the right.

			Loss
Net Personal service income (PSI) (A item 13)		$_______
Net income or loss from business – primary production (B item 14)		$_______
Net income or loss from business – non-primary production (C item 14)		$_______
Deferred non-commercial business losses from primary production (I item 15)
Deferred non-commercial business losses from  non-primary production (J item 15)		$_______
Net amount of farm management deposits and withdrawals (E item,16)		$_______
Add up all the income amounts and deduct any loss amounts	(a)	$_______
STEP 2	Work out the following income amounts. For some people the amounts you show in the boxes below will only be part of the amounts you have shown on your tax return (supplementary section).  If you had a loss, print L at the loss box to the right

From N item 12 – distribution from partnerships – primary production.  But only the distributions relating to the income from working from the partnership tax return.  See the note below		$_______
From O item 12 – distributions from partnerships less foreign income – non-primary production.  But only the distributions relating to the income from working from the partnership tax return.  See the note below
From L item 19 – only your net foreign employment income (not foreign pension or annuity income)		$_______
From V item 22 – only the following income: Income from activities as a special professional that you have not included at items 1, 2, 12, 13 or 14		$_______
Income protection, sickness and accident policy payments		$_______
Discounts on shares or rights received under an employee share scheme where the shares or rights were issued to you this year		$_______
Allowances or payments received as a member of a local government council		$_______
Add up all the income amounts and deduct any loss amounts	(b)	$_______
Total income – add (a) from step 1 and (b) from step 2 above	(c)	$_______

NOTE:
You will have to do the following calculation for each partnership and for each partnership within a partnership and then transfer the amount to step 2 above.

From your Partnership tax return 2007:

Add up

•	the amount at Net income or loss from business S item 5 Business income and expenses

•	Distribution from partnerships at A and B item 8 Partnerships and trusts

•	Only the amount of income from working at O item 12 Other Australian income

Less

•	Only the amount of any partnership (not trust) deductions related to income from working included in Deductions relating to distribution in A and Z at S and Deductions relating to distribution in B and R at T item 8 Partnerships and trusts

•	Only the amount of any deduction related to income from working at Q item 15 Other deductions

STEP 3	Transfer the deduction amounts from the relevant items you have completed in your tax return (supplementary section) to the boxes below.

Landcare operations and deduction for the decline in value of water facility (I item 12)		$_______
Landcare operations expenses (J item 12)		$_______
Add up all the deduction amounts	(d)	$_______
STEP 4	Work out the following deduction amounts. For some people the amounts you show in the boxes below will only be part of the amounts you have shown on your tax return (supplementary section).

From X item 12 – the total deductions that relate to your share of primary production income or loss from a partnership (not from a trust).  But only the deductions relating to the distribution of income from working from the partnership tax return.		$_______
From Y item 12 – the total deductions that relate to your share of non-primary production income or loss from a partnership (not from a trust).  But only the deductions relating to the distribution of income from working from the partnership tax return.		$_______
From J item D15 – only the following deductions: Income protection, sickness and accident insurance premiums		$_______
Debt deductions incurred in earning assessable income from working		$_______
Section 40-880 deductions relating to ‘income from working’		$_______
Net personal services income (PSI) loss of a personal services entity that related to your PSI		$_______
Add up all the deduction amounts	(e)	$_______
Total deductions  – add (d) from step 3 and (e) from step 4 above	(f)	$_______
STEP 5	Calculate your net income from working (supplementary section).

			Loss
If (c) is not a loss then (c) – (f) = (g)  If (c) is a loss then (c) + (f) = (g)	(g)	$_______
The amount at (g) is your net income from working (supplementary section)

STEP 6	e-tax will write the amount at (g) to M item T13 on page 12 of your tax return (supplementary section). If you have a loss, e-tax will print L in the box at the right of M. Even if you have a loss you may be still entitled to the offset.

If you want to know how to work out your offset read How your mature age worker tax offset is worked out.

HOW DO YOU CALCULATE YOUR NET INCOME FROM WORKING FROM PARTNERSHIPS WHEN USING e-tax?

You do not have to work out your mature age worker tax offset.  From the information you have entered into e-tax, the amount of your net income from working will be automatically calculated and your tax offset amount will be shown in your tax estimate.  However to enable e-tax to complete this calculation you will need to include your net income from working from partnerships.

NOTE:
Your mature age worker tax offset is based on your net income from working which is:
 -  Income that is mainly a reward for your personal effort or skills less any related deductions,
    and
 -  Income from a business that you carry on, less any related deductions.

Complete the following calculation for each partnership you have received a distribution from:

STEP1	Add the distributions relating to income from working for each partnership (both primary production and non-primary production)

STEP2	Add up the following deduction amounts (that relate to income from working for each partnership):

•	Landcare operations and deduction for the decline in value of water facility (both primary production and non-primary production)

•	The total deductions which relate to the distribution of income from working (both primary production and non-primary production).

STEP3	Calculate your net income or loss from working from each partnership

                                                                                               Loss

STEP1-STEP2                                                                                                     $

This amount is your net income from working from a partnership.  You will need to enter your calculation of your net income or loss from working from each partnership in the column provided on the e-tax screen.  The e-tax software will then calculate your total net income from working from partnerships.

If you want to know how to work out your offset read How your mature age worker tax offset is worked out.


Item T13 How your mature age worker tax offset is worked out
How your mature age worker tax offset is worked out

WHO DOES THIS ITEM APPLY TO?

To be eligible for the mature age worker tax offset you must have:

•	have had net income from working within certain limits

•	have been an Australian resident on 30 June 2007, and

•	have been aged 55 years or older as at 30 June 2007.

The maximum mature age worker age worker tax offset is $500

NOTE:
Your mature age worker tax offset is based on your net income from working which is:
 -  income that is mainly a reward for your personal effort or skills less any related
    deductions, or
 -  income from a business that you carry on, less any related deductions.

You do not have to work out your tax offset. From the information you have entered into e-tax, the amount of your net income from working will be automatically calculated and your tax offset amount will be shown in your tax estimate. e-tax also completes a worksheet showing the calculation which is automatically printed when you have completed your return. If you want to print or preview a copy of your worksheet now follow these steps.

Previewing or Printing the worksheet

STEP 1	Click on Printing in the Navigator. You will be prompted for the items you want to preview or print.

STEP 2	Select Worksheets. (You may want to clear the Tax return box).

STEP 3	Click on the Preview or Print button and use the arrow buttons to locate the worksheet.

STEP 4	Click on the Print button to print your worksheet.

To calculate your net income from working complete the worksheet below. To do this you will need to transfer the amounts from your tax return and supplementary section (if relevant). If any of the amounts listed below do not apply to you write 0 in the appropriate box.

WORKSHEET 1

Working out your total net income from working

If any of the amounts listed below do not apply to you write 0 in the appropriate box

Step 1 –  Total income from working

Salary or wages (C to G item 1)		$_____________
Allowances, earnings, tips directors fees etc (K item 2)		$_____________
Attributed personal services income (O item 8)		$_____________
Total reportable fringe benefits amounts (W item 9)		$_____________
Add up all your income from working	(a)	$_____________
Step 2 – Related deductions

Work-related car expenses (A item D1)		$_____________
Work-related travel expenses (B item D2)		$_____________
Work-related uniform, occupation specific or protective clothing laundry and dry cleaning expenses (C item D3)		$_____________
Work-related self-education expenses (D item D4)		$_____________
Other work related expenses (E item D5)		$_____________
Low-value pool deduction (K item D6)		$_____________
Add up all your related deductions	(b)	$_____________
Step 3 – Net income from working (tax return)

Take (b) from (a) This can be zero or a negative amount	(c)	$_____________
Step 4 – Net income from working (supplementary section)

If you have an amount at M item T13 from the supplementary section, write this amount at (d) This can be a zero or a negative amount	(d)	$_____________
Step 5 – Total net income from working

Add (c) and (d)	(e)	$_____________
Use the table below to help you decide which worksheet to use to workout your tax offset.

If your net income from working at (e) is	Your tax offset is	To calculate your offset
0 or a negative amount	$0	You are not entitled to the tax offset
$1 to $9,999	5% of your net income from working	Use worksheet 2
Between $10,000 and $53,000	$500	This is your tax offset. You do not need to calculate it.
More than $53,000 but less than $63,000	Reduced by 5 cents per dollar over $53,000	Use worksheet 3
$63,000 and above	$0	You are not entitled to the tax offset

WORKSHEET 2
Net income from working is between $1 – $9,999

Write your net income from working here	(a)	$___________
Divide (a) by 100	(b)	$___________
Multiply (b) by 5	(c)	$___________
The amount at (c) is the tax offset you are entitled to. Use this amount when working out your tax refund or tax debt. e-tax does not write this amount anywhere on your tax return.  The Tax Office will work out your mature age worker tax offset and make sure it reduces your tax.

WORKSHEET 3
Net income from working is between $53,001 – $62,999

Maximum tax offset	(a)	$ 500
Write your net income from working here	(b)	$___________
Threshold at which tax offset reduces	(c)	$ 53,000
Take (c) away from (b)	(d)	$___________
Divide (d) by 100	(e)	$___________
Multiply (e) by 5	(f)	$___________
Take (f) away from (a)	(g)	$___________
The amount at (g) is the tax offset you are entitled to. Use this amount when working out your tax refund or tax debt. e-tax does not write this amount anywhere on your tax return. The Tax Office will work out your mature age worker tax offset and make sure it reduces your tax.


Item T15 Other tax offsets
	Other tax offsets
This topic covers:

Who does this item apply to?

Interest from the land transport facilities tax offset scheme or infrastructure borrowings scheme

Performing work or services in the Joint Petroleum Development Area (JPDA) of the Timor Sea

WHO DOES THIS ITEM APPLY TO?

Complete this item if you were entitled to a tax offset for:

•	interest from the land transport facilities tax offset scheme or infrastructure borrowings scheme, or

•	performing work or services in the Joint Petroleum Development Area (JPDA) of the Timor Sea.

TAX OFFSET FOR INTEREST DERIVED FROM THE LAND TRANSPORT FACILITIES TAX OFFSET SCHEME OR INFRASTRUCTURE BORROWINGS SCHEME

You may be able to claim a tax offset if:

•	you derived any interest from the land transport facilities tax offset scheme, or

•	you elected to have interest derived from your investment in infrastructure borrowings included as part of your assessable income

You may be entitled to a tax offset of 30%.

NOTE:
If your interest derived from the land transport facilities tax offset scheme is subject to an annual upper limit under an agreement between the lenders, the borrowers and the Minister for Transport and Regional Services, you cannot claim a tax offset for the part of your interest that exceeds that upper limit.

TAX OFFSET FOR PERFORMING WORK OR SERVICES IN THE JOINT PETROLEUM DEVELOPMENT AREA (JPDA) OF THE TIMOR SEA

You will need to refer to Timor Sea Treaty – Joint Petroleum Development Area instructions 2007 (NAT 8277). The instructions will tell you how to complete your tax return so that you receive a correct assessment.

NOTE:
A recent change to worksheet 2 in the Timor Sea Treaty – Joint Petroleum Development Area instructions 2006 (NAT 8277) removed steps (l), (m) and (n).  If you used an earlier version of that worksheet to complete your tax return for any year from 20 May 2002, you can now use the new version, and if you get a different value for your foreign tax credit (r) you can lodge a request for an amendment for that year.


Item T6 30% child care rebate
	30% child care tax rebate
This topic covers:

Who does this item apply to?

You need to know

How does the 30% child care tax rebate work with CCB?

Explanation of terms

Further information

Do you want to work out your tax rebate?

Transfer of your unused child care tax rebate

Pre-filling your child care details

NOTE:
This is the last time you will claim the rebate in your tax return. Your next rebate will be paid by the Family Assistance Office.

WHO DOES THIS ITEM APPLY TO?

Complete this item if you had to pay child care fees for approved child care for any period between 1 July 2005 and 30 June 2006.

YOU NEED TO KNOW

You may be entitled to a rebate of 30% for the out-of-pocket approved child care expenses you had to pay for the period 1 July 2005 to 30 June 2006, up to a maximum of $4,096 per child. Out-of-pocket child care expenses are your total fees for approved child care less the Child Care Benefit (CCB) to which you were entitled.

You will be eligible to claim the rebate for child care fees you had to pay if for at least one week, starting in the period 1 July 2005 to 30 June 2006 you:

•	 used approved child care

•	 were entitled to receive CCB, and

•	 passed the CCB work/training/study test (for the purposes of the rebate).

You will receive the rebate for any period during which you met each of the eligibility requirements.

DEFINITION:
Your spouse is your husband or wife to whom you are legally married, or a person who lives with you on a genuine domestic basis as your husband or wife. Under Australian law your husband or wife cannot be the same sex as you.
You can claim the 30% child care tax rebate only if you were the person who received the CCB from the FAO.

Where you are in a salary sacrificing arrangement for child care you will receive the rebate for the child care fees you paid if you were reimbursed by your employer or your employer paid the child care fees on your behalf.

You are not eligible for the rebate if your employer provided you with a child care service on their business premises under a salary sacrifice arrangement. Your employer should be able to confirm if the cost of your child care is met under a salary sacrifice arrangement.

The rebate is limited to $4,096 per child.

HOW DOES THE 30% CHILD CARE TAX REBATE WORK WITH CCB?

•	you can claim both the 30% child care tax rebate and CCB

•	you claim the 30% child care tax rebate from the Tax Office on your income tax return

•	CCB is claimed from the FAO

•	the amount you receive for the 30% child care tax rebate will not affect your CCB entitlement

•	the FAO will provide your CCB information to the Tax Office.

EXPLANATION OF TERMS

Approved child care is care approved by the Australian Government for CCB eligibility provided by long day care, family day care, in-home care, occasional care, before and after school care, and vacation care .

If you are unsure if your child care is approved, contact your child care provider or call the child care access hotline on Freecall 1800 670 305 (TTY Service Freecall 1800 639 327).

Child Care Benefit (CCB) is a payment made by the FAO to assist with the cost of child care. If you have used approved child care but not claimed CCB, please contact the Family Assistance Office.

CCB entitlement is the amount of CCB you were actually entitled to for each child for the period 1 July 2005 to 30 June 2006.

CCB work/training/study test is administered by the FAO. You pass the test if you are in paid work, are actively looking for paid work, are studying or training. If you have a spouse, they must also pass the test. If you are unsure whether you passed this test contact the Family Assistance Office.

Total Fees are the amount of child care fees you had to pay for the year, including both CCB paid directly to your child care provider  on your behalf as well as any additional amount that you pay.

FURTHER INFORMATION

If you use the pre-filling function, e-tax will work out an estimate of your rebate for your tax estimate

TRANSFER OF YOUR UNUSED CHILD CARE TAX REBATE

The 30% child care tax rebate can only reduce your tax liability to nil. However, you cannot get a refund of any amount of rebate that exceeds your tax liability.

You can transfer to your spouse the part of the rebate that is still unused after your tax liability has been reduced to nil. This may be used to reduce your spouse’s tax liability.

The person to whom you transfer this amount (the ‘unused rebate’) must have been your spouse on 30 June 2007.

EXAMPLE

Melinda’s taxable income for 2007 is $18,000. Her spouse David’s taxable income for 2007 is $90,000.  They had one child in approved child care during the period 1 July 2005 to 30 June 2006 at the cost of $9,000. Melinda was the Child Care Benefit (CCB) recipient which means that she is eligible to claim the 30% child care tax rebate. She calculated her rebate to be $1,890.  Melinda completed her tax return and showed $1,890 at item T6.

Because she was unsure whether she would have any unused rebate to transfer to David, Melinda also completed the Spouse details – married or de facto section of her tax return, making sure that she included David’s tax file number. She and David also completed the 30% child care tax rebate transfer agreement 2007 and both kept a copy with their tax records.

When Melinda lodged her tax return, the Tax Office applied her rebate of $1,890 to her tax liability of $1,800. As Melinda’s rebate was more than her tax liability, she had an unused rebate of $90. Because she had completed the Spouse details – married or de facto section correctly, the Tax Office automatically applied this amount to reduce David’s tax liability when he lodged his tax return. David did not have to claim the rebate in his tax return.

As David has already lodged his tax return, the Tax Office amended his return to include the unused rebate amount of $90.

If the person who was eligible to claim the rebate died during the year, the executor or administrator of the person’s estate can transfer the unused rebate to the person who was the deceased person’s spouse at the time of death.

Things you need to know

•	you cannot cancel or reverse a transfer

•	the amount you can transfer depends on your tax liability. A subsequent change in your tax liability will change the amount that you had transferred to your spouse and may affect their tax liability.

Do you want to transfer the unused rebate to your spouse?

If you are unsure if you will have any unused rebate to transfer, you should answer YES to this question.

NO	Go to Item T7

YES	Read below

HOW TO TRANSFER YOUR UNUSED REBATE

We will automatically transfer any unused rebate to your spouse after your tax return is lodged if you follow the instructions below.

You must complete the Spouse details - married or de facto section of your tax return. Make sure you include your spouse’s tax file number.

You and your spouse must also complete the transfer agreement. This agreement needs to be kept with your tax records for this tax return – DO NOT send it in to the Tax Office. Your spouse should also keep a copy.

Your spouse does not need to claim the rebate in their tax return. If your spouse has already lodged their 2007 tax return, we will automatically amend it to include any unused rebate.

DEFINITION:
Your spouse is your husband or wife to whom you are legally married, or a person who lives with you on a genuine domestic basis as your husband or wife. Under Australian law your husband or wife cannot be the same sex as you.

Previewing or Printing the transfer agreement

STEP 1	Click on Printing in the Navigator. You will be prompted for the items you want to preview or print.

STEP 2	Select 30% CCTR transfer agreement. (You may want to clear the Tax return box).

STEP 3	Click on the Preview or Print button and use the arrow buttons to locate the transfer agreement.

STEP 4	Click on the Print button to print your transfer agreement.


Item T6 How your 30% child care tax rebate is worked out
T6	How your 30% child care tax rebate is worked out

If you want to work out your 30% child care tax rebate entitlement before you receive your notice of assessment follow the steps below.

You will need to know your total fees and your CCB entitlement which can be accessed by:

•	going to the website www.familyassist.gov.au and by clicking on ‘View 30% child care tax rebate details’

•	Phoning the FAO on 13 61 50, or

•	Phoning us on 13 28 61

Worksheet

		Child 1	Child 2	Child 3
STEP 1  Calculate your total fees for each child for the period 1 July 2005 to 30 June 2006. Only include the total fees for the weeks when you met all three eligibility requirements. Enter the total fees at (a)	(a)	$___________	$___________	$___________
STEP 2  Enter your CCB entitlement for each child at (b)	(b)	$___________	$___________	$___________
STEP 3  Take (b) away from (a). Enter this amount at (c). These are your out-of-pocket expenses.	(c)	$___________	$___________	$___________
STEP 4  Multiply the amount at (c) by 30%. Enter this amount at (d)	(d)	$___________	$___________	$___________
STEP 5  Your rebate for each child is limited to $4,096. Enter at (e) the amount at (d) or $4,096 whichever is lower.	(e)	$___________	$___________	$___________
STEP 6  Enter at (f) the total of all the amounts from (e)	(f)	$___________
The amount at (f) is your 30% child care tax rebate.


Item T6 30% Child care tax rebate transfer agreement
30% Child care tax rebate transfer agreement 2007

e-tax will print a 30% child care tax rebate transfer agreement 2007 at the end of the interview. Keep it with your tax records for this year.

Things you need to know:
 - we will calculate your rebate for you
 - you cannot cancel or reverse a transfer
 - the amount you can transfer depends on your tax liability. A subsequent change in
   your tax liability will change the amount you had transferred to your spouse.

30% CHILD CARE TAX REBATE TRANSFER AGREEMENT 2007

This agreement must be completed and retained by both you and your spouse.

You need to complete this section of this agreement

 I .........................………………………………………………………........................,

want to transfer my unused 30% child care tax rebate to my spouse. I am aware that I cannot cancel or reverse the transfer.

My tax file number is  .....................……………………………………………………………..

………………………………………………………..                   ........... / ........... / ..........

           Your signature                                                                              Date

 Your spouse needs to complete this section of this agreement

 I .........................………………………………………………………........................,

agree to receive the transfer of the unused 30% child care tax rebate. I am aware that I cannot cancel or reverse the transfer.

My tax file number is …………………………………………………………………..

I give permission for my tax file number to be disclosed to allow the transfer. I also understand that the rebate transferred to me can be increased or decreased, for example due to changes in my spouse’s taxable income or changes to child care benefit.

.……………………………………………………………          ........... / ........... / ...........

                            Your spouse’s signature                                         Date


Item T6 Downloading your child care details
Pre-filling your child care details

You may be able to pre-fill your child care details received through the Family Assistance Office.

You will view:

•	your child’s name

•	details of total fees and child care benefit entitlement for approved child care, and

•	details of any periods when the child care benefit work/training/study test – for the purposes of the rebate – was not passed.

This information will be used to pre-fill item T6 – 30% child care tax rebate.

You must view this item, and if applicable, enter your spouse details to transfer any unused rebate.

NOTE:
If the pre-fill service is unavailable you can still claim the rebate by answering ‘yes’ at item T6 – 30% child care tax rebate. If you are eligible for the 30% child care tax rebate the Tax Office will calculate your rebate entitlement based on information provided to us by the Family Assistance Office. You rebate will be automatically shown on your notice of assessment.
If you still want to use the pre-fill service, see e-tax pre-filling information for details about when the service may be available again.

CHANGING THE CHILD CARE INFORMATION

You cannot change the pre-filled details.

VIEWING AND/OR PRINTING YOUR CHILD CARE INFORMATION

You can view and or/print the details that are pre-filled into e-tax by selecting  Printing in the e-tax Navigator when it appears on the left hand side of the screen. Select 30% child care tax rebate summary in the Downloaded Data section and select Preview or Print.

IF NO CHILD CARE DATA IS AVAILABLE FOR DOWNLOAD

Your child care data may be unavailable for the following reasons.

•	You have not claimed Child Care Benefit (CCB). You need to contact the Family Assistance Office and claim for CCB before lodging your tax return. Once you have received CCB, you can lodge your tax return.

•	You have received CCB but the Tax Office is unable to match your child care data to your tax records. You should contact the Tax Office on 13 28 61 to have this corrected.

VERIFICATION

You must provide information that allows the Tax Office to verify your identity before your data is pre-filled into e-tax. To do this

1.	Click on Pre-filling in the Navigator or the Pre-filling button on the relevant screens.

2.	e-tax will ask you for your password or information that will allow the Tax Office to verify your identity. When you have successfully matched your details against the Tax Office records, you will be issued with a password.

NOTE:
Keep your password as you will need it to lodge your tax return or claim form.

For more details about obtaining a Tax Office password using e-tax refer to Tax Office password.

IF YOU RECEIVE AMENDED DETAILS FROM THE FAO

If you receive amended details from the FAO after you have lodged your return, please check to see if the change affects your 30% child care tax rebate claim. You may need to request an amendment – see If you made a mistake on your tax return.


Item T6 Family Assistance Office - Contact Details
Family Assistance Office – Contact Details

To contact the FAO:

•	visit the FAO’s website at www.familyassist.gov.au

•	phone the FAO on 13 61 50 between 8.00am and 8.00pm (local time), Monday to Friday

•	visit your nearest FAO – offices are located in Medicare offices, Centrelink customer service centres and Tax Office shopfronts

•	use the FAO’s teletypewriter (TTY) service: 1800 810 586 (this service is only available via a teletypewriter machine, for people with a hearing and/or speech impairment), or

•	if you speak a language other than English, phone 13 12 02.


Item T14 Entrepreneurs tax offset
	Entrepreneurs tax offset
This topic covers:

Who does this item apply to?

You need to know

Definitions

Completing the e-tax screens

Do you want to work out your tax offset?

WHO DOES THIS ITEM APPLY TO?

Complete this item if:

•	you were in the simplified tax system (STS), or

•	you received a distribution from a partnership or trust that was in the STS

YOU NEED TO KNOW

From the information you have entered into e-tax, the amount of your entrepreneurs tax offset will be automatically calculated and your tax offset amount will be shown in your tax estimate. If you want to work out your tax offset read How your entrepreneurs tax offset is worked out.

The entrepreneurs tax offset is a tax offset equal to 25% of the income tax liability attributable to the business income of small businesses in the STS with an annual STS group turnover of $50,000 or less. The tax offset is phased out when the STS group turnover is over $50,000 and ceases when the group turnover reaches $75,000.

Your entitlement to the tax offset is based on your net STS income or your share of net STS income if you are a partner in a partnership or a beneficiary of a trust.  You are not entitled to the tax offset if you have no STS net income.

The tax offset can only reduce the amount of tax you must pay this year. That is, any unused offset cannot be refunded to you, deferred to reduce your tax in a later income year or transferred to another taxpayer to reduce their tax.

You may be eligible for more than one offset. For example, if you were a sole trader who had elected to enter the STS and you were also a partner in a partnership that had elected into the STS, you may be entitled to a tax offset in respect of your income as a sole trader and also in respect of your share of the net STS income from the partnership.

Your entitlement to the entrepreneurs tax offset may be affected by the rules concerning the grouping of STS entities and the calculation of STS group turnover.  In the example in the previous paragraph, if the partnership is grouped with you as a sole trader, your STS group turnover is relevant in determining your eligibility to a tax offset in relation to your sole trader business income.  In addition, the STS group turnover of the partnership is relevant in determining your eligibility to a tax offset in relation to your share of the partnership’s net STS income.

DEFINITIONS

Net STS income is the amount by which your STS annual turnover exceeds your allowable deductions attributable to that STS turnover; or if you were a partner in a partnership or a beneficiary of a trust, the amount by which the entity’s STS annual turnover exceeded the entity’s allowable deductions attributable to that STS turnover.

STS annual turnover is the value of the business supplies you made, or the entity made (if you are a partner in a partnership or a beneficiary of a trust) during the year.

Unlike your STS group turnover, it does not include the value of business supplies made by any entities that you are grouped with

The value of business supplies means the value of supplies made in the ordinary course of carrying on a business.   Supplies include:

•	the sale of goods

•	the provision of services

•	interest received on amounts deposited in business banking accounts, and

•	holding of security deposits forfeited by customers.

 For supplies that do not attract goods and services tax (GST), the value is simply the price.  For supplies that do attract GST, the value is the price less the GST component.

The value of business supplied does not include amounts such as:

•	rental income where rental activities do not form an ordinary part of the business

•	amounts received from the sale of a capital asset (for example, the sale of a building used in the business)

•	payments received under an insurance recovery, and the principal component of a loan repayment.

NOTE:
For more information on the value of business supplies, phone the Business Infoline on 13 28 66 or refer to Taxation Ruling TR 2002/11 – Income tax: Simplified Tax System eligibility - STS average turnover.

Allowable deductions attributable to STS annual turnover are the allowable deductions that you or an entity can claim which specifically relate to that turnover.  The allowable deductions attributable to STS annual turnover do not include:

•	any tax losses from prior years

•	superannuation contributions

•	gifts or donations, or

•	costs of managing your or the entity’s tax affairs.

If your or the entity’s simplified tax system (STS) pool includes assets which are used partly for business and partly for other income-producing activities, then the STS pool deduction will need to be apportioned on a reasonable basis.

STS group turnover is the sum of:

•	the value of business supplies you or the entity (if you are a partner in a partnership or a beneficiary of a trust) made during the year, and

•	the value of business supplies made during the year by entities that you or the entity are grouped with, even if you or the entity did not earn or receive any income from those entities.

 Simplified tax system (STS) group turnover does not include the value of business supplies made between you (or if you are a partner in a partnership or a beneficiary of a trust, the entity) and any businesses you (or the entity) are grouped with.

If you are not grouped with any other entities under the STS grouping rules, your STS group turnover will also be your STS annual turnover.

For more information on the STS grouping rules, please phone the Business Infoline on 13 28 66 or see Taxation Ruling TR 2002/6 – Income tax: Simplified Tax System: eligibility – grouping rules (*STS affiliate, control of non fixed trusts).

BUSINESS CARRIED ON FOR ONLY PART OF THE YEAR

For the purposes of the entrepreneurs tax offset, if you have been in business for only part of the year, you don’t need to use a reasonable estimate of what the STS annual turnover or STS group turnover would have been if you had been in business for the whole year.  This is in contrast to what is required when calculating STS average turnover or STS group turnover for the purposes of determining eligibility for STS.

For more information on the entrepreneurs’ tax offset, please phone the Business infoline on 13 28 66 or see the publication The simplified tax system - a guide for tax agents and small businesses (NAT 6459).

WHAT YOU MAY NEED

•	Details of all the business supplies you made during the year.

•	Details of the deductions that you can claim which are attributable to the business supplies you made during the year.

•	Details of all business supplies made during the year by entities you were grouped with.

•	A statement or advice from the partnership or trust showing the following details:

o	the partnership or trust’s STS group turnover

o	your share of the net partnership’s or trust’s STS income

COMPLETING THE e-tax SCREENS

These instructions will help you to complete the e-tax tables for the entrepreneurs tax offset.

Were you in the simplified tax system (STS)

OR

Did you receive a distribution from a partnership or a trust that was in the STS ?

YES	Click on the Yes button to proceed to screen 6552.

NO	You are not entitled to this tax offset unless you have completed any of the items – STS election in the Personal Details section,  12 – Partnership and Trusts, 13 – Personal services income or 14 – Net income or loss from a business.  Click on the No button to go back to those items via the Navigator and complete them if you are entitled to this offset, otherwise go to Item T15.

Screen 6552 provides more information about your entitlement to the offset and the way in which it is calculated. It provides important links to the rules concerning the grouping of STS entities and STS group turnover that you should read before clicking Next to proceed.

e-tax will detect the information you have included at the STS election and/or items 12, 13 and 14 and will present this information in screens relevant to your circumstances.

If you are a sole trader who has elected into the STS, e-tax will present screen 6553 which requires you to enter your STS group turnover, annual STS turnover and allowable deductions. e-tax will calculate your net STS income from the details you enter on this screen.

If you are a partner in a partnership or a beneficiary of a trust, e-tax will import the details of each entity that you entered in item 12 into screen 6554. At screen 6554, you must indicate which of these entities are in the STS by selecting either Yes or No from the drop-down list in the final column of the table.

Click Next to proceed. If any of the entities are in the STS, e-tax will proceed to screen 6555 where you need to enter the following amounts for each entity in the table:

•	your share of the Net STS income from the entity

•	the amount of the entity’s STS group turnover.

Once all the relevant screens above are complete, e-tax will calculate and display the tax offset amount for each entity and the total entrepreneurs tax offset amount on screen 6556.

e-tax will include the amount of your entrepreneurs tax office in your tax estimate.

e-tax will also complete item T14 – Entrepreneurs tax offset in the Supplementary section of your tax return with the following details of the first tax offset:

•	Label K – Simplified tax system group turnover

•	Label N – Net simplified tax system income, and

•	the code that indicates whether the offset is from sole trader activities, a partnership or a trust.

NOTE:
If you are entitled to more than one offset, you do not need to do anything further – e-tax will send all of the relevant details with your tax return.

e-tax will also include all of these details in a worksheet that you can view or print from the Printing option in the e-tax Navigator.

DO YOU WANT TO WORK OUT YOUR TAX OFFSET?

You do not have to work out your tax offset.  We will work out your tax offset based on the information you have provided in e-tax.  If you do want to work out your tax offset, read How your entrepreneurs tax offset is worked out.


Item T14 How your entrepreneurs tax offset is worked out
How your entrepreneurs tax offset is worked out

If your STS group turnover is $50,000 or less, you can claim a tax offset of 25% of the income tax liability attributable to your STS business income. If the STS group turnover is more than $50,000, the tax offset is phased out until it equals zero at a turnover of $75,000.

The method of calculating the ETO depends on the type of entity.

INDIVIDUAL OR A COMPANY

STEP 1:	Work out the taxable income for the year.
STEP 2:	Work out 25% of the basic income tax liability on that taxable income (in working this out, use the applicable tax rates and take into account any special provisions that affect the calculation of liability, but don’t take any tax offsets into account).
STEP 3:	Work out the STS percentage using the formula: net STS income for the year  x 100 taxable income for the year
If the percentage that results is more than 100%, the STS percentage is 100%.

STEP 4:	If the STS group turnover is $50,000 or less, the tax offset is: Step 2 amount x STS percentage
STEP 5:	If the STS group turnover is more than $50,000, the offset is adjusted by the STS phase-out fraction. This is worked out using the formula:
	$75,000 – the STS group turnover for the year                                    $25,000
	The tax offset is then: Step 2 amount x STS percentage x STS phase-out fraction
EXAMPLE - SOLE TRADER WITH OTHER NON-BUSINESS INCOME

Kalee runs a business from her home and is an STS taxpayer for the year ended 30 June 2007. The net income from her business is $18,000 (representing a turnover of $28,000 less business expenses of $10,000).

In addition she has a part-time job as an employee from which she receives a salary of $27,000.

The Step 1 amount	=	$18,000 + $27,000
	=	$45,000 (taxable income)
The Step 2 amount	=	25% of Kalee’s basic income tax liability of *$9,360
	=	$2,340
The Step 3 percentage	=	$18,000 / $45,000 x 100
	=	40% (the STS percentage)
The Step 4 amount	=	$2,340 x 40%
	=	$936
Step 5 is not applicable as her STS group turnover is not more than $50,000.

Kalee is entitled to a tax offset of $936.

* resident individual tax rates applying to taxable income of $45,000

If you are a partner in an STS partnership

The partnership’s STS group turnover determines the partner’s eligibility for the ETO. However, it is the partner’s taxable income and the partner’s share of the partnership’s net STS income that is used in steps 1 to 3 of the calculation method for an individual or company.

If you are a trustee of an STS trust

The trust’s STS group turnover determines the trustee’s eligibility for the ETO. However, taxable income is replaced by net income of the trust in steps 1 to 3.
It is that share of the trust’s net STS income that the trustee is liable to be assessed* on that is used in Step 3 of the calculation method for an individual or company.

*A trustee can be assessed under either section 98, 99 or 99A of the Income Tax Assessment Act 1936

If you are a beneficiary of an STS trust

The trust’s STS group turnover determines the beneficiary’s eligibility for the ETO. However, it is the beneficiary’s taxable income and the beneficiary’s share of the trust’s net STS income that is used in steps 1 to 3 of the calculation method for an individual or company.

CAN YOU BE ELIGIBLE FOR MORE THAN ONE ETO IN AN INCOME YEAR?

Yes, where you receive STS income from more than one source.

For example, if you are a sole trader who has elected into the STS, and you are also a partner in a partnership that has elected into the STS, you may be entitled to an ETO in respect of your income as a sole trader and also in respect of your share of the STS income from the partnership.

However, if the partnership and the sole trader are grouped entities, the amount of STS group turnover has to be taken into account in determining eligibility for an ETO.


ATO Receivables Policy

4 July 2006  Version

PART E. Interest Payable by the Commissioner

82. INTEREST ON EARLY PAYMENTS

82.1 PURPOSE

82.1.1 	This chapter deals with the early payment of certain liabilities, where the circumstances attract interest on early payments.

82.2 LEGISLATION

82.2.1	Payment of interest on early payments is set out in under Part IIA of the Taxation (Interest on Overpayments and Early Payments) Act 1983 (T(IOEP)A 1983). Generally, this Part applies to assessed income tax and certain other related amounts. Interest paid under the T(IOEP)A is assessable income under section 15-35 of the Income Tax Assessment Act 1997 when it is received (applied, credited or refunded).

82.2.2	Interest under the T(IOEP)A 1983 is payable at the annual rate or rates provided for in section 214A Income Tax Assessment Act 1936 (ITAA 1936). Interest is calculated as simple interest, not compound interest (refer to the decision in Consolidated Fertilizers Ltd v DCT (1992) 23 ATR 305).

82.2.3	Interest is calculated to the nearest cent (0.5 cent increased to nearest cent) and amounts less than 50 cents are not refundable in accordance with Part IIIB of the T(IOEP)A.

82.2.4     If an amount of interest has been paid to a non-resident, 10% of the interest is to be deducted under section 12-245 of the Taxation Administration Act 1953 (TAA).

82.2.5     Interest on early payments is payable pursuant to Part IIA of the T(IOEP)A if a payment takes place more than 14 days before the tax, debt, interest, amount or instalment concerned becomes due and payable.

82.2.6     Under paragraph 8A(1)(a) of the T(IOEP)A, interest on early payments is payable only on a payment of, or a payment on account of:

•	income tax (this includes the Medicare levy and the Medicare levy surcharge);

•	a higher education contribution scheme (HEC) assessment debt;

•	a compulsory repayment amount arising under the Higher Education Support Act                        2003 ;

•	a student financial supplement (FS) assessment debt;

•	penalty tax under Part VII of the ITAA 1936;

•	interest under section 102AAM of the ITAA 1936;

•	late lodgment penalties for relevant entities, instalment taxpayers and full self-assessment taxpayers under section 163A of the ITAA 1936;

•	general interest charge for late lodgment of returns by entities other than relevant entities, instalment taxpayers or full self-assessment taxpayers under section 163B of the ITAA 1936;

•	general interest charge on debit amendments under section 170AA of the ITAA 1936; and

•	a shortfall interest charge under Division 280 in Schedule 1 to the TAA.

82.2.7	Debts which are not directly paid but are reduced by the crediting or applying of an   amount   do not attract early payment interest. These amounts include:

•	credit for instalments payable under the pay as you go (PAYG) instalment regime;

•	credit for amounts withheld from payments under the PAYG withholding regime;

•	an overpayment of other income tax liabilities;

•	an RBA surplus; and

•	any other credit entitlement arising under a taxation law.

82.2.8 	Early payment interest is not payable on:

•	any component of the payment that exceeds the amount due; and

•	an amount for any period during which that amount also attracts interest under Part    IIIA of the T(IOEP)A.

82.2.9	Under special transitional provisions, certain full self-assessment taxpayers were able to defer their final company tax instalment for 1999-2000 income year. Early payment of a deferred instalment does not attract interest.

82.2.10	The interest on early payments is payable for the period:

•	if the person is not a relevant entity, an instalment taxpayer or a full self assessment taxpayer - from the beginning of the later of the following days:

a.	the day on which the payment is made;

b.	the day on which the notice notifying the tax, debt, interest or instalment concerned is issued; and

•	if the person is a relevant entity, an instalment taxpayer or a full self-assessment taxpayer - from the beginning of the day on which the payment is made;

until the earlier of the appropriate due date for the payment or when refund occurs - section 8B T(IOEP)A.

82.3 INTRODUCTION

82.3.1 	Entitlement to interest on early payments is set out under Part IIA of the T(IOEP)A.

82.3.2 	The Commissioner has authority under Division 3 of Part IIB of the TAA to apply an amount of interest payable to a taxpayer under that Act against any amount due to the Commonwealth directly arising under a taxation law, including any such amount not yet payable.

82.3.3 	Interest under the T(IOEP)A is payable at the annual rate or rates provided for in section 214A of the ITAA 1936.

82.4 POLICY

82.4.1 	Under the T(IOEP)A 1983 interest may be payable on a payment made early. Interest can be claimed where a payment is directly made:

•	for an amount listed under subsection 8A(1) of T(IOEP)A 8(1)(a) (for example tax assessed under the ITAA 1936), and

•	more than 14 days before the due date, and

•	be for in relation to the 1993-1994 and subsequent income years.

82.4.2 	Claims for interest on early payments should be made either in a written request to the Tax Office by the taxpayer/tax agent or calculated and claimed in the next income tax return. A direct payment of interest can only be made if it is greater than $5.

82.4.3 	Interest on early paymens can only be paid after the due date for payment of the tax paid early and only after that tax amount has been established.

82.4.4 	If the payment is for more than the value of the debt, interest can only be paid in respect to payment up to the value of the debt and not on the full payment.

82.4.5     The Tax Office will provide written details to a taxpayer of the amount early payment interest when the interest is paid. If the interest has been offset against any outstanding taxation debts, the taxpayer will also be advised in writing as to the nature and date of the offset.

82.5 TERMS USED

82.5.1    'Compulsory repayment amount' means amounts that are treated under Subdivision 154-D of the Higher Education Support Act 2003 as if they were income tax.

82.5.2     'FS assessment debt' means amounts that are treated under subsection 12ZN(1) of the Student and Youth Assistance Act 1973 as if they were income tax.

82.5.3     'Full self-assessment taxpayer' is defined under subsection 6(1) of the ITAA 1936. It includes companies (including corporate unit trusts and public trading trusts), superannuation funds, approved deposit funds and pooled superannuation trusts. The term 'full self-assessment taxpayer' applies to the 2000-2001 and later income years.

82.5.4     'HEC assessment debt' means amounts that are treated under subsection 106U(1) of the Higher Education Funding Act 1988 as if they were income tax.

82.5.5     'Instalment taxpayer' is defined in subsection 221AZK(1) of the ITAA 1936. It includes companies (including corporate unit trusts and public trading trusts), superannuation funds, approved deposit funds and pooled superannuation trusts. The term 'instalment taxpayer' applies to the years of income from the 1994-1995 income year (the 1995-1996 income year for entities classified as large) to the 1999-2000 income year.

82.5.6     'Relevant entity' is defined in section 221AK of the ITAA 1936. It includes companies (including corporate unit trusts and public trading trusts), superannuation funds, approved deposit funds and pooled superannuation trusts. The term 'relevant entity' applies to the years of income from the 1989-1990 income year to the 1994-1995 income year (the 1995-1996 income year for entities classified as large).


Product Ruling PR 1999/95 Income tax and fringe benefits tax: Product Rulings system
Product Ruling PR 1999/95

There is an Addendum to this document

There is a second Addendum to this document

Income tax and fringe benefits tax: Product Rulings system

Preamble

This Product Ruling is not a "public ruling" in terms of Part IVAAA of the Taxation Administration Act 1953. Product Ruling PR 1999/95 explains Product Rulings and Taxation Rulings TR 92/1 and TR 97/16 together explain when a Ruling is a public ruling and how it is binding on the Commissioner.

Contents

What this Product Ruling is about

Date of effect

Previous Rulings

Ruling

What constitutes a Product Ruling

Class of person/arrangement

"Tax Law"

Product

Numbering of Product Rulings

Publication

Copyright

Applying for a Product Ruling

Obligations after the issue of a Product Ruling

Testing our views

When we will not rule

WHAT THIS PRODUCT RULING IS ABOUT

1.	This Ruling outlines the system of Product Rulings, which are binding public rulings under the Taxation Administration Act 1953 (TAA), in relation to the income tax and fringe benefits tax law. This Ruling considers:

•	the date of effect of Product Rulings;

•	what constitutes a Product Ruling;

•	applying for a Product Ruling; and

•	when we will not rule.

1.	The term "investors" is used throughout this Ruling to describe persons who purchase or otherwise obtain participation in a "product" (as defined below at paragraph 16). The terms "invest", "investing", "investment" and "investor" are used in the same context.

DATE OF EFFECT

This Ruling

2.	This Product Ruling applies from 13 October 1999.

Later Rulings

3.	Product Rulings have prospective effect only. Therefore, a Product Ruling applies only to arrangements entered into after the date the Ruling is made. Persons investing in the product before the Ruling is made are not able to rely on it as a public ruling.

4.	A Product Ruling also specifies the date on which it will be withdrawn and cease to have effect. A Product Ruling applies to all persons within the specified class who enter into the specified arrangement (usually identified by the particular product name, applicant and year) during the term of the Ruling. Thus, a Product Ruling continues to apply to those persons, even following its withdrawal, for arrangements entered into prior to withdrawal of the Ruling. This is subject to there being no change in the arrangement or in the persons’ involvement in the arrangement.

5.	The Commissioner will not give a Product Ruling for a period exceeding three years from the end of the income year in which it is made, unless exceptional circumstances exist. Additionally, as a general rule, the Commissioner will not rule on the tax benefits available to investors beyond a period exceeding three years from the end of the income year in which the Product Ruling is made.

PREVIOUS RULINGS

6.	This Ruling replaces Product Ruling PR 98/1, which is now withdrawn.

RULING

What constitutes a Product Ruling

7.	Product Rulings have been introduced to enable the Commissioner to rule publicly on the availability of claimed tax benefits from "products" (as defined below at paragraph 16). Being a type of public ruling, the Commissioner derives the power to issue Product Rulings under Part IVAAA of the Taxation Administration Act 1953 (TAA). The Commissioner has an unfettered discretion as to whether or not to issue a Product Ruling in relation to any particular project.

8.	A Product Ruling provides certainty to potential investors by confirming that the tax benefits set out in the Ruling part of the Product Ruling are available, provided that the arrangements are carried out in accordance with the information provided by the applicant and described in the Arrangement part of the Product Ruling. The highest levels of disclosure are expected of the applicant. If the arrangement described in the Product Ruling is materially different from the arrangement that is actually carried out, investors lose the protection of the Product Ruling:

•	the Ruling has no binding effect on the Commissioner, as the arrangement entered into is not the arrangement ruled upon; and

•	the Ruling will be withdrawn or modified.

This is likely to occur when there is a material omission or misrepresentation in the application for the Ruling.

9.	Potential investors in a particular project may wish to seek assurances from the promoter of the project that the arrangement will be carried out as described in the Product Ruling relating to the project.

Class of person/arrangement

10.	Part IVAAA of the TAA contains the public ruling provisions and sets out what is necessary for a published opinion of the Commissioner to be a public ruling. A Product Ruling sets out the Commissioner’s opinion as to the way in which a "tax law" applies to a class of persons in relation to an arrangement (section 14ZAAF of the TAA).

11.	The class of persons subject to a Product Ruling is defined in the Product Ruling. For example, where Australian residency is a factor in the tax consequences, the class of persons is described accordingly. The class is investors. These investors need not seek a private ruling on the tax consequences of their investment in the product. The Product Ruling is legally binding on the Commissioner and investors can rely on the statements it contains.

12.	However, the tax consequences for the Product Ruling applicant are not addressed in the Ruling. When in doubt, applicants may request a private ruling on the matter.

"Tax law"

13.	A "tax law" to which the public ruling provisions apply is a provision of an Act or a regulation under which the extent of liability to income tax, withholding taxes, franking deficit tax, Medicare levy, or fringe benefits tax is worked out (see definition of "tax law" in section 14ZAAA of the TAA).

14.	A public ruling on the way in which a tax law applies may be a ruling on the way in which a discretion of the Commissioner under that law would be exercised (section 14ZAAD of the TAA).

Product

15.	A Product Ruling fully describes the relevant details of the particular product. A "product" refers to an arrangement in which a number of taxpayers individually enter into substantially the same transactions with a common entity or a group of entities. For example, they may all enter into substantially the same management agreements with a manager connected with the promoter. The product may be described as an investment arrangement, a tax effective arrangement, a financial arrangement or an insurance arrangement. Often, it is offered to the general public by way of an offering memorandum or prospectus, but it may be put forward to individuals on an invitation basis. The Commissioner rules on the precise arrangement identified in the Ruling.

16.	A Product Ruling provides investors with a binding ruling as to the tax consequences of the particular product, but provides no assurance that the product is commercially viable, that charges are reasonable or represent industry norms, or that projected returns will be achieved or are reasonably based. Potential investors must form their own view about the commercial and financial viability of the product. This will involve a consideration of important issues such as whether projected returns are realistic, the "track record" of the management, the level of fees in comparison to similar products, how the investment fits into an existing portfolio, etc. A financial (or other) adviser should be consulted for such information.

Numbering of Product Rulings

17.	Product Rulings will:

•	be grouped as the "PR" series;

•	have a prefix for the particular calendar year in which they issue; and

•	be numbered in issue order.

Publication

18.	A Product Ruling is a public ruling in terms of the TAA. Accordingly, for a Product Ruling to be made, the Ruling must be published and notice of it must be published in the Gazette. Because a Product Ruling only applies for a set term, the Gazette notice giving notice of the making of the Ruling will also give notice of the future date on which the Ruling will be withdrawn. The Commissioner may, however, withdraw a Product Ruling at any stage by publishing notice of the withdrawal in the Gazette.

Copyright

19.	Each Product Ruling is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth, available from AusInfo. Requests and inquiries concerning reproduction and rights should be addressed to the Manager, Legislative Services, AusInfo, GPO Box 1920, Canberra ACT 2601. The relevant form that must be completed (entitled "A Request to Reproduce Published Commonwealth of Australia Copyright Material") is available on AusInfo’s Internet site at www.ausinfo.gov.au/infoman/im_copyright.htm.

Applying for a Product Ruling

20.	Promoters, or the persons involved as principals in the carrying out of the arrangement (but not participants or intermediaries), may apply for a Product Ruling.

21.	A short time prior to submitting formally an application for a Product Ruling, applicants may forward to the Australian Taxation Office a completed "Intention to Submit a Product Ruling Application" form. A copy of this form may be printed off the ATO’s Internet site at www.ato.gov.au or obtained from the ATO. The completed form should be directed to:

Product Rulings Contact Officer

Rulings Unit

Office of the Chief Tax Counsel

Australian Taxation Office

PO Box 900

Civic Square  ACT  2608.

22.	Early notification of an intention to lodge a Product Ruling allows us to allocate resources in advance and thereby reduce likely processing times. In acknowledging receipt of the "Intention to Submit a Product Ruling" form, the applicant will be given details of a contact officer and information about forwarding the finalised application. The application will not be considered lodged until the finalised application is received.

23.	Alternatively, applicants may submit an application for a Product Ruling directly to the Product Rulings Contact Officer in the Rulings Unit at the address given above (see paragraph 22).

24.	A written application is required for a Product Ruling. The information that must be addressed in an application is detailed in a checklist, which can be printed off the ATO’s Internet site at www.ato.gov.au or obtained from the ATO. In particular, a draft of the proposed Arrangement, Ruling and Explanations parts of the Product Ruling must be provided. The draft must be signed and include a declaration that all material contained in the draft is true and correct. Reference may be had to published Product Rulings for guidance as to the style in which the various parts of a Product Ruling are drafted. Copies of published Product Rulings can be accessed on the ATO’s Internet site at www.ato.gov.au.

25.	Applicants should take particular care to ensure that any draft Product Ruling produced in the course of preparing an application is clearly distinguishable in format from a final Product Ruling as issued by the ATO. In particular, each page of any draft Product Ruling produced should carry a notation to the effect that it is a draft for application purposes only (this ensures potential investors are not inadvertently misled about the nature of the document).

26.	The completed checklist must be attached to the front of the application. All aspects of the information specified in the checklist must be addressed in the application. An application cannot be fully considered if insufficient information is provided. The applicant will be contacted, advised that the ATO cannot rule, and asked to provide further and better particulars if the information is deficient in any way.

27.	Applications and all supporting documents should be provided in triplicate. In addition, an electronic copy of the proposed parts of the draft Product Ruling, and other relevant documents, if available, should be provided on disc.

28.	Applicants are encouraged to lodge applications early in the financial year to which the proposed Product Ruling relates. This should ensure sufficient time to finalise the Ruling.

29.	The issuing of a Product Ruling in relation to a particular Project is conditional on the applicant:

•	acknowledging that the Commissioner will reveal in the Ruling:

o	the name and address of the persons involved as principals in the carrying out of the arrangement;

o	the name and description of the product; and

o	a description of the agreements, deeds and transactions to which the investors are parties;

•	obtaining express consent to be named from all parties named in the Ruling;

•	verifying that the description of the Project contained in the proposed Ruling is accurate; and

•	agreeing to abide by a number of terms of use, e.g., agreeing to provide each investor in the project shortly following the conclusion of each financial year with a statement of income derived by the investor in that financial year. A copy of the terms of use may be printed from the ATO’s Internet site at www.ato.gov.au or obtained from the ATO.

30.	The quality and completeness of information supplied (including that contained in the draft Product Ruling) and the need to research, analyse and resolve issues that arise, are factors in the time taken to provide a Product Ruling.

31.	As soon as it becomes apparent that the product has features requiring detailed research and analysis, the applicant will be contacted to discuss the matter. Applicants should note that any revision of arrangements or submission of additional material, whether requested by the ATO or not, will be treated as a fresh application made at the time the revised or additional information is received.

32.	If a Product Ruling is no longer sought on an arrangement (i.e., the application is withdrawn), the Commissioner may still provide the applicant with unpublished written confirmation of his conclusion in relation to the product.

Obligations after the issue of a Product Ruling

33.	The Corporations Law requires a company, a registered managed investment scheme and other prescribed entities to lodge with the Australian Securities and Investments Commission (ASIC) a directors’ report. The report must (among other requirements):

•	give details of any significant changes in the entity’s state of affairs during the financial year;

•	state the entity’s principal activities during the financial year and any significant changes in the nature of those activities during the financial year; and

•	give details of any matter or circumstance that has arisen since the end of the financial year that has significantly affected, or may significantly affect:

o	the entity’s operations in future financial years;

o	the results of those operations in future financial years; or

o	the entity’s state of affairs in future financial years.

The entity reported on is the company, registered managed investment scheme or other prescribed entity.

34.	If such a report is required to be lodged, the applicant is required to provide this information to the Commissioner within the time for lodgment of the report with the ASIC. The Commissioner must receive this information after the end of each financial year for the duration of the Product Ruling. If the information is not provided, the Ruling may be withdrawn.

Testing our views

35.	Where we are unable to rule favourably, we will, if the applicant wishes to test our views, agree to issue a private ruling in response to a valid application by a proposed investor, enabling the relevant review processes.

When we will not rule

36.	The Commissioner makes and withdraws Product Rulings at his discretion.

37.	Without limiting the discretion to refuse to rule in relation to other instances, a Product Ruling will not be issued in the following circumstances:

(a)	the class of persons to which the Ruling applies is so narrow that the anonymity of those persons cannot be guaranteed;

(b)	the application is frivolous or vexatious. Falling within this category are requests where:

o	the arrangement is only hypothetical, in that the arrangement to which the application relates is not being carried out and is not seriously contemplated by the applicant;

•	there is no realistic chance of implementing the arrangement; or

•	an applicant continues to present "shifting scenarios", indicating that there is, in fact, no settled arrangement on which the ATO may rule;

(c)	the persons who may purchase the product are not an homogeneous group, such that the tax result is the same for all (for example, the arrangement includes options which, if exercised, would be likely to change the tax outcome for some investors), or the tax result is dependent on the outcome of an unresolved issue (for example, whether an investor is in business);

(d)	the Ruling, or circumstances associated with the Ruling, could reasonably be misleading to potential investors. Falling within this category are requests where:

•	the ATO cannot give a positive clearance on general anti-avoidance provisions; or

•	the material provided in support of the application cannot reasonably be relied upon;

(e)	in the opinion of the Commissioner, insufficient information has been provided despite a request by the Commissioner for additional information. Falling within this category also are requests where material provided is inconsistent, inaccurate or contains errors such that the arrangement cannot be ascertained with particularity; and

(f)	in the opinion of the Commissioner it is unreasonable to comply with the application given the extent of resources available or other relevant matters. For example, the Commissioner may refuse to issue a Product Ruling in the following circumstances:

•	in the case of protracted and very time consuming matters to which the Commissioner cannot devote resources. An example may be the "arm’s length consideration" requirements in Division 13 of the Income Tax Assessment Act 1936 (ITAA 1936);

•	where the issues are sufficiently covered by a previously issued public ruling; or

•	where statutory or other Government requirements (e.g., prospectuses, licences, approvals) have not been met and are not expected to be met, have expired, have been withdrawn, or are expected to expire or be withdrawn in the near future.

38.	Product Rulings will generally be withdrawn where no longer needed. For example, a Product Ruling will be withdrawn where the arrangement in relation to which the Product Ruling issued is no longer to be implemented, the arrangement has been implemented but in a way materially different from that described in the Ruling, or where a replacement Ruling has issued. A Product Ruling, although withdrawn, will continue to bind the Commissioner in relation to those who entered into the arrangement as described in the Ruling during the currency of the Ruling.

Commissioner of Taxation

15 September 1999


Practice Statement PS 2001/6 Home office expenses:diaries of use and calculation of home office expenses
Practice statement 1999/2

Calculating car expense deductions where the car is jointly owned, jointly leased or jointly hired under a hire purchase agreement (but is not owned, leased or hired by a partnership)

STATEMENT

1.	A taxpayer who jointly owns or jointly leases a car (or jointly hires a car under a hire purchase agreement) and uses the car for income producing purposes can claim a deduction for car expenses using one of the following four methods:

METHOD 1 – Cents per kilometre method

Under this method, a joint owner can claim up to a maximum of 5,000 kilometres in respect of their income producing use. Where both joint owners use the car for separate income producing purposes, each can claim up to a maximum of 5,000 kilometres in relation to their income producing use.

METHOD 2 – 12% of original value method

A joint owner can deduct their share of 12% of the cost of the car. Therefore, where there are two joint owners, each owner can claim a deduction of 6% of the cost of the car if they are using this method. This method is only available where the taxpayer's income producing use exceeds 5,000 kilometres.

METHOD 3 – One-third of actual expenses method

A joint owner can deduct one-third of the car expenses, excluding capital expenses, they incur (i.e. one-third of their share of jointly incurred expenses and one-third of expenses wholly incurred by them) and one-third of their share of depreciation. This method is only available where the taxpayer's income producing use exceeds 5,000 kilometres.

METHOD 4 – Log book method

A joint owner can deduct the car expenses, including depreciation (but excluding other capital expenses), multiplied by the business use percentage.

2.	Joint owners can use different methods from each other in calculating their deductions under Division 28 of the Income Tax Assessment Act 1997 (ITAA 1997).

EXPLANATION

Division 28 of the ITAA 1997

3.	A taxpayer has to have either owned, leased or hired a car under a hire purchase agreement to be able to claim a deduction under Division 28 of the ITAA 1997. A taxpayer who jointly owned, jointly leased or jointly hired a car under a hire purchase agreement during an income year "owned", "leased" or "hired" the car and can therefore claim a deduction under Division 28.

4.	Division 28 applies to a partnership (i.e. including an association of persons in receipt of income jointly) as if it were an individual. Therefore, this Practice Statement does not apply to a taxpayer who is acting in the capacity of a partner in a partnership.

Deductions under METHOD 1 – Cents per kilometre method

5.	The 5,000 kilometre limit applies to a particular taxpayer in relation to a particular car. It does not apply to the car itself. Therefore, each joint owner or joint lessee can claim a maximum deduction of 5,000 kilometres in relation to their income producing use for each income year.

Deductions under METHOD 2 – 12% of original value method

6.	The deduction available to a taxpayer under the 12% of original value method is 12% of the cost of the car when they acquired it. Where a car is jointly owned, Subdivision 28-D allows the joint owner a deduction according to their share in the ownership of the car because each joint owner has not "acquired it" – only a share of it. Therefore, each joint owner can deduct their share of 12% of the cost of the car (i.e. where two joint owners – 6% each).

Deductions under METHOD 3 – One-third of actual expenses method

7.	The deduction available to a taxpayer under the one-third of actual expenses method is one-third of the car expenses they incur (excluding capital expenses) plus one-third of their share of the depreciation.

8.	Where a car is jointly owned or jointly leased, expenses may have been incurred wholly by one of the joint owners or jointly with other joint owners. It depends on who has the legal liability for the expenses. A taxpayer who is a joint owner or joint lessee can deduct one-third of expenses wholly incurred by them and one-third of their share of jointly incurred expenses.

9.	Where a car is jointly owned, depreciation is shared by the joint owners according to their respective interests in the car. A joint owner who uses the one-third of actual expenses method can deduct one-third of their share of the depreciation.

Deductions under METHOD 4 – Log book method

10.	As a matter of practice, the ATO accepts that deductions for joint owners under the log book method are calculated on the following basis:

Total kilometres travelled by the taxpayer in producing their assessable income	X	total car expenses incurred (individually or jointly) by any of  the joint owners plus total depreciation for the car  for the period.
total number of kilometres the car travelled in the period


Practice Statement PS 2001/6 Home office expenses:diaries of use and calculation of home office expenses
Practice Statement PS 2001/6

Amendments 1 June 2004: change "depreciation" to "decline in value"

Amendment 11 May 2005 to update rate from 20c per hour to 26c per hour, effective 1 July 2004

Home office expenses: diaries of use and calculation of home office expenses

This Practice Statement is issued under the authority of the Commissioners and must be read in conjunction with Practice Statement PS 1998/1. It must be followed by ATO Officers unless doing so creates unintended consequences. Where this occurs ATO officers must follow their Business Line’s escalation process for significant issues.

STATEMENT

1.	Where individual taxpayers keep a diary for the purpose of establishing a connection between the use of their home office and their work or business, the Commissioner will accept diary records covering a representative four week period as establishing a pattern of use for the entire year.

2.	Individual taxpayers who claim deductions for work or business related home office running expenses comprising electricity, gas and decline in value on office furniture may claim either a deduction for the actual expenses incurred or a deduction calculated at the rate of 26 cents per hour. A deduction is allowable only where additional running costs are incurred by a taxpayer because of income producing activities. For example, if a taxpayer undertakes a work activity in a room where other family members are watching television, there may be no additional cost occasioned by that work activity. Also, the income producing use of the home office needs to be substantial and not merely incidental. For example, a deduction would not be allowed at the rate of 26 cents per hour for the home office simply because a facsimile machine is left on 24 hours a day 7 days a week to receive business documents.

3.	Other home office expenses, such as telephone expenses and decline in value on computers or other equipment, will have to be calculated separately.

4.	Telephone expenses

(a)	Home office telephone rental expenses may be partly deductible for taxpayers who are either "on call" or required to contact their employer or clients on a regular basis. TR 98/14 states that the deductible portion of telephone rental expenses can be calculated using the formula:

Business calls (incoming and outgoing) / Total calls (incoming and outgoing)

(b)	A deduction is allowable for the cost of telephone calls made in the course of work or business. Work or business calls may be identified from an itemised telephone account. If such an account is not provided, records covering a representative four week period will be accepted as establishing a pattern of use for the entire year for the purpose of making a reasonable estimate of the portion of call expenses for work or business.

5.	Decline in value of computers or other equipment

If home office equipment, such as a computer, printer, photocopier etc., is used only partly for work or business purposes, then the decline in value deduction is reduced by an amount that reasonably reflects the extent that equipment was not used for income producing purposes. Taxation Ruling TR 93/30 states that the amount of decline in value claimed as a deduction should be based on a bona fide estimate of the percentage of income producing use. The Commissioner will accept an estimate of the extent of income producing use where it is based on a diary record of the income related and non-income related use of that equipment covering a representative four week period. Such a diary record would need to show the nature of each use of the equipment, whether that use was for an income producing or non-income producing purpose and the period of time for which it was used.

EXPLANATION

Records of Home Office Use

6.	Individual taxpayers who claim home office expenses are required to be able to prove that they have incurred such expenses. Such taxpayers must also be able to establish a connection between the use of their home office and their work or business. The Commissioner’s view of the law relating to home office expenses is contained in Taxation Ruling TR 93/30 – Deductions for home office expenses.

7.	Normally, a taxpayer would have to keep a complete diary recording the duration and purpose of each use of their home office during the year in order to demonstrate this connection for every occasion. However, this imposes an unreasonably high compliance cost upon taxpayers in relation to what are frequently small claims.

8.	In order to ease this evidentiary burden, the Commissioner will accept a diary covering a representative four week period as establishing a pattern of use for the entire year. The taxpayer may then use this pattern of home office use to calculate the home office running expenses claim for the entire year, allowing for periods when the home office is not used for income production, such as holidays, illnesses, etc. This method is outlined in Tax Pack.

9.	A new diary must be kept for each financial year, as patterns of use are likely to fluctuate over two or more years. Employees must keep each of these diaries for five years after lodgment of the return for that year or the due date for that lodgment, whichever is later, in accordance with section 900-25 of the Income Tax Assessment Act 1997.

10.	A small number of taxpayers incurring home office expenses may not have a regular pattern of home office use upon which a representative pattern may be based. Such taxpayers will need to keep records of the duration and purpose of each use of their home office during the year.

Calculation of Home Office Running Expenses

11.	Based upon actual use or an established pattern of use, the Commissioner will accept that a taxpayer has incurred 26 cents per hour for home office running expenses for heating, cooling, lighting and decline in value of furniture (desks, tables, chairs, cabinets and shelves). This rate is based upon average energy costs and the value of common furniture items used in home offices. However, due to larger variations in cost of computers, telephones, photocopiers, etc, the taxpayer will still have to calculate decline in value on other items in the home office separately.

12.	Naturally, taxpayers who wish to use the actual costs method to claim a deduction for these home office running expenses can do so, but they will need to keep appropriate records to be able to show the amounts of the expenses incurred and the extent to which they are incurred in deriving assessable income.

13.	By accepting this simpler and easier method of calculating the small amounts of home office running expenses, the Commissioner is again attempting to decrease the cost of compliance for individual taxpayers.

Examples

14.	The following are examples applying this approach to typical taxpayer situations.

Example 1

Betty is an employee accountant working for a city-based firm that expects her to complete a specified amount of work each day. In order to achieve this, Betty has elected to take some of her work home at night so that she can spend more time with her family. Betty spends an average of two hours per night Monday to Friday working in her home office.

Betty has two options for calculating her running expenses, both of which require her to keep a log to apportion between income producing activities and private/domestic use, aside from decline in value on her computer equipment (which is common to both scenarios but separately calculated):

Option 1 (Actual Running Expenses)

Betty has the following home office running expenses, including energy expenses which have been calculated using electricity authority hourly costs per appliance. The apportionment has been based on four weeks’ diary entries as follows:

Item	Calculation	Deduction Amount This year	Deduction Amount Future years (assuming similar use)
Decline in value on Desk	Value $350 over 10 years	$35.00	$35.00
Decline in value on Chair	Value $200 over 1 year	$200.00	$NIL
Electricity for 60W Ceiling Light	0.7c per hour for ten hours per week for 48 weeks	$3.36	$3.36
Electricity for Computer	1c per hour for ten hours per week for 48 weeks	$4.80	$4.80
Electricity for Heating/Cooling	9c per hour for ten hours per week for 48 weeks	$43.20	$43.20
Total Deductible Amount		$286.36	$86.36
Option 2 (Estimated Running Expenses)

Betty is able to use a simpler and quicker calculation for her expenses:

Item	Calculation	Deduction Amount This year	Deduction Amount Future Years (assuming similar use)
Running Expenses	26c per hour for ten hours per week for 48 weeks	$124.00	$124.00
While Option 1 gives a greater deduction this year because of the immediate write-off of a chair costing less than $300, Option 2 will allow greater ongoing deductions with a simpler calculation, assuming future use and electricity costs remain similar.

Example 2

Felix is a computer programmer with BMI Corp. Felix telecommutes to the BMI site in Silicon Valley USA for fifteen hours each week.

Option 1 (Actual Running Expenses)

Felix has the following home office running expenses, including energy expenses which have been calculated using electricity authority hourly costs per appliance. The apportionment has been based on four weeks’ diary entries as follows:

Item	Calculation	Deduction Amount This year	Deduction Amount Future years (assuming similar use)
Decline in value on Desk	Value $350 over 10 years	$35.00	$35.00
Decline in value on Chair	Value $200 over 1 year	$200.00	$NIL
Electricity for 100W Lamp	1c per hour for fifteen hours per week for 48 weeks	$7.20	$7.20
Electricity for 60W Ceiling Light	0.7c per hour for fifteen hours per week for 48 weeks	$5.04	$5.04
Electricity for Computer	1c per hour for fifteen hours per week for 48 weeks	$7.20	$7.20
Electricity for Heating/Cooling	9c per hour for fifteen hours per week for 48 weeks	$64.80	$64.80
Total Deductible Amount		$319.24	$119.24
Option 2 (Estimated Running Expenses)

Felix also has the option of using a simpler, less complicated method of calculating his expenditure:

Item	Calculation	Deduction Amount	Deduction Amount
Running Expenses	26c per hour for fifteen hours per week for 48 weeks	$144.00	$144.00
Once again, while Option 1 gives a greater deduction this year because of the immediate write-off of a chair costing less than $300, Option 2 will allow greater ongoing deductions with a simpler calculation, assuming future use and electricity costs remain similar.


Practice Statement Law Administration 2005/7 Substantiation of deductions claimed by individual taxpayers for work and car expe
Practice Statement Law Administration 2005/7

Substantiation of deductions claimed by individual taxpayers for work and car expenses incurred in the course of earning non-business and non-investment income

Preamble

This Practice Statement is issued under the authority of the Commissioner and must be read in conjunction with Law Administration Practice Statement PS LA 1998/1. It must be followed by Tax officers unless doing so creates unintended consequences. Where this occurs officers must follow their Business Line’s escalation process.

Contents:

Purpose

Scope

Statement

Flow Chart of Tax Office Approach

Explanation

Example 1 – use of a bank credit card statement only

Example 2 – use of a bank credit card statement combined with other evidence

Example 3 – use of electronic verification of purchase

Example 4 – evidence under various methods of payment

Example 5 – insufficient evidence

Example 6 – insufficient evidence

Copies of records, electronic records and electronic copies of records

Example 7 – receipts received in electronic format

Example 8 – copies of receipts

Example 9 – electronic copies of receipts

Attachment A – Types of evidence

PURPOSE

To provide guidance to tax officers as to what documentary or other evidence will normally be accepted as sufficient evidence to substantiate an individual taxpayer’s claim for deductible work and car expenses (refer to work related deduction questions on an individual income tax return), where these expenses relate to non-business and non-investment income.

SCOPE

1.	This Practice Statement provides guidance on the documentary or other evidence tax officers should accept, in the absence of exceptional circumstances, as sufficient evidence to substantiate individuals’ claims for certain deductible work and car expenses under Division 900 of Part 5-30 of the Income Tax Assessment Act 1997 (Division 900). (Refer to work related deduction questions on an individual income tax return.) Division 900 deals with record keeping and other obligations. The Practice Statement applies to these types of expenses for which deductions are claimed in 2004-05 and later income year tax returns.

2.	This Practice Statement does not apply to expenses incurred in the course of earning business or investment income, or to any expenses to which Division 900 does not apply. It deals only with evidentiary issues and does not attempt to address whether an expense is deductible or whether it has been incurred.

3.	In normal circumstances, the general guidelines set out in this Practice Statement should be applied by tax officers. However, all cases that exhibit special or exceptional circumstances must be considered on their merits. These cases should be dealt with on a case by case basis having regard to their particular circumstances. Examples of exceptional circumstances include situations in which there is evidence to suggest that the documentation is fraudulent, or where the characteristics of the taxpayer’s evidence differ substantially from the approaches set out in this Practice Statement.

4.	The period of time for which records must be kept is not changed by this Practice Statement as the taxpayer must continue to retain all relevant records for the period specified under income tax and other taxation laws.

5.	This Practice Statement has no impact upon the requirement to hold a tax invoice in order to be able to claim an input tax credit. It does not impact on Law Administration Practice Statement PS LA 2004/11 regarding the Commissioner’s discretion to treat a particular document as a tax invoice or adjustment note; or the application of Goods and Services Tax Ruling GSTR 2000/26: Corporate card statements – entitlement to an input tax credit without a tax invoice.

6.	This Practice Statement has no bearing on the rules for recording small expenses of up to $10 and to a maximum of $200 in total (section 900-125 of the Income Tax Assessment Act 1997 (ITAA 1997)). Nor does it have any relevance to the situation where the Commissioner considers it unreasonable for a taxpayer to have obtained written evidence (section 900-130 of the ITAA 1997). A taxpayer would still be required to seek an opinion from the Tax Office prior to making a claim that depended upon the discretion provided by this section.

7.	This Practice Statement does not alter the reasonable expense amounts for overtime meal allowances and travel allowances that are outlined in Tax Determination TD 2004/19 and later year Taxation Determinations, or the Taxation Rulings in previous years covering the reasonable allowances amounts. Nor does it have any bearing on the rules applicable for reasonable laundry expenses as outlined in Taxation Ruling TR 98/5 or the rules for home office expenses covered in Law Administration Practice Statement PS LA 2001/6.

8.	This Practice Statement applies to expenses relating to income reported on an Individual Non Business payment summary, such as salary and wages income. As it does not apply to non-individual, business or investment expenses, it does not extend to expenses relating to income (such as labour hire income, alienated personal services income and voluntary agreement income) reported on other payment summary types.

STATEMENT

9.	Division 900 outlines the substantiation requirements that apply specifically in respect of work expenses, and car expenses calculated under either the one-third of actual expenses method or the log book method. For other expenses incurred by individuals, a taxpayer must be able to show how they reasonably arrived at a claim, although the legislation does not specify the form that evidence must take.

10.	Subsections 900-115(2) and 900-120(2) of Subdivision 900-E of the ITAA 1997 require a taxpayer to obtain a document from the supplier of the relevant goods or services, except in special circumstances referred to elsewhere in Subdivision 900-E of the ITAA 1997. These subsections specify that the document must set out:

(a)	the name or business name of the supplier

(b)	the amount of the expense, expressed in the currency in which it was incurred – or the cost of the asset

(c)	the nature of the goods or services – or asset,

(d)	the day the expense was incurred – or asset was acquired, and

(e)	the day it is made out.

Where the details of (c) and (d) are missing from the document, subsection 900-115(3) operates to allow the taxpayer to write the missing details regarding the nature of the goods or services on the document before they lodge their tax return. It also provides for the taxpayer to use alternate reasonable evidence, such as a bank statement, to show when the amount was paid. Separately, relief may be available under Subdivision 900-H of the ITAA 1997 where the requirements of Subdivision 900-E of the ITAA 1997 have not been met.

11.	Section 900-195 of Subdivision 900-H of the ITAA 1997 enables the Commissioner to exercise a discretion to allow a deduction where the above requirements have not been met, provided the taxpayer is able to satisfy the Commissioner that they have incurred the expense and are entitled to deduct the amount. This Practice Statement illustrates, by way of examples contained in the explanation, the nature and quality of evidence that the Tax Office will accept as sufficient evidence to substantiate the amount claimed in normal circumstances only. It does not deal with the issues of whether or not an outlay has been incurred by the claimant or is deductible.

12.	Where an individual’s case is not covered by these guidelines, nothing in this Practice Statement affects their right to request the Commissioner to exercise the aforementioned discretion in their favour based on the merits of their case. Taxation Ruling TR 97/24 explains in further detail, the application of the discretion on a case by case basis.

13.	The Tax Office may elect to verify at source any document tendered by a taxpayer, even where that document contains the details required by either the legislation or this Practice Statement. For example, this may occur in an audit where, in the course of that audit, the Tax Office seeks to verify the authenticity and accuracy of a document.

14.	This Practice Statement reduces or minimises the need to obtain additional records, where those already obtained include sufficient detail to support the correctness of the claim. Types of evidence to which the principles of this Practice Statement apply include documents such as those outlined in the Attachment A to this Practice Statement.

15.	As a consequence of technological advancement, many transactions are now entered into and paid for in an electronic environment. For example, taxpayers may purchase goods and services on the internet or over the telephone and routinely pay for goods using Billpay (BPAY), internet banking, an Electronic Funds Transfer Point of Sale (EFTPOS) terminal and other electronic means.

16.	In some circumstances, such as where BPAY or internet banking is used to pay for purchases, while there may be an invoice issued by the supplier for the purchase of goods or services, suppliers may not issue a receipt containing all the information required by the substantiation legislation. However, taxpayers in this situation and taxpayers who did not obtain or retain a receipt may have another document or combination of documents with sufficient information to support the correctness of their claim.

17.	Generally, documents or combinations of documents containing the particulars set out in Subdivision 900-E of the ITAA 1997 should be accepted as written evidence, whether issued by the supplier of the goods or services or another third party. If a combination of documents is used (as opposed to a single document), these documents do not need to contain the date they were created. However, they still need to contain the date the expense was incurred.

FLOW CHART OF TAX OFFICE APPROACH

18.	The following diagram illustrates the Tax Office approach. It is supported with examples, which follow in the Explanation section of this Practice Statement.

EXPLANATION

19.	This Practice Statement clarifies the application of the Commissioner’s discretion under section 900-195 of the ITAA 1997. It assists tax officers when dealing with taxpayers who do not meet the specific substantiation requirements but have other evidence that demonstrates compliance with the law.

Example 1 – use of a bank or credit card statement only

20.	Daniel, who is employed by a large firm of solicitors, receives a bill for his annual professional subscription fees, which he pays using his credit card. His credit card statement bears the date of the transaction, the name of the professional association and the amount paid. Before he lodges his income tax return, Daniel makes a note on his credit card statement to the effect that the transaction related to his professional subscription fees.

21.	The Tax Office will accept the credit card statement as sufficient evidence to substantiate Daniel’s claim for a deduction for the fees.

Example 2 – use of a bank or credit card statement combined with other evidence

22.	Kylie, having just started her first full time job as a clerical worker, purchased a pen for use at work costing $50 from a jeweller’s shop. She also bought a pair of earrings for $100 and paid for both items on her credit card. Having never completed a tax return before, she was not aware that the pen would be a deductible expense. She did not request or receive a receipt.

23.	When it was time to prepare her return, Kylie realised that she could claim her pen as a work expense. She had also incurred union fees of $478, which were recorded on her payment summary.

24.	Kylie checked her credit card statement and found that it showed an amount of $150 and the name of the jeweller’s shop. Initially, she decided it would be safest not to claim for the pen because she had no specific receipt and she was not sure of the exact amount. However, she had kept the box the pen had been packaged in, and upon checking the box for further information noted the $50 price sticker on the outside. Before lodging her income tax return, Kylie made a note on the credit card statement detailing the two items and their respective prices and kept the pen packaging along with her bank statement.

25.	By keeping the pen packaging and the credit card statement including her notation, Kylie has ensured she has sufficient information to substantiate her expense. The Tax Office will accept the combination of the pen packaging and the credit card statement as sufficient evidence to substantiate her claim.

26.	Had Kylie not kept the box that her pen came in with the price sticker on it, but was able to obtain from the jewellery store a written breakdown of how much she spent on each of the items, she would also have been able to make a note on her credit card statement detailing the two items and their respective prices, and would have had sufficient evidence to substantiate her claim. The Tax Office would accept the combination of the credit card statement containing Kylie’s notation and the written price breakdown from the jewellery store as sufficient substantiation.

Example 3 – use of electronic verification of purchase

27.	Minh, a computer programmer, purchased some floppy discs for work over the internet. When he ordered the floppy discs, he received an automatic response via email that quoted an order reference number, the nature of the goods, and the amount due to be paid. He paid by sending a money order to the supplier and kept the stub of the money order, which included the supplier name and the amount paid.

28.	Minh stored the email in an electronic folder labelled "Tax", which he also backed up on disc. The Tax Office will accept the combination of the automatic email response and money order stub as sufficient evidence to substantiate Minh’s expense.

29.	Note: The Tax Office prefers that where records are stored electronically, a back up copy of the records is made to ensure the ease of accessibility of the evidence in the event that the original becomes inaccessible or unreadable (for example, where a compact disc, floppy disc or hard drive is corrupted). Taxation Ruling TR 97/24 addresses relief from the substantiation provisions where documents are lost or destroyed.

Example 4 – evidence under various methods of payment

30.	Louise is an apprentice plumber employed by a small plumbing business. As part of her employment she needs to provide her own tools.

31.	Louise purchased $250 worth of tools from her local hardware store. As she is a regular customer, the hardware store issues her with a tax invoice requesting payment within 30 days, which she pays at the end of the month by way of an electronic transfer from her bank account. The Tax Office will accept the combination of the tax invoice and bank statement showing the electronic transfer as sufficient evidence to substantiate the claim for the purchases from the local hardware store.

32.	Louise also purchased a spanner from a different hardware store as she needed to replace one that was damaged while completing a job for a client. She paid for the spanner using EFTPOS, withdrew some cash and kept her receipt. The receipt contained the relevant details required by the substantiation legislation and outlined an amount of $129 for the spanner and $100 for the cash withdrawal. The receipt is sufficient evidence to substantiate Louise’s expense as it meets the requirements of the substantiation legislation.

33.	For the majority of EFTPOS transactions, a bank statement alone would not be sufficient evidence to substantiate a claim. This is because bank statements do not generally show a cash withdrawal separately from the amounts associated with the item(s) purchased in the transaction, nor do they usually show the nature of the items purchased.

34.	In situations where the taxpayer did not obtain or retain the receipt for an EFTPOS transaction, the taxpayer will generally need further evidence showing the amount of the item purchased. Had Louise not kept the receipt, the Tax Office would accept other evidence that demonstrates the amount spent on the spanner – for example, the combination of the bank statement and the written price breakdown from the hardware store, or the combination of the bank statement and the tool packaging marked with the price.

35.	Louise also needs to use her mobile phone for business calls and pays the mobile phone bill over the phone, using BPAY. As Louise cannot claim a deduction for the private use component of her phone, she maintains a log of calls made for business purposes including the date, time of call and phone number called. She uses her itemised phone bill to determine the cost of her business related calls. She notes her BPAY reference number on the bill. The Tax Office will accept the combination of the BPAY reference number, log of phone calls and itemised phone bill as sufficient evidence to substantiate the expense.

Example 5 – insufficient evidence

36.	Tom, an apprentice mechanic employed by a small auto-repair business requires numerous text books for the TAFE component of his apprenticeship. He purchases these for $270 cash from an ex-student at the TAFE he attends. He does not ask for a receipt and when it is time to prepare his tax return does not recall the name or contact details of the person from whom he purchased them. The text books have prices written in pencil on the inside cover. Tom has other work expenses in excess of $300.

37.	Tom has no receipt and no method through which to obtain a receipt or other evidence to support his claim for the text books. The notation on the inside cover of the text book alone would not be sufficient evidence to substantiate Tom’s expense within the guidelines of this Practice Statement.

38.	Note: This Practice Statement has no impact on Taxation Ruling TR 97/24, which addresses the Commissioner’s discretion to grant relief from the substantiation requirements where it is unreasonable to expect written evidence to be obtained.

39.	Note: this Practice Statement has no impact on the requirement – under section 82A of the Income Tax Assessment Act 1936, as outlined in Taxation Ruling TR 98/9 – to reduce certain work-related self-education expenses by $250.

Example 6 – insufficient evidence

40.	Jane, a radio engineer employed by a local radio station, purchases some tools for work for $200 from a private individual who advertised them for sale in the local paper. Jane pays cash for the tools and does not obtain a receipt but keeps the advertisement. The advertisement includes a description of the tools, the price advertised and a contact phone number for the seller. At the end of the financial year Jane decides to call the seller to obtain a receipt for the tools but finds that the number has since been disconnected. Jane has other work related expenses in excess of $300.

41.	Jane has no receipt and no method through which to obtain a receipt or other evidence to support her claim for the tools. The advertisement alone would not be accepted as sufficient evidence to substantiate Jane’s expense within the guidelines of this Practice Statement.

42.	Note: This Practice Statement has no impact on Taxation Ruling TR 97/24, which addresses the Commissioner’s discretion to grant relief from the substantiation requirements where it is unreasonable to expect written evidence to be obtained.

COPIES OF RECORDS, ELECTRONIC RECORDS AND ELECTRONIC COPIES OF RECORDS

43.	Records made and stored in a computer are recognised as documents for the purposes of Commonwealth legislation. Section 25 of the Acts Interpretation Act 1901 was amended to extend the ordinary meaning of the word record to include information stored by means of a computer. Taxpayers may also, for various reasons, choose to make copies of records, whether electronic or otherwise. Examples of how individuals may choose to store records in an electronic environment or use electronic or hardcopy reproductions of original records are given below.

Example 7 – receipts received in electronic format

44.	Amanda, a computer programmer, retains her internet-generated receipt for work expenses, including supplier details and purchase amount, on her computer. If necessary, the receipt could be printed and may be able to be verified as being a genuine receipt by the Tax Office through communications with the issuer of the receipt. The Tax Office will accept the electronic receipt as sufficient evidence to substantiate Amanda’s expense as it meets the requirements of the substantiation legislation.

Example 8 – copies of receipts

45.	Marco, a real estate agent employed by a large real estate agency, uses his car for work purposes and pays for fuel, oil, repairs and maintenance at the local garage. He pays by credit card, EFTPOS, or occasionally cash. The receipts are printed on thermal paper, which fades over time.

46.	Marco claims his car expenses via the log book method, and so does not need to keep the receipts for fuel and oil (he relies on his odometer records). However, he needs to claim separately for the repairs and maintenance. Marco photocopies the thermal paper receipts to protect the information contained on the receipts and ensure that he is able to continue to provide a copy of the receipts long after the original receipts fade.

47.	If the receipts contain sufficient information to support the correctness of the claim, they would be acceptable as sufficient evidence to substantiate Marco’s expense, whether they are in the form of original receipts or copies of the original receipts. This is provided that the copies are a true and clear reproduction of the originals.

48.	Note: Taxation Ruling TR 97/24 addresses relief from the substantiation provisions where documents are lost or destroyed.

Example 9 – electronic copies of receipts

49.	Jonathan often moves from job to job, frequently relocating to different cities in order to take up employment opportunities. He prefers not to keep large numbers of paper receipts. Instead he scans his receipts and stores them on his computer. He keeps a backup burned to compact disc.

50.	If the original receipts contained the required information, they would be sufficient to substantiate the relevant expenses. Electronic copies that are a true and clear reproduction of the originals would be acceptable to the Tax Office. The receipts may be able to be verified as being genuine receipts by the Tax Office through communications with the issuer of the receipts.

ATTACHMENT A

Types of evidence

Types of evidence to which the principles of this practice statement apply include documents such as:

•	bank statements

•	credit card statements

•	internet-generated bank or credit card statements

•	BPAY reference numbers, combined with bank statements

•	BPAY reference numbers, combined with tax invoices

•	internet generated receipts

•	email receipts

•	paper copies of receipts

•	electronic receipts

•	electronic copies of receipts

These types of evidence or combinations of these types of evidence will be taken to be appropriate evidence of an expense, where they contain sufficient information and the principles outlined in this Practice Statement are adhered to.

Subject references		Work expenses: car expenses; travel expenses; uniform expenses, clothing expenses, laundry and dry cleaning expenses; work related self-education expenses; and other work expenses. Substantiation. Deductions. Electronic records. Receipts. Records. Record Keeping.
Legislative references		Division 900 Income Tax Assessment Act 1997 Division 28 Income Tax Assessment Act 1997 Electronic Transactions Act 1999 Acts Interpretation Act 1901 Section 82A Income Tax Assessment Act 1936
Related public rulings		Taxation Ruling TR 97/24 Taxation Ruling TR 98/5 Taxation Ruling TR 98/9 Taxation Ruling TR 2004/6 Goods and Services Tax Ruling GSTR 2000/26 Taxation Determination TD 2004/19
Related practice statements		Law Administration Practice Statement PS LA 2001/6 Home Office Expenses; diaries of use and calculation of home office expenses Law Administration Practice Statement PS LA 2004/11 The Commissioner’s discretions to treat a particular document as a tax invoice or adjustment note
Case references
File references		04/7007
Date issued		20 April 2005
Date of effect		1 July 2004
Authorised by		Michael D’Ascenzo
Other Business Lines and committees consulted		OCTC; PMD; LB&I; SB; GST; OPS; ECMP; OCOM; ICT; SPR; EXC; BS; ATP; SNC; ARL; People; ATORM; Technet Committee; Individuals Market Segment Committee; Income Tax Steering Committee
Contact Officer/s		Karen Foat and Judith Tobin
Business Line		PTax
Section		Personal Tax Design
Phone		(07) 6279 7415 and (07) 6279 7413


Taxation Determination TD 93/167 Foreign income - when is Foreign Investment Fund (FIF) income not included in...
Taxation Determination TD 93/167

Income tax: foreign income – when is Foreign Investment Fund (FIF) income not included in:

(a)	the assessable income of an attributable taxpayer of a Controlled Foreign Company (CFC); or

(b)	the notional assessable income of a CFC ?

1.	Sections 431A and 494 of the Income Tax Assessment Act 1936 (the "Act") set out the circumstances where FIF income is not included in (a) or (b) above. This determination first deals with section 494, i.e., where a first tier FIF and CFC are the same entity.

1.	There are two tests under section 494 for determining whether the FIF measures apply to a taxpayer's interest in a CFC where section 456 applies to that interest.

2.	The first test is used where the statutory accounting period of the CFC coincides with the notional accounting period of the FIF. In this case, no amount will be included in respect of the taxpayer's interest in the CFC under the FIF measures if section 456 applies to the interest at the end of that period.

3.	This exemption will not apply where, at the end of the company's statutory accounting period, the company ceases to be a CFC or if the taxpayer ceases to be an attributable taxpayer of the CFC. The exemption would, however, apply where a company became a CFC during its notional accounting period for the purposes of the FIF measures.

4.	The second test is used where the statutory accounting period of the entity as a CFC does not coincide with the notional accounting period of the entity as a FIF. In this case, no amount will be included in respect of the taxpayer's interest in the CFC under the FIF measures if section 456 applies to that interest at the end of both of the CFC's statutory accounting periods which overlap the FIF's notional accounting period, that is, the statutory accounting period of the CFC which ends and the period which commences during the notional accounting period of the FIF.

5.	Both of the tests require that section 456 applies to the taxpayer. For the purposes of these tests, the Commissioner will accept that section 456 applies to the attributable taxpayer, for the relevant year of income, in circumstances where no amount of attributable income is included in the assessable income of the taxpayer under section 456 because, in relation to the relevant statutory accounting period:

(a)	the CFC has no amounts of notional assessable income to which section 384 or 385 applies; or

(b)	the amount of notional assessable income of the CFC does not exceed its notional allowable deductions; or

(c)	subsection 385(4) applies to the CFC.

6.	This ruling also applies to the provisions of section 431A where, at the end of the relevant statutory accounting period, the FIF referred to in section 431A is a CFC. Section 431A contains tests similar to those referred to above in section 494. For the purposes of section 431A, the Commissioner will accept that section 456 applies to the eligible taxpayer at the end of the relevant statutory accounting period of the FIF, in circumstances where no amount of attributable income is included in the assessable income of the eligible taxpayer under section 456 in relation to the FIF because, in relation to the relevant statutory accounting period:

(a)	the FIF has no amounts of notional assessable income to which section 384 or 385 applies; or

(b)	the amount of notional assessable income of the FIF does not exceed its notional allowable deductions; or

(c)	subsection 385(4) applies to the FIF.

7.	It should be noted that where a CFC has an interest in a FIF, and that FIF is not a CFC, paragraphs 384(2)(ca) and 385(2)(ca) will include FIF income in the notional assessable income of the CFC.

Commissioner of Taxation

26 August 1993


Taxation Determination TD 96/39 Can a controlled foreign company (CFC) obtain the benefit of the trading stock exemption...
Taxation Determination TD 96/39

Can a controlled foreign company (CFC) obtain the benefit of the trading stock exemption under section 521 of the Income Tax Assessment Act 1936 ("the Act")?

1.	No. A CFC cannot obtain the benefit of this Foreign Investment Fund (FIF) exemption.

1.	The FIF trading stock exemption under section 521 of the Act is available if a taxpayer elects, under subsection 31(5) of the Act, to account for all of its interests in FIFs that are trading stock at market value.

2.	However, for the purposes of calculating the attributable income of a CFC, section 397 modifies the trading stock provisions of the Act so that the value of any article of trading stock to be taken into account is its cost price only.

3.	Thus, an election cannot be made by, or on behalf of, a CFC under subsection 31(5) to value its trading stock at market value because of the requirement in section 397 that the CFC must value its trading stock at cost price.

Commissioner of Taxation

18 September 1996


Taxation Determination TD 1999/42 Do the principles set out in Taxation Ruling TR 98/22 apply to line of credit facilities?
Taxation Determination TD 1999/42

Do the principles set out in Taxation Ruling TR 98/22 apply to line of credit facilities?

Preamble

This Taxation Determination is a "public ruling" for the purposes of Part IVAAA of the Taxation Administration Act 1953 and is legally binding on the Commissioner. Taxation Rulings TR 92/1 and TR 97/16 together explain how a Determination is legally or administratively binding.

DATE OF EFFECT

This Determination applies to years commencing both before and after its date of issue. However, this Determination does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of the Determination (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

1.	Yes. The principles and reasoning set out in Taxation Ruling TR 98/22 ‘the taxation consequences for taxpayers entering into certain linked or split loan arrangements apply to line of credit facilities that are operated as follows:

•	there are two or more sub-accounts within the line of credit;

•	at least one sub-account is used for non-income producing purposes and at least one sub-account is used for business or investment purposes;

•	there is one overarching credit limit;

•	the lender requires a minimum payment which is equal to the amount of interest which accrues on the whole of the outstanding liability, including the investment sub-account;

•	no part of the minimum payment is applied to the investment sub-account;

•	the whole of the minimum repayment is directed to the non-income producing sub-account; and

•	where a taxpayer does not make any payments on the investment sub-account, interest accrues on both the unpaid principal sum and the unpaid interest.

2.	In this Determination, we refer to the total interest that has accrued on the investment sub-account during the period that all payments are directed to the non-income producing account as "capitalised interest", and the portion of this interest that has accrued on the unpaid interest in the relevant year as "the further interest amount".

Application of section 8-1

3.	The advantage arising to the taxpayer on capitalisation of interest on the investment sub-account is the reduction of the principal amount outstanding under the non-income producing sub-account. Having regard to this advantage, we take the view that the further interest amount does not have the necessary character required for it to be deductible under section 8-1 of the Income Tax Assessment Act 1997 ("ITAA 1997").

4.	Alternatively, having regard to all the circumstances relating to the facility, we take the view that a single liability incurred in respect of interest on the investment sub-account in any particular period serves more than one end, activity or object. We consider that the further interest amount is incurred for the purpose of enabling a corresponding reduction in the non-income producing sub-account.

5.	On this basis, an apportionment of the interest incurred on the investment sub-account in the relevant year is warranted. A fair and reasonable apportionment would be to allow as a deduction under section 8-1 the interest to the extent to which the interest incurred on the investment sub-account in that year exceeds the further interest amount.

Application of Part IVA

6.	If any part of the further interest amount incurred on the investment sub-account is deductible under section 8-1, we would then consider whether the general anti-avoidance provisions of Part IVA are applicable. As the application of Part IVA depends on the facts, the observations below are necessarily subject to the facts of any particular case.

Identification of the scheme

7.	We consider that the scheme would have the same features as those set out in paragraphs 16 to 19 in TR 98/22.

Tax benefit

8.	The tax benefit is the difference between the deductible interest incurred on the investment sub-account under the scheme and the deductible interest that would have been incurred on the investment sub-account if payments equivalent to the interest accrued on the investment sub-account were, in fact, allocated to that sub-account. The tax benefit equals that part (if any) of the further interest amount which would have been deductible under section 8-1.

Dominant purpose

9.	Each case must be considered on its own merits. However, having regard to the eight items listed in paragraph 177D(b) of the ITAA 1936, it is open to a reasonable person to conclude objectively that a taxpayer, who has entered into a scheme with the characteristics outlined in TR 98/22 and paragraph 1 above, did so for the dominant purpose of enabling that taxpayer to obtain a tax benefit. In such a case, it would be appropriate for the Commissioner to exercise his discretion under section 177F to determine that the whole or a part of the interest deduction otherwise allowable shall not be allowable to the taxpayer.

Calculation of the cost base for capital gains tax purposes

10.	The further interest amount cannot be included in the cost base or indexed cost base for the purposes of the Parts 3-1 and 3-3 of the ITAA 1997 (the capital gains tax provisions).

11.	We discuss the application of relevant principles and authorities in detail in Taxation Ruling TR 98/22.

Example one

Patricia is looking to purchase an investment property. She has recently noticed advertisements in newspapers promoting the advantages (including tax advantages) associated with linking non-income producing and investment loans, thereby allowing investment interest to be capitalised creating increased deductible interest.

Patricia takes out a line of credit facility with GHI Pty Ltd. She pays a $600 application fee and then opens two sub-accounts. One is to refinance her home and has an opening balance of $100,000. It also has a limit of $100,000. The other sub-account is to purchase an investment property and it also has an opening balance of $100,000. It has a limit of $150,000.

Patricia is required to pay $1,300 per month to cover the interest, fees and charges on both sub-accounts. She receives $550 rent per month from the investment property. She pays this plus $750 to the line of credit each month. She directs that all of this payment be applied to her home loan sub-account.

After a period of time Patricia reaches her limit on the investment sub-account. She approaches Rod, the manager at GHI Pty Ltd, who agrees that he will increase the credit limit on the investment sub-account by the amount of unused limit available on the non-income producing sub-account. He also agrees to continue to do this until the non-income producing sub-account is reduced to nil.

How does section 8-1 apply?

The advantage arising to Patricia on capitalisation of interest on the investment account is the reduction of the principal amount outstanding under the non-income producing account. Therefore, the further interest amount does not have the necessary character to be deductible under section 8-1. Patricia is entitled to claim only the interest she would have incurred if she had not redirected payments and capitalised interest, i.e., equal to that she would have incurred under an interest only investment loan.

Alternatively, Patricia incurred the liability to interest to achieve two ends, one of which was to acquire an investment property and derive assessable income, and the other to enable her to pay off her non-income producing loan more quickly. In such circumstances, apportionment is required on a fair and reasonable basis. In this case, the amount of interest that would be disallowed is the further interest amount.

Where the further interest amount is not an allowable deduction under section 8-1 there would be no "tax benefit" for the purposes of Part IVA. Where some part of the further interest amount is deductible under section 8-1, we would also consider whether Part IVA would apply.

How does Part IVA apply?

Applying Part IVA, Patricia is not entitled to a deduction for all the interest charged on the investment loan under the facility. In each year the difference between the interest actually incurred on the investment loan and the interest that would have been incurred if Patricia had applied that part of the payment referable to the investment loan against the investment loan account rather than the non-income producing loan account, is not allowable. The "tax benefit" would be equal to that part of the further interest amount which would otherwise have been deductible under section 8-1.

Calculation of the cost base for capital gains tax purposes

When Patricia disposes of the investment property, CGT event A1 occurs. Patricia needs to calculate the cost base or indexed cost base of the asset for the purpose of calculating whether a capital gain or capital loss is made in terms of Parts 3-1 and 3-3. In calculating the cost base, the further interest amount is not included in the third element of the cost base.

Example Two

Patricia enters into the same arrangement as set out in Example One above. However, Patricia receives $800 per month rent. She pays this plus $750 per month to the line of credit. Although Patricia is paying more than the minimum payment required, the amount of interest that is not deductible under section 8-1, or is not allowable as a deduction because of the operation of Part IVA, will be the same as in Example One, i.e., the further interest amount.

Commissioner of Taxation

18 August 1999


Taxation Ruling IT 2167 Rental properties - non economic rental, holiday home, share of residence etc
Taxation Ruling IT 2167

Income tax: rental properties – non economic rental, holiday home, share of residence, etc.

Income Tax Rulings do not have the force of law. Each decision made by the Australian Taxation Office is made on the merits of each individual case having regard to any relevant Ruling.

Preamble

From time to time questions arise about the extent to which losses and outgoings incurred in connection with rent producing properties are allowable as income tax deductions.

1.	The sorts of situations in which the questions arise are:-

•	arm's length letting of an identified part of a residence, e.g. a bedroom, with access to general living areas of the residence

•	letting of property to relatives

•	payment by family members of an amount for board and lodging

•	occupancy of part of a residence on the basis of occupants sharing household costs such as food, electricity, heating, etc

•	letting of a holiday home or potential retirement home for part only of a year

•	letting of a residence during a transfer in place of employment

•	purchase of a residence by a family trust and the subsequent leasing of it to family beneficiaries in the trust

2.	Before canvassing how the relevant provisions of the income tax law are considered to operate in these situations, it is appropriate to make some general comments.

3.	In Press Release, No. 45 of 30 June 1983, the Treasurer announced that the Commissioner of Taxation would not be changing the long standing practice of allowing deductions in full for interest on moneys borrowed to invest in rent-producing properties where the interest and other outgoings exceeded the rental income in any year. There is nothing in this Ruling which would detract from the Treasurer's statement. In the situations to which this Ruling applies the questions which arise are concerned with apportionment of losses and outgoings where a property is not wholly used for rental purposes and with determining whether particular receipts are assessable income.

•	The second point to be made is that, ordinarily, where a taxpayer grants a lease or licence of property, whether wholly or in part, whether at arms length or otherwise, the amount received as rent or in respect of the licence is assessable income. This is illustrated by the decision in FCT v Kowal, 84 ATC 4001: 15 ATR 125.

•	It is necessary to make the qualification "ordinarily" because some cases may arise, particularly where the arrangements are not at arm's length, where an amount described as or said to be rent is not of income nature and, therefore, not assessable income. In FCT v Groser, 82 ATC 4478: 13 ATR 445, for example, the taxpayer permitted his invalid brother to live in a house which the taxpayer owned. The taxpayer arranged to receive his brother's invalid pension so that he could use the moneys to provide for the brother's maintenance. It was arranged that $2 per week would be deducted for rent of the taxpayer's house. The Court held that the weekly amounts of $2 were not assessable income. They were a contribution to the funds out of which the taxpayer proposed to maintain his brother. The arrangements were simply not of a kind which produced a receipt of income as that term is normally understood.

4.	A third point to make is, that in determining the extent to which losses and outgoings incurred in connection with rent producing properties are allowable as income tax deductions, there is no basis for distinguishing between fixed costs, such as interest and insurance, and other costs. It has been suggested that, in cases where part of a private residence is let, the reasoning of the Courts in the home office cases would lead to the conclusion that the fixed costs attributable to the private residence, e.g. interest, insurance, etc., are essentially of a private or domestic nature and that no part of them is allowable as an income tax deduction.

5.	The suggestion does not accord with the official approach. In paragraph 5 of Taxation Ruling No. IT 191 it is stated that, where a taxpayer derives assessable income from self-employed activities carried out at his home, an income tax deduction may be allowed up to a reasonable amount in respect of rent, interest, insurance, etc. paid in respect of the home. The employee accountant who conducts a tax agent's practice from his home, the employee architect who does freelance work at a room in his home are examples of situations to which paragraph 5 of Ruling No. IT 191 applies. It is considered that a taxpayer who derives assessable income from letting part of his private residence is in the same category as the examples referred to and is entitled to appropriate income tax deductions for rent, interest, insurance, etc.

6.	The final point to be made is that, while this Ruling deals with the apportionment of losses and outgoings incurred in connection with rent producing properties, not all losses and outgoings will necessarily be apportioned. For example, there will be no question of apportioning depreciation on furniture in a room which is let to a tenant for the whole of a year. On the other hand there would be a need to apportion depreciation on jointly-used facilities, e.g. refrigerator, washing machine, etc. Expenditure on repainting a room let to a tenant for the whole of a year would qualify for deduction in full under section 53 but the cost of repainting the entire house would need to be apportioned. It will be a question of applying the relevant provisions of the income tax law to each claim for deduction.

Arms length letting of an identified part of a residence, e.g. a bedroom, with access to general living areas

7.	This heading typifies a situation which is commonly encountered. A variety of arrangements may occur in situations of this nature. The rent payable may cover variable or running costs such as electricity, heating, etc. or the arrangements may require the tenant to pay, in addition to rent, a separate amount towards variable or running costs. The heading would also cover situations where board and lodging is provided.

8.	The situations represented under this heading call for apportionment of expenditures incurred in respect of the residence to determine what amounts may be allowed as income tax deductions. Inevitably it will be a question for decision in each case. As a general approach apportionment should be made on a floor area basis, i.e. by reference to the floor area of the residence to which the tenant/lodger has sole occupancy together with a reasonable figure for access to the general living areas including garage and outdoor areas. If, for example, the tenant/lodger had sole occupation of one room in the residence and shared the general living areas equally with the owner/occupier, it would be appropriate to add one half of the floor area of the general living areas to the floor area of the room of sole occupancy in order to make the necessary apportionment. In some cases access to the general living area may be restricted to the kitchen, bathroom, a laundry – it would be necessary to restrict the reasonable figure for access to general living areas to those rooms.

9.	Where the tenant/lodger, in addition to paying rent, or an amount for board and lodging, is required to make a separate contribution to specific variable or running costs such as electricity, heating, etc., the question arises whether the separate contribution is assessable income. On the basis that the separate contribution represents part of the reward of the owner of letting part of his residence, the amounts are considered to be assessable income. If the arrangements are such that the separate contribution is made on a precise sharing of costs basis the assessable income will be offset by allowable deductions. If the separate contribution is a fixed amount income tax deductions will be allowed for the part of the variable or running costs attributable to the tenant/lodger's use of the relevant facilities.

10.	The approach to be followed in cases arising under this heading has been framed on the basis that the rent charged by the owner represents a normal commercial rent. If the amount charged is significantly less than the normal commercial rate, enquiries would be justified to ascertain the reason for the lower charge. The basis of apportionment in cases of this nature will be determined on the facts of each case having regard to the reason for the lower charge.

Letting of property to relatives

11.	property is let to relatives the essential question for decision is whether the arrangements are consistent with normal commercial practices in this area. If they are, the owner of the property would be treated no differently for income tax purposes from any other owner in a comparable arm's length situation.

12.	If property is let to relatives at less than commercial rent other considerations arise. Unless the arrangements are comparable to those in FCT v Groser referred to earlier, the rent would represent assessable income. It would not necessarily follow, however, that losses and outgoings in relation to the property would be wholly deductible. The ultimate resolution of the matter would depend upon the purposes of the taxpayer in acquiring the property and in letting out to relatives.

13.	In the Kowal case, for example, the Court found that the taxpayer had two purposes or objects in mind in acquiring the relevant property. One was to provide his mother with a good home at moderate cost. The other was to earn assessable income. The Court further found that the second purpose or object was the predominant one and, in the result, allowed income deductions for 80% of the losses and outgoings falling within sub-sections 51(1) and 67(1). In the Groser case, on the other hand, the Court expressed the view that, if the weekly rental had been assessable income, it would have allowed no more than $104 by way of deduction under sub-section 51(1) – the reason for this being that private or domestic purposes for the expenditure predominated over the purpose of producing assessable income.

14.	As has been said earlier, decisions in these cases will ultimately depend upon the facts of each case. As a matter of experience it is unlikely that there will be sufficient information provided in return forms to enable a final decision to be made. In these circumstances, and as a working rule, income tax deductions for losses and outgoings incurred in connection with the rented property may be allowed up to the amount of rent received. Whether any additional deduction is to be allowed will depend upon the nature of any further information provided by the taxpayer.

Payment by family members of an amount for "board and lodging"

15.	Arrangements of this nature, whether the payment is said to be for board only or for lodging only or for both, are considered to be in the nature of domestic arrangements not giving rise to the derivation of assessable income by the recipient of the payments. It follows that the question of income tax deductions for losses and outgoings does not arise.

Occupancy of part of a residence on the basis of the occupants sharing household costs such as food, electricity and cleaning, etc.

16.	What will be decisive in cases of this nature will be the characterization of the arrangements, i.e., do they produce assessable income. Situations arise where the owner of a residence permits persons to share the residence on the basis that all the occupants, including the owner, bear an appropriate proportion of the costs actually incurred on food, electricity, etc. Arrangements of this nature are not considered to confer any benefit on the owner. There is no assessable income and the question of allowable deductions does not arise.

17.	Care should be taken to ensure, however, that what may be termed ordinary tenancy arrangements are not dressed up in the form represented by the above heading. If the owner were not party to the sharing arrangements or if the occupants made a fixed contribution to the owner for household costs, there would be a presumption that the payments made by the occupants contained an element of reward to the owner for the occupancy of the residence. Enquiries will be necessary in these cases to establish the extent of the benefit to the owner which should be included in his assessable income. Income tax deductions for losses and outgoings attributable to the residence would be determined on the same basis as applies under the heading "arms length letting of an identified part of a residence, e.g. a bedroom, with access to general living areas of the residence".

Letting of a holiday home or potential retirement home for part only of the year

18.	The problem involved under this heading relates to properties which are essentially private residences. They are located in holiday resort-areas or away from mainstream residential areas. The properties may be let for short periods of time, e.g. during school holidays. In some instances friends or relatives of an owner may occupy a property for holidays at no or minimal cost. For the greater part of the year, however, the properties will be either occupied by the owner for short periods or remain unoccupied.

19.	The minimal amounts received from friends or relatives in these cases are not considered to be assessable income. The occupancy arrangements in these cases are in the nature of domestic or family arrangements and the amounts received by the owner from friends or relatives are reimbursements for costs incurred during the period of occupancy.

20.	On the other hand the rent received from the commercial letting of the properties i.e. the letting of the properties, at a commercial rental, is clearly assessable income. It is a question of deciding what amount of the losses and outgoings incurred in connection with the properties is allowable as an income tax deduction.

21.	Again this will be a question to be determined in the light of individual cases. In Case No. P116, 82 ATC 590 : Case No. 49, 26 CTBR (NS) 372, a property was let for 16 days during the year of income, occupied by the owners for 107 and vacant for the balance of the year. Taxation Board of Review No. 1 apportioned the losses and outgoings attributable to the property on a time basis and allowed a deduction for the proportion that the property was let, i.e. 4.4%.

22.	As a general rule the approach of the Board in the case cited should be followed in comparable cases, i.e. the time basis should be used to determine the income tax deduction allowable in respect of the relevant losses and outgoings. Where the information supplied in a return of income is insufficient to enable a final decision to be made, the income tax deductions allowed should be limited to the amount of rent received. Whether a further deduction is to be allowed will depend upon the nature of any additional information provided by the taxpayer.

23.	A question which may arise in cases coming under this heading is whether the apportionment of losses and outgoings attributable to a property should take into account the periods during which the property was not only let at a commercial rental but also available for letting at a commercial rental. The question is, of course, one for decision in individual cases. Nevertheless, a period of time during which a property was available for letting should only be taken into account where it is established that active and bona fide efforts to let the property at a commercial rental were made during the relevant period.

24.	An associated problem that arises in cases under this heading is the extent to which travelling expenses incurred by the owner of the property in inspecting and maintaining the property are allowable as income tax deductions. The answer will depend, of course, on the nature of the travel. If, for example, it is undertaken to prepare the property for incoming tenants or to inspect the property at the conclusion of the tenancy, the costs of travel would be allowable as an income tax deduction. If, on the other hand, the travelling is associated with the owner's personal use of the property or with the general maintenance of it, the costs of travel would not be allowable as an income tax deduction.

Letting of a residence during a transfer in place of employment

25.	Where a residence is let on a normal commercial basis during the period of transfer, losses and outgoings in relation to the residence and which are eligible for income tax deduction would be allowable as income tax deductions.

26.	There would be a need for apportionment on a time basis if the residence was let for less than a year.

Purchase of a residence by a family trust and the subsequent leasing of it to family beneficiaries in the trust.

27.	Situations under this heading are designed to obtain an income tax deduction for losses and outgoings which would otherwise be characterized as private or domestic expenditure. By way of illustration, a family trust may be established to acquire what is in fact the private residence of the beneficiaries of the trust. Financial arrangements for the purchase of the residence by the trustee may be highly geared. The trustee will let the residence to one or both parents at a commercial rental and the family would occupy the residence as the family home. The trustee lodges a return of income disclosing the rental as assessable income and claiming income tax deductions for the losses and outgoings attributable to the residence. Income from other sources is channelled into the trust to absorb the losses arising from the rental of the residence to the parents.

28.	In situations such as this it is apparent that, had the parents acquired the residence in their own right, the losses and outgoings attributable to the residence would not have been allowable as income tax deductions – they would have been private or domestic expenditure. In cases of this nature that have arisen, the deductions claimed by the trustee have been reduced. A case in point has been heard by a Taxation Board of Review and is currently awaiting decision. In the meantime it should not be accepted in cases of this nature that the rent payable by the parents is assessable income of the trustee or that the losses and outgoings attributable to the residence are allowable as income tax deductions.

Commissioner of Taxation

4 July 1985


Taxation Determination TD 1999/62 Criteria for deciding whether clothing items constitute a compulsory uniform
Taxation Determination TD 1999/62

Income tax: what are the criteria to be considered in deciding whether clothing items constitute a compulsory corporate uniform/wardrobe for the purposes of paragraph 30 of Taxation Ruling TR 97/12?

Preamble

This Taxation Determination is a "public ruling" for the purposes of Part IVAAA of the Taxation Administration Act 1953 and is legally binding on the Commissioner. Taxation Rulings TR 92/1 and TR 97/16 together explain when a Determination is a public ruling and how it is legally binding on the Commissioner.

DATE OF EFFECT

This Determination applies to years commencing both before and after its date of issue. However, this Determination does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of the Determination (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

1.	This Determination sets the criteria to out be considered in deciding whether clothing items constitute (wholly or in part) a compulsory corporate uniform/wardrobe. The cost of acquiring and maintaining a compulsory corporate uniform/wardrobe is an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (see Taxation Ruling TR 97/12 – "Income tax and fringe benefits tax: work related expenses: deductibility of expenses on clothing, uniform and footwear").

2.	A compulsory uniform/wardrobe must be prescribed by the employer in an expressed policy that makes it a requirement for a particular class of employees to wear that uniform while at work, and which identifies the relevant employer. The employer’s compulsory uniform/wardrobe policy guidelines should stipulate the characteristics of the colour, style and type of the clothing and accessories that qualify them as being a distinctive part of the compulsory uniform/wardrobe. Also, the wearing generally of the uniform/wardrobe should be strictly and consistently enforced. To be a compulsory corporate uniform/wardrobe, the clothing must be unique, distinctive and peculiar to the particular organisation, with a timeless quality unaffected by short term changes in fashion.

3.	Whether clothing constitutes a compulsory corporate uniform/wardrobe is a question of fact and impression that can only be determined on a case by case basis in the light of all the circumstances. The following criteria (failure to satisfy one or more of which does not necessarily mean the clothing is not a compulsory corporate uniform/wardrobe) should be considered:

(a) Objective

A compulsory corporate uniform/wardrobe should be designed to enhance the public image of an employing organisation and to act as a form of indirect advertising. The uniform/wardrobe should also be intended to secure a commitment from employees to the corporate culture of the organisation, be a means of easily identifying employees and of avoiding their fashion excesses.

(b) Understanding on how the wardrobe is to be worn

At the time of purchasing a compulsory corporate uniform/wardrobe there should exist a general understanding among employees that such items are only to be worn while on official duty, including travel to and from work. They must also understand that the wardrobe should generally be worn as an entirety rather than as individual pieces. The constant wearing of corporate uniform/wardrobe items in conjunction with ordinary clothing may lead to the conclusion that the items are simply a collection of ordinary clothing items. However, the collection of clothing items does not lose its essential character as a corporate uniform/wardrobe simply because individual items within the wardrobe or uniform are occasionally worn with non-uniform garments while not on official duty.

(c) Fabric

(i)	The word "fabric" is used in the sense of material type, i.e., what the material is made of, e.g., cotton, silk, a mixture of cotton and polyester, etc. There should only be a limited range of fabrics used in the uniform/wardrobe because the greater the range of fabrics used the more likely it is the wardrobe loses its distinctive and unique look. A range of 5 or 6 fabrics is generally not considered excessive. These fabrics should be readily identifiable as belonging to the compulsory corporate uniform/wardrobe of the particular organisation. This may be satisfied by ensuring that the fabric is unique or, at the very least, only in limited use by the general public. Simply having a distinctive and unique lining to a jacket, etc., is not sufficient because the lining is not generally visible and does not serve to identify the item as part of a corporate uniform/wardrobe.

(ii)	Plain fabrics are generally not in themselves considered to be sufficiently unique and distinctive so as to render them easily identifiable. It is, therefore, necessary for plain fabrics to have some distinguishing feature either woven, printed or embroidered into them. However, individual items should be considered in the context of the overall look of the uniform/wardrobe.

(d) Colours

The total number of colours or shades used in the uniform/wardrobe should be limited. The use of a large number of colours may make it difficult to say that the wardrobe is distinctive or unique, particularly when taken into account with the number of fabrics and styles used. Colours should be in distinctive shades or combinations. For example, if an organisation has corporate colours, then it may be appropriate to limit the number of colours to those corporate colours plus one or two additional colours.

(e) Style

There should be a limited number of styles available both in respect of individual items of apparel (e.g., women’s blouses) and in respect of the uniform/wardrobe as a whole. The greater the number of styles possible, the more likely it is that the uniform/wardrobe is viewed simply as a collection of conventional clothing.

(f) Corporate identifiers

These are features that readily identify a particular organisation and include such things as logos, initials or insignias on buttons, pockets, etc. Identifiers are not compulsory but they add to the distinctive and unique nature of the uniform/wardrobe, particularly when incorporated into items that, in and of themselves, are not distinctive or unique, e.g., a plain white shirt. The identifier should be in a contrasting colour or shade and be of sufficient size to be plainly visible to the casual observer.

(g) Durability

(i)	In order to be distinctive and unique, a compulsory corporate uniform/wardrobe should be durable, in the sense that the overall concept or look of the wardrobe should be intended to last for a number of years. Rapid changes in style, colour or fabric can detract from the uniform/wardrobe’s ability to be easily recognised as a corporate uniform/wardrobe and, therefore, also detract from its distinctive and unique character. Where these rapid changes do occur, the uniform/wardrobe might in reality be nothing more than a collection of items of ordinary clothing. For example, substantial changes to the uniform/wardrobe on a yearly basis to take into account changing fashions may result in employees wearing a vast array of different clothing composed of items from both the current and previous years’ collections. In this situation, it would be difficult to say that there is a distinctive and unique compulsory corporate uniform/wardrobe. Consequently, fabrics, styles and colours should not be adversely affected by altering fashion trends. As a general rule, the overall look or concept of a corporate uniform/wardrobe should be designed to last between three to five years, although it is accepted that individual items of clothing within that uniform/wardrobe may wear out in a shorter period. However, regard should always be had to the type of industry involved. For example, a period of less than three years may be acceptable in some parts of the retail fashion industry.

(ii)	It is also accepted that, in the initial stages of establishing a compulsory corporate uniform/wardrobe, changes may be necessary as items prove unsuitable. For example, experience may show that particular fabrics are not long lasting or popular with staff. If these changes do not result in substantial changes in the uniform/wardrobe as originally designed, they do not alter the tax deductible status of the wardrobe. Summer and winter variations in a corporate uniform/wardrobe need not be introduced at the same time if they clearly form part of the overall uniform/wardrobe package.

(h) Range

(i)	It is necessary to take into account the total number of possible variations in fabrics, colours and styles in order to determine whether the uniform/wardrobe, as a whole, has a cohesive identity or whether the uniform/wardrobe should simply be considered a collection of conventional clothing items. For example, suit combinations (e.g., men’s and women’s suits) that are designed and intended to be worn as a whole must be considered in their entirety, rather than as individual items. If the suit combination is distinctive and unique, it is irrelevant that one or more of the individual items can be characterised as ordinary clothing or that the items may be worn with non-uniform items. However, if the suit combination is essentially conventional, it is not sufficient simply for one or two items within the combination to have a corporate identifier or colour.

(ii)	It is accepted that, where an organisation operates over a wide geographic and climatic area, it may be necessary to vary the uniform/wardrobe so as to take into account variations in climate. For example, fabrics suitable for the climate in northern Queensland may not be suitable for Tasmania.

(i) Accessories

Expenditure on accessory items, such as handbags, shoes and trenchcoats, that do not bear any distinguishable features, such as a corporate identifier, is considered to be of a private nature. Accessories such as ties, handkerchiefs and hair ribbons that are made of the same unique fabrics as the other items in the compulsory corporate uniform/wardrobe, or have clearly visible distinguishing features such as a corporate logo, form a deductible part of the uniform/wardrobe. The cost of belts that have a clearly visible logo embossed or engraved on to them is also deductible.

4.	The explanation of the criteria in paragraph 3 is based, in part, on Case R55 84 ATC 411 at 416-419; 27 CTBR (NS) 867 at 874-877.

5.	A substantial change to a compulsory corporate wardrobe (e.g., a complete change in the style, colours or fabrics) would require the above criteria to be fully addressed for the whole wardrobe. A minor change (e.g., replacement of one or two items of clothing of an older or no longer desired style within a corporate wardrobe, or the addition of one or two new accessories) would not ordinarily be regarded as a substantial change and would not require the whole wardrobe to be reassessed.

Previous Rulings

6.	Taxation Ruling IT 2641 is now withdrawn (it is replaced by this TD and Taxation Ruling TR 97/12).

Commissioner of Taxation

10 November 1999


Taxation Ruling IT 2258 Election expenses: deductibility of expenditure incurred and effect of public funding of elections
Taxation Ruling IT 2258

Income tax: election expenses: deductibility of expenditure incurred and effect of public funding of elections

There is an Erratum for this document

Preamble

The purpose of this Ruling is to set out guidelines to be followed in determining the extent to which income tax deductions are allowable in terms of sub-sections 74(1) and 74A(2) for expenditure incurred in being elected as a member, or in contesting an election for membership, of the Federal or a State Parliament, of the Legislative Assembly of the Northern Territory, of the Australian Capital Territory House of Assembly or of a local governing body. The Ruling also examines the implications for income tax purposes of the introduction of public funding of Federal and New South Wales elections.

PART 1: ELECTION EXPENSES

FACTS

1.	The decision of the Federal Court of Australia in Federal Commissioner of Taxation v Wilcox 82 ATC 4411; 13 ATR 395 has necessitated a review of the manner in which claims for deductions under sub-section 74(1) of the Income Tax Assessment Act 1936 should be treated. The Wilcox case was an appeal by the Commissioner from the decision of Sheahan J. in the Supreme Court of Queensland (13 ATR at 396). The Supreme Court had dismissed the Commissioner's appeal from a decision of Taxation Board of Review No. 3 (reported as Case N80 81 ATC 408, 25 CTBR(NS) Case 35).

2.	At issue before the Federal Court was the extent to which expenditure of $1185 incurred by the taxpayer was allowable as an income tax deduction under sub-section 74(1). The expenditure was incurred by the taxpayer during the year ended 30 June 1979 following his pre-selection on 28 September 1978 as his political party's candidate for the next State Parliament general election due to be held before the end of 1980. Issue of the writ for the election occurred on 27 October 1980 and the taxpayer submitted his nomination on 3 November 1980. The polling date was 29 November 1980 which was more than two years after the date of the endorsement of the taxpayer. In the event the taxpayer was unsuccessful in his bid for election.

3.	Up until the Wilcox case it had been the official practice to restrict claims for income tax deductions for election expenses to expenditure incurred after the issue of election writs. The Federal Court held, however, that section 74 operated to allow the taxpayer income tax deductions for expenses incurred subsequent to his endorsement some two years prior to the actual election date. All judges agreed that the phrase "in contesting an election" in sub-section 74(1) could be referable to events prior to the commencement of the formal election process.

4.	Since the Wilcox case, another claim under section 74 has been reviewed by a Taxation Board of Review. It is reported as Case S23 85 ATC 253; 28 CTBR(NS) 169 Case 22. A sitting member of a State Parliament claimed as a deduction under section 74 expenditure incurred some time after she had been elected to Parliament and almost two years before the next election took place. The taxpayer was not endorsed as her party's candidate for the next election at the time the expenditure was incurred.

5.	The Board of Review did not allow the taxpayer a deduction under section 74. The Board observed that, although the decision in the Wilcox case provides authority for the view that campaign expenses incurred prior to the official commencement of the election may in certain circumstances qualify for deduction in terms of section 74, the precise parameters of time are not clearly defined. In the case before it, the Board decided that, having regard to all the circumstances, and particularly the absence of party endorsement, the taxpayer was not engaged in contesting an election at the relevant time. Even if she was, there was not sufficient connection between the expenditure and the contesting of an election for a deduction to be allowable.

RULING

6.	In practice the decision in the Wilcox case means that provided expenditure can be characterised as a type that would be incurred by a candidate to further his or her chances of being elected to a Parliament, the expenditure will qualify for deduction under section 74.

7.	Election expenses incurred by an endorsed candidate will qualify for deduction notwithstanding that endorsement, which may not always be a very formal process, may be given two or three years prior to the relevant election. Expenditure incurred in gaining pre-selection is not seen as coming within the scope of section 74.

8.	Sitting members representing a political party may be endorsed for the next election at any time between elections or they may fail to obtain endorsement and still attempt to be re-elected. Whether expenditure incurred by them should be accepted as election expenses or whether it is incurred in the course of undertaking duties as the sitting member will sometimes require close scrutiny. It will be a matter of being satisfied that the expenditure is directly related to the next election. A similar approach would need to be followed with independent sitting members.

9.	In the case of independent candidates, again it will be a question in each case of determining whether particular expenses can be said to be incurred in being elected as a Member or in contesting an election for membership of a Parliament. Expenditure incurred by independent candidates close to the date of an election should present little problem. Where the expenditure is incurred some time before the writs for an election are issued, however, regard may need to be had not only to the precise nature of the expenditure but also to the background activities of the taxpayer relevant to his claims, his or her declared political intentions and whether the activities giving rise to the expenditure could be regarded as representing those of a person attempting to be elected.

10.	Similar considerations will apply to election expenses of candidates for local governments or the ACT House of Assembly. Section 74A follows closely section 74, i.e. it relates to expenditure incurred in being elected as a member, or in contesting an election for membership.

11.	Following the recent introduction of Subdivision F of Division 3 of part III of the Income Tax Assessment Act, i.e. the substantiation provisions, income tax deductions will not be allowed for unvouched expenditure incurred after 1 July 1986 in contesting an election. Expenditure in respect of which a deduction would otherwise be allowable under section 74 or 74A is specifically included in the definition of "employment-related expenses" to which the substantiation provisions apply. As a result, candidates for election in Federal, State and local government elections will be required to substantiate all such expenses incurred after 1 July 1986.

12.	In addition recently enacted section 74B specifically excludes, subject to the following exceptions, expenditure incurred after 19 September 1985 in respect of entertainment expenses. The exceptions relate to entertainment that is available to the public generally and to expenditure on meals while travelling in the course of a campaign provided that the expenditure was not incurred in the course of entertaining another person.

13.	Instructions contained in CITCM 692 and in the Business Assessing Handbook, Vol. 2, paragraphs 2.10.74 to 2.10.78 are modified in accordance with this ruling.

PART 2: PUBLIC FUNDING OF ELECTIONS

FACTS

14.	Public funding of elections has been introduced by the Australian and New South Wales Governments. The relevant legislation permits reimbursement of certain campaign expenses incurred by candidates. The payments are made under Division 3, Part XVI of the Commonwealth Electoral Act 1918 (as amended) and the New South Wales Election Funding Act 1981, as the case may be. Under the Commonwealth scheme a candidate must receive 4% of the total number of formal first preference votes in an election before an entitlement to public funding arises. The New South Wales legislation provides, as a general rule, that an entitlement to public funding arises if a candidate is entitled to a refund of his or her election deposit. Payment is made either to the candidate or the political party which he represents, depending on the circumstances. The important features of each scheme are outlined below.

Commonwealth

15.	The election funding scheme is administered by the Electoral Commission which determines in each particular case whether an item of expenditure is "election-related". The Commission must be satisfied that the electoral expenditure was expenditure incurred or authorised by a candidate or a political party and specifically related to an election. The electoral expenditure eligible for reimbursement is the total expenditure incurred on certain items, being goods and services provided between the issue of the writ for an election and the end of polling day in the election, irrespective of when the expenditure on the items was actually incurred. The Electoral Commission has indicated that the following types of expenditure will prima facie be accepted as "election-related":

•	any item included in the return of electoral expenditure e.g. electoral advertising expenses, expenses of printing electoral material that is used in the electoral period, costs of conducting during the election period an opinion poll or other research relating to the election;

•	interest paid on money borrowed to finance the election campaign;

•	travel and accommodation costs associated with the campaign;

•	salaries paid to persons employed for campaign purposes;

•	auditing costs to provide an audit certificate to support the claim;

•	costs of production of campaign novelty items – car stickers, T-shirts, lapel buttons or badges, pens, pencils or balloons;

•	costs of insurance policies specifically to cover volunteer workers for the campaign;

•	additional expenditure on postage and telecommunications generated by an election for the period from the announcement of the election until polling day;

•	running costs for vehicles used during the campaign period;

•	expenditure on the holding of campaign rallies and meetings;

•	expenditure for the purpose of conveying voters to the polls;

•	payment to scrutineers.

16.	Expenditures of the kinds listed in the preceding paragraph would generally be allowed as income tax deductions under sub-section 74(1) or section 74A of the Income Tax Assessment Act. For the purposes of sub-section 74(1) and section 74A the list is not exhaustive. Expenditure which prima facie will not be approved to support a claim for public funding may, nevertheless, qualify as election expenses, e.g. ex-gratia payments to volunteer workers, nomination deposits or costs involved in raffles or other fundraising activities.

17.	When the Electoral Commission is satisfied that an amount is payable to a candidate or a political party the payment will be made to the agent of the candidate or political party. In the case of political parties the agents will generally comprise the national secretary and the secretaries of the State and Territory branches of the party.

18.	Candidates endorsed by registered political parties may not claim public funding on an individual basis. It is the party which will lodge a claim. The party may distribute any public funding payment as it sees fit. Expenditure incurred by an endorsed party candidate is deemed for the purposes of the Electoral Act to be incurred by the State Branch of the party.

19.	To be eligible for public funding an independent candidate must be registered in the Register of Candidates with the Electoral Commission. A candidate may appoint an agent. If there is no appointment of an agent, the candidate is taken to be his/her own agent. A claim by a registered candidate may be submitted only by the agent of the candidate.

New South Wales

20.	Under the New South Wales Election Funding Act 1981 public funding of election expenditure is available to a sitting member or unsuccessful candidate in respect of expenditure incurred from the day following the polling day of the previous election until polling day of the current election. A new candidate is eligible for reimbursement of election expenditure incurred 12 months before the day on which the candidate was nominated until polling day of the current election. For income tax purposes the new candidate may be entitled to a deduction for electoral expenditure incurred prior to 12 months before the nomination date even though the expenditure cannot be used to support a claim for public funding.

21.	Election expenditure which has to be disclosed is expenditure for or in connection with promoting or opposing directly or indirectly a party or the election of candidates or for the purpose of influencing directly or indirectly the voting at an election. As with the Commonwealth legislation public finding payments are made directly to an independent candidate or his agent and to the agents of political parties for appropriate distribution.

RULING

22.	-section 74(2) provides that, where an income tax deduction has been allowed or is allowable under sub-section 74(1) in respect of any election expenditure and the expenditure or any part of it is reimbursed to the taxpayer or paid for him by any other person or by any organisation, the assessable income of the taxpayer of the year in which the amount is so reimbursed or paid shall include the amount. A similar provision, sub-section 74A(4), applies in case of election expenses of candidates seeking election to local government bodies and the Australian Capital Territory House of Assembly.

23.	In the case of an endorsed candidate who is a member of a political party claims for public funding, as has been stated earlier, are made by the agent of the political party and any funding is paid to the party. Where public funding is paid to a political party the candidate is not required to include any part of the funding in his assessable income, unless and until the party in turn either reimburses, or pays on behalf of the candidate, expenses allowed or allowable under sub-section 74(1). Any reimbursement for election expenses received by the candidate from the political party or the amount of any expenses paid by the party on behalf of the candidate constitute assessable income of the candidate in terms of sub-section 74(2) or sub-section 74A(4)

24.	In the case of an independent candidate, a claim for public funding is made by or on behalf of the candidate and payments are made directly to him or his agent. In these circumstances, any public funding payments would be required to be included in the candidate's assessable income.

Commissioner of Taxation

30 June 1986

ERRATUM

The reference in the preamble and in paragraph 23 of the ruling to the words "Australian Capital territory House of Assembly" should read as "Legislative Assembly for the Australian Capital Territory". This alteration is to have immediate effect.

Commissioner of Taxation

15 September 1994


Taxation Ruling IT 2308: Depreciation of plant acquired otherwise than by purchase
Taxation Ruling IT 2308 – WITHDRAWN

Income tax: depreciation of plant acquired otherwise than by purchase

Preamble

1.	Section 54 of the Income Tax Assessment Act authorises an income tax deduction for depreciation on plant and articles owned by a taxpayer and used by him for the purpose of gaining or producing assessable income. The annual deduction allowable is calculated by applying the appropriate rate of depreciation to the cost of or the depreciated value of the plant or articles.

2.	Situations arise from time to time where plant or articles for use for the purpose of gaining or producing assessable income are acquired by a taxpayer otherwise than by purchase. The acquisition of property by way of inheritance or gift affords an illustration. Official practice in these situations is stated at paragraph 101 of Income Tax Order No. 1217 to be:-

"Where property is acquired otherwise than by purchase, for example, by inheritance or gift, the taxpayer acquiring the property is not entitled to any greater allowance for depreciation than that which would have been allowable to the testator if he had lived, or to the donor if he had retained the property. Generally, the allowance will be based on the depreciated value of the property immediately prior to the date of acquisition."

3.	In some cases the property may not have been plant or articles in the hands of the testator or vendor, i.e. it may not have been used for the purpose of gaining or producing assessable income, e.g. a motor vehicle. In such circumstances an income tax deduction to the taxpayer for depreciation would be based on a notional depreciated value at the date of inheritance or gift, i.e. a value calculated by applying the appropriate depreciation rate to the cost of the property to the testator or donor.

RULING

4.	This office recently had occasion to consider whether any income tax deduction for depreciation was allowable where a taxpayer acquired property by way of a prize in an art union and subsequently used the property as plant in his business operations. It was decided that acquisition of the property should be treated in the same way as an acquisition of property by inheritance or gift. Income tax deductions for depreciation would be allowable to the taxpayer calculated on the cost of the property to the sponsor of the art union, i.e. the amount upon which depreciation deductions would have been based had the sponsor retained the property and been entitled to income tax deductions for depreciation on the property.

5.	This decision may be followed in comparable cases.

Commissioner of Taxation

30 May 1986

NOTICE OF WITHDRAWAL

Taxation Ruling IT 2308 is withdrawn with effect from today.

1. Taxation Ruling IT 2308, which issued on 30 May 1986, deals with the question of whether for the purposes of section 54 of the Income Tax Assessment Act 1936 (ITAA 1936), plant or articles acquired by a taxpayer otherwise than by purchase, are depreciable. Section 54 of the ITAA 1936 allowed an income tax deduction for depreciation in respect of plant or articles owned by a taxpayer and used by them during the year of income for the purpose of producing assessable income.

2. From 1 July 2001, deductions for depreciating assets are dealt with in Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997). Section 40-180 of the ITAA 1997 deals with the situation covered in Taxation Ruling IT 2308.

3. As the legislation dealt with in Taxation Ruling IT 2308 no longer applies, the Ruling is withdrawn.

Commissioner of Taxation

15 December 2004


Taxation Ruling IT 2316 Distribution of partnership profits and losses
Taxation Ruling IT 2316

Income tax: distribution of partnership profits and losses

Preamble

1.	In a recent unreported decision Taxation Board of Review No.1 had to determine to what extent partners of a partnership were entitled to share profits and losses of the partnership.

FACTS

2.	The partners were husband and wife and the partnership had incurred losses from the rental of three separate properties. One property was held by the husband and wife as tenants in common in equal shares and the other two properties were held as joint tenants. The written partnership agreement provided that profits and losses were to be distributed in accordance with each partner's share of the capital account. The amount standing to credit in the capital account had not altered since formation and was held in the proportions of – 96% husband, 4% wife.

3.	The partners had attempted to distribute the rental property losses according to the partnership agreement but the Commissioner treated the losses as being distributable on a 50: 50 basis, i.e. in accordance with their respective registered interests in the properties.

4.	At the hearing the Commissioner argued that, although a partnership existed for income tax purposes, there was not a partnership at general law. In rejecting this the Board held that a partnership existed at general law and that the distribution of rental losses must be regulated by the terms of the written partnership agreement. The Board considered that the evidence adduced established that it had always been the intention of the parties to purchase the rental properties as partnership assets subject to the terms of the partnership agreement.

RULING

5.	It is considered that the finding of the Board was open to it on the facts. The decision is seen as being consistent with the previously stated policy that net income of a partnership should be distributed according to the basic agreement between the partners for the sharing of profits and losses (IT 2218 – paragraph 6).

6.	Situations may arise, however, where it is apparent that the partnership agreement is merely a device to enable distributions to be made which are completely out of proportion to either the partners' true interests in the partnership assets or their participation in the partnership business. Such cases will continue to require assessment on their own merits.

Commissioner of Taxation

17 June 1986


Taxation Ruling IT 2346 Bonuses paid on certain life assurance policies
Taxation Ruling IT 2346

There is an Addendum to this document

Income tax: bonuses paid on certain life assurance policies – section 26AH – interpretation and operation

Preamble

1.	The purpose of this Ruling is to explain a number of issues that have been raised in relation to the interpretation and operation of section 26AH of the Income Tax Assessment Act 1936. Section 26AH was inserted in that Act by the Income Tax Assessment Amendment Act 1984 (Act No. 14 of 1984), which received the Royal Assent on 12 April 1984. The section provides for the taxing of amounts paid as or by way of bonuses under life assurance policies taken out after 27 August 1982, and which are not subject to tax under any other provision of the income tax law. Section 160AAB, inserted in the Assessment Act by the same amending Act, provides a rebate of tax at the rate of 30% in respect of amounts included as assessable income under section 26AH.

BACKGROUND

2.	Section 26AH provides that a taxpayer's assessable income shall include bonuses, and some other amounts in the nature of bonuses, received under a relevant life assurance policy ("an eligible policy") during a specified period ("the eligible period"). An eligible policy is defined to mean a policy of life assurance in relation to which the date of commencement of risk is after 27 August 1982, while the date of commencement of risk in relation to an eligible policy is –

•	the date of commencement of the period to which the first or only premium paid under the policy relates; or

•	where the first or only premium does not relate to a particular period, the date of payment of that premium.

The eligible period in respect of an eligible policy is the first 10 years in the case of a policy with a date of commencement of risk after 7 December 1983 or the first 4 years where the date of commencement of risk is after 27 August 1982 and on or before 7 December 1983.

3.	The combined effect of sub-sections 26AH(6) and (14) is that, for an eligible policy taken out after 27 August 1982 and on or before 7 December 1983, amounts received as or by way of bonuses are included in the recipient's assessable income in full if received within two years of the date of commencement of risk of the policy, and as to two-thirds or one-third if received in the third or fourth year after that date. In respect of an eligible policy taken out after 7 December 1983, amounts received as or by way of bonuses are assessable in full if received in the first eight years after the date of commencement of risk of the policy, and as to two-thirds or one-third if received in the ninth or tenth year after that date.

4.	Section 26AH does not subject to tax amounts received under a policy of life assurance where the amount is received as a result of the death of, or an accident, illness or other disability suffered by, the person on whose life the policy was effected. Receipts arising from policies that are part of an exempt superannuation fund or scheme are also outside the scope of the section. In addition, the section does not apply to amounts received as a result of the forfeiture, surrender or other termination of the whole or a part of a policy in circumstances arising out of serious financial difficulties of the taxpayer, unless the policy was effected, purchased or taken on assignment with a view to it being forfeited, surrendered or otherwise terminated, or to it maturing, within ten years (or four years in the case of a policy with a date of commencement of risk after 27 August 1982 and on or before 7 December 1983). These exclusions are specified in sub-section 26AH(7).

5.	Section 26AH may apply to amounts received under any form of life assurance policy including those known as unbundled life assurance contracts (referred to in this Ruling as "unbundled policies") and which may be categorised as either investment account or investment-linked policies. Some of the more general features of unbundled policies are as follows:

•	Investment account policy

A contract providing a death benefit plus some type of identifiable savings account or investment account, the balance of which usually becomes the benefit payable in certain circumstances, most commonly after a number of years when a balance has accumulated in the account.
Source : Life Insurance Commissioner Annual Report 1985

•	Investment-linked policy

A contract providing a death benefit, and an investment account the value of which is directly linked to the performance of a specific investment portfolio. The value of the policyholder's interest will rise and fall with the movements in the value of the portfolio.
Source : Life Insurance Commissioner Annual Report 1985

6.	Premiums in respect of an unbundled policy may be paid in a lump sum or annually, or the policyholder may elect to vary the amount of the premium by making additional payments under the policy at any time. A further feature of these types of policies is that they generally allow the policyholder to surrender a part of the policy at any time (a "partial surrender").

RULING

The meaning of "received"

7.	Section 26AH primarily applies to amounts actually received by a taxpayer as or by way of a bonus under an eligible policy. However, sub-section 26AH(4) operates, subject to sub-section 26AH(5), to ensure that where an amount of bonus is dealt with on behalf of or at the direction of the taxpayer, he or she is taken to have received that amount. It is important to note, however, that the mere crediting of a bonus to a policy of life assurance is not to be taken as the receipt by the taxpayer of the bonus. In this regard, sub-section 26AH(5) provides that sub-section 26AH(4) does not apply to a bonus or similar amount that is applied to increase the surrender or maturity value of a life assurance policy.

The meaning of "bonus"

8.	The term bonus is not defined. In relation to the more traditional policies (e.g. endowment policies – the proceeds of which are payable on survival to the maturity date stated in the policy or on prior death), a bonus is a guaranteed addition to the sum insured which is payable when the sum insured is payable. This additional amount paid in respect of a life assurance policy represents a form of participation by the policyholder in the issuing company's profits. It represents a share in the surpluses derived by the issuing company during the period the policy is in force. Such a bonus received under a policy that was taken out after 27 August 1982 and that matures or is surrendered, forfeited or otherwise terminated in whole or part within the eligible period (i.e. 4 years or 10 years after commencement) falls within the scope of section 26AH.

9.	In the case of unbundled policies, the concept of bonuses representing the profit or gain element passed on to the policyholder is maintained for the purposes of section 26AH. For example, where a policy is linked to the purchase and sale of investment units, the profit derived on the sale of those units is, when paid to the policyholder, regarded as a payment by way of a bonus. Similarly, interest derived in respect of an investment account policy is, when paid to the policyholder, regarded as a payment by way of a bonus. Sub-section 26AH(9) is relevant in this regard. Under that sub-section, an amount received otherwise than as or by way of a bonus is nevertheless deemed to have been received as or by way of a bonus where the Commissioner considers that the amount represents an existing or reasonably expected future bonus.

Commissioner's discretion – sub-section 26AH(8)

10.	Sub-section 26AH(8) provides a discretion to exclude from assessable income the whole or part of an amount received as or by way of a bonus (including an amount deemed to have been so received by virtue of sub-section 26AH(9)) by reason of the forfeiture, surrender or other termination of the whole or a part of an eligible policy, and which would otherwise be included in assessable income by the application of sub-section 26AH(6). The object of this discretion is to ensure that bonuses or other amounts in the nature of bonuses are not subject to tax unless the total amount received by the holder or holders of the policy exceeds the premiums paid under the policy. In deciding whether the discretion should be exercised, regard is to be had to certain matters specified in sub-section (8). These matters are the total amount of the premiums paid, any amounts previously received by any person under the policy (including any amounts of bonuses), the surrender value of the policy at the time of forfeiture, surrender or other termination and any other relevant matters.

11.	As a general rule, where a policyholder forfeits, surrenders or otherwise terminates, in whole or in part, a policy of life assurance in relation to which the date of commencement of risk is after 27 August 1982, the "relevant amount" to be included in assessable income under sub-section 26AH(6) – having regard to the terms of sub-section (8) – is to be calculated in accordance with the formula:

(A / B) x [(B + C) – (D + E)]

where:

A = the amount withdrawn from the policy.

B = the surrender value of the policy immediately prior to the withdrawal.

C = the sum of any earlier amounts paid out under the policy.

D = the total gross (i.e., without deduction of charges such as commissions and management fees) premiums paid to the date of withdrawal.

E = the sum of previous "relevant amounts" plus the sum of any previous bonuses taxed under any other provision of the Act – e.g., paragraph 26(i).

The gain [(B + C) – (D + E)] represents the difference between the policy value and the gross premiums paid with an adjustment in respect of earlier withdrawals.

12.	The following very broad example illustrates the above formula.

A taxpayer takes out after 7 December 1983 a life assurance policy with an annual premium of $1,200 payable at the commencement of each assurance year. Assume that immediately before the end of the eighth year the policy is worth $10,139, determined as follows:

Premiums	$  9,600
Less Management costs	2,333
	$  7,267
Plus Bonuses	$  2,872
Value of eligible policy	$10,139
The policyholder effects three partial surrenders each of $2,500 immediately before the close of the eighth, ninth and tenth years.

8th year

By applying the formula:

(A / B) x [(B + C) – (D + E)],

the "relevant amount" under sub-section 26AH(6) is :

(2,500 / 10,139) x [(10,139 + 0) – (9,600 + 0)]

= $132 (in whole dollars).

As the "relevant amount" was received during the first 8 years of the eligible period, the assessable income of the taxpayer of the year of receipt includes an amount equal to the relevant amount – i.e., $132 (paragraph 26AH(6)(a) applies).

9th year

At the end of the ninth year and immediately before the partial surrender in that year (i.e., withdrawal of $2,500), the value of the policy is $9,382 after accounting for a further premium payment of $1,200 at the commencement of the ninth year and the crediting of bonuses of $543 for that year.

By applying the formula in paragraph 11, the "relevant amount" under sub-section 26AH(6) is :

(2,500 / 9,382) x [(9,382 + 2,500) – (10,800 + 132)]

 = $253 (in whole dollars).

As the "relevant amount" was received during the ninth year of the eligible period, paragraph 26AH(6)(b) operates to include in the assessable income of the taxpayer of the year of receipt 2/3rds of the relevant amount – i.e., $168.

10th year

At the end of the tenth year and immediately before the partial surrender (i.e., withdrawal of $2,500), the value of the policy is $8,556 – a further premium payment of $1,200 having been made at the beginning of the tenth year and bonuses of $474 having been credited for that year.

By applying the formula in paragraph 11, the "relevant amount" under sub-section 26AH(6) is:

(2,500 / 8556) x [(8,556 + 5,000) – (12,000 + 132 + 253)]

= $342 (in whole dollars).

Under paragraph 26AH(6)(c), the amount to be included in assessable income is 1/3rd of the "relevant amount" – i.e., $114.

Year 11

If a further withdrawal had taken place, or the whole of the policy had been forfeited, surrendered or otherwise terminated, any amounts received as or by way of bonuses would not be subject to tax.

13.	The above method of calculating the "relevant amount" is illustrated by reference to a policy taken out after 7 December 1983. The same approach is applicable to policies taken out after 27 August 1982 and on or before 7 December 1983 where the 4 year rule applies.

Restructured policies

14.	Where a policyholder decides to discontinue premium payments and is issued with a paid-up policy in lieu of the original policy, sub-section 26AH(2) operates to deem the paid-up policy to be a continuation of the existing policy. However, where existing eligible policies are consolidated by applying cash surrender values and accumulations in respect of those policies into a new life assurance policy, or where a policy is converted to a different policy table (e.g., whole of life to endowment assurance), a new eligible policy is created. As mentioned in paragraph 7, by virtue of sub-section 26AH(4), the value to be attached to an existing eligible policy on termination shall be taken to have been received by the taxpayer even though the amount may not be paid to the taxpayer but re-invested on the taxpayer's behalf to obtain a new life assurance policy. The amount to be included in the taxpayer's assessable income as a consequence of the termination of the eligible policy is to be determined in accordance with the principles outlined in paragraphs 10-13 of this Ruling.

15.	In relation to unbundled policies which involve the purchase of units in specified investment classes, the sale of one class of units for the purpose of re-investing the amount derived into units in another class is to be regarded as a partial surrender and, by virtue of sub-section 26AH(4), the principles outlined in paragraph 10-13 are to be applied. Sub-section 26AH(5) would, however, exclude the operation of sub-section (4) where the re-investment of the relevant amount increases the amount that might reasonably be expected to be received under the eligible policy on surrender or maturity. It should be noted that sub-section 26AH(13) may operate in these cases to create a new eligible period if the amount re-invested plus the amount of any other premium paid in that same assurance year exceeds by more than 25% the premium paid under the policy in relation to the immediately preceding assurance year – see paragraphs 18 to 20. In this regard, the premium payable in relation to an assurance year in respect of these types of policies is the total amount paid into the policy during that year.

16.	Related to the application of section 26AH to restructured policies is the assessability of bonuses accrued on an eligible policy that are applied to pay premiums under the policy. Unless sub-section 26AH(5) applies (see paragraph 7), the use of bonuses to pay premiums is to be treated as a partial surrender and assessable in accordance with the principles outlined in paragraphs 10-13 of this Ruling.

17.	Where the conditions attaching to an eligible policy are varied (e.g., an increase in the sum insured or a change in its term), the rearrangement of the policy conditions does not give rise to a new eligible policy. However, an increase in the amount of premiums payable under the policy, while not giving rise to a new eligible policy, could have the effect of recommencing the eligible period in respect of the policy – see paragraphs 18 to 20.

Increased premiums

18.	Under sub-section 26AH(13) of the Act, the eligible period in respect of a policy recommences at the start of any assurance year in which premiums payable exceed by more than 25% the amount of the premiums payable under the policy in relation to the immediately preceding assurance year.

19.	Where the premium payable is at the policyholder's discretion, the premium payable in relation to an assurance year is the total amount paid on the policy during that year.

20.	Where a policyholder is contractually obligated to make a fixed premium payment, the relevant amount for the purposes of sub-section 26AH(13) is the amount of premium payable in relation to the relevant assurance year. If such a policyholder failed to meet a particular premium payment and in a subsequent assurance year paid the overdue premium together with that subsequent year's premium, the payment is not to be taken to represent an increased premium for the purposes of sub-section 26AH(13). However, the sub-section would apply in such a case if the premium paid in respect of the subsequent year exceeded by more than 25% the amount of the premium payable in respect of the immediately preceding year.

Interest free or low interest loans

21.	Sub-section 26AH(11) deals with amounts received by a taxpayer by way of an interest free, or low interest, loan (or advance) in connection with an eligible policy, either from the assurer or from a third party associated with the assurer. A low interest loan (or advance) for the purposes of the sub-section (11) is one in respect of which interest is payable at a rate lower than that which could reasonably be expected if the parties were dealing at arm's length.

22.	The effect of sub-section 26AH(11) together with sub-section 26AH(9) is that, where the Commissioner forms the opinion that the whole or a part of the low or interest free loan represents the whole or a part of a bonus under the policy, the amount is deemed to have been received as or by way of a bonus and so is within the scope of sub-section 26AH(6). The circumstances surrounding the making of a loan, its amount in relation to the bonuses credited and the taxpayer's financial position are among the factors that would need to be taken into account in deciding whether or not to treat a loan as being in the nature of a bonus.

23.	Where an interest free or low interest loan against an eligible policy represents a partial surrender of the policy – e.g., where the amount borrowed clearly consists of accrued bonuses as well as some part of the capital component of the policy or where there is no intention that the loan or advance be repaid – the principles outlined at paragraphs 10-13 apply in determining the "relevant amount" for the purposes of sub-section 26AH(6) – the loan being reflected in the paragraph 11 formula as an amount withdrawn from the policy. Similarly, those principles would apply where, subsequent to the receipt by the taxpayer of an interest free or low interest loan, the eligible policy is the subject of another such loan, is partially surrendered or is terminated. If part of a loan had been repaid, only the net amount outstanding would be included as component C of the paragraph 11 formula. If the loan or some part of the loan has previously been deemed to have been received as or by way of a bonus and included in assessable income of an earlier year of income that amount will be taken into account (component E of the formula) in arriving at the amount (if any) of assessable bonus subsequently received.

Sale or assignment of eligible policy or benefits under that policy

24.	Where a policy taken out after 27 August 1982, or any right to receive any benefits under such a policy, is sold or assigned during the eligible period of the policy, and the Commissioner forms the opinion that the amount of, or some part of the amount of, any consideration received by the taxpayer in respect of the sale or assignment is attributable to a bonus, that amount is deemed by virtue of sub-sections 26AH(9) and (12) to have been received by the taxpayer as or by way of a bonus and is within the scope of sub-section 26AH(6).

25.	Where the sale or assignment of the policy is akin to the policy being forfeited, surrendered or terminated in whole or part – e.g., where the policyholder disposes of for consideration his or her interest in the policy to a third party – the amount deemed to have been received as or by way of a bonus is to be calculated in accordance with the principles outlined at paragraphs 10-13.

Taxation Ruling No. IT 2147 – paragraph 9 modified

26.	Taxation Ruling No. IT 2147 (at paragraph 9) states that the proceeds of a policy of life assurance, taken out as a personal guarantee in the circumstances outlined in that Ruling, will not be assessable income in the hands of the guarantor or the guarantor's estate. Paragraph 9 of Ruling IT 2147 is modified by this Ruling in that section 26AH may operate to tax bonuses received by the guarantor during the eligible period – i.e., the first 10 years of a policy of life assurance with a date of commencement of risk after 7 December 1983 or the first 4 years where the date of commencement of risk is after 27 August 1982 and on or before 7 December 1983. Amounts received by the guarantor's estate in consequence of the death of the guarantor on whose life the policy was effected will not, however, be taxable. Sub-section 26AH(7) would apply – see paragraph 4 of this Ruling.

Commissioner of Taxation

31 July 1986

ADDENDUM

Preamble, lines 11-12; delete the words "at the rate of 30%".

The sentence now reads:

"Section 160AAB , inserted in the Assessment Act by the same amending Act, provides a rebate of tax in respect of amounts included as assessable income under section 26AH."

Commissioner of Taxation

1 September 1994


Taxation Ruling IT 2446 Foreign tax credits - allowable deductions referrable to foreign income
Taxation Ruling IT 2446

Income tax: foreign tax credit system – allowable deductions referrable to foreign income

Preamble

1.	This Ruling is concerned with a matter relevant to the operation of the general foreign tax credit system (FTCS) of double taxation relief. It deals with the practical application of various provisions of the income tax law which set out the basis for the allocation to foreign income derived by a taxpayer in a year of income of deductions allowed or allowable from assessable income.

2.	The provisions of the Assessment Act which are primarily the subject of this Ruling are subsection 51(6) (which deals with current year foreign losses), subsection 80(8) (carry-forward of prior year domestic losses), the definition of "net foreign income" in subsection 160AF(8) (foreign tax credits) and subsection 160AFD(5) (quarantining of prior year foreign losses). Subsection 35(2) of the Taxation Laws Amendment (Foreign Tax Credits) Act 1986, which relates to the carry-forward of pre-FTCS foreign losses, is also relevant.

3.	Those provisions, while serving different purposes, follow a similar pattern and essentially require the offset against relevant foreign income of allowable deductions that relate exclusively to the derivation of that income, as well as so much of any other allowable deductions from assessable income (other than apportionable deductions) as, in the opinion of the Commissioner, may appropriately be related to the foreign income. The definition of "net foreign income" in subsection 160AF(8) specifically provides for the offset also against relevant foreign income of any amount of a prior year domestic loss which a taxpayer elects, under subsection 80(2C), for deduction against the relevant foreign income. Read in context, therefore, the reference to "deductions allowed or allowable" in that definition and in the other provisions referred to in paragraph 2 above are required to be construed as not including prior year domestic losses allowable as deductions under subsection 80(2). Nor will the rules contained in section 50 of the Assessment Act apply for the purposes of the allocation of deductions to foreign income under those provisions.

4.	Apportionable deductions as defined in subsection 6(1) of the Assessment Act are precluded from consideration for those purposes because they represent deductions of a concessional or semi-concessional nature which are not, strictly speaking, directly related to income producing activities and cannot therefore be said to relate to any particular part or class of a taxpayer's assessable income.

5.	Each of those provisions is, with necessary modifications, modelled on provisions that previously applied for the purposes of determination of credits for tax paid in Papua New Guinea under former Division 18 of Part III of the Assessment Act or for foreign tax paid in respect of certain income derived from a treaty partner country under former section 15 of the Income Tax (International Agreements) Act 1953.

6.	Although subsection 6AB(1) of the Assessment Act provides that a reference in the Act to foreign income is a reference to income derived from sources in a foreign country or countries, it is important to note that the definition of "net foreign income" in subsection 160AF(8), when read with subsection 160AF(7), applies separately in relation to foreign income which is quarantined interest income (as defined in subsection 160AE(3)) and in relation to all other foreign income. This result is in keeping with the general scheme of section 160AF which separates world-wide foreign income into two classes for purposes of ascertaining the amount of foreign tax credit that is to be allowed. One effect is that the rules contained in that definition for the offset of allowable deductions against foreign income also apply separately in respect of each of those classes of foreign income.

7.	The other provisions referred to in paragraph 2 of this Ruling are concerned with the treatment under the FTCS of losses incurred in deriving domestic or foreign source income. Each of those provisions applies on both a "class of income" and "foreign source" basis, within the special meanings ascribed to those expressions in subsections 160AFD(6) and (7). The rules for the offset of allowable deductions contained in those provisions apply, therefore, separately in respect of each such class of foreign income derived by a taxpayer in a year of income from each such foreign source. The references in this Ruling to "relevant foreign income" should be read accordingly, as the context requires, in the light of the explanation given in this paragraph and in the preceding paragraph.

8.	The purpose of this Ruling is to provide guidelines for the practical application of the provisions referred to in paragraph 2 above and, in particular, for the basis upon which the Commissioner could normally be expected to form an opinion as to the extent to which allowable deductions that do not relate exclusively to relevant foreign income may be treated as appropriately related to that income. It essentially confirms the practice that has applied in the past for those purposes in relation to the determination of tax credits in respect of income from Papua New Guinea or from a treaty partner country.

9.	The guidelines set out in this ruling should be regarded as having application also (as appropriate) in relation to the provisions of subsection 160AFA(4) of the Assessment Act. Those provisions apply for the purposes of the application of the substantive provisions of section 160AFA, and are concerned with the allocation of deductions allowable under any law (viz, a foreign country's law) against quarantined interest income (as defined in subsection 160AE(3)) derived by a foreign company.

RULING

10.	The determination of allowable deductions that relate exclusively to relevant foreign income will be a question of fact to be decided on the basis of the circumstances of each particular case. The proportion of other allowable deductions to be set off against the relevant foreign income will similarly need to be determined according to the circumstances of each case and no hard and fast rule can be laid down that will cover all situations. The formation of the requisite opinion by the Commissioner in relation to other allowable deductions may present more difficulty in practice, however, and needs to be approached against the background that the relevant provisions are designed to permit an appropriate apportionment between the relevant foreign source income derived by a taxpayer, and other income of the taxpayer, of expenses and other tax deductible items that can reasonably be regarded as in part related to the derivation of each of those categories of income.

11.	Deductions that clearly relate exclusively to income other than the relevant foreign income should be excluded from consideration. Only those allowable deductions which can clearly be viewed as related to the derivation by the taxpayer of both the relevant foreign income and other income are to be subject to apportionment. An example would be general administration or head office expenses incurred by a taxpayer who conducts business activities both in Australia and overseas and which are incidental or relevant to the conduct of each of those activities. Another example may be an expense such as interest on borrowed funds which have been used to purchase income-producing assets, including assets used to derive foreign income.

12.	Branch Offices will necessarily have to rely in the first instance on information provided by a taxpayer to support the method of apportionment or allocation of the relevant expenses. A broad, practical, approach on a reasonable basis is required. Providing the method used can, on an objective basis, be regarded as one which results in a reasonable and appropriate break-up of the expenses, it would normally be acceptable.

13.	What will constitute a reasonable and appropriate basis of apportionment or allocation of expenses will be dependent on a variety of factors, including such things as the nature and size of the respective businesses or other activities of the taxpayer in Australia and abroad, the types of income concerned and the methods used by the taxpayer to generally account for foreign income and expenses. The same method of allocation of expenses may not be appropriate for all classes or categories of expenses or income. For example, the method of allocation of head office expenses may be different from that which is appropriate for the allocation of interest expenses. However, where a resident of Australia carries on business in another country at or through a permanent establishment, a relevant consideration would be that the method used should give a result that is consistent with an "arm's length" apportionment of expenses between the taxpayer's business operations in Australia and those outside Australia. It would also be expected that the same method or methods of allocation of expenses would be used from year to year unless the taxpayer can advance sufficient reasons to justify a change.

14.	For the reasons outlined above, this Ruling does not attempt to specify any formal expense allocation rules. Each case will have to be decided on the basis of all the relevant circumstances and the broad guidelines outlined. Another Ruling will be issued at a later date to elaborate on acceptable methods of allocation of deduction items as experience develops with administration of the FTCS and decisions are made in relation to methods of allocation of particular categories of deduction items in particular circumstances.

15.	It will be necessary for all claims for allocation of deductions to foreign income to be accompanied by a statement showing the basis of that allocation. The basis of allocation used could be expected to be subject to review, and adjustment where necessary, either at the time of assessment or upon post-issue examination and audit. It should be also noted that section 136AE contains specific provisions that permit claims for expenses relating to the derivation of foreign income, in the circumstances to which the section applies, to be adjusted in accordance with the requirements of those provisions. A taxpayer who is dissatisfied with an adjustment made would, of course, have the usual rights of objection and review.

16.	One example of a situation where an adjustment could be expected is where there has been a "loading" of deductions by the taxpayer against either Australian source or the relevant foreign income component of the assessable income in order to obtain an unwarranted tax advantage. For instance, there may be an excessive allocation of allowable deductions against Australian source income so as to reduce the tax payable in respect of that income and/or to either reduce the amount of a quarantined foreign loss or increase the Australian tax attributable to the relevant foreign income in order to fully utilise available foreign tax credits.

17.	The normal tests for deductibility of expenses in a particular year of income will apply. Nevertheless, instances of contrived foreign expenditure deferral (or income advancement) arising in the transitional period surrounding the termination of the exemption provided by paragraph 23(q) of the Assessment Act and the commencement of the FTCS could be expected to be closely examined with a view to the application of anti-avoidance provisions of the Assessment Act in appropriate cases.

Commissioner of Taxation

10 September 1987


Taxation Ruling IT 2486 Childrens Savings Accounts
Taxation Ruling IT 2486

Income tax: children's savings accounts

Income Tax Rulings do not have the force of law. Each decision made by the Australian Taxation Office is made on the merits of each individual case having regard to any relevant Ruling.

Preamble

1.	This Ruling considers the question of who should pay tax on the interest earned on accounts often referred to as children's savings accounts.

2.	Children's savings accounts may be held with a bank, credit union, building society or other financial institution. The requirements and practices of the financial institutions may vary. The accounts are usually opened and operated by parents but some may be opened by others such as grandparents. In some cases children open and operate their own accounts. Many accounts are opened in the names of the children while others are called trust accounts.

3.	The problem for the Taxation Office is that some people are using children's savings accounts to hide their own money to avoid paying tax on the interest they earn.

4.	Regardless of the name and type of the account, the essential question that must be asked is: "Whose money is it?". If the money really belongs to the parent, in the sense that the parent provided the money and may spend it as he or she likes, then the parent should include the interest in his or her return. If it belongs to the child and the child's total income from all sources is less than $416 no tax is payable and no tax returns will be required.

5.	The answer to the question "Whose money is it?" must inevitably depend upon the facts of each case. If, for example, the account is made up of money the child has received as birthday or Christmas presents, pocket-money or money from newspaper rounds, childminding, etc., then the money in the account should be regarded as that of the child.

6.	On the other hand, if the account contains a large sum of money careful examination is needed to decide where it came from and whose money it really is. There will be other cases where, although an account is opened by a parent in a child's name, the parent spends or intends to use the funds in the account as if they belonged to the parent. In such cases the money in the account will be treated as belonging to the parent.

7.	As a general rule, where the Taxation Office is satisfied that the money in the account really belongs to the child, it will not insist on a strict application of the trust provisions of the Income Tax Assessment Act where the account is operated by a parent as trustee. Where the interest is shown in a tax return lodged by a child a trust tax return will not be necessary.

8.	In contrast, the Taxation Office will rely on all arguments available to it to combat the practice by some people of using children's savings accounts to invest their own money and avoid paying tax on the interest they earn.

Commissioner of Taxation

18 July 1988


Taxation Ruling IT 2507 Foreign tax credit system - foreign taxes eligible for credit against Australian income tax
Taxation Ruling IT 2507

Income tax: foreign tax credit system – foreign taxes eligible for credit against Australian income tax

Preamble

1.	Taxation Ruling No. IT 2437 sets out the relevant legislative provisions and general criteria which apply in determining whether a foreign tax is a creditable tax under the general foreign tax credit system (FTCS).

2.	That Ruling contains a non-exhaustive list of foreign taxes which are recognised as creditable taxes. Paragraph 7 of the Ruling foreshadows periodical updates of that list – in the form of future Rulings incorporating an updated consolidated list of creditable taxes – as a consequence of changes in other countries' taxes and as other foreign taxes are admitted as creditable taxes. This Ruling represents the first such update.

3.	While the issue of this Ruling in that form will obviate the need for reference back to the list of creditable taxes contained in IT 2437, the comments in the Preamble to that Ruling concerning the relevant statutory provisions and guidelines for creditable tax determinations remain pertinent. In particular, it is emphasised that taxpayers who seek credit for foreign taxes not identified in this Ruling (or in the subsequent Rulings) should supply the following details of those taxes in the relevant income tax returns:

•	the precise title of the tax;

•	the title of the law under which the tax is imposed;

•	whether the tax is levied by a national, state or local authority and the name of that authority; and

•	a description of the nature of the tax and the basis for its implementation.

4.	Decisions as to whether particular foreign taxes not included in this Ruling (or in subsequent Rulings) are creditable taxes under the FTCS will continue to be taken in National Office. Branch Offices should therefore refer enquiries received, or claims in returns, in relation to such taxes to National Office for consideration and advice. It would also continue to assist with the processing of returns if taxpayers were to supply relevant details to National Office as soon as a liability to pay such a foreign tax becomes apparent.

RULING

5.	Subject to the provisions of Division 18 of Part III of the Income Tax Assessment Act 1936, a taxpayer will be entitled to a credit against Australian tax payable on foreign income for any of the foreign taxes listed below paid in respect of that income (changes and additions to the taxes listed in IT 2437 are marked with an asterisk):

ARGENTINA

•	Income tax (Impuesto a las ganancias)

•	Tax on casual gains (Impuesto sobre los beneficios eventuales)

AUSTRIA

•	Income tax (Einkommensteuer)

•	Corporation tax (Korperschaftsteuer)

•	Tax on Interest Yields (Zinserstragsteuer)

•	Directors' tax (Aufsichtsratsabgabe)

•	Tax on commercial and industrial enterprises (Gewerbesteuer), only where levied on a basis other than capital or the sum of wages

BANGLADESH

•	Income tax

BELGIUM

•	Individual income tax (impot des personnes physiques/personen belasting)

•	Corporate income tax (impot des societes/vennootschapsbelasting)

•	Income tax on legal entities (impot des personnes morales/rechtspersonenbelasting)

•	Income tax on non-residents (impot des non-residents/belasting der nietverb-lijfhouders) including the prepayments, the surcharges on these taxes and prepayments, and the communal supplement to the individual income tax.

BRAZIL

•	Income tax (Imposto de renda)

•	Withholding tax on pure income, e.g. interest or dividends

•	Supplementary tax (Imposto suplementar), where charged on dividends or branch profits arising in Brazil

•	Payments to the development funds PIN and PIS (Programa de integracao nacional/social) and MOBRAL (Fundacao moviments brasileiro de alfabetizacao)

BRUNEI

•	Income tax

•	Petroleum income tax

BURMA

•	Income tax

CANADA

•	Federal: Income taxes imposed by the Government of Canada

•	Provincial:

ALBERTA

-	Provincial income tax

BRITISH COLUMBIA

-	Provincial income tax

-	Mining tax

-	Mineral resource tax

-	Logging tax

MANITOBA

-	Provincial income tax

NEW BRUNSWICK

-	Provincial income tax

-	Mining tax

NEWFOUNDLAND

-	Provincial income tax

-	Mining tax

NOVA SCOTIA

-	Provincial income tax

-	Mining tax

ONTARIO

-	Provincial corporation tax on company profits

-	Provincial income tax on individuals

-	Mining tax

PRINCE EDWARD ISLAND

-	Provincial income tax

QUEBEC

-	Provincial corporation tax on company profits

-	Provincial income tax on individuals

-	Mining tax

-	Logging tax

SASKATCHEWAN

-	Provincial income tax

-	Mining royalty tax

CHILE

•	Income tax (Impuesto a la renta)

•	Additional tax (Impuesto adicional)

•	Additional tax (Tasa adicional)

CHINA

•	Individual income tax

•	Income tax concerning joint ventures with Chinese and foreign investment

•	Income tax concerning foreign enterprises

•	Local income tax

COOK ISLANDS

•	*Income tax (including withholding tax)

CYPRUS

•	Income tax

•	Special contributions under Law 55 of 1974 and subsequent annual extensions

CZECHOSLOVAKIA

•	Tax on profits (Dan ze zisku)

•	Artists' tax (Dan z prijmu literarni a umelecke cinnosti)

DENMARK

•	Income taxes to the State and to the municipalities (indkomstskatterne til staten og til kommunerne)

FINLAND

•	State income tax

•	Communal tax

•	Church tax

•	Tax withheld at source from non-residents' income

FRANCE

•	Income tax and corporation tax including any withholding tax, prepayment (precompte) or advance payment with respect to the aforesaid taxes.

FRENCH POLYNESIA (TAHITI)

•	Corporation tax (Impot sur les benefices des societes)

•	Territorial solidarity tax (Prelevement territorial de solidarite)

•	Extraordinary solidarity tax (Prelevement exceptionnel de solidarite)

FIJI

•	Income tax (including basic tax and normal tax)

•	Non-resident dividend withholding tax

•	Interest withholding tax

•	Royalty withholding tax

•	Dividend tax

•	Land sales tax

GERMAN DEMOCRATIC REPUBLIC

•	Corporation tax (korperschaftsteuer)

•	Trade tax (Gewerbesteuer) to the extent that it is computed by reference to trading profits

•	Wages tax (Lohnsteuer)

GERMANY (FEDERAL REPUBLIC)

•	Income tax (Einkommensteuer) including the surcharge (Erganzungsabgabe) thereon

•	Corporation tax (korperschaftsteuer) including the surcharge (Erganzungsabgabe) thereon

•	Trade tax (Gewerbesteuer) only where it is levied on a basis other than capital or pay-roll

GHANA

•	*Income tax

GREECE

•	Income tax, including schedular or analytical tax

HONG KONG

•	Tax on earnings, profits and interest, comprising:

-	salaries tax

-	profits tax

-	interest tax

HUNGARY

•	Income taxes (a jovedelemadok)

•	Profit taxes (a nyeresegadok)

•	Enterprises special tax (a vallalati kulonado)

•	Contribution to communal development (a kozseg-fejlesztesi hozzajarulas)

•	Levy on dividends and profit distributions of commercial companies (a kereskedelmi tarsasagok osztalek es nyereseg kifizetesei utani illetek)

INDIA

•	Income tax, including any surcharge thereon

•	Income tax and super tax levied by States on agricultural income

•	Surtax imposed on chargeable profits of companies

INDONESIA

•	Income tax (pajak pendapatan)

•	Company tax (pajak perseroan)

•	Withholding tax on interest, dividends and royalties (pajak atas bunga, dividen dan royalty)

IRELAND

•	Income tax

•	Corporation tax

•	Capital gains tax

ISRAEL

•	Income tax (including capital gains tax)

•	Company tax

•	Tax on gains from the sale of land under the Land Appreciation Tax Law

ITALY

•	Individual income tax (Imposta sul reddito delle persone fisiche

•	Corporate income tax (Imposta sul reddito delle persone giuridiche) even if they are collected by withholding taxes at source

•	Local tax on income (Imposta locale sui redditi)

•	Communal tax on capital appreciation of real property (Imposta comunale sull incremento di valore degli imm (INVIM)), where charged on a capital gain also chargeable in Australia.

JAPAN

•	Income tax

•	Corporation tax

•	Enterprise tax, so far as payable on profits or income

•	Local (prefectural or municipal) inhabitant taxes, so far as payable on profits, income or chargeable gains from sources in Japan

JERSEY

•	*Income tax

KENYA

•	Income tax

REPUBLIC OF KIRIBATI

•	*Income tax

REPUBLIC OF KOREA

•	Income tax

•	Corporation tax

•	Inhabitant tax

•	Defence tax, where charged by reference to income tax or corporation tax

LIBERIA

•	*Income tax

LUXEMBOURG

•	Income tax on individuals (Impot sur le revenu des personnes physiques)

•	Tax on fees of directors of companies (Impot sur les tantiemes)

•	Corporation tax (Impot sur le revenu des collectivites)

•	Tax on the total amount of wages and salaries (Impot commercial communal Y compris limpot sur le total des salaries), except in so far as it is computed on a basis other than profits

MACAU

•	Complementary tax on income (Imposto comp-lementar de rendimentos)

MALAYSIA

•	Income tax and excess profit tax

•	Supplementary income taxes (i.e. tin profits tax, development tax and timber profits tax)

•	Petroleum income tax

•	Real property gains tax

MALTA

•	Income tax, including prepayments of tax, whether made by deduction at source or otherwise

MEXICO

•	Income tax

•	Federal District tax on income from capital (Impuesto sobre productos de capitales)

•	Federal District surcharge, in so far as charged on the tax above

MONACO

•	Tax on profits (Impot sur les benefices)

NETHERLANDS

•	Income tax (Inkomstenbelasting)

•	Wages tax (Loonbelasting)

•	Corporation tax (vennootschapsbelasting)

•	Dividend tax (Dividend belasting)

NEW ZEALAND

•	Income tax

•	Excess retention tax

•	*Non-resident withholding tax

NIGERIA

•	*Personal income tax

NIUE

•	*Income tax

NORWAY

•	National tax on income (Inntektsskatt til staten)

•	County municipal tax on income (Inntektsskatt til fylkeskommunen)

•	Municipal tax on income (Inntektsskatt til kommunen)

•	National contributions to the Tax Equalisation Fund (Fellesskatt til Skattefordelingsfondet)

•	National tax relating to income from the exploration for and the exploitation of submarine petroleum resources and activities and work relating thereto, including pipeline transport of petroleum produced (Skatt til staten vedrorende inntekt og formue i forbindelse med undersokelse etter og utnyttelse av undersjoiske petroleumsforekomster og dertil knyttet virksomhet og arbeid, herunder rorledningstransport av utvunnet petroleum)

•	National dues on remuneration to non-resident artistes (avgift til staten av honorarer som tilfaller kunstnere bosatt i utlandet)

•	Seamen's tax (Sjomannsskatt)

PAKISTAN

•	Income tax

•	Super tax

PAPUA NEW GUINEA

•	The Income tax imposed under the law of Papua New Guinea, including:

-	salary or wages tax;

-	additional profits tax upon taxable additional profits from mining operations;

-	additional profits tax upon taxable additional profits from petroleum operations;

-	specific gains tax upon taxable specific gains; and

-	dividend withholding tax upon taxable dividend income.

PHILIPPINES

•	Income tax imposed by the Government of the Republic of the Philippines

POLAND

•	Income tax (podatek dochodowy)

•	Tax on wages and salaries (podatek ad wynagrodzen)

•	Surcharge on the income tax or on the tax on wages or salaries (podatek wyrownawczy)

PORTUGAL

•	Agricultural tax (Imposto sobre a industria agricola)

•	Industrial tax (Contribuicao industrial)

•	Tax on income from capital (Imposto de capitais)

•	Professional tax (Imposto profissional)

•	Complementary tax (Imposto complementar)

•	Tax on capital gains (Imposto de mais-valias)

•	Any surcharges on the preceding taxes

ROMANIA

•	Tax on incomes derived by individuals and corporate bodies (Impozitul pe veniturile realizate de persoane fizice si juridice)

•	Tax on the profits of joint companies constituted with the participation of some Romanian economic organisations and some foreign partners (Impoz-itul pe beneficiile societatilor mixte constituite cu participare romana si straina)

•	Tax on income realised from agricultural activities (Impozitul pe veniturile realizate din activitati agricole)

SINGAPORE

•	Income tax

SOLOMON ISLANDS

•	Income tax

SOUTH AFRICA

•	Normal tax (the general income tax)

•	Non-resident shareholders' tax

•	Undistributed profits tax

•	Non-residents' tax on interest

•	*Non-residents' tax on royalties

SPAIN

•	Individual income tax (Impuesto sobre la renta de las personas fisicas)

•	Company tax (Impuesto sobre sociedades)

•	Local taxes on income

•	*Chamber of Commerce surcharge based on admissible taxes

SRI LANKA

•	Income tax

SWEDEN

•	State income tax including sailors' tax and coupon tax

•	Tax on undistributed profits of companies and the tax on distribution in connection with reduction of share capital or the winding-up of a company

•	Tax on public entertainers

•	Communal income tax

SWITZERLAND

•	The Federal, cantonal and communal taxes on income (total income, earned income, income from capital, industrial and commercial profits and other items of income)

TAIWAN

•	Business income tax

•	Personal income tax

•	Withholding tax on interest

•	Withholding tax on dividends

THAILAND

•	Income tax

•	Petroleum income tax

TURKEY

•	Income tax, including withholding or "stoppage" tax where charged on net profits

•	Corporation tax, where charged on net profits

TUVALU

•	Income tax

UNITED KINGDOM

•	Income tax (including surtax)

•	Corporation tax

•	Capital gains tax

UNITED STATES OF AMERICA

•	Federal : Federal income taxes imposed by the Internal Revenue Code, but excluding the accumulated earnings tax and the personal holding company tax

•	*Contributions under the Federal Insurance Contributions Act (FICA)

•	State or other: As detailed below, but note that any state or other tax which may be construed as a unitary tax (as defined by subsection 6AB(6) of the Australian Income Tax Assessment Act) is not creditable

ALABAMA

-	Income tax on individuals

-	General income tax

ALASKA

-	General income tax

ARIZONA

-	General income tax

ARKANSAS

-	Income tax

CALIFORNIA

-	Bank and corporation income tax

-	*Bank and corporation franchise tax

-	Excise (income) tax, except where it represents a minimum levy

-	Personal income tax

-	Insurance companies tax on marine insurance companies

COLORADO

-	General income tax

-	Excise (income) tax

CONNECTICUT

-	Corporation business tax where it is charged on income

DELAWARE

-	Corporation income tax

-	Personal income tax

DISTRICT OF COLUMBIA

-	Individual and corporate income tax

FLORIDA

-	Corporation income tax

GEORGIA

-	General income tax

HAWAII

-	General income tax

IDAHO

-	General income tax

ILLINOIS

-	Income tax

-	Corporate replacement income tax (personal property replacement tax)

IOWA

-	General income tax

KANSAS

-	Income tax

KENTUCKY

-	General income tax

LOUISIANA

-	General income tax

MAINE

-	Corporate income tax

-	Personal income tax

MARYLAND

-	Income tax

MASSACHUSETTS

-	Corporate excise (income) tax, where charged on net income

-	Personal income tax

MICHIGAN

-	Income tax

-	Single business tax

MINNESOTA

-	Income tax

MISSOURI

-	Income tax

MONTANA

-	Corporate income tax (licence)

-	Personal income tax

NEBRASKA

-	Personal income tax

NEW HAMPSHIRE

-	Business profits tax

NEW JERSEY

-	Corporation franchise tax except where it represents a minimum levy or is charged on amounts other than net income

-	Insurance companies tax on marine insurance companies

-	Personal income tax

NEW MEXICO

-	Income tax

NEW YORK CITY

-	Earnings tax on non-residents where it is charged on salaries

-	Financial corporation tax where it is charged on income

-	General corporate (income) tax, where charged on net income

-	Personal income tax on residents where it is charged on salaries

NEW YORK STATE

-	Personal income tax

-	Unincorporated business tax

-	*Corporation franchise tax where it is charged on the basis of net income. Where charged on a basis other than net income, credit is allowable up to the amount of tax that equates with the amount of tax that would have been payable if the net income basis had applied

NORTH CAROLINA

-	General income tax

-	Financial institutions excise tax, except where it represents a minimum levy

NORTH DAKOTA

-	General income tax

OHIO

-	Corporation franchise tax when charged on net income

-	Income tax (Canton, Cincinatti, Cleveland, Columbus and Toledo)

-	Net profits tax (Cleveland)

OKLAHOMA

-	General income tax

OREGON

-	Corporate (excise) income tax

-	Personal income tax

PENNSYLVANIA

-	Corporate net income tax except where it is charged on amounts other than net income

-	Personal income tax

-	Philadelphia net profits and wages tax

-	Philadelphia city tax

RHODE ISLAND

-	Business corporate tax where charged on net income

SOUTH CAROLINA

-	Income tax

TENNESSEE

-	Corporate excise (income) tax

UTAH

-	Corporation franchise tax when charged on net income

VERMONT

-	Corporate income tax

-	Personal income tax

VIRGINIA

-	Direct corporate income tax

-	Personal income tax

WISCONSIN

-	Corporate franchise tax

-	Income tax

U.S.S.R.

•	Income tax on foreign legal persons

•	Income tax on the population

WESTERN SAMOA

•	Income tax

YUGOSLAVIA

•	Tax on income of a basic organisation of associated labour

•	Tax on a worker's personal income

•	Tax on personal income derived from independent exercise of agricultural activity

•	Tax on personal income derived from independent exercise of economic activity

•	Tax on personal income derived from independent exercise of professional activity

•	Tax on personal income derived from copyrights, patents and technical innovations

•	Tax on revenue derived from capital and capital rights

•	Tax on total revenue of citizens

•	Tax on income of a foreign person engaged in economic and professional activities

•	Tax on compensation obtained by a foreign person from investments in a domestic organisation of associated labour

•	Tax on income of a foreign person carrying out investment projects

•	Tax on revenue of a foreign person carrying on passenger and cargo transport

Commissioner of Taxation

10 November 1988


Taxation Ruling IT 2527 Foreign tax credit system - procedures in relation to claims for foreign tax paid
Taxation Ruling IT 2527

Income tax: foreign tax credit system – procedures in relation to claims for foreign tax paid

Contents:

Preamble

Ruling

Foreign tax must be paid and not just accrued

Apportionment of foreign tax and foreign income

Eligibility of foreign taxes for FTCS purposes

Foreign taxes in excess of limited rates of tax specified...

Documentary evidence to support claims for foreign tax credits...

General issues

Individual taxpayers

Partnerships

Companies and underlying tax credits

Trusts

Preamble

1.	The primary purpose of this Ruling is to set out rules for the practical administration of the requirement of subsection 160AF(1) of the Income Tax Assessment Act ("the Assessment Act") that foreign tax claimed as a credit must have been paid before it may be offset against the Australian tax payable on the foreign income. It should be read in conjunction with Taxation Rulings Nos. IT 2528 and IT 2529 which address other aspects of the practical administration of that requirement.

2.	These Rulings have been developed after extensive examination and review of the issues involved in the light of comments and suggestions received from various professional bodies and interested parties. Many of those comments and suggestions have been accommodated within the Rulings. While this process has delayed the issue of these Rulings, it has nevertheless assisted greatly in finalisation of the rules and approaches reflected in them.

3.	Subsection 160AF(1) is the main operative provision of the general foreign tax credit system (FTCS) of unilateral double tax relief which has applied from the commencement of the 1987-88 year of income. Under this subsection, Australian resident taxpayers are entitled to claim credit for foreign tax paid on foreign income against the Australian tax payable on that income. An Australian company which receives a dividend from a related foreign company (in terms of section 160AFB) may also be entitled to a credit for underlying foreign tax paid by the foreign company on the profits out of which the dividend is paid (section 160AFC). In all cases, the amount of credit to be allowed for foreign tax paid is limited by subsection 160AF(1) to the Australian tax payable on the relevant foreign income. That income is taken, for the purposes of the Assessment Act, to be the amount of such income received as grossed-up, where appropriate, by the foreign tax paid in respect of that income (section 6AC).

4.	When determining the amount of foreign tax eligible for credit relief in terms of subsection 160AF(1), regard must be had to subsection 160AF(2). That subsection ensures that if a taxpayer is entitled to have any foreign tax that was deducted at source reduced by electing to have tax determined on an assessment basis, then, even if the taxpayer has not taken advantage of that reduction, credit will be allowed only for the notional reduced foreign tax.

5.	Where the amount of foreign tax paid in respect of foreign income that is included in assessable income of a year of income exceeds the Australian tax payable on that income, the excess foreign tax cannot be carried forward or carried back for foreign tax credit relief purposes to other years of income. However, such excess foreign tax credits arising in a year of income are transferable within wholly-owned company groups for set-off against Australian tax payable on other foreign income by other Australian resident companies in the group in the same income year (section 160AFE).

6.	Subsection 160AF(1) specifies two basic tests that must be satisfied before any credit for foreign tax paid can be allowed. These tests are:

(a)	that the assessable income of a year of income of a resident taxpayer includes foreign income (as defined by subsection 6AB(1)); and

(b)	that the taxpayer has paid foreign tax (as defined by subsection 6AB(2)) in respect of that foreign income, being tax for which the taxpayer was personally liable.

It is important to note in this context that in the situations of "indirect payment" of foreign tax described in subsection 6AB(3), e.g., where foreign withholding tax applies, the taxpayer is deemed to have been personally liable for, and to have paid, the foreign tax.

7.	Where both of these tests are met, a credit for the foreign tax paid is authorised to the extent of the amount of Australian tax payable on the foreign income. This amount is calculated – in accordance with the formula set out in subsection 160AF(3) – by applying the "average rate of Australian tax" to the "adjusted net foreign income" (both terms being defined in subsection 160AF(8)), and deducting from the resultant amount any rebates relating exclusively to the foreign income to which the taxpayer is entitled, other than a rebate allowable under a Rates Act for the year of tax. The determination of the average rate of Australian tax takes into account the Medicare levy (by reason of subsection 251R(7) of the Assessment Act), and the "exemption with progression" measures contained in subsections 23AF(17A) and 23AG(4) in cases where those provisions of the Assessment Act apply to foreign earnings.

8.	Other measures contained in section 160AF modify this general formula to meet the special circumstances of private companies remaining subject to any additional tax under Division 7, and of persons liable to pay tax under section 94 on uncontrolled partnership income, on income of revocable trusts and of certain trusts for minors.

9.	In the case of foreign earnings subject to partial exemption from Australian tax under subsection 23AG(2), subsection 160AF(6) ensures that the amount of credit to be allowed under subsection 160AF(1) is pro-rated in the same proportion as the amount of assessable foreign earnings income bears to the total foreign earnings. By this means a foreign tax credit will be given only in respect of that portion of the foreign tax paid that is attributable to the foreign earnings included in assessable income.

10.	Subsection 160AF(7) requires that the foreign tax credit be determined (on a world-wide basis) separately in relation to all foreign income of a taxpayer that is interest income (as defined in subsection 160AE(3)), offshore banking income (as defined in subsection 160AE(4)) and all other foreign income respectively. Each of these categories of foreign income are referred to as a "class of income" for those purposes, which also accords with their classification respectively as a "single class of income" for various other purposes of the foreign tax credit system (see subsection 51(6), section 79D, and section 160AFD).

11.	The foreign tax paid requirement of subsection 160AF(1) and other matters concerning the administration of section 160AF are discussed in this Ruling under the following headings:

PARAGRAPHS
Foreign tax must be paid and not just accrued.	12-13
Apportionment of foreign tax and foreign income.	14-17
Eligibility of foreign taxes for FTCS purposes.	18-31
Foreign taxes in excess of limited rates of tax specified in Australia's comprehensive taxation agreements.	32-41
Documentary evidence to support claims for foreign tax credits and related matters:
• general issues	42-57
• individual taxpayers	58-63
• partnerships	64-66
• trusts	67-69
• companies and underlying tax credits.	70-74
RULING

Foreign tax must be paid and not just accrued

12.	The governing factor underlying this Ruling is the fundamental requirement of subsection 160AF(1) that the foreign tax must have been paid before it is eligible for consideration for credit relief under that provision of the Assessment Act. Prior to this point in time the question of relief does not arise because double taxation of the foreign income will not have occurred until the foreign tax is, in fact, paid.

13.	Regardless of when the foreign tax is paid, credit for such tax will only be allowed in terms of subsection 160AF(1) in relation to the year of income in which the foreign income giving rise to that tax has been brought to account as assessable income for Australian tax purposes. This result is consistent with the double tax relief purpose of subsection 160AF(1) and the requirement of section 6AC that the foreign income in respect of which the foreign tax credit is allowed is the gross amount of that income before payment of that foreign tax.

Apportionment of foreign tax and foreign income

14.	Taxation Ruling No. IT 2498 provides detailed guidelines as to the acceptable methods of declaring foreign income in Australian income tax returns. It addresses the particular problems encountered with foreign tax years being generally on a different basis to that of the normal Australian fiscal year ended 30 June. In situations in which the special rules relating to the returning by individual taxpayers of foreign income for Australian tax purposes on the basis of the foreign income year, as outlined in that Ruling, apply, there will be no need to dissect the foreign tax paid between more than one Australian tax year. Likewise, taxpayers who have been granted leave to adopt a substituted accounting period which mirrors that of the foreign country or countries in which they derive foreign income should also experience little difficulty in claiming credits for foreign taxes paid on this basis.

15.	However, taxpayers who are required by that Ruling to make a dissection of their foreign income derived during a foreign tax year between two Australian tax years must apportion the foreign tax relating to that foreign income on the same basis as that used for dissecting the income between the various years concerned. For example, if a gross income basis is used for determining the amount of foreign income related to each Australian tax year, then the same method must also be used to dissect the foreign tax paid. Dissection of income on a gross earnings basis but dissection of the tax paid on a days basis will not be acceptable. Dissection on a days basis will generally only be appropriate in cases where the foreign income is being derived at roughly equal amounts throughout the year, such as income earned in overseas employment.

16.	The net amounts on which tax is assessed (or levied) for Australian and foreign tax purposes will not always be the same. For instance, certain deductions may be allowable under the Assessment Act which are not deductible under the income tax law of the country of source. The reverse may also be the case. Irrespective of whether this situation occurs, the foreign tax credit to be allowed is to be the actual amount of foreign tax paid in respect of the foreign income included in the taxpayer's assessable income for the year of income subject, of course, to the limitation provided by paragraphs (c) and (d) of subsection 160AF(1). The following examples illustrate the treatment to be adopted in the above circumstances:

EXAMPLE 1

Foreign country assessment
Gross foreign branch profits	$100
less deductions allowable under foreign law	10
Net income	90
Foreign tax (33%)	$29.70
Australian assessment
Gross foreign branch profits	$100
less deductions allowable under Australian law	20
Net income	80
Australian tax (39%)	$31.20
less foreign tax credit	29.70
Net Australian tax payable	1.50
EXAMPLE 2

Foreign country assessment
Gross foreign branch profits	$100
less deductions allowable under foreign law	20
Net income	80
Foreign tax (33%)	$26.40
Australian assessment
Gross foreign branch profits	$100
less deductions allowable under Australian law	10
Net income	90
Australian tax (39%)	$35.10
less foreign tax credit	26.40
Net Australian tax payable	8.70
17.	Subsections 20(2) and 20(4) require that any amount of foreign tax paid in respect of certain categories of foreign income shall be expressed in Australian currency at the exchange rate applicable at the time when the tax is paid. That rate will normally be the rate applicable at the time of payment of the relevant foreign assessment. (See Taxation Ruling No. IT 2498 and paragraph 44 of this Ruling). For other foreign income and foreign tax, subsection 20(3) requires the currency translation to be based on the exchange rate on the day of remittance to Australia of the relevant foreign income or, for such income that is not remitted to Australia during the year, the last day in the year of income during which the income was derived. This requirement does not alter the fact that credit for foreign tax paid is to be allowed in relation to the Australian year of income for which the taxpayer's assessable income includes the foreign income in respect of which the foreign tax has been paid.

Eligibility of foreign taxes for FTCS purposes

18.	Under subsection 6AB(2), foreign taxes for which credit will be allowed will be those taxes imposed on income and gains that are basically similar in nature to the Australian income tax. A credit is not to be allowed pursuant to that subsection for unitary or credit absorption taxes. (See also Taxation Rulings Nos. IT 2437 and IT 2507 concerning creditable foreign taxes).

19.	Consistent, however, with the governing factor underlying this Ruling referred to in paragraph 12 above, and in recognition that many foreign tax jurisdictions require progressive tax payments, a credit may be allowed for creditable foreign taxes that can be demonstrated as having been paid by a taxpayer in respect of foreign income prior to the raising of an assessment in respect of that income. Subject to other parts of this Ruling, e.g. paragraphs 28 to 31 concerning the application of subsection 160AF(2) and paragraphs 37 and 38 regarding taxes withheld or imposed by a foreign tax jurisdiction in excess of a relevant tax treaty rate – this position may apply notwithstanding that the payments might not represent the taxpayer's final foreign tax liability in relation to that income.

20.	Accordingly, subject to the availability of evidence of the payments (see paragraphs 42-57 below), advance or instalment payments, including a provisional tax payment of foreign creditable taxes made up to the time of lodgment of the relevant Australian income tax return may be the subject of a credit determination.

21.	An amended credit determination would be required pursuant to section 160AK of the Assessment Act (and an amended assessment pursuant, normally, to subsection 170(3) or 170(4), where necessary to increase or decrease the assessable amount of the foreign income in accordance with section 6AC) in the event of any subsequent foreign tax payments being made by the taxpayer in respect of the relevant foreign income for that year, or a determination by the foreign revenue authorities which results in a refund of some portion of the advance or instalment payments (see further paragraph 54 below concerning amended assessments and Taxation Ruling No. IT 2529 concerning the limitations applicable in relation to amended credit determinations).

22.	However, compensatory taxes paid by a foreign company at the time of payment of a dividend under an imputation system of another country, such as United Kingdom advance corporation tax, do not qualify for consideration when determining foreign underlying tax in respect of dividends distributed from a related foreign company unless and until taken into account for the purposes of discharge of the company's foreign corporate tax liability on its profits, eg., where the foreign corporation tax liability as finally determined by assessment is offset by compensatory tax credits. At that time, the full amount of the foreign corporation tax will qualify for underlying tax credit purposes, i.e., both the compensatory tax credits and the net amount paid on the assessment.

23.	The relevance of the United Kingdom advance corporation tax and its dividend imputation system generally to the treatment for FTCS purposes of dividends received from a United Kingdom resident company by an Australian resident individual shareholder is primarily governed by the terms of Article 8 of the comprehensive taxation agreement with the United Kingdom. That Article was substituted for the former Article 8 by Article II of the Protocol to that agreement – see Schedule 1A of the Income Tax (International Agreements) Act 1953 – and its overall effect is broadly described in paragraph 33 of Taxation Ruling No. IT 2498.

24.	The introduction of the FTCS does not alter the practical effects of Article 8 for Australian tax purposes. The key elements for present purposes are that the United Kingdom may tax an Australian individual shareholder on the sum of the dividend received and the United Kingdom advance corporation tax, but at a rate not exceeding 15 percent. (To the extent that the advance corporation tax credit available in the United Kingdom to the Australian shareholder exceeds that of the treaty rate of tax, he or she may seek a refund from the U.K. tax authorities of the excess credit.)

25.	Against that background, the effect for Australian tax purposes is that the shareholder is assessable in Australia on the sum of the amount of the dividend received as grossed-up by the amount of United Kingdom advance corporation tax, with the shareholder's foreign tax credit entitlement being determined on the basis of the United Kingdom treaty rate limit of 15 percent of that sum.

26.	Foreign "taxes" which represent amounts paid to a foreign government to satisfy a liability for interest, fines, penalties or any other similar obligations are not income taxes and do not qualify for credit relief. That principle is recognised internationally and is reflected in Australia's current comprehensive taxation agreements. Each of those agreements specifically deny "tax" status to any amounts which represent a penalty or interest imposed under the law in force in Australia or in the treaty partner country relating to the taxes to which the agreement applies, thereby preventing such amounts from being eligible for credit relief under the respective treaties.

27.	It follows from the "class of income" basis for the allowance of foreign tax credits (see paragraph 10 above), that where creditable foreign tax has not been paid in respect of a particular class of foreign income, credit will not be allowed against the Australian tax payable on that income, even though creditable foreign tax may have been paid in respect of foreign income of another class. However, where creditable foreign tax has been paid in respect of part (but not all) of the foreign income of a particular class, the taxed and untaxed foreign income of that class will be combined and credit will be allowed for the amount of the foreign tax paid against, and up to the amount of, the Australian tax payable on that class of foreign income – Taxation Ruling No. IT 2508 refers.

28.	As mentioned in paragraph 4 above, subsection 160AF(2) deals with the situation where foreign tax has been deducted from the income of a taxpayer derived from sources in a foreign country and the taxpayer could have elected, under the law of that country, to have the taxpayer's liability to tax in that country determined on an assessment basis. Where this occurs, the subsection requires that the taxpayer be treated, for the purposes of paragraph 160AF (1)(c), as being entitled to foreign tax credit relief in respect of the foreign income equal to the amount (if any) by which the liability to foreign tax on that income would have been reduced if the liability had been so determined.

29.	An example of such a situation has arisen in the case of a non-resident of the United States (an Australian resident taxpayer) deriving income from real property from sources within the United States. An election available to such non-residents under the United States law permitted the taxpayer to have tax applied on a net basis rather than being taxed on a gross (withholding) basis. It was ruled in that case that although the taxpayer had not filed an American income tax return to obtain the advantage of a lesser rate of United States tax, the taxpayer would only be entitled to a foreign tax credit in the Australian tax assessment at the reduced rate of United States tax, determined on the basis of a notional estimate of the United States tax that would have been payable under the United States law if a return had been lodged.

30.	In other cases in which subsection 160AF(2) is applicable, it is consistent with that approach that the taxpayer need not file an income tax return in the foreign country in order to determine the amount of foreign tax payable on the foreign income on an assessment basis. Such a requirement could be seen to be placing an unnecessary burden on the taxpayer and lead to undue delays in determining the amount of foreign tax properly creditable pursuant to subsection 160AF(2) in respect of the foreign income.

31.	Accordingly, a notional estimate submitted by the taxpayer of the foreign tax payable on an assessment basis, together with details of the basis for that estimate, could be accepted as sufficient for purposes of determination of the foreign tax properly creditable provided the basis for the estimate appears to substantially accord with the relevant provisions of the tax laws of the foreign country concerned.

Foreign taxes in excess of limited rates of tax specified in Australia's comprehensive taxation agreements

32.	In general, Australia's comprehensive taxation agreements specify a limit on the rate of tax that each Contracting State is authorised to impose on most income consisting of interest, dividends and royalties flowing between the two treaty countries. However, despite rate limitations being imposed on these particular classes of income, certain foreign tax jurisdictions require that they sight a certificate of residence or taxable status in Australia, issued by the Australian Taxation Office, prior to the income remittance being made.

33.	The certificate would confirm, for the purposes of the relevant treaty, that the person stated in the certificate is entitled to the treaty rate of tax by virtue of being a resident of Australia. Production of such a certificate will enable the reduced (treaty) rate of tax to be applied to the remittance rather than the higher source country rate. Where an Australian resident is not entitled to a reduced rate of foreign tax (see for example, Article 9(3) of the New Zealand comprehensive taxation agreement), the taxpayer's foreign tax credit entitlement will, of course, be determined on the basis of the full amount of foreign tax paid.

34.	Some foreign tax jurisdictions apply, as a matter of course, their higher domestic rate of tax to all remittances but then allow the non-resident recipient to claim a refund of the excess over the treaty rate at a later date, provided the person claiming the refund can provide proof of Australian resident status for Australian income tax purposes.

35.	To facilitate this process, many of these countries have designed special claim forms (stocks of most of which are held by the various branch Taxation Offices) which must be completed in order to obtain the benefit of the treaty rate. It is important to note that certification of such forms prior to their being on-forwarded to the relevant foreign tax authority is necessary. Such certification should be carried out by the relevant branch Taxation Office at which taxpayers submit their annual income tax returns. Taxpayers should also supply their Australian income tax file number when making requests for certification of the foreign claim forms.

36.	In cases where proof of residential status is required but no specific form exists, application should be made to the relevant branch Taxation Office for either a certificate of residency (for individuals, including partners and beneficiaries) or a certificate of taxable status (for companies and superannuation funds). These one-off official certificates will enable taxpayers to prove to the relevant foreign tax authority that they are entitled to the treaty rate of tax.

37.	The foreign tax jurisdictions involved in such procedures are not technically authorised to withhold or impose tax at a rate higher than that specified in the relevant treaty. Accordingly, credit for such foreign tax in Australia will only be allowed up to the extent of that specified in the treaty, in accordance with the provisions of paragraph 160AF(1)(c). Relief for the purposes of that paragraph is defined in subsection 160AE(1) to mean, in relation to foreign tax, relief in the nature of a credit, rebate, remission or deduction.

38.	By way of example, if country A has concluded a comprehensive taxation agreement with Australia stating that its tax on interest remittances to Australia for the purposes of the Agreement is to be limited to 10 percent, but country A in fact imposes a domestic tax rate of 25 percent upon such a remittance, a credit for the foreign tax will be allowed only up to a maximum of 10 percent (being the treaty rate limit). Country A's tax authorities would be obliged to grant a refund to the taxpayer of the excess over this rate (i.e. 15 percent in this case).

39.	In the majority of cases the taxation treatment of foreign pensions received by Australian residents is governed by the terms of an existing comprehensive taxation agreement. This position is not altered by the FTCS. The FTCS will therefore usually only apply to foreign pension income in the limited number of cases where such pensions are derived from non-treaty countries (i.e. all countries not listed in paragraph 60 below).

40.	This is because most of the comprehensive taxation agreements provide for the taxation of pension income to be restricted to the country of residence of the pension recipient (although there are some exceptions to this rule). Accordingly, where a treaty provides that a particular foreign source pension shall be taxable only in Australia, credit for foreign tax cannot be allowed, even if it has been imposed at source. The question of relief from the imposition of foreign tax or a refund of the foreign tax imposed in such cases must be pursued by the taxpayer with the relevant foreign authorities in accordance with procedures of the type outlined at paragraphs 32 to 36.

41.	The issue of the amount of foreign tax to be recognised for foreign tax credit purposes in relation to foreign pension income to which a treaty applies, or other foreign income subject to a limited foreign tax rate under a treaty, may be subject to further review, of course, in the event of any dispute over the applicability of the treaty in the case of a particular taxpayer. Such a case might arise, for example, should the treaty partner country not accept that the taxpayer is a resident of Australia, or for some other reason consider that the taxpayer is not entitled to the treaty tax rate limit.

Documentary evidence to support claims for foreign tax credits and related matters

General issues

42.	Subject to the special rules outlined in paragraphs 58 to 69 of this Ruling, documentary evidence that the foreign tax has been paid will be required to be submitted where a claim is made for a foreign tax credit. It would assist for this purpose if claims for foreign tax credits and supporting documentary evidence show the following details:

the amount of foreign income in the foreign currency;

the foreign tax year to which the income relates;

the nature and amount of foreign tax levied on the foreign income;

the date upon which the foreign tax was paid;

whether the tax paid represents an advance, instalment, or final, foreign tax payment in relation to the foreign income concerned.

Where a taxpayer can demonstrate that it is not practicable or possible to obtain all of that information, a decision as to whether the information provided is sufficient to allow the claim for credit will need to be made in the relevant branch Taxation Office on a case by case basis (see also paragraph 10 of Taxation Ruling No. IT 2529).

43.	The best form of documentary evidence would be a receipted notice of assessment or similar official receipt or other document evidencing payment of the foreign tax. If the foreign notice has no provision for a cash register receipt, taxpayers will be required to provide a separate receipt to indicate that the foreign tax liability has been paid. A notice of assessment that does not show that the foreign tax has been paid will not constitute sufficient proof that the tax shown on such a notice has been paid.

44.	Depending on the type of income involved, subsections 20(2) and (4) require that all foreign taxes paid in foreign currencies be translated to Australian dollars on the day the relevant foreign tax was paid. That rate will normally be the rate applicable at the time of payment of the relevant assessment. Accordingly, all documentary evidence (especially receipts) will need to indicate the day upon which the foreign tax liability was paid. Taxation Ruling No. IT 2498 provides that where tax paid by instalments or on account is credited against or offset against an ultimate or final assessed tax liability, the rate to apply in respect of the instalments or amounts paid on account may be that applicable at the date of issue of the relevant final assessment. In this circumstance, documentary evidence will need to indicate the date of issue of the assessment. The balance would be translated at the date of payment pursuant to the final assessment.

45.	Alternatively, Taxation Ruling No. IT 2498 also provides that where it can be demonstrated that the final liability amount has been fully settled, the translation in respect of the sum of that liability could be made on the basis of the various exchange rates applicable at the date of each instalment payment and the payment of the final balance. Again suitable documentary evidence will need to be provided. That latter basis of currency translation could also be used in respect of instalment payments of foreign tax of the type described in paragraphs 19 and 20 of this Ruling.

46.	Unlike Australia, some countries do not issue notices of assessment. Therefore, taxpayers who claim a credit for a final foreign tax liability and are unable to provide a notice of assessment for this reason will be permitted to supply a copy of the foreign income tax return accompanied by a receipt verifying that the foreign tax as calculated on the basis of the return has been paid. Other suitable documentation would be a letter from the relevant foreign tax authority stating that all taxes for that year of income have been paid. Any adjustments which may have subsequently been made by the foreign tax authorities should also be included with the copy of the relevant foreign tax return in order that a proper reconciliation can be made between the return submitted and the foreign tax finally paid.

47.	Clearly acceptable evidence to support a claim for a foreign tax credit would be duly certified or authenticated copies of original documents or legible photocopies. In the case of a photocopy of a notice of assessment, receipt or return, there must be kept readily available for comparison on request the original, a duplicate original, or a duly certified or authenticated copy. In all cases the original documents should be retained for 7 years from the date of payment of the foreign tax, as they will be required to be produced should an audit be conducted of the taxpayer's affairs at a later date.

48.	If any of the documentary evidence submitted with the claim is in a foreign language, a translation of those details necessary to allow the taxpayer's foreign tax credit entitlement to be determined should be supplied by the taxpayer.

49.	Where an amount of foreign tax payable in respect of foreign income has not been paid at the time of lodgment of the relevant Australian return of income, a statement to that effect should be included in the return. A claim for allowance of a credit in respect of that tax could be made subsequently when the tax is paid and the relevant documentary evidence becomes available. Similarly, a claim for credit in respect of foreign tax paid could be included in a return in advance of the relevant documentary evidence becoming available. If the foreign tax has not been paid or appropriate documentary evidence is still not available when the assessment is issued, an extension of time to pay the Australian tax assessed as payable in respect of the foreign income may be granted in certain circumstances (see Taxation Ruling No IT 2528).

50.	In the case of most foreign income (including foreign branch or other trading operations, rental income and dividends, interest or royalties subject to a fixed rate of withholding tax), the gross amount of the foreign income would be known and is required to be included in assessable income pursuant to section 6AC and subsection 25(1) of the Assessment Act notwithstanding that a foreign tax credit determination cannot be made, by reason of circumstances described in this Ruling, until after the assessment has issued. That position could also be expected to generally apply where a credit is claimed in respect of advance or instalment payments of creditable foreign taxes. However, it may only be possible in some cases to gross-up the foreign income at the time an assessment is raised by the then known amount of foreign tax paid, with an appropriate amended assessment possibly following later (see paragraphs 19 to 21 above).

51.	However, cases may arise where foreign income is derived by a taxpayer net of foreign tax deductions during a year of income and it is not capable of being grossed-up by the amount of foreign tax paid in respect of that income until the amount of that tax can be accurately quantified. Returns of income containing a statement to that effect may be accepted in such cases and assessments raised on the basis of the foreign income derived net of foreign tax, as it would not be appropriate for lodgment of the Australian return of income, and the raising of the assessment, to be deferred indefinitely. An extension of time to pay the Australian tax assessed as payable in respect of the foreign income would also be available in those circumstances (see Taxation Ruling No. IT 2528).

52.	An example of such a case would be periodical remittances during a year of income of foreign income after deduction of foreign tax at source and due to such matters as variations in the amounts of the periodical remittances, foreign tax charged or exchange rate variations, it is not practicable to determine the gross amount of the foreign income derived during the Australian year of income and the total foreign tax paid for that year until receipt by the taxpayer of an end of year statement from the foreign tax authorities or the remitter of the income (see also paragraph 73 below).

53.	Foreign tax credit determinations (or amended determinations where applicable) should be promptly made subsequent to the issue of an assessment in the cases described in the preceding paragraphs upon production by the taxpayer of documentary evidence of payment of foreign tax and the amount of that tax (see also Taxation Ruling No. IT 2529). Where it is necessary to adjust taxable income, e.g. in the cases described in paragraph 51 because of having to gross-up the assessable amount of foreign income by the amount of foreign tax paid, an amended assessment will also need to be issued.

54.	Such an amended assessment would technically increase the liability of the taxpayer under the assessment that was being amended, but the effect of the application of the foreign tax credit determination would be to result in an overall reduction in the amount of tax payable under the assessment. By reason of lodgment of a return of income on the basis described in paragraph 51, the taxpayer could also be treated, in the absence of evidence to the contrary, as having made a full and true disclosure of the facts known or capable of being known at the time of lodgment of the return with respect to the amount of foreign income derived. Accordingly, in cases of the type addressed in that paragraph, an amended assessment could be treated as authorised by subsection 170(3) of the Assessment Act. (For similar reasons, subsection 170(3) could also normally be regarded as authorising an amended assessment in the case of an increase in taxable income as the result of a subsequent foreign tax payment in addition to or in adjustment of advance or instalment payments of foreign tax that are treated as creditable taxes – see paragraphs 19 to 21 above.)

55.	The amendment of an assessment to increase the taxable income in the circumstances described would be restricted by subsection 170(3) to being made within 3 years of the date that the assessment became due and payable. This 3 year period coincides with the 3 years in which information necessary for a credit determination must be furnished under section 160AM. The assessment could normally be expected, therefore, to qualify for amendment within that 3 year period.

56.	However, section 160AM authorises the Commissioner, in special circumstances, to determine a further period of up to 3 years for the furnishing of all the information necessary for a credit determination. Further consideration is being given to the situation where a credit determination is sought, and an associated amended assessment is required, outside the primary 3 year period referred to in section 160AM or in certain other circumstances.

57.	Where an amended assessment is made because of the circumstances described in paragraphs 51 to 54 the taxpayer should normally, in the absence of evidence to the contrary, fall to be treated as having not made a false or misleading statement (with respect to the amount of the foreign income) attracting additional or penalty tax under Part VII of the Assessment Act. As the tax payable under the amended assessment (after taking into account the foreign tax credit determination) would be less than the tax payable under the assessment that was amended, nor would the taxpayer be liable to pay interest under section 170AA of the Assessment Act.

Individual taxpayers

58.	by Australian resident individuals for credits for foreign tax paid on interest, dividends or royalties derived after the commencement of the 1987-88 year of income will generally be accepted without supporting documentary evidence of the tax paid, provided:

the interest, dividend or royalty income has been derived from a country with which a comprehensive taxation agreement with Australia is in force and an Article of the agreement sets a limit on the source country tax that may be imposed in respect of the interest, dividend or royalty income, as the case may be; and

the country of source of the interest, dividend or royalty payment imposes a tax on the respective interest, dividend or royalty income.

59.	As indicated in paragraphs 32 to 38 of this Ruling, the taxpayer's eligibility for a credit for the foreign tax paid will be determined in those cases on the basis of the rate limit specified in the agreement. See also paragraphs 23 to 25 regarding the position of Australian resident individuals who derive dividends from United Kingdom resident companies.

60.	Comprehensive taxation agreements presently exist with the following countries:

United Kingdom

Switzerland

United States of America

Malaysia

Canada

Sweden

New Zealand

Denmark

Singapore

Republic of Ireland

Japan

Italy

Federal Republic of Germany

Republic of Korea

The Netherlands

Norway

France

Malta

Belgium

Finland

Philippines

Austria

The People's Republic of China (not yet in force)

61.	Although most of those comprehensive agreements provide for a tax rate not exceeding 15 percent of the gross payment to be imposed by the source country on dividend income, some countries such as Singapore and Malaysia do not impose a dividend withholding tax at the present time. Tax that may be shown on company dividend advices as being withheld from the gross dividend is, in fact, tax paid by the company. It is not a tax for which the shareholder is personally liable to pay within the meaning of that expression as given by subsection 6AB(3). Australian individual resident recipients of dividends from these countries are to be assessed on the net dividend received with no credit being allowed. This practice accords with the previous treatment afforded to Singaporean and Malaysian dividends derived by Australian resident individuals in years prior to the commencement of the FTCS.

62.	In all other cases, where the foreign tax paid in respect of foreign income derived by an individual taxpayer does not exceed A$1000, a statement from the taxpayer's tax agent or accountant that the overseas assessment or other documentary evidence has been sighted would be acceptable. Such a statement should normally accompany the return of income in which the relevant foreign income has been declared as assessable income.

63.	Where the foreign tax credit claimed exceeds A$1000 or returns of income have been completed by taxpayers themselves without the assistance of a tax agent or accountant, documentary evidence should be furnished to support a claim for a credit in order that the credit may be allowed.

Partnerships

64.	All foreign income distributed or credited to an Australian partnership in its own right should be included in the calculation of the net income of that partnership if it would be assessable income if derived by a resident individual taxpayer. The rules outlined in paragraphs 58 to 63 concerning individual taxpayers also apply to individuals deriving foreign income through a partnership. The A$1000 limit referred to in paragraphs 62 and 63 is to be applied in respect of each partner in the partnership at any time during the year of income in which the partnership has derived foreign income.

65.	In all other cases, documentary evidence will need to be furnished, preferably with the partnership return. As it is likely only one notice of assessment or receipt will be available as proof that the foreign tax has been paid, individual resident partners will need to indicate in their returns in such cases that the necessary documentary evidence is to be furnished with the relevant partnership return. This will avoid having the claim for credit disallowed.

66.	In situations in which the individual partners are personally liable in their own right in the foreign country on their respective shares of the Australian partnership's foreign income, documentary evidence of the foreign tax paid should continue to be supplied in the individual resident partner's return of income in which the distribution has been declared as assessable income. (This has been the practice in the past with foreign partnership income liable to Australian tax under the former Division 18 relating to income derived from Papua New Guinea.) A statement should accompany the partnership distribution which clearly specifies the amount of the total distribution which consists of foreign income as well as the country of derivation of this income and the type of foreign income received.

Trusts

64.	Public unit trusts which engage independent agents to act on their behalf to receive all the foreign income, pay all the appropriate foreign taxes and remit the net amount to the trust, will be permitted to use the statement of account supplied by the agent as proof of the overseas income having suffered foreign tax. Such statements will be acceptable documentary evidence upon which preparation of income tax returns may be made, provided copies of the same are lodged with the relevant trust returns.

65.	Should the unit trust's affairs be subject to audit at a later stage, the statements previously used for return preparation purposes will need to be substantiated against the official documentary evidence issued by overseas tax administrations proving that the tax has been paid. All other trusts in receipt of foreign income and in respect of which claims for foreign tax credits will be made, either by the trustee or beneficiaries, will need to furnish with the trust return documentary evidence of payment of foreign tax as outlined in paragraphs 42 to 49 of this Ruling.

66.	The foreign tax paid details shown in trust distribution advices provided by a trustee of a trust to beneficiaries or unitholders will normally suffice as sufficient evidence to support a claim for a relevant foreign tax credit where foreign income derived by the trust is assessable to beneficiaries or unitholders and they are entitled to relevant foreign tax credits, pursuant to section 6B and subsections 6AB(3) and (4) of the Assessment Act. Verification of those details, if required, should be obtained by reference to the evidence of foreign tax paid provided by the trustee in the trust return (as set out above), or from the trustee of the trust.

Companies and underlying tax credits

67.	Australian company which derives a dividend from a related foreign company, as determined in accordance with section 160AFB, will be entitled to a credit for the underlying foreign company tax paid by the company from which the dividend is received on that portion of the profits of that company from which the dividends are paid. That underlying tax credit is authorised by paragraph 6AB(2)(c) and section 160AFC in addition to a credit for the foreign withholding or other tax paid on the dividend. Section 160AFC also provides for the credit for underlying foreign company tax to be available in respect of unlimited tiers of related foreign companies.

68.	Companies claiming underlying tax credits will generally be required to furnish a statement from each company in the chain that will demonstrate that the relevant profits from which dividend payments are made have, in fact, borne foreign income tax and the statement should make it clear that the foreign company has paid that amount of foreign tax. These statements will be required to be submitted with the relevant return in which a claim is being made for underlying tax credit.

69.	The need for a separate statement may generally be dispensed with where the published accounts of the foreign company are supplied by the company claiming the underlying tax credit and those accounts contain sufficient details to indicate the foreign tax liability in respect of the relevant profits. Where, because of the operation of deferred tax accounting or some other reason, it is not possible to verify payment of the underlying tax from the tier company's financial statements, other details, such as of the current component (i.e. excluding deferred tax) of the income tax expense charge in the tier company's accounts, may be required.

70.	It is acknowledged that in some circumstances an Australian resident company may be unable to ascertain whether it is entitled to a credit for underlying foreign company tax or the amount of the credit. In other cases, a company may not be able to obtain evidence of payment of underlying tax by a related foreign company. In these circumstances, it would be acceptable for the company to include any dividends received in its assessable income without grossing-up the dividends by the underlying foreign tax and without claiming the underlying credit. This would, of course, increase the incidence of Australian taxation payable.

71.	Where a company chooses this course, a statement to that effect should be included in the relevant return of income. Subject to the statutory limitations on amendment of assessments (see paragraphs 54 to 57 above) and credit determinations, an amended assessment and credit determination would normally be available at a later date should the company subsequently resolve those difficulties and request credit for the underlying tax.

Commissioner of Taxation

4 May 1989


Taxation Ruling IT 2529 Foreign tax credit system - foreign tax credit determinations
Taxation Ruling IT 2529

Income tax: foreign tax credit system – foreign tax credit determinations

Preamble

1.	This Ruling deals with various issues relating to the determination of foreign tax credits. The Ruling has been written against the background of the requirement of subsection 160AF(1) of the Income Tax Assessment Act ("the Assessment Act") that foreign tax claimed as a credit must have been paid before it may be offset against the Australian tax payable on the foreign income. It should be read in conjunction with Taxation Rulings Nos IT 2527 and IT 2528, which address other aspects of the practical administration of that requirement.

2.	Division 19 of the Assessment Act contains a number of requirements governing the procedures for determination by the Commissioner of claims made by persons for foreign tax credits under that Act and the Income Tax (International Agreements) Act 1953. The Division therefore provides the machinery provisions relating to Division 18 (Credits in Respect of Foreign Tax, including credits pursuant to Australia's international taxation agreements), Division 18A (Credits in Respect of Foreign Tax Paid on Certain Film Income) and Division 18B (Credits in Respect of Foreign Tax Paid on Certain Shipping Income). It contains rules relating to amendments of such determinations, objection and appeal rights for taxpayers against such determinations, power for the Commissioner to apply credits in settlement of any outstanding tax and a limitation on the total credits allowable to a person to the amount of Australian tax payable in respect of the taxpayer's taxable income of the year of income.

RULING

3.	Taxation Ruling No. IT 2527 deals generally with the difficulties that can arise in the practical application of subsection 160AF(1) of the Assessment Act where foreign income is included in a return of income of an Australian resident taxpayer for a year of income but the foreign tax on that income has not been paid or is not quantifiable at the time the return is required to be submitted, or where there are delays in obtaining documentary evidence supporting a claim for foreign tax paid. In certain cases an extension of time to pay the Australian tax payable in respect of the foreign income may be granted pending the determination and allowance of the taxpayer's foreign tax credit entitlement (see Taxation Ruling No. IT 2528). However, circumstances of the type addressed in those Rulings are not grounds for the granting to a taxpayer of an extension of time to lodge the relevant return.

4.	Those circumstances affect the making of a determination by the Commissioner (pursuant to subsection 160AI(1) of the Assessment Act) of the taxpayer's foreign tax credit entitlement rather than the making of an assessment. Such a determination does not form part of an assessment (subsection 160AI(2)), and hence an assessment can be made independently of the calculation of the foreign tax credit entitlement.

5.	A person may make a claim for a foreign tax credit either at the time of lodging the return of income which includes foreign income in respect of which foreign tax has been paid or at some later date. Subsections 160AI(1) and (3) require the Commissioner to determine whether a credit claimed by the taxpayer is allowable and, if so, the amount of the credit, whenever the claim is made, and to advise the taxpayer accordingly. While the determination of a credit does not form part of an assessment, the Commissioner's notification may be included either in a notice of assessment (subsection 160AI(4)), or in a separate written advice.

6.	Section 160AM provides that where a person makes a claim for a credit, the credit shall not be allowed unless the taxpayer furnishes to the Commissioner all the information necessary for determining the amount of the credit, i.e., including documentary evidence demonstrating that the relevant foreign tax has been paid and information relating to any reduction or refund of the relevant foreign tax. Such information has to be furnished within three years after the date upon which the Australian tax against which the credit is claimed became due and payable (see also paragraphs 42 to 74 of Taxation Ruling No. IT 2527).

7.	However, the section empowers the Commissioner to determine a further period of up to three years within which to furnish the necessary information in special circumstances. The section does not require for this purpose that the taxpayer advise the Commissioner prior to the expiry of the initial three year period that a further period is required. That power could be expected to be exercised where a taxpayer can demonstrate that the delay in claiming a credit is due to circumstances beyond the control of the taxpayer. An example would be where the delay in claiming a credit is due to action, or inaction, by the relevant foreign revenue authority.

8.	The terms of section 160AM are such that requests made outside these time constraints cannot be allowed. However, the effects of the comments which follow – concerning the procedures to apply where insufficient information has been provided to determine the amount of credit to be allowed and the absence of a time limit on the amendment of a credit determination – may provide some flexibility in that regard in particular cases.

9.	It should also be noted that a credit determination made at a date subsequent to the issue of the relevant assessment, but within the time period specified in section 160AM, would (if no previous credit determination had been made in respect of that assessment) constitute an original determination even though from the view point of practical administration the allowance of any such credit may be included in a notice of amended assessment.

10.	In cases in which insufficient information has been provided to determine the amount of the credit to be allowed, the relevant branch Taxation Office should advise the taxpayer to that effect and remind that person of the time limit imposed by that section for the submission of the additional details required. That notification will not constitute a determination within the context of subsection 160AI(1) and such action by the Commissioner will not of course provide the basis from which a right of objection or appeal can flow. Where, however, on receipt of such a notification a taxpayer advises the Commissioner in writing that additional relevant information cannot or will not be provided, and sets out the pertinent circumstances, the claim for credit will be reviewed. A determination as to allowance or disallowance of the claim for credit will then be notified to the taxpayer. Upon receipt of this latter notification a taxpayer whose claim for a credit is disallowed will have a right of redress pursuant to the objection and appeal provisions – see paragraph 16 below.

11.	Where all the information necessary to make a determination has been supplied by a taxpayer, the Commissioner will notify the taxpayer whether the claim has been allowed in full, allowed in part, or disallowed.

12.	Section 160AK provides for the amendment of a determination of credit. Subsection 160AK(1) permits the Commissioner to amend a determination at any time subject to the succeeding provisions of the section (see paragraph 15 below). Those provisions recognise that a variation of the amount of Australian or foreign tax payable in respect of foreign income may give rise to a consequent variation of the credit allowable. As it is not practicable to determine the period in which the amount of Australian or foreign tax may be altered, it would accordingly be inappropriate for a time limit to apply with respect to the amendment of determinations in these circumstances. Such a limitation could be detrimental to either the taxpayer or the Revenue.

13.	Accordingly, if an amount of foreign tax claimed or allowed as a credit in any year of income is subsequently altered by an overseas tax authority – so as to either increase, decrease or refund the amount of the foreign tax paid – sections 160AK and 160AM require that the relevant branch Taxation Office be notified in order that an appropriate credit determination or amended determination can be made for the Australian year concerned.

14.	As indicated in Taxation Ruling No. IT 2527, a credit determination or amended credit determination may result in a complementary amendment of the taxpayer's assessment for the income year concerned in order to adjust the assessable amount of the relevant foreign income. As also indicated there, further consideration is being given in this context to the situation where the need for a credit determination or amended credit determination might arise outside the relevant time limitations specified in section 170 of the Assessment Act for amendment of assessments.

15.	In certain circumstances (subsections 160AK(2) and (3)), the Commissioner is precluded from amending a determination to decrease or increase a credit to correct an error in law after the end of three years after the date on which the relevant determination was made. For practical purposes, that date may be regarded as the date of issue of the determination notification. Where such a notification is incorporated in a notice of assessment the date of issue of that notice may be treated as the relevant date.

16.	Section 160AL extends to persons claiming credits the same rights of objection and appeal against determinations as are given to taxpayers dissatisfied with their assessments. Accordingly, a valid objection or appeal lodged against either an original or amended credit determination will give rise to an entitlement for the taxpayer to be paid interest on amounts refunded as a result of a successful resolution of that dispute in accordance with the provisions of the Taxation (Interest on Overpayments) Act 1983.

Commissioner of Taxation

4 May 1989


Taxation Ruling IT 2562 Foreign tax credit system (FTCS) - interaction of FTCS provisions with capital gains...
Taxation Ruling IT 2562

Income tax: foreign tax credit system (FTCS) – interaction of FTCS provisions with capital gains and capital losses provisions of Part IIIA of the Act

Contents:

Preamble

Ruling

Appendixes – Examples

Appendix A

Appendix B

Appendix C

Appendix D

Appendix E

Preamble

This Ruling is designed to clarify in general the interaction of the foreign tax credit provisions of Division 18 of Part III of the Income Tax Assessment Act (the Assessment Act) with the capital gains and capital losses provisions of Part IIIA of that Act.

1.	The matter needs to be considered against the background that -

•	Part IIIA generally applies in respect of gains and losses realised on disposals of assets acquired on or after 20 September 1985, and provides for the inclusion in the assessable income of a resident taxpayer of a year of income the amount of the "net capital gain" (determined on a worldwide basis) that accrues to the taxpayer in respect of that year.

•	Prior to the introduction of the general foreign tax credit system (FTCS), with effect from the commencement of the 1987-88 year of income, former paragraph 23(q) of the Assessment Act operated to treat as exempt from income tax (and therefore as excluded from assessable income) most categories of income, or profits or gains of a capital nature, where derived by a resident taxpayer from sources out of Australia and Papua New Guinea and where not exempt from tax in the country of derivation.

•	Since the commencement of the FTCS, an Australian resident taxpayer has generally been assessable to Australian tax on income from all sources (apart from salary or wages and other income exempted under section 23AF or 23AG), with a credit for foreign tax paid on foreign income being allowed against the Australian tax payable in respect of that foreign income.

•	Subsection 6AB(1) effectively defines foreign income for purposes of the Assessment Act to mean income derived from sources in a foreign country or foreign countries (according to ordinary concepts of source of income), while subsection 6AB(2) provides for a reference to foreign tax to include, amongst other taxes, a tax imposed by a law of a foreign country upon profits or gains, whether of an income or capital nature.

•	Subsection 160AE(2) of Division 18 provides, in effect, for a profit of a capital nature derived by a resident taxpayer from a source in a foreign country, hereinafter referred to as a "foreign capital gain", to be treated as foreign income (within the meaning of subsection 6AB(1)) for the purposes of the foreign tax credit provisions of Division 18 providing foreign tax is payable in respect of that gain and it is a gain which is taken into account, pursuant to Part IIIA, in determining the assessable income of the taxpayer for a year of income.

•	Given the worldwide basis for determining a taxpayer's liability for tax in relation to a "net capital gain" and the basic double tax relief purpose of the FTCS, Part IIIA and the FTCS provisions interact in a way that afford the maximum benefit to a taxpayer by way of capital loss offsets against capital gains and foreign tax credit relief entitlements respectively.

RULING

2.	Subsection 6AB(1) refers to income (not assessable income) and therefore does not operate to generally require references to foreign income in the Assessment Act to be read as including foreign capital gains. The purpose, therefore, of subsection 160AE(2) is to complement subsection 6AB(1), for foreign tax credit purposes, by operating where -

(a)	a resident taxpayer realises a foreign capital gain on the disposal of an asset acquired on or after 20 September 1985;

(b)	the whole or a part of that gain is included in the "net capital gain" to be included in the taxpayer's assessable income for the year of income pursuant to the provisions of Part IIIA; and

(c)	foreign tax is paid by the taxpayer in respect of the capital gain,

to deem the amount of the foreign capital gain that is so included in assessable income to be foreign income so that double taxation relief is provided with respect to the foreign tax paid on that gain by way of a foreign tax credit under subsection 160AF(1), in place of the exemption that formerly applied under paragraph 23(q).

Determination of foreign tax credit relief in respect of foreign capital gains

3.	It follows that such an amount of a foreign capital gain falls, together with other relevant foreign income derived by a taxpayer, to be treated as the class of income described as "other income" in subsection 160AF(7). A resident taxpayer is thus entitled to a foreign tax credit in relation to such "other income" and attributable foreign taxes, as determined on a worldwide basis, pursuant to subsection 160AF(1).

4.	In broad terms, a foreign capital gain realised on disposal of an asset acquired before 20 September 1985, or such a gain realised on disposal of an asset acquired on or after that date in respect of which foreign tax is not payable, is not treated under subsection 160AE(2) as foreign income for the purposes of Division 18. Such a gain does not therefore fall to be aggregated with other relevant foreign income, and foreign capital gains that have suffered foreign tax, when determining a taxpayer's foreign tax credit entitlement (on a worldwide basis) with respect to the class of income described as "other income" in subsection 160AF(7).

5.	The references to "foreign income" in Taxation Ruling No. IT 2508 – which deals generally with aggregation of the various classes of income for foreign tax credit purposes and provides for all foreign income, whether or not subject to foreign tax, to be taken into account for those purposes – needs to be read accordingly (i.e. in the light of paragraphs 4 and 5 of this Ruling.)

6.	As indicated earlier, a foreign capital gain (or capital loss in respect of the disposal of an asset situated outside Australia) remains to be brought to account for assessment purposes in accordance with the provisions of Part IIIA. This means, for example, that where in a year of income a taxpayer incurs both foreign and domestic capital losses that are completely absorbed by a domestic capital gain derived in the same year of income by the taxpayer, it is only the resultant net capital gain which is included in the taxpayer's assessable income for the relevant year of income in accordance with the provisions of Part IIIA (as indicated later in this Ruling, the foreign capital loss would not be treated as subject to the foreign loss quarantining provisions of the FTCS).

7.	It follows that as the amount to be included in a taxpayer's assessable income under Part IIIA is the amount of the worldwide "net capital gain" (as determined under that Part) that accrues to a taxpayer in respect of a year of income, subsection 160AE(2) has to be read as deeming to be foreign income only the whole or the part of any foreign capital gain (or gains), in respect of which foreign tax is payable, that is included in the amount of that "net capital gain" of a resident taxpayer for a year of income.

8.	This amount could be greater or smaller than the amount of relevant capital gain (or gains) taken into account for purposes of imposition of the foreign tax. In any event, the foreign tax would in many cases have been imposed on a different basis than that which applies in Australia under Part IIIA with respect to capital gains. Consistent, however, with the approach reflected in paragraph 16 of Taxation Ruling No. IT 2527, the actual amount of foreign tax paid in respect of the relevant foreign capital gain (or gains) is to be taken into account when determining the taxpayer's foreign tax credit entitlement under section 160AF in respect of the deemed foreign income (i.e. the relevant foreign capital gain component of the "net capital gain" which forms part of the taxpayer's assessable income for the year of income).

9.	Consistent also with subsection 160AF(3), the Australian tax payable on the amount of that deemed foreign income is calculated by multiplying that amount by the average rate of tax applicable to the taxable income of the taxpayer for the year of income. Simplified examples are given in Appendix A and Appendix B.

10.	Those examples and the comments in paragraphs 9 and 10 presuppose that the deemed foreign income constitutes the whole of the class of income in relation to the taxpayer described as "other income" in subsection 160AF(7). However, as indicated earlier in this Ruling, where the taxpayer has derived other foreign income of the same class during the income year, the worldwide basis for determining foreign tax credits would require that foreign income and attributable foreign tax to be taken into account also when determining the taxpayer's foreign tax credit entitlement under section 160AF in relation to that class of income.

11.	It follows also from paragraph 8 of this Ruling that situations may arise where the disposal by a resident taxpayer of an asset in a foreign country produces a capital gain which is subject to tax in that country but there is no amount of deemed foreign income pursuant to subsection 160AE(2), and thus no foreign tax credit entitlement under subsection 160AF(1) with respect to the foreign tax paid. This would be the case should the application in relation to the year of income of Part IIIA with respect to that asset disposal (and any other capital gains realised or capital losses incurred by the taxpayer) result in a "net capital loss" for that year for the purposes of that Part.

12.	Further examples relating to the operation of the provisions of Part IIIA and Division 18 are at Appendix C and Appendix D.

Ordering of offset of capital losses against capital gains when determining a "net capital gain"

13.	As already indicated, the FTCS provisions do not override the operational effect of the provisions of Part IIIA of the Assessment Act, the broad scheme of which is that worldwide capital gains that accrue to a resident taxpayer during a year of income and worldwide capital losses that are incurred during the year for the purposes of that Part are "netted" to arrive at the amount of the "net capital gain" or "net capital loss" of the taxpayer for the year. It follows that a foreign capital gain or foreign capital loss for purposes of Part IIIA is not taken into account for purposes of the foreign loss quarantining provisions of former subsection 51(6), section 79D or section 160AFD of the Assessment Act; those provisions are concerned only with losses arising by reason of an excess of allowable deductions over assessable income derived from a "foreign source", within the special meaning of that expression in subsection 160AFD(7), and the offsetting of such losses against income derived in a subsequent year of income from such a "foreign source" from a business or other income-producing activity.

14.	Accordingly, where a resident taxpayer disposes of an asset situated outside Australia and incurs in a year of income a foreign capital loss for purposes of Part IIIA, that amount is available under that Part, together with any domestic capital loss, for offset against any worldwide capital gains derived by the taxpayer in that year when determining the "net capital gain" of the taxpayer for the year. If no such capital gains have been derived, or a "net capital loss" otherwise results, the amount of that loss for the year (determined on a worldwide basis) is available to be carried forward to the next succeeding year of income for the purpose of calculating the taxpayer's "net capital gain" or "net capital loss" for that year.

15.	Given that situation, it would be appropriate for priority to be given, when determining the "net capital gain" to be included in a taxpayer's assessable income (or the "net capital loss" of the taxpayer) for a year of income under Part IIIA, to ensuring maximum foreign tax credit relief is available to the taxpayer.

16.	Accordingly, any foreign and/or Australian "sourced" capital losses (of the same year of income or available for carry forward from previous years pursuant to Part IIIA) are to be offset against the sum of Australian "sourced" capital gains and foreign capital gains in respect of which no foreign tax is paid, with only the excess (if any) being offset against foreign capital gains subject to foreign tax. This approach will afford maximum foreign tax credit relief with respect to the latter gains – see example at Appendix E. It is noted that this approach is broadly consistent with the design under the FTCS of the domestic carry forward loss election provisions of subsections 80(2B) and (2C) of the Assessment Act.

Commissioner of Taxation

14 December 1989

APPENDIX A

EXAMPLE – Resident individual taxpayer

FOREIGN COUNTRY X ASSESSMENT

	Purchase price of foreign asset X	$20,000
	Sale price of foreign asset X	$30,000
	Gain on sale of foreign asset X	$10,000
LESS	Deductions allowable under foreign law	$ 2,000
	Net foreign gain	$ 8,000
	Foreign tax paid (20%)	$ 1,600

AUSTRALIAN ASSESSMENT

INCOME	DOMESTIC	FOREIGN	TOTAL
• Professional fees	$17,000		$17,000
CAPITAL GAINS
• Gain on sale of domestic asset Y (1)	$6,000
• Gain on sale of foreign asset X (2)		$7,000
"Net capital gain"			$13,000
Gross assessable income			$30,000
LESS
• Deductions allowable in respect of professional services			$2,000
Taxable income (3)			$28,000
Australian tax payable (4)			$4,809
(5)
LESS
• Foreign tax credit (FTC)  entitlement (6)			$1,190
Net Australian tax payable			$3,619
NOTES:

(1)	The gain realised on the sale of the domestic asset is calculated in accordance with Part IIIA.

(2)	The gain realised on the sale of the foreign asset is also calculated for Australian tax assessment purposes in accordance with Part IIIA, and this amount is less than the gain of $10,000 taken into account in country X.

(3)	The "net capital gain" for Australian tax purposes is included in the taxpayer's assessable income by virtue of sections 160ZC and 160Z0.

(4)	The Australian tax payable is calculated (at 1989-90 rates) using the formula A + B where

A = tax at ordinary resident rates on $15,000          (the reduced taxable income)	$2,079
and B = 5 x [(tax at ordinary resident rates on a taxable income                     of $15,000 + 20% of $13,000) – A]
=  5 x [(tax at ordinary resident rates on $17,600) – A]
=  5 x [$2,625 – $2,079]
=  5 x [546]	$2,730
Australian tax payable	$4,809
(5)	The Medicare levy has not been taken into account for the purposes of this example.

(6)	The FTC entitlement is the lesser of the foreign tax paid ($1,600) and the Australian tax payable in respect of the foreign capital gain included in assessable net capital gain ($7,000 x 0.17 [average rate of Australian tax payable]  =  $1,190).

APPENDIX B

EXAMPLE – Resident company taxpayer

FOREIGN COUNTRY X ASSESSMENT

Purchase price of foreign asset X	$25,000
Sale price of foreign asset X	$45,000
Gain on sale of foreign asset X	$20,000
LESS  Deductions allowable under country X's law	$ 3,000
Net foreign gain on foreign asset X	$17,000
Foreign tax paid (30%)	$ 5,100

FOREIGN COUNTRY Y (NIL ASSESSMENT)

Purchase price of foreign asset Y	$15,000
Sale price of foreign asset Y	$20,000
Gain on sale of foreign asset Y	$ 5,000

Foreign country Y does not impose tax on capital gains made on disposals of assets.

AUSTRALIAN ASSESSMENT

INCOME	DOMESTIC	FOREIGN	TOTAL
• Product sales	$40,000		$40,000
CAPITAL GAINS
• Gain on disposal of domestic asset (1)	$10,000
• Gain on disposal of :
o foreign asset X (2)		$14,000
o foreign asset Y (2)		$ 4,000
"Net capital gain"			$28,000
Gross assessable income			$68,000
LESS Deductions allowable in respect of product sales			$20,000
Taxable income			$48,000
Australian tax  39%			$18,720
LESS FTC entitlement (3)			$ 5,100
Net Australian tax payable			$13,620
NOTES

(1)	The gain realised on the sale of the domestic asset is calculated in accordance with Part IIIA.

(2)	The gains realised on the sale of foreign assets X and Y calculated for Australian tax assessment purposes in accordance with Part IIIA, are less than the gains of $20,000 and $5,000 taken into account in countries X and Y respectively.

(3)	The FTC entitlement is the lesser of the foreign tax paid ($5,100) and the Australian tax payable in respect of the foreign capital gain calculated in accordance with Part IIIA made on the disposal of foreign asset X and included in assessable income ($14,000 x 0.39 = $5,460). Note that because no foreign tax is payable in foreign country Y with respect to the gain on sale of foreign asset Y, that gain is not deemed by subsection 160AE(2) to be foreign income for purposes of Division 18 and does not therefore enter into the FTC entitlement calculation.

APPENDIX C

EXAMPLE
A resident company taxpayer in a year of income derives a foreign capital gain that is subject to foreign tax, a foreign capital loss, "interest income" as defined in subsection 160AE(3) and contract fees from its Australian operations.

FOREIGN COUNTRY E ASSESSMENT

Purchase price of foreign asset E	$20,000
Sale price of foreign asset E	$90,000
Gain on sale of foreign asset E	$70,000
LESS Deductions allowable under Country E's laws	$ 5,000
Net foreign gain on foreign asset E	$65,000
Foreign capital gains tax paid (20%)	$13,000
Interest income	$10,000
Foreign income tax paid (10%)	$ 1,000

FOREIGN COUNTRY F ASSESSMENT

Purchase price of foreign asset F	$80,000
Sale price of foreign asset F	$40,000
Net loss on sale of foreign asset F	($40,000)

AUSTRALIAN ASSESSMENT

INCOME	DOMESTIC	FOREIGN	TOTAL
• Contract fees	$100,000		$100,000
• Net Capital gain (1)		$ 25,000
• Interest income		$ 10,000	$ 35,000
Gross assessable income			$135,000
LESS
• Deductions allowable in respect of contract fees			$ 35,000
Taxable income			$100,000
Australian tax (39%)			$ 39,000
Less FTC (2)			$ 10,750
Net Australian tax payable			$ 18,250
NOTES

(1)	The net capital gain to be included in assessable income is calculated in accordance with the provisions of Part IIIA. (For ease of illustration in this example, the foreign capital gain and loss have been treated as being the same amounts for those purposes as the net amounts taken into account in the foreign countries). Accordingly, the capital gain made on the disposal of foreign asset E ($65,000) is reduced by the capital loss incurred on the disposal of foreign asset F ($40,000) resulting in a net capital gain of $25,000 being included in assessable income. The amount of this net capital gain relates solely to the foreign capital gain in respect of which foreign tax has been paid. The whole amount of the net capital gain qualifies, therefore, to be treated as foreign income for foreign tax credit purposes pursuant to subsection 160AE(2).

(2)	Pursuant to subsection 160AF(7), the amount of the net capital gain (deemed by subsection 160AE(2) to be foreign income) and the amount of the interest income are treated as separate classes of foreign income for the purposes of determining the taxpayer's foreign tax credit entitlement under subsection 160AF(1). Accordingly, a separate foreign tax credit is applicable in relation to each of those classes of foreign income.

The FTC entitlement in relation to each class of foreign income is the lesser of the sum of the Australian tax payable on the amount included in assessable income and the foreign tax paid, viz:

Net capital gain

Australian tax payable (25,000 x 0.39)	$9,750
Foreign tax paid	$13,000
FTC  =	$9,750
Interest income

Australian tax payable (10,000 x .39)	$3,900
Foreign tax paid	$1,000
FTC  =	$1,000
Accordingly, the total FTC allowable is $9,750 + $1000 =	$10,750
APPENDIX D

EXAMPLE:
A resident company taxpayer in a year of income disposes of a foreign asset resulting in the realisation of a foreign capital gain that is subject to foreign tax. However, for Australian assessment purposes the disposal of the foreign asset results in a capital loss. No other foreign sourced income is derived but the taxpayer also derives a domestic sourced capital gain from the disposal of an Australian asset. The taxpayer also derives management fees from its Australian operations.

FOREIGN COUNTRY D ASSESSMENT

Purchase price of foreign asset D	$15,000
Sale price of foreign asset D	$20,000
Gain on sale of foreign asset D	$  5,000
LESS Deductions allowable under country D's laws	$  2,000
Net foreign gain on foreign asset D	$  3,000
Foreign tax paid (30%)	$     900

AUSTRALIAN ASSESSMENT

INCOME	DOMESTIC	FOREIGN	TOTAL
Management fees	$20,000		$20,000
CAPITAL GAINS
• Gain on disposal of domestic asset (1)	$10,000
• Loss on disposal of foreign asset  D (2)		($1,000)
"Net capital gain"			$ 9,000
Gross assessable income			$29,000
LESS Deductions allowable in respect           of management fees			$ 5,000
Taxable income			$24,000
Australian tax payable (39%)  (3)			$ 9,360
NOTES

(1)	The gain realised on the sale of the domestic asset is calculated in accordance with Part IIIA.

(2)	The loss incurred on the sale of foreign asset D is calculated for Australian tax assessment purposes in accordance with Part IIIA. In this example, even though a gain was realised on the disposal of foreign asset D under foreign country D's laws, for Australian assessment purposes the disposal resulted in a capital loss due to the effects of indexation of the cost base of the asset and the allowance under Australia's law of a different quantum of incidental expenses deductions relating to its disposal.

(3)	In this example, the taxpayer is not entitled to any foreign tax credit relief in relation to the foreign tax paid with respect to the foreign gain realised on the disposal of asset D because, for Australian assessment purposes, the disposal of foreign asset D resulted in the realisation of a capital loss. Accordingly, no part of the foreign capital gain in respect of which foreign tax has been paid was included in the net capital gain which formed part of the assessable income. It therefore follows that subsection 160AE(2) is not called into operation.

APPENDIX E

EXAMPLE – Resident company taxpayer

The taxpayer realises the following capital gains and losses during the income year:

FOREIGN COUNTRY D ASSESSMENT

Purchase price of foreign asset D	$ 50,000
Sale price of foreign asset D	$200,000
Gain on sale of foreign asset D	$150,000
LESS Deductions allowable under country D's laws	$ 20,000
Net foreign gain on foreign asset D	$130,000
Foreign tax paid (30%)	$ 39,000

FOREIGN COUNTRY E (NIL ASSESSMENT)

Purchase price of foreign asset E	$ 50,000
Sale price of foreign asset E	$ 65,000
Gain on sale of foreign asset E	$ 15,000
Foreign country E does not impose tax on capital gains made on disposals of assets.

FOREIGN COUNTRY F

Purchase price of foreign asset F	$ 90,000
Sale price of foreign asset F	$ 50,000
Loss on sale of foreign asset F	$(40,000)

AUSTRALIA

Indexed cost base of asset G	$ 90,000
Sale price of asset G	$150,000
Gain on sale of asset G	$ 60,000*
Reduced cost base of asset H	$ 65,000
Sale price of asset H	$ 25,000
Loss on sale of asset H	$(40,000)*
 * No expenses were incurred in relation to the holding or disposal of the assets.

AUSTRALIAN ASSESSMENT

INCOME	DOMESTIC	FOREIGN	TOTAL
Machinery sales	$ 60,000		$ 60,000
"Net capital gain"(1)		$125,000	$125,000
Gross assessable income			$185,000
LESS Deductions allowable in respect           of machinery  sales			$ 20,000
Taxable income			$165,000
Australian tax 39%			$ 64,350
LESS  FTC entitlement (2)			$ 39,000
Net Australian tax payable			$ 25,350
NOTES

(1)	The "Net capital gain" is calculated as follows:

Gain on sale of foreign asset D (in respect of which foreign tax has been paid)			$130,000
LESS/ADD
Gain on sale of  foreign asset E  (in respect of which  no foreign tax has  been paid)	$ 15,000
Gain on sale of Australian asset G	$ 60,000	$ 75,000
Loss on sale of foreign asset F	$ 40,000
Loss on sale of Australian asset H	$ 40,000	($80,000)	($ 5,000)
Net Capital Gain			$125,000
The net capital gain has been calculated so as to ensure maximum allowable foreign tax credit relief to the taxpayer.  This is achieved by adding the domestic sourced capital loss and the foreign sourced capital loss together and deducting this amount from firstly, the sum of the domestic sourced capital gain and the foreign sourced capital gain in respect of which NO foreign tax has been paid and secondly, as this results in a capital loss, from the foreign sourced capital gain in respect of which foreign tax has been paid.

Foreign source capital gains and capital losses for Australian assessment purposes are calculated in accordance with Part IIIA. However, for ease of illustration, in this example the foreign capital gains and losses have been treated as being the same for those purposes as the amounts taken into account in the foreign countries.

(2)	In this example the amount of the "net capital gain" included in the taxpayer's assessable income relates solely to the foreign capital gain in respect of which foreign tax has been paid.  The whole amount qualifies, therefore, to be treated as foreign income for foreign tax credit purposes pursuant to subsection 160AE(2).

Accordingly, the taxpayer is entitled to a credit for the lesser of the foreign tax paid ($39,000) and the Australian tax payable in respect of the foreign capital gain that is included in assessable income ($125,000 x 0.39 = $48,750).


Taxation Ruling IT 2624 Foreign income - Company self-assessment, elections and other notifications - additional (penalty) tax
Taxation Ruling IT 2624

Income tax: foreign income – company self-assessment, elections and other notifications – additional (penalty) tax

Preamble

1.	As a result of the introduction of full self assessment procedures, companies and funds (that is, superannuation funds, approved deposit funds and pooled superannuation trusts) are required to provide less information in their income tax returns than previously.

2.	The legislation for the new system was contained in Taxation Laws Amendment Act (No. 5) 1989 and associated amendments were made to the income tax regulations. The changes apply to tax returns and payments in respect of income derived in the 1989-90 and later income years or relevant substituted accounting periods.

3.	The simplified return form now used by companies and funds is authorised by regulation 17 (formerly regulation 11). Section 161 of the Income Tax Assessment Act 1936 (the Act) now requires a company or fund to give only limited information in accordance with the return form. Other significant changes were made to s.222 and s.223 and a new s.262A was introduced.

4.	Sub-section 222(1A) imposes a liability to pay additional tax where a company or fund fails to keep a record containing particulars of the basis of the calculation of its taxable income and tax payable, or refuses to provide, when and as required by the Commissioner, a document containing those details. Similarly, s.262A obliges a person carrying on a business to keep records that record and explain all transactions and other acts engaged in by the taxpayer that are relevant for any purpose of the Act. Documents containing particulars of any election, estimate, determination or calculation are now generally required to be kept by taxpayers for a five year period.

5.	The Treasurer's Explanatory Memorandum states that the purpose of s.222(1A) and s.262A(2) is to make it clear that all records of the type previously included in a return but no longer required to be included under self assessment are to be retained by the taxpayer for the purpose of examination by the Commissioner, if and when requested by the Commissioner for the purposes of the Act.

6.	Section 223 imposes a penalty where a false or misleading statement is made. Changes have also been made to s.223(8) and (9) to include within the reference to a statement for the purposes of s.223, a statement made in a document "... prepared ... or purporting to be prepared ... under or pursuant to this Act or the regulations." The purpose of the changes is to ensure that documents that are brought into existence under self assessment are within the scope of s.223, whether or not they are sent to the Commissioner.

7.	Nevertheless some concern has been expressed about the application to the self assessment system of the current penalty regime, and those areas of the law which require or permit taxpayers to lodge elections and other notifications.

8.	One concern relates to the possible imposition of penalty under s.223 where there would not have been a false or misleading statement in terms of Taxation Ruling IT 2141 if full disclosure could have been made in the return by the inclusion of material retained by the taxpayer. Similarly, where there would have been a false or misleading statement if such material had been supplied in the return, clarification has been sought as to whether the penalty remission guidelines contained in Taxation Ruling IT 2517 are applicable.

9.	The specific concern about elections and other notifications is whether the taxpayer is fully protected against any possible disallowance of the particular operation of the law, as claimed by the taxpayer, or against penalty for failure to notify, on the ground that an election or other notification has not been received in time.

10.	This Ruling has two functions:

(a)	it provides guidelines for use in applying the "false or misleading statement" concept in s.223(1)to companies and funds; and

(b)	it sets down the approach being taken by the Taxation Office to the application to companies and funds of the provisions of the law which require taxpayers to make elections or give other notifications as a condition of a particular operation of the law.

RULING

11.	In short, this Ruling confirms that Taxation Rulings IT 2141 and IT 2517 apply to companies and funds in a manner consistent with the rights and responsibilities of taxpayers applicable prior to self assessment, as long as taxpayers keep and provide to the Taxation Office on request the type of records which they would have previously lodged with their returns. It also extends the time for making most elections or other notifications until the Commissioner specifically asks for them.

Penalties

12.	The reference in s.223(1) to "a statement ... that is false or misleading in a material particular" has hitherto potentially applied to each item of assessable income included in (or excluded from) a return and to each claim for entitlement to an allowable deduction, rebate or credit (see IT 2141 and paragraph 4 of IT 2517). It has also applied to any explanation of those items and claims included in the return. However, IT 2141 makes it clear that information that is adequate to lead a reasonably prudent and competent taxation officer to disallow the whole or part of a deduction claimed in a return is not to be taken as misleading (paragraph 13 of IT 2141). It also indicates as a general rule that in the case of a statement, the substance of which is clearly arguable as a matter of law, no penalty would be imposed even though the statement may be found, again as a matter of law, to have been inaccurate (paragraph 19 of IT 2141). That is, in considering whether a particular item or claim constitutes a false or misleading statement all the underlying factors are required to be taken into account. Paragraph 22 of IT 2141, which refers to the omission of assessable income, should also be read in this light.

13.	Taxation Ruling IT 2141 was drafted prior to the introduction of self assessment and the changes outlined in paragraph 3 above. In the circumstances now prevailing, where a company or fund is not required to specify and explain in its return particular items of income and particular claims, it is not possible to determine whether a statement is false or misleading without reference to documents of the type which would have previously been lodged with the return, including documents containing particulars of any election, estimate, determination or calculation, and particulars thereof. These documents, which should exist at the time the return is lodged, are required to be retained and made available by the taxpayer should they be required in the course of an audit.

14.	As outlined in the preamble, the changes to the Act and regulations associated with self assessment reveal a legislative scheme under which taxpayers are required to include only a limited amount of information in the return form; with other information of the type that would previously have been included in the return being retained by the relevant entities. The changes to s.223(8) and (9) mean that both the return form and the information kept by the taxpayer and provided on request in accordance with s.222(1A) are to be read together in determining whether there has been a false or misleading statement for the purposes of s.223.

15.	Accordingly, the guidelines in Rulings IT 2141 and IT 2517, as explained in this Ruling, remain relevant for companies and funds and will be applied on the following basis:

(a)	the specifying of the amount of taxable income and of the tax payable in a return is to be taken as a series of statements to the effect that the items included in (or excluded from) assessable income and the claims for allowable deductions that make up the taxable income are properly included (or excluded) and deductible respectively, and that any rebates or credits affecting the amount of tax payable are properly allowable; and

(b)	whether any of those statements are false or misleading will be determined by reference to records (including explanatory documents) that:

(i)	existed at the time the return was lodged; and

(ii)	are retained by the taxpayer or its agent and made available to the Taxation Office on request (e.g., at the commencement of an audit or other relevant enquiry).

Such records would ordinarily have been kept in order to not offend against s.222(1A).

16.	Where an issue is contentious (as explained in paragraph 19 of IT 2517) and there is or was, at the time the return was lodged, genuine uncertainty about the application of the law (paragraph 19 of IT 2593) a taxpayer who retains and provides to the Taxation Office on request an explanation of its taxation position, would be treated in the same way as if the relevant disclosure had been made in the return. Where in the light of the information provided on request there is no false or misleading statement, the taxpayer would be subject to interest only under s.170AA, as would previously have been the case. Of course, interest penalty would be remitted in accordance with Taxation Ruling IT 2593.

17.	On the other hand, where a false or misleading statement has been made, e.g., where the records retained were either inadequate (in terms of paragraph 13 of IT 2141), or not provided on request, the penalty imposed by s.223 would be remitted on the basis of the guidelines contained in IT 2517.

18.	In summary, the legislative scheme requires the question of whether or not a false or misleading statement has been made in a return to be answered by reference to the return and records retained by the taxpayer and made available on request. Taxation Rulings IT 2141 and IT 2517 should be read in this light. Where a company or fund is uncertain about a question which affects its taxation liability for a particular year, the opportunity is provided by s.169A(2), s.160AIB(2) and s.160AQKB(2) to seek the Commissioner's views: refer to IT 2593 and IT 2616.

Elections and other notifications

19.	There are many provisions in the Act which require or permit taxpayers to lodge elections or other notifications with the Commissioner on or before the last day for the furnishing of the return. All but a few (those referred to in paragraph 24 below) authorise an extension of time to be allowed by the Commissioner. For example, frequently used provisions such as s.31(3) (value of trading stock), s.59(2A) (depreciation balancing charge), and s.80G(6)(c) (transfer of loss within company group) all contain the words "or within such further time as the Commissioner allows."

20.	Consistent with the self assessment system, in every situation where the law authorises the Commissioner to extend the time for making a written election or other notification, the time for lodgment is to be taken as extended for companies and funds until such time as the Commissioner requires the election or notification to be made. Exceptions to this are the specific elections or other notifications that are embodied in the return form for funds.

21.	This means that nearly all elections and other notifications should not be lodged with the Commissioner by companies and funds until requested.

22.	However, documents containing particulars of any election or other notification that record or explain the calculation of taxable income as disclosed in the taxpayer's return must be kept with other taxation records and made available when requested by the Commissioner.

23.	Where the time for notifying the Commissioner has been extended, by force of this Ruling, the fact that notification has not been received by the Commissioner by the date the assessment is deemed to be made, is not a point that could be taken by the Commissioner in any subsequent dispute over the taxpayer's entitlement to a particular operation of the law. Nor could the non-lodgment of such materials justify the imposition of penalty under s.222 or s.223, where particulars were kept by the taxpayer and provided to the Commissioner on request in accordance with s.222(1A).

24.	As mentioned, there are a small number of election and notification provisions that do not authorise the Commissioner to extend the time for lodgment or giving notice. Those elections and notifications will have to be lodged within the time specified in the law, generally by the date of lodgment of the return. The provisions in question are:

Section 52 – loss on property acquired for profitmaking this does not apply to property acquired on or after 20 September 1985;

Section 124ZADA (Division 10BA – Australian films) – a declaration under s.124ZADA(1) or (5) may be made under an extension of time, but no extension is permitted for a subsequent notification under s.124ZADA(3), which can be given only after the declaration is made. Accordingly, this Ruling does not extend generally the time for making a declaration under s.124ZADA(1) or (5);

Section 124ZAE – election that Division 10BA is not to apply; and

Section 297B – pooled superannuation trusts exemption for current pension liabilities.

25.	Companies and funds are, of course, required to notify the Taxation Office if they elect to make a single payment of tax in accordance with s.221AU(1). This election would normally be lodged separately from the return.

Commissioner of Taxation

10 December 1990


Taxation Ruling IT 2685 Depreciation
Taxation Ruling IT 2685

Income tax: depreciation

Withdrawn effective 1 January 2001. See Taxation Ruling TR 2006/15.

Income Tax Rulings do not have the force of law. Each decision made by the Australian Taxation Office is made on the merits of each individual case having regard to any relevant Ruling.

Contents:

What this Ruling is about

Ruling

Date of effect

Explanations

Effective life

Commissioner's published advisory rates

Self-assessed effective lives

Amendments to estimates of effective life

Option to adopt Commissioner's estimate

Variation of existing determination

Application for item not listed

Rates of depreciation

System before 1 July 1991

System from 1 July 1991

Assets acquired after 26 February 1992

Immediate deductions – administrative arrangements

Some common depreciation rates

WHAT THIS RULING IS ABOUT

1.	This Ruling contains the Commissioner of Taxation's depreciation determination under section 54A of the Income Tax Assessment Act 1936. It also explains the change in the method of fixing depreciation rates:

•	commencing with the beginning of the 1991/92 income year; and

•	for plant or articles acquired after 26 February 1992.

RULING

2.	Section 54A requires the Commissioner of Taxation to make a determination of the effective lives of particular items of plant, which taxpayers may adopt as an alternative to making their own estimate of effective life. That determination is set out in the attached table.

3.	For convenience, the table also lists the applicable depreciation percentages under the rules that applied from the beginning of the 1991/1992 income year and the rules commencing 27 February 1992. Those percentages are expressed in both prime cost and diminishing value terms.

DATE OF EFFECT

4.	The rates specified in the table should only be used to calculate depreciation deductions for the 1991/92 income year and later years. Claims for previous years should be based on rates published in Income Tax Order 1217 or as specially approved.

EXPLANATIONS

Effective life

5.	The effective life of a particular item of plant is used to determine its relevant depreciation rate for tax deduction purposes. Broadly, the effective life of a particular item is the period of time the item can be expected to be used for income-producing purposes, assuming it is kept in good order and condition.

Commissioner's published advisory rates

6.	Until 1 July 1991, the Commissioner of Taxation had authority to determine the effective life of each item of plant when it became eligible for depreciation deductions and thereby fix the relevant rate of depreciation. For example, if the Commissioner determined the effective life of a particular item as 20 years, the basic rate of depreciation would be 5 percent per annum.

7.	The rate of depreciation for a particular item of plant remains unchanged once it has been set, even in the hands of subsequent owners.

8.	As a practical measure, the Commissioner has published Income Tax Order 1217 (ITO 1217) which specifies basic depreciation rates for particular classes of plant. Taxpayers have been able to rely on those published rates instead of seeking a specific determination from the Commissioner in respect of their own individual items of plant.

Self-assessed effective lives

9.	From 1 July 1991, taxpayers may make their own estimate of the effective life of assets that they acquire after 12 March 1991.

10.	Taxpayers will need to estimate the period during which the asset could reasonably be expected to be used in producing assessable income, based on that particular taxpayer's circumstances of use.

11.	Sometimes, taxpayers will sell an asset at a time when its useful life has not expired. The time of sale is not to be treated as the end of the asset's effective life. Instead, at the time when a taxpayer first uses an asset (or installs it ready for use as reserve plant), the taxpayer needs to estimate effective life on the assumption that the asset will not be disposed of but will continue to be used by the taxpayer until it would no longer be useful for income-producing purposes.

12.	An asset which is not new at the time it first becomes depreciable to a particular taxpayer is to be assumed to be new in estimating its effective life.

13.	Factors to be taken into account in making an estimate of effective life include:

•	potential physical life;

•	expected circumstances of use by the particular taxpayer;

•	predictable obsolescence; and

•	whether the effective life is restricted by the duration of a particular project.

14.	The sort of information which could be used to make an estimate would include:

•	the manufacturer's specifications;

•	independent engineering information;

•	the taxpayer's own past experience with similar assets;

•	past experience of other users of similar assets.

15.	Details of how an estimate is made need to be retained for five years.

Amendments to estimates of effective life

16.	Estimates of effective life are to made objectively by reference to all relevant information available at the time an asset first becomes depreciable. If that estimate is reasonably made on the best available information, it is not open to either the taxpayer or the Commissioner to vary that estimate to reflect information gained with the benefit of hindsight.

17.	However, if a taxpayer later realises that an estimate was not reasonably made on the facts – for example, that an incorrect conclusion was drawn from the available facts, or an error of calculation was made – then it will be open to the taxpayer, under the usual rules, to seek an amendment of prior assessments to reflect the correct rate of depreciation.

Option to adopt Commissioner's estimate

18.	As an alternative to "self-assessing" effective lives, taxpayers may make a written election to adopt effective lives as determined by the Commissioner. The precise form of an election is at a taxpayer's discretion and is not required to be lodged with income tax returns. An election needs to be retained for five years after the earlier of the disposal, loss or destruction of the asset.

19.	The Commissioner's determination of effective lives, set out in the attached table, largely reflects earlier determinations upon which the rates published in ITO 1217 were fixed in relation to income years before the 1991/92 year.

20.	Those earlier determinations were based on estimates of the average effective life of classes of assets in common use. In some instances, separate rates have been set for a particular class of asset when used in different circumstances. For example, a higher rate has applied to carpeting for use in public places compared to use in private rental accommodation, reflecting the likely higher rate of wear and tear in the former use.

21.	That approach will continue under the new arrangements. Taxpayers wishing to adopt a period different from one specified in the Commissioner's determination will need to make their own estimate, as described in paragraphs 9 to 15.

Variation of existing determination

22.	The Commissioner will review an existing determination if it can be demonstrated that it is no longer appropriate. For example, a change in technology may mean that the average effective life of a class of asset has changed. Or a particular industry may be able to justify a special rate for its members.

23.	Accordingly, industry groups are invited to approach the Taxation Office for a review of an existing determination if they feel it is not a fair estimate of average effective life.

Application for item not listed

24.	Similarly, applications can be made for the Commissioner to determine the effective life for a class of asset not specified in the attached table. The period set will reflect what is appropriate for a broad range of users or a particular class of taxpayers.

RATES OF DEPRECIATION

System before 1 July 1991

25.	Before 1 July 1991, unless special rates applied, depreciation rates were fixed according to the Commissioner's determination of effective life. For example, if the effective life of an asset was 10 years, the basic rate of depreciation was 10 percent per annum.

26.	The following summarises a number of concessions that have applied to assets acquired before 1 July 1991.

Loadings

27.	Basic rates of depreciation could be increased by a loading of either 18% or 20%, depending on when property was acquired. For instance, assets acquired after 25 May 1988 were eligible for a loading of 20%. So, a basic rate of depreciation of 10% prime cost (15% diminishing value) was increased to 12% prime cost (18% diminishing value) by the loading.

28.	The following are the loading rates which have applied:

Date of purchase contract or commencement of construction	Loading %
before 20 August 1980	0
after 19 August 1980 and before 1 May 1981	20
after 30 April 1981 and before 26 May 1988	18
after 25 May 1988	20
29.	Loadings do not apply to motor cars and derivatives, motor cycles and other vehicles designed to carry either less than 1 tonne or fewer than nine passengers. Those vehicles were depreciated at basic rates only.

30.	Nor did loadings apply to plant eligible for write-off at the following special rates:

•	"employee amenities" which are depreciable at 33 1/3% under the prime cost method or 50% under the diminishing value method; employee amenities means property for use principally in providing clothing cupboards, first aid, rest-rooms, recreational facilities, cafeterias and the like for employees or for the care of employees' children;

•	plant for use in scientific research which is depreciable at	 33 1/3% under the prime cost method or 50% under the diminishing value method;

•	"Australian trading ships" which are eligible for a 5 year write-off;

•	plant used in "basic iron or steel production" which was eligible for a 3 or 5 year write-off, depending on the relevant basic rate of depreciation as increased by the loading;

•	a number of repealed "5/3" concessions under which assets could be depreciated over 5 or 3 years, depending upon the relevant loaded basic rate of depreciation.

System from 1 July 1991

31.	The March 1991 Industry Statement foreshadowed a number of changes to depreciation which generally apply from 1 July 1991, including:

•	immediate deductibility for low cost and short life assets;

•	a new seven rate schedule for most assets; and

•	the option to either self-assess effective life or adopt periods specified by the Commissioner of Taxation (discussed at paragraphs 9 and 18 respectively).

Immediate deduction

32.	An immediate deduction is available for plant acquired on or after 1 July 1991 either costing $300 or less or with an effective life of less than 3 years.

Broadbanding

33.	Commencing with the 1991/92 income year, depreciation rates have been rationalised ("broadbanded") so that the number of different depreciation rates was reduced.

34.	Under broadbanding, there are 7 basic rate classes – 33 1/3%, 20%, 15%, 10%, 7 1/2%, 5% or 2 1/2%. If the basic rate of depreciation for an item is not one of the seven broadbanded rates, the basic rate is adjusted to the next highest broadbanded rate. For example, if the effective life of an item was 12 years, its basic rate would be 8%; that rate would then be adjusted up to 10%, the next highest broadbanded rate.

20% loading

35.	Basic rates for assets are further increased by a standard loading of 20%. The loaded rate is then increased by 50% if the diminishing value method of calculating deductions is used. So, using the example above, the broadbanded basic rate of 10% becomes 12% after loading (18% diminishing value).

When broadbanding applies

36.	Broadbanding first applies in the 1991/92 income year including plant acquired before 1 July 1991. (However, as discussed at paragraph 48, new rules apply to assets acquired after 26 February 1992.) Broadbanding is optional; that is, an election can be made to retain a basic rate that is not one of the seven broadbanded rates.

37.	The following table sets out the relevant rates of depreciation where both broadbanding and the 20% loading apply:

Years in effective life	Prime cost	Diminishing value
3 to less than 5	40%	60%
5 to less than 6 2/3	24%	36%
6 2/3 to less than 10	18%	27%
10 to less than 13 1/3	12%	18%
13 1/3 to less than 20	9%	13.5%
20 to less than 40	6%	9%
40 or more	3%	4.5%
Loading does not apply to certain motor vehicles

38.	The 20% loading does not apply to passenger motor vehicles and derivatives, motor cycles and other vehicles designed to carry less than either 1 tonne or nine passengers. The following table sets out the applicable rates of depreciation for those sorts of motor vehicles:

Years in effective life	Prime cost	Diminishing value
3 to less than 5	33.3%	50%
5 to less than 6 2/3	20%	30%
6 2/3 to less than 10	15%	22.5%
10 to less than 13 1/3	10%	15%
13 1/3 to less than 20	7.5%	11.25%
20 to less than 40	5%	7.5%
40 or more	2.5%	3.75%
Works of art

39.	Broadbanding does not apply to originals or reproductions of paintings, sculptures, drawings, engravings, photographs, and similar things. However, the 20% loading does apply. For example, if the effective life of a painting was 100 years, the basic rate would be 1%. The 20% loading would then increase that rate to 1.2% (1.8% diminishing value).

Special rates of depreciation

40.	Broadbanding and the 20% loading do not apply to the following assets eligible for concessional write-offs:

•	"employee amenities" and "scientific research" plant which are depreciable at 33 1/3% under the prime cost method and 50% under the diminishing value method, whatever their actual effective life;

•	assets deductible under the special provisions for "Australian trading ships" (5 year write-off) and "basic iron or steel production" (3 or 5 year write-off).

•	assets that are being depreciated under repealed measures which gave special deductions over 3 or 5 years;

Broadbanding and assets acquired before beginning of 1991/92 income year

41.	Broadbanding also applies to assets acquired before the beginning of the 1991/92 income year; that is, before 1 July 1991 for taxpayers whose income years commence on 1 July each year. Taxpayers will be able to increase the rates of depreciation that they previously used for such assets other than "works of art", if the basic rates on which those rates were fixed are not one of the 7 broadbanded rates.

42.	Broadbanding does not apply to assets eligible for the special rates of depreciation mentioned at paragraph 40. Those assets continue to be depreciable at the applicable special rates until either fully depreciated or sold, scrapped or destroyed.

43.	The table below lists the various broadbanded rates, increased by the 20% loading, and the corresponding diminishing value rates. It can be used to work out whether an increased rate applies to an asset, other than motor vehicles not eligible for the 20% loading and "works of art", acquired before the 1991/92 income year.

44.	The table also shows the broadbanded rates without the 20% loading, relevant for motor vehicles not entitled to the 20% loading.

45.	If, before the 1991/92 income year, an asset was being depreciated under the prime cost method and the prime cost rate being used is not one of the prime cost rates listed in the table, the next highest listed prime cost rate can be used to calculate depreciation deductions for that asset in 1991/92 and later years. Similarly, if a diminishing value rate does not appear in the table, the next highest diminishing value rate can be used.

Broadbanded rates with 20% loading	Broadbanded rates without 20% loading
Prime cost	Diminishing  value	Prime cost	Diminishing value
40%	60%	33.3%	50%
24%	36%	20%	30%
18%	27%	15%	22.5%
12%	18%	10%	15%
9%	13.5%	7.5%	11.25%
6%	9%	5%	7.5%
3%	4.5%	2.5%	3.75%
Assets acquired between 12 March 1991 and 1 July 1991

46.	For assets acquired after 12 March 1991 and before 1 July 1991, depreciation deductions for the period before 1 July 1991 are to be calculated under the general depreciation rules (explained in paragraphs 25 to 30) that applied up to 30 June 1991.

47.	However, from 1 July 1991, depreciation rates applicable to such assets may be set under the "self-assessment" procedures described at paragraphs 9 to 15 or by adopting the effective life determined by the Commissioner (see paragraphs 18 to 21).

Example

A taxpayer acquires an asset on 1 May 1991 for which the Commissioner has specified a basic rate of 10% based on an effective life of 10 years. With the loading of 20%, the relevant rates would be 12% prime cost and 18% diminishing value. Depreciation for the period 1 May 1991 to 30 June 1991 would be calculated using those rates.

The taxpayer has estimated that the effective life of the asset under his/her particular circumstances of use is 8 years. From 1 July, the taxpayer could either fix the applicable rate according the taxpayers own estimate of 8 years or continue with rates based on the Commissioner's determination of 10 years.

If the taxpayer decided to use his/her own estimate, the relevant broadbanded rates would be worked out as follows:

(1)	The effective life of 8 years is divided into 100 which gives a basic rate of 12.5%.

(2)	That basic rate is not one of the 7 broadbanded rates and would be adjusted to the next highest broadbanded rate of 15%.

(3)	The broadbanded rate would then be increased by 20% to  18% prime cost. The diminishing value rate would be 50% higher than the prime cost rate, at 27%.

If the taxpayer instead decided to continue with the Commissioner's effective life, the relevant depreciation rates would remain at 12% prime cost and 18% diminishing value – they are broadbanded rates and no increase would be available.

Assets acquired after 26 February 1992

New six rate schedule

48.	The One Nation Economic Statement foreshadowed a new six rate schedule to replace the seven broadbanded rates. The new rates apply to assets, whether new or second-hand, acquired after 26 February 1992. Assets acquired before 27 February 1992 continue to be depreciable under the broadbanding rules described above.

49.	An asset is taken to be acquired after 26 February 1992 if either acquired under a contract entered into after that date, or, if constructed by the taxpayer, construction commenced after that date.

50.	The new rates will not apply to assets acquired after 26 February 1992 from an "associate" if the associate acquired the asset before 27 February 1992. Nor will they apply to pre-27 February 1992 assets involved in sale-leasebacks after 26 February 1992. In those cases, the asset would continue to be treated as acquired before 27 February 1992.

51.	The meaning of associate is quite extensive and broadly applies to relatives and partners of a taxpayer or trusts or companies which a taxpayer controls.

52.	Under the new arrangements, items either costing $300 or less or with an effective life of less than 3 years continue to be immediately deductible. As well, the rates of depreciation for assets with effective lives of 3 to less than 5 years remain unchanged. However, the rates for assets with effective lives of 5 or more years have increased.

53.	The new depreciation rates are expressed as diminishing value rates. The corresponding prime cost rates are 2/3rds of the diminishing value rates, rounded to the nearest whole number. The following table summarises the new rates:

Years in effective life	Prime cost	Diminishing value
3 to less than 5	40%	60%
5 to less than 6 2/3	27%	40%
6 2/3 to less than 10	20%	30%
10 to less than 13	17%	25%
13 to less than 30	13%	20%
30 or more	7%	10%
The table does not apply to the following:

Excluded motor vehicles

54.	Rates for passenger motor vehicles and derivatives, motor cycles, and other vehicles designed to carry either less than 1 tonne or fewer than 9 passengers remain unchanged from those applicable under the rules that apply from 1 July 1991, as explained at paragraph 38. However, prime cost rates are rounded to the nearest whole number.

55.	The following table can be used to work out the relevant depreciation rate for such vehicles.

Years in effective life	Prime cost	Diminishing value
3 to less than 5	33%	50%
5 to less than 6 2/3	20%	30%
6 2/3 to less than 10	15%	22.5%
10 to less than 13 1/3	10%	15%
13 1/3 to less than 20	8%	11.25%
20 to less than 40	5%	7.5%
40 or more	3%	3.75%
Employee amenities and scientific research plant

56.	"Employee amenities" and "scientific research plant" are depreciable at a minimum of 33% prime cost or 50% diminishing value.

Works of art

57.	Diminishing value depreciation rates for "works of art" are calculated by dividing effective life into 1.8 and multiplying by 100. The prime cost rate is 2/3rds of that rate, rounded to the nearest whole number.

58.	For example, a painting with an effective life of 100 years would have a diminishing value rate of 1.8% and a prime cost rate of 1% (rounded to the nearest whole number).

New rates are maximum

59.	Rates fixed under these measures represent the maximum rates at which assets may be depreciated. Lower rates can be adopted each year at taxpayers' discretion.

Immediate deductions – administrative arrangements

60.	It has been a longstanding practice to permit taxpayers to treat initial purchases of certain items as not depreciable and to claim an immediate deduction for replacements.

61.	That practice principally relates to low cost items that have very long or indeterminate effective lives but are subject to frequent replacement through loss or breakage; for example, crockery and loose tools. It is also administratively simpler for some taxpayers who would otherwise be required to calculate depreciation for a myriad of low cost items and separately account for losses or breakages.

62.	Items for which the Commissioner is prepared to accept that practice have been identified in the publication of advisory depreciation rates (ITO 1217).

63.	That arrangement is to continue. However, with the introduction of immediate deductions for items either not costing more than $300 or with effective lives or less than 3 years, the arrangement now need only apply to items which are not otherwise immediately deductible. Items for which the replacement method may be adopted are identified in the attached table.

64.	Another longstanding practice has been to allow mining companies and other taxpayers involved in large scale operations immediate deductions for items not costing more than $500 (Taxation Ruling IT 2264). That arrangement is also to continue.

See also: Depreciation rates – extract from Taxation Ruling IT 2685

Commissioner of Taxation

11 June 1992


Depreciation rates

Extract from Taxation ruling IT 2685 on effective life and depreciation rates

		Acquired pre-27.2.92	Acquired post-26.2.92
Item	Effective life  in years	Prime cost %	Diminishing value %	Prime cost %	Diminishing value %
Air-conditioners:
•  ducted	15	9	13.5	13	20
• room units	10	12	18	17	25
Alarms	20	6	9	13	20
Calculators, electronic	10	12	18	17	25
Carpets, business premises	5	24	36	27	40
Cash registers:
•  general	10	12	18	17	25
•  computerised	7	18	27	20	30
Computers	5	24	36	27	40
Curtains and drapes	7	18	27	20	30
Electric hand tools	5	24	36	27	40
Electric vacuum cleaners	10	12	18	17	25
Furniture	15	9	13.5	13	20
Houses and flats let furnished:
• bedding	-----------------------You can claim full replacement costs -----------------------
• blind, venetian	20	6	9	13	20
• carpets	10	12	18	17	25
• chainsaw	3	40	60	40	60
• crockery, cutlery	-----------------------You can claim full replacement costs -----------------------
• glassware	-----------------------You can claim full replacement costs -----------------------
• cooking utensils	-----------------------You can claim full replacement costs -----------------------
• curtains and drapes	7	18	27	20	30
• electric bed	15	9	13.5	13	20
• electric clock	15	9	13.5	13	20
• electric heater	10	12	18	17	25
• furniture and fittings	15	9	13.5	13	20
• garbage unit, compacting	7	18	27	20	30
• gas copper	20	6	9	13	20
• hot water service	20	6	9	13	20
• lawn mowers:
o motor	7	18	27	20	30
o self-propelled	5	24	36	27	40
• linen	-----------------------You can claim full replacement costs -----------------------
• linoleum and similar floor coverings	10	12	18	17	25
• microwave ovens	7	18	27	20	30
• radios	10	12	18	17	25
• refrigerators	15	9	13.5	13	20
• Solahart	20	6	9	13	20
• stoves	20	6	9	13	20
• sun louvres	---------------------------------------------- Nil ---------------------------------------------
• television sets	10	12	18	17	25
• vacuum cleaners	10	12	18	17	25
• washing machines	7	18	27	20	30
Hot water services	20	6	9	13	20
Libraries	10	12	18	17	25
Lights, fluorescent	20	6	9	13	20
Loose hand tools	-----------------------You can claim full replacement costs -----------------------
Motor vehicles:
• buses
o carry 9 or more	7	18	27	20	30
o carry fewer than 9	7	15	22.5	15	22.5
• cars
o taxis	4	33.3	50	33	50
o other	7	15	22.5	15	22.5
• trucks
o carry 1 tonne or more	7	18	27	20	30
o carry less than 1 tonne	7	15	22.5	15	22.5
Photocopiers	10	12	18	17	25
Television sets	10	12	18	17	25
Typewriters	10	12	18	17	25
Washing machines	7	18	27	20	30


Taxation Ruling TR 1999/10 Members of Parliament - allowances, reimbursements, donations and gifts, benefits, deductions and recoupment
Taxation Ruling TR 1999/10

Income tax and fringe benefits tax: Members of Parliament – allowances, reimbursements, donations and gifts, benefits, deductions and recoupment

Preamble

The number, subject heading, Class of person/arrangement, Date of effect and Ruling parts of this document are a "public ruling" for the purposes of Part IVAAA of the Taxation Administration Act 1953 and are legally binding on the Commissioner. The remainder of the document is administratively binding on the Commissioner. Taxation Rulings TR 92/1 and TR 97/16 together explain when a Ruling is a public ruling and how it is binding on the Commissioner.

IMPORTANT: There is an Addendum for this document

Contents

What this Ruling is about

Cross reference table of provisions

Previous Rulings

Ruling

Date of effect and application

Explanations

Alternative views

WHAT THIS RULING IS ABOUT

Class of person/arrangement

1.	This Ruling applies to Members of the Commonwealth House of Representatives and of the Senate, Members of State Legislative Assemblies and Legislative Councils, Members of the Northern Territory and Australian Capital Territory Legislative Assemblies, and Ministers of the Crown (Ministers), collectively referred to in this Ruling as Members.

2.	This Ruling deals with:

(a)	the assessability of allowances and reimbursements received by Members;

(b)	the assessability of donations and gifts received by Members;

(c)	the assessability of the benefits received under frequent flyer programs;

(d)	the taxation treatment of life gold passes and severance passes used by Members;

(e)	the deductibility of losses or outgoings commonly claimed by Members; and

(f)	the recoupment of deductible expenses.

3.	The Ruling also discusses paragraphs 26(e) and 26(eaa) of the Income Tax Assessment Act 1936 (ITAA 1936) and whether deductions are allowable or are specifically excluded (or limited) under subsection 26-20(1); section 8-1, 25-60, 26-30 or 26-45; Division 32, 34 or 42 of the Income Tax Assessment Act 1997 (ITAA 1997*); or section 51AGA or 51AH of the ITAA 1936.

* All further references in this draft Ruling are to the ITAA 1997, unless otherwise stated.

4.	This Ruling is confined to the taxation treatment of transactions arising from a Member's Parliamentary, electoral, party or portfolio activities referred to in this Ruling as "work-related" activities.

CROSS REFERENCE TABLE OF PROVISIONS

5.	A reference to a provision in the ITAA 1997 should be read as a reference to any equivalent provision in the ITAA 1936. The following table cross references the provisions of the ITAA 1997 to the corresponding provisions of the ITAA 1936.

	ITAA 1997	ITAA 1936
Subject	1997-98 and later	1996-97 and earlier
Ordinary income	section 6-5	subsection 25(1)
Ordinary deductions	section 8-1	subsection 51(1)
Rates or taxes	sections 8-1, 20-20, 20-40	subsection 51(1), section 72
Assessable recoupments	section 20-20	sections 69, 72, 74
Tax-related expenses	section 25-5, 20-25	section 69
Election expenses	sections 25-60, 20-20, 20-35	section 74
Election expenses do not  extend to entertainment	section 25-70	section 74B
Penalty expenses	section 26-5	subsection 51(4)
HECS and student assistance	subsection 26-20(1)	subsection 51(6)
Relative travel expenses	section 26-30	section 51AG
Related entities	section 26-35	section 65
Recreational club expenses	section 26-45	subsection 51AB(4)
Entertainment expenses	Division 32	section 51AE
Deduction for entertainment	section 32-5	subsection 51AE(4)
Non compulsory uniform	Division 34	section 51AL
Occupational specific clothing	subsection 34-20(1)	subsection 51AL(26) in part
Car depreciation limit	section 42-80	section 57AF
Depreciation rate	sections 42-125, 42-130,  42-135	section 55
Reducing depreciation deductions	subsection 42-170(1)	section 61
Substantiation	Division 900	Schedule 2B
Meaning of work expense	subsection 900-30	Division 2 of Schedule 2B
Written evidence	Subdivision 900-E	Division 5 of Schedule 2B
Relief from effects of failing to substantiate	Subdivision 900-H	Division 8 of Schedule 2B
Definitions	section 995-1	subsection 6(1)
PREVIOUS RULINGS

6.	Taxation Rulings IT 2331 and IT 2532 are withdrawn. To the extent that our views in these Rulings still apply, we have incorporated them in this Ruling.

7.	7Taxation Ruling IT 2258 is withdrawn except insofar as it applies to expenses incurred in contesting an election for membership of a local governing body. To the extent that our views in that Ruling still apply to Members, we have incorporated them in this Ruling.

RULING

IMPORTANT: There is an Addendum for this document

Allowances

8.	A payment is an allowance when a Member is paid a definite predetermined amount to cover an estimated expense. It is an amount contributed towards an expected expense, and is made regardless of whether the Member incurs the expected expense. The spending of the allowance is at the complete discretion of the Member.

9.	The receipt of an allowance does not, in itself, entitle a Member to a deduction (see paragraphs 91 to 93).

10.	Members commonly receive the following types of allowances, in addition to their Parliamentary "salaries" (see paragraphs 42 to 45). Particular allowances may vary depending on the Parliament in which a Member serves.

•	Committee allowance

•	Daily expense allowance

•	Electorate allowance

•	Expense or entertainment allowance

•	Opposition spokespersons' allowance

•	Postage allowance

•	Printing and stationery allowance

•	Private vehicle allowance/motor vehicle allowance

•	Telephone allowance

•	Travel allowance.

Assessability of allowances

11.	Members should return allowances (and Parliamentary "salaries"), with the exception of those allowances referred to at paragraph 12, as assessable income. The fact that members may claim certain deductions in respect of losses or outgoings arising from the activity to which the allowance is directed does not affect assessability.

12.	The exception applies where:

(i)	a Member receives a domestic travel allowance or an overseas travel allowance for food, drink or incidentals; and

(ii)	the deductible expenses incurred are equal to, or greater than, the amounts considered reasonable by the Commissioner for substantiation purposes; and

(iii)	the Member chooses not to claim deductions for relevant expenses in his or her income tax return.

In these circumstances, the member need not include the amount of the allowance in assessable income (see Administrative arrangements applicable to travel allowances, paragraphs 57 to 64). See, also, Travel expenses covered by an annual entitlement, paragraphs 323 to 325.

Reimbursements

13.	If a Member is compensated for an expense already incurred, the payment is a reimbursement (paragraphs 65 to 70).

14.	If a reimbursement of a deductible expense is a fringe benefit under the Fringe Benefits Tax Assessment Act 1986 (FBTAA), any deduction otherwise allowable to a Member is reduced by the amount of the reimbursement (section 51AH of the ITAA 1936). The amount reimbursed does not form part of a Member's assessable income.

15.	Where a non-deductible reimbursement is a fringe benefit, the entity that makes the reimbursement may be subject to fringe benefits tax (FBT) (e.g., refund of child care expenses). The amount reimbursed does not form part of a Member's assessable income.

16.	If a Member receives a payment in respect of motor vehicle expenses that is based on the distance travelled by the motor vehicle, e.g., cents per kilometre, the amount is to be included in the Member's assessable income under paragraph 26(eaa) of the ITAA 1936.

17.	Where a reimbursement is a "recoupment", as defined in section 20-25, and the recoupment is for a loss or outgoing of a kind specified in section 20-30, the amount recouped forms part of a Member's assessable income (see Recoupment of deductible expenses at paragraph 28).

18.	If a member receives a payment for an estimated expense, we consider the amount received by the Member to be an allowance, not a reimbursement (see Allowances, paragraphs 8 to 12).

Donations and gifts

19.	A donation or gift does not form part of a Member's assessable income where it is given for personal reasons unconnected with any work-related activities of the Member. However, if a donation or gift is made because of, in respect of, for, or in relation to, his or her work-related activities, the donation or gift forms part of the Member's assessable income (paragraphs 71 to 78).

20.	If a donation or gift to a nominated Member is channelled through a political party (including a donation or gift to a fund established by the political party) on the basis that the party will pass it on to that Member, the gift is assessable to the Member at the time the political party receives the donation or gift (paragraphs 79 to 81).

Frequent flyer programs

21.	Benefits that arise under a standard frequent flyer program do not form part of a Member's assessable income (paragraphs 82 and 83).

Life gold passes and severance passes

22.	On "retirement" from Federal Parliament, Members may be issued with either a Life Gold Pass or a Severance Pass. Similar travel entitlements are available for Members of State and Territory Parliaments.

23.	We consider that the issuing of a Life Gold Pass or Severance Pass has no income taxation implications. Similarly, the value of the travel benefits received through the use of the Pass does not form part of a Member's assessable income. This may also apply to the spouse, and widow or widower of a deceased Member (paragraphs 84 to 88).

General deductions

24.	A deduction is only allowable if a loss or outgoing:

(a)	is actually incurred (paragraph 90);

(b)	meets the deductibility tests (paragraph 91 to 93); and

(c)	satisfies the substantiation rules, where applicable (paragraphs 46 to 56).

Apportionment

25.	Losses or outgoings are not deductible to the extent to which they are not incurred in gaining or producing assessable income, are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income. A loss or outgoing may, therefore, need to be apportioned between deductible and non-deductible components (paragraph 94).

Losses or outgoings actually incurred

26.	A deduction is only allowable for losses or outgoings actually incurred by a Member (paragraph 90)

Does paragraph 8-1(1)(b) apply to losses or outgoings incurred by a Member?

27.	We consider that a Member's activities cannot be characterised as a business carried on for the purpose of gaining or producing assessable income. Therefore, claims for deduction of losses and outgoings incurred in the course of gaining or producing assessable Parliamentary remuneration may only be considered under paragraph 8-1(1)(a) (paragraphs 95 to 112).

Recoupment of deductible expenses

28.	Specific provisions operate to include in assessable income amounts received as recoupment of certain losses or outgoings allowed, or allowable as deductions, such as election expenses. The effect of these provisions is that, where there is a specified "recoupment" in respect of specified losses or outgoings, the amount is to be included in assessable income (paragraphs 113 and 114). (See, also, Reimbursements at paragraphs 65 to 70.)

Work-related expense claims

29.	We discuss below commonly encountered work-related expenses incurred by Members, and the extent to which they are allowable as deductions.

Bank fees:

A deduction is allowable, as a work-related expense, for Financial Institutions Duty that relates to Parliamentary remuneration deposited in a Member's bank account(s). A deduction is also allowable for government duty tax or debits tax charged on any outgoing from a Member's account, to the extent to which the outgoing is an allowable deduction (see Taxation Ruling IT 2084).

Briefcases, calculators and electronic organisers:

A deduction is allowable for the work-related portion of depreciation on these items (see Depreciation of equipment, paragraphs 141 to 152).

Child Care:

A deduction is not allowable for child care expenses (paragraphs 118 to 120).

Clothing:

A deduction is not allowable for the cost of conventional clothing and footwear (paragraphs 121 to 123).

Laundry and maintenance:

A deduction is not allowable for the cost of cleaning and maintaining conventional clothing (paragraphs 124 and 125).

Club membership fees:

A deduction is not allowable for recreational club membership fees. However, a deduction is allowable for fees paid for Airport Lounge membership to the extent to which they are incurred on work-related activities (paragraph 126).

Community group membership fees:

A deduction is not allowable for membership fees of a community group unless there is a direct connection between a Member's work-related activities and the Member's involvement with the community group, and the fees are not of a private nature (paragraphs 127 to 129).

Computers and software:

A deduction is allowable for depreciation on the cost of computers, modems and related software and hardware to the extent to which they are used by a Member for work-related purposes. An item bought on or after 1 July 1991 can be depreciated at the rate of 100% if its cost is $300 or less, or its effective life is less than 3 years (paragraphs 130 to 133).

If a member buys software separately from a computer, in the period 1 July 1991 to 11 May 1998, a deduction for the full cost of the software is allowable (under the general deduction provisions) in the year in which the member purchases it. The member must apportion the deduction, if applicable, between work-related and private use (see Depreciation of equipment, paragraphs 141 to 152).

The cost of software purchased for more than $300, on or after 10 a.m. Australian Eastern Standard Time (AEST) on 11 May 1998, must be amortised either at the rate of 40% over two and a half years, or the life of the software licence, whichever is shorter.

Conferences, seminars and training courses:

A deduction is allowable for the cost of attending conferences and seminars if the expense is directly connected to a Member's work-related activities (paragraphs 134 to 140).

Depreciation of equipment:

A deduction is allowable for depreciation to the extent of the work-related use of the equipment. A member can depreciate an item of equipment bought on or after 1 July 1991 at a rate of 100% if it costs $300 or less, or if its effective life is less than three years (paragraphs 141 to 152).

Donations, gifts and contributions:

A deduction is allowable under Division 30 of the ITAA 1997 for gifts of $2 or more to listed or approved recipients, or under section 8-1 in respect of donations, gifts, contributions to constituents and organisations where the outgoings are directly connected with a Member's work-related activities and they are not private or domestic in nature (paragraphs 153 to 155). (See, also, Party membership fees, levies and donations, paragraphs 257 to 259.)

Driver's licence:

A deduction is not allowable for the cost of acquiring or renewing a driver's licence (paragraphs 156 and 157).

Election expenses:

A deduction is allowable for expenses incurred in contesting an election for Membership, of the Federal or a State Parliament, or the Legislative Assembly of the Northern Territory or the Legislative Assembly for the Australian Capital Territory (paragraphs 158 to 173).

Entertainment expenses:

A deduction is not allowable for the cost of providing entertainment (food and drink) except where it is incurred in providing entertainment for the public at large.

A deduction is allowable for the cost of providing light refreshments in the nature of morning and afternoon teas to staff and visitors (paragraphs 174 to 181).

Expenses incurred in the transitional period before a Member takes his or her seat:

A deduction is not allowable for any losses or outgoings incurred by Members "elect" prior to the date on which they take their seats because any connection that might exist between them and the income producing process is too remote (paragraphs 182 to 184).

Fares:

A deduction is allowable for the cost of using public transport for work-related travel.

Fines:

A deduction is not allowable for fines imposed under a law of the Commonwealth, a State, a Territory or a foreign country, or by a court (see Taxation Ruling TR 93/25).

Functions and presentations:

A deduction is allowable for the cost of attending functions where the role of a Member requires attendance at the function (paragraph 185 to 191). A deduction is not allowable if a Member is attending a purely social function (see Entertainment expenses, paragraphs 174 to 181).

A deduction is not allowable for the cost of goods, such as food and clothing, purchased at fetes and fairs.

A deduction is allowable for the cost of prizes donated and presented at functions where there is a direct connection with a Member's work-related activities.

Attendance on behalf of a Member:

A deduction is allowable for costs incurred by a Member who is represented by another person at functions, presentations and Parliamentary, electoral or party meetings. However, a deduction is not allowable for costs that would not have been deductible to the Member had he or she attended personally (paragraphs 192 and 193).

Glasses/contact lenses:

A deduction is not allowable for the cost of buying prescription glasses, contact lenses or sunglasses, because these expenses are private or domestic in nature.

Grooming:

A deduction is not allowable for grooming expenses, for example, hairdressing and make-up, as such expenses lack the essential character of expenses incurred in gaining or producing a Member's Parliamentary remuneration (paragraphs 194 to 196).

Guard dogs:

A deduction is not allowable for losses or outgoings incurred in maintaining guard dogs for the protection of a Member and his or her family (see Security costs, paragraphs 282 to 284).

Home office expenses:

A deduction is allowable for running expenses related to a private study, or other room, to the extent to which it is used for work-related activities (paragraphs 197 to 205).

Insurance of equipment:

A deduction is allowable for the cost of insurance of equipment to the extent of its work-related use (paragraphs 206 and 207).

Interest on loan to purchase equipment:

A deduction is allowable for interest on money borrowed to finance the purchase of equipment to the extent to which the equipment is used for work-related purposes (paragraphs 208 and 209).

Internet access:

A deduction is allowable for the "time usage cost" of researching work-related matters on the Internet. This includes the work-related portion of the service provider recurrent costs or costs associated with accessing web sites. Installation and connection costs of an Internet environment are not allowable deductions (paragraphs 210 and 211). (See, also, Telephones, answering machines, pagers, beepers and other telecommunications equipment expenses, paragraphs 296 to 303.)

Laundry and maintenance of clothing, etc:

A deduction is not allowable for the cost of laundry and maintenance of clothing and footwear (see Clothing, paragraphs 124 and 125).

Legal expenses:

A deduction is allowable for legal expenses incurred by a Member in defending the day-to-day activities through which he or she gains or produces assessable income (work-related activities), if the losses or outgoings are not capital, private or domestic in nature. Where legal proceedings stem from activities that could not reasonably be regarded as being part of the work-related activities of a Member, the losses or outgoings are not allowable deductions (paragraphs 212 to 221).

Maintaining a private residence:

A deduction is not allowable for the cost of maintaining a Member's private residence.

Meals:

A deduction is not allowable for the cost of meals eaten during a normal working day (paragraphs 222 to 227). A deduction is not allowable for the cost of providing meals to visitors or guests (see Entertainment expenses, paragraphs 174 to 181). A deduction is allowable if meal costs are incurred by a Member who travels away from home overnight on work-related activities (see Travel expenses, paragraphs 307 to 343).

Motor vehicle and other transport expenses:

Transport expenses include public transport fares and running costs associated with using motor vehicles, motor cycles, bicycles, etc., for work-related travel (paragraphs 228 to 230). These expenses do not include accommodation, meals and incidental expenses incurred in undertaking work-related travel involving an overnight stay away from a Member's residence (see Travel expenses, paragraphs 307 to 343). We consider the treatment of motor vehicle and other transport expenses incurred by a Member when travelling below.

Travel between home and a normal place of work:

A deduction is not allowable for the cost of travel between home and the normal work place. This outcome is not altered by the performance of incidental tasks en route, or if the travel is outside normal working hours, or includes a second or subsequent trip (paragraphs 231 to 235).

Travel between two separate work places:

A deduction is allowable for the cost of travelling directly between two separate work places (paragraph 236).

Travel from a normal work place to an alternative work place and back to a normal work place, or directly home:

A deduction is allowable for the cost of travelling directly between a normal work place and an alternative work place. A deduction is also allowable for the cost of travel from an alternative work place back to a normal work place or directly home (paragraphs 237 and 238).

Travel from home to an alternative work place and then to a normal work place, or directly home:

A deduction is allowable for the cost of travel from home to an alternative work place and then on to the normal work place or directly home (paragraphs 239 and 240).

Automobile Association/Club membership fees:

The annual road service fee is taken into account in calculating the deduction allowable if a Member uses either the log book method or one-third of actual expenses method to claim work-related car expenses (paragraphs 241 and 242).

Calculation of motor vehicle depreciation balancing adjustment:

A depreciation balancing adjustment may be necessary on the disposal of a motor vehicle that a Member owns and uses for work-related purposes (see Taxation Ruling IT 2493 and paragraph 243).

Car wash expenses:

The cost of cleaning a vehicle is taken into account in calculating the deduction allowable if a Member uses either the log book method or one-third of actual expenses method to claim work-related car expenses (paragraph 244).

Depreciation cost limit for motor vehicles:

Section 42-80 imposes a limit on the depreciable cost base of motor vehicles (including four-wheel drive vehicles) (paragraph 245).

Car provided by "employer":

A deduction is not allowable for car expenses incurred by a Member if:

(a)	an "employer" provides the car (see Role of a Member, paragraph 35 – 41) for the exclusive use of the Member and/or their relatives; and

(b)	the Member and/or his or her relatives are entitled to use the car for private purposes (see section 51AF of the ITAA 1936 and paragraphs 246 and 247).

Parking fees and tolls:

A deduction is allowable for bridge tolls, road tolls and parking fees (but not fines) paid by a Member while travelling on, or for, work-related purposes (paragraph 248).

Newspapers:

A deduction is allowable for the cost of newspapers to the extent to which a Member uses them for work-related purposes (paragraphs 249 to 256).

Party membership fees, levies and donations:

A deduction is allowable for compulsory membership subscriptions and levies paid to retain membership of a political party. A deduction may also be allowable, up to a maximum of $1,500 in any one income year, for donations of $2 or more made to certain political parties, independent candidates and independent Members ** (paragraphs 257 to 259).

**Note proposed legislation (These comments do not form part of the Ruling and are provided to alert readers to a potential legislative change).

Patron expenses:

A deduction is allowable for expenses incurred in being a patron of an organisation where the outgoings are directly connected to a Member's work-related activities and they are not of a private or domestic nature (paragraphs 260 and 261).

Professional library:

A deduction is allowable for depreciation of a professional library to the extent of its work-related use. The content of reference material must be directly relevant to work-related activities (paragraphs 262 to 266).

Raffle ticket expenses:

A deduction is allowable for the cost of raffle tickets where a Member incurs the expenditure as a consequence of his or her participation in work-related functions and activities.

A deduction is not allowable for the cost of raffle tickets where the expenditure is incurred in situations where the Member is merely attending a function or activity in his or her private capacity (paragraphs 267 to 273).

Raffle prizes:

The value of any prizes won does not form part of a Member's assessable income (paragraph 274).

Relocation expenses:

A deduction is not allowable for expenses incurred when a Member moves from a residence in one location to another location (paragraphs 275 to 279).

Repairs to equipment:

A deduction is allowable for the cost of repairs to equipment to the extent that the equipment is used for work-related purposes (section 25-10) (paragraphs 280 and 281).

Security costs:

A deduction is not allowable for the cost of installing a security system at a Member's residence. However, a deduction is allowable for the depreciation and maintenance of a security system installed in a Member's electorate office where a Member incurs the costs of installation and maintenance. A deduction is also allowable for the depreciation and maintenance of a security system installed in a second property to the extent to which that property is used by a Member for accommodation purposes on work-related travel involving an overnight stay away from his or her residence (paragraphs 282 to 284).

Self-education expenses:

A deduction is allowable for the cost of self-education if there is a sufficient connection between the course of education and the work-related activities of a Member. Self-education costs can include fees, travel, books, and equipment (paragraphs 285 to 288). See, also, Taxation Ruling TR 98/9.

Limit on deductibility:

In some circumstances, the amount allowable under section 8-1 will need to be adjusted (see paragraphs 289 to 291).

Stationery:

A deduction is allowable for the cost of stationery, log books, diaries, etc., to the extent to which a Member uses them for work-related purposes.

Technical or professional publications:

A deduction is allowable for the cost of buying, or subscribing to, journals, periodicals and magazines that are not general in nature and have a content specifically connected to a Member's work-related activities (paragraphs 292 to 295).

Telephones, answering machines, pagers, beepers and other telecommunications equipment expenses:

A deduction is allowable for the work-related portion of the rental cost (paragraphs 301 and 302), or depreciation of these items (see Depreciation of equipment, paragraphs 141 to 152).

Cost of calls:

A deduction is allowable for the cost of work-related calls (paragraphs 296 to 298).

Installation or connection costs:

A deduction is not allowable for the cost of installing or connecting a telephone, etc., (paragraphs 299 and 300).

Rental Costs:

A deduction is allowable for a proportion of private home telephone/equipment rental costs where a Member can demonstrate that he or she has a work-related need to use their private telephone equipment outside normal "office" hours (paragraphs 301 and 302).

Unlisted telephone number:

A deduction is not allowable for the cost of obtaining an unlisted telephone number (paragraph 303).

Trade, business or professional association fees:

A deduction is allowable for annual fees paid to associations to the extent to which the fees relate to a Member's work-related activities. A deduction is not allowable for joining fees or for contributions to staff social clubs or associations. Where the services provided by an association do not directly relate to a Member s work-related activities, the deduction for any income year is limited to $42 in respect of any one association (paragraphs 304 to 306).

Travel expenses:

A deduction is allowable for the cost of travel (fares, accommodation, meals and incidentals) incurred by a Member on work-related travel (paragraphs 307 to 343). Special substantiation rules apply to travel allowance expense claims (see Substantiation rules, paragraphs 46 to 56).

Travel expenses covered by a travel allowance:

A deduction is allowable for travel expenses that are covered by a travel allowance, provided the tests for deductibility and the substantiation rules are satisfied. However, where the claim for deductible travel allowance expenses does not exceed amounts considered reasonable by the Commissioner, substantiation is not required (paragraphs 313 to 320). The receipt of an allowance does not automatically entitle a member to a deduction for travel expenses.

Travel expenses not covered by a travel allowance:

A deduction is allowable for travel expenses incurred that are not covered by a travel allowance, provided the tests for deductibility and the substantiation rules are satisfied (paragraphs 321 and 322).

Travel expenses covered by an annual entitlement:

A deduction is allowable for travel expenses that are covered by an annual entitlement, provided the tests for deductibility and the substantiation rules are satisfied (paragraphs 323 to 325).

Accompanying relatives travel expenses:

Section 26 -30 may affect the deduction allowable for the cost of travel attributable to relatives accompanying a Member on work-related travel (paragraphs 326 and 327).

Second property not used as a Member's residence:

A deduction is allowable for expenses of a non-capital nature, and for depreciation of plant, where the property is not properly regarded as a second residence. However, the deduction is limited to the extent to which the expenditure is incurred in respect of a property that is used by a Member for work-related travel purposes on overnight stays away from his or her residence, and the expenditure is not private or domestic in nature (paragraphs 328 to 336).

Second residence expenses:

A deduction is not allowable for the costs of maintaining a property that is used as a second residence (paragraphs 337 to 343).

Wages:

A deduction is allowable for the cost of wages paid for services rendered to assist a Member to carry out his or her work-related activities, provided the expenditure is not private or domestic in nature (paragraphs 344 and 345).

Related entity:

A deduction is not allowable to the extent to which a payment of wages to a relative, exceeds the amount considered reasonable (paragraphs 346 to 348).

Watches:

A deduction is not allowable for the cost of purchasing, repairing or maintaining a watch (paragraphs 349 and 350).

DATE OF EFFECT AND APPLICATION

30.	This Ruling applies to years of income commencing both before and after its date of issue. The only exceptions are our views on the deductibility of travel and newspaper expenses, which apply only to the 1999-2000 year of income and subsequent income years.

31.	The view expressed at paragraph 27 in relation to the inapplicability of paragraph 8-1(1)(b) to losses or outgoings incurred by a Member, differs from our previously held view. Consequently, the position outlined therein will only apply, where necessary, to a Member's losses or outgoings incurred in the 1999-2000 year of income and subsequent income years.

32.	The Ruling does not apply to Members to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

33.	Where a Member's circumstances are different from those described in this Ruling he or she can apply for a private ruling under section 14ZAF or 14ZAG of the Taxation Administration Act 1953.

34.	The application of public rulings where a taxpayer has a private ruling is considered at paragraph 19 of Taxation Ruling TR 92/20 and also in Taxation Determination TD 93/34.

EXPLANATIONS

Role of a Member

35.	The role of a Member can be summarised as follows.

•	Parliamentary. The primary role of a Member is to represent his or her electorate in the Parliament. A Member is expected to attend Parliament and vote regularly on Bills, take part in debates and Parliamentary committees, present petitions from his or her electorate, talk to the media, etc.

•	Electoral. A Member is expected to meet with constituents and attend activities within the electorate such as school fetes, annual meetings of community clubs and organisations, balls, new factory and public works openings, and the like. A Member may also be required to travel intrastate, interstate and overseas as part of his or her overall responsibilities.

•	Party. A Member who is a member of a political party is expected to organise and sustain branches of the party, help formulate policy through party committees, and to campaign for the party. He or she also campaigns for party endorsement as a candidate for election.

36.	Members are not common law employees. None of the usual indicia of an employee/employer relationship, such as an express or implied contract of employment, ability to direct activities or exercise control over the employee, apply to Members. There is clearly no employer, although in a sense a Member owes duties to the Parliament, constituents and probably his or her party organisation.

37.	For the reasons outlined at paragraphs 95 to 112, although a Member is not a common law employee, we do not consider that a Member's work-related activities, undertaken to discharge his or her Parliamentary, electoral and party responsibilities, amount to a business carried on for the purpose of gaining or producing assessable income.

38.	However, a Member of an Australian Parliament is specifically incorporated into the definition of "employee" by virtue of the definitions of "salary or wages" and "eligible person" in section 221A of the ITAA 1936. The person or government body who pays a Member's Parliamentary remuneration is also defined in section 221A as the Member's "employer".

39.	 [A] Member of an Australian Parliament' also comes within the statutory definition of "employee" in the FBTAA by virtue of its link to section 221A of the ITAA 1936.

40.	In addition, a Member is treated as an "employee" for Superannuation Guarantee purposes (section 12, Superannuation Guarantee (Administration) Act 1992).

41.	The intention, and effect, of these provisions is to ensure that a Member's Parliamentary "salary" and allowances are subjected to tax instalment deductions, that certain claims for deductions are subject to the substantiation provisions, that fringe benefits are taxed, and that the superannuation guarantee provisions apply in appropriate circumstances.

Allowances

42.	Members commonly receive the following types of allowances in addition to their Parliamentary "salaries". Particular allowances may vary, depending on the Parliament in which a Member serves.

Committee allowances:

This is a daily allowance paid to Members of Parliamentary Committees to cover incidental costs.

Daily expense allowance:

This allowance is paid to federal Members who hold seats in the Australian Capital Territory for each day they attend sittings or meetings in Canberra.

Electorate allowance:

This allowance is paid to cover incidental expenditure incurred in discharging a Member's electoral responsibilities.

Expense or entertainment allowance:

This allowance is paid to some Ministers and office holders in State Parliaments. It is paid to cover incidental expenditure incurred in discharging his or her additional responsibilities.

Opposition spokespersons' allowance:

This allowance is paid to cover additional costs incurred by nominated opposition spokespersons.

Postage allowance:

This allowance is paid to cover postage costs incurred in discharging Parliamentary and electoral responsibilities.

Printing and stationery allowance:

This allowance is paid to cover the costs of printing and stationery incurred in discharging Parliamentary and electoral responsibilities.

Private vehicle allowance/motor vehicle allowance:

This allowance is paid where a Member uses his or her private vehicle for work-related purposes.

Telephone allowance:

This allowance is paid to offset the work-related costs associated with the use of home and mobile telephones.

Travel allowances including the following:

•	An allowance, based on prescribed amounts, paid on a per trip basis for specific travel to nominated destinations.

•	An allowance, based on prescribed amounts, paid in respect of a special purpose, such as continuing professional development.

•	An allowance, based on a fixed annual entitlement, paid to cover the travel costs of a spouse or nominee who accompanies a Member.

•	An allowance, based on prescribed amounts, paid on a per trip basis for travel to nominated destinations where evidence is available that expenses have been incurred at commercial establishments such as hotels and motels.

•	An allowance paid on a per trip basis for travel to nominated destinations where Members are not accommodated at commercial establishments. The rate at which this allowance is paid reflects the reduced costs associated with being accommodated at non-commercial establishments.

•	An allowance, based on an average number of anticipated trips, paid to Members in the form of a fixed annual entitlement to cover the costs of accommodation, food, drink and incidental expenses for overnight travel. The allowance is not paid on a trip-by-trip basis as and when travel is undertaken.

•	An allowance, paid to some State Members, towards the cost of overnight accommodation and incidental expenses where their usual place of residence is located a "prescribed distance" from the GPO of the State Capital. The "prescribed distance" may be determined by way of a specified distance from a GPO or by way of a specified electorate categorisation. The allowance is paid as a fixed annual entitlement. A Member can use the allowance to cover the costs of commercial or non-commercial accommodation.

43.	As at the date of this Ruling, the various travel allowances received by Members do not exceed amounts set by the Remuneration Tribunal on which the reasonable allowance amounts in respect of travel expenses are based (see paragraphs 51 to 55).

44.	Members should return allowances (and Parliamentary "salaries"), with the exception of those allowances referred to at paragraph 45, as assessable income under section 6-5 or 6-10. The fact that a Member may claim certain deductions in respect of losses or outgoings arising from the activity to which the allowance is directed, does not affect assessability.

45.	The exception applies where a Member receives a domestic travel allowance or an overseas travel allowance for food, drink or incidentals and the deductible expenses incurred are equal to, or greater than, the amounts considered reasonable by the Commissioner for substantiation purposes. In these circumstances, if the Member chooses not to claim deductions for relevant expenses in his or her income tax return, then the amount of the allowance need not be included in assessable income (see Administrative arrangements applicable to travel allowances, paragraphs 57 to 64). See, also, Travel expenses covered by an annual entitlement, paragraphs 323 to 325.

Substantiation rules

46.	As explained at paragraphs 38 to 41, the substantiation rules in Division 900 apply to Members because they are included in the definition of "PAYE earner" and are, therefore, treated for substantiation purposes as if they are employees.

47.	In respect of a Member's work-related activities, the substantiation rules apply only to "work expenses" that qualify as deductions under a Division of the ITAA 1997, other than Division 900 – the substantiation rules – and "car expenses" that qualify as deductions under a Division other than Division 28.

Work expenses

48.	"Work expenses" are those losses or outgoings incurred in producing a Member's Parliamentary salary and allowances, and include, but are not limited to:

•	expenses for accommodation, food, drink and incidentals covered by a travel allowance ("travel allowance expenses");

•	expenses for food and drink covered by a meal allowance ("meal allowance expenses");

•	depreciation expenses; and

•	Parliamentary election expenses.

Car expenses

49.	Written evidence is required to substantiate the total claims for deduction under the "one-third of actual expenses" and "log book" methods of deducting car expenses. The substantiation rules do not apply to "car expenses" claimed under the cents per kilometre or 12% of original cost methods. There is no exception for a small total of expenses equivalent to that found with "work expenses" of $300 or less. A comprehensive explanation of the "one-third of actual expenses" and "log book" methods of deducting car expenses is provided in the annual TaxPack publication under the "car expenses" question.

50.	The effect of the substantiation rules on "work expenses" and "car expenses" is that, even though the expenses might otherwise satisfy the general tests for deductibility (see "General deductions", paragraphs 89 to 94) or other deduction provisions, they are not allowable as deductions unless they can be substantiated with written evidence. However, if the total "work expenses" (which do not include "car expenses") claimed, excluding "travel allowance expenses" and "meal allowance expenses", are $300 or less, the expenses incurred can be claimed without getting written evidence, provided they are otherwise deductible.

Exception to the substantiation rules – "work-expenses"

51.	The Commissioner of Taxation publishes an annual Taxation Ruling that outlines amounts considered reasonable in relation to certain "work expenses". For Members, these are:

•	domestic travel allowance expenses, and

•	overseas travel allowance expenses for food, drink or incidentals.

52.	If a Member receives an allowance for domestic travel expenses or overseas travel expenses for food, drink or incidentals, and the amount of the deduction the Member claims for expenses covered by the allowance is no more than the reasonable amount notified in the annual Reasonable Allowance Amounts Taxation Ruling, substantiation is not required. However, as explained at paragraph 50, deductions are limited to expenses that qualify as allowable deductions under other provisions. If the Member claims a deduction that is more than the reasonable amount, the exception does not apply and the Member must substantiate the whole claim – not just the excess over the reasonable amount.

53.	However, notwithstanding the exception in relation to overseas travel allowance expenses, a deduction for these expenses incurred in travelling away from a Member's ordinary residence for six or more nights in a row is not allowable unless the Member keeps travel records showing that the Member undertook the activities in the course of producing the Member's assessable income.

54.	The exceptions to the substantiation rules do not cover accommodation expenses incurred in respect of overseas travel (see subsection 900-55(1)).

55.	The annual Reasonable Allowance Amounts Ruling published by the Commissioner has detailed information on the amounts considered reasonable, and relevant substantiation rules. (See for example, Taxation Ruling TR 1999/7 for the 1999-2000 income year).

Relief from substantiation rules

56.	If a Member cannot substantiate a claim for a deduction in respect of "work expenses" or "car expenses", the Member's right to deduct the amount may not be affected if the nature and quality of the evidence available is sufficient to satisfy the Commissioner that the Member has incurred the expense, and it is otherwise deductible (see Subdivision 900-H and Taxation Ruling TR 97/24).

Administrative arrangements applicable to travel allowances

57.	In the interests of reducing the costs of complying with taxation laws, the Commissioner adopts a pragmatic approach in relation to certain allowances. This obviates the need for tax instalments to be deducted from domestic travel allowances, and overseas travel allowances for food, drink or incidentals where the recipient of the allowance is expected to incur deductible expenses at least equal to the amounts the Commissioner considers reasonable. Where applicable, the allowances concerned do not have to be shown on group certificates (see, for example, PAYE Bulletin No. 8 for the 1999-2000 and future income years). See, also, Travel expenses covered by an annual entitlement, paragraphs 323 to 325.

Claims for deduction

58.	If a Member receives a travel allowance of the kind described at paragraph 52 and incurs deductible expenses equal to, or greater than, the reasonable amount, the Member may choose not to claim a deduction in his or her income tax return, or to include the allowance in assessable income.

59.	However, where a Member chooses to claim a deduction, be it less than, equal to, or greater than, the reasonable amount, the Member must include the full amount of the allowance in assessable income, and may claim a deduction for the actual expenditure incurred provided, where necessary, the claim can be substantiated.

60.	If a Member wishes to claim a deduction for expenditure in excess of the reasonable amount, it is only the amount for the particular trip, or trips, that needs to be included as assessable income.

61.	Example: A Member undertakes ten domestic trips in an income year for which he is paid travel expense allowances totalling $7,500. Each allowance paid does not exceed the amounts considered reasonable, and it is expected that the Member would incur deductible expenses at least equal to the amount of the allowances paid. Tax instalments are, therefore, not deducted and no part of the $7500 is shown on his group certificate.

62.	On one trip, for which he is paid an allowance of $1,250, the Member incurs deductible expenses of $1,500 that can be substantiated. As he wishes to claim a deduction for the full $1,500 he incurred, the Member must include the $1,250 allowance received for that trip in his assessable income, and claim a deduction for the $1,500 expenses.

63.	Provided the Member incurs deductible expenses in relation to each of the other nine trips, at least equal to the amount of the allowances received for each of those trips, the Member does not need to include any further amount in respect of the allowances in his assessable income.

64.	If a deduction is claimed for travel expenses covered by a travel allowance, the Member must include the allowance as assessable income.

Reimbursements

65.	If a Member is compensated for an expense already incurred, the payment is a reimbursement (see Taxation Ruling TR 92/15).

66.	Where a reimbursement of a deductible expense is a fringe benefit under the FBTAA, any deduction otherwise allowable to a Member is reduced by the amount of the reimbursement (section 51AH of the ITAA 1936). Where the actual expense incurred is reimbursed, no part of the reimbursement is included in a Member's assessable income, and no part of the expense is allowable as a deduction.

67.	Where a non-deductible expense is reimbursed, section 51AH has no application. However, where the reimbursement is a fringe benefit, the entity that makes the reimbursement may be subject to FBT (e.g., refund of child care expenses). In these circumstances, no part of the reimbursement forms part of a Member's assessable income.

68.	Where a Member receives a payment in respect of motor vehicle expenses that is based on the distance travelled by the motor vehicle, e.g., cents per kilometre, the Member should include the amount received as assessable income under paragraph 26(eaa) of the ITAA 1936. A deduction may be allowable for the motor vehicle expenses incurred (see Motor Vehicle and other transport expenses, paragraphs 228 to 248).

69.	However, where a reimbursement that is not a fringe benefit under the FBTAA comprises a "recoupment" as defined in section 20-25 of the ITAA 1997, and the recoupment is for a loss or outgoing of a kind specified in section 20-30, the amount recouped forms part of a Member's assessable income and the deduction for the relevant loss or outgoing is not reduced (see, also, Recoupment of deductible expenses at paragraphs 113 and 114).

70.	If a Member receives a payment for an estimated expense, we consider the amount received by the Member to be an allowance, not a reimbursement (see Allowances, paragraphs 8 to 12).

Donations and gifts

71.	If a Member receives a donation or gift of money because of, in respect of, for, or in relation to, his or her work-related activities, the amount received forms part of his or her assessable income under section 6-5 or 6-10. This view follows from the principles that have been established in cases such as: The Squatting Investment Co. Ltd v. FC of T (1953) 86 CLR 570; Scott v. FC of T (1966) 117 CLR 514; 40 ALJR 205; Kelly v. FC of T (1985) 80 FLR 155; (1985) 16 ATR 478; 85 ATC 4283; FC of T v. Dixon (1952) 86 CLR 540; Hayes v. FC of T (1956) 96 CLR 47; FC of T v. Blake (1984) 2 Qd R 303; 75 FLR 315; (1984) 15 ATR 1006; 84 ATC 4661; G v. Commr of IR (NZ) 12 ATD 378 and FC of T v. Cooke & Sherden (1980) 42 FLR 403; (1980) 29 ALR 202; (1980) 10 ATR 696; 80 ATC 4140.

72.	Where a Member receives a donation or gift in the above circumstances in a form other than money, the Member is to include the value of the donation as assessable income (based on an arm's length value: see paragraph 26(e) of the ITAA 1936; section 6-10 of the ITAA 1997). This is because the donation or gift is given or granted to the Member in respect of, for or in relation directly or indirectly, to the Member's work-related activities (see paragraph 19).

73.	If a donation or gift is in all other respects assessable income, the fact that it is paid to a Member by a relative, friend or colleague is not sufficient to alter its character as assessable income in the hands of the Member.

74.	Example: A Member plans to seek re-election to the seat that he holds. To assist him to finance his campaign, friends and relatives arrange various fundraising activities and give the proceeds to the Member. These amounts form part of the Member's assessable income in the year in which the Member receives them.

75.	A donation or gift does not form part of a Member's assessable income in circumstances where it is given for personal reasons, unconnected with any work-related activities of the Member.

76.	Example: A Member relocates to the National Capital for a year due to the demands of her position. During the year she receives a number of gifts from her parents and other close relatives out of natural love and affection. There are no income tax consequences arising from the receipt of these gifts.

77.	Donations and gifts may be made to Members both as an expression of goodwill towards them personally, and also in recognition of some work-related activity of the Member (perhaps a major funding boost for the electorate) or the Member's political convictions. Accordingly, where a donation or gift is given on personal grounds, and a substantial, but not necessarily dominant reason for the donation or gift being received by the Member is to be found in his or her work-related activities, the donation or gift forms part of the Member's assessable income in the year in which the member receives it.

78.	Example: A Member receives unsolicited gifts of money when he addresses a meeting of party Members. These gifts are given because those attending are politically motivated to contribute to the work the Member is undertaking. Although the Member is not in any way motivated by the prospect of receiving the gifts when he sets out to address the meeting, these amounts form part of the Member's assessable income in the year in which the Member receives them.

79.	If a donation or gift to a nominated Member is channelled through a political party (including a donation or gift to a fund established by the political party) on the basis that the party will pass it on to that Member, the gift is assessable to the Member at the time the political party receives the donation or gift.

80.	Sometimes a donor makes a donation or gift to a political party and merely expresses a preference that it be passed on to a particular Member. The political party owns the donation or gift at the time it is made and retains an unfettered discretion about whether or not it acts in accordance with the donor's preference. In these circumstances, the donation or gift is assessable to the Member if, and to the extent to which, the political party actually passes on the donation or gift to the Member or otherwise deals with it on his or her behalf. The Member derives the income in these cases when he or she receives the donation or gift from the political party or it is otherwise dealt with on his or her behalf.

81.	Where a donor makes a donation or gift to a special purpose fund, such as a Member's re-election fund, that has been established by a political party to directly fund designated activities, the donation or gift does not form part of the Member's assessable income and there are no other income tax consequences for the Member.

Frequent flyer programs

82.	Benefits that arise under a standard frequent flyer program do not form part of a Member's assessable income because the benefits result from a personal contractual relationship that is not, in itself, productive of assessable income.

83.	The standard features of these programs are:

(a)	the customer is dealing with the supplier in a personal capacity, that is, in accordance with the normal arm's length commercial relationship that exists between consumers and suppliers;

(b)	membership is restricted to natural persons;

(c)	membership of the program is usually by application that may require an application fee;

(d)	benefits are accrued, in the form of points, with each purchase of goods or services;

(e)	program members and non-members both pay the same amount for the goods or services purchased; and

(f)	points are redeemable for goods or services.

Life gold passes and severance passes

84.	On "retirement" from Federal Parliament, Members are issued with either a Life Gold Pass or a Severance Pass. Similar travel entitlements are available for State and Territory Members.

85.	The benefits available to a Federal Member who has served in the Parliament are:

a)	Life Gold Pass: A Life Gold Pass is awarded to a Member who has either held high office (such as a Minister, Speaker or Prime Minister) or who has served in Parliament for 20 years (or the life of 7 Parliaments). The holder of a Life Gold Pass (and his or her spouse, if he or she accompanies the holder at the time of the travel) is entitled to up to 25 return trips per annum (by plane, train or bus) for non-commercial purposes within Australia, at government expense.

Furthermore, the widow or widower of a Gold Pass holder, or the widow or widower of a Member who would have qualified for a Gold Pass at the time of his or her death, is also entitled to travel for a period of 12 months from the death of the Gold Pass holder or Member, as the case may be.

b)	Severance Pass: A Member who doesn't qualify for a Gold Pass upon "retirement" from Parliament may, nevertheless, obtain a Severance Pass for non-commercial travel. The period of entitlement to travel under a Severance Pass varies from 6 months for service in one Parliament, to 5 years for service in 6 Parliaments. However, unlike the spouse of a Life Gold Pass holder, the spouse of a Member holding a Severance Pass has no entitlement to travel, whether during the lifetime of a Member or after the date of death of the Member.

86.	We do not consider that the issuing of passes under the Life Gold Pass and Severance Pass Schemes attracts any income tax implications. However, travel benefits received in relation to each use of a Gold Pass or Severance Pass by a Member will be taxed as a residual benefit, within the meaning of section 45 of Division 12 of the FBTAA, to the provider of the pass.

87.	Similarly, travel benefits received by the spouse of a Gold Pass holder, or by a widow or widower of a Member who dies in office but who would have qualified for a Gold pass at the time of his or her death, will be taxed as a residual fringe benefit to the provider of the pass.

88.	Under section 23L of the ITAA 1936 the value of these travel benefits do not form part of the recipient's assessable income under sections 6-5 or 6-10 of the ITAA 1997. This applies to a Member, the Member's spouse, and the widow or widower of the deceased Member, as the case may be.

General deductions

89.	A deduction is only allowable if a loss or outgoing:

(a)	is actually incurred (paragraph 90);

(b)	meets the deductibility tests (paragraphs 91 to 93); and

(c)	satisfies the substantiation rules where applicable (paragraphs 46 to 56).

Losses or outgoings actually incurred

90.	A deduction is only allowable for losses or outgoings actually incurred by a Member. For example, a deduction is not allowable for items provided to a Member free of charge, regardless of whether it is possible to substantiate the relevant expenses.

Deductibility tests

91.	The tests for deductibility of losses or outgoings are in section 8-1, which provides that:

"8-1(1) You can deduct from your assessable income any loss or outgoing to the extent that:

(a)	it is incurred in gaining or producing your assessable income; or

(b)	it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

8-1(2) However, you cannot deduct a loss or outgoing under this section to the extent that:

(a)	it is a loss or outgoing of capital, or of a capital nature; or

(b)	it is a loss or outgoing of a private or domestic nature; or

(c)	it is incurred in relation to gaining or producing your exempt income; or

(d)	a provision of this Act prevents you from deducting it."

92.	Section 8-1 applies to the 1997-98 year of income and subsequent years. The equivalent provision in the ITAA 1936, which expresses the same ideas, is subsection 51(1), which applies to income years up to, and including, the 1996-97 year of income.

93.	As a result of considerations of subsection 51(1), the courts have established that for a loss or outgoing to be deductible under paragraph 8-1(1)(a):

(a)	it must have the essential character of a loss or outgoing incurred in gaining assessable income or, in other words, of an income producing expense (Lunney v. FC of T; Hayley v. FC of T (1958) 100 CLR 478; (1958) 32 ALJR 139; (1958) 11 ATD 404 (Lunney's case));

(b)	there must be a nexus between the loss or outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T (1949) 78 CLR 47; (1949) 8 ATD 431 (Ronpibon Tin)); and

(c)	it is necessary to determine the connection between the particular loss or outgoing and the operations or activities by which the taxpayer more directly gains or produces his or her assessable income (Charles Moore & Co (WA) Pty Ltd v. FC of T (1956) 95 CLR 344; (1956) 11 ATD 147; 6 AITR 379; FC of T v. Hatchett (1971) 125 CLR 494; 71 ATC 4184; (1971) 2 ATR 557 (Hatchett's case)).

Apportionment

94.	The combined operation of subsections 8-1(1) and 8-1(2) may require apportionment of a loss or outgoing into deductible and non-deductible components, where a single loss or outgoing is incurred for more than one purpose or on items of a differing nature.

Does paragraph 8-1(1)(b) apply to losses or outgoings incurred by a Member?

95.	In Case N26 81 ATC 143; 24 CTBR (NS) Case 98 and Case M71 80 ATC 492; 24 CTBR (NS) Case 46, the Board of Review decided that each applicant Member was carrying on the business of a political vocation, with the result that consideration of their claims for deductions was not confined to paragraph 8-1(1)(a) and relevant parts of subsection 8-1(2), the bulk of the analysis being devoted to the application of paragraph 8-1(1)(b).

96.	Whereas courts interpret the paragraph 8-1(1)(b) test in fairly broad terms in comparison to the language they use in relation to the paragraph 8-1(1)(a) test, in practice the application of the paragraph 8-1(1)(b) test rarely produces a different result to the application of the paragraph 8-1(1)(a) test.

97.	As the Full High Court said, at CLR 56, of Ronpibon Tin:

"No doubt the expression "in carrying on a business for the purpose of gaining or producing" lays down a test that is different from that implied by the words "in gaining or producing". But these latter words have a very wide operation and will cover almost all the ground occupied by the alternative."

98.	Members are not common law employees (see, for example, State Chamber of Commerce and Industry & Ors v. The Commonwealth of Australia (1987) 163 CLR 329; 61 ALJR 459; 73 ALR 161; (1987) 19 ATR 103; 87 ATC 4745) because they have no identifiable employer. There is no express or implied contract of employment between a Member, his or her political party, the Executive, a Premier or the Prime Minister, or the Governor-General or a State Governor. Also, none of these entities exercises, or is entitled to exercise, a degree of control over a Member's activities sufficient to support an argument that a master servant relationship exists.

99.	The fact that Members are not common law employees does not lead, inexorably, to the conclusion that they are carrying on business within the meaning of the paragraph 8-1(1)(b) test for deductibility (see FC of T v. Charlton (1984) 71 FLR 107; (1984) 15 ATR 711; 84 ATC 4415 at 4418). For paragraph 8-1(1)(b) to apply, a Member's activities must amount to a business that he or she is "carrying on ... for the purpose of gaining or producing ... assessable income".

100.	In subsection 995-1(1), "business" is defined in the following terms: "business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee". The words "profession, trade, employment, vocation or calling" are not technical terms, and are, therefore, to be interpreted according to their ordinary meaning.

101.	Denman J considered the word "vocation", which is apt to describe a Member's activities, in Partridge v. Mallandaine (Surveyor of Taxes) (1886) 2 TC 179. He said, at 180, that:

"[a] man may employ himself in order to earn money in such a way as to come within that definition [employment], but I think the word "vocation" is a still stronger word. It is admitted to be analogous to the word "calling", which is a very large word; it means the way in which a person passes his life, and it is a very large word indeed."

102.	The words "vocation or calling" in the subsection 995-1(1) definition of "business" are wide enough to encompass a "profession" (see Robbins Herbal Institute v. FC of T (1923) 32 CLR 457 at 460-461) or "trade", as does "employment". It is, therefore, apparent that there is considerable overlap in the terms "profession, trade, employment, vocation or calling", and that the words "vocation or calling" are used in an extending sense to aid the inclusive nature of the definition, rather than as a reference to discrete occupations specifically intended to be brought within the definition.

103.	It is a common occurrence in the community for people to pursue vocations – passing their lives in particular ways for particular causes – that we could not regard as businesses carried on for the purpose of gaining or producing assessable income. The most frequently encountered are those pursuing hobbies or recreations, however avidly.

104.	People who, beyond formal retirement, continue their former activities in a scaled down or uncommercial manner, would also fall into the category of those pursuing vocations that do not amount to businesses carried on for the purpose of gaining or producing assessable income. For example, an accountant who continues to practice, but on a cost recovery or less than cost recovery, basis, or a lawyer who continues to practice for the benefit of community groups on a voluntary basis, may be said to be continuing their vocations. However, they could no longer be said to be carrying on a business for the purpose of gaining or producing assessable income.

105.	The categories, "profession, trade, employment, vocation or calling" referred to in the definition of "business" in subsection 995-1(1), represent occupations that have the potential to constitute businesses carried on for the purpose of gaining or producing assessable income as required by paragraph 8-1(1)(b). However, there is nothing in the definition of "business" that provides any guidance for determining whether the nature, extent and manner of undertaking those occupations would meet the requirements of paragraph 8-1(1)(b). Whether or not a particular occupation is carried on as a business for the purpose of gaining or producing assessable income is a question that can only be decided on the facts of the particular case.

106.	The courts have considered the meaning of the phrase "carrying on a business" on many occasions and have determined that, among other things, it is necessary for the activities under consideration to amount to a commercial enterprise (see, for example, Hope v. Bathurst City Council (1980) 144 CLR 1; 54 ALJR 345; 41 LGRA 262; (1980) 29 ALR 577; (1981) 12 ATR 231; 80 ATC 4386 per Mason J and State Superannuation Board (NSW) v. FC of T (1988) 82 ALR 63; (1988) 19 ATR 1264; 88 ATC 4382). Further, in the appeal to the Full Federal Court in the latter case (State Superannuation Board v. FC of T (1988) 21 FCR 535; (1988) 85 ALR 125; (1988) 20 ATR 211; 89 ATC 4078) Davies J stated (at FCR 548; ALR 139; ATR 222; ATC 4088) that:

"[a] business must have organisation. It usually has capital, plant, employees and consumables. It must derive income and it must trade with or deal with another person or persons".

107.	There are some similarities between a Member's activities and those undertaken by business proprietors in the commercial environment. For example, Members set up offices and go about their tasks in a businesslike way with system, regularity and repetition, etc. However, the nature of a Member's role is fundamentally different. On election, a Member becomes an integral part of the Parliament that, under the relevant constitutional framework, exercises the legislative power of the Commonwealth, State or Territory, as the case may be. Also, the associated activities undertaken by a Member in relation to his or her Parliamentary constituency are inextricably linked to the Member's primary and pivotal role as a Parliamentarian – they cannot be considered in isolation from that role. We consider that the essential nature of a Member's activities and those of the Parliament in which he or she serves are the same. The activities of Parliaments could not be described as being commercial in nature. Therefore, it follows that the activities of a Member do not amount to a commercial enterprise.

108.	For the above reasons, we cannot characterise a Member's activities as a business carried on for the purpose of gaining or producing assessable income. A Member's activities are more appropriately described as the rendering of services to the Parliament and their Parliamentary constituency, for which a Parliamentary remuneration is paid. Therefore, claims for deduction of losses and outgoings incurred in the course of gaining or producing assessable Parliamentary remuneration may only be considered under paragraph 8-1(1)(a).

109.	It follows from the above that we are, respectfully, of the view that Case N26 81 ATC 143; 24 CTBR (NS) Case 98 and Case M71 80 ATC 492; 24 CTBR (NS) Case 46 were wrongly decided. We believe that the Board of Review, in those cases, misdirected itself on its interpretation of the definition of "business", the relationship of that definition with the language of paragraph 8-1(1)(b), and the true nature of a Member's activities.

Ministers

110.	Ministers of State undertake a dual role. As elected Members, they have the normal Parliamentary and electoral responsibilities assumed by their non-Ministerial colleagues. However, they also have responsibility for administering government departments and membership of the Executive Council and Cabinet, where applicable. In the exercise of their statutory and other responsibilities, Ministers represent the Crown and do not act in the capacity of servants of the Crown. In this context, the administration of a government department is more appropriately described as the rendering of services by the responsible Minister to the department concerned.

111.	Although the Governor-General and State Governors have a limited legal right to control Ministers of State in respect of their appointment, they have rarely, if ever, in accordance with convention, exercised it. We do not consider that the existence of this limited right of control is sufficient, in itself, to establish a master servant relationship.

112.	Should we be wrong in this conclusion, it nevertheless follows that a Minister who is regarded as a common law employee would not be entitled to have claims for deduction of expenses incurred in connection with his or her Ministerial activities tested against paragraph 8-1(1)(b). Therefore, for the purposes of this Ruling, we do not need to draw a relevant distinction between Ministers and their non-Ministerial colleagues.

Recoupment of deductible expenses

113.	Subdivision 20-A operates to include in assessable income amounts received as recoupment of specified losses or outgoings allowed or allowable as deductions, such as election expenses, rates or taxes and tax-related expenses. The effect of these provisions is that, where there is a specified "recoupment", that broadly includes any kind of reimbursement, refund, insurance, indemnity or recovery, or grant in respect of a loss or outgoing, a member should include that amount as assessable income.

114.	Subdivision 20-A does not apply to recoupment amounts that are ordinary income or amounts that are included in assessable income by some other provision of the ITAA 1997. Neither does the Subdivision apply to recoupments of deductible expenses that are fringe benefits under the FBTAA. In practice, therefore, the recoupment provisions only apply to reimbursements of specified deductible expenses when a reimbursement is made by an entity other than the Member's "employer" (see Role of a Member, paragraph 35 – 41).

Work-related expense claims

115.	We discuss commonly encountered work-related expenses incurred by Members, and the extent to which they are allowable deductions, in alphabetical order below.

Briefcases, calculators and electronic organisers

116.	A deduction is allowable for depreciation on an item of plant, such as a briefcase, a calculator or an electronic organiser to the extent to which that item is used for work-related activities (section 42-15). For information on depreciation of items of plant generally, and specifically those costing $300 or less, or those having an effective life of 3 years or less, see Depreciation of equipment, paragraphs 141 to 152.

117.	A deduction is allowable for the cost of repairing and maintaining briefcases, calculators and electronic organisers to the extent of their work-related use. A deduction is also allowable for the cost of batteries for calculators and electronic organisers.

Child care

118.	A deduction is not allowable for child care expenses, even if a Member must arrange for child care so that he or she can undertake work-related activities. However, we may regard these expenses as "necessarily incurred" to the extent to which they form part of the costs of a prescribed course of education for the purpose of determining entitlement to a deduction for self education expenses (see Self education expenses, paragraphs 285 to 291).

119.	The High Court held in Lodge v. FC of T (1972) 128 CLR 171; 72 ATC 4174; (1972) 3 ATR 254 that child care expenditure was neither relevant nor incidental to gaining or producing assessable income and was, therefore, not an allowable deduction. The expenditure was also of a private or domestic nature (see, also, Jayatilake v. FC of T (1991) 101 ALR 11; 91 ATC 4516; (1991) 22 ATR 125).

120.	Example: A Member and his spouse are invited to attend a public function. They engage the services of a baby sitter to care for their children. The cost of the child care is not an allowable deduction as it is a private expense (see Case M 71 80 ATC 492; 24 CTBR (NS) Case 46) and Martin v. FC of T 84 ATC 4501; (1984) 15 ATR 808).

Clothing

121.	deduction is not allowable for the cost of conventional clothing and footwear, or for the cost of cleaning and maintaining conventional clothing or footwear.

122.	Example: A Member decides, as a result of the televising of parliamentary proceedings, to purchase a range of high quality garments to wear on those occasions. A deduction is not allowable because there is an insufficient connection between the acquisition of these items and the Member's work-related activities. The costs incurred by the Member are also private or domestic in nature.

123.	The fact that conventional clothing is damaged in an accident at work does not alter the private nature of the cost of replacement clothing or the cost of repairing the damage.

Laundry and maintenance

124.	A deduction is not allowable for the cost of cleaning and maintaining clothing of the kind worn by Members, because the losses or outgoings are private or domestic in nature.

125.	See, also, Taxation Rulings TR 94/22 and TR 97/12.

Club membership fees

126.	A deduction is not allowable for recreational club membership fees as they are losses or outgoings of a private nature. Section 26-45 specifically denies a deduction for the cost of recreational club membership, or the right to enjoy the facilities of a club. However, a deduction is allowable for annual fees paid for Airport Lounge membership to the extent to which a Member uses the membership for work-related purposes.

Community group membership fees

127.	A deduction is not allowable for membership fees of a community group unless the Member's involvement with the community group is for work-related purposes and the fees are not of a private nature.

128.	In Case H33 76 ATC 285; 20 CTBR (NS) Case 87, a member of a State Parliament was allowed a deduction for a subscription to a suburban Catholic Club. The membership was mainly for political reasons and gave the taxpayer little personal advantage.

129.	A deduction is not allowable for membership fees where a community group is established or carried on mainly to provide facilities for the use or benefit of its members for drinking, dining, recreation or entertainment (section 26-45).

Computers and software

130.	A deduction is allowable under section 42-15 for depreciation on the cost of computers, modems and related software and hardware to the extent to which a Member uses them for work-related purposes. A member can depreciate a computer bought on or after 1 July 1991 at the rate of 100% if its cost is $300 or less, or its effective life is less than 3 years.

131.	If a Member buys software separately from a computer, in the period 1 July 1991 to 11 May 1998, a deduction for the full cost of the software is allowable (under the general deduction provisions) in the year in which it is purchased. The Member must apportion the deduction between work-related and private use, if applicable (see Depreciation of equipment, paragraphs 141 to 152).

132.	A deduction is allowable under section 25-10 for the cost of repairs to computer equipment. A Member must apportion the cost of any repair between work-related and private use, if applicable.

133.	A deduction is allowable for the interest paid on money borrowed to finance the purchase of a computer. A Member must apportion the amount of interest between work-related and private use, if applicable.

Conferences, seminars and training courses

134.	Subject to the limitations of deductibility for Self education expenses explained at paragraphs 289 and 291, a deduction is allowable for the cost of attending conferences, seminars and training courses to maintain or increase the knowledge, ability or skills required by a Member. There must be a relevant connection between the conference, seminar or training course and the current work-related activities of a Member.

135.	In FC of T v. Finn (1961) 106 CLR 60; (1961) 12 ATD 348, an architect voluntarily studied architectural development overseas. The High Court held (at CLR 70; ATD 352) that:

"... a taxpayer who gains income by the exercise of his skill in some profession or calling and who incurs expenses in maintaining or increasing his learning, knowledge, experience and ability in that profession or calling necessarily incurs those expenses in carrying on his profession or calling."

136.	A deduction is allowable for the cost of travel (fares, accommodation, meals and incidental expenses), registration and conference material costs incurred in attending work-related conferences or seminars.

137.	Example: A Member attends a training seminar delivered by the Media Entertainment and Arts Alliance at a venue located away from his workplace and is required to stay overnight. The seminar covers topics such as: dealing with media interviews; how to present a professional image on camera; and wardrobe considerations. The seminar is directly relevant to increasing the Member's knowledge and work-related skills. A deduction is allowable for the cost of attending the seminar.

138.	If part of the cost of a conference, seminar or training course represents the cost of food and drink that is provided, the cost is only an allowable deduction according to the terms of section 32-35 (see Taxation Determination TD 93/195).

139.	If the main purpose in incurring relevant costs is to attend a conference, seminar or training course and the existence of any private activity is merely incidental, no apportionment of the costs is necessary. If attendance at a conference, seminar or training course is only incidental to a private activity (e.g., a holiday) then only those costs directly attributable to the conference, seminar or training course are an allowable deduction. The cost of accommodation, meals and travel directly relating to the private activity is not an allowable deduction under section 8-1.

140.	Example: A Member with responsibilities in the areas of economics and commerce attends a ten day training course on "Trade negotiations in Asia – a practical guide". The course is directly relevant to her work-related activities and is held at a resort on the Gold Coast. She takes advantage of this location to take a few days holiday at the end of the course and incurs additional accommodation expenses as a result. As the main purpose in travelling to the resort is to attend the training course, she is entitled to claim the cost of her travel directly to and from the course. However, the only accommodation and meal expenses she can claim are those directly associated with the course.

Depreciation of equipment

141.	A deduction is not allowable under section 8-1 for the cost of an item of plant as it is a capital expense.

142.	A deduction is allowable for depreciation of items of plant owned and used by a Member for income-producing purposes (section 42-15). A deduction is also allowable for depreciation of items of plant that a Member does not actually use during the year of income for income-producing purposes, but installs ready for use for that purpose and holds in reserve.

143.	There are two methods of calculating depreciation. These are the prime cost method and the diminishing value method. Depreciation using the prime cost method is calculated as a percentage of the cost of the item of plant. Depreciation using the diminishing value method is calculated initially as a percentage of the plant's cost and thereafter as a percentage of the undeducted cost (the cost of the plant less the sum of the depreciation deductions and any further depreciation amounts that are not allowable as deductions because the plant was not wholly used for income-producing purposes).

144.	A Member can depreciate an item of plant acquired on or after 1 July 1991 at a rate of 100% if its cost is $300 or less (section 42-130), or if its effective life is less than three years (section 42-125). This means that an immediate deduction is available for the cost of such items of plant in the year of income in which the member acquires them. However, the Member may depreciate items at a rate less than 100% if the he or she so elects (section 42-120).

145.	Example: A Member pays $250 for a briefcase that he uses only for work-related activities, e.g., carrying reference books, documents and notes. The amount of $250 is an allowable deduction in the income year in which he acquired the briefcase.

146.	If a Member uses plant partly for work-related purposes and partly for other purposes, the Member should reduce the depreciation deduction to reflect the extent of work-related use (subsection 42-170(1)).

147.	Example: A Member owns a laptop computer that she uses for work-related purposes during the week, and at home on weekends for preparing personal letters. The Member estimates from diary notes that 15% of the computer's use is for private purposes. The Member is entitled to a deduction for 85% of the total depreciation.

148.	If a Member acquires plant part way through an income year, the Member must apportion the depreciation on a pro-rata basis.

149.	We do not accept an arbitrary figure when determining the value of plant for depreciation purposes (Case R62 84 ATC 454; 27 CTBR (NS) Case 113).

150.	Example: A Member purchases a bookcase on 1 July 1996 for $400 but does not use it for work-related purposes until 1 July 1998. He depreciates it at a rate of 13.5% using the diminishing value method.

151.	To determine the opening undeducted cost of the bookcase, the Member should calculate depreciation at the specified rate from the date of purchase to 30 June 1998. The depreciation in the 1997 and 1998 years is $54 and $47 respectively. The opening undeducted cost of the bookcase at 1 July 1998 is $299 ($400 – $54 – $47). In the 1998-99 year, the Member uses the bookcase solely for work-related purposes, and the depreciation expense that is allowable as a deduction is $299 x 13.5% = $40.36, rounded to $41.

152.	Taxation Ruling IT 2685 sets out the current indicative depreciation rates.

Donations, gifts and contributions

153.	Division 30 of the ITAA 1997 contains specific provisions regarding the deductibility of gifts and donations of $2 or more to listed or approved recipients. (See, also, Party membership fees, levies and donations, paragraphs 257 to 259.)

154.	Apart from the specific provisions of Division 30, a deduction is allowable under section 8-1 for the cost of:

(i)	donations – such as trophies, books and sporting equipment;

(ii)	gifts – such as flowers and cards for birthdays, anniversaries, funerals and the like and ad hoc emergency monetary assistance to constituents; and

(iii)	contributions to organisations – such as guides, scouts, church organisations and sporting clubs

within the Member's electorate, where the outgoings are directly connected to work-related activities, and they are not private or domestic in nature. A deduction may also be allowable for the cost of such donations, gifts and contributions made outside the Member's electorate where that direct connection exists. For example, in the case of a Minister (or Shadow Minister) who makes a donation to an organisation located outside of his or her electorate that performs services in an area covered by his or her portfolio responsibilities. Where a deduction is allowable under one of these provisions, it is not also allowable as a double deduction under the other.

155.	"Donations" for the provision of entertainment are not deductible (see Entertainment expenses, paragraph 176).

Driver's licence

156.	A deduction is not allowable for the cost of obtaining or renewing a driver's licence. The cost associated with obtaining a driver's licence is of a capital or private nature. The cost of renewing a licence is private in nature.

157.	In Case R49 84 ATC 387; 27 CTBR (NS) Case 104, the Board of Review held that even though travel was an essential element of the work to be performed by the taxpayer, a driver's licence was still an expense that was private in nature and the cost was not an allowable deduction under subsection 51(1) of the ITAA 1936.

Election expenses

158.	A deduction is allowable for expenditure incurred in contesting Parliamentary elections (section 25-60). Unlike the general deduction provisions of section 8-1, the election expense provisions do not specifically "deny deductibility on the basis that the outgoings are of a capital, private or domestic nature" (Case S23 85 ATC 253 at 254; 28 CTBR (NS) Case 22 at 169 (Case S23)). However, for a deduction to be allowable, the expenditure must be "incurred in contesting an election" and it must be of a type that a Member would incur to further his or her chances of being elected to a Parliament.

159.	Claims for election expenses are only allowable where a Member can substantiate them (see Substantiation rules, paragraphs 46 to 56).

160.	In FC of T v. Wilcox 82 ATC 4411; (1982) 13 ATR 395 (Wilcox) it was decided that section 74 of the ITAA 1936 operated to allow the taxpayer deductions for election expenses incurred during a period of some 2 years between the date he was endorsed as a candidate and the date of the election he contested. The Court also agreed that the phrase "in contesting an election" in subsection 74(1) could be referable to events prior to the commencement of the formal election process.

161.	In Case S23 the Board found (at ATC 255; CTBR 170) that:

"[w]hilst the decision in Wilcox provides authority for the view that campaign expenses incurred prior to the official commencement of the election may, in certain circumstances, qualify for deduction in terms of section 74, the precise parameters of time are not clearly defined."

162.	The Board in Case S23 decided that, having regard to the circumstances of the case before it, particularly the absence of party endorsement, the taxpayer was not engaged in contesting an election when the expenses in question were incurred. In addition, the taxpayer had not established a connection between the expenditure and the contesting of the election necessary for a deduction to be allowable.

163.	The following expenditure, although not an exhaustive list, is typically incurred "in contesting an election":

•	advertising and promotional expenses incurred during the election period;

•	expenses of printing electoral material that is used in the election period;

•	costs of election-related opinion polls or other research undertaken during the election period;

•	travel and accommodation costs associated with the campaign;

•	wages paid to persons employed for campaign purposes;

•	auditing costs related to reimbursement claims;

•	costs of campaign novelty items – car stickers, T-shirts, lapel buttons or badges, pens, pencils or balloons;

•	costs of insurance policies specifically taken out to cover volunteer workers for the campaign;

•	additional expenditure on postage and telecommunications occasioned by an election;

•	running costs for vehicles used during the campaign period;

•	costs of campaign rallies and meetings;

•	costs of conveying voters to the polls;

•	payments to scrutineers;

•	ex-gratia payments to volunteer workers;

•	nomination deposits; and

•	costs involved in raffles or other fundraising activities.

164.	A deduction is not allowable for expenses incurred merely because a candidate incurs them during the period of time he or she contests the election, for example, where a candidate incurs "normal" household expenditure or acquires an asset that he or she may use during and after the election period.

165.	Example: A candidate claims deductions for a series of outgoings directed specifically at an election campaign, together with his normal housekeeping expenses incurred during the election period. A deduction is not allowable for the housekeeping expenses because they are not connected with the candidate's attempt at winning the election.

166.	Example: A candidate owns a car that is nearing the end of its effective life. As she needs a reliable vehicle to use in her election campaign, the candidate purchases another car for a change-over cost of $30,000 and claims this amount as a deduction under section 25-60. A deduction is not allowable for the $30,000 because the car is predominantly used for purposes other than contesting the election. However, running costs of the car incurred in contesting the election are allowable deductions.

167.	Section 25-70 limits the deductions that a candidate can claim under section 25-60 in relation to the provision of entertainment. These expenses are only deductible to the extent to which the candidate incurs them in respect of the provision of entertainment that is available to the public generally, or food or drink to the candidate while travelling overnight in the course of a campaign, unless the expenses of food and drink are incurred in the course of entertaining another person.

168.	A sitting Member who incurs expenditure that is not deductible under some other provision of the ITAA 1997, for example, section 8-1, is not able to gain the benefits of a deduction under section 25-60 merely because he or she may be contesting an election at some time in the future.

169.	In Case S23, a sitting Member incurred expenditure in relation to clothing, hair care, and dry-cleaning (which would not have been deductible under section 8-1). She claimed that the amounts expended would enhance the likelihood of her subsequent re-election and, therefore, the expenses were deductible as election expenses. The Board found (at ATC 256; CTBR 171):

"... having due regard to all of the circumstances, particularly those relating to the absence of party endorsement, that the taxpayer was not at that stage engaged in contesting an election, ...".

170.	A deduction is not allowable under section 25-60 for expenditure incurred in gaining party pre-selection.

171.	In Case J48 77 ATC 425; 21 CTBR (NS) Case 70, the Board disallowed pre-selection expenses because (ATC 427; CTBR 759):

"... in our opinion the best view is that pre-selection expenses, even if the pre-selection occurs close to election day, do not constitute expenditure incurred "in being elected a member, or in contesting an election for membership, of the Parliament", and hence do not fall within section 74 [of the ITAA 1936]."

172.	A person who is seeking to be elected as an independent does not need pre-selection. The time at which an independent candidate commences contesting an election, and from which expenses are incurred for that purpose, is a question of fact that varies according to individual circumstances.

173.	Where a Member receives a recoupment of deductible election expenses, the Member may need to include the amount of the recoupment as assessable income (see Recoupment of deductible expenses, paragraphs 113 and 114).

Entertainment expenses

174.	A deduction is not allowable under the general deduction provisions of section 8-1 for the provision of entertainment (see section 32-5). Of the exceptions to this general rule that are set out in Subdivision 32B, only section 32-35 relating to seminar expenses is relevant to Members (see paragraph 138).

175.	Broadly, the "provision of entertainment" means entertainment by way of food, drink, recreation, accommodation or travel. Entertainment includes business lunches and social functions, but excludes meals purchased during overnight work-related travel (subsection 32-10(2)).

176.	A deduction is not allowable for "donations" made under an arrangement for the specific purpose of enabling the recipient to provide entertainment, or to compensate or reimburse the recipient for the cost of providing entertainment, whether made for fund raising purposes or otherwise (see section 32-75).

177.	In Case Y11 91 ATC 184; AAT Case 6641 (1991) 22 ATR 3063, the Tribunal denied a senior officer in the Australian Defence Force, who was involved in negotiations to buy defence equipment, a deduction for expenditure incurred in attending a range of lunches, cocktail parties, dinners and other forms of social contact relevant to the performance of his duties. The officer did direct business on many of those occasions. The Tribunal held that the entertainment provisions (subsection 51AE(4) of the ITAA 1936) operated to deny the claim. It did not matter that the expenditure was directly relevant to business transactions.

178.	In Frankcom v. FC of T (1982) 65 FLR 25; 82 ATC 4599; (1982) 13 ATR 636, a magistrate was denied a deduction under the general deduction provisions for the costs of attending a cocktail party hosted by the Bar Association and Law Society and dinners given by the Queensland Stipendiary Magistrates" Association. The taxpayer’s duties as a magistrate did not necessitate his attendance at social functions. Hence, the expenditure was not incidental and relevant to the taxpayer's income-producing activities and was of a private nature. It should be noted, however, that this case was decided prior to the enactment of the entertainment provisions.

179.	Example: A Member provides light refreshments such as tea, coffee, fruit drinks, cakes and biscuits to constituents when they visit her electorate office. A deduction is allowable for the cost of providing these refreshments to the constituents because we do not consider that this amounts to the provision of entertainment, and the expenditure satisfies the general deduction tests.

180.	Example: When entertaining constituents and overseas visitors, a Member often invites guests to join him for a meal, at his expense, in the Parliamentary dining room. The provision of these meals amounts to entertainment and the cost is not an allowable deduction.

181.	Example: A Member hosts a barbecue at which proposals for government funding programs are debated and voted on by invited members of his local business community. The cost of this function is not an allowable deduction because it represents the provision of entertainment.

Expenses incurred in the transitional period before a Member takes his or her seat

182.	A Member who is elected to the Senate as the result of a half senate election does not take his or her seat until the 1st of July following the polling day. Similarly, a Member elected to the Western Australian Legislative Council does not take his or her seat until the 22nd of May following the polling day. In both cases, affected Members are not entitled to receive their Parliamentary remuneration until such time as they take their seats.

183.	Retiring Senators and Western Australian MLCs hold their seats, and are entitled to their Parliamentary remuneration until the end of their term in the Parliament. Throughout this period, retiring Members continue to represent their constituencies.

184.	A deduction is not allowable for any losses or outgoings incurred by Members "elect" prior to the date on which they take their seats because any connection which might exist between them and the income-producing process is too remote.

Functions and presentations

185.	A deduction is allowable for the cost of attending functions where a Member's attendance is for work-related purposes. A deduction is not allowable if a Member is attending a purely social function, such as a football match or family get-together. These expenses are private in nature and may also relate to the provision of entertainment (see Entertainment expenses, paragraphs 174 to 181).

186.	A deduction is allowable for the cost of attending a function, such as a gathering of parents and citizens who are representing schools within a Member's electorate, where a "meal" comprising finger food, such as sandwiches, cakes, party pies, sausage rolls and the like is served. That is, the "meal" is incidental to the main purpose of the gathering. The principle is not altered if refreshments such as tea, coffee, cool drinks and a glass of wine are also served – the function would not constitute entertainment.

187.	A deduction is allowable for the cost of attending a fund raising function if the circumstances are similar to those outlined at paragraph 186, that is, the "meal" is incidental to the main purpose of the gathering

188.	A deduction is not allowable for the cost of attending functions, such as those outlined at paragraphs 186 and 187, if a more substantial meal, perhaps in the form of a sit-down dinner, is provided. This is because the "meal" is not merely incidental to the main purpose of the gathering – it is entertainment.

189.	A deduction is not allowable for the cost of attending a function, such as a charity ball or cocktail party, whether it is held for fund raising or other purposes. This is because the main reason for gatherings of this type is for entertainment.

190.	We have based the views outlined at paragraphs 185 to 189 on principles that we have considered in Taxation Rulings TR 97/17, IT 2675 and Taxation Determination 94/55. See also Entertainment expenses, paragraphs 174 to 181.

191.	A deduction is not allowable for the cost of goods, such as food and clothing, purchased at fetes and fairs. These expenses are considered to be of a private or domestic nature.

Attendance on behalf of Member

192.	A deduction is allowable for costs incurred by a Member who is represented by another person at functions, presentations and Parliamentary, electoral or party meetings. However, a deduction is not allowable for costs that would not have been deductible to the Member had he or she attended personally.

193.	Example: A Member incurs motor vehicle expenses as a result of his spouse deputising for him at the opening of a government funded youth centre in his electorate. The motor vehicle expenses incurred are an allowable deduction.

Grooming

194.	A deduction is not allowable for grooming expenses, for example, hairdressing and make-up, as such expenses lack the essential character of expenses incurred in gaining or producing a Member's Parliamentary remuneration.

195.	Hill J considered the deductibility of these expenses in Mansfield v. FC of T 96 ATC 4001; (1995) 31 ATR 367. His Honour was of the view that the cost of make-up incurred by a flight attendant retained an essential personal character that excluded it from deductibility, even though the taxpayer was required by her employer to wear make-up. Hill J also concluded that, although the employer required the taxpayer to be well groomed and presentable, there was no "additional feature" present that established a relationship between the general hairdressing expenses and the taxpayer's employment as a flight attendant. He held that the hairdressing expenses were not an allowable deduction.

196.	In Case 72/96 96 ATC 640; AAT Case 11,455 (1996) 34 ATR 1098, a television newsreader claimed a deduction for the cost of hairdressing, make-up and other items purchased for use on-camera. The taxpayer stated that she was required to wear her hair in an appropriate style and that the make-up was theatrical in nature. The Administrative Appeals Tribunal found that expenditure on hairdressing or on ordinary make-up purchased in order to be well groomed, was expenditure of a private nature.

Home office expenses

197.	Costs associated with a Member's home are normally of a private or domestic nature. However, a deduction may be allowable for a proportion of the expenses associated with a Member's home if part of the home is used in connection with the Member's work-related activities, e.g., an area of the home is a private study.

198.	Taxation Ruling TR 93/30 distinguishes between two types of expenses associated with the home.

(a)	Occupancy expenses related to ownership, or use of a home, that are not affected by the taxpayer's income-earning activities. These include rent, mortgage interest, municipal and water rates, property taxes, house insurance premiums and repairs to the home; and

(b)	Running expenses related to the use of facilities in the home. These include heating/cooling and lighting expenses, cleaning costs, depreciation, leasing charges and the cost of repairs to furniture and furnishings in the home office.

199.	A deduction is not allowable for the cost of occupancy expenses for Members who maintain an office or study at home if they carry out work-related activities at home as a matter of convenience. This was clearly established by the High Court decisions in Handley v. FC of T (1981) 148 CLR 182; 81 ATC 4165; (1981) 11 ATR 644 (Handley's case) and FC of T v. Forsyth (1981) 148 CLR 203; 81 ATC 4157; (1981) 11 ATR 657. In Handley's case, the High Court decided that Mr Handley's outgoings on mortgage interest, rates and insurance premiums were related to the building and/or home as a whole, and they would remain the same whether or not he worked at home.

200.	This principle is based on the proposition that occupancy expenses are related to a building's primary function as a house, and this is not changed even if a room is set aside exclusively for income-producing purposes (see Thomas v. FC of T (1972) ALR 368; 72 ATC 4094; (1972) 3 ATR 165).

201.	A deduction is allowable for additional running expenses if a Member maintains a separate office or study at home (e.g., for carrying out research, preparing speeches, reading reports, etc). Where the Member uses the office or study exclusively for work-related activities, all of the running costs attributable to that area of a Member's home are allowable as deductions (see FC of T v. Faichney (1972) 129 CLR 38; 72 ATC 4245; (1972) 3 ATR 435). However, where the Member also uses the office or study for other purposes, the Member must apportion running expenses between deductible and non-deductible components.

202.	Some running costs (e.g., heating, cooling and lighting) may be an allowable deduction even though an area of the home has not been set aside exclusively for use as a private office or study. This may occur where a Member uses a room, e.g., the lounge room, for work-related purposes at times when others are not present.

203.	Example: A Member performs work-related activities in his lounge room when it is not being used by other family members. The Member would be entitled to a deduction for expenditure incurred for heating, cooling and lighting etc to the extent to which those costs related directly to the period(s) of such use.

204.	The amount that a Member is entitled to claim is the difference between what was actually paid for heating, cooling and lighting, and what would have been paid had he or she not worked from home. That is, the Member is only entitled to claim a deduction for that portion of the expenditure that relates directly to his or her work-related activities.

205.	Further information can be found in Taxation Ruling TR 93/30 and in Practice Statement PS 1999/4. See also Taxation Ruling IT 2673 for details of the potential capital gains tax (CGT) consequences of using a home office for income-producing purposes.

Insurance of equipment

206.	Where a Member pays a premium on an insurance policy that provides coverage for loss, damage, theft, etc., of equipment that is used in his or her work-related activities, a deduction is allowable to the extent of the equipment's work-related use.

207.	Example: A Member insures the contents of her home. Included in the contents is a computer that she uses exclusively for work-related purposes. The Member is entitled to a deduction for the portion of the insurance premium that is referrable to the value of the computer. If only 50% of the computer's use is for work-related activities, a deduction is only allowable for 50% of that portion of the insurance premium referrable to the computer.

Interest on loan to purchase equipment

208.	A deduction is allowable for interest on money borrowed to acquire equipment, to the extent to which a Member uses the equipment for work-related purposes. If, for instance, the Member uses the equipment other than for work-related purposes, the Member must apportion the interest between deductible and non-deductible components on the basis of the equipment's usage.

209.	Example: A Member takes out a loan to acquire a computer and associated hardware and software that he will use solely for work-related purposes. A deduction is allowable for the interest incurred in respect of those borrowings.

Internet access

210.	Where a Member utilises information from the Internet for the purposes of research, or otherwise in the course of carrying out his or her work-related activities, the work-related portion of the fee paid to the Internet Service provider (ISP) is an allowable deduction.

211.	Example: Over a period of one month a Member accesses the Internet for the purpose of work-related research. This research takes the Member 10 hours to complete. For another 10 hours the Member and his family access the Internet for private purposes. The Member has a contract with an ISP that provides him with 20 hours of access to the Internet each month for a $40 fee. The Member is entitled to claim a deduction of $20, i.e., half the $40 fee paid to the ISP.

Legal expenses

212.	A deduction is allowable for legal expenses incurred by a Member in defending the day-to-day activities through which he or she gains or produces assessable income (work-related activities), if the losses or outgoings are not capital, private or domestic in nature. Where legal proceedings stem from activities that could not reasonably be regarded as being part of the work-related activities of a Member, the losses or outgoings are not allowable deductions because they are not incurred in the course of gaining or producing assessable income.

213.	In Case V116 88 ATC 737; AAT Case 4,502 (1988) 19 ATR 3703, a member of a board of directors incurred expenses in defending himself against defamation proceedings brought by the dismissed chairman of directors. The Tribunal found, on the facts, that the taxpayer was defending himself against a claim that he had made defamatory remarks in the course of the performance of his duties, and the alleged defamation was not "private" in character. The deduction was allowed.

214.	In FC of T v. Rowe 95 ATC 4691; (1995) 31 ATR 392, an engineer employed by the Livingston Shire Council incurred legal costs as a result of engaging a solicitor and counsel to defend himself against dismissal during the course of a statutory inquiry established under the Local Government Act 1936-1985 (Qld). Burchett J stated (at ATC 4702-4703; ATR 404):

"... I think these expenses should be recognised as incurred by the respondent in defending the manner of his performance of his duties. It was only by so justifying himself that he could make a successful defence against dismissal. When the matter is seen in this light, it falls squarely within the rule discussed in Putnin v. Commissioner of Taxation 91 ATC 4097; (1991) 27 FCR 508. To adapt language there quoted (at ATC 4100; FCR 511) from The Herald and Weekly Times Limited v. FC of T (1932) 2 ATD 169 at 170-172; (1932) 48 CLR 113 at 117-119, the liability in question was incurred, or the claim was encountered, because of the very act of performing the work by which the respondent earned assessable income. The activities which produced the assessable income were what exposed the taxpayer to the liability discharged by the expenditure. As the Court said in Putnin at ATC 4102; FCR 513, so here, "the ... proceedings arose from the activities by which the taxpayer earned his income, the mode of his performance of a particular task carried out in the course of business operations"."

215.	Example: A Member incurs legal expenses in being represented before a Royal Commission at which she is required to appear. The Royal Commission is enquiring into Cabinet decisions made during the term of a former Parliament when the Member was a senior Minister. The Member is entitled to a deduction because it is her work-related activities that expose her to the liability for the legal expenses.

216.	A deduction is not allowable where a Member incurs legal expenses to protect his or her personal reputation, and perhaps, his or her seat in Parliament. This is because the losses or outgoings are not incurred in respect of the Member's work-related activities, but are of a capital, private or domestic nature.

217.	In Case N9 81 ATC 56; 24 CTBR (NS) Case 81, the Board of Review disallowed a deduction for legal expenses incurred by a director of a number of companies in defending himself on charges under the Companies Act that stood to affect his future appointment as a director. The expenses were held to be essentially private (as they were incurred to protect his good name and reputation) and of a capital nature (as they were incurred to retain and restore his position). The Board stated (Case N9 at 59; Case 81 at 698) that:

"At all events, it seems to us that the happenings which gave rise to the expenditure, irrespective of whether convictions were recorded against the taxpayer, could not be regarded as normally to be expected in ordinary business transactions or, as in the instant case, to be resorted to as a matter of course by a director or an employee working in the interests of his employer in the course of gaining or producing his personal assessable income."

218.	In Case W101 89 ATC 821; AAT Case 5,009 (1989) 20 ATR 3421, the taxpayer obtained a corporate credit card at the request of the company that employed him. The cost of overseas air travel undertaken by three other executives of the company was charged to the taxpayer's credit card. The company did not pay the debt and the credit card company sued the taxpayer, who eventually paid the debt. The legal expenses incurred by the taxpayer in relation to the matter (as well as the debt itself) were held not to be deductible, as they were not incurred by him in the course of gaining or producing assessable income.

219.	A deduction is not allowable for losses or outgoings incurred in relation to a Member's personal affairs that are not part of his or her work-related activities because they are not connected with the income-producing process and are private or domestic in nature.

220.	Example: A Member incurred legal expenses in defending an action for breach of contract brought by a former landlord. The action arose in respect of a house used by the Member as a second residence when she was based in Canberra on work-related activities. A deduction is not allowable as the expenditure is of a private or domestic nature.

221.	A deduction is not allowable where a Member incurs legal expenses on behalf of another person because the Member does not incur the losses or outgoings in respect of his or her work-related activities, and they are of a private or domestic nature.

Meals

222.	A deduction is not allowable for the cost of meals consumed by a Member in the course of a normal working day, that is, where the Member is not travelling away from home overnight on work-related activities (see Travel expenses, paragraph 307). It is our view that the cost of such meals does not have sufficient connection with the work-related activities of the Member and, in any case, the cost is a private expense and fails to meet the tests of deductibility described in paragraphs 91 to 93.

223.	The Full Federal Court considered the deductibility of food costs in FC of T v. Cooper (1991) 29 FCR 177; 91 ATC 4396; (1991) 21 ATR 1616 (Cooper's case). In that case, a professional footballer had been instructed to consume large quantities of food during the off-season to ensure his weight was maintained. By majority, the Full Federal Court found that the cost of additional food was not allowable. Hill J said (at FCR 199-200; ATC 4414; ATR 1636):

"The income-producing activities to be considered in the present case are training for and playing football. It is for these activities that a professional footballer is paid. The income-producing activities do not include the taking of food, albeit that unless food is eaten, the player would be unable to play. Expenditure on food, even as here "additional food" does not form part of expenditure related to the income-producing activities of playing football or training."

His honour went on to say (at FCR 201; ATC 4415; ATR 1638):

"Food and drink are ordinarily private matters, and the essential character of expenditure on food and drink will ordinarily be private rather than having the character of a working or business expense. However, the occasion of the outgoing may operate to give to expenditure on food and drink the essential character of a working expense in cases such as those illustrated of work-related entertainment or expenditure incurred while away from home."

224.	We do not accept that a deduction is allowable for the difference between the cost of preparing a home-made meal and the cost of a meal purchased during an ordinary working day.

225.	The fact that a Member might incur the cost of meals, that he or she would not normally incur, as a result of working extended hours, does not alter the private or domestic nature of the outgoings.

226.	In Case Y8 91 ATC 166; AAT Case 6,587 (1991) 22 ATR 3037, a police officer claimed a deduction for the cost of meals while performing special duties away from his normal place of residence, but not involving an overnight stay away from his residence. It was held that the cost of these meals was private in nature and no deduction was allowable under subsection 51(1) of the ITAA 1936.

227.	Example: Due to a late night sitting of Parliament, a Member, who is not travelling away from home overnight, decides to purchase her evening meal in the Parliamentary Dinning Room. A deduction is not allowable for the cost of the meal. The expense is private in nature.

Motor vehicle and other transport expenses

228.	Motor vehicle and other transport expenses, referred to in this section as transport expenses, include public transport fares, and the running costs associated with using motor vehicles, motor cycles, bicycles, etc., for work-related travel. They do not include meals, accommodation and incidental expenses incurred in undertaking work-related travel involving an overnight stay away from a Member's residence (see Travel expenses, paragraphs 307 to 343). The following views on the deductibility of motor vehicle and other transport expenses are subject to the exception outlined in paragraph 246 in connection with a car provided by an "employer" (see Role of a Member, paragraph 35 – 41).

229.	A Member may work at a number of different places, such as an electorate office, Parliament, a Ministerial office and other places depending on his or her Parliamentary responsibilities. We consider each of these places to be a normal place of work.

230.	However, a Member often needs to perform a diverse range of activities at other places. These constitute alternative places of work. These places are often one-off, or temporary places of work, such as radio and television stations and constituents' homes.

Travel between home and a normal place of work

231.	Subject to the exceptions discussed below, a deduction is not allowable for the cost of travel between home and the normal work place. It is not incurred in the course of producing assessable income and, in any case, it is considered to be a private expense. This principle is not altered by the performance of incidental tasks undertaken en route, nor is the principle changed if the travel is outside working hours or includes a second or subsequent trip (see Taxation Ruling MT 2027, paragraph 34).

232.	Example: A Member normally travels directly to Parliament when it is sitting. She collects her mail at her electorate office on the way to Parliament, but does nothing else at the electorate office. No deduction is allowable for her transport expenses. The incidental nature of picking up the mail does not alter the essential character of her travelling between home and work.

233.	The High Court considered the deductibility of transport expenses incurred in travelling between home and work in (Lunney's case). Williams, Kitto and Taylor JJ stated that (CLR 498-499; ATD 412-413):

"The question whether the fares which were paid by the appellants are deductible under section 51 should not and, indeed, cannot be solved simply by a process of reasoning which asserts that because expenditure on fares from a taxpayer's residence to his place of employment or place of business is necessary if assessable income is to be derived, such expenditure must be regarded as "incidental and relevant" to the derivation of such income ... But to say that expenditure on fares is a prerequisite to the earning of a taxpayer's income is not to say that such expenditure is incurred in or in the course of gaining or producing his income."

234.	The fact that the travel is outside normal working hours, or involves a second or subsequent trip, does not change this principle.

235.	For more information see paragraph 6 of Taxation Ruling IT 2543, Taxation Ruling IT 112 and Taxation Determination TD 93/113.

Travel between two separate work places

236.	A deduction is allowable for the cost of travelling directly between two separate work places.

Travel from the normal work place to an alternative work place and back to a normal work place, or directly home

237.	A deduction is allowable for the cost of travel from a Member's normal work place to other work places. A deduction is also allowable for the cost of travel from an alternative work place back to a normal work place or directly home. This travel is undertaken in the performance of a Member's work-related activities. The cost of the travel is incurred in the course of a Member's income-producing activities and is an allowable deduction.

238.	Example: A Member is required to travel from her electorate office to a constituent's home. The cost of the travel undertaken from the electorate office directly to her constituent's home, and then back to the electorate office, or directly home, is an allowable deduction.

Travel from home to an alternative work place and then to a normal work place, or directly home.

239.	A deduction is allowable for the cost of travel from home to an alternative work place. The cost of travel from the alternative work place to the normal work place, or directly home, is also an allowable deduction (see Taxation Ruling MT 2027, paragraphs 32 to 35).

240.	Example: A Member ordinarily travels from home directly to her electorate office on Monday. On occasions she travels from her home to a radio station to conduct an interview, and afterwards travels to her electorate office. The cost of the travel undertaken from her home to the radio station, and then on to the electorate office, or directly home, is an allowable deduction.

Automobile Association/Club membership fees

241.	The annual membership fee is taken into account in calculating the deduction allowable if a Member uses either the log book method or one-third of actual expenses method to claim work-related car expenses. For a deduction to be allowable the Member must own or lease the car.

242.	A deduction is allowable for membership fees paid to an Automobile Association or Club for the provision of roadside or break down services in respect of work-related activities. Although members are usually entitled to additional benefits, such as the provision of a magazine, travel and legal advice, we consider these benefits to be incidental to the main purpose of membership, that is, the provision of roadside or breakdown service. A deduction is not allowable for a joining fee as this is an expense of a capital nature.

Calculation of motor vehicle depreciation balancing adjustment

243.	A depreciation balancing adjustment may be necessary on the disposal of a motor vehicle that a Member owned and used for work-related purposes (see Taxation Ruling IT 2493).

Car wash expenses

244.	The cost of cleaning a vehicle is taken into account in calculating the deduction allowable if either the log book method or one-third of actual expenses method is used to claim work-related car expenses. For a deduction to be allowable the Member must own or lease the car.

Depreciation cost limit for motor vehicles

245.	Section 42-80 imposes a limit on the depreciable cost base of motor cars (including station wagons and four-wheel drive vehicles) if the acquisition cost is greater than a specified amount. The depreciable cost base limit applies to both new and second hand vehicles (see Taxation Ruling TR 93/24).

Car provided by "employer"

246.	A deduction is not allowable for car expenses, and depreciation, related to a car if:

(a)	the car is provided by an "employer" (see Role of a Member, paragraph 35 – 41) for the exclusive use of the Member and/or their relatives; and

(b)	the Member and/or their relatives are entitled to use the car for private purposes (see section 51AF of the ITAA 1936).

247.	Section 51AF of the ITAA 1936 does not preclude deductions for expenses associated with the use of the car but that are not costs related to the car itself, e.g., parking fees and tolls (see Case Y43 91 ATC 412; AAT Case 7,273 (1991) 22 ATR 3402).

Parking fees and tolls

248.	A deduction is allowable for parking fees and tolls (but not fines) if a Member incurs the expenses while travelling:

(a)	on work-related activities where the travelling expenses are allowable deductions; or

(b)	for self education purposes where the self education expenses are allowable deductions (see paragraph 289).

Newspapers

249.	A deduction is not allowable under section 8-1 for the cost of newspapers that a Member does not purchase specifically for work-related purposes as the cost of such newspapers is essentially private in nature. Although a Member may use some part of the information in these newspapers in the course of his or her work, the connection between the cost incurred and any work-related benefit gained is usually remote and merely incidental to the private component. This view is supported by: Case K68 78 ATC 667; (1978) 22 CTBR (NS) Case 86; Case N67 81 ATC 349; (1981) 25 CTBR (NS) Case 18; Case P114 82 ATC 586; (1982) 26 CTBR (NS) Case 47 and Case P124 82 ATC 629; (1982) 26 CTBR (NS) Case 55.

250.	These cases can be contrasted with Case R70 84 ATC 493; (1984) 27 CTBR (NS) Case 124, where a supervisor in the Commonwealth Auditor-General's Department was allowed a deduction for the cost of certain issues of The National Times and The Australian Financial Review. In this case the Board of Review held that there was a sufficient connection between the duties carried out by the taxpayer and the content of the issues purchased. A deduction was not allowed for the cost of the taxpayer's local newspaper, The Canberra Times, as the expense was held to be essentially private in nature.

251.	However, we accept that Members may need to directly utilise particular newspapers as part of their work-related activities. If the main reason a Member purchases a particular newspaper is for its use in the course of his or her work-related activities, the cost is allowable as a deduction (analogous cases: Case S12 85 ATC 165; 28 CTBR (NS) Case 18 and Case U5 87 ATC 124).

252.	Example: A Member has three of the major Sydney newspapers delivered to her home. Before leaving home in the morning she scrutinises the major political interest stories from two of these papers, and takes any relevant pages with her to her electorate office. As this activity is directed solely to her work-related activities, and any private use is purely incidental, the cost of the two newspapers is an allowable deduction. However, the cost of the third newspaper, that is used for private reading at home, is not an allowable deduction.

253.	In addition, some Members require access to specialist newspapers because of the nature of their particular work-related activities. Where such a requirement exists, a deduction is allowable for the full cost of purchasing, or subscribing to, these publications.

254.	Example: A Minister (or Shadow Minister) with a finance-related portfolio takes out an annual subscription to The Australian Financial Review. The full cost of the subscription is an allowable deduction. However, other Members whose role does not include responsibility for specific finance-related matters, who also purchase this newspaper, are not entitled to deductions except for the cost of those issues used directly in the course of their work-related activities.

255.	A Member is entitled to a deduction for the cost of newspapers that he or she purchases for use by staff and constituents in his or her electorate office.

256.	However, if a Member receives a reimbursement for the cost of purchasing newspapers that would otherwise be fully or partly deductible, and the reimbursement is a fringe benefit under the FBTAA, the deduction otherwise allowable is to be reduced by the amount of the reimbursement (see Reimbursements, paragraphs 65 to 70).

Party membership fees, levies and donations

257.	A deduction is allowable under section 8-1 for a Member's ordinary membership subscription to a political party, and for compulsory levies paid to retain membership of the party.

258.	A deduction is allowable under Subdivision 30-DA, up to a maximum of $1,500 in any one income year, for donations of $2 or more made to political parties that are registered under Part XI of the Commonwealth Electoral Act 1918 or under corresponding State or Territory legislation.**

259.	A deduction is also allowable Subdivision 30-DA, up to a maximum of $1,500 in any one income year, for donations of $2 or more made to independent candidates or independent Members who are not endorsed by, or members of, political parties that are registered under Part XI of the Commonwealth Electoral Act 1918 or under corresponding State or Territory legislation.**

** Note proposed legislation. (These comments do not form part of the Explanation and are provided to alert readers to a potential legislative change.)

Patron expenses

260.	A deduction is allowable for expenses incurred by a Member in being a patron of an organisation there is a direct connection between the Member's position as a Patron and his or her work-related activities. Where a Member acts as the patron for personal reasons, any expenses incurred in relation to that position are not allowable deductions because they are private or domestic in nature.

261.	Example: A Member who is patron of a youth group in his electorate incurs expenses in travelling from home to the annual general meeting of the group. He also contributes $100 towards the cost of the meeting. The Member's participation as patron of this group formed part of his program of maintaining contact with his constituents. Both expenses are allowable deductions. The transport expenses are allowable because the meeting place is an alternative work place (see Motor vehicle and other transport expenses, paragraphs 239 and 240) and the $100 contribution is directly connected with the Member's work-related activities (see Donations, paragraphs 153 to 155).

Professional library

262.	A deduction is allowable for depreciation of a professional library used by a Member for work-related activities (section 42-15). If the Member purchases an individual reference book on or after 1 July 1991 the Member can depreciate it at a rate of 100% if its cost is $300 or less (section 42-130), or if its effective life is less than three years (section 42-125). Where this provision applies, an immediate deduction is available for the cost of each book in the year in which the Member purchased it. However, the Member may depreciate a book at a rate less than 100% if he or she so chooses (section 42-120).

263.	Taxation Ruling IT 2685 sets out the current indicative depreciation rates.

264.	For depreciation purposes, a Member may only include reference books in the professional library if their content is directly relevant to a Member's work-related activities. Depreciation deductions are not allowable in respect of encyclopaedias and general reference books because their content is non-specific.

265.	In Case P26 82 ATC 110; (1982) 25 CTBR (NS) Case 90, the Board of Review allowed a university lecturer a deduction for depreciation on legal books but denied a deduction for depreciation on general reading and fiction books. The Board stated (ATC 116; CTBR 666):

"No doubt the illustrations and anecdotes which he was able to use did serve as useful teaching aids but in my view these activities were not plant or articles within the meaning of section 54 of the Act [ITAA 1936], as they were not used or installed ready for use for the purpose of producing assessable income."

266.	If the cost of a textbook is allowable as a deduction under a provision of the ITAA 1997 other than the depreciation provisions, its cost may not be added to the value of a professional library and depreciated. For example, a Member may have claimed a deduction for the cost of a textbook as part of her self education expenses. The Member cannot also include the cost of this textbook in the value of a professional library for depreciation purposes (see Depreciation of equipment, paragraphs 141 to 152).

Raffle ticket expenses

267.	In attending fetes and other community activities, Members are often encouraged, and indeed expected, to purchase raffle tickets. Similarly, in carrying out the duties of their designated portfolios, Ministers (or Shadow Ministers) attend certain functions and activities within the community where they are also expected to purchase raffle tickets.

268.	Expenditure on raffle tickets is an allowable deduction where the expenses are incurred in attending functions or activities within the Member's electorate in his or her capacity as a Member, i.e., not in some private capacity. Members should ensure that they have appropriate records that enable the basis of claims for raffle ticket expenses to be determined.

269.	Example: A Member attends the annual fete of a school in her electorate as part of her regular program of maintaining contact with her constituents. The Member's children attend other schools, and she has no private connection with the school in her electorate. In the course of the fete, the Member spends $30 on raffle tickets she is asked to buy. The cost of the raffle tickets is an allowable deduction because it is an expense directly connected to her work-related activities as a Member.

270.	A deduction is not allowable for the cost of raffle tickets purchased outside a Member's electorate unless the Member is undertaking work-related representational activities on behalf of his or her electorate, or on behalf of another Member.

271.	Similarly, where a Minister (or Shadow Minister) purchases raffle tickets at an activity or function outside his or her electorate, a deduction is allowable where there is a direct connection between the occasion of the outgoing and his or her portfolio related responsibilities.

272.	Example: A Member with responsibilities in the education area is invited to attend a speech night at a school outside his electorate. During the evening, the Member agrees to buy $20 worth of raffle tickets. The $20 is an allowable deduction.

273.	A deduction is not allowable for the cost of raffle tickets bought by a Member in a private capacity rather than in carrying out work-related activities. For example, where a Member buys raffle tickets at the local shops from XYZ Charity while doing his or her weekly grocery shopping, or purchases tickets from his or her secretary who is fund raising for a children's sporting club.

Raffle Prizes

274.	The prospect of a Member winning a prize as the result of purchasing a raffle ticket is so remote that, if it does occur, the prize constitutes a windfall gain. The value of the gain does not form part of a Member's assessable income. However, if a Member subsequently disposes of a prize, there may be CGT consequences.

Relocation expenses

275.	A deduction is not allowable under section 8-1 for losses or outgoings incurred when a Member changes his or her residential location, as they are not incurred in the course of work-related activities and, in any case, are private or domestic in nature. This principle applies to transfers within an electorate and between electorates. Expenses that fall into this category include temporary board and lodging; freight to consign personal and educational items; insurance; and hire of vehicles to transport items.

276.	In Fullerton v. FC of T (1991) 32 FCR 486; 91 ATC 4983; (1991) 22 ATR 757, the taxpayer worked for the Queensland Forest Service (QFS) as a professional forester for over 20 years. In that time, QFS transferred him to a number of different locations. His position ceased to exist as a result of a reorganisation and he had no choice but to accept a transfer to avoid retrenchment. The QFS reimbursed a portion of the relocation expenses incurred and the taxpayer claimed the remainder as a tax deduction. It was held that the expenditure on the taxpayer's domestic or family arrangements was not an allowable deduction under subsection 51(1) of the ITAA 1936, even though the expenses had a causal connection with the derivation of his assessable income.

277.	In Case U91 87 ATC 525, the taxpayer, a Commonwealth public servant, was transferred at the request of his employer from a State office to the central office of the department in Canberra. He was denied a deduction for expenses incurred in attempting to auction his house. It was held the connection between the expenses and the income-producing process was too remote for the expenses to be said to have been incurred in gaining or producing assessable income.

278.	Relocation expenses incurred by a Member as a result of an undertaking given to move to the electorate after being elected, are not election expenses for the purposes of section 25-60 (see Election expenses, paragraphs 158 to 173).

279.	Taxation Rulings IT 2406, IT 2481, IT 2566, and IT 2614 provide further information on the treatment of relocation expenses.

Repairs to equipment

280.	A deduction is allowable for repairs to equipment that a Member uses or holds solely for work-related purposes, (see subsection 25-10(1)). If the Member uses or holds the equipment only partly for income producing purposes, the deduction is limited to an amount that is reasonable in the circumstances (see subsection 25-10(2)).

281.	Example: A Member expends $200 on repairs that are carried out on a computer that he uses 60% for work-related purposes and 40% for private purposes. The Member is entitled to a deduction for 60% of the repair costs, i.e., $120.

Security costs

282.	A deduction is not allowable for expenses incurred in obtaining and maintaining guard dogs for the protection of Members and/or their families. The expenses are not incurred in the course of work-related activities and are, in any case, private or domestic in nature. For the same reasons, a deduction is not allowable for the installation, maintenance and depreciation of a security system at a Member's residence. The cost of installing a security system is also an outgoing of capital, or of a capital nature.

283.	However, a deduction is allowable for the depreciation and maintenance of a security system installed in a Member's electorate office where the Member incurs the costs of installation and maintenance. A deduction is also allowable for the depreciation and maintenance of a security system installed in a second property (not used as a Member's residence) to the extent to which the Member is entitled to a deduction for expenses associated with that second property.

284.	In Case T20 86 ATC 211; 29 CTBR (NS) Case 23 and Case V144 88 ATC 906; AAT Case 4,609 (1988) 19 ATR 3880, the taxpayers were Family Court Judges who were advised to improve the security of their private residences for safety reasons. In both cases, it was held that the expenses incurred in installing a security system and maintaining a guard dog were essentially private in nature and no deduction was allowable.

Self-education expenses

285.	Subject to the limit on deductibility explained at paragraphs 289 to 291, a deduction is allowable for self-education expenses under section 8-1 where the education is directly relevant to a Member's current work-related activities.

286.	A deduction is not allowable if the education is designed to enable a Member to get employment, to obtain new employment, or to open up a new income producing activity (FC of T v. Maddalena 71 ATC 4161; (1971) 2 ATR 541).

287.	Self-education includes courses undertaken at an educational institution (whether leading to a formal qualification or not), attendance at work-related conferences, seminars and training courses, self-paced learning and study tours (see Conferences, seminars and training courses, paragraphs 134 to 140).

288.	Self-education expenses include fees, travel expenses (e.g., attending an interstate conference), transport costs, books and equipment.

Limit on deductibility

289.	A self-education expense that is an allowable deduction under section 8-1 is limited if it falls under the definition of an "expense of self-education" under section 82A of the ITAA 1936. Generally, an "expense of self-education" needs to be incurred in connection with a "prescribed course of education". A "prescribed course of education" refers to an organised course of study provided by schools, colleges or universities. It also includes a course provided by an institution or organisation whose primary function is to provide systematic instruction, training or schooling in a subject, skill or trade.

290.	If a self-education expense that is deductible under section 8-1 is also regarded as an "expense of self-education" under section 82A, then the deduction allowable under section 8-1 cannot be greater than the net amount of expenses of self-education less $250.

291.	Taxation Ruling TR 98/9 provides further information on self education expenses.

Technical or professional publications

292.	A deduction is allowable under section 8-1 for the cost of buying, or subscribing to, journals, periodicals and magazines that have a content directly connected to a Member's work-related activities, provided the contents of the publications are not general in nature. For example, a deduction is not allowable for the cost of buying magazines such as Time, The Bulletin and Reader's Digest as they are general interest publications.

293.	In Case P124 82 ATC 629; 26 CTBR (NS) Case 55, the Board of Review denied an air traffic controller a deduction for the cost of aviation magazines. Dr G W Beck (Member) said (at ATC 634; CTBR 422):

"There might be some tenuous connection between the cost of aviation magazines and the maintenance of knowledge necessary for holding a flying licence ... but it seems to me that the possible connection is altogether too remote."

294.	This can be contrasted with Case R70 84 ATC 493; 27 CTBR (NS) Case 124, where the Board allowed an accountant employed with the Public Service a deduction for the cost of publications produced by a business and law publisher. The nexus between the expense and the accountant's occupation was established, as the publications contained current technical information that related to her day-to-day work. However, she was not allowed a deduction for the cost of daily newspapers and periodicals.

295.	Example: A Minister (or Shadow Minister) with a finance-related portfolio takes out an annual subscription to The Economist. The full cost of the subscription is an allowable deduction. However, other Members whose role does not include responsibility for specific finance-related matters and who also purchase this journal, are not entitled to deductions except for the cost of particular issues used directly in the course of their work-related activities.

Telephones, answering machines, pagers, beepers and other telecommunications equipment expenses

Cost of calls

296.	A deduction is allowable for the cost of telephone calls made from a Member's home in the course of carrying out his or her work-related activities.

297.	A Member may identify work-related calls from an itemised telephone account. If the Member does not prepare such an account, we will accept a reasonable estimate of call costs, based on diary entries of calls made over a period of one month, together with relevant telephone accounts for substantiation purposes.

298.	If a Member is reimbursed for the cost of calls that would otherwise be fully or partly deductible, and the reimbursement is a fringe benefit under the FBTAA, the deduction otherwise allowable is reduced by the amount of the reimbursement.

Installation or connection costs

299.	A deduction is not allowable for the cost of installing or connecting telephones, answering machines, pagers, beepers or other telecommunications equipment, as the expenditure is of a capital nature. Whether the connection is made to a Member's electorate office or private residence does not change this. If the connection is made to a Member's residence, we also consider it to be private or domestic in nature.

300.	In Case M53 80 ATC 357; 24 CTBR (NS) Case 29, Dr P Gerber (Member) stated (at ATC 359; CTBR 236):

"... on payment of the connection fee, this taxpayer brought into existence an advantage for the enduring benefit of his newly established medical practice ... It follows that it is "like" an expenditure of a capital nature."

Rental costs

301.	A deduction is allowable for a proportion of private home telephone equipment rental costs where a Member can demonstrate, for example, based on the number of calls recorded in diary notes, that he or she has a work-related need to use private telephone equipment outside normal "office" hours.

302.	If a Member is reimbursed for rental costs that would otherwise be fully or partly deductible, and the reimbursement is a fringe benefit under the FBTAA, the deduction otherwise allowable is reduced by the amount of the reimbursement.

Unlisted telephone number

303.	A deduction is not allowable for the cost of obtaining an unlisted number as it is private or domestic in nature (see Taxation Determination TD 93/115).

Trade, business or professional association fees

304.	A deduction is allowable under section 8-1 for annual fees paid to a trade, business or professional association to the extent to which the fees relate to a Member's work-related activities. A deduction is not allowable for an initial fee paid to join an association, as it is an outgoing of a capital nature. Taxation Rulings IT 299, IT 327, IT 2062 and IT 2416 provide further information on the treatment of trade and professional association fees.

305.	A deduction is not allowable for payments to staff social clubs or associations (section 26-45).

306.	Where the services provided by a trade, business or professional association do not directly relate to a Member's work-related activities and are, therefore, not deductible under section 8-1. A deduction is allowable, up to a maximum of $42, for the cost of membership of that organisation (section 25-55).

Travel expenses

307.	Subject to the exception referred to at paragraph 308, a Member must include travel allowances as assessable income.

308.	The exception applies where a Member receives a domestic travel allowance or an overseas travel allowance for food, drink or incidentals, and the deductible expenses incurred are equal to, or greater than, the amount considered reasonable by the Commissioner for substantiation purposes. In these circumstances, if a Member chooses not to claim any deductions for travel expenses in his or her income tax return, then the Member does not need to include the amount of the travel allowance received in assessable income. (See, also, Administrative arrangements applicable to travel allowances at paragraph 57 and Travel expenses covered by an annual entitlement, paragraphs 323 to 325.)

309.	Travel expenses referred to in this section are those expenses incurred by a Member on fares, meals, accommodation and incidental expenses in undertaking work-related travel involving an overnight stay away from his or her residence. They do not include public transport fares, and running costs associated with using motor vehicles, motor cycles, bicycles, etc., dealt with under Motor vehicle and other transport expenses at paragraphs 228 to 248. Travel expenses include losses or outgoings incurred on both domestic and overseas travel. Deductions can only be claimed for expenses actually incurred, whether or not an allowance is received. (See also Substantiation rules at paragraphs 46 to 56).

310.	Example: A Member travels by air from Perth to Canberra to attend Parliamentary sittings. He stays in Canberra for three days, and then travels by air to Melbourne to chair a Parliamentary committee meeting. He stays overnight in Melbourne and, on the following day, travels to Ballarat to pursue business that arose at the committee meeting. He travels from Ballarat, via Melbourne, back to Perth. A deduction is allowable for travel expenses incurred by the Member in respect of the whole journey.

311.	Travel expenses that are unconnected with a Member's work-related activities are not allowable deductions. They are not incurred in the course of gaining or producing assessable income and, in any case, are of a private or domestic nature.

312.	Example: A Member flies from her New South Wales country electorate to Sydney to attend Parliamentary sittings for five days. On the conclusion of those sittings, she is joined by her family for a holiday in Sydney that extends for two days. Although she incurs accommodation and other expenses in Sydney for seven days, no part of the expenses incurred in respect of the two day holiday period is allowable as a deduction. However, she would be entitled to claim the full cost of her return fare because the main purpose of the travel was work-related.

Travel expenses covered by a travel allowance

313.	The receipt of an allowance does not automatically entitle a Member to a deduction for travel expenses (see Taxation Rulings IT 2543 and TR 1999/7 and Taxation Determination TD 93/174). Travel expenses (covered by a travel allowance) for accommodation, food, drink and incidentals, but not fares, constitute "travel allowance expenses" for substantiation purposes (see subsection 900-30(2)).

314.	Reasonable travel allowance expense amounts (reasonable amounts) under the substantiation provisions are notified in annual Taxation Rulings (see, for example, Taxation Ruling TR 1999/7 for the 1999-2000 income year). Where a Member's claim for deductible travel allowance expenses does not exceed these reasonable amounts, substantiation is not required. However, the Member must still be able to demonstrate the deductibility of the expenses incurred.

315.	Example: In the 1998-99 year of income, a Member travels to a capital city and stays overnight. He is paid a travel allowance of $320 (see paragraph 30 of Taxation Ruling TR 98/10). This amount is fully expended on accommodation, meals and incidentals. In accordance with the Administrative arrangements applicable to travel allowances explained at paragraphs 57 to 64, the Member is not obliged to include the allowance received in his assessable income, provided that he does not claim as a deduction the travel allowance expenses in his income tax return. See, also, Travel expenses covered by an annual entitlement, paragraphs 323 to 325.

316.	Where the reasonable allowance amount is not fully expended, a deduction can only be claimed for the actual expenses incurred.

317.	Example: A Member travels from his country electorate to a capital city to attend a Parliamentary sitting. He receives a travel allowance of $3,200 in respect of the sitting. The Member only incurs $2,750 on travel allowance expenses. He must include the full amount of the $3,200 allowance received in his assessable income, and limit his claim for deduction to $2,750.

318.	Where a Member claims a deduction in excess of a reasonable allowance amount, the Member must substantiate the whole claim , not just the excess over the reasonable allowance amount.

319.	Example: A Member travels from her country electorate to a capital city to attend a Parliamentary sitting. She receives a travel allowance of $3,200 in respect of the sitting. The reasonable allowance amount for the trip is $3,200. The Member expends $3,800 on travel allowance expenses. If she wishes to claim a deduction for the total expenses of $3,800, the Member must have written evidence to support the whole of her claim, not just the $600 excess over the reasonable amount. The Member must also include the full amount of the $3,200 allowance received in her assessable income.

320.	Alternatively, if the Member chose not to keep written evidence of her expenses of a standard sufficient to satisfy the substantiation rules in respect of the total expenses of $3,800, she does not need to include the allowance of $3,200 as assessable income provided that she does not claim a deduction for the expenses in her income tax return. However, she must still be able to demonstrate the deductibility of travel expenses of at least $3,200 (see, also, the example in Administrative arrangements applicable to travel allowances at paragraphs 57 to 64 and Travel expenses covered by an annual entitlement at paragraphs 323 to 325).

Travel expenses not covered by a travel allowance

321.	A deduction is allowable for work-related travel expenses not covered by a travel allowance to the extent to which they can be substantiated in accordance with the substantiation rules (see paragraphs 46 to 56). As no travel allowance is received for this category of expenses, the exception to the substantiation rules cannot apply.

322.	Example: A Member incurred work-related travel expenses totalling $550 that were not covered by an allowance. She can only substantiate $475 of the travel expenses, and the nature and quality of her records is insufficient to satisfy the Commissioner that he should grant relief from the substantiation rules in respect of the remaining $75. The Member is only entitled to a deduction of $475.

Travel expenses covered by an annual entitlement

323.	A travel allowance that is not paid to cover relevant expenses for specific journeys undertaken, or to be undertaken, for work-related travel, is not a travel allowance for the purposes of the exception from substantiation, i.e., a Member needs to substantiate the expenses with written evidence. For example, this could occur where a Member uses part of his or her electorate allowance to travel within the electorate. The electorate allowance is not paid in respect of specific journeys undertaken, or to be undertaken, by the Member – it is paid to cover a variety of obligations associated with a Member's duties. Travel allowances that are paid in the form of fixed annual entitlements do not come within the statutory definition of "travel allowances" because it could not be said that they are paid "to cover losses or outgoings ... that you incur for travel away from your ordinary residence" (see subsection 900-30(3) and paragraphs 59 to 63 of Taxation Ruling TR 1999/7).

324.	However, a fixed annual entitlement for work-related travel expenses may be a travel allowance where the allowance is based on a specified number of overnight stays and there is a requirement, where a Member does not travel for the number of overnight stays in the year in question, for the Member to repay that part of the entitlement referrable to the trips not undertaken.

325.	Where a Member travels for more than the number of overnight stays covered by an annual travel allowance of the kind referred to at paragraph 324, he or she is entitled to a deduction for work-related travel expenses incurred in respect of these additional overnight stays. As these additional overnight travel expenses are not covered by a travel allowance, a Member needs to substantiate the expenses incurred in respect of the additional overnight travel with written evidence.

Accompanying relatives travel expenses

326.	A deduction is not allowable for losses or outgoings incurred that are attributable to a relative accompanying a Member while travelling, unless:

(i)	the relative performs substantial duties; and

(ii)	the relative is either a fellow Member, a common law employee of the Commonwealth of Australia, a State or a Territory, as the case may be, or an employee of the Member; and

(iii)	it is reasonable to conclude that the relative would still have accompanied the Member even if he or she had not had a personal relationship with the Member (see section 26-30).

327.	For section 26-30 purposes, if a Member makes a single outgoing , an apportionment may be necessary to determine the amount attributable to the accompanying relative. The method of determining that amount depends on the individual circumstances of the case (see Case R2 84 ATC 106; 27 CTBR (NS) Case 53; Case S80 85 ATC 589; 28 CTBR (NS) Case 88 and Case V39 88 ATC 335; AAT Case 4,157 (1988) 19 ATR 3292).

Second property not used as a Member's residence

328.	A Member may choose to rent or buy a property rather than stay in a hotel or other commercial establishment when travelling. A deduction is allowable for expenses, that are not of a capital, private or domestic nature, in respect of such a property where:

(i)	it is used by a Member for accommodation when he or she is undertaking work-related travel involving an overnight stay away from home; and

(ii)	the property is not regarded as a second residence.

Such expenses include: lease payments; rent; interest on borrowings used for the acquisition of the property; rates; taxes; insurance; general maintenance of the building, plant and grounds. A deduction is also allowable for depreciation of plant used in connection with such a property.

329.	Where a Member uses the property for a dual purpose, the Member may need to apportion relevant losses or outgoings between deductible and non-deductible components. The method of any such apportionment could only be determined after consideration of all relevant facts, but would generally follow the "common sense" approach adopted in Case V39 88 ATC 335; AAT Case 4,157 (1988) 19 ATR 3292. Merely incidental or immaterial usage not connected with work-related travel may be disregarded.

330.	Example: A Member of a State Parliament maintains a residence in her country electorate. Her Parliamentary duties require her to stay in the capital city for a total of four months each year. The Member prefers not to stay in hotels. She takes out a three year lease of an apartment in the capital city to provide her with the necessary accommodation while travelling away from home. The Member's husband and children remain in the family home, the only exception being the use of the city apartment on two weekends by her eldest daughter.

331.	In these circumstances it could not be said that the Member has established a second residence. Also, the minimal use of the property by her eldest daughter may be disregarded. The Member is entitled to deductions for the lease rental and other non-capital expenses, and depreciation of plant, in relation to the apartment without apportionment.

332.	Had the family members used the city apartment for material periods for non-work related purposes in any income year, the Member would need to apportion the deductions otherwise allowable between deductible and non-deductible components.

333.	Example: In the example at paragraph 330, if other family members used the city apartment for two periods of two weeks during term breaks, and one period of eight weeks (a total of three months) at times when the Member was not using the apartment, a deduction is only allowable for three quarters of the total expenses.

334.	Where two or more Members share a property , the deductions allowable to each Member depends on:

•	whether the property is owned, leased or rented;

•	the form of ownership, where applicable; and

•	the financial arrangements implemented between the Members.

335.	The deductions allowable to individual Members can only be established after a consideration of the facts of each case. However, the total claims for deductions made by the Members involved in sharing a property cannot exceed the deductible outgoings incurred in relation to the property had only one Member owned and used it.

336.	Disposal of a property of the kind referred to at paragraphs 328 to 335 may have CGT consequences. However, any gain made on disposal would not form part of a Member's ordinary income under section 6-5 unless the transaction giving rise to the gain formed part of a business carried on by the Member for the purpose of gaining or producing assessable income. Each case would need to be considered on its own facts.

Second residence expenses

337.	Where it has been established that a property used to accommodate a taxpayer amounts to a second residence, the Courts and the Administrative Appeals Tribunal have consistently held that the essential character of the expenses incurred is of a private or domestic nature unconnected with income-producing activities and, therefore, the expenses are not deductible. Expenses considered included lease payments, rent, interest on borrowings used for the acquisition of the property, rates, taxes, insurance, depreciation of plant and general maintenance of the building, plant and grounds. The reasoning in these cases is that a taxpayer's choice to establish a residence is not dictated by travel needs, but by considerations of a private or domestic nature. It follows that the required connection between second residence expenses and a taxpayer's income-producing activities is absent. See FC of T v. Charlton (1984) 71 FLR 107; (1984) 15 ATR 711; 84 ATC 4415; FC of T v. Toms (1989) 20 ATR 466; 89 ATC 4373; Case X4 90 ATC 116; AAT Case 5,545 (1989) 21 ATR 3120 (Case X4) and Roads and Traffic Authority of NSW v. FC of T (1993) 43 FCR 223; (1993) 116 ALR 482; (1993) 26 ATR 76; 93 ATC 4508.

338.	In Case X4, Senior Member Beddoe (at ATC 118; ATR 3122) found, on the facts, that the house in respect of which claims for deduction had been made:

"was used therefore for domestic purposes of the applicant's family as well as himself"

and that

"[t]he overall picture painted by the applicant's evidence is that he was intent on creating a home away from home. He did not wish to stay in hotels and preferred to have his own premises with his own facilities, books etc. The essential character of the house was that of a second home."

339.	Case X4 assists in explaining the criteria by which it may be concluded that a property is to be regarded as a second residence. However, the circumstances of each case differ and each must, therefore, be decided on its own facts.

340.	While it is not possible to lay down a definitive formula for resolving the question, we generally consider the following factors:

(a)	the number and location of all properties used for the Member's accommodation;

(b)	the nature and purpose of the travel leading to the Member' occupation of the property;

(c)	the type of property giving rise to the expenses claimed, e.g., apartment, house, hostel, hotel;

(d)	the size and standard of the accommodation;

(e)	the furniture, fixtures and contents of the property;

(f)	the basis on which the Member secures the use of the property, e.g., ownership, long or short term lease/rental;

(g)	the reason why the Member chose to use that particular property;

(h)	periods of use, and how used by the Member;

(i)	whether, and to what extent, the Member was accompanied by family members, friends or associates;

(j)	the frequency and duration of return trips to the Member's ordinary or former residence;

(k)	the use to which the Member's ordinary or former residence was put when not occupied by the Member;

(l)	whether the Member's children attend school at the second location; and

(m)	whether the Member's spouse seeks employment at the second location.

341.	Example: After a Member is appointed to the Federal Ministry at the beginning of a new Parliament, he purchases a house in Canberra so he can live close to the National Parliament. His wife and children move with him into the Canberra house, and he leases the family home in Melbourne on a commercial basis. The Member's children commence full time education in Canberra and in the relevant income year, the family reside in the Canberra house for nine months. During this period, the entire family is only ever away from the Canberra house on one occasion for a family holiday.

342.	The Canberra house constitutes a residence. Therefore, it could not be said that the Member is travelling away from home during the period of occupancy. Any expenses incurred by the Member in relation to the Canberra house are private or domestic in nature, and are not allowable deductions even though the Member may have qualified for, and received, a travel allowance in respect of that period.

343.	This view has equal application to State and Territory Members who establish a second residence.

Wages

344.	A deduction is allowable for wages paid by a Member for services rendered to assist the Member to carry out his or her work-related activities, provided the expenditure is not private or domestic in nature.

345.	Members are not common law employees working in an environment where the manner in which they carry out their work-related activities is subject to employer control (see paragraph 38). Although we do not consider that a Member's work-related activities amount to the carrying on of a business, in common with commission only real estate salespersons, they perform their work-related activities under significantly different circumstances to most employees, with considerable flexibility in how they perform their duties (see paragraph 210 of Taxation Ruling TR 98/6).

Related entity

346.	Subsection 26-35(1) applies to deductions claimed for payments made, or for a liability incurred, to a "related entity". A "related entity" includes a relative and a partnership in which a Member's relative is a partner. Deductions are limited to so much of the amount as the Commissioner considers reasonable (section 26-35). In forming a view as to an amount that is considered reasonable, the Commissioner has regard to the amount the Member would have been expected to pay to an unrelated person with similar skills and experience for provision of the same services.

347.	Example: A Member employs her spouse as a research assistant to complete research on issues that are expected to be debated in a coming Parliamentary session. The Member's spouse has nine years commercial experience as a research assistant. The costs are not reimbursed, as the Member is currently employing the maximum number of staff she is entitled to employ at government expense.

348.	A deduction is allowable for the amount paid to her spouse if the rate of the payment made was commensurate with commercial rates for the type of work performed. If the amount paid exceeded the amount payable under a commercial arrangement, a deduction may not be allowable for the amount of the excess.

Watches

349.	A deduction is not allowable for a loss or outgoing incurred in purchasing, repairing or maintaining a watch as the expense is of a private or domestic nature.

350.	In Case S82 85 ATC 608; 28 CTBR (NS) Case 87, a nursing sister was denied a deduction for the cost of a watch that was used in the course of her employment. The Board of Review's decision was that the watch was (ATC 612; CTBR 682):

"...an item of a private nature ... [and] ... [t]he use of a watch ... is important to most people in the community whether it be used ... to ensure not commencing work too early or finishing too late; or to log overtime ...".

ALTERNATIVE VIEWS

351.	During consultation on this Ruling, alternative views were expressed as follows:

Clothing (including laundry and maintenance)

352.	The view was expressed that there may be circumstances where a Member is entitled to claim a deduction for expenditure on clothing (and associated laundry and maintenance) on the basis of the decision in FC of T v. Edwards 94 ATC 4255; (1994) 28 ATR 87. The view of the Commissioner is that it is unlikely that a Member would qualify for a deduction on that basis. See paragraphs 121 to 125.

Expenses incurred in the transitional period before a Member takes his or her seat

353.	The view was expressed that a deduction should be allowed to the extent that the expenses relate to electoral duties. The view of the Commissioner is at paragraphs 182 to 184.

Home office expenses / base of operations / place of business

354.	The view was expressed that the nature of a Member's work-related activities are such that his or her home is akin to a base of operations or a place of business. That is, a deduction should be allowable for occupancy expenses of the kind referred to at paragraph 198 (a) because a Member's home is commonly used for the purpose of receiving and dealing with work-related correspondence, telephone calls and facsimiles, meeting constituents and party members. Further, a Member does not have a home office as a matter of convenience, but of necessity in dealing with the demands of Parliament, political parties, the electorate and the media. The Commissioner acknowledges that Members will be required to undertake some work-related activities at home, but is of the view that for most Members such activities would not entitle them to a deduction for occupancy expenses. That is, a Member's home does not generally constitute a base of operations or a place of business. See also paragraphs 35, 95 to 112 and 356.

Meals

355.	The view was expressed that the nature of a Member's work-related activities is such that, where they are required to sit beyond normal working day hours, their ability to partake of a normal meal is severely restricted. It was pointed out that there is a disparity between those Members who are travelling away from home overnight (and are therefore entitled to claim a deduction for meals) and those Members who are merely unable to go home for their normal meals due to the demands of Parliament. It was suggested that Members in the latter category could be given, as a minimum, a threshold amount as a deduction in recognition of their particular circumstances. The Commissioner's view is that in the circumstances described, a deduction is not allowable for the cost of meals. See also paragraphs 222 to 227.

Members are carrying on a business / role of a Member

356.	The view was expressed that the nature of a Member's work-related activities amounts to the carrying on of a business by virtue of the Member being engaged in a political vocation. It was pointed out that the demands of the role undertaken by Members sets them apart from other members of the community in terms of the level of commitment to their duties and the hours that are devoted to those duties. It was also suggested that the nature of a Member's income-producing activities is not readily comparable with a general employment arrangement and therefore separate tests need to be applied to determine if the expenses have been incurred in producing assessable income. The Commissioner's view is that factors of this kind are not relevant considerations in the determination of whether a business is being carried on. See also paragraph 35 and paragraphs 95 to 112.

Commissioner of Taxation

27 June 1999

ADDENDUM

This Addendum amends Taxation Ruling TR 1999/10 to correct the ruling in regard to the treatment of benefits provided to the spouse of a deceased employee. The fringe benefits tax system does not apply to benefits provided to relatives of deceased employees. This Addendum applies to years of income commencing both before and after its date of issue. The ruling is amended as follows:

1. Paragraph 22

After "a Severance Pass", insert "which may entitle the holder of the pass and his or her spouse to travel benefits"

2. Paragraph 23

Omit the paragraph; and substitute:

23.	We consider that the issuing of a Life Gold Pass or Severance Pass has no income taxation implications. The value of travel benefits received through the use of these passes does not form part of either a Member’s or a Member's spouse’s assessable income. However, travel benefits received from the use of a Life Gold Pass or Severance Pass are residual fringe benefits and the provider of the pass may be subject to fringe benefits tax when the passes are used for travel (paragraphs 84 to 88).

3. Paragraph 87

a)	Omit "or by a widow or widower of a Member who dies in office but who would have qualified for a Gold pass at the time of his or her death,"

b)	After "provider of the pass.", insert "However, where such benefits are provided to the widow or widower of the Member, they are not subject to FBT."

4. Paragraph 88

Omit the paragraph; and substitute

Under subsection 6-15(2) of the ITAA 1997 the value of these travel benefits do not form part of the Member's or the Member’s spouse's assessable income as they will be exempt income by virtue of section 23L of the ITAA 1936 and section 11-10 of the ITAA 1997.

Commissioner of Taxation

18 December 2002


Taxation Ruling TR 1999/D3 Deductibility of interest on moneys drawn down under line of credit facilities and redraw
Taxation Ruling TR 1999/D3

Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw

Contents:

What this Ruling is about

Ruling

Line of credit facilities

Redraw facilities

Date of effect

Explanations

Alternative views

Examples

WHAT THIS RULING IS ABOUT

Class of person/arrangement

1.	This Ruling considers the deductibility of interest incurred on moneys drawn down under line of credit facilities and moneys redrawn under other loans offering redraw facilities. It considers the operation of section 8-1 of the Income Tax Assessment Act 1997 ("ITAA 1997") (formerly subsection 51(1) of the Income Tax Assessment Act 1936 ("ITAA 1936")) where the borrowed money has been applied for both income producing and non-income producing purposes.

2.	The cases cited in this Ruling that consider deductibility under subsection 51(1) of the ITAA 1936 have equal application to section 8-1 of the ITAA 1997. All references to subsection 51(1) should be taken as including a reference to section 8-1, and vice versa.

3.	This Ruling applies only to line of credit facilities as described in paragraphs 4 to 7 below and redraw facilities as described in paragraphs 8 to 10 below. This Ruling does not deal with facilities that permit the capitalisation of interest or the applicability of the "refinancing principle" for funds borrowed by business partnerships as discussed in Taxation Ruling TR 95/25.

Line of credit facilities

4.	A line of credit facility is a credit facility taken out with a financial institution under which a borrower may draw down funds up to an agreed credit limit. There are a number of different facilities available. There may be one or more loan contracts and one or more borrowers. The line of credit may be fully drawn, i.e., the taxpayer borrows up to the credit limit, or partly drawn, i.e., the taxpayer draws only some of the funds leaving credit available to be utilised at a later date. If the facility is fully drawn the taxpayer can only draw further funds if extra payments are made into the facility. Where the facility is partly drawn the taxpayer can draw down further funds up to the credit limit without making extra payments.

5.	The facility may operate with one account that is used for all draw downs. Funds may be drawn down from a single line of credit account up to the full amount of the available credit limit and may be used for both income producing and non-income producing purposes.

6.	Alternatively, the facility may be divided into a number of sub-accounts by agreement between the lender and the borrower. Some financial institutions allow the sub-accounts to be held by different borrowers. Some sub-accounts may be used for income producing purposes ("investment sub-account") and others may be used for non-income producing purposes ("private sub-account"). Some sub-accounts may be used for mixed income producing and non-income producing purposes ("mixed purpose sub-account"). Funds may be drawn down from each sub-account up to an allocated portion of the overall credit limit.

7.	Generally, the lender requires the borrower to make a minimum monthly payment equal to the interest, fees and charges that have accrued on the facility. Every payment into that facility, to the extent it is in excess of the interest, fees and charges, is a repayment of principal. Under these facilities, the borrower is able to make repayments to reduce the amount owing under the line of credit account or sub-account at any time. Any extra repayments over and above the required minimum payments increase the funds available to the borrower to draw down, subject to the agreed credit limit for that account or sub-account. Where a taxpayer makes a repayment over and above the required minimum payment, the taxpayer can direct this repayment be allocated to a particular sub-account.

Redraw facilities

8.	There are a number of loan arrangements under which a borrower may redraw previous repayments of the loan principal. There may be one or more loan contracts and one or more borrowers. The loan may be for income producing purposes, non-income producing purposes or mixed purposes. The lender prescribes a minimum payment that is due on the loan. This minimum payment is at least equal to the amount of interest, fees and charges that accrues on the loan, but more commonly is a principal and interest repayment.

9.	The redraw facility allows the borrower to make extra repayments over and above the minimum repayments required under the loan agreement, and then permits the borrower to redraw an amount equivalent to those extra repayments at a later time. The extra repayments reduce the borrower's outstanding loan debt and money redrawn increases the outstanding loan debt.

10.	A taxpayer may use the money redrawn for income producing purposes, non-income producing purposes or mixed purposes regardless of the use of the original borrowed funds. In some cases the consent of the lender is required to redraw funds and the redraw may be subject to other conditions affecting the amount and frequency of redraws. Redraws may also be subject to the consent of the loan guarantors.

RULING

Line of credit facilities

11.	Where a line of credit facility is divided into sub-accounts and each sub-account is used for a specific purpose, interest is fully deductible where funds drawn down on an investment sub-account continue to be applied exclusively to an income producing purpose. Interest is not deductible where funds drawn down on a private sub-account are applied to a non-income producing purpose.

12.	Where a taxpayer has a mixed purpose sub-account, or the line of credit facility comprises only one account that is used for both income producing and non-income producing purposes, the interest needs to be apportioned between those income producing and non-income producing purposes. Apportionment must be made on a fair and reasonable basis. One approach that we accept as fair and reasonable in relation to the apportionment of interest that has accrued on a daily basis on a mixed purpose account is set out in the following paragraphs. We accept this approach to apportionment is not the only approach that is fair and reasonable.

13.	Where interest accrues daily under a mixed purpose account, a taxpayer is entitled to a deduction in respect of that part of the interest that has accrued on the portion of the outstanding daily loan balance attributable to an income producing purpose. In calculating the portion of the outstanding daily loan balance attributable to an income producing purpose, any repayment of principal must be applied proportionately against the outstanding balance of amounts applied to income producing and non-income producing purposes respectively, at the time the repayment is made.

14.	Where interest on borrowed money accrues daily, we accept it would be unnecessarily onerous to require a manual daily apportionment calculation. We accept the interest accrued in a month is deductible under section 8-1 to the extent it is related to the average outstanding principal used that month for income producing purposes. The deductible portion of interest accruing in each month is calculated as follows:

total interest accrued for the month x deductible interest percentage figure

15.	The deductible interest percentage figure is calculated as follows:

(A + B)/(C + D) x 100

where

A = 	opening balance (beginning of month) of outstanding principal used for income producing purposes

B = 	closing balance (end of month) of outstanding principal used for income producing purposes

C = 	opening balance of total outstanding principal

D = 	closing balance of total outstanding principal

NOTE:
The closing balance for one month is the opening balance for the next month.

16.	Where a taxpayer makes repayments over and above the required minimum payment and the line of credit facility comprises one mixed purpose account only, these repayments must be apportioned across the total debt. The taxpayer cannot notionally allocate the repayments to a particular portion of the total debt, e.g., the non-income producing portion.

Redraw facilities

17.	The deductibility of interest on a further borrowing of money under a redraw facility depends upon the use to which the redrawn funds are put. Where the original borrowing is for non-income producing purposes and the taxpayer uses the redrawn funds exclusively for income producing purposes, that part of the accrued interest attributable to the redrawn funds is deductible.

18.	Similarly, where the original borrowing is for income producing purposes and the taxpayer uses the redrawn funds exclusively for non-income producing purposes, that part of the accrued interest attributable to the redrawn funds is not deductible.

19.	Where a taxpayer uses redrawn funds partly for income producing purposes and partly for non-income producing purposes, the taxpayer must apportion the interest that has accrued on the redrawn funds.

DATE OF EFFECT

20.	This Ruling applies to years commencing both before and after its date of issue. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

EXPLANATIONS

21.	For an expense or outgoing to be deductible under section 8 1 of the ITAA 1997 it must be characterised as an outgoing that is incurred for the purpose of gaining or producing assessable income or is necessarily incurred in carrying on a business of gaining or producing assessable income. Outgoings of interest draw their character from the use of the borrowed funds (see Fletcher & Ors v. FC of T 91 ATC 4950; (1991) 22 ATR 613).

22.	The term "use" in this context does not necessarily require a strict tracing approach to the application of the borrowed money (see FC of T v. JD Roberts; FC of T v Smith 92 ATC 4380; (1992) 23 ATR 494). Rather, the characterisation of interest on money borrowed is ascertained by reference to the advantages sought from the use of the borrowed funds.

23.	Gibbs ACJ in FC of T v. South Australian Battery Makers Pty Ltd (1978) 140 CLR 645 at 660; 78 ATC 4412 at 4420; (1978) 8 ATR 879 at 887 states:

"... it is the advantage which the expenditure was intended to gain, directly or indirectly, for the taxpayer that is relevant in determining the character of the expenditure ..."

24.	It is not possible to prescribe exhaustively all the factors that may be relevant considerations in determining the advantages sought from the use of the borrowing. A guide, however, is given by Brennan J in Ure v. FC of T 81 ATC 4100 at 4104; (1981) 11 ATR 484 at 489 where his Honour says:

"The purposes for which money is laid out is an issue of fact, turning upon the objective circumstances which human experience would judge to be relevant to the issue ..."

Line of credit facilities and redraw facilities

25.	Where a loan facility allows for redraws of extra repayments, we consider those redraws constitute new borrowings of funds that cannot be traced to the extra repayments. In this regard the term "redraw" is a misnomer. Similarly, a draw down on a line of credit that has not been fully drawn is a new borrowing of funds.

26.	In our view, it is not correct to characterise the reduced loan balance as comprising the previous loan balance plus the extra repayments or available credit as if those extra repayments or available credit were standing to the credit of the borrower in the books of the lender. The extra repayments or available credit do not create a debt due by the lender to the borrower. Those funds used to make extra repayments simply cease to exist as an asset of the borrower after being used to discharge part of the loan debt.

27.	In the case of a repayment of principal on a line of credit, the borrower acquires a contractual right to borrow a further amount equal to the difference between the reduced drawn-down amount and the available credit limit. That right to borrow further funds is a contractual right under the loan agreement permitting the borrower to draw down funds up to the agreed credit limit. The available credit is not an asset of the borrower and the available credit limit can be varied by the lender upon review.

28.	Similarly, under a redraw facility, the loan agreement gives the borrower the right, subject to restrictions in some cases, to borrow a further amount up to the balance of the loan debt that would have been outstanding if the minimum loan repayments required under the loan agreement had been made. The extra repayments do not create a debt payable by the lender to the borrower and are not an asset of the borrower after they have been used to discharge part of the loan debt.

29.	We consider a draw-down from a line of credit account or sub-account, or a redraw from a loan account, is a separate borrowing. Therefore, the deductibility of the interest on that separate borrowing depends on whether the interest is incurred in gaining or producing assessable income or is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. To the extent borrowings are used for income producing purposes, that part of the accrued interest attributable to those borrowings is deductible. Conversely, that part of the accrued interest attributable to borrowings used for non-income producing purposes is not deductible.

30.	A mixed purpose line of credit sub-account is an undivided single debt owed by the borrower to the lender. When repayments of principal are made, it is not considered possible to direct those payments to only that part of the borrowed funds used for a particular purpose as if it were a separate loan debt. While it may be possible to trace the uses to which different parts of the borrowed funds are put, it is considered repayments of principal need to be applied proportionately to reduce the balance of the outstanding principal attributable to income producing use and non-income producing use respectively.

ALTERNATIVE VIEWS

31.	It has been suggested that funds withdrawn from a loan account or a line of credit account can be attributed to the extra repayments made and they simply represent a withdrawal of funds temporarily "parked in the loan". This view depends upon a characterisation of the extra repayments as effectively remaining an asset of the borrower, available to the borrower by virtue of the contractual right to redraw them. As discussed above, we believe this view is not correct. The extra repayments have been used to discharge part of the loan or line of credit debt and the subsequent redraw or draw down is funded by a subsequent increasing of the loan or line of credit debt. In our view, the redraw or draw down is a new borrowing of money. The deductibility of the interest payable on those new borrowings depends upon the advantages sought from the use of those funds.

EXAMPLES

Example one

32.	Barry has a line of credit with the XYZ Bank. His credit limit is $100,000 and when that facility is established on 1 April he draws down $80,000 to invest in income producing shares. Barry's net salary of $4,000 per month is paid directly into the line of credit account on the last day of the month and interest and charges are debited on the same day. Barry redraws $2,000 per month on the first day of the month for living expenses. On 30 April, Barry makes a lump sum repayment of $20,000 from the proceeds of the sale of a private yacht, in addition to the $4,000 repayment from his salary. On 1 June, Barry draws down a further $20,000 for home renovations, in addition to the $2,000 draw down for living expenses.

Barry's transactions are summarised below:

Date	Borrowings and Interest	Payments	Account Balance	Income Portion (see below)	Non-income Portion (see below)
1 Apr	80,000		80,000	80,000	NIL
30 Apr	400	24,000	56,400	56,400	NIL
1 May	2,000		58,400	56,400	2,000
31 May	292	4,000	54,692	52,819	1,873
1 Jun	22,000		76,692	52,819	23,873
30 Jun	383	4,000	73,075	50,328	22,747
33.	The repayments of $20,000 and $4,000 made on 30 April first pay the accrued interest of $400 and then reduce the outstanding principal used at that time for income producing purposes to $56,400.

34.	The interest of $400 accrued in April is wholly attributable to borrowed funds used for income producing purposes and is therefore fully deductible.

35.	The $4,000 repayment on 31 May first pays the accrued interest of $292 and then proportionately reduces the outstanding principal used at that time for income producing purposes and for non-income producing purposes. The proportionate reduction in the outstanding principal attributable to income producing purposes will be $3,708 x 56,400/58,400 = $3,581, giving a balance of the outstanding principal used for income producing purposes at that time of $52,819. The proportionate reduction of principal attributed to non-income producing purposes will be $3,708 x 2,000/58,400 = $127. The balance of the outstanding principal used for non-income producing purposes at that time, therefore, will be reduced by $127 to $1,873.

36.	The interest of $292 accrued in May is related partly to the outstanding principal used that month for income producing purposes and partly to the outstanding principal used that month for non-income producing purposes. The amount of interest Barry can claim as a deduction for May is calculated as:

292 x deductible interest percentage

= 292 x ((56,400 + 52,819)/(56,400 + 54,692)) x 100
= 292 x 98.3%
= 287

Barry can claim a deduction of $287 for interest for the month of May.

37.	The borrowings on 1 June of $20,000 for home renovations and $2,000 for living expenses were for non-income producing purposes. The outstanding principal used for non-income producing purposes at 1 June will, therefore, be $1,873 (see paragraph 33 above) + $22,000 = $23,873.

38.	The $4,000 repayment on 30 June first pays the interest accrued that month of $383 and then proportionately reduces the outstanding principal used at that time for income producing purposes and for non-income producing purposes. The proportionate reduction in the outstanding principal used at that time for income producing purposes will be $3,617 x 52,819/76,692 = $2,491, giving a balance of the outstanding principal used at 30 June for income producing purposes of $50,328. The balance of the outstanding principal used for non-income producing purposes at 30 June will, therefore, be reduced by $1,126 to $22,747.

39.	The interest of $383 accrued in June is related partly to the outstanding principal used that month for income producing purposes and partly to the outstanding principal used that month for non-income producing purposes. The amount of interest Barry can claim as a deduction for June is calculated as:

383 x deductible interest percentage

=383 x ((52,819 + 50,328)/(54,692 + 73,075)) x 100

=383 x 80.7%

=309

Barry can claim a deduction of $309 for interest for the month of June.

Example two

40.	Bill is a computer programmer. He is offered a job in Darwin and decides to relocate his family there. He borrows $200,000 from the bank and purchases a house in Darwin. He makes the minimum monthly payment of $1650. After two years the balance on Bill's home loan is $186,000.

41.	Bill receives a $50,000 windfall and decides to pay this money off his home loan. This reduces the balance to $136,000.

42.	Bill is then offered a job in Perth. He decides to take the job and relocate his family. He decides to rent out the house in Darwin and borrow to purchase a new residential property in Perth. Bill redraws $50,000 from the Darwin loan and uses this as a deposit for the new home in Perth.

43.	Bill can deduct the interest accrued on the outstanding loan principal of $136,000 that is related to the Darwin house from the date that property is available for rental. Those borrowed funds are used at that time for income producing purposes. As the new borrowing of $50,000 is used as a deposit on the residence in Perth, the interest on that borrowing will not be deductible as it is incurred for a non-income producing purpose.

Example three

44.	Kathy has a home loan that is linked to an interest offset savings account into which her wages are paid and from which she makes private drawings for living expenses. The credit balance of the interest offset savings account reduces the interest payable on her home loan. Kathy also has a separate home equity line of credit that comprises two sub-accounts. One sub-account is used to borrow money that is used solely for investments in income producing shares. Another sub-account is used to borrow money that is used solely for holidays. Kathy moves to another city on work for six months and rents out her home.

45.	In the period in which Kathy's home is available for rent, the interest accrued on the outstanding balance of her home loan will be fully deductible. The deductibility of that interest will not be affected by private drawings from the interest offset savings account. The interest accrued on the line of credit sub-account used solely for investments in income producing shares will be fully deductible. The interest accrued on the sub-account used solely for holidays will not be deductible.

Commissioner of Taxation

10 February 1999


Taxation Ruling TR 98/9 Deductibility of self-education expenses
Taxation Ruling TR 98/9

Income tax: deductibility of self-education expenses

Contents:

What this Ruling is about

Date of effect

Previous Rulings

Ruling

PART A

Circumstances in which self-education expenses are allowable

Commonwealth educational assistance schemes

Depreciation

Types of self-education expenses allowable

Types of self-education expenses not allowable

PART B

Section 82A

Explanations

Alternative views

Note

WHAT THIS RULING IS ABOUT

Class of person/arrangement

1.	Part A of this Ruling sets out the circumstances in which self-education expenses are allowable as deductions to individuals under the Income Tax Assessment Act 1936 (ITAA 1936) and the Income Tax Assessment Act 1997 (ITAA 1997). In doing so, the Ruling discusses the types of expenditure that are considered to be allowable.

2.	While many of the cases cited in this Ruling consider deductibility under subsection 51(1) of the ITAA 1936, the decisions in these cases and the discussion in this Ruling have equal application to section 8-1 of the ITAA 1997. All references to subsection 51(1) should therefore be taken as including a reference to section 8-1, and vice versa.

3.	This Ruling does not deal with the question of the deductibility of expenses associated with travel between a taxpayer's home, an educational institution and a place of work. Taxation Ruling TR 92/8 (paragraphs 11(d), 13(c), 43 and 44) addresses the relevant principles in terms of the deductibility of motor vehicle expenses. These paragraphs have been reproduced in the Note at the end of this Ruling (see paragraph 160).

4.	The Ruling does not discuss the substantiation requirements in Divisions 28 and 900 of the ITAA 1997.

5.	For the purposes of Part A of this Ruling, self-education includes courses undertaken at an educational institution (whether leading to a formal qualification or not), attendance at work-related conferences or seminars, self-paced learning and study tours, including sabbatical (whether within Australia or overseas).

6.	Part B of this Ruling discusses the operation of section 82A of the ITAA 1936 which, in some circumstances, limits the amount of expenses of self-education otherwise allowable under section 8-1.

DATE OF EFFECT

7.	Subject to paragraphs 8 and 9 below, this Ruling applies to years commencing both before and after its date of issue. The views expressed concerning the operation of section 82A are more favourable to taxpayers and apply to years both before and after the issue of the Ruling, subject to the statutory limitation in section 170 of the ITAA 1936. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

8.	Paragraph 18 of this Ruling states that self-education expenses are not deductible to recipients of Commonwealth educational assistance payments made under the AUSTUDY, ABSTUDY, AIC and VCES schemes. This view is less favourable than our earlier view that appears in publications such as Taxation Rulings IT 2458 and TR 92/8, and Tax Pack. Accordingly, our view that self-education expenses are not deductible to the recipients of these payments only applies to expenditure incurred on or after 1 July 1998.

9.	Our interpretation of the term "a prescribed course of education" has changed from the views previously expressed in Taxation Rulings IT 283 (withdrawn on 8 October 1997) and IT 314. Accordingly, paragraphs 128 and 136 of this Ruling apply to all expenses of self-education incurred on or after 1 July 1998.

PREVIOUS RULINGS

10.	This Ruling is essentially an updated version of Taxation Ruling TR 92/8. It clarifies some issues that have arisen in relation to the matters covered in TR 92/8 and also incorporates our views on the operation of section 82A. The principles contained in paragraphs 11(d), 13(c), 43 and 44 of Taxation Ruling TR 92/8 relating to motor vehicle and travel expenses have not been dealt with in this Ruling. Consequently, TR 92/8, with the exception of paragraphs 11(d), 13(c), 43 and 44, is now withdrawn.

11.	The principles contained in Taxation Rulings IT 313 and IT 2290 have been incorporated in this Ruling. These Rulings are now withdrawn. The views expressed in Taxation Ruling IT 314 and paragraphs 19 and 20 of Taxation Ruling IT 2458 have changed. Accordingly, IT 314, together with paragraphs 19 and 20 of IT 2458 are now withdrawn.

RULING

PART A

Circumstances in which self-education expenses are allowable

Section 8-1 of the ITAA 1997

12.	Self-education expenses are deductible under section 8-1 where they have a relevant connection to the taxpayer's current income-earning activities.

13.	If a taxpayer's income-earning activities are based on the exercise of a skill or some specific knowledge and the subject of self-education enables the taxpayer to maintain or improve that skill or knowledge, the self-education expenses are allowable as a deduction.

14.	If the study of a subject of self-education objectively leads to, or is likely to lead to, an increase in a taxpayer's income from his or her current income-earning activities in the future, the self-education expenses are allowable as a deduction.

15.	No deduction is allowable for self-education expenses if the study is to enable a taxpayer to get employment, to obtain new employment or to open up a new income-earning activity (whether in business or in the taxpayer's current employment). This includes studies relating to a particular profession, occupation or field of employment in which the taxpayer is not yet engaged. The expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.

16.	In practice, the above principles do not always operate on a mutually exclusive basis. It is always necessary to have regard to the words of section 8-1 and apply them to the facts.

17.	An expense is deductible under section 8-1 when it has the essential character of an income-producing expense. The essential character is to be determined by an objective analysis of all the surrounding circumstances. There are circumstances where apportionment under section 8-1 is required. For example, if a study tour or attendance at a work-related conference or seminar is undertaken for income-earning purposes and for private purposes, it is appropriate to apportion the expenses between the purposes. If the income-earning purpose is merely incidental to the main private purpose, only the expenses which relate directly to the former purpose are allowable. However, if the private purpose is merely incidental to the main income-earning purpose, apportionment is not appropriate.

Commonwealth educational assistance schemes

18.	1We consider that self-education expenses are not deductible against payments under the following Commonwealth educational assistance schemes:

(a)	AUSTUDY;

(b)	ABSTUDY;

(c)	Assistance for Isolated Children Scheme (AIC); and

(d)	Veterans' Children Education Scheme (VCES).

19.	The principles of deductibility discussed in paragraphs 13 and 14 above are not satisfied. Expenses incurred in fulfilling the course requirements are correctly characterised as expenses incurred in undertaking study that might enable the student to obtain employment in a particular field. The expenses are not incidental and relevant to the educational assistance payments.

20.	There may be cases where a payment under a Commonwealth education assistance scheme is exempt income. For example, AIC payments received after 1 July 1996 are exempt income. In these cases there is an additional reason for the deduction not being allowable: the income tax law does not allow a deduction for expenses incurred in earning exempt income.

21.	This Ruling does not specifically address the deductibility of self-education expenses in relation to other educational assistance schemes. However, while the relevant principles need to be considered in light of the facts in each case, generally, self-education expenses are not deductible where the scheme provides payments in the nature of assistance.

Depreciation

22.	A deduction is allowable under section 42-15 of the ITAA 1997 for depreciation of items of plant or articles used for the purpose of producing assessable income. If the subject of self-education enables a taxpayer to maintain their skill or knowledge or is likely to lead to an increase in income from their current income-earning activity, depreciation of items used for self-education purposes is allowable. For example, depreciation of technical instruments and equipment, computers, calculators, professional libraries, filing cabinets and desks is allowable, where the self-education satisfies the principles outlined in paragraphs 13 and 14.

Types of self-education expenses allowable

23.	Subject to the general tests under section 8-1 being met, the following types of expenses related to self-education are allowable:

(a)	course or tuition fees of attending an educational institution, work-related conference or seminar, including student union fees;

(b)	the cost of professional and trade journals, text books and stationery;

(c)	airfares incurred on overseas study tours or sabbatical, on work-related conferences or seminars, or attending an educational institution. They are part of the necessary cost of participating in the tour, etc.;

(d)	subject to paragraph 24(c) of this Ruling, where a taxpayer is away from home overnight, accommodation and meals expenses incurred on overseas study tours, on work-related conferences or seminars, or attending an educational institution; and

(e)	interest incurred on borrowed monies where the funds are used to pay for self-education expenses associated with a course of education, that enables a taxpayer to maintain or improve his or her skill or knowledge or is likely to lead to an increase in income from the taxpayer's current income-earning activities. Regard must be had to the connection between the interest expense and the income-earning activity in each income year interest is claimed because a change in circumstances, for example, a change of employment, may mean that the necessary connection no longer exists.

Types of self-education expenses not allowable

24.	The following expenses related to self-education are not allowable under section 8-1:

(a)	a higher education contribution payment made under Chapter 4 of the Higher Education Funding Act 1988 (section 26-20 of the ITAA 1997);

(b)	expenditure on meals while attending an educational institution, work-related conference or seminar where the taxpayer is not required to sleep away from home;

(c)	expenditure on accommodation and meals where a taxpayer who has travelled to another location for self-education purposes has established a new home.

PART B

Section 82A

25.	If self-education expenses are allowable under section 8-1 but also fall within the definition of "expenses of self-education" in section 82A, the section operates to limit the amount of expenses otherwise allowable under section 8-1.

Expenses of self-education

26.	Expenses of self-education include those expenses that are "necessarily incurred" in connection with a prescribed course of education, but do not include payments made under the Higher Education Contribution Scheme (HECS) or the Tertiary Student Financial Supplement Scheme. Compulsory and unavoidable expenses, as well as those for which a need can be shown in terms of fulfilling the requirements of the course, are regarded as being "necessarily incurred".

Prescribed course of education

27.	The expression "prescribed course of education" used in subsection 82A(2) refers to an organised course of study, full-time or part-time, provided by schools, colleges or universities. It also includes a course provided by an institution or organisation, or a dedicated part thereof, whose primary function is the provision of systematic instruction, training or schooling in a subject, skill or trade.

28.	In addition, the expression "course of education" requires an element of continuity and of ongoing instruction or training. It therefore does not include short-term refresher courses, in-service activities or short-term development courses. These are considered to be more akin to on-the-job training.

Operation of section 82A

29.	Where section 82A applies, the total allowable deduction under section 8-1 cannot be greater than the amount by which the net amount of expenses of self-education exceeds $250. In other words, only the excess of the self-education expenses over $250 may be considered for deduction under section 8-1. In performing this calculation, it is not necessary that the expenses of self-education be deductible (provided they are "necessarily incurred" in connection with a prescribed course of education). Expenses that are deductible under provisions other than section 8-1 are also taken into account in the section 82A calculation.

30.	However, having established the maximum amount (i.e., the net amount of self-education expenses over $250), any expenses that meet the requirements of section 8-1 may be claimed in full up to the maximum amount. The operation of section 82A is illustrated in the Examples at paragraphs 145-150 and 151-155 of this Ruling.

EXPLANATIONS

PART A

General principles of deductibility under section 8-1

31.	Expenditure on self-education falls for consideration under section 8-1. As most self-education expenses are voluntarily incurred to produce income, we believe it is not necessary in this Ruling to consider the second positive limb of section 8-1. The first positive limb applies to all taxpayers, including those taxpayers carrying on business.

32.	To be allowable under the first positive limb of section 8-1, expenditure must be able to be characterised as having been incurred in gaining or producing assessable income (Fletcher & Ors v. FC of T (1991) 173 CLR 1 at 17; 91 ATC 4950 at 4957; (1991) 22 ATR 613 at 621-622). In so far as it is relevant for present purposes, section 8-1 provides as follows:

"8-1(1) You can deduct from your assessable income any loss or outgoing to the extent that:

(a)	it is incurred in gaining or producing your assessable income ... ".

33.	The High Court of Australia has indicated that the expenditure must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T; Hayley v. FC of T (1958) 100 CLR 478 at 497-498; (1958) 11 ATD 404 at 412). There must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of the assessable income (Ronpibon Tin NL v. FC of T (1949) 78 CLR 47 at 56; (1949) 8 ATD 431 at 435).

34.	Consequently, it is necessary to determine the connection between the particular outgoing and the operations by which the taxpayer more directly gains or produces his or her assessable income (Charles Moore & Co (WA) Pty Ltd v. FC of T (1956) 95 CLR 344 at 349-350; (1956) 11 ATD 147 at 148; (1956) 6 AITR 379 at 384; FC of T v. Cooper 91 ATC 4396 at 4403; (1991) 21 ATR 1616 at 1624; Roads and Traffic Authority of NSW v. FC of T 93 ATC 4508 at 4521; (1993) 26 ATR 76 at 91). Whether such a connection exists is a question of fact to be determined by reference to all the facts of the particular case.

35.	The many cases dealing with expenses of self-education and section 8-1 are no more than examples of the application of these general principles to the facts of those cases. These cases provide an indication of the facts relevant in the self-education area in determining the characterisation issue.

36.	Some of the decisions of the courts and the Taxation Boards of Review (see FC of T v. White 75 ATC 4018; (1975) 5 ATR 192; FC of T v. Kropp 76 ATC 4406; (1976) 6 ATR 655; Case G65 75 ATC 474; 20 CTBR (NS) Case 36) have caused confusion by using expressions, such as "a perceived connection between expenditure and the gaining of assessable income", "direct effect on income", "part and parcel of the employment" or "express or implied condition of employment", as determinants of deductibility for self-education expenses under section 8-1. In doing so, they probably applied tests for deductibility that were stricter than necessary. However, the courts are having more regard to the words of the relevant provisions, in later decisions such as FC of T v. Studdert 91 ATC 5006; (1991) 22 ATR 762.

Self-education – principles of deductibility under section 8-1

(a) A deduction is allowable for self-education expenses if the taxpayer's income-earning activities are based on the exercise of a skill or some specific knowledge and the subject of self-education enables the taxpayer to maintain or improve that skill or knowledge

37.	In FC of T v. Finn (1961) 106 CLR 60; (1961) 12 ATD 348, the High Court held that expenditure incurred by a senior government architect on an overseas tour devoted to the study of architecture was allowable under section 8-1. All three Judges recognised that the tour expenses were relevant to the activities by which Mr Finn was currently producing income. Kitto J found (106 CLR at 69; 12 ATD at 352) that the tour was incidental to the proper execution of the duties of Mr Finn's office because:

"Its professional status implied an obligation of progressive acquaintance with a living and developing art. It was therefore, I think, plainly incidental to the office that the respondent should avail himself of such opportunities as might arise to add ... to his knowledge and understanding of architectural achievements and trends overseas ...".

38.	Windeyer J (106 CLR at 70; 12 ATD at 352) was of a similar view to Kitto J, stating that:

"... a taxpayer who gains income by the exercise of his skill in some profession or calling and who incurs expenses in maintaining or increasing his learning, knowledge, experience and ability in that profession or calling necessarily incurs those expenses in carrying on his profession or calling."

39.	In Studdert, the taxpayer, a flight engineer, sought a deduction for expenses incurred on light aircraft flying lessons leading to a private pilot's licence. The Administrative Appeals Tribunal (AAT) (91 ATC 2007; (1991) 22 ATR 3042) at first instance was prepared to accept that it was part of Mr Studdert's duties to understand the overall workings of aircraft flight. The AAT allowed the expenditure on the basis that the lessons improved his proficiency in those duties. It also found that Mr Studdert rightly believed that possession of the pilot's licence would assist him in promotion to higher grades as an engineer, although the AAT did not consider it necessary to base its decision on this finding.

40.	On appeal to the Federal Court, Hill J substantially agreed with the decision of the AAT. His Honour found that the expenses were relevant and incidental to the activities as flight engineer that directly produced Mr Studdert's income. This finding was based on the facts that undertaking the lessons made him better equipped to perform his skilled job and better proficiency was a motivation for undertaking the lessons. If necessary, his Honour would also have supported his decision with the finding that flying proficiency would assist Mr Studdert in promotion to higher grades in his current job (91 ATC 5006 at 5015-5016; (1991) 22 ATR 762 at 772).

41.	Example: Barry, a trainee accountant, is studying commerce part-time at university. He is allowed a deduction for the costs associated with the course because the course enables Barry to maintain or increase the specific knowledge required in his current position and to carry out his duties more effectively.

42.	If a course of study is too general in terms of the taxpayer's current income-earning activities, the necessary connection between the self-education expense and the income-earning activity does not exist. The cost of self-improvement or personal development courses is generally not allowable, although a deduction may be allowed in certain circumstances. In Case Z42 92 ATC 381; AAT Case 8419 (1992) 24 ATR 1183, a senior newspaper journalist, whose duties involved interviewing people for feature articles and making presentations to potential advertisers, was allowed a deduction for the cost of a speech course because it was incurred in maintaining or increasing his ability in his current employment and therefore was necessarily incurred in carrying on that employment.

43.	Example: Brianna, a company director, was having difficulty coping with work due to stress brought about by difficulties with her family situation. She decided to attend a four-week course in stress management to help her deal with the situation. Brianna attended the course after hours and paid for it herself.

The cost of the course is not allowable because the course was not designed to maintain or increase the skill or specific knowledge required in her current position. The expenses are more correctly characterised as related to a private matter.

(b) A deduction is allowable for self-education expenses if the subject of self-education leads to, or is likely to lead to, an increase in the taxpayer's income from current income-earning activities

44.	In FC of T v. Hatchett (1971) 125 CLR 494; 71 ATC 4184; (1971) 2 ATR 557, Menzies J held that expenses incurred by a primary school teacher in relation to the submission of theses to gain a Teacher's Higher Certificate were allowable. His Honour considered that the certificate expenses were related to the actual gaining of income because possession of the certificate entitled Mr Hatchett to move to another pay scale and, therefore, to earn more money in the future. It also entitled him to be paid more for doing the same work without any change in grade (125 CLR at 498; 71 ATC at 4186; 2 ATR at 559).

45.	Similar reasoning was used to allow self-education expenses in FC of T v. Smith 78 ATC 4157; (1978) 8 ATR 518 and in FC of T v. Lacelles-Smith 78 ATC 4162; (1978) 8 ATR 524. Furthermore, in Studdert, Hill J said that an expense normally is allowable if it can be shown to contribute or be likely to contribute to increased income, but noted that such a finding is not a prerequisite for deductibility (91 ATC at 5013-5014; 22 ATR at 770).

46.	Example: Kieran, a computer salesman, takes six months leave without pay to undertake a business administration course. He has an agreement with his employer that, upon successful completion of the course, he will be promoted to an assistant manager position with his current employer. Kieran is allowed a deduction for the costs of the course because it leads to an increase in income from his current employment.

(c) Expenses related to improving knowledge or skills are not of a capital nature

47.	Both Finn (106 CLR at 68-69; 12 ATD at 351) and Hatchett (125 CLR at 497-498; 71 ATC at 4186; 2 ATR at 559) make it clear that expenses related to improving knowledge or skills are not of a capital nature. They rejected the argument that such improvement amounts to the acquisition of something of an enduring nature, equivalent to the extension of plant in a factory.

(d) A deduction is not allowable for self-education expenses if the subject of self-education is designed to get employment, to obtain new employment or to open up a new income-earning activity

48.	The decision of the High Court in FC of T v. Maddalena 71 ATC 4161; (1971) 2 ATR 541 establishes the principle that no deduction is allowable for self-education expenses if the study is designed to enable a taxpayer to get employment or to obtain new employment. Such expenses are incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.

49.	The Federal Court in FC of T v. M I Roberts 92 ATC 4787; (1992) 24 ATR 479 applied the principle in Maddalena when it overturned an AAT decision allowing a mine manager a deduction for expenses associated with a Master of Business Administration degree. Mr Roberts was retrenched by his employer in Australia and then undertook an MBA course in the US for two years. On his return to Australia, he was re-employed as a mine manager by another company at a significantly increased salary when compared with his previous position.

50.	The AAT had relied on Kropp to allow a deduction for his MBA studies, based on a finding that there was a sufficient connection between the expenses and the income derived on the taxpayer's return to Australia. In overturning the AAT decision, Cooper J considered that moneys were spent to obtain a new employment, albeit one in a better position and on higher wages, rather than in the course of employment and that Maddalena clearly applied.

51.	In the course of his judgement, Cooper J considered the decision in Kropp where an accountant resigned from his employment with an Australian accounting firm to take up a two-year development appointment with an associated firm in Canada. Mr Kropp later returned to Australia and recommenced work with his old employer at an increased salary. Waddell J allowed a deduction for the cost of the taxpayer's air fare to Canada on the basis that there was a perceived connection between the expenditure and the gaining of increased income on Mr Kropp's return to Australia. Cooper J considered that "the principles enunciated by the High Court in Maddalena were not applicable ..." on the facts of Kropp.

52.	Despite the view expressed by Cooper J, we regard the decision in Kropp as in error. The decision fails to recognise that, because of the break in employment, the expenses in issue were incurred at a point too soon to be regarded as incurred in gaining or producing income.

53.	Example: After finishing her final year of school, Sarah enrols in a full-time fashion photography course at a technical college. She is supported by her parents during her studies and does not receive any government assistance, but does some casual sales work on weekends.

54.	Sarah cannot claim the costs associated with the course against her casual work income because her study costs were incurred at a point too soon to be regarded as incurred in gaining or producing income from her future employment in the fashion photography industry.

55.	Example: Stuart wants to be the manager of an hotel. He enrols in a hotel management course, one semester of which involves an industry placement to gain work experience. Stuart is placed with a major hotel where he gains experience in all facets of hotel management, including catering, housekeeping and bar work. He claims a deduction for the cost of the course against income earned during the placement.

56.	A deduction is not allowable because the study is designed to get Stuart employment as a hotel manager, not derive income from work experience. It is incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.

57.	Example: Shannon, who is undertaking a 4-year university degree in mining engineering, takes a job as a casual employee with a mining company during the end of year holiday period. It is the company's policy to take only students who are pursuing relevant studies. Shannon is not entitled to a deduction for the cost of the course because the study is designed to get future employment in the field. It is incurred at a point too soon.

58.	We believe that Maddalena also supports our view that no deduction is allowable for self-education expenses if the study is designed to enable a taxpayer to open up a new income-earning activity, whether in business or in the taxpayer's current employment. In Case Z1 92 ATC 101; AAT Case 7541 (1991) 22 ATR 3549, a public service clerk studying for a law degree later obtained a legal officer position in the public service. Such expenses of self-education were incurred at a point too soon to be regarded as incurred in gaining or producing assessable income.

59.	Example: Joseph is currently employed as a clerk in a public service department. He would like to transfer to a position in another section of the department and undertakes a course of study designed to equip him with the skills needed in that position. The study is unrelated to the skills required in his current position and is not likely to lead to an increase in income. As the study is designed to enable Joseph to enter a new income-earning activity, no deduction is allowable.

60.	Also believe that obiter comments of Lee J in FC of T v. Highfield 82 ATC 4463; (1982) 13 ATR 426 are consistent with the views discussed in paragraph 58. Although not necessary to decide, his Honour discussed whether expenses incurred by a dentist in general practice on a post-graduate degree in periodontics would have been allowable if the study had been undertaken to become a specialist periodontist.

61.	His Honour came to no final conclusion on the matter, but recognised that there were equally competing views. On the one hand, such expenses could be said to be allowable on the basis that the dentist was an independent contractor who was attempting to obtain contracts. On the other hand, the expenses would not be allowable because the dentist was attempting to carry on a different income-earning activity or business and would be in no different position from a person who undertakes study to obtain a job (82 ATC at 4474; 13 ATR at 439). We believe that the latter view is the correct application of section 8-1.

62.	Example: Desiree is a general medical practitioner in partnership with two other general practitioners in a large regional town. She undertakes further study in dermatology in order to set herself up independently as a specialist dermatologist. The expenses related to the study are not allowable as the study is designed to open up a new income-earning activity as a specialist.

(e) The intention or purpose in incurring the expense may be an element in determining whether the expense is allowable

63.	An expense is deductible under section 8-1 when the essential character is that of an income producing expense. The essential character is to be determined by an objective analysis of all the surrounding circumstances (see Fletcher & Ors (199 ) 173 CLR 1 at 17; 91 ATC 4950 at 4957 and 4958; (1991) 22 ATR 613 at 622).

64.	If the purpose of a study tour or attendance at a work-related conference or seminar is the gaining or producing of income, the existence of an incidental private purpose does not affect the characterisation of the related expenses as wholly incurred in gaining assessable income.

65.	Both Ronpibon Tin NL (78 CLR at 59; 8 ATD at 437) and Fletcher & Ors (173 CLR at 16; 91 ATC at 4957; 22 ATR at 621) recognise there are at least two kinds of expenditure that require apportionment under section 8-1. The first is expenditure in respect of a matter where distinct and severable parts are devoted to gaining income and other parts are devoted to some other end. If a study tour or work-related conference or seminar was mainly devoted to a private purpose, such as having a holiday, and the gaining or producing of income was merely incidental to the private purpose, only those expenses directly attributable to the income-earning purpose would be allowable.

66.	The second kind of apportionable expenditure is a single outlay that serves both an income-earning purpose and some other purpose indifferently. While the High Court recognised that there can be no precise arithmetical division in such cases, it said there must be some fair and reasonable division on the facts of each case. For example, if a study tour or work-related conference or seminar is undertaken equally for income-earning purposes and private purposes, it would be appropriate to apportion the expenses equally between the purposes.

67.	Example: Glenn, a qualified architect, attends an eight-day work-related conference in Hawaii on trends in modern architecture. One day of the conference involves a sight-seeing tour of the island and a game of golf is held on the final afternoon of the conference. As the main purpose of attending the conference is the gaining or producing of income, the total cost of the conference (air fares, accommodation and meals) is allowable.

68.	The existence of private pursuits, such as the island tour and the game of golf, is purely incidental to the main purpose and does not affect the characterisation of the conference expenses as wholly incurred in gaining assessable income.

69.	Example: Jenny, a doctor, was holidaying in Cairns when she became aware of a work-related seminar on the current treatment of cancer patients. The cost of the half-day seminar was $200. Jenny is able to claim a deduction for the cost of the seminar because it is directly attributable to an income-earning purpose. However, no part of her air fare to Cairns or her holiday accommodation is an allowable deduction.

70.	Example: Francesco, a paediatrician, has 2 equal purposes when he decides to attend a five-day international conference on paediatrics in Singapore to be followed by a seven-day holiday in Thailand. The conference package is $2,500 ($1,000 return air fare, $500 for the cost of the conference and $1,000 for accommodation and meals at the conference venue). Francesco paid another $2,000 for accommodation, meals and car hire for the 7 day holiday in Thailand. Francesco is allowed a deduction of $1,500 for the conference cost and the accommodation and meals expenses at the conference. Only half of the return air fare ($500) is allowed as the expense was incurred for two equal purposes, one income-earning and the other private. The other expenditure of $2,000 relating to the holiday in Thailand is private in nature and not allowable as a deduction.

Commonwealth educational assistance schemes

AUSTUDY scheme

71.	AUSTUDY payments made under the Student and Youth Assistance Act 1973 and administered by the Department of Employment, Education, Training and Youth Affairs (DEETYA), provide financial assistance to students. (It is proposed that, as from 1 July 1998, AUSTUDY will be replaced by the Youth Allowance for under 25 year olds and an austudy payment for over 25 year olds. The principles discussed below in relation to AUSTUDY have equal application to these new payments). To be eligible for AUSTUDY payments, a person must satisfy citizenship and residency requirements, be of appropriate age or status and be enrolled in an approved course of study. A student's continuing eligibility for payment generally depends on making satisfactory progress during the course of study.

72.	Having regard to the nature of the payment, we believe that self-education expenses relating to a course of study are not relevant and incidental to the derivation of AUSTUDY income. Viewed objectively, self-education expenses are incurred to undertake the course of study. Consequently, the essential character of these expenses is linked to that study. AUSTUDY is in the nature of assistance and the essential nature of the expense relates to the study, not the assistance which may be available as an incident of the study.

73.	A course of study undertaken by a recipient of AUSTUDY income would not fall within the principles discussed in paragraphs 37 to 46. Consequently, the necessary connection does not exist.

74.	AUSTUDY payments are received because a student is enrolled in a course of study and satisfies eligibility requirements. Expenses incurred in satisfying course requirements are correctly characterised as expenses in gaining a qualification which is designed to enable the student to obtain employment in a particular field. As discussed in paragraph 48, no deduction is allowed if the study, viewed objectively, is designed to enable a taxpayer to get employment, to obtain new employment or to open up a new income-earning activity.

ABSTUDY, AIC and VCES schemes

75.	We consider that our views concerning the deductibility of self-education expenses in relation to AUSTUDY payments also apply to student assistance payments made under the ABSTUDY and AIC schemes, which are administered by DEETYA, and the VCES, which is administered by the Department of Veterans' Affairs. Costs associated with a course of study are not deductible to recipients of these payments.

76.	The view we have expressed concerning the deductibility of self-education expenses to recipients of AUSTUDY, ABSTUDY, AIC and VCES payments represents a change in the view previously expressed in paragraphs 19 and 20 of Taxation Ruling IT 2458 (these two paragraphs only, are now withdrawn ) and in Taxation Ruling TR 92/8 (now withdrawn except for paragraphs 11(d), 13(c), 43 and 44). We believe our previous view was based on an incorrect interpretation of the law.

Other educational assistance payments

77.	A comprehensive consideration of the deductibility of self-education expenses to recipients of payments under the various educational assistance schemes is beyond the scope of this Ruling. While the principles of deductibility discussed in this Ruling need to be considered in each case, we consider that self-education expenses are not deductible where the scheme provides for payments in the nature of assistance.

Depreciation

78.	A deduction is allowable under section 42-15 of the ITAA 1997 for depreciation of items of plant or articles owned and used by a taxpayer for the purpose of producing assessable income. If the subject of self-education enables a taxpayer to maintain their skill or knowledge or is likely to lead to an increase in income from their current income-earning activities, depreciation of items used for self-education purposes is allowable.

79.	We consider that depreciation is allowable for items such as technical instruments and equipment, computers, calculators, professional libraries, filing cabinets and desks. If the item is used partly for self-education purposes and partly for private purposes, the deduction for depreciation should be apportioned based on an estimate of the percentage of use for self-education purposes.

80.	Depreciation is calculated using either the prime cost method or the diminishing value method. Depreciation using the prime cost method is calculated as a percentage of the cost of the item. Depreciation using the diminishing value method is calculated initially as a percentage of the cost of the item and thereafter as a percentage of the written down value of the item.

81.	If the item used is bought part way through the year, the deduction for depreciation should be apportioned on a pro rata basis.

82.	Any item of plant or articles bought on or after 1 July 1991 can be depreciated at a rate of 100% under sections 42-125 and 42-130 of the ITAA 1997 if it cost $300 or less, or if its effective life is less than 3 years (see Taxation Determination TD 93/159). This means an immediate deduction is available for each item in the year of purchase. However, the item may be depreciated at a rate less than 100% if the taxpayer elects (section 42-120 of the ITAA 1997). A guide as to acceptable depreciation rates is set out in Taxation Ruling IT 2685.

83.	An arbitrary figure is not acceptable when determining the value of items for depreciation purposes (Case R62 84 ATC 454; 27 CTBR (NS) Case 113). In determining the value of an item to be depreciated, its opening value is the original cost to the taxpayer less the amount of any depreciation that would have been allowed if the item had been used, since purchase, to produce assessable income (see Taxation Determination TD 92/142).

Types of self-education expenses allowable

84.	The following paragraphs discuss the types of self-education expenditure that are considered to be allowable under section 8-1.

Course or tuition fees

85.	Course or tuition fees incurred in attending an educational institution or attending work-related conferences or seminars, including student union fees, are allowable under section 8-1. However, under section 26-20 of the ITAA 1997, no deduction is allowable for a higher education contribution payment made under Chapter 4 of the Higher Education Funding Act 1988. Such payments are made by a student to cover the cost of a course of study at a tertiary educational institution. Also, AUSTUDY Supplement loan repayments and Open Learning Agency of Australia charges are not allowable.

Books, journals and stationery

86.	Expenditure on professional and trade journals is allowable under section 8-1. Expenditure on items of stationery, such as pens, pencils and photocopying, is also allowable.

87.	Text books are generally used during the course of study and, in most cases, only in the year of purchase. In such circumstances, the cost of the books is allowable under section 8-1. However, if the text books are intended to be used for a number of years as reference material for income-producing purposes, depreciation on the books is allowable under section 42-15 of the ITAA 1997. An immediate deduction may be available under the depreciation provisions (refer to paragraph 82).

Accommodation and meals (as part of a travel expense)

88.	Expenditure on accommodation and meals ordinarily has the character of a private or domestic expense. However, the occasion of the outgoing may operate to give the expenditure the essential character of an income-producing expense. An example is where the expenditure is incurred while away from home overnight on a work-related activity (Case E34 5 TBRD (NS) 205 at 211; 4 CTBR (NS) Case 99 at 587; FC of T v. Cooper 91 ATC 4396 at 4415; (1991) 21 ATR 1616 at 1638; Roads and Traffic Authority of NSW v. FC of T 93 ATC 4508 at 4521; (1993) 26 ATR 76 at 92).

89.	Where a taxpayer is away from home overnight in connection with a self-education activity, accommodation and meals expenses incurred are deductible under section 8-1. (Examples include an overseas study tour or sabbatical, a work-related conference or seminar or attending an educational institution.) They are part of the necessary cost of participating in the tour or attending the conference, the seminar or the educational institution. We do not consider such expenditure to be of a private nature because its occasion is the taxpayer's travel away from home on income-producing activities.

90.	However, we believe that comments by Hill J in the Roads and Traffic Authority of NSW support our view that there may be exceptions to the general rule outlined in the previous paragraph. The case raised issues concerning the application of fringe benefits tax where workers required to camp at the work site, were paid a camping allowance. It was necessary for his Honour to consider whether expenditure on meals in the circumstances would have been deductible under section 8-1. In considering the question he stated (93 ATC at 4523; 26 ATD at 94 and 95) that:

"An employee who had no private home and was employed indefinitely to work at a particular site and did in fact work for the whole of his employment at that site, might be said to have chosen to live at the site so that the cost of his accommodation there would be private."

91.	In our opinion, the same principle applies when a taxpayer establishes a new home. In these circumstances, expenditure on meals and accommodation is private or domestic in nature and therefore not allowable under section 8-1.

92.	Generally, it is obvious where a taxpayer's home is located. For example, if a taxpayer lives with her spouse and children in Sydney and travels to Melbourne for a 10-day seminar, her home remains in Sydney. Alternatively, if she sold the family home in Sydney and moved with the family to Harvard (USA) to do a two-year business course, her home would now be in Harvard.

When is a new home established?

The key factors to be taken into account in determining whether a new home has been established include:

•	the total duration of the travel;

•	whether the taxpayer stays in one place or moves frequently from place to place;

•	the nature of the accommodation, e.g., hotel, motel, long term accommodation;

•	whether the taxpayer is accompanied by his or her family;

•	whether the taxpayer is maintaining a home at the previous location while away. The fact that the taxpayer did not maintain a home while away for an extended period was the decisive factor in characterising expenditure on accommodation and meals as private "living expenses" in a series of Board of Review decisions: Case N13 13 TBRD (NS) 45; 10 CTBR (NS) Case 98; Case N16 13 TBRD (NS) 65; 10 CTBR (NS) Case 99; Case N19 13 TBRD (NS) 76; Case N20 13 TBRD (NS) 79; and

•	the frequency and duration of return trips to the previous location.

93.	Each of the following examples is designed to illustrate factors and circumstances that are relevant in determining whether a taxpayer has established a new home in the new location. For these examples, it is assumed that there is a sufficient connection between the self-education expense and the income-earning activity.

94.	Example 1: Elizabeth ordinarily lives with her parents in a country town outside Brisbane. She takes 4 months leave from her job to undertake a course of education at a training college in Brisbane. She shares a rented unit in Brisbane with two other students and returns to her parental home every weekend and during holiday periods.

95.	The relatively short period of her stay in Brisbane and the frequency of her return visits to her parental home indicate that Elizabeth has not established a new home in Brisbane.

96.	Example 2: John, who is single, decides to undertake a 2-year course of study at a university in a city 250 kilometres from the town where he lives with his parents. He shares a rented house with some other students during this period and takes a casual job. He occasionally returns to the parental home on weekends.

97.	The length of time that John resides in the city, the long term nature of his accommodation and the fact that he has employment in the city indicate he has established a new home.

98.	Example 3: Madonna undertakes a 5-month study tour in Europe. Her husband and family remain at the family home in Melbourne. The study tour involves travel to four separate locations in Europe for periods of between four and six weeks each. At each location, Madonna stays in serviced apartments.

99.	The relevant factors are the short-term nature of the tour and accommodation, travel to several locations and the fact that she is maintaining a home in Melbourne. Together, they indicate that Madonna is travelling away from her home. The conclusion is the same if Madonna was accompanied by her husband and family and their Melbourne home was rented out for the period of the study tour.

100.	Example 4: James, a university lecturer, travels overseas for 12 months to undertake a studies program. He spends 10 months in the USA where he attends a university and 2 months based at an academic institution in the UK. He is accompanied by his wife and the family home in Australia is rented out while he is away. While in the USA, he resides with his wife in an apartment leased for the duration of their stay.

101.	The facts indicate that James has established a new home in the USA for the period of his stay. He stayed in one place in leased accommodation with his wife for the 10-month period and the family home in Australia was rented out during the period he was away.

102.	The facts in Case V15 88 ATC 177; AAT Case 4075 (1988) 19 ATR 3147 are similar to this example. In that case, the Commissioner argued that the taxpayer had established a new residence in the USA. While the AAT held that, on balance, the taxpayer had not established a new residence, the tribunal found the Commissioner's argument could not easily be dismissed. The AAT considered that in the particular circumstances it was more appropriate to regard the apartment as a place temporarily occupied by the couple in order that the taxpayer might perform the duties of his employment.

103.	Example 5: Katherine travelled overseas for 6 months to study at a university in Germany. She was accompanied by her husband and three children. An apartment suitable to accommodate the family was rented for the period of her stay and the family home in Australia was rented out.

104.	The relevant factors are the period of time away, the renting of the family home and staying in one place with her family. These factors indicate that a new home was established in Germany.

105.	A similar factual situation occurred in Case S80 85 ATC 589; 28 CTBR (NS) Case 88. While the case concerned the question of the appropriate apportionment of a rental expense, preliminary comments made by T J McCarthy (Member) support our view. He did not consider that any part of expenditure on accommodation was allowable as a deduction under section 8-1. He stated (85 ATC at 595; 28 CTBR (NS) at 690):

"Between ... the taxpayer was not travelling away from his home on his work. The apartment in Bonn was, and was intended to be, the family residence for five months. The older children went to school in Bonn and family life was centred in Bonn. Whilst in some cases questions of degree may be involved, I do not think there is any doubt in the present circumstances. The essential character of the rental expenditure is of a private or domestic nature."

106.	As the above examples illustrate, the question of whether a new home has been established depends on all the facts. There is no one test to satisfy all circumstances. Also, a change in circumstances may affect deductibility of expenditure on accommodation and meals.

107.	Example 6: Don travels to London to undertake a 3-week course of study to maintain and improve knowledge relevant to his income-earning activities. He stays in hotel accommodation until the end of the 3-week period when he decides he should extend his stay and complete a more extensive 6-month course of study. He rents an apartment and arranges for his family to join him in London.

108.	Expenditure on accommodation and meals during the initial 3-week period is deductible as Don is away from home. However, depending on all the relevant facts, Don may be considered to have established a new home for the period of his stay in the apartment with his family.

Meals and accommodation when not sleeping away from home

109.	Expenditure on meals and accommodation while attending an educational institution, work-related conference or seminar where the taxpayer is not required to sleep away from home, for example, a taxpayer living in a suburb of Sydney and attending an institution in the metropolitan area, is not allowable as a deduction. The expenditure is private in nature.

Airfares

110.	Airfares incurred on overseas study tours or sabbatical, on work related conferences or seminars or attending an educational institution are deductible under section 8-1. They are part of the necessary cost of participating in the tour or attending the conference or seminar or the educational institution.

Interest expenses

111.	Interest incurred by a taxpayer on moneys borrowed to pay for self-education expenses is allowable under section 8-1 where the interest expense has a relevant connection with the activities by which a taxpayer currently derives his or her assessable income. Generally, we consider the relevant connection can be shown where the interest expense relates to funds borrowed and used to pay self-education expenses associated with a course of education, etc., that enables a taxpayer to maintain or improve their skill or knowledge or is likely to lead to an increase in income from their current income-earning activity.

112.	However, it is necessary to have regard to the connection between the interest expense and the income-earning activity in each year in which the interest is claimed. There may be situations where funds borrowed were initially applied to an income-producing purpose, but a change in circumstances means there is no longer a connection between the interest expense and the earning of assessable income. An example is where a taxpayer subsequently changes his or her income-earning activity or ceases employment altogether.

113.	Example: Christine, an employee solicitor, is undertaking a Master of Laws course to enable her to carry out her current duties more efficiently. She borrows $10,000, repayable over 3 years, to pay tuition fees. She incurs $1,000 interest in each year. Christine continues in her employment during the 3-year period and completes her studies after 2 years.

114.	Christine is allowed a deduction of $1,000 for interest in each year because there is a sufficient connection between the interest expense and her current income-earning activity.

115.	Example: Assume the above facts, except that Christine ceases employment after the first year or changes her job to a fashion designer. A deduction for interest is allowable only for the first year. No deduction is allowed in subsequent years because there is no connection between the interest expense and gaining of assessable income in those years.

116.	Example: After completing his secondary education, Alex studied commerce as a full-time student at a private university. He borrowed $30,000 in 1995, repayable over 5 years, and used the funds to pay course tuition fees. He completed his degree the following year and obtained employment with an accounting firm in early 1997.

117.	No deduction is allowable for interest incurred on the loan. The funds borrowed were not used for an income-producing purpose, but related to a course of study undertaken by Alex before he obtained his current employment. Accordingly, there is not a sufficient connection between the interest expense and Alex's current income-earning activities.

PART B

Section 82A – limits to the deductibility of self-education expenses

118.	The amount of self-education expenses allowable under section 8-1 must not be greater than the excess of the net amount of "expenses of self-education" over $250.

119.	Section 82A applies if:

(a)	the expenses of self-education are necessarily incurred by the taxpayer for or in connection with a course of education provided by a school, college, university or other place of education; and

(b)	the course is undertaken by the taxpayer for the purpose of gaining qualifications for use in the carrying on of a profession, business or trade, or in the course of any employment.

120.	Subsection 82A(2) specifies that the net amount of expenses of self-education is calculated by reducing the total amount of expenses of self-education by:

(a)	the amount of Commonwealth educational assistance for secondary education, technical or tertiary education or post-graduate study that was capable of being claimed by the taxpayer or by another person in respect of the taxpayer, but excluding amounts that have been or will be included in the taxpayer's assessable income; and

(b)	any non-assessable payments received or receivable from the taxpayer's employer or other person in the year of income in respect of the self-education expenses.

121.	Subsection 82A(2) expressly excludes HECS payments, Open Learning charges and debt repayments under the Tertiary Student Financial Supplement Scheme from being classified as an expense of self-education.

Expressions used in section 82A

Expenses "necessarily incurred"

122.	The expression "necessarily incurred" was considered by the Supreme Court of South Australia in Pearce v. FC of T 79 ATC 4195 in relation to the former section 82J of the ITAA 1936, which allowed a deduction for education expenses. Subsection 82J(6) defined education expenses to mean "expenses necessarily incurred by the taxpayer for or in connection with full-time education ...". Sangster J did not accept that the words "necessarily incurred" in the context of the former section 82J had the same meaning as those words have in section 8-1. He considered the ordinary meaning of the word "necessarily" "imports at least some element of need (for the expense in question)".

123.	We consider it is appropriate to adopt the approach taken by Sangster J in the context of section 82A. Therefore, compulsory and unavoidable expenses, as well as those for which a need can be shown, are regarded as "necessarily incurred". This includes expenditure on fares, travel and accommodation, as well as fees, books and equipment to the extent they are incurred in pursuing a prescribed course of education. The balance is between expenses needed to fulfil the requirements of the course and those related to the provision of items, etc., which may merely serve a useful purpose.

124.	We discuss below our view of the extent to which particular common expenses, other than those mentioned in the previous paragraph, are regarded as "necessarily incurred by the taxpayer for or in connection with a prescribed course of education" in terms of section 82A.

Child care costs: where there is a need to incur expenditure for child minding to enable a taxpayer to attend lectures or other activities in connection with a prescribed course of education, child minding expenses to the extent they relate to those activities are "necessarily incurred". This would include the cost of travel associated with using child minding facilities.

Capital cost of computers: where there is a need to own and use a computer to fulfil the requirements of a prescribed course of education and the computer is acquired and used for this purpose, the capital cost of the computer is regarded as an expense "necessarily incurred".

Capital cost of filing cabinets, desks and books comprising part of a professional library: where there is a need for such items to fulfil the requirements of a prescribed course of education and the item is acquired and used for this purpose, the cost is an expense "necessarily incurred".

Repairs: the cost of repairs to items of equipment used in fulfilling the requirements of a prescribed course of education is "necessarily incurred".

Expenses not "necessarily incurred"

125.	Meals: the cost of meals purchased while travelling to and from or attending an educational institution when not sleeping away from home does not qualify as "necessarily incurred" in terms of section 82A; rather, the expenditure relates to a private matter not connected with the course of education.

Prescribed course of education

126.	Subsection 82A(2) defines a "prescribed course of education" as a course of education given by a school, college, university or other place of education, and undertaken by the taxpayer for the purpose of gaining qualifications for use in the carrying on of a profession, business or trade or in the course of any employment.

"Course of education"

127.	In our view, a course of education is a course or program of study involving systematic instruction, training or schooling. "Education" is to be given its ordinary meaning of "acquisition of knowledge, skill, etc." (Macquarie Dictionary) and refers to a wide range of areas of knowledge or skill, including sport. To this extent, our view has changed from that expressed in Taxation Ruling IT 314 (now withdrawn), which adopted a narrower interpretation by stating that a sporting activity is not "education" in the generally accepted meaning of the term.

128.	To qualify as a course of education, a program of study need not be conducted on a full-time basis. Part-time courses of study can also be courses of education. However, a course of education does not include short-term refresher courses, in-service activities, short-term staff development courses, seminars or workshops. These are considered to be more akin to on-the-job training. Costs of short-term refresher courses by employees are therefore not regarded as "expenses of self-education" in the sense required in subsection 82A(2). In some cases, the total cost of short-term refresher courses may be allowed as deductions under section 8-1 provided they meet the requirements of the provision.

129.	Example: Will, who is an editor in a publishing house, undertakes a speed-reading course of three days duration at an educational institution through an organisation whose primary objective is to improve people's reading skills and comprehension. The course teaches various techniques that improve reading skills. The proficiency of each participant is tested and assessed. A certificate is awarded to each student at the end of the course showing the reading and comprehension rate achieved.

130.	The course is considered to be a prescribed course of education because the primary function of the course provider is the education of people in speed-reading skills. Because Will intends to use those skills in his work as an editor, section 82A applies.

131.	Example: Mary is employed as a manager with a large advertising company. Her employer actively encourages her to attend a personal development course which is a full-time residential course of five days duration, where trained instructors supervise a structured program of physical and team-building activities designed to develop personal characteristics of the trainees. The course places particular emphasis on professional skills such as confidence, leadership qualities, communication and problem solving techniques needed in the employment environment.

132.	The course is accepted as being a course of education provided by a place of education. As the qualifications or skills acquired by Mary will be used in her employment, the course is a prescribed course of education for the purposes of section 82A. The active encouragement by Mary's employer for her to participate in the course is strong evidence to support this view. Had the course been undertaken for recreational, hobby or other private purposes, neither section 8-1 nor section 82A would have applied.

"Other place of education"

133.	A place of education is an institution or organisation, or a dedicated part of it, whose primary function is to provide systematic instruction, teaching or schooling in a subject, skill or competency. This view is supported by the decision of the No 2 Board of Review in Case M11 80 ATC 78; 23 CTBR (NS) Case 97. There, L C Voumard (Member) relied on Barry v. Hughes [1973] 1 All ER 537, where it was said that an educational establishment was one whose primary function was that of education.

134.	In Case S95 85 ATC 688; 29 CTBR (NS) Case 2, the No 1 Board held that a correspondence course provided by a correspondence school was a course provided by a place of education even though the provider did not conduct set classes or have a building where classes were conducted. In deciding the matter, the Board took the view that the words "other place of education" should not be limited as having a similar meaning as the words "school, college or university". The provider was an organisation established with the dominant function of training and educating people in various skills and areas of knowledge.

135.	Our interpretation of the meaning of the expression "other place of education" has changed from the view expressed in Taxation Ruling IT 283 (withdrawn on 8 October 1997). That Ruling expressed the view that we did not agree with the principle in Barry v. Hughes. The Ruling stated that, if a course or program of study is a course of education, then the place where it is given is a place of education. We consider that our former view is not appropriate, given the court and Board decisions mentioned above.

Operation of section 82A

136.	Section 82A operates to limit the amount of expenses of self-education otherwise allowable under section 8-1. Section 82A provides that a deduction for self-education expenses under section 8-1 is not to be greater than the amount by which the net amount of expenses of self-education exceeds $250. In more simple terms, section 82A requires a mathematical calculation to determine if claims for allowable deductions under section 8-1 need to be reduced (the maximum reduction would be $250).

137.	If educational expenses do not fall within the definition of "expenses of self-education" in section 82A, the whole amount may be deducted, provided it meets the requirements of section 8-1 or another deduction provision.

138.	If all the expenditure falls within the definition of "expenses of self-education" in section 82A, it is only the excess of the expenditure over $250 which may be deductible under section 8-1.

139.	For some time, it has been our practice to require that the $250 reduction be applied only to expenses that are allowable as deductions under section 8-1. This practice was based on an interpretation of the law supported by an unreported AAT decision of Purvis J (NT 85/16096-98) delivered in December 1987. In that case, Purvis J rejected the taxpayer's argument that capital expenditure should be taken into account in calculating the total of expenses of self-education in excess of $250 and held that self-education expenses allowable under section 8-1 were to be reduced by $250.

140.	However, we now consider that this practice is not appropriate and is based on an incorrect interpretation of the words "expenses of self-education" in section 82A. The correct interpretation of the words "expenses of self-education" is considered to include expenses that are not allowable deductions under section 8-1. This interpretation represents a change to the view expressed in Taxation Rulings TR 95/8 to TR 95/22 (inclusive). The operation of section 82A is illustrated by the Examples at paragraphs 145-150 and 151-155.

141.	Expenses related to self-education that are deductible under provisions other than section 8-1 are taken into account in the section 82A calculation. For example, car expenses claimed using the "cents per kilometre" and "12% of original value" methods are deductible under sections 28-25 to 28-60 of the ITAA 1997. Although there is a question as to whether deductions claimed using these methods are in the nature of "expenses", we accept that they would qualify for the purposes of section 82A. Where expenses of self-education are deductible under a provision other than section 8-1, they are not subject to any reduction as a result of the application of section 82A. Therefore, provided the requirements of that provision are satisfied, the whole amount of those expenses is deductible.

142.	Expenses of self-education that are not deductible under any provision are taken into account in the section 82A calculation. For example, a taxpayer may undertake travel that is not deductible, but still qualifies for the purposes of section 82A. For the purposes of calculating the cost of this travel, if the travel is by car, we accept calculations based on a rate per kilometre multiplied by the number of kilometres travelled. The rate that may be used is the same rate used to calculate car expenses under sections 28-25 to 28-35 of the ITAA 1997.

143.	The capital cost of items such as computers is another example of a non-deductible expense which may qualify for the purposes of section 82A. Where this expense, the capital cost, is taken into account for the purpose of section 82A it has no effect on a claim for depreciation.

144.	Example: Con, who is employed as a civil engineer, is completing part-time university studies to obtain post-graduate qualifications in engineering. As the qualifications or skills acquired by Con will be applied in his current employment to increase his income-earning capacity, the course is a prescribed course of education for the purposes of section 82A. In the year of income, he wishes to claim the following:

Travel between work and university:
Bus fares	$50
Car expenses 213 km @ 47 cents	$100
Child minding fees  (during course attendance)	$500
University fees	$200
Depreciation of computer	$200
Computer repairs	$100
Stationery	$100
Total expenses	$1,250
145.	As depreciation is not in the nature of an actual "expense" (it is not an outgoing), it does not fall within the definition of "expenses of self-education" in section 82A. Therefore, depreciation is not taken into account in the section 82A calculation. Consequently, the net amount of "expenses of self-education" is:

Travel between work and university:
Bus fares	$50
Car expenses 213 km @ 47 cents	$100
Child minding fees  (during course attendance)	$500
University fees	$200
Computer repairs	$100
Stationery	$100
Total expenses	$1,050
146.	Because of the operation of section 82A, the limit up to which a deduction may be allowable under section 8-1 is $800 (i.e., net amount of $1,050 less $250). Computer repairs, car expenses using the cents per kilometre method and child minding fees are not allowable under section 8-1. A deduction of $350 is allowable under section 8-1 (i.e., university fees $200, bus fares $50 and stationery $100).

147.	Car expenses using the cents per kilometre method may be allowable under sections 28-25 to 28-35 of the ITAA 1997, while repairs and depreciation may be deductible under section 25-10 and 42-15 of the ITAA 1997. The cost of child minding fees is not deductible under any provision.

148.	The following amounts will be allowable:

University fees	$200
Bus fares	$50
Stationery	$100
Depreciation	$200
Repairs	$100
Stationery	$100
Total expenses	$750
149.	In other words, because Con had expenses that were either not deductible (child minding fees of $500) or deductible under a provision other than section 8-1 (repairs of $100, car expenses of $100) which exceeded $250, his claims under section 8-1 did not have to be reduced.

150.	Example: Assume that Con in the above example incurred the following expenses during the year of income:

Books, stationery and tuition fees	$500
Computer	$2,200
Total expenses	$2,700
151.	Con is also entitled to claim a deduction of $400 for depreciation on the computer. Depreciation is not an expense and does not form part of the section 82A calculation.

152.	Because of the operation of section 82A, the limit up to which a deduction may be allowable under section 8-1 is $2,450 (i.e., net amount of $2,700 less $250). As the cost of books, stationery and tuition fees allowable under section 8-1 is $500, a deduction of $500 is allowable.

153.	In other words, because Con had expenses that were not deductible under section 8-1 (the capital cost of the computer of $2,200) which exceeded $250, his section 8-1 claim did not have to be reduced.

154.	In total, Con can claim $500 for the cost of books, stationery and tuition fees and $400 for depreciation. He cannot claim a deduction for the capital cost of his computer.

ALTERNATIVE VIEWS

AUSTUDY scheme

155.	The view has been expressed that self-education expenses are deductible because, if the expenses were not incurred, the taxpayer may not be entitled to receive future AUSTUDY income. This is based on the premise that expenses need to be incurred to meet the satisfactory progress requirement. It has also been suggested that, by accepting AUSTUDY payments, the taxpayer has a duty to study and any expense incurred in fulfilling that duty is deductible.

156.	It is our view that the object of the expenditure in these circumstances is to gain a qualification and their essential character is taken from this purpose.

157.	Case N94 81 ATC 507; 25 CTBR (NS) Case 48 supports our view. In that case, a taxpayer in receipt of unemployment benefits claimed the cost of travel, accommodation and sundry items in seeking employment. It was argued by the taxpayer these expenses were incurred in order to continue to receive unemployment benefits, it being a statutory requirement that the recipient of such benefits take reasonable steps to obtain work. In deciding that the expenses were not deductible, B R Pape (Member) said (81 ATC at 512; 25 CTBR (NS) at 363):

"He received the benefit because he was unemployed not because he spent money in searching for employment, albeit that the continuation of benefits may have been withdrawn if he did not satisfy the Director-General of Social Security of the matters prescribed in para.(c) sec.107(1) of the Social Services Act 1947. Thus I am of the opinion that the expenditure incurred by the taxpayer in seeking employment was not an outgoing incurred in gaining the unemployment benefit. Moreover I am of the opinion that the expenditure was incurred at a point too soon to be properly regarded as gaining or producing the taxpayer's future assessable income."

158.	It has been argued that there is a sufficient connection between the self-education expenses and the receipt of AUSTUDY income where a taxpayer's purpose in undertaking the course of study is to receive the AUSTUDY payment. However, we regard the essential character of the expenditure as derived from the objective pursuit of formal study rather than gaining AUSTUDY income.

NOTE

159.	Paragraphs 11(d), 13(c), 43 and 44 of Taxation Ruling TR 92/8 are reproduced below for your convenience.

RULING

Types of self-education expenses allowable

11.	Subject to the general tests under subsection 51(1) being met, the following types of expenses related to self education are allowable under the subsection:

   ...

(d)	Subject to paragraph 13(c), motor vehicle expenses between a taxpayer's home and an educational institution (including a library for research) and return and between his or her place of work and the educational institution and return.  If a taxpayer travels from his or her home to an educational institution and then to his or her place of work and returns home by the same route, only the costs of the first leg of each journey are allowable.

Types of self education expenses not allowable

13.	The following expenses related to self-education are not allowable under subsection 51(1):

   ...

(c)	Motor vehicle expenses and fares between a taxpayer's home and an educational institution where the taxpayer carries out income-earning activities at the institution.  If a taxpayer travels from his or her home to an educational institution and then to his or her place of work and returns home by the same route, only the costs of the journeys between the institution and the place of work are allowable.

EXPLANATIONS

Motor vehicle expenses

43.	Motor vehicle expenses between a taxpayer's home and an educational institution and return and between his or her place of work and the educational institution and return are allowable, as being part of the incidental costs of the course of study. If a taxpayer travels from his or her home to an educational institution and then to his or her place of work and returns home by the same route, only the costs of the first leg of each journey are allowable, as being incidental costs of the study. The costs of the second leg of the outward journey are costs incurred in order to get to work. The costs of the second leg of the return journey are costs incurred in order to return to the taxpayer's home. The High Court in Lunney v. FC of T; Hayley v. FC of T (1958) 100 CLR 478 at 501; 11 ATD 404 at 414, held that the essential character of these types of expenditure is of a private nature.

44.	We consider that the decision of the AAT in Case U45 87 ATC 320 does not require any departure from the views expressed in the previous paragraph. In that case, the AAT was of the view that, in determining whether self education expenses are allowable, an educational institution is considered to be a place of work. Accordingly, deductions were allowed for the costs of travelling between the institution and the taxpayer's place of work, but not for the costs of travelling between the taxpayer's home and the institution. We believe that, in the majority of cases, an institution is not a place of work at which income-earning activities are carried out.

Commissioner of Taxation

17 June 1998


Taxation Ruling TR 98/5 Calculating and claiming a deduction for laundry expenses
Taxation Ruling TR 98/5

Income tax: calculating and claiming a deduction for laundry expenses

Preamble

The number, subject heading and the Date of effect and Ruling parts of this document are a "public ruling" for the purposes of Part IVAAA of the Taxation Administration Act 1953 and are legally binding on the Commissioner. The remainder of the document is administratively binding on the Commissioner. Taxation Rulings TR 92/1 and TR 97/16 together explain when a Ruling is a public ruling and how it is binding on the Commissioner.

Contents:

What this Ruling is about

Cross-reference table of provisions

Date of effect

Previous Rulings

Definitions

Ruling

When is a deduction allowable for laundry expenses?

Laundry allowance

How do you substantiate laundry expenses?

Explanations

Examples

WHAT THIS RULING IS ABOUT

Class of person/arrangement

1.	The Tax Law Improvement Project is restructuring, renumbering and rewriting the income tax law in plain language. The Parliament is amending the income tax law progressively to reflect these aims. As new laws come into effect, Taxation Rulings about old laws are being brought into line with them.

2.	Prior to 1995 there was no specific provision dealing with substantiation of laundry expenses. Such expenses were covered by section 82KZB of the Income Tax Assessment Act 1936 ("the old Act") and treated similarly to other work expenses (see Taxation Determination TD 93/232 "Income tax: how are laundry expense claims for work clothes calculated and substantiated for the purposes of subsection 51(1) and section 82KZB of the Income Tax Assessment Act 1936?"). In 1995 a new provision was inserted in the old Act as subsection 2-6(1) of Schedule 2B. That subsection has now been renumbered and included in Subdivision 900-B of the Income Tax Assessment Act 1997 ("the new Act" or "the Act"). This Ruling explains the new provisions.

3.	This Ruling sets out the rules for calculating and claiming a deduction for laundry expenses. It addresses separately the situations where total laundry expenses incurred for the income year are:

•	up to $150; and

•	are more than $150.

4.	The Ruling does not consider dry cleaning expenses. These expenses are not laundry expenses. Separate substantiation requirements apply (see subsection 900-40(4) and Subdivision 900-B of the new Act).

CROSS-REFERENCE TABLE OF PROVISIONS

5.	Taxation Determination TD 93/232 dealt with the old substantiation law (for income years up to and including 1993-94). In 1995 a new provision was inserted in the old Act as subsection 2-6(1) of Schedule 2B (for the 1994-95, 1995-96 and 1996-97 income years). The new section, which has been renumbered, is included in Subdivision 900-B of the new Act (for the 1997-98 and later income years). The following table cross-references provisions in the new Act to the corresponding provision in the old Act.

	New Act	Old Act
Years	1997-98 and later	1994-95, 1995-96 and 1996-97	1993-94 and earlier
Statute	Income Tax Assessment Act 1997	Income Tax Assessment Act 1936	Income Tax Assessment Act 1936
Ruling	this Ruling	this Ruling	IT 2452, TD 93/232
Ordinary income	subsection 6-5(1)	subsection  25(1)	subsection 25(1)
Expense excluded from deductibility	subsection 34-10(2)	section  51AL	section 51AL applies from 1/9/93
Non compulsory uniform/ wardrobe	subsection  34-15(2)	subsection 51AL(4)	subsection 51AL(4) applies from 1/9/93
Occupation specific clothing	subsection  34-20(1)	subsection 51AL(26)	subsection 51AL(26) applies from 1/9/93
Protective clothing	subsection  34-20(2)	subsection 51AL(26)	subsection 51AL(26) applies from 1/9/93
Work expense	subsection 900-30(1)	subsection  2-2(1) of Schedule 2B	subsection 82KT(1)
Exception for small total of expenses	section 900-35	section 2-5 of Schedule 2B	subsection 82KZB(2)
Written evidence not required	subsection 900-40(1)	section 2-1 and subsection  2-6(1) of Schedule 2B	no comparable section
Laundry expenses as part of $300 limit	subsection 900-40(2)	subsection  2-6(2) of Schedule 2B	no comparable section
Written evidence from supplier	section  900-115	section 5-4 of Schedule 2B	subsection 82KU(1)
Evidence of small expenses	section  900-125	section 5-6 of Schedule 2B	subsections 82KU(6), (7) and (8)
Failure to substantiate	subdivision 900-H	Division 8 of Schedule 2B	subsections 82KU(10), 82KZA(5), and 82KZA(6),  sections  82KZAA and 82KZBB
DATE OF EFFECT

6.	This Ruling applies for the 1994-95 and later income years. This Ruling does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

PREVIOUS RULINGS

7.	Taxation Ruling IT 2452 "Income tax: substantiation – upkeep of uniforms and/or protective clothing" and Taxation Determination TD 93/232 "Income tax: how are laundry expense claims calculated and substantiated for the purposes of subsection 51(1) and section 82KZB of the Income Tax Assessment Act 1936?", which applied in relation to the period before 1 July 1994, have been withdrawn.

DEFINITIONS

8.	Some of the terms used in this Ruling are explained below:

Uniform/wardrobe – a uniform/wardrobe is one or more items of clothing (including accessories) which, when considered as a set, distinctively identify the taxpayer as a person associated (directly or indirectly) with their employer, or a group consisting of their employer and one or more of their employer's associates. See subsection 34-15(1) of the new Act (formerly subsection 51AL(4) of the old Act).

Compulsory uniform/wardrobe – to be compulsory, the wearing of the uniform/wardrobe must be strictly and consistently enforced except where it is impossible to enforce. A compulsory uniform/wardrobe only includes shoes, socks, stockings and accessories where the employer's express uniform/wardrobe guidelines stipulate the characteristics that qualify each of these items as an integral part of the compulsory uniform/wardrobe, e.g., colour, style, type. See Taxation Ruling TR 97/12 "Income tax and fringe benefits tax: work-related expenses: deductibility of expenses on clothing, uniform and footwear" which discusses what is a "compulsory uniform/wardrobe" in more detail.

Conventional clothing – this is clothing that would ordinarily be worn, or which could reasonably be expected to be worn, by a person irrespective of whether that person is working or not, e.g., jeans, dress suit, etc. See Taxation Ruling TR 94/22 "Income tax: implications of the Edwards' case for the deductibility of expenditure on conventional clothing by employees" and paragraphs 19 to 24 of Taxation Ruling TR 97/12.

Laundry expense – this is a work expense to do with washing, drying or ironing clothes, but not dry cleaning. See subsection 900-40(4) of the new Act.

Non-compulsory uniform/wardrobe – this is similar to a compulsory uniform/wardrobe in that it identifies the employer, but the wearing of the clothing at work is not compulsory, or, if compulsory, the wearing of the clothing is not consistently enforced (subsection 34-15(2) of the new Act (formerly subsection 51AL(4) of the old Act)). The design of the uniform/wardrobe has to be entered on the Register of Approved Occupational Clothing. Paragraphs 36 to 40 of Taxation Ruling TR 97/12 discuss what is a "non-compulsory uniform/wardrobe" in more detail.

Occupation specific clothing – this is clothing that distinctively identifies the wearer as a person associated with a particular profession, trade, vocation, occupation or calling. It is this distinctive nature of the clothing that provides a nexus between the expenditure and the income earning activities such that the essential character of the expense is work related and not of a private nature (e.g., a nurse's traditional uniform, a chef's checked pants and a religious cleric's ceremonial robes). It is not clothing that could be worn in a number of occupations. See subsection 34-20(1) of the new Act (formerly subsection 51AL(26) of the old Act) and Taxation Ruling TR 97/12.

Protective clothing and footwear – this is clothing that when worn while working protects a taxpayer or others from death, disease, injury, damage to other clothing worn or from damage to artificial or medical appliances used – see subsection 34-20(2) of the new Act (formerly subsection 51AL(26) of the old Act) and Taxation Ruling TR 97/12. See also Case A45 69 ATC 270 which discusses the "protective" qualities of clothing in more detail.

Work expense – an expense a taxpayer incurs in the course of producing their salary or wages – subsection 900-30(1) of the new Act (formerly subsection 2-2(1) of Schedule 2B of the old Act).

Written evidence – a document or other records that can be used to demonstrate that the expense was incurred. It can be:

(i)	a document from the supplier of the goods (e.g., receipts) – section 900-115 of the new Act (formerly section 5-4 of Schedule 2B of the old Act); or

(ii)	evidence a taxpayer has recorded themselves for small expenses – section 900-125 of the new Act (formerly section 5-6 of Schedule 2B of the old Act) – see paragraph 25 of this Ruling.

RULING

When is a deduction allowable for laundry expenses?

9.	In short, a deduction is allowable if an expense:

(a)	is incurred;

(b)	meets the deductibility tests;

(c)	satisfies the substantiation rules which apply to employees; and

(d)	is not excluded from deductibility under section 51AH of the old Act or subsection 34-10(2) of the new Act (formerly section 51AL of the old Act).

(a) Expense must be incurred

10.	The laundry expense must be incurred by the taxpayer to be an allowable deduction. An expense is incurred when a taxpayer has spent the money, or paid by cheque or credit card. In some cases an expense will have been incurred when a taxpayer receives a bill or invoice for the expense for which they are liable and must pay. See Taxation Ruling TR 97/7 "Income tax: subsection 51(1) – meaning of "incurred" – timing of deductions" for more information about when an expense is "incurred".

(b) Expense must meet the deductibility tests

11.	The laundry expense must be incurred in the course of producing salary or wage income. If the laundry expense is partly for work purposes and partly for private purposes, then only the work related portion is an allowable deduction.

12.	A deduction is only allowable for the cost of washing, drying or ironing clothes that fall into one or more of the following categories:

•	compulsory uniform/wardrobe;

•	non-compulsory uniform/wardrobe;

•	occupation specific clothing; or

•	protective clothing;

(see paragraph 8 for definitions of these terms).

13.	A deduction is not allowable for the cost of laundering conventional clothing unless there is a sufficient connection between the expenditure on the conventional clothing and the income earning activities of the taxpayer. Whether such a connection exists, and the essential character of the expense, are matters to be determined by reference to all the circumstances of the particular case. See Taxation Ruling TR 94/22 and Taxation Ruling TR 96/16 "Income tax: work-related expenses: deductibility of expenses on compulsory uniform shoes, socks and stockings".

14.	A deduction is not allowable if the expense is incurred in earning tax exempt income (e.g., laundry of uniforms for members of the Army Reserve).

(c) Expense satisfies the substantiation rules

15.	A deduction for laundry expenses is not allowable in circumstances where the substantiation rules (see paragraphs 19-22) contained in Subdivision 900-B of the new Act (formerly Schedule 2B of the old Act) are not met. Subdivision 900-B requires written evidence to be kept that proves the expense was incurred, unless the exception for laundry expenses below a certain limit is satisfied (see paragraph 19-22). However, if the nature and quality of the evidence available to substantiate a claim is sufficient, the Commissioner may exercise a discretion in some circumstances and provide relief – see Taxation Ruling TR 97/24 "Income tax: relief from the substantiation requirements".

(d) Expense is not excluded from deductibility under section 51AH of the old Act or subsection 34-10(2) of the new Act (formerly section 51AL of the old Act)

16.	Under section 51AH of the old Act where all or part of the expenditure is reimbursed, and the reimbursement constitutes a fringe benefit under the Fringe Benefits Tax Assessment Act 1986, the amount reimbursed is not an allowable deduction.

17.	Under subsection 34-10(2) of the new Act (formerly section 51AL of the old Act) a deduction is not allowable for laundry expenses associated with a non-compulsory uniform/wardrobe unless the design of the uniform/wardrobe has been entered on the Register of Approved Occupational Clothing.

Laundry allowance

18.	The receipt of an allowance for laundry expenses does not automatically mean that the expenditure is deductible. However, allowances received for laundry, clothing, uniform/wardrobe and related expenditure are fully assessable under subsection 6-5(1) of the new Act (formerly subsection 25(1) of the old Act) or paragraph 26(e) of the old Act. See Mansfield v. FC of T 96 ATC 4001 at 4006; (1995) 31 ATR 367 at 372.

How do you substantiate laundry expenses?

Laundry expenses up to $150

19.	Where the total amount of laundry expenses incurred in the income year is up to $150, there is no need to retain written evidence of each laundry expense – subsection 900-40(1) of the Act (formerly subsection 2-6(1) of Schedule 2B of the old Act).

20.	However, a taxpayer may calculate their laundry expenses by keeping written evidence. See paragraph 8 for an explanation of what is written evidence.

21.	Where a taxpayer does not keep written evidence of their laundry expenses, the Commissioner will allow a claim of $1 per load (which covers washing, drying and ironing) in situations where only work related clothing is being laundered, and 50 cents per load where both private and work related clothing is being laundered at the same time. This is hereafter referred to as the "Commissioner's estimate". If the Commissioner's estimate is used, a taxpayer should keep details of the number of washes that were done during the year, and what type of clothes (work related, private or both) were included in each wash.

Laundry expenses more than $150

22.	Where the total amount of work expenses incurred in the income year is $300 or less, there is no need for written evidence to be kept for laundry or other work expenses even if the laundry expenses are more than $150 – section 900-35 of the new Act (formerly section 2-5 of Schedule 2B of the old Act). A taxpayer may use the Commissioner's estimate of laundry expenses or calculate their laundry expenses by keeping written evidence. However, where the total amount of work expenses is more than $300, then to claim laundry expenses that total more than $150, a taxpayer must keep written evidence of all their laundry expenses (not just the amount above $150).

EXPLANATIONS

23.	Laundry expenses fall within the definition of "work expenses" (see paragraph 8). Laundry expenses are those expenses to do with washing, drying or ironing clothes but not dry cleaning. Expenses such as washing detergent, water and electricity may be claimed as a deduction.

24.	A taxpayer is entitled to claim as a deduction up to $300 of work expenses without the need to keep written evidence. Even if the total work expenses claimed exceed $300, up to $150 of laundry expenses may be claimed without keeping written evidence. However, this exception does not increase the $300 limit to $450 – subsection 900-40(2) of the Act (formerly subsection 2-6(2) of Schedule 2B of the old Act).

25.	Written evidence of costs such as cleaning agents (detergents, etc.) may be kept in the form of receipts. Where each expense is $10 or less, and the total of all a taxpayer's small work expenses, not just laundry expenses, is $200 or less for the year of income, then the individual costs may be recorded in a diary and there is no need to keep receipts – section 900-125 of the Act (formerly section 5-6 of Schedule 2B of the old Act).

26.	Electricity expenses may be calculated by reference to the average power consumption for household appliances guide that is available from a taxpayer's local electricity authority. Diaries and other records may also be used to determine the pattern of usage (the Commissioner will accept a diary that has been maintained for a minimum period of one month if it is representative of the normal pattern of usage).

27.	Depreciation may also be claimed on items used in the course of washing, drying or ironing clothes (e.g., washing machine or dryer). It should be noted that if the intention is to claim depreciation of such items, full documentary evidence is to be kept of the original cost and date of purchase (subject to the application of the Commissioner's discretion in subdivision 900-H of the Act (formerly Division 8 of Schedule 2B of the old Act)).

28.	A taxpayer may also claim a deduction for expenses incurred in using a laundromat. The deduction may be calculated using the Commissioner's estimate or as a total of actual expenses incurred. If a taxpayer wishes to claim their actual expenses, a record of each expense incurred must be kept (see paragraph 25).

29.	The Commissioner's estimate is based on the following breakdown of costs incurred per single wash of work related clothes:

Laundry Expense	$
Cost of detergent	0.45
Average cost of using washing machine  (warm machine wash)	0.15
Water costs	0.05
Average cost of using clothes dryer	0.25
Average cost of using iron	0.10
Average cost per wash	$1.00
Where work related clothing is laundered with private clothing, the amount of $1 per wash is to be halved (i.e., only 50 cents per wash is allowed).

EXAMPLES

Example 1

Total laundry expenses are up to $150 and when added to other work expenses the total is $300 or less

30.	Joe works as a mechanic. He incurred $90 in purchasing protective overalls. Joe washed his overalls twice a week for 48 weeks of the year and did no other washing at the same time (i.e., his overalls were washed separately from all his other clothes). He did not keep detailed records of his laundry expenses and has chosen to use the Commissioner's estimate.

Joe calculates his deduction as follows:

$1 per wash  x  2 washes per week  x  48 weeks  =  $96

Joe's total work expenses are as follows:

Laundry	$96
Other work expenses	$90
Total work expenses	$186
31.	Where the total of laundry and other work expenses is $300 or less, there is no need to retain written evidence of each expense incurred. As Joe's laundry expenses do not exceed $150, and his total work expenses do not exceed $300, he does not need to keep written evidence of either his laundry expenses or his other work expenses. However, he should keep details showing how the number of washes was worked out.

Example 2

Total laundry expenses are up to $150 and when added to other work expenses the total is more than $300

32.	Lisa works as a nurse. She wants to claim a deduction for laundering her nurse's traditional uniform and incurred $290 in other work expenses. Lisa washed her uniform twice a week for 48 weeks of the year and did no other washing at the same time (i.e., her uniform was washed separately from all her other clothes). She did not keep detailed records of her laundry expenses and has chosen to use the Commissioner's estimate.

Lisa calculates her deduction as follows:

$1 per wash  x  2 washes per week  x  48 weeks  =  $96

Lisa's total work expenses are as follows:

Laundry	$96
Other work expenses	$290
Total work expenses	$386
33.	Where the total of laundry expenses is up to $150 and the total of laundry expenses and other work expenses is more than $300, written evidence of each work expense incurred (other than laundry expenses) must be kept. As Lisa's total work expenses are more than $300 she must keep written evidence of her other work expenses. She does not need to keep written evidence of her laundry expenses as they do not exceed $150. However, she should keep details showing how the number of washes was worked out.

Example 3

Total laundry expenses are more than $150 and when added to other work expenses the total is $300 or less

34.	Julie works as a plumber. She incurred $40 in purchasing protective overalls and washed them five times a week (for 48 weeks of the year) – no other washing was done at the same time (i.e., her overalls were washed separately from all her other clothes). She did not keep detailed records of her laundry expenses and has chosen to use the Commissioner's estimate.

Julie calculates her deduction as follows:

$1 per wash  x  5 washes per week  x  48 weeks  =  $240

Julie's total work expenses are as follows:

Laundry	$240
Other work expenses	$ 40
Total work expenses	$280
35.	Where laundry expenses total more than $150 and the total of work expenses (including laundry) is $300 or less, there is no need to retain written evidence of each expense incurred. As Julie's total work expenses do not exceed $300 she does not need to keep written evidence of either her laundry expenses or her other work expenses.

Example 4

Total laundry expenses are more than $150 and when added to other work expenses the total is more than $300

36.	Charles works as a bank teller in Victoria and incurred $500 in purchasing his compulsory bank uniform. He washed the uniform twice a week for 48 weeks of the year and washed his other clothes at the same time. He kept detailed records of his laundry expenses which showed that each load cost $4.07.

Charles calculates the total cost of all the washes he did for the year (2 per week for 52 weeks of the year) as follows:

Expense	Cost	Total
Depreciation of  washing machine	$1000 x 20%	$20.00
Water	14,000 litres per year @ $0.00065 per litre*	$0.10
Electricity –  washing machine	$9 per quarter**	$ 36.00
Detergent	$7 per 20 washes x 104 washes for the year***	$36.40
Depreciation of  clothes dryer	$400 x 20%	$80.00
Electricity –  clothes dryer	$14 per quarter**	$56.00
Electricity – Iron	$1.40 per quarter**	$5.60
Total	$423.10
*	The water usage for Charles' washing machine was obtained from the guide "How much water do you use?" issued by South East Water (each taxpayer should use the guide issued by their local authority). Each taxpayer should also obtain the cost per litre of water used from their local authority.

**	The electricity cost for Charles' washing machine, clothes dryer and iron were obtained from the "Guide to Operating Costs of Domestic Electrical Appliances" issued by United Energy (each taxpayer should use the guide issued by their local authority).

***	A bottle of detergent, which lasted 20 washes, cost Charles $7. Therefore, the cost of detergent per wash is $7 / 20 washes  =  35 cents per wash.

The average cost per wash  =  $423.10 / 104  =  $4.07

However, as Charles washed his private clothes with his work clothes the cost of a "work related wash" must be halved:

$4.07 / 2  =  $2.04 (rounded)

Charles must multiply the average cost per wash by the number of times he washed his uniform:

$2.04 per wash  x  2 washes per week  x  48 weeks  =  $196

Charles' total work expenses are as follows:

Laundry	$196
Other work expenses	$500
Total work expenses	$696
37.	Where laundry expenses total more than $150 and the total of work expenses (including laundry) is more than $300, written evidence of each expense incurred (including laundry) must be kept. As Charles' total work expenses are more than $300 he must keep written evidence of his other work expenses (i.e., the cost of purchasing his uniform). He also needs to keep written evidence of his laundry expenses as they total more than $150.

Commissioner of Taxation

6 May 1998


Taxation Ruling TR 96/15 Income tax: foreign tax credit system: issues relating to the practical application of section 23AG
Taxation Ruling TR 96/15

Income tax: foreign tax credit system: issues relating to the practical application of section 23AG

See also: TR 96/15A2 - Addendum

Preamble

This Ruling, to the extent that it is capable of being a "public ruling" in terms of Part IVAAA of the Taxation Administration Act 1953, is a public ruling for the purposes of that Part. Taxation Ruling TR 92/1 explains when Ruling is a public ruling and how it is binding on the Commissioner

Contents:

What this Ruling is about

Class of person/arrangement

Ruling

Change in residential status

Exempted foreign earnings not to be aggregated with other foreign income for tax credit purposes

Temporary absences forming part of a period of foreign service

Temporary absences not forming part of a period of foreign service

Meaning of "foreign earnings" and "foreign service"

Service on a foreign ship

Fees for independent personal services

Directors' fees

Supplements paid under the Australian Staffing Assistance Scheme (ASAS), or similar arrangements for the 1990/91 and subsequent years of income

Exemption with progression

Examples

Date of effect

WHAT THIS RULING IS ABOUT

1.	This Ruling is essentially an updated version of Taxation Ruling IT 2563. It takes into account the changes which have occurred in the law since that Ruling was released. In particular, section 19 of the Taxation Laws Amendment Act (No. 2) 1991 which applies in relation to income derived in the 1990/91 and subsequent years of income made significant changes to the operation of section 23AG of the Income Tax Assessment Act 1936 (the Act) .

Class of person/arrangement

2.	Section 23AG provides an exemption from Australian tax for foreign earnings derived by a resident individual taxpayer during a continuous period of foreign service exceeding 90 days. The purpose of this Ruling is to clarify certain aspects of the practical application of that section in relation to income derived in the 1990/91 and subsequent years of income. IT 2563 still applies in respect of earlier years.

3.	The question has been raised whether section 23AG is capable of application where the residential status for Australian tax purposes of an individual taxpayer changes during a year of income from non-resident to resident and on or after that date the taxpayer receives foreign earnings in respect of a continuous period of foreign service performed whilst a non-resident. That question has been raised against the background of the well established principle that salary and wages income, whether for current or past services, is generally derived when received.

4.	One of the key tests to be satisfied before foreign earnings may qualify for an exemption from Australian tax under section 23AG is that those earnings be derived in respect of a continuous period of foreign service. Taxation Ruling IT 2441 deals with certain aspects of the practical application of that test. This Ruling deals principally with other circumstances, and distinguishes between certain breaks in foreign service that may be treated as forming part of that service and others that do not qualify for that treatment.

RULING

Change in residential status

5.	The taxpayer could not, in the circumstances described in paragraph 3 above, normally claim that the foreign earnings qualify for exemption from Australian tax pursuant to paragraph 23(r) of the Act. Although the income is ex-Australian income, it is not derived by a non-resident. Nevertheless, while it is a requirement for the operation of section 23AG that the foreign earnings be derived whilst the individual is a resident for Australian taxation purposes, it is not also a requirement that the relevant foreign service be performed whilst the individual is a resident for those purposes. Accordingly, exemption from Australian tax as provided under section 23AG may apply.

6.	Where foreign earnings are derived (received) while the taxpayer is a non-resident, section 23AG is, of course, inapplicable, and the earnings would qualify for exemption from Australian tax under paragraph 23(r).

Exempted foreign earnings not to be aggregated with other foreign income for tax credit purposes

7.	Taxation Ruling IT 2508, which deals with the aggregation of the various classes of income for foreign tax credit purposes, specifies that the worldwide basis for determining foreign tax credits requires that all foreign income of the same class, whether or not subject to foreign tax, be taken into account for those purposes. It is clear, however, from the terms of subsection 160AF(1), that the foreign income to be taken into account is only that which is included in the taxpayer's assessable income for Australian tax purposes. Taxation Ruling IT 2508 should be read as adjusted accordingly.

8.	It follows that foreign earnings derived by a taxpayer in a year of income which is exempted from Australian tax under section 23AG, and the foreign tax paid in respect of those foreign earnings, are not to be taken into account in determining any foreign tax credit entitlements of the taxpayer with respect to a class of other foreign income derived by the taxpayer in the same year of income.

Temporary absences forming part of a period of foreign service

9.	Subsection 23AG(6) identifies certain temporary absences from a period of foreign service that are related to the foreign service and will not be taken to constitute a break in a period of foreign service. These absences are recreation leave wholly attributable to the period of foreign service (other than, for example, long service leave, leave without pay, furlough and extended leave) and sick leave. Additional recreation leave entitlements granted to employees posted overseas are not considered to constitute extended leave where the additional leave is reasonable. For example, where the employer grants five weeks annual leave instead of the usual four weeks provided to employees working in Australia. It is acknowledged that the additional leave is granted because of factors associated with the foreign service, for example, the extra travel time required to return to Australia, the hardship involved in some overseas postings resulting in the need for more rest and recreation and the fact that some time will need to spent on matters other than rest and recreation.

10.	As subsection 23AG(6) does not cover the gamut of temporary absences, representations have been received seeking clarification of when section 23AG will be treated as applicable in circumstances where there is a temporary break within a person's commenced foreign service engagement as a consequence of visiting Australia (or another country):

(a)	in the course of carrying out duties under a continuing foreign service engagement (i.e., business trips);

(b)	on weekends, public holidays, rostered days off, or other approved paid time off; or

(c)	compassionate leave.

11.	In each case such visits fall to be treated as temporary absences related to a period of foreign service and are to be dealt with as follows:

Business trips to Australia

(a)	Where an employee/office holder engaged in foreign service makes a short business trip to Australia or to another foreign country during a period of foreign service for reasons directly related to that person's continuing foreign service engagement, and made bona fide for that purpose, for example, to attend conferences, training sessions or briefing sessions, it is accepted that those trips should be treated as part of the person's continuous period of foreign service provided they are not excessive by comparison with the scheduled period of foreign service.

Weekends, public holidays, etc.

(b) 	A period of foreign service is taken to include weekends, public holidays, rostered days off and flexidays, and days off in lieu of such, provided such breaks are authorised by the terms and conditions of the foreign service employment or engagement. Any such breaks utilised to visit Australia or another foreign country do not break the continuity of service provided that there are no restrictions in the terms and conditions of employment or engagement prohibiting the employee or officer from leaving the country of foreign service on those occasions.

Compassionate leave

(c) 	Given that the absence of a person from foreign service due to an accident or illness is specifically treated as part of foreign service by reason of paragraph 23AG(6)(b), it is accepted that similar treatment would be appropriate in the case of compassionate leave granted for reason of an accident or illness of a person other than the taxpayer, or because of the death of another person. Accordingly, a short visit to Australia or another country for such a reason as permitted by the employer should be treated as forming part of the taxpayer's period of continuous foreign service. However, where leave not covered in this Ruling is granted for other reasons it is considered that a break will have occurred in the continuous foreign service.

12.	Similarly, where the foreign service employment or engagement is part time in nature, it will be accepted that visits to Australia or another foreign country would not constitute a break in continuous foreign service provided the visits, etc., do not occur in times that attendance at work is required and there are no other restrictions in the foreign service engagement preventing such visits.

13.	Each day of a visit to Australia or another country which, in accordance with subparagraphs (a), (b), or (c) of paragraph 11, or paragraph 12 of this Ruling, is treated as forming part of a person's continuous period of foreign service would qualify to be taken into account in determining the person's "absentee credits" in relation to that period of foreign service pursuant to subsection 23AG(6B). Conversely, each day of a visit which is treated as constituting a break in a person's continuous period of foreign service would give rise to an "absentee debit" in accordance with subsection 23AG(6C). (See examples at paragraph 30 concerning the operation of subsections 23AG(6B) and (6C)).

Temporary absences not forming part of a period of foreign service

14.	Broadly speaking, subsections 23AG(6A) to (6E) allow in certain circumstances for successive periods of foreign service, which are broken by a period where the person is not engaged in that service, to be added together to constitute a single continuous period of foreign service. For example, when the person is between jobs in a foreign country or breaks a period of foreign service for reasons not directly related to his or her foreign service engagement.

15.	In broad terms, these subsections operate on the basis that, provided a person is not absent from foreign service for such reasons for a period in excess of an "absentee credit balance" of days accrued during a continuous period of foreign service, the periods of foreign service either side of the period of absence will together constitute a continuous period of foreign service.

16.	In other words, provided a person has an absentee credit balance, the continuity of the person's foreign service will not be broken even when there is an intervening period between engagement on a foreign job or jobs. Conversely, when a person ceases to have an absentee credit balance, continuity will be interrupted by such an intervening period and it will be necessary to consider whether the foreign earnings qualify for exemption. The purpose of the subsections is further explained in the Explanatory Memorandum to the Taxation Laws Amendment Act (No. 2) 1988 . This Ruling does not incorporate that explanation but sets out examples to illustrate the practical application of the subsections: see paragraphs 30 and 31 below.

Meaning of "foreign earnings" and "foreign service"

17.	An exemption afforded by section 23AG applies only in respect of foreign earnings derived from a continuous period of foreign service. In general, subsection 23AG(7) defines the term "foreign earnings" to mean income consisting of earnings, salary, wages, commission, bonuses or allowances and the term "foreign service" to mean service in a foreign country as the holder of an office or in the capacity of an employee.

18.	Representations have been received seeking guidance on whether certain types of payments fall within the ambit of the definitions of "foreign earnings" and "foreign service". The position of these payments is discussed in the following paragraphs.

Service on a foreign ship

19.	To fall within the definition of "foreign service" the service must be performed in a foreign country. Service on a foreign ship in international waters does not therefore constitute "foreign service".

Fees for independent personal services

20.	While the term "foreign earnings" as defined may, on its own, be capable of being construed as sufficiently broad to include earnings derived from the provision of independent personal services by professional persons such as doctors, lawyers, architects and the like, such earnings fail to qualify for exemption under section 23AG because they are not rendered during the course of a period of "foreign service", i.e., as the holder of an office or in the capacity of an employee (see Case R45 84 ATC 369 and FC of T v. White ; FC of T v. Griffin 85 ATC 4743; (1985) 16 ATR 510). Accordingly, foreign earnings from the provision of independent personal services remain subject to the provisions of the general foreign tax credit system.

Directors' fees

21.	Directors may be classified as either executive directors or non-executive directors. The former are generally salaried employees as well as directors and may receive no separate fee for their activities as directors although their salary package may recognise such a role. In such a case there would be no doubt that the income in this situation would be "earnings, salary, wages," etc., derived as the holder of an office or in the capacity of an employee. Similarly, while fees paid to non-executive directors might not come within the ordinary meaning of salary or wages, such remuneration would nevertheless fall within the concept of "earnings" derived as the holder of an office.

22.	However, in order for such earnings to qualify for exemption under section 23AG the requirement of derivation during a continuous period of "foreign service" must also be satisfied. This means that the director must perform his or her duties in a foreign country for at least 3 continuous months.

Supplements paid under the Australian Staffing Assistance Scheme (ASAS), or similar arrangements for the 1990/91 and subsequent years of income

•	Where the remuneration package of an Australian resident in respect of foreign service performed in a foreign country under the ASAS, or a similar arrangement, consists of a base salary paid and taxed in the foreign country, as well as a supplement paid in Australia and not subject to tax in the foreign country, the supplement (in common with the base salary) is considered to be derived from sources in the country where the service is performed (see FC of T v. French (1957) 98 CLR 398).

•	If the salary is exempt from tax in the foreign country by virtue of a Memorandum of Understanding (MOU), or some similar agreement, it will not be denied exemption from Australian tax by virtue of subsection 23AG(2). This is because it is not exempt in the foreign country solely because of events listed in that subsection; it is also exempt because of the MOU which is not a reason listed in subsection 23AG(2).

23.	Similarly, salary supplements paid in Australia and not subject to tax in the foreign country will be exempt from Australian tax under section 23AG as they are not exempt from tax in the foreign country solely because of events listed in subsection 23AG(2).

Exemption with progression

24.	Some taxpayers who derive foreign earnings or other foreign income which is exempt from income tax under provisions other than section 23AG have asked whether this exempt income is to be treated as subject to "exemption with progression", and therefore taken into account in calculating the Australian tax on the income of the taxpayer.

25.	This is true only with respect to remuneration derived by persons working overseas on approved projects, which qualifies in certain circumstances for exemption from Australian tax pursuant to section 23AF of the Act.

26.	Subsection 23AF(17A), which contains such "exemption with progression" provisions, specifically applies only in respect of income which is exempt from tax under section 23AF. Likewise, the terms of the "exemption with progression" provisions of subsection 23AG(3) are specifically limited to foreign earnings that qualify for exemption under section 23AG.

27.	Accordingly, pay and allowances of members of the Defence Forces or Australian Federal Police serving in special areas overseas which are exempted by section 23AC, section 23AD, or section 23ADA are not subject to "exemption with progression". Neither is income derived by persons serving overseas for international organisations which is exempt under regulations made under the International Organisations (Privileges and Immunities) Act 1963.

EXAMPLES

28.	With respect to subsections 23AG(6A) to (6D), assume a resident taxpayer is engaged in foreign service for three successive continuous periods of foreign service as shown below:

Foreign Service Period	Break	Service (days)	Break (days)
1		400
	A		40
2		200
	B		16
3		50
	C		Indefinite
Period 1

Subsection 23AG(6B) operates to accrue an absentee credit of 31/334 x 24 hours for each of the first 334 days. As there are no breaks in period 1, the absentee credit balance (subsection 23AG(6A)) in whole days at the end of the 334th day will be 31 days. As the balance would exceed 31 if there were further credits, no credits will arise in respect of days 335 to 400. Thus, the balance at the end of the 400th day will be 31 days.

Break A

Subsection 23AG(6C) operates to reduce the absentee credit balance of 31 days at the end of each whole day of the break by 1 day. Thus, after a break of 30 days (i.e., at the beginning of the 31st day) the balance will be 1 day. A further absentee debit of 24 hours will arise at the end of the 31st day resulting in an absentee credit balance of nil. As the balance is nil at the start of the 32nd day, paragraph 23AG(6C)(d) will operate to prevent an absentee debit of 24 hours arising for break days 32 to 40.

Periods 2 and 3

At the commencement of period 2, paragraph 23AG(6D)(c) will operate to prevent periods 1 and 2 constituting a single continuous period of foreign service. Continuity is not achieved as the "absentee credit balance" at the beginning of break day 40, i.e., the day before the commencement of period 2, did not exceed nil. (Note that if break A was less than 32 days duration, continuity would have followed.)

It should also be noted that once the absentee credit balance is reduced to nil, which is the position at the commencement of period 2, it is not necessary to have regard to all prior absentee credits and debits in calculating future balances. They are, in effect, reflected in the nil balance. The following results in respect of periods 2 and 3 are achieved:

	Balance (whole days)	Credits – Debits (hours)
Absentee credit at end of period 2	18	(200*(31/334)*24)
Absentee credit balance at the beginning of the day before commencement of period 3 **	3	(200*(31/334)*24)-(15*24)
Absentee credit balance at the commencement of period 3	2	(200*(31/334)*24)-(16*24)
Absentee credit balance at the end of period 3	7	(250*(31/334)*24)-(16*24)
** As this exceeds nil, periods 2 and 3 would constitute a single continuous period of foreign service.

29.	The following further example illustrates the interaction of subsections 23AG(6D) and (6E). Assume that a resident taxpayer is engaged in foreign service for a period of 30 whole days and takes 27 hours leave without pay (LWOP) from 9 am on the 31st day to midday on the 32nd day. LWOP of 7 hours is subsequently taken from 9 am on the 95th day.

Foreign Service Period	Break	Service (days)	Break (hours)
1		30 – 3/8
	A		27
2		62 – 7/8
	B		7
3		Indefinite
Break A is not less than 24 hours and subsection 23AG(6E) will not apply. As Break A consists of two part days (as distinct from a "whole day" as defined in subsection 23AG(6J), subsections 23AG(6B) and (6C) will not operate and there will be no absentee credits or absentee debits arising in respect of either the 31st or 32nd days. The absentee credit balance at the commencement and conclusion of Break A will therefore remain at 2 days (30 x 31/334). The application of subsection 23AG(6D) will result in foreign service periods 1 and 2 constituting a continuous period during which the taxpayer was engaged in foreign service.

At the end of period 2 (i.e., at 9 am on the 95th day), the continuous period of foreign service will be 93 days and the absentee credit balance will be 8 whole days (92 (i.e., 30 + 62) x 31/334). As with the 31st and 32nd days, no absentee credits or debits will arise in respect of the 95th day, the day on which Break B of 7 hours occurs.

As Break B is less than 24 hours, subsection 23AG(6E) will operate to make the first period (periods 1 and 2 by a previous application of subsection 23AG(6D)) and the second period (period 3) constitute one continuous period. The absentee credit balance at the commencement and conclusion of Break B will remain at 8 days and the next credit will accrue at the end of the 96th day at which time the foreign service period will be 94 7/12 days (93 1/4 + 1 1/3).

DATE OF EFFECT

30.	This Ruling applies to income derived on or after 1 July 1990. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20). Taxation Ruling IT 2563 applies in respect of income derived on or before 30 June 1990.

Commissioner of Taxation

22 May 1996


TR 96/15A - Addendum
Taxation Ruling TR 96/15A2  addendum

Income tax:  foreign tax credit system:  issues relating to the practical application of section 23AG

This Addendum amends Taxation Ruling TR 96/15 to change the date of effect for certain paragraphs in that Ruling to reflect legislative amendments to section 23AG of the Income Tax Assessment Act 1936. Tax Laws Amendment (2005 Measures No. 5) Act 2005 repealed subsections 23AG(6A) to (6E) and substituted new subsections 23AG(6A) and (6B).

ADDENDUM

Taxation Ruling TR 96/15 is amended as follows:

1.	Paragraph 32

After the paragraph insert:

33.	Following the enactment of the Tax Laws Amendment (2005 Measures No. 5) Act 2005 former subsections 23AG(6A) to (6E) of the ITAA 1936 have been replaced by new subsections 23AG(6A) and (6B). As a result of this:

•	paragraphs 13 to 16, 30 and 31 of this Ruling do not apply to foreign service performed on or after 19 December 2005; and

•	paragraphs 11(b) and 31A of this Ruling, to the extent that they refer to former subsections 23AG(6A) to (6E), do not apply to foreign service performed on or after 19 December 2005.

2.	References

Under "Legislative References" insert:

•	Tax Laws Amendment (2005 Measures No. 5) Act 2005

This Addendum applies from 19 December 2005.

Commissioner of Taxation

20 December 2006


Taxation Ruling TR 97/12 Work related expenses: deductibility of expenses on clothing, uniform and footwear
Taxation Ruling TR 97/12

This Ruling has been partially replaced by TR 2003/D4

There is an Addendum to this document

Income tax and fringe benefits tax: work related expenses: deductibility of expenses on clothing, uniform and footwear

This Ruling, to the extent that it is capable of being a "public ruling" in terms of Part IVAAA of the Taxation Administration Act 1953, is a public ruling for the purposes of that Part. Taxation Ruling TR 92/1 explains when a Ruling is a public ruling and how it is binding on the Commissioner.

Contents:

What this Ruling is about

Date of effect

Previous Rulings

Ruling

Deductibility of work related expenses

Conventional clothing

Occupation specific clothing

Protective clothing and footwear

Compulsory uniform/wardrobe

Non-compulsory uniform/wardrobe

Depreciation of articles of clothing

Fringe benefits tax

Explanations

Conventional clothing

Occupation specific clothing

Protective clothing and footwear

Compulsory uniform/wardrobe

Non-compulsory uniform/wardrobe

Laundry and maintenance

Substantiation rules

Capital exclusion

Alternative views

Cross references to previous Rulings for examples used in this Ruling

WHAT THIS RULING IS ABOUT

1.	This Ruling deals with the circumstances where work related clothing, uniform and footwear expenses, including associated maintenance costs, are allowable as deductions under subsection 51(1) of the Income Tax Assessment Act 1936 ("the ITAA").

2.	It also discusses any fringe benefits tax liability on employers under the Fringe Benefits Tax Assessment Act 1986 ("the FBTAA") for providing support to employees in connection with clothing, uniform and footwear.

Class of person/arrangement

3.	This Ruling applies to individuals who are employees or in receipt of prescribed payments and who incur work related clothing, uniform or footwear expenses, and to employers who provide benefits to employees in connection with clothing, uniform and footwear.

DATE OF EFFECT

4.	This Ruling applies to years commencing both before and after its date of issue. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

PREVIOUS RULINGS

5.	Taxation Rulings IT 300, IT 2096, and Taxation Determinations TD 93/101, TD 93/109, TD 93/121, and TD 93/154 are now withdrawn.

RULING

6.	To be deductible, expenditure on clothing, uniforms and footwear must satisfy the deductibility tests contained in subsection 51(1) and not be excluded from deductibility by section 51AL or section 51AH of the ITAA. The expenditure is only deductible where there is a sufficient connection between the clothing and the activities productive of assessable income such that its essential character is work related and not private or domestic in nature. While this depends on all the facts, this Ruling provides broad principles to help in determining this question in any given case.

7.	Costs of buying, renting, laundering, dry cleaning, repairing and replacing clothing are private in nature except where the expense is directly attributable to the income earning activities of the taxpayer.

Deductibility of work related expenses

8.	In short, a deduction is allowable if an expense:

(a)	is incurred;

(b)	meets the deductibility tests;

(c)	satisfies the substantiation rules which apply to employees; and

(d)	is not excluded from deductibility under section 51AH or section 51AL (see paragraph 37).

(a) Expense must be incurred

9.	The expense must be incurred by the taxpayer to be deductible.

(b) Expense must meet deductibility tests

10.	Expenditure is deductible under subsection 51(1) where there is a sufficient connection between the expense and the income earning activities, such that its essential character is work related and not private or domestic in nature.

11.	A deduction is not allowable if the expense is:

(a)	capital in nature (e.g., initial purchase of judges' ceremonial robes);

(b)	private or domestic in nature; or

(c)	incurred in earning tax exempt income (e.g., on uniform maintenance related to membership of the Army Reserve).

12.	Generally, the costs of living, such as the purchase of conventional clothing, food, drink and shelter are private or domestic in nature and therefore not deductible.

13.	If an expense is incurred partly for work purposes and partly for private purposes, then only the work related portion is an allowable deduction.

14.	The mere fact that an employee incurs expenses at the direction of his or her employer does not mean that a deduction is necessarily allowable. Also, a deduction is not allowable by the mere fact that the taxpayer will not be able to engage in the activity from which his or her income is derived unless the expenditure is incurred.

Clothing allowance

15.	The receipt of an allowance does not automatically mean that the expenditure is deductible. However, allowances received for clothing, uniform/wardrobe and related expenditure are fully assessable under subsection 25(1) or paragraph 26(e) of the ITAA: see Mansfield v. FC of T 96 ATC 4001 at 4006; (1996) 31 ATR 367 at 372 (Mansfield's case).

Reimbursements of clothing, uniform and footwear expenses

16.	Under section 51AH, where all or part of the expenditure is reimbursed, and the reimbursement constitutes a fringe benefit under the FBTAA, the amount reimbursed is not an allowable deduction.

(c) Expense satisfies the substantiation rules

17.	The income tax law requires substantiation of certain work related expenses, including clothing.

18.	A deduction is not allowable if the substantiation rules are not met, although if evidence is provided the Commissioner's discretion may be exercised in some circumstances (Schedule 2B of the ITAA).

Conventional clothing

19.	Expenditure on conventional clothing is often not an allowable deduction under subsection 51(1). This is because there is not usually a sufficient connection between expenditure on clothing and the income earning activities of the taxpayer.

20.	Whether such a connection exists, and the essential character of the expense, are matters to be determined by reference to all the circumstances of the particular case.

21.	The mere fact that a taxpayer's employer requires or expects the taxpayer to wear a particular type or style of conventional clothing does not make the cost of that clothing deductible: see FC of T v. Cooper (1991) 29 FCR 177 at 185, 201-202; 91 ATC 4396 at 4402, 4414-4415; (1991) 21 ATR 1616 at 1623, 1637-1638 (Cooper's case) and Mansfield's case ATC at 4008; ATR at 374.

•	Similarly, the fact that a taxpayer may perceive that it is important to his/her success in his/her occupation or profession to wear a particular type or style of conventional clothing does not make the cost of that clothing deductible: see, for example, Case 16/93 93 ATC 208 at 214; AAT Case 8658 (1993) 25 ATR 1115 at 1121-1122.

•	However, there may be cases where there exists a connection between the expenditure on the clothes and the income producing activities of the taxpayer. FC of T v. Edwards (1994) 49 FCR 318; 94 ATC 4255; (1994) 28 ATR 87 (Edwards' case) provides an example. In that case, as well as the circumstances outlined in paragraphs 21 and 22 above, there were other factors present, such as the need for additional clothing and for frequent changes of clothing while the taxpayer was performing her duties.

22.	Further information about conventional clothing is contained in the Explanations section at paragraphs 51 to 65.

Occupation specific clothing

23.	A deduction is allowable for the cost of occupation specific clothing under subsection 51(1) because the distinctive characteristics of the clothing provide the nexus between the expenditure and the work activity. An example is a chef's traditional uniform consisting of a chef's hat, chef's chequered pants and a chef's white jacket.

24.	Further information about occupation specific clothing is contained in the Explanations section at paragraphs 66 to 69.

Protective clothing and footwear

25.	Protective clothing is clothing worn while working which protects persons from:

(a)	injury (e.g., steel capped safety boots for building workers);

(b)	death (e.g., lead aprons worn by x-ray machine operators);

(c)	disease (e.g., protective gloves used by dentists); or

(d)	damage to other clothing, in circumstances where such damage would otherwise be a normal incident of the taxpayer's income earning activities (e.g., overalls for coal miners or mechanics).

26.	A deduction is allowable for the cost of protective clothing under subsection 51(1) because there is a sufficient connection between the expenditure and the income earning activities.

27.	Further information about protective clothing and footwear is contained in the Explanations section at paragraphs 70 to 78.

Compulsory uniform/wardrobe

28.	A deduction is allowable for the cost of a compulsory and distinctive uniform/wardrobe under subsection 51(1).

29.	The essential character of an employee's expenditure on clothing items including shoes, socks, stockings and accessories which form an integral part of a compulsory and distinctive uniform/wardrobe is expenditure directly related to the income producing activities of the employee. It is the compulsory and distinctive characteristics which provide the nexus between the expenditure on the uniform and the work activity.

30.	A compulsory uniform/wardrobe must be prescribed by the employer in an expressed policy which makes it a requirement for a particular class of employees to wear that uniform while at work, and which identifies the relevant employer. The employer's compulsory uniform/wardrobe policy guidelines should stipulate the characteristics of the colour, style and type of the clothing and accessories that qualify them as being a distinctive part of the compulsory uniform/wardrobe. Also, the wearing of the uniform/wardrobe generally should be strictly and consistently enforced.

31.	In our view, it is only in these strict regimes for compulsory and distinctive uniforms/wardrobes that expenditure on these items is likely to be regarded as work related rather than private in nature.

32.	Further information about compulsory uniform/wardrobe is contained in the Explanations section at paragraphs 79 to 86.

Single items of compulsory clothing

33.	Where employees are required, as a strict condition of their employment, to wear at work single items of distinctive clothing, a deduction is allowable for the costs of this item of clothing under subsection 51(1). Further information about single items of compulsory clothing is contained in the Explanations section at paragraph 87 and 88.

Non-compulsory uniform/wardrobe

34.	Expenditure in relation to a non-compulsory uniform/wardrobe as defined in section 51AL is only deductible if it satisfies the requirements of that section.

35.	Section 51AL requires that the design of the uniform/wardrobe has been entered on the Register of Approved Occupational Clothing ("the Register").

36.	The characteristics of a non-compulsory uniform/wardrobe under section 51AL are:

(a)	the wearer has to be an employee, or recipient of a prescribed payment;

(b)	the uniform has to identify the wearer distinctively as associated with the employer;

(c)	it is not compulsory to wear the uniform/wardrobe, or, if compulsory, the wearing of the uniform is not consistently enforced; and

(d)	the uniform/wardrobe design has been entered on the Register.

37.	The definition of non-compulsory uniform/wardrobe in subsection 51AL(4) refers to a set of one or more items of clothing. Expenditure on single items of non-compulsory clothing, which come within the definition of non-compulsory uniform/wardrobe in that subsection, but which are not registered, is not deductible under subsection 51(1). Where items of clothing cannot be included on the Register on the basis that they do not come within that definition, the deductibility of expenditure on those items depends on the tests contained in subsection 51(1).

38.	Further information about non-compulsory uniform/wardrobe is contained in the Explanations section at paragraphs 89 to 93.

Depreciation of articles of clothing

39.	Where the initial outlay on long-lasting clothing is substantial (e.g., judges' ceremonial robes) such outlays are, on balance, considered to be a capital expense that can be depreciated in terms of section 54 of the ITAA (see the Explanations section at paragraphs 99 and 100).

Fringe benefits tax

40.	The provision of financial or property support by an employer to enable employees to acquire clothing, accessories and footwear gives rise to a fringe benefit under the FBTAA.

41.	However, the "otherwise deductible rule" in either sections 24 or 44 of the FBTAA operates to reduce the taxable value of a fringe benefit by the notional amount of any tax deduction that would have been available to the employee in respect of the particular item acquired.

42.	Any financial or property support provided by the employer for deductible items does not attract fringe benefits tax. The taxable value of the benefit in this case is nil because of the "otherwise deductible rule". However, where expenditure on clothing is not deductible, the taxable value of the fringe benefit corresponds to the value of support provided by the employer.

EXPLANATIONS

43.	The tests for deductibility of work related expenses are contained in subsection 51(1) as follows:

"All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income."

44.	A number of court decisions have determined that, for an expense to satisfy the tests in subsection 51(1):

(a)	it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T; Hayley v. FC of T (1958) 100 CLR 478; (1958) ALR 225, (1958) 11 ATD 404);

(b)	there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T (1949) 78 CLR 47; (1949) 8 ATD 431);

(c)	it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore & Co (WA) Pty Ltd v. FC of T (1956) 95 CLR 344; (1956) 11 ATD 147; (1956) 6 AITR 379; Cooper's case; Roads and Traffic Authority of New South Wales v. FC of T (1993) 43 FCR 223; 93 ATC 4508; (1993) 26 ATR 76; FC of T v. Hatchett (1971) 125 CLR 494; 71 ATC 4184; (1971) 2 ATR 557); and

(d)	its essential character must not be of a capital, private or domestic nature (per Lockhart J in Cooper's case FCR at 181-182; ATC at 4400; ATR at 1620; and Mansfield's case).

45.	It is not sufficient that the expenditure is a prerequisite to the derivation of assessable income. The expenditure must be relevant and incidental to the actual activities which gain assessable income.

46.	The fact that the expense is incurred at the employer's direction does not convert the essential character of that expenditure from a private to a work related expense. In Cooper's case, Hill J said (FCR at 200; ATC at 4414; ATR at 1636) that:

".. the fact that the employee is required, as a term of his employment, to incur a particular expenditure does not convert expenditure that is not incurred in the course of the income-producing operations into a deductible outgoing."

47.	Similarly, in Mansfield's case, Hill J said (ATC at 4008; ATR at 375) that:

"The mere fact that a particular form of clothing is required to be used in an occupation or profession will not necessarily lead to the conclusion that expenditure on that form of clothing was deductible.

It can be said that generally expenditure on ordinary articles of apparel will not be deductible, notwithstanding that such expenditure is necessary to ensure a suitable appearance in a particular job or profession. An employed solicitor may be required to dress in an appropriate way by his or her employer, but that fact alone would not bring about the result that the expenditure was deductible."

48.	Also, it is not sufficient that the taxpayer will not be able to engage in the activity from which his income is derived unless the expenditure is incurred: Cooper's case ATC per Lockhart J at 4402 and Hill J at 4415; FCR at 184 and 201; ATR at 1622 and 1637.

Conventional clothing

49.	For expenditure on clothing generally, the decision of the Full Federal Court in Edwards' case contains the following cautionary statement (FCR at 323; ATC at 4259; ATR at 91):

"It should be noted that the decision does not establish that the cost of all clothing acquired and worn at work will, because of that circumstance alone, become deductible as an outgoing incurred in deriving assessable income."

•	Generally, expenditure on conventional clothing is not deductible. However, this is not a universal proposition and in special circumstances there may be a sufficient connection between the income earning activities and expenditure on conventional clothing (see Edwards' case).

•	In Case T47 (1968) 18 TBRD 242; 14 CTBR (NS) Case 56, J F McCaffrey (Member) stated the rationale why conventional clothing is usually private in nature (TBRD at 243; CTBR at 307):

"In order to live normally in our society, it is requisite that individual members thereof be clothed, whether or not they go out to work. In general, expenditure thereon is properly characterised as a personal or living expense ..."

•	See also Case R55 84 ATC 411 at 416; Case U80 87 ATC 470 at 472 where a shop assistant was denied a deduction for the cost of black clothes. In Case 16/93 93 ATC 208; AAT Case 8658 (1993) 25 ATR 1115 a fashion editor was denied a deduction for clothes, dry cleaning and grooming expenses. In Case 72/96 96 ATC 640; AAT Case 11455 (1996) 34 ATR 1098, a television newsreader was denied deductions for ordinary clothes, jewellery and grooming expenses.

•	While Tribunal decisions prior to Edwards' and Mansfield's cases must now be read in the light of these decisions, they are illustrative of the factors that are relevant to the question whether a sufficient connection exists between the expenditure on clothing and the income earning activities such that the essential character of the expense is work related rather than private in nature. For example, the Tribunal in Case U95 87 ATC 575 at 580 said:

"There is no one test which will satisfy all facts, but clearly on the decided cases, relevant considerations include:

(1)	Express or implied requirements of the employer or business concerning clothing;

(2)	The extent to which the clothing is distinctive or unique to the nature of the employment or business having regard to particular, special or accepted work clothing requirements, including its availability to be worn by members of the general public;

(3)	The extent to which the clothing is used solely for work;

(4)	The extent to which the clothing is unsuitable for any activity other than work;

and no doubt other factors may become relevant depending on particular facts or circumstances of a given case."

50.	Some of the tests formulated by the Boards of Review include the "abnormal expenditure" test (see Case A45 69 ATC 270; 15 CTBR (NS) Case 24 (Case A45)); the "necessary and peculiar test" (see Case H61 (1957) 8 TBRD 287; 7 CTBR (NS) Case 54; Case G81 75 ATC 572; 20 CTBR (NS) Case 50; Case H2 76 ATC 7; 20 CTBR (NS) Case 56); or the "abnormal wear and tear" test (see Case T47 (1968) 18 TBRD 242; 14 CTBR (NS) Case 56; Case G81 75 ATC 572; 20 CTBR (NS) Case 50; Case H33 76 ATC 285; 20 CTBR (NS) Case 87; Case M28 80 ATC 187; 24 CTBR (NS) Case 3). However, as has been pointed out by the courts on many occasions, in the end one must always return to the words of section 51.

•	According to the Full Federal Court in Edwards' case FCR at 323; ATC at 4259; ATR at 91:

•	"The decision [of the AAT in Case 31/93 93 ATC 359; AAT Case 8858 (1993) 26 ATR 1181, and Gummow J in FC of T v. Edwards 93 ATC 5162; (1993) 27 ATR 293] turns on its own special facts." (citations added)

51.	These facts included the following circumstances:

(a)	the taxpayer gained her income by attending the Governor's wife as her personal secretary;

(b)	the extensive wardrobe of high quality clothes was necessary to perform properly her activities;

(c)	she was expected to dress in a manner compatible with the Governor's wife and in an appropriate way for each occasion;

(d)	she changed her clothing, sometimes two or three times a day, in the course of performing her income-producing activities;

(e)	the quantity and quality clothing was in excess of her normal every day requirements; and

(f)	she only infrequently used the wardrobe for private purposes.

52.	It was found that together these factors established a sufficient connection between the expenditure on additional clothing and the activities by which the taxpayer earned her income. The essential character of the expenditure was held to be the gaining or producing of assessable income.

53.	Edwards' case is important in emphasising that the proper construction of subsection 51(1) does not result in a universal proposition that expenditure on additional clothing of a conventional kind worn in a conventional way can, by itself, never attract deductibility under the ITAA: see Full Federal Court FCR at 323; ATC at 4259; ATR at 91. However, the facts in Edwards' case were special, and it is likely that there will be few situations that are analogous to Ms Edwards' circumstances. For example, in Case 48/94 94 ATC 422; AAT Case 9679 (1994) 29 ATR 1077 (Case 48/94), the taxpayer, a self-employed professional presenter and speaker, submitted that her circumstances were comparable to those of Ms Edwards. The taxpayer gave evidence that she maintained a separate wardrobe to meet her work requirements and that she used this wardrobe exclusively in relation to her work. Sometimes, a client would request that she should dress in a specific manner when performing a presentation. Her image was of vital importance in both securing and performing her duties, and her clothes were an aspect of her image.

54.	Senior Member Barbour, in disallowing the deduction for the cost of the clothing, said (ATC at 427; ATR 1083) that:

"While the A list clothes [those used exclusively for work] assisted in creating an image compatible with the applicant's perceptions of her clients' and audiences' expectations, her activities productive of income did not turn upon her wearing A list clothes, however important the applicant may have perceived these clothes to be in her presentation activities. There is not the requisite nexus between her income earning activities and the A list clothing expenses."

55.	He went on to say (ATC at 427-428; ATR at 1083-1084) that:

"... the expense is not a business expense is also indicated by the very conventionality of the clothing. The applicant did not buy specific clothes for specific presentations (as an entertainer might) or have clothes that were specific and suited only for her employment or business (as a nurse might). The applicant chose to wear her A list clothes for business only, but this does not then enable the expense in purchasing those clothes to be treated as a business expense. Nor did she wear several changes of clothes while performing her duties, such that this expense for additional clothing was purely for the purpose of gaining or producing income, and hence properly regarded as a business expense, despite its conventionality (as in Edwards)."

56.	Example: As part of her work as an undercover police officer, Jill is required to play a "role" which requires the wearing of clothing that she would not otherwise wear and which is necessary and peculiar to her "role". Jill wears other clothing to and from work and does not wear the clothing used in her "role" for private purposes. Jill's expenditure on clothing worn in her undercover activities, which are additional to her normal needs, has a direct connection with her income-producing activities as a police officer and is deductible.

57.	Example: Beata is a marriage celebrant who claims expenditure on dress suits, accessories, shoes and stockings. She contends that the wardrobe of hats and garments, including shoes and stockings, ranging from the highly formal to the informal, is far more extensive than she would ordinarily acquire. Even if the additional clothing is worn solely for the purpose of performing her duties as a marriage celebrant, the facts would be analogous to Case 48/94, where the expenditure was held to be private in nature. In particular, her activities productive of income do not turn upon her wearing the additional clothes, nor are the clothes specific and suited only to her income earning activities. Despite having an extensive wardrobe, Beata's duties do not involve multiple daily changes of clothing and the expenditure remains purely private in nature: see Case V68 88 ATC 508, but compare Case V143 88 ATC 899; AAT Case 4608 (1988) 19 ATR 3872. Similarly, the expenditure incurred on shoes and stockings is private in nature and is not deductible.

58.	Example: Warren is a sports teacher. He claims deductions for the cost of purchasing track suits, T-shirts, shorts and socks. These are conventional clothes which do not form part of a uniform, do not protect Warren and are not distinctive of Warren's particular occupation or employer. Expenditure on clothing of this type is generally private in nature and is not deductible.

59.	Example: Jim is a public servant. He wears trousers and a shirt to work, and keeps a suit handy in case he is needed to advise the Minister at Parliament House. A deduction is not allowable for the cost of his suit because the expenditure is private in nature: see Case A45; Mallalieu v. Drummond [1983] 2 AC 861 (the solicitor's black clothes case); Case U80 87 ATC 470; and Case K2 78 ATC 13; 22 CTBR (NS) Case 21.

Occupation specific clothing

60.	Occupation specific clothing distinctively identifies the wearer as a person associated with a particular profession, trade, vocation, occupation or calling. It is this distinctive nature of the clothing that provides the nexus between the expenditure and the income earning activities such that the essential character of the expense is work related and not of a private nature.

61.	Examples of clothing that are considered by this Office to be occupation specific are a cleric's ceremonial robes, a barrister's robes, a chef's chequered trousers and a nurse's traditional uniform (i.e., consisting of a cap, cardigan, white dress normally with short sleeves, action back, zip front, front pockets, front pleat and non-slip nursing shoes).

62.	Nevertheless, clothing which could be worn in a number of occupations is not occupation specific clothing. For example, a white coat worn with white trousers may designate a health worker but does not differentiate, for example, between a pharmacist or a laboratory technician. However, the cost of these items may be an allowable deduction under subsection 51(1) if they are protective (see paragraphs 27 and 28).

63.	Example: Norm is a chef who wears a chef's traditional uniform, i.e., chef's hat, chef's chequered pants and a chef's white jacket. A deduction is allowable under subsection 51(1) for the cost of the uniform because the clothing is considered peculiar, incidental and relevant to the gaining of assessable income from his specific occupation as a chef.

Protective clothing and footwear

64.	The cost of an item of clothing is deductible where the wearing of such an item is necessary to protect the taxpayer from above average risk of physical injury in carrying out the requirements of his/her occupation or is necessary to enable the taxpayer physically to perform such requirements. The level of danger required was described in Case A45 (at ATC 271; CTBR (NS) 162) as:

"... a continuing, high level of danger, such as arises in the particular process in which this taxpayer was involved, and not the mere statistical risk of injury that may be run by employees in general ..."

65.	The deductibility of expenditure on these items therefore depends on the circumstances of the taxpayer's income earning activities. For example, a deduction is allowable for expenditure on clothing used exclusively on the job to protect a person from the rigours of harsh or extreme working conditions. Thus, in Case V79 88 ATC 550; AAT Case 4353 (1988) 19 ATR 3504, the cost of a waterproof jacket, woollen jumper and thick socks acquired by an employee for exclusive use in the harsh climate of the Snowy Mountains was found to be deductible. In the circumstances of that case, the clothing was found to have a "distinct occupational character" and "was used exclusively for work".

•	Thus, except where the wearing of the clothing is a practical necessity if the taxpayer is to be able to carry out his or her duties without personal danger, a deduction is not generally allowable for items that provide protection from the natural environment (e.g., sunhats): see, for example, Case Q11 83 ATC 41; (1983) 26 CTBR (NS) Case 75.

•	Further, in Case A45, a blast furnace worker was allowed deductions for protective woollen clothing which:

•	were a "practical necessity intended for the protection of the taxpayer's body" in the presence of extreme heat and flying sparks;

•	were put on at the place of work and taken off after duty, and not used for private purposes; and

•	were entirely unsuitable for private use.

The clothing in this case was found to bear a distinct occupational character such that there was a sufficient nexus between the clothing and his occupation.

66.	Similarly, some occupations, such as cleaners, building workers and truck drivers, use high pressure hoses. These individuals may wear heavy duty wet weather gear to protect themselves and their clothing. Other occupations may require special clothing to protect the employee when using chemicals. Having regard to the income earning activities, a deduction would be allowed in these circumstances to the extent to which the clothing is worn for work purposes.

•	Overalls to protect the person from grease and dirt have been held to be deductible: Case R80 (1966) 16 TBRD 388; 12 CTBR (NS) Case 107. Also, protective boots and overalls worn solely and exclusively for work purposes, white coats for doctors and boiler suits for boilermakers have been described as sufficiently peculiar to take them out of the normal character of conventional clothing: Case T103 86 ATC 1182.

•	However, expenditure on heavy duty conventional clothing such as jeans, drill shirts, trousers and socks, will not usually have a sufficient connection with the income earning activities. In addition, the essential character of such expenditure is private in nature, and not deductible. Although heavy duty conventional clothing may be worn to help prevent injury at work, this does not change its character from being conventional in nature (see Case T103).

67.	A deduction may be allowable under subsection 51(1) for footwear which is necessary to protect the wearer from the hazards and conditions likely to be encountered in his or her occupation (e.g., non-slip nurse's shoes, steel capped boots for a bricklayer, or rubber boots for a concreter). This will only be the case where there is a direct nexus between the income producing activities and the expenditure. Non-slip shoes are designed specifically for the taxpayer's occupation and do not include conventional non-slip footwear (e.g., sports shoes).

68.	The distinction to be made here is between someone who must wear the footwear so as to be able to perform his or her duties without serious risk of injury (e.g., the nature of the duties of an aerobics instructor conducting "high impact" classes may necessitate the purchase of special gym shoes) and someone who merely wears those shoes because they find them comfortable, convenient or appropriate.

Compulsory uniform/wardrobe

69.	Expenditure on a compulsory and distinctive uniform/wardrobe is deductible because the necessary connection exists between the expenditure and the occupation such that the essential character of the expense is work related and unique. Compulsion is not the determinant for deductibility, but where it applies to clothing that is a distinctive uniform/wardrobe, a deduction is allowable without section 51AL operating to deny deductibility (see paragraph 89 for non-compulsory uniforms/wardrobes). To constitute a distinctive uniform/wardrobe it is not enough that there is a requirement to wear clothing of a particular colour or style at work. The uniform/wardrobe needs to be sufficiently distinctive so that the casual observer can clearly identify the employee as working for the particular employer, or identify the products or services provided by the employer.

70.	A uniform/wardrobe is a collection of inter-related items of clothing and accessories that is distinctive to a particular organisation. In Case R55 84 ATC 411 at 416; 27 CTBR (NS) Case 109 at 874, the Tribunal said that:

"... conventional clothing of a particular colour or style does not necessarily, because of those factors alone, assume the character of a uniform. Likewise, ordinary clothing is not converted into a uniform by the simple process of asserting that it fills that role or by the wearing of a name plate, etc. attached to clothing."

Further information about compulsory uniform/wardrobe is contained in Taxation Ruling IT 2641.

71.	In Mansfield's case, Hill J stated (ATC at 4008; ATR at 375) that:

"A uniform is not merely a set of clothes reserved for the occasion of work. Rather it is the fact that the uniform has a distinctive characteristic which provides the nexus between the expenditure on the uniform and the work activity ..."

72.	His Honour noted that the mere fact that a particular expenditure or a particular form of clothing may be required by the employer is not determinative of its deductibility, nor is the existence of an award or allowance, nor that the expenditure is a prerequisite to the derivation of assessable income. It must be relevant and incidental to the actual activities which gain the assessable income.

73.	To be compulsory, generally the wearing of the uniform must be strictly and consistently enforced. In these circumstances the uniform is relevant and incidental to the actual activities which gain the assessable income.

74.	A uniform only includes shoes, socks, stockings and accessories where the employer's express uniform/wardrobe guidelines stipulate the characteristics which qualify each item as an integral part of the compulsory uniform, e.g., colour, style, type. As an integral part of a compulsory uniform such items can be differentiated from ordinary clothing.

75.	In Case U95 at 580 , the Tribunal held that a deduction for clothing, including shoes and stockings, claimed by a shop assistant was disallowed because there was:

"... nothing distinctive or unique about the combination of clothing which would identify the wearer as a [name of employer] shop assistant or even a shop assistant from another department store. The colour combination of the clothing would be included in the range of acceptable street dress unassociated with business or employment, as well as a combination of colours sometimes worn by female drink or food waiting staff."

76.	In Mansfield's case, a flight attendant was allowed a deduction for stockings and shoes which were required to be worn as part of a compulsory and distinctive uniform/wardrobe, the wearing of which was strictly enforced by the airline.

Single items of compulsory clothing

77.	In situations where employees are required to wear single items of compulsory and distinctive clothing, expenditure incurred on that clothing is an allowable deduction under subsection 51(1) where:

(a)	the employer stipulates the nature of the clothing;

(b)	the clothing is distinctive or unique to the nature of the employment or business and identifies the wearer with a particular organisation or body of persons. Generally, the clothing is distinctive or unique where the clothing has a clearly visible logo or emblem of the employing organisation permanently affixed and that clothing is not available to the general public;

(c)	the employer strictly and consistently enforces the compulsory nature of the item; and

(d)	the clothing is used solely for work (otherwise the claim may need to be apportioned between private use and work use).

78.	Example: Ronald is a service station attendant who wears on duty a green monogrammed shirt supplied by his employer. His other clothing worn at work is conventional clothing. It is compulsory for him to wear the shirt at work. The shirt is not available for use by, or for sale to, the public. Ronald can claim a deduction for his costs of laundering and maintaining the shirt.

Non-compulsory uniform/wardrobe

79.	Non-compulsory uniform/wardrobe is defined in subsection 51AL(4) as a set of one or more items of clothing (other than occupation specific clothing and protective clothing), where:

(a)	the items of clothing, when considered as a set, distinctively identify the wearer as a person associated, directly or indirectly, with the employer; and

(b)	either:

(i)	the employer does not have an express policy to the effect that the wearing of the set of clothes is compulsory except in special circumstances; or

(ii)	the employer has such a policy but does not consistently enforce it.

80.	A deduction is not allowable for a non-compulsory uniform/wardrobe expense incurred after 31 August 1993 by an employee or a recipient of prescribed payments, except where the clothing designs have been entered on the Register of Approved Occupational Clothing (subsection 51AL (2)) and the tests in subsection 51(1) are met.

81.	Only those costs incurred after the date of registration can be claimed as an allowable deduction.

82.	An application for entry of a clothing design on the Register must be made by an employer to the Department of Industry, Science and Tourism ("DIST"). Clothing which may be registered includes accessories such as belts, ties, scarves and hats. Underwear, short socks, stockings or shoes cannot be registered.

83.	The Secretary of DIST will not approve a clothing design unless the clothing meets the criteria set out in the DIST guidelines. These guidelines are available from DIST to interested persons without charge.

Laundry and maintenance

84.	In Case U95 the Tribunal commented at 579:

"The purchase and wearing of clothing as well as its cleaning and maintenance is therefore a necessary and personal expense which would normally be classified as being an expense of a private and domestic nature.

There are occasions, however, when because of the relationship between expenditure on clothing and the gaining and producing of income, the private and domestic character of that expenditure is converted instead to an employment or business character."

85.	It is noted that Gummow J in FC of T v. Edwards ATC at 5169; ATR at 301 questioned whether the essential character of the dry cleaning costs in that case was sufficiently relevant to the revenue earning activity of the taxpayer. Nevertheless, on balance, it is considered that generally a deduction is allowable for the cost of cleaning and maintaining clothing and footwear provided the clothing is used for income producing purposes and the laundry, dry cleaning or maintenance expense is occasioned by the performance of those duties: see Case R80 at 390-391 cited in Case V79 at 553-554.

Substantiation rules

86.	To be an allowable deduction, the expenditure on clothing must also satisfy the substantiation provisions of Division 2 of Schedule 2B to the ITAA.

87.	To claim a deduction, an employee must have written evidence of the work expense (including clothing, laundry and cleaning) where the total work expenses exceed $300.

88.	An exception relates to laundry expenses where a maximum of $150 may be claimed without written evidence, provided it is incurred, even where work expenses total more than $300. The Commissioner accepts that a reasonable estimate of laundry costs may be used provided the claim for laundry costs does not exceed $150.

Capital exclusion

89.	Generally, the initial purchase cost of clothing is not a capital expense. This is because the benefit of the expenditure will usually not endure beyond several years.

90.	An exception to this general rule could be found, for example, with the costs of judges' robes or barristers' silk robes (Case 625 (1946) 14 SAfTC 528). In such a case, the initial purchase cost of the robe itself is significant and the average life of the robe has been estimated at between five and ten years. Accordingly, it can be depreciated under section 54 of the ITAA.

ALTERNATIVE VIEWS

•	It has been suggested that the cost of all clothing acquired and worn at work is deductible. However, it is clear from the Full Federal Court in Edwards' case FCR at 322; ATC at 4259; ATR at 90 that this circumstance alone is not sufficient.

•	Similarly, it has been suggested that the cost of purchasing stockings, socks and shoes used solely at work is deductible to taxpayers generally. However, in Mansfield's case Hill J noted that the shoes were worn as part of the uniform, and that they were too large for ordinary use and subject to regular scuffing. As for the stockings, Hill J took the view, not without some doubt, that the connection with employment was to be found in the fact that the pantyhose were part of a compulsory and distinctive uniform that was strictly enforced. It was this feature that differentiated the hosiery from ordinary clothing.

91.	The view has been expressed that expenditure incurred on additional conventional clothing worn at work is an allowable deduction. Reliance is placed on Board of Review and Tribunal decisions that refer to "the abnormal expenditure on conventional clothing" test, e.g., Case A45, and on the reference to additional expenditure in Edwards' case. However, it is clear that "such a test cannot replace either a statutory expression or judicially expressed statements of principle in relation to such an expression": Case V79 ATC at 552; ATR at 3507. Even in FC of T v. Edwards ATC at 5168; ATR at 299, Gummow J observed:

"Thus in the present case, in its reasons the AAT referred to the application in the past by it of two "tests" as a guide for determining whether expenditure on clothing is allowable under sub-s. 51(1). The first was the "necessary and peculiar" test (e.g. uniforms required by the employer) and the second the "abnormal expenditure on conventional clothing" test (e.g. the wardrobe of a mannequin). However, as the AAT went on to point out, these "tests" have fallen into disfavour before it and the position which now applies is that such "secondary" criteria tend only to obscure the application of s. 51. That, of course, throws one back to the search, among other things, for the "essential character" of the outgoing."

92.	In Edwards' case, the Court pointed to the significance of the fact that the amount claimed for expenditure was for "additional clothing" over and above the taxpayer's personal requirements of modesty, decency and warmth. Weight was also given to the fact that there were additional changes of clothes in the working day over and above the first set of clothes, and that the clothing was qualitatively different from that which she wore in ordinary life. The Full Federal Court noted at FCR 323; ATC 4259; ATR 91: "the decision turns on its own special facts". As Hill J pointed out in Mansfield's case, Edwards' case is at one end of the deductibility spectrum of what might be deductible in contrast with the distinctive and compulsory uniforms which are at the other end.

•	No doubt the additional nature of the clothing is a relevant factor to be taken into account. However, as was explained by Hill J in Mansfield's case at ATC 4007; ATR 374, to seize upon the reference to "additional clothing" in Edwards' case as serving the private purposes of modesty, decency and warmth is to elevate a proposition of fact to a proposition of law.

•	As is illustrated in Case 48/94, the "additional clothing" factor will not be sufficient where the income earning activities do not turn upon the wearing of the additional clothes and where they are not specific and suited only for the income earning activity.

93.	In this Ruling, a view is sometimes taken that a particular expense is not likely to be regarded as deductible because it is not sufficiently connected to the income earning activities and that its essential character is private in nature. As noted by Wilcox J in Cooper's case at ATC 4404-4405; FCR 187-188; ATR 1625-1626 in addressing this issue:

"Everything depends upon the ambit of the facts selected for inclusion in the description of essential character ...

... The whole of the relevant circumstances must be looked at in order to determine whether the expenditure was incurred in gaining assessable income."

This cautionary note is relevant when considering the Examples contained in this Ruling.

CROSS REFERENCES TO PREVIOUS RULINGS FOR EXAMPLES USED IN THIS RULING

94.

Paragraph 62 example:	see paragraph 69 of TR 95/13 and paragraph 28 of TR 94/22.

Paragraph 63 example:	new example with reference to Cases 48/94, V68 and V143.

Paragraph 64 example:	new example that reflects paragraph 2 of TD 93/109.

Paragraph 65 example:	see paragraph 30 of TR 94/22.

Paragraph 69 example:	new example to show the effect of paragraph 70 of TR 95/15.

Paragraph 88 example:	see paragraphs 32 and 33 of TR 95/15.

Commissioner of Taxation

18 June 1997

NOTICE OF PARTIAL WITHDRAWAL

Taxation Ruling TR 97/12

Income tax and fringe benefits tax: work related expenses: deductibility of expenses on clothing, uniform and footwear

FOI status: may be released

Taxation Ruling TR 97/12 is partially withdrawn with effect from today by omitting paragraphs 27, 28 and 70 to 78.

A number of paragraphs in the Ruling deal with the circumstances where expenditure on work related clothing, uniform and footwear, including associated maintenance costs, are deductible as a work expense. Those matters have been incorporated into Draft Taxation Ruling TR 2003/D4, which issued today.

TR 2003/D4 consolidates into the one taxation ruling the various taxation rulings and determinations previously issued in relation to the deductibility of items used for protection against illness or injury in the course of earning assessable income.

Commissioner of Taxation

11 June 2003

ADDENDUM

Taxation Ruling: TR 97/12

Income tax and fringe benefits tax: work related expenses: deductibility of expenses on clothing, uniform and footwear

FOI status: may be released

This Addendum amends Taxation Ruling TR 97/12 as follows:

At Paragraph 80

In the last sentence, replace "Taxation Ruling IT 2641" with "Taxation Determination TD 1999/62".

Commissioner of Taxation

20 January 1999


Taxation Ruling TR 97/7 Meaning of 'incurred'
Taxation Ruling TR 97/7 – This incorporates addendum TR 97/7A

Income tax: section 8-1 – meaning of "incurred" – timing of deductions

NOTE:
This Ruling, to the extent that it is capable of being a "public ruling" in terms of Part IVAAA of the Taxation Administration Act 1953, is a public ruling for the purposes of that Part. Taxation Ruling TR 92/1 explains when a Ruling is a public ruling and how it is binding on the Commissioner.

Contents:

What this Ruling is about

Background

Ruling

Date of effect

Explanations

Presently existing liability

Defeasible

Payments made in the absence of a presently existing pecuniary liability

Accounting practice

Properly referable

Alternative views

Examples

WHAT THIS RULING IS ABOUT

1.	This Ruling sets out the views of the Australian Taxation Office (ATO) on whether the word "incurred", in section 8-1 of the Income Tax Assessment Act 1997 (ITAA), has the same meaning for taxpayers who return their income on a receipts basis as it does for those taxpayers who generally return their income on an earnings basis. The Ruling does not apply to the use of the words "incur" or "incurred" in other parts of the ITAA, for example, section 25-10.

"1A. Sections 8-1 and 25-10 of the ITAA, to which this Ruling refers, express the same ideas as subsection 51(1) and section 53, respectively, of the Income Tax Assessment Act 1936."

Class of person/arrangement

2.	It applies to all taxpayers who claim a loss or outgoing under section 8-1 of the ITAA, whether or not the taxpayer accounts for income on a cash receipts or earnings basis.

BACKGROUND

3.	To qualify for deduction under section 8-1 a loss or outgoing must have been incurred.

Incurred

4.	There is no statutory definition of the term "incurred".

5.	As a broad guide, you incur an outgoing at the time you owe a present money debt that you cannot escape. But this broad guide must be read subject to the propositions developed by the courts, which are set out immediately below.

6.	The courts have been reluctant to attempt an exhaustive definition of a term such as "incurred". The following propositions do not purport to do this, they help to outline the scope of the definition. The following general rules, settled by case law, assist in most cases in defining whether and when a loss or outgoing has been incurred:

(a)	a taxpayer need not actually have paid any money to have incurred an outgoing provided the taxpayer is definitively committed in the year of income. Accordingly, a loss or outgoing may be incurred within section 8-1 even though it remains unpaid, provided the taxpayer is "completely subjected" to the loss or outgoing. That is, subject to the principles set out below, it is not sufficient if the liability is merely contingent or no more than pending, threatened or expected, no matter how certain it is in the year of income that the loss or outgoing will be incurred in the future. It must be a presently existing liability to pay a pecuniary sum;

(b)	a taxpayer may have a presently existing liability, even though the liability may be defeasible by others;

(c)	a taxpayer may have a presently existing liability, even though the amount of the liability cannot be precisely ascertained, provided it is capable of reasonable estimation (based on probabilities);

(d)	whether there is a presently existing liability is a legal question in each case, having regard to the circumstances under which the liability is claimed to arise;

(e)	in the case of a payment made in the absence of a presently existing liability(where the money ceases to be the taxpayer's funds) the expense is incurred when the money is paid.

7.	For the purposes of section 8-1 it is sometimes not enough that a loss or outgoing has been incurred. The outgoing must also be properly referable to the year of income in which the deduction is sought – refer Coles Myer Finance Pty Ltd v. FC of T 93 ATC 4214 at 4222; (1993) 25 ATR 95 at 105 (Coles Myer). The matter of the taxpayer's accounting system may be indicative, but not determinative of the income year to which an outgoing is properly referable.

RULING

Accounting practice

8.	The principles set out above relating to the interpretation of the word "incurred" derive from cases where taxpayers operated on an earnings basis. However, the cases have not generally sought to limit the meaning of the word "incurred" by reference to the nature of a taxpayer's accounting system.

9.	In these circumstances, subject to the propositions outlined above, a taxpayer who uses a cash receipts based accounting system need not necessarily have paid or borne a loss or outgoing in order for that loss or outgoing to have been "incurred" for the purposes of section 8-1.

DATE OF EFFECT

10.	The ATO recognises that there is a difference of opinion about the meaning of "incurred" for taxpayers who use a cash based accounting system, and who do not keep elaborate books of account. This Ruling explains that, in certain circumstances, such taxpayers are able to claim relevant expenditure prior to the outgoing actually having been paid.

11.	However, many small business taxpayers use a cash received and expenditure paid basis both for their accounts and for taxation purposes. Additionally, many non-business taxpayers use a cash received and cash paid basis for taxation purposes: few maintain an elaborate accounting system.

12.	It has long been established practice, where the receipts basis is the appropriate method to account for income, to accept the returns lodged by taxpayers, notwithstanding that both income and expenses have been accounted for on a cash receipts basis. However, we have insisted that this basis should be adopted consistently year by year, and that there be no doubling up of deductions. That is, you cannot claim an unpaid expense in one year on the basis that it has been incurred, and then claim again in a subsequent year when it is paid.

•	In the interests of practical administration, there is no intention to disturb this practice – refer FC of T v. Solling; FC of T v. Pepper 85 ATC 4518 at 4538; (1985) 16 ATR 753 at 776-777.

•	If taxpayers now want to claim deductible outgoings incurred but not claimed in a previous year, they can seek amendment(s) of their assessment(s), subject to the four year limitation set by subsection 170(3) of the Income Tax Assessment Act 1936 (refer Taxation Ruling IT 2613). Alternatively, as a transitional measure to avoid unnecessary compliance costs, where a taxpayer has incurred a deductible outgoing in the 1995/96 year, but not claimed that deduction in the return because it was unpaid, the Commissioner will accept a claim for the deduction when it is actually paid in the 1996/97 year, in addition to other outgoings actually incurred in the 1996/97 year. A taxpayer who adopts this approach in 1996/97, or seeks amendments as outlined above, whether in 1996/97 or later, is expected to continue to claim deductions on this same basis for subsequent years.

EXPLANATIONS

13.	It is often the case that an outgoing will be both incurred and paid in the same year of income, and no issue of timing arises. However, the point in time when an outgoing may be taken to be deductible becomes an issue of practical concern to taxpayers who have unpaid liabilities at year end or outgoings which relate to two or more income years.

Presently existing liability

14.	A loss or outgoing may be incurred for the purposes of section 8-1 even though no money has actually been paid out. In W Nevill & Company Ltd v. FC of T (1937) 56 CLR 290 at 302 it was said:

"the word used is "incurred" and not "made" or "paid". The language lends colour to the suggestion that, if a liability to pay money as an outgoing comes into existence, [the section is satisfied] even though the liability has not been actually discharged at the relevant time ... it is only the incurring of the outgoing that must be actual; the section does not say in terms that there must be an actual outgoing – a payment out."

•	(See also New Zealand Flax Investments Ltd v. FC of T (1938) 61 CLR 179 at 207 (New Zealand Flax); FC of T v. James Flood Pty Ltd (1953) 88 CLR 492 at 506 (James Flood); Nilsen Development Laboratories Pty Ltd & Ors v. FC of T (1981) 144 CLR 616 at 624 (Nilsen Development Laboratories); FC of T v. Firstenberg 76 ATC 4141 at 4148; (1976) 6 ATR 297 at 305.)

•	This proposition was recently confirmed by the High Court in FC of T v. Energy Resources of Australia Limited 96 ATC 4536; (1996) 33 ATR 52 (Energy Resources) when, quoting from James Flood, it said (ATC at 4539; ATR at 56):

"Section 51(1) "has been interpreted to cover outgoings to which the taxpayer is definitively committed in the year of income although there has been no actual disbursement".

15.	The liability must be "more than impending, threatened or expected" – refer New Zealand Flax (CLR at 207). "[W]hat is clearly necessary is that there should be a presently existing liability" – Nilsen Development Laboratories (CLR at 624). It is not a presently existing liability if it is contingent – refer James Flood (CLR at 506); Nilsen Development Laboratories (CLR at 207); Marbren Pty Ltd v. FC of T 84 ATC 4783 at 4788-4789; (1984) 15 ATR 1145 at 1152.

Defeasible

16.	A taxpayer can be completely subjected to a liability even though it is defeasible by others – refer Commonwealth Aluminium Corporation Ltd (77 ATC 4151 at 4161; (1977) 7 ATR 376 at 386).

17.	But, it is to be emphasised that the taxpayer must be definitively committed to the outgoing, even though it may be defeasible. A taxpayer who takes goods on approval for example could not be said to be definitively committed to their purchase.

Payments made in the absence of a presently existing pecuniary liability

18.	Generally, a deduction is allowable because a liability arises necessitating the payment of an expense. However, some payments are not necessitated by a presently existing pecuniary liability, and they are incurred only upon payment. Examples of such expenses include gifts, insurance premiums, licence renewals and motor vehicle registration fees – these payments are at the discretion of the taxpayer, if the taxpayer wants those benefits.

Accounting practice

•	The determination that an outgoing has been incurred depends on a jurisprudential analysis of whether there is a presently existing pecuniary liability, having regard to the terms of the contract and other arrangements giving rise to that liability, rather than a commercial view of the arrangements – refer James Flood (CLR at 506); Nilsen Development Laboratories (CLR at 624); and see also FC of T v. Citibank Ltd & Ors 93 ATC 4691 at 4699; (1993) 26 ATR 423 at 432-433 (Citibank Ltd & Ors); Ogilvy and Mather Pty Ltd v. FC of T 90 ATC 4836 at 4842; (1990) 21 ATR 841 at 848; Coles Myer (ATC at 4221; ATR at 103).

•	The reliance on a jurisprudential analysis, and the place of accounting evidence in determining whether an outgoing has been incurred were discussed in Citibank Ltd & Ors by Hill J who said (ATC at 4699; ATR at 432):

•	"While in the area of s.51(1) of the Act the courts have, as was pointed out in Coles Myer Finance Ltd v Federal Commissioner of Taxation ... adopted a legal or jurisprudential analysis rather than a commercial view, this does not mean that accounting evidence has been seen to be irrelevant, the true position being, as Barwick CJ, Kitto and Taylor JJ said in the Arthur Murray case ..., speaking of the decision of the High Court in Federal Commissioner of Taxation v. James Flood Pty Ltd ...:

"The Court there held that, while commercial and accountancy practice may assist in ascertaining the true nature and incidence of an item as a step towards determining whether the item answers the test laid down in the Act for allowable deductions, it cannot be substituted for the test."

Refer also Arthur Murray (NSW) Pty Ltd v. FC of T (1965) 114 CLR 314 at 320; Coles Myer (ATC at 4221; ATR at 103).

19.	Hill J then went on to note (ATC at 4699; ATR at 432):

"Accounting evidence may also have particular significance in determining the timing of a deduction, that is to say not whether it is incurred, but whether it is incurred in respect of a year of income."

That is, he does not consider accounting principles as relevant to the question whether an outgoing has been incurred, but only as to what year of income it is to be treated as being properly referable.

20.	Although the cases which raise the meaning of the word "incurred" involve the ascertainment of taxable income on an earnings basis, there is no suggestion in those cases that the general principles necessarily differ where different accounting methods are used.

Properly referable

21.	A determination of the year of income to which the loss or outgoing is properly referable is required at least in relation to cases involving financing transactions and liabilities which accrue either daily or periodically (and perhaps more broadly) – refer Taxation Ruling TR 94/26.

22.	As is illustrated by Coles Myer, Citibank Ltd & Ors and Australian and New Zealand Banking Group Limited v. FC of T 94 ATC 4026; (1994) 27 ATR 559, accounting principles, though never determinative, may indicate the time during which the benefit from incurring the loss or outgoing is put to profitable advantage.

Alternative views

Incurred equals paid

23.	An alternative view is that there is a common measure under ordinary principles for incomings and outgoings. Only with a common measure can you have a logically coherent measurement of taxable income. For example, it would be inappropriate to measure receipts in Australian dollars but outgoings in US dollars. It is equally inappropriate, the argument runs, to measure incomings on a cash receipts basis and outgoings on an earnings basis.

24.	A symmetrical approach provides a logical measurement of your taxable income. If what comes in is assessable to you when it comes in, then what goes out is only deductible when it goes out. On the other hand, if what comes in is assessable to you when it has accrued, even if not yet received, then outgoings made to gain that amount should be deductible when you are committed to paying them, even if you haven't paid them yet.

25.	If incomings are measured on one accounting basis and outgoings on another, there is no clear idea of what you are seeking to measure. On the other hand, under a consistent accounting basis, there is a much clearer conception of taxable income. For example, if a cash basis applies to incomings and outgoings, taxable income is the excess of revenue receipts over revenue payments.

26.	This alternative view seems to be the position under English income tax law (see Inland Revenue Commissioners v. Morrison (1932) SC 638 at 642; 17 TC 325 at 330). There is support for the alternative view in R W Parsons, Income Taxation in Australia (1985) Law Book Co at para 11.174 and in Case 49/94 94 ATC 429 at 430; AAT Case 9749 (1994) 29 ATR 1138 at 1140, and Case H46 (1957) 8 TBRD. The Asprey Committee report also took this view (Taxation Review Committee, Full Report, 31 January 1975, para 8.16).

27.	However, we think that the better view is that "incurred" has a consistent meaning in the income tax law and does not vary according to the accounting treatment of the corresponding item of income. There are several reasons for this conclusion.

28.	First, from a strictly legal viewpoint, the several judicial explanations of what "incurred" means do not say that the meaning varies according to the proper accounting treatment of the corresponding item of income, or when the income is derived under the law.

29.	Secondly, if "incurred" did mean different things in different circumstances, there would often be significant practical difficulties in calculating the amount of the loss or outgoing incurred. For example, if an outgoing related indiscriminately to different income items, it would be difficult to know how much was incurred immediately and how much only on payment.

30.	Thirdly, the argument for a coherent logical measurement is theoretical only. The law already departs from that position by providing a range of specific timing rules for specific items of income (e.g., section 44 assesses a dividend when paid to a taxpayer and not when declared even though many taxpayers receiving a dividend would account for their other income on an earnings basis and claim expenses related to their dividend income when the relevant liabilities arise, rather than when they were paid). The law also departs from that position for items of ordinary income. For example, interest is accounted for by most taxpayers as income on a cash receipts basis (which includes when it is credited to the taxpayer's bank account), even for taxpayers whose main income is accounted for on an earnings basis.

Properly referable

31.	This alternative view proceeds on the basis that the law on whether a taxpayer has incurred an outgoing applies in the same way to all taxpayers. But, it also suggests that the outgoings accounted for on a cash based accounting system are only properly referable to the year in which they are actually paid.

32.	It is said that accounting evidence is relevant to determining the year to which an outgoing is properly referable, and that for a cash based accounting system the evidence provided by that system of accounting points to the year of payment.

33.	However, the decision in Coles Myer does not advocate a literal adoption of what the accounting records say. It proceeds, in the ATO's view, on the basis that the accounting records may show the period of time during which the benefit from incurring the outgoing is put to profitable advantage, and therefore the extent to which the outgoing is incurred in the relevant year for the purpose of producing assessable income in terms of section 8-1.

EXAMPLES

Example 1

34.	Marilyn is a Government employee. However, she also operates a small sales business from her home in the evening. She has a telephone dedicated exclusively to that business. On 28 June 1997 Marilyn receives a telephone account for her business phone, which gives rise to a presently existing liability. She pays the account on 4 July 1997. Marilyn has incurred the outgoing in the 1996/97 year as it is properly referable to that year.

Example 2

35.	Dolores is employed by a tax accountant and is studying tax law. She orders a taxation loose-leaf series from a commercial publisher for herself on 15 June 1997, which arrives on 27 June 1997. The books are sent on the basis that they are on 10 days approval from date of arrival, and can be returned if not wanted. Assuming that this outgoing is deductible, it will not be incurred until Dolores finally commits to the outlay – in this case that will be when the books are not returned at the expiration of the 10 day approval period or when payment is made, whichever occurs first.

36.	If, however, Dolores had ordered the loose-leaf series for her employer and endorsed and forwarded the invoice for payment in the usual manner of the business on 27 June 1997, the outgoing would be incurred by the tax accountant in the 1996/97 year.

Example 3

37.	Sue has a sickness insurance policy that will pay a weekly benefit and is renewable in advance each July. She receives the renewal notice each June and pays it in July. The outgoing will be incurred in July when the premium is paid as the payment is voluntary and made in the absence of a presently existing pecuniary liability.

Example 4

38.	Bob is an employee superannuation expert who has a contract with a commercial publisher to supply him with a loose-leaf service. He receives the annual invoice for the next 12 months service on 12 June 1997 and pays it by direct debit over the next 12 months commencing 15 July 1997. Notwithstanding that an annual invoice is received, Bob may cancel the service at any time, and the direct debiting will cease. The outgoing will be incurred when each direct debit is made.

Example 5

39.	Vanden Pty Ltd staff superannuation fund, which is an internally managed superannuation fund with less than 5 members, operating on a receipts basis of accounting, receives invoices for the following expenses on 28 June 1997 for services provided to it in May and June 1997:

•	trust deed amendment at $300

•	ISC lodgment fees at $200

•	audit expenses at $900.

The invoices are not paid until 10 July 1997. Vanden Pty Ltd staff superannuation fund has incurred these outgoings in the 1996/97 year.

Example 6

40.	Fiona, a Chartered Accountant, carries on business as a sole practitioner with 6 full-time staff, none of whom is professionally qualified. Fiona takes sole professional responsibility for the practice and signs all statutory certificates. She returns her income on a receipts basis. In June 1997 she receives invoices for a number of expenses, including: insurance renewal, telephone, stationery and day to day motor vehicle costs (for example, petrol and oil). The invoices are all paid in July 1997. Fiona has incurred the outgoings in relation to the telephone, stationery and day to day motor vehicle costs, in the 1996/97 income year. The insurance payment is incurred when it is paid in the 1997/98 income year.

Example 7

41.	Dianna is an employee working for Dial-A-Label Manufacturing Company Pty Ltd and is a member of a work union. She has gone through hard times and currently her union fees are in arrears in the amount of $244 as at 30 June 1997. She does not pay the union fees until the commencement of August 1997 on a half yearly instalment basis. On the basis that Dianna is definitively committed to paying the fees, she has incurred them in the 1996/97 income year. However, if she is not definitively committed to paying the fees, for example, she disputed the liability, she will not have incurred the outgoing until it is actually paid – (refer, for example, Softwood Pulp & Paper Ltd v. FC of T 76 ATC 4439; (1976) 7 ATR 101).

Commissioner of Taxation

23 July 1997 (Addendum)


Taxation Ruling TR 97/23 Deductions for repairs
Taxation Ruling TR 97/23

Income tax: deductions for repairs

Contents:

What this Ruling is about

Previous Rulings

Ruling

Meaning of the word "repairs"

Repair expenditure of a capital nature

Distinction between repair and either renewal or reconstruction – what is meant by the "entirety"

Distinction between a repair and an improvement

Expenditure to remedy defects, damage or deterioration in existence at the date of acquisition (initial repairs)

Some specific issues in construing section 25-10

Expenditure for repairs must be "incurred"

Expenditure for repairs before property is held, etc., for income purposes

Expenditure for repairs to property previously used by taxpayer for non-income producing purposes

Expenditure for repairs to property used for the purpose of providing non-deductible entertainment

Expenditure for repairs to property used only partly for income producing purposes during a year of income

Date of effect

Explanations

Examples

WHAT THIS RULING IS ABOUT

Class of person/arrangement

1.	This Ruling explains the circumstances in which expenditure incurred by a taxpayer for repairs is an allowable deduction under section 25-10 of the Income Tax Assessment Act 1997 ("the ITAA 1997") – formerly contained in section 53 of the Income Tax Assessment Act 1936 ("the ITAA 1936"). It consolidates most prior Taxation Rulings and Taxation Determinations on repairs. The Ruling deals with:

(a)	the meaning of the word "repairs" in subsection 25-10(1), and in the former subsection 53(1);

(b)	repair expenditure of a capital nature;

(c)	the distinction between repair and either renewal or reconstruction – what is meant by an "entirety";

(d)	the distinction between a repair and an improvement;

(e)	expenditure to remedy defects, damage or deterioration in existence at the date of acquisition of property (that is, an initial repair);

(f)	some specific issues in construing section 25-10 and the former section 53;

(g)	expenditure for repairs before property is held, occupied or used for income producing or business purposes;

(h)	expenditure for repairs to property previously used for non-income producing purposes;

(i)	expenditure for repairs to property used for the purpose of providing non-deductible entertainment; and

(j)	expenditure for repairs to property used only partly for income producing purposes during a year of income.

2.	The following expressions in section 25-10 and the former section 53, in column 1, are abbreviated at times in this Ruling as indicated in column 2:

Expression in section 25-10 (column 1)	Abbreviation in this Ruling (column 2)
"premises (or part of premises), plant, machinery, tools or articles"	"property"
"held or used"	"held, etc.,"
"purpose of producing assessable income"	"income purposes"
Expression in section 53 (column 1)	Abbreviation in this Ruling (column 2)
"premises, or part of premises, plant, machinery, implements, utensils, rolling stock or articles"	"property"
"held, occupied or used"	"held, etc.,"
"purpose of producing assessable income, or in carrying on a business for that purpose"	"income purposes"
3.	In this Ruling, a reference to:

•	"section 8-1" means, as appropriate, "section 8-1 of the ITAA 1997 or the former subsection 51(1) of the ITAA 1936";

•	"section 25-10" means, as appropriate, "section 25-10 of the ITAA 1997 or the former subsection 53(1) of the ITAA 1936";

•	"section 42-15" means, as appropriate, "section 42-15 of the ITAA 1997 or the former subsection 54(1) of the ITAA 1936";

•	"the old law" means "the former subsection 53(1) of the ITAA 1936"; and

•	"the new law" means "section 25-10 of the ITAA 1997".

4.	In this Ruling, the expression "initial repair" refers to a repair by a taxpayer that remedies some defect in property or makes good damage to, or deterioration of, property being a defect, damage or deterioration:

(a)	existing when the property was acquired from another person (whether by purchase, lease or licence); and

(b)	not arising from the operations of the taxpayer who incurs the repair expenditure.

5.	A repair is not an "initial repair" simply because it is the first repair made after property is acquired. It is an "initial repair" if repair is due when the property is acquired in the sense that the property has defects, damage or deterioration or is not in good order and suitable for use in the way intended.

6.	This Ruling does not consider in detail the circumstances in which a loss or outgoing for repairs may be deductible under the general deduction provision (section 8-1) or under the depreciation deduction provision (section 42-15). Repairs may include some maintenance work but only if it is done in conjunction with work that is a repair. Repairs may not involve only maintenance work. If non-capital maintenance work is not a repair, it may be deductible under section 8-1. If expenditure on maintenance work is of a capital nature, it may be depreciable under section 42-15.

7.	Section 8-10 of the ITAA 1997 provides a rule against double deductions. If expenditure on repairs is potentially deductible under both sections 25-10 and 8-1, section 8-10 provides that you can deduct only under the provision that is most appropriate. Which provision is the most appropriate is an objective question. In our view, if both sections 25-10 and 8-1 allow you to deduct the same amount, section 25-10, being the provision that deals specifically with repair expenditure, is the most appropriate provision.

8.	Under the old law, if expenditure on repairs is potentially deductible under both subsections 53(1) and 51(1), we consider it is more "appropriate" in exercising the discretion in subsection 82(1) (no double deductions) that the deduction be allowed under subsection 53(1) rather than 51(1): see Case Q98 83 ATC 487 at 489; Case 26 (1983) 27 CTBR (NS) at 160.

9.	The Ruling does not deal with the question whether expenditure for repairs after property ceases to be held, occupied or used for income producing or business purposes is deductible under section 25-10 or under the old law. Taxation Ruling IT 180 addresses this question for the old law. Because section 25-10 expresses the same ideas as the old law, IT 180 also applies to the new law: Taxation Ruling TR 97/16, paragraph 17.

10.	The Ruling also does not deal with the question whether expenditure for repairs may be included in the cost base of an asset for the purposes of the capital gains provisions, nor with the depreciation and other capital allowance provisions in the income tax law.

PREVIOUS RULINGS

11.	This Ruling replaces Taxation Rulings IT 153, IT 2089 (which was withdrawn on 3 September 1997), IT 2116, IT 2149, IT 2183, IT 2587 and Taxation Determination TD 92/180. These Rulings and the Determination are now withdrawn.

RULING

Meaning of the word "repairs"

NOTE:
See explanation at paragraphs 83 to 107 and examples at paragraphs 162 and 163 of this Ruling

Context of the word "repairs" in section 25-10

12.	In its context in section 25-10, the word "repairs" relates to work done to "premises (or part of premises), plant, machinery, tools or articles". The word "repairs" appeared in a similar context in the old law. While the things specified in the section cover a wide range of property, they do not extend to all classes of property, e.g., intangible property.

Ordinary meaning of "repairs"

13.	The word "repairs" has its ordinary meaning. It ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired (being defects, damage or deterioration in a mechanical and physical sense) and contemplates the continued existence of the property.

14.	Work done to prevent or anticipate defects, damage or deterioration (in a mechanical or physical sense) in property is not in itself a "repair" unless it is done in conjunction with remedying or making good defects in, damage to, or deterioration of, the property.

15.	Repair for the most part is occasional and partial. It involves restoration of the efficiency of function of the property being repaired without changing its character and may include restoration to its former appearance, form, state or condition. A repair merely replaces a part of something or corrects something that is already there and has become worn out or dilapidated. Works can fairly be described as "repairs" if they are done to make good damage or deterioration that has occurred by ordinary wear and tear, by accidental or deliberate damage or by the operation of natural causes (whether expected or unexpected) during the passage of time.

16.	To repair property improves to some extent the condition it was in immediately before repair. A minor and incidental degree of improvement, addition or alteration may be done to property and still be a repair. If the work amounts to a substantial improvement, addition or alteration, it is not a repair and is not deductible under section 25-10.

Restoration of the efficiency of function of the property

17.	"Repairs", in its context in section 25-10, is directed to the holding or use of property for income purposes. Under the old law, the property had to be "held, occupied or used" for income purposes. Holding or use of property for this purpose indicates that, in determining whether work done to property constitutes "repairs", it is more significant to consider whether the work restores the efficiency of function of the property without changing its character than it is to consider whether the appearance, form, state or condition of the property is exactly restored.

Need for exercise of judgment

18.	We recognise that in some cases practical difficulty may be involved in deciding, for the purpose of deductibility of repair expenditure under section 25-10, whether the property is returned to its original efficiency of function by particular work done to it. We accept that there can be sound commercial and other reasons for doing work on property to improve its appearance, condition or functional efficiency. The question is necessarily one of fact and degree. It requires a careful weighing of the various factors discussed in this Ruling and exercising judgment in the light of decided case law and practical commercial experience. If a taxpayer is experiencing practical difficulty in deciding whether particular repair expenditure is deductible, he or she can seek a private binding ruling from the Australian Taxation Office ("the ATO").

Maintenance work – whether "repair"

19.	Work done partly to remedy or make good defects, damage or deterioration does not cease to be a repair if it is also done partly – even largely – to prevent or anticipate defects, damage or deterioration (in a mechanical or physical sense) in property or in rectifying defects in their very early stages. Repairs are not confined to rectifying defects, damage or deterioration that have already become serious. Work done to property not in need of repair, however, is not repair work and any expenditure for the work in these circumstances is not deductible under section 25-10.

20.	Some kinds of maintenance work are "repairs" in terms of section 25-10, for example, painting plant or business premises to rectify existing deterioration and to prevent further deterioration. Other kinds of maintenance work, such as oiling, brushing or cleaning something that is otherwise in good working condition and only requires attention to prevent the possibility of its going wrong in the future, are not "repairs" in terms of the section . Expenditure on the latter kind of maintenance work may be an allowable deduction under section 8-1.

Question of fact and degree

21.	What is a "repair" for the purposes of section 25-10 is a question of fact and degree in each case having regard to the appearance, form, state and condition of the particular property at the time the expenditure is incurred and to the nature and extent of the work done to the property.

22.	If work done to property goes beyond what is a "repair" in terms of section 25-10, any expenditure for the work is not deductible. The work may go beyond "repairs" in terms of the section if it:

(a)	changes the character of the property; or

(b)	does more than restore its efficiency of function.

(The cost of this work may be deductible under other provisions of the income tax law, e.g., section 8-1 or section 42-15 or Division 43 of the ITAA 1997 (or the former Division 10C or 10D of Part III of the ITAA 1936).)

Work done solely to meet requirements of regulatory bodies

23.	To determine whether work done to meet requirements of regulatory bodies, or to conform with their standards, constitutes "repairs" for the purposes of section 25-10, it is necessary to consider the general principles and the various factors discussed in this Ruling.

24.	Expenditure on work that modifies property to satisfy regulatory requirements is allowable under section 25-10 as repair expenditure only if the work:

(a)	remedies or makes good a defect in, damage to, or deterioration (in a mechanical or physical sense) of, property; and

(b)	restores the efficiency of function of the property; and

(c)	does not produce a new and different function for the property nor add to the property a function that it did not previously have.

25.	The expenditure must not be of a capital nature, e.g., an improvement.

Expenditure to control health risks from dangerous substances

26.	Work done to property in controlling health risks associated with the use of dangerous substances (such as asbestos, chloroflurocarbons ("CFCs"), chromium, dioxin, cyanide, pesticides and arsenic) does not qualify as a "repair" for the purposes of section 25-10 unless the work remedies or makes good defects in, damage to, or deterioration (in a mechanical or physical sense) of, the property.

27.	An example of expenditure that is not deductible as a repair is the cost of removing asbestos insulation from factory walls (if the insulation is not in need of repair) and replacing it with modern insulation material. This work does not constitute the rectification of a defect in a mechanical or physical sense as envisaged by section 25-10. The asbestos insulation functions efficiently as insulation. It is being replaced because of the health risk it might pose to factory occupants, not to "repair" the factory in the ordinary sense of the word. The costs, if incurred on or after 19 August 1992, are deductible under subsection 82BK(1) of the ITAA 1936 as allowable environmental protection expenditure.

28.	Another example of costs that are not deductible under section 25-10 is the cost of removing CFC gases from air conditioning plant and replacing them with non-ozone depleting gases. This work does not remedy any defect (in a mechanical or physical sense) in the holding, etc., of the air conditioning plant for income purposes, even though it is beneficial to public health. The costs, if incurred on or after 19 August 1992, are deductible under subsection 82BK(1) of the ITAA 1936 as allowable environmental protection expenditure.

29.	Expenditure to control health risks associated with the use of dangerous substances that is not deductible under section 25-10 may be deductible under section 8-1 or Subdivision CA of Division 3 of Part III of the ITAA 1936.

30.	The provisions of Subdivision CA (comprising sections 82BH to 82BR of the ITAA 1936) allow a deduction for expenditure, including expenditure of a capital nature, incurred on or after 19 August 1992 by a taxpayer carrying on eligible environmental protection activities. These activities are the preventing, combating or rectifying pollution (which here means contamination of the environment by harmful or such potentially dangerous substances as asbestos and CFCs) in the circumstances specified in paragraph 82BM(1)(a) of the ITAA 1936, and the treating, cleaning up, removing or storing of waste in the circumstances specified in paragraph 82BM(1)(b) of that Act. The environmental protection provisions are provisions of last resort. If a deduction for environmental protection activities is allowable under another provision of the Act, the expenditure is not deductible under Subdivision CA (see subsection 82BL(3) of the ITAA 1936).

Repair expenditure of a capital nature

NOTE:
See explanation at paragraphs 108 to 112 and example at paragraph 164 of this Ruling

In what situations is repair expenditure of a capital nature?

31.	Expenditure incurred for repairs is not deductible under section 25-10 if the expenditure is of a capital nature. Subsection 25-10(3) precludes a deduction for capital expenditure.

32.	Expenditure for repairs to property is capital expenditure if any of the following subparagraphs applies:

(a)	The guidelines for distinguishing between capital and revenue outgoings laid down by the courts for the purposes of the forerunners of section 8-1 in such cases as Sun Newspapers Ltd v. FC of T (1938) 61 CLR 337; (1938) 5 ATD 87 and Hallstroms Pty Ltd v. FC of T (1946) 72 CLR 634; (1946) 8 ATD 190 indicate that the expenditure is incurred in establishing, replacing or enlarging the profit-yielding (i.e., business) structure rather being a working or operating expense (see also paragraphs 111 and 134 of this Ruling).

(b)	The expenditure, rather than being for work done to restore the property by renewal or replacement of subsidiary parts of a whole, is for work that is a renewal in the sense of a reconstruction of the entirety (see paragraph 114 of this Ruling for what is meant by an "entirety"). The application of this distinction depends very much on what, in the circumstances of the case, is properly considered to be the relevant entirety (see also paragraph 115 of this Ruling).

(c)	If property bought for use as a capital asset in the buyer's business is not in good order and suitable for use in the way intended, expenditure incurred in putting it in order suitable for use is part of the cost of its acquisition and is of a capital nature (see also paragraphs 59 to 66 and 125 to 140 of this Ruling).

33.	The cost of replacing things such as free-standing stoves, refrigerators and furniture in premises used for income purposes is capital expenditure and is not deductible under section 25-10. (Note, however, that these items (if they are not permanent fixtures) are plant on which depreciation is allowable: see Taxation Ruling IT 242.)

34.	The cost of replacing items such as locks and exhaust fans, which are permanent fixtures installed in premises used for income purposes, is deductible as a repair under section 25-10 provided it is a replacement of a worn out unit by a new unit of a similar design that simply restores its efficiency of function and is not an improvement: see Case S27 (1966) 17 TBRD 163; (1966) 13 CTBR (NS) Case 56.

No deduction for "notional" repairs

35.	If work done goes beyond "repair" and the whole cost is capital expenditure, no amount is allowable as a deduction under section 25-10 for "notional" repairs, i.e., an amount it is estimated that repair work would have cost the taxpayer if the property had in fact merely been repaired (but see paragraphs 55 to 57 of this Ruling for the deductibility of repairs carried out at the same time as an improvement, and paragraphs 63 to 66 and 136 to 140 of this Ruling for dissecting or apportioning initial repair costs).

Distinction between repair and either renewal or reconstruction – what is meant by the "entirety"

NOTE:
See explanations at paragraphs 113 to 119 and examples at paragraphs 165 to 170 of this Ruling

Repair is distinct from renewal or reconstruction

36.	Repair is restoration by renewal or replacement of subsidiary parts of a whole. Renewal or reconstruction, as distinguished from repair, is restoration of the entirety.

What is an "entirety"?

37.	The term "entirety" is used by the courts in repair cases to refer to something "separately identifiable as a principal item of capital equipment" (Lindsay v. FC of T (1960) 106 CLR 377 at 385; (1960) 12 ATD 197 at 201), "a physical thing which satisfies a particular notion" (the Lindsay case at 106 CLR 384; 12 ATD 201) and "not necessarily the whole but substantially the whole of the [property] under discussion" (the Lindsay case at 106 CLR 383-4; 12 ATD 200). There is no one correct test for what is a subsidiary part and what is an entirety. Which approach to adopt depends on the facts in each particular case and, even then, the question is one to be answered in the light of all the circumstances it is reasonable to take into account (see Regent Oil Co Ltd v. Strick Inspector of Taxes [1965] 3 All ER 174 at 179; Brown (Inspector of Taxes) v. Burnley Football and Athletic Co Ltd [1980] 3 All ER 244 at 255).

38.	Property is more likely to be an entirety if:

•	the property is separately identifiable as a principal item of capital equipment; or

•	the thing or structure is an integral part, but only a part, of entire premises and is capable of providing a useful function without regard to any other part of the premises; or

•	the thing or structure is a separate and distinct item of plant in itself from the thing or structure which it serves; or

•	the thing or structure is a "unit of property" as that expression is used in the depreciation deduction provisions of the income tax law.

39.	Property is more likely to be a subsidiary part rather than an entirety if:

•	it is an integral part of some larger item of plant; or

•	the property is physically, commercially and functionally an inseparable part of something else.

40.	Examples of property that constitute an entirety are a slipway on the business site of a slip proprietor and ship repairer (the Lindsay case); a spectators' grandstand in a football stadium (the Burnley FC case); a bridge giving access to the driveway of a garage (Case B21 (1951) 2 TBRD 101); a substantially new race track (Case D64 72 ATC 390; (1972) 18 CTBR (NS) Case 33); and a factory drainage system comprising an underground system of concrete storm water drains (Case G5 (1955) 7 TBRD 29). Examples of property that do not constitute an entirety are the insulation and lining for a cool room (Case T14 (1968) 18 TBRD 67) and a window in a factory (even though the window is totally restored). Something that is part of a building, e.g., a roof or wall, is just that and no more. The building itself is the entirety.

41.	If a series of separate buildings collectively form and function as a single industrial undertaking or commercial complex, we take the view that each separate building in the undertaking or complex is an entirety in itself. We do not accept that the whole undertaking or complex is an entirety. As a result, the replacement of a complete building is not regarded as replacement of a subsidiary part of an entirety comprised of the undertaking or complex.

42.	Work done to a part of a building, though not amounting to a replacement or reconstruction of an entirety, may still be capital expenditure and not deductible, for example, because it amounts to an improvement: see (1953) 4 CTBR (NS) Case 9 and paragraphs 44 to 57 of this Ruling for the distinction between a repair and an improvement.

Progressive restoration can involve deductible repairs

43.	Although a reconstruction of the whole of property (e.g., fencing or a railway) is not a deductible repair, a series of restorations of the property could be undertaken over a period of time that progressively restores subsidiary parts of the whole. The progressive restoration would involve a series of deductible repair expenses. It is a question of fact and degree whether the work is the reconstruction of an entirety or a progressive restoration of subsidiary parts of the entirety over a period of time. Relevant considerations in drawing the line of demarcation here include:

•	the nature, scale and dimensions of the work in proportion to the nature, scale and dimensions of the property involved (the larger the work in comparison with the scale and dimensions of the property, the more likely a reconstruction of the entirety is involved);

•	the period of time over which the work is done (the shorter the period, the more likely a reconstruction of the entirety is involved); and

•	whether the work is done in accordance with an on-going program of restoration (more likely to constitute deductible repairs) or done in one operation (more likely to constitute a non-deductible reconstruction of the whole property).

Distinction between a repair and an improvement

NOTE:
See explanations at paragraphs 120 to 124 and examples at paragraphs 172 to 176 of this Ruling

Repair is distinct from improvement

44.	The meaning of "repair" or "repairs" is considered in paragraphs 12 to 30 of this Ruling. In the case of a "repair", broadly speaking, the work restores the efficiency of function of the property without changing its character. An "improvement", on the other hand, provides a greater efficiency of function in the property – usually in some existing function. It involves bringing a thing or structure into a more valuable or desirable form, state or condition than a mere repair would do. Some factors that point to work done to property being an improvement include whether the work will extend the property's income producing ability, significantly enhance its saleability or market value or extend the property's expected life.

45.	To distinguish between a "repair" and an "improvement" to property, one needs to consider the effect that the work done on the property has on its efficiency of function. This is the determinative test.

46.	If the work entails the replacement or restoration of some defective, damaged or deteriorated part of the property, one does not focus on the effect the work has on the efficiency of function of the part. That is not determinative of whether the property is repaired or improved. It is a relevant factor to take into account, however, in considering the effect of the work on the property's efficiency of function. It is possible, for instance, that the replacement of a subsidiary part of property with a part better in some ways than the original is a repair to the property without the work being an improvement to the property.

47.	Replacement or substantial reconstruction of the entirety, as distinct from the subsidiary parts of the whole, is an improvement.

Use of different materials

48.	If expenditure is incurred in replacing or renewing a part of property with a material of a different type from the original, the work done may either repair the property, or be an improvement to it. The use of different materials is not in itself determinative of the issue.

49.	Whether the use of a more modern material to replace the original material qualifies as a repair is a question determined on the facts of each case. It is restoration of a thing's efficiency of function (without changing its character) rather than exact repetition of form or material that is significant.

50.	If the work done restores a previous function to the property, or restores the efficiency of the previous function, it does not matter that a different material is used. Even if the work done using different material enables the property to perform its function marginally more efficiently, the work may still constitute a deductible repair. However, the greater the work enhances the efficient functioning of the property, the more likely it is that the work constitutes an improvement.

51.	The test is whether there is a sufficient degree of improvement to justify characterising the expenditure as capital and therefore excluding it from deductibility under section 25-10.

52.	If the work produces a new and different function, or an additional function, it is likely to constitute a capital improvement.

Technological advances or enhancements

53.	As a general proposition, the greater the degree of technological advancement involved in work done to property, the more it is likely the work goes beyond a "repair". This is so because it is more likely the work does more than restore the property to its original efficiency of function. If it does, the cost of the work is not deductible under section 25-10. (It might be deductible under section 8-1 if the cost is a working or operating expense and it is not of a capital nature.)

54.	If, however:

(a)	the work done to property involves:

(i)	a degree of technological advancement that results in only a minor and incidental improvement to the property; or

(ii)	an enhancement arising from the use of more modern materials and component parts (often where original materials and parts are no longer available) that adds in only a minor and incidental way to the overall efficiency of function of the property; and

(b)	the work done does not change the property's character;

this does not in itself preclude the expenditure from being characterised as repair expenditure deductible under section 25-10.

Repairs done at the same time as improvements

55.	The character of a repair does not necessarily change because it is carried out at the same time as an improvement. If, for example, a shopping centre is extensively renovated or restored (the project combining repairs and improvements) and if some parts of the project can be effectively separated and considered in isolation from the rest of the project, they may still be repairs. It is necessary to examine separately the individual parts of the total project to determine whether any part, if considered in isolation, is a repair. It is not appropriate to have regard only to the result of the entire work done. It is inappropriate to regard the whole project as an affair of capital. In other words, if individual parts of the total project can be separated and characterised as repairs, and if their cost can be segregated and accurately quantified, their cost is deductible. It must be possible to segregate the cost of the repairs actually effected from the capital cost of the improvements.

56.	If, however, repair work is inextricably bound up with work of an improvement nature, and the repair work cannot be separately segregated and its cost accurately quantified independently from the cost of the improvements, we regard the cost of the entire work as being of a capital nature and not deductible.

57.	For example, if work normally regarded as a repair, such as painting, is done to property as part of, or in conjunction with, a reconstruction and modernisation of the property, and it cannot be segregated and its cost separately quantified, it may not be deductible. It is again a question of fact and degree.

58.	Expenditure on "notional" repairs is not deductible; see paragraph 35 of this Ruling.

Expenditure to remedy defects, damage or deterioration in existence at the date of acquisition (initial repairs)

NOTE:
See explanations at paragraphs 125 to 140 and examples at paragraphs 177 to 179 of this Ruling

Initial repairs are of a capital nature and not deductible

59.	Expenditure incurred on an initial repair after property is acquired, if the expenditure is incurred in remedying defects, damage or deterioration in existence at the date of acquisition, is capital expenditure and is not, therefore, deductible under section 25-10. This is so whether the property is purchased or obtained under lease or licence by the taxpayer. The cost of effecting an initial repair is still not deductible even if some income happens to be earned after acquisition but before the repair expenditure is incurred: but see paragraphs 63 to 66 of this Ruling in relation to dissecting or apportioning initial repair costs.

60.	The main consideration in relation to initial repairs is the appearance, form, state and condition of the property and its functional efficiency when it is acquired. Expenditure that remedies some defect or damage to, or deterioration of, property is capital expenditure if the defect, damage or deterioration:

(a)	existed at the time of acquisition of the property; and

(b)	did not arise from the operations of the person who incurs the expenditure.

61.	It is immaterial whether at the time of acquisition the taxpayer was aware of the condition of the property, including its need for repair. It is also immaterial whether the purchase price (or lease rentals) reflected the need for repairs. We consider that the English Court of Appeal decision in Odeon Associated Theatres Ltd v. Jones (Inspector of Taxes) [1972] 1 All ER 681 is not authority in Australia for a contrary view. An initial repair expense is not the type of repair expenditure ordinarily incurred as a working or operating expense in producing assessable income or in carrying on a business. This is because it lacks a connection with the conduct or operations of the taxpayer that produce the taxpayer's assessable income. It is essentially an additional cost of acquiring the property or an improvement in the quality of the property acquired. Initial repair expenditure relates to the establishment of the profit – yielding structure. It is capital expenditure and is not deductible under section 25-10.

Initial repairs to property obtained by lease or licence

62.	If property is obtained under lease or licence (rather than purchased) and is, or is to be, held, etc., for income purposes, expenditure on "initial repairs" is capital expenditure. Expenditure for initial repairs after property is obtained under lease or licence is therefore not deductible under section 25-10.

Initial repair costs can be dissected or apportioned

63.	An initial repair expense can be dissected or apportioned to allow a deduction under section 25-10 of any part of the expense that remedies deterioration arising from the holding, etc., of the property by the taxpayer for income purposes after it was acquired. No dissection or apportionment is available, however, if the repair expenditure is necessitated by a defect or damage to property because this expenditure is either wholly attributable to the holding, etc., of the property before the taxpayer acquired it or wholly attributable to the holding, etc., of the property by the taxpayer for income purposes after it was acquired.

64.	Dissection or apportionment on a time basis is appropriate if repair costs are incurred either due to defects (whether expected or unexpected) that arise gradually over an extended period or due to wear and tear or deterioration that occurs:

(a)	in part before the property is acquired by a taxpayer; and

(b)	in part in the course of the taxpayer's holding, etc., of the property for income purposes.

65.	This dissection may be done either in the year of income the property is acquired if the initial repair expenditure is incurred in that year or in a later year in which the expenditure is incurred.

66.	If repair costs are attributable either to damage before property is acquired by a taxpayer, or to defects that emerged suddenly and matured by the time of acquisition of the property, no deduction is allowable under section 25-10 in accordance with paragraph 59 of this Ruling. If repair costs are attributable either to damage that occurs during the taxpayer's holding, etc., of the property for income purposes or to defects that emerge suddenly and mature during that time, a deduction is allowable if the other general principles stated in this Ruling are satisfied.

Some specific issues in construing section 25-10

NOTE:
See explanations at paragraphs 141 to 144 and examples at paragraphs 180 and 181 of this Ruling

Expenditure incurred by a taxpayer on repairs to property that the taxpayer does not own

67.	A taxpayer is entitled to a deduction under section 25-10 for expenditure for repairs to property he or she holds, etc., for income purposes, even though the taxpayer does not own the property. The test is whether the taxpayer held or used the property as required, not that the taxpayer owned the property.

68.	A lessee of business premises, for example, is entitled to a deduction under section 25-10 for repair expenditure incurred in a year of income during the term of the lease if the lessee held, etc., the premises for income purposes when the expenditure is incurred. This is so even though the lessee does not own the premises and even if the year of income is the year that the lease expires, provided that, when the repair expenditure is incurred, the lessee held, etc., the premises for income purposes. A deduction is also allowable if a licence to use the business premises is granted to the taxpayer rather than a lease of the premises.

69.	No deduction under section 25-10 is allowable to a real estate agent who incurs repair expenditure on a rental property on the agent's list. This is because a real estate agent does not hold, occupy or use a rental property for the purpose of producing assessable income or in carrying on business for that purpose. It is the owner or lessor of a rental property who holds or uses it for income purposes.

70.	The deductibility under section 8-1 of costs incurred by a real estate industry employee on such things as replacing a cracked window and repairs to door locks in presenting a property for sale is considered in Taxation Ruling TR 95/21. Paragraphs 22 and 172 to 174 of TR 95/21 state that these costs are not deductible under subsection 51(1) of the ITAA 1936 because they are not incurred in deriving the employee's income. Rather, they are incurred in deriving the employer's income.

Expenditure for repairs must be "incurred"

71.	There need be no legal obligation on the taxpayer to undertake repairs for the taxpayer to be entitled to a deduction. Expenditure for the repairs must be "incurred" by the taxpayer in the year of income in which the deduction is claimed. The word "incur" in section 25-10 has the same meaning as the word "incurred" in section 8-1.

Property must be held or used bone fide for income purposes

72.	You can deduct repair expenditure if, when you incurred the expenditure, you held or used the property bona fide for income purposes. We say "bona fide" here because some arrangements may not result in an allowable deduction. For instance, a taxpayer's beachside apartment may have deteriorated over several years due to wear and tear arising from its use for private purposes. If the taxpayer arranges to "rent" the apartment to his or her adult child for, say, a month and during that month incurs expenditure to repair and paint the apartment, a deduction may not be allowable, in our view, under section 25-10 for the repair and painting costs. We would take the view in appropriate circumstances that no deduction is allowable either because:

(a)	the apartment is not held, etc., for income purposes; or

(b)	Part IVA of the ITAA 1936, may apply to the arrangement.

Expenditure for repairs after property is held, etc., for income purposes but before income is actually derived

73.	A deduction is allowable under section 25-10 for repair expenditure incurred in a year of income after property is first held, etc., for income purposes but before income is actually derived from the property, provided the repairs are not initial repairs. For example, a rental property may be vacant but be advertised as being available for rental. Before a tenant occupies the property, storm damage or an accidental breakage occurs. Expenditure incurred to repair the damage or breakage is deductible under section 25-10 because the property is held, etc., for income purposes.

Scope of repair deduction provision and general deduction provision

74.	Generally speaking, section 8-1 produces the same result as section 25-10 in relation to the deductibility of repair costs. Section 8-1 has its own tests for deductibility. There may be occasions, however, where section 8-1 allows a deduction for repair expenditure that would otherwise not be deductible under section 25-10. Section 8-1 might allow a deduction, for example, after a taxpayer ceases to hold, etc., property for income purposes even though section 25-10 would not allow a deduction (see Placer Pacific Management Pty Ltd v FC of T 95 ATC 4459; (1995) 31 ATR 253).

Expenditure for repairs before property is held, etc., for income purposes

NOTE:
See explanations at paragraph 145 and example at paragraph 182 of this Ruling

75.	Repair expenditure incurred in a year of income before property is held, etc., for income purposes is not deductible under section 25-10.

Expenditure for repairs to property previously used by the taxpayer for non-income producing purposes

NOTE:
See explanations at paragraph 146 and examples at paragraphs 183 and 184 of this Ruling

76.	In appropriate circumstances, expenditure for repairs can qualify as a deduction even though the property has previously been held, etc., by the taxpayer for non-income purposes. This situation is different from an initial repair done to newly purchased or newly leased property, where the repair expenditure is capital expenditure.

77.	A deduction is allowable under section 25-10 if, when the repair expenditure is incurred in a year of income, the property is held, etc., by a taxpayer for income purposes:

(a)	even though the property has previously been held, etc., by the taxpayer for non-income purposes; and

(b)	even though some or all of the defects, damage or deterioration arise from, or are attributable to, the taxpayer's holding, etc., of the property before its holding, etc., for income purposes; and

(c)	provided that the repair expenditure is not capital expenditure.

Expenditure for repairs to property used for the purpose of providing non-deductible entertainment

NOTE:
See explanations at paragraphs 147 to 150 and example at paragraph 185 of this Ruling

78.	Deductions otherwise allowable under section 25-10 or under section 8-1 for repairs to property are reduced to the extent that the property, when the expenditure is incurred, is used by a taxpayer for the purpose of providing, or in connection with providing, entertainment that is made non-deductible by section 32-15 of the ITAA 1997 (or the former section 51AE of the ITAA 1936). The deduction is wholly denied if the property is used solely for non-deductible entertainment. If the property is used to provide both deductible and non-deductible entertainment, the deduction is proportionately reduced to the extent that the property is used for non-deductible entertainment.

Expenditure for repairs to property used only partly for income producing purposes during a year of income

NOTE:
See explanations at paragraphs 151 to 161 and examples at paragraphs 186 and 187 of this Ruling

79.	If property is held, etc., in a year of income partly for income purposes and partly for non-income purposes, repair expenditure is only deductible to the extent that is reasonable in the circumstances of the case. The reasonableness test is an objective one and each case must be decided on its own merits. However, we would expect that the amount of expenditure allowable as a deduction under subsection 25-10(2) (or the old law, when read with subsection 53(3)) would ordinarily be calculated by reference to the extent to which the property was held, etc., in the year of income for income purposes.

DATE OF EFFECT

80.	Subject to paragraphs 81 and 82, this Ruling applies to years commencing both before and after its date of issue. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

81.	Paragraphs 26 to 30 of this Ruling (expenditure to control health risks from dangerous substances) may be less favourable in some circumstances than Taxation Ruling IT 2183. It is less favourable because IT 2183, broadly stated, accepted as deductible repair work done in controlling health risks associated with the use of asbestos in income producing buildings. Paragraphs 26 to 30 only have a future application. They only apply to expenditure incurred after the date of this Ruling.

82.	Paragraphs 63 to 66 of this Ruling (initial repair costs can be dissected or apportioned) are more favourable to taxpayers than the Commissioner's earlier practice of denying any dissection or apportionment. Paragraphs 63 to 66 have both a past and future application, subject to the statutory limits of section 170 of the ITAA 1936.

EXPLANATIONS

Meaning of the word "repairs"

NOTE:
See ruling at paragraphs 12 to 30 and examples at paragraphs 162 and 163 of this Ruling

Ordinary meaning of the word "repairs" in its context in section 25-10

83.	The word "repairs" is not defined in the Act. In its context in section 25-10, the word "repairs" bears its ordinary meaning. According to The Shorter Oxford English Dictionary, "repair" means:

"Restoration of some material thing or structure by the renewal of decayed or worn out parts, by refixing what has become loose or detached; the result of this."

84.	Osborn's Concise Law Dictionary, 8th ed, defines "repair" as:

"The making good of defects in a property which has deteriorated from its original state. The work required may involve curing defects arising from the defective design or construction of the building, but it must fall short of effectively reconstructing the premises or improving them."

85.	Many judicial decisions make it plain that "repair" involves the making good of defects, damage or deterioration including the renewal of parts and that the word does not imply a total reconstruction: see Stroud's Judicial Dictionary. In BP Oil Refinery (Bulwer Island) Ltd v. FC of T 92 ATC 4031 at 4039; (1992) 23 ATR 65 at 73, the Federal Court of Australia (Jenkinson J) expressed the opinion that "work will not be considered repair unless it includes some restoration of something lost or damaged, whether function or substance or some other quality or characteristic".

86.	Repair, as the word is commonly understood, does not depend on whether much is done or only a little. Lord Macnaghten said in the House of Lords decision in Hoddinott v. Newton, Chambers & Co Ltd [1901] AC 49 at 54:

"A man does not usually wait to repair his house until it is altogether ruinous and on the point of falling to pieces."

87.	What is a "repair" for the purposes of section 25-10 is a question of fact and degree in each case having regard to the form, state and condition of the particular property and its functional efficiency when the expenditure is incurred (per Buckley LJ in Lurcott v. Wakely & Wheeler [1911] 1 KB 905 at 924) and to the nature and extent of the work done. "Repair" may involve renewal or replacement of subsidiary parts to some degree and may involve improvement but only to a minor and incidental extent.

Restoration of efficiency of function of the property

88.	The High Court of Australia (Windeyer J) said in W Thomas & Co Pty Ltd v. FC of T (1965) 115 CLR 58 at 72; (1965) 14 ATD 78 at 87:

"The words "repair" and "improvement" may for some purposes connote contrasting concepts; but obviously repairing a thing improves the condition it was in immediately before repair. It may sometimes be convenient for some purposes to contrast a "repair" with a "replacement" or a "renewal". But repairs to a whole are often made by the replacement of worn-out parts by new parts. Repair involves a restoration of a thing to a condition it formerly had without changing its character. But in the case of a thing considered from the point of view of its use as distinct from its appearance, it is restoration of efficiency of function rather than exact repetition of form or material that is significant. Whether or not work done upon a thing is aptly described as a repair of that thing is thus a question of fact and degree." (emphasis added)

89.	It is therefore more significant in applying the word "repairs" in its context in section 25-10, to consider whether the work restores the efficiency of function of the property for income purposes (without changing its character) than it is to consider whether the appearance, form, state or condition of the property is exactly restored.

Functionality of the property on which the work is done

90.	In considering whether work does more than restore property to its original efficiency of function, what is determinative is the functionality of the property on which the work is being done and not the functionality of the defective component or part. That is not to say, however, that the effect of the work on the functionality of the defective component or part is not relevant. It is a relevant factor to take into account in considering the extent of change made to the functionality of the property.

91.	To illustrate, if cast-iron pistons in an engine are replaced with aluminium-alloy pistons, being a more modern material for the construction of pistons, the determining question is whether the functionality of the engine has been restored or has only been enhanced in a minor and incidental way. However, any greater efficiency of function of the pistons is a relevant consideration in deciding that question. Expenditure in replacing the pistons is deductible under section 25-10. The engine's essential efficiency of function has not changed. Nor has the character of the engine changed by the use of marginally more efficient pistons. The aluminium-alloy pistons are marginally more efficient because they are lighter, hardier and are machined differently to produce less friction.

Maintenance work – whether "repair"

92.	Maintenance, as generally understood, includes the prevention of defects, damage or deterioration; a common example is the regular re-painting of business premises. The word "maintenance" may in some contexts be the same as "repair", and it may in some contexts have a wider meaning that includes repairing as well as other operations. Some kinds of maintenance work constitute "repairs" in its context in section 25-10, for example, painting plant or business premises to rectify existing deterioration and to prevent further deterioration. Maintenance done to property that is not in need of repair, however, is not repair work and any expenditure for the work in these circumstances is not deductible under section 25-10.

•	In Day v. Harland and Wolff [1953] 2 All ER 387 Pearson J observed at 388:

•	"So, very broadly speaking, I think that to repair is to remedy defects, but it can also properly include an element of the "stitch in time which saves nine". Work does not cease to be repair work because it is done to a large extent in anticipation of forthcoming defects or in rectification of merely incipient defects, rather than the rectification of defects which have already become serious. Some element of anticipation is included." (emphasis added)

93.	His Honour's statement, by necessary implication, indicates that work done that is only in anticipation of forthcoming defects or deterioration does in fact cease to be repair work. Work done in anticipation of forthcoming defects or deterioration can be considered a "repair" if it is done in combination with work of rectification: see the BP Oil Refinery (Bulwer Island) Ltd case at 92 ATC 4039; 23 ATR 73.

94.	Oiling, brushing or cleaning something that is otherwise in good working condition and only requires attention to prevent the possibility of its going wrong in the future, is not "repairs" in terms of section 25-10: compare London & North Eastern Ry. Co. v. Berriman [1946] 1 All ER 255 at 267 and the BP Oil Refinery(Bulwer Island) Ltd case. (The cost of these operations may be deductible under section 8-1.)

Work done to meet requirements of regulatory bodies

95.	To constitute a "repair" for the purposes of section 25-10, work done to meet requirements of regulatory bodies must satisfy the general principles and the various factors discussed in this Ruling. Work done to repair property that also happens to meet the requirements of regulatory bodies is deductible under the section. However, work done solely to meet requirements of regulatory bodies is not a "repair" for the purposes of the section.

96.	A "repair" for the purposes of section 25-10 is, fundamentally, work done to remedy or restore a defect in, damage to, or deterioration of, property in a mechanical or physical sense.

97.	We take the view that "repair" does not extend to a removal of any impediment to the holding, etc., of property for income purposes arising solely from regulatory requirements. This is clearly demonstrable if the property is otherwise functioning (in a mechanical or physical sense) as intended and, in that sense, is not in a state of disrepair.

98.	If Government regulations, for instance, require something to be added to property (e.g., an automatic sprinkler system to a building or an air bag to a motor vehicle), work done to comply with this requirement does not constitute a repair because it is not work done to remedy or make good any defect, damage or deterioration in a mechanical or physical sense. In any event, this is likely to involve capital expenditure and be excluded from section 25-10.

Alternative view

99.	We acknowledge that an alternative view exists whether work done to meet regulatory requirements constitutes a "repair" under the terms of section 25-10.

100.	If a regulatory body imposes a requirement to do work to property (say, a requirement relating to health, safety or for some other social utilitarian purpose), proponents of this view contend that, until the work is done, this is an impediment or defect in the property that can necessitate a "repair" in terms of section 25-10.

101.	The regulatory requirement, on this view, is arguably an impediment or defect in the efficient functioning of the property, and thus, in the holding, etc., of the property for income purposes. In an extreme case, non-compliance with the requirement may even require income producing activities to cease. This view advocates that expenditure to remedy the impediment is deductible under section 25-10.

102.	If Government regulations, for instance, require that work be done to property to control health risks associated with the use of dangerous substances (such as asbestos, CFCs, chromium, dioxins, cyanide, pesticides and arsenic), the work done could qualify, on this view, as a "repair" for the purposes of section 25-10.

103.	We do not accept the correctness of this alternative view. As stated earlier, we take the view that removing an impediment to the holding, etc., of property for income purposes arising from regulatory requirements does not constitute "repair" of a defect in, damage to, or deterioration of the property in the context required by section 25-10.

Technological advances or enhancements

104.	In many a repair process, there is some improvement made to property as a result of technological advancements or more modern materials and component parts becoming available. The extent of this improvement is crucial in making a judgment about the deductibility of repair expenditure under section 25-10.

105.	As a general proposition, the greater the degree of:

(a)	technological advancement; or

(b)	enhancement arising due to the use of more modern materials and component parts;

involved in the work done to property, the more likely it is that the work involves an improvement or a change in the character of the property rather than a repair.

106.	If, however, only minor and incidental improvement is made to the overall efficiency of function of property as a result of technological advancement, or by reason of enhancements due to the use of more modern materials and component parts in the work done to the property, the repair expenditure remains deductible under section 25-10.

In what situations is repair expenditure of a capital nature?

NOTE:
See ruling at paragraphs 31 to 35 and example at paragraph 164 of this Ruling

107.	Subsection 25-10(3) excludes capital expenditure from being a deduction. Under the old law, expenditure of a capital nature was also excluded.

•	Two of the leading Australian cases on determining whether expenditure for repairs is of a capital nature are FC of T v. Western Suburbs Cinemas Ltd (1952) 86 CLR 102; (1952) 9 ATD 452 and the Lindsay case (affirmed on appeal at (1961) 106 CLR 377; 12 ATD 505).

•	In the Western Suburbs Cinemas case, the ceiling of a motion picture theatre was in a state of disrepair. To restore the ceiling to its original condition would have cost $603. The company instead replaced the ceiling with a new one of a different design and better material for a cost of more than $3,000. The High Court (Kitto J) concluded that the new ceiling was an improvement to a fixed capital asset and that its cost was a capital charge. His Honour said at 86 CLR 105; 9 ATD 454:

"To decide whether a particular item of expenditure on business premises ought to be charged to capital or revenue account is apt to be a matter of difficulty, though the difference between the two accounts is clear enough as a matter of general statement (Sun Newspapers Ltd v. Federal Commissioner of Taxation). In this case, the work done consisted of the replacement of the entire ceiling, a major and important part of the structure of the theatre, with a new and better ceiling. The operation seems to me different, not only in degree, but in kind, from the type of repairs which are properly allowed for in the working expenses of a theatre business. It did much more than meet a need for restoration; it provided a ceiling having considerable advantages over the old one, including the advantage that it reduced the likelihood of repair bills in the future ... . The truth is, I think, that the new ceiling was an improvement to a fixed capital asset and that its cost was a capital charge."

108.	In Lindsay v. FC of T (1960) 106 CLR 197; 12 ATD 505, the High Court (Kitto J) held that expenditure incurred to renew a slipway was a renewal of an entirety and not a deductible repair. His Honour said at 106 CLR 383; 12 ATD 200:

•	"If the work done in respect of the slipway is correctly described as repairs, it cannot, I think, on the facts of this case, be of a capital nature. The problem is to characterize the expenditure according to the familiar distinction between repair, in the sense of restoration by renewal or replacement of subsidiary parts of a whole, and renewal in the sense of reconstruction of the entirety, meaning by the entirety not necessarily the whole but substantially the whole of the subject matter under discussion: per Buckley L.J., in Lurcott v. Wakely & Wheeler; Rhodesia Railways v. Collector of Income Tax, Bechuanaland".

•	In order to determine whether an item of expenditure is to be held on general principles to be chargeable to income or capital account, it is of course necessary to distinguish between "the business entity, structure or organization set up or established for the earning of profit and the process by which such an organization operates to obtain regular returns by means of regular outlay" ... : Sun Newspapers Ltd and Associated Newspapers Ltd. v. Federal Commissioner of Taxation [(1938) 61 CLR 337 at pp 359, 360]. But where the question is whether expenditure has been for repairs, and for the purpose of deciding that question one asks what is the entirety which it is relevant to consider, one is looking not for a profit-earning structure or entity, as such, but for a physical thing which satisfies a particular notion."

No deduction for notional repairs

109.	In the Western Suburbs Cinemas case, Kitto J rejected an argument that, where an actual expenditure is not an allowable deduction, a notional expenditure may be. His Honour said at 86 CLR 107; 9 ATD 455:

" ... when a taxpayer has two courses open to him, one involving an expenditure which will be an allowable deduction for income tax and the other involving an expenditure which will not be an allowable deduction, and for his own reasons he chooses the second course, he cannot have his income tax assessed as if he had exercised his choice in the opposite way. Section 53 is concerned with expenditure which was in fact incurred, not with expenditure which could have been incurred but was not."

Distinction between repair and either renewal or reconstruction – what is meant by the "entirety"

NOTE:
See ruling at paragraphs 36 to 43 and examples at paragraphs 165 to 170 of this Ruling

Repair is distinct from renewal or replacement

110.	Repairs to property may involve renewal or replacement of a subordinate part of the property. As Buckley LJ said in Lurcott v. Wakely & Wheeler [1911] 1 KB 905 at 924:

"Repair is restoration by renewal or replacement of subsidiary parts of a whole. Renewal, as distinguished from repair, is reconstruction of the entirety, meaning by the entirety not necessarily the whole but substantially the whole subject-matter under discussion ... the question of repair is in every case one of degree, and the test is whether the act to be done is one which in substance is the renewal or replacement of defective parts, or the renewal or replacement of substantially the whole."

111.	Renewal, replacement or reconstruction of the entirety (i.e., the whole or substantially the whole) of a thing or structure is an improvement rather than a deductible repair.

What is an entirety?

112.	The tests used by the courts and tribunals or suggested by commentators to identify an entirety – as distinct from a subsidiary part – include one or more of the following:

•	is the property (e.g., a chimney) physically, commercially and functionally an inseparable part of an entirety (e.g., a factory)?: Samuel Jones & Co (Devondale) Ltd v. Commissioners of Inland Revenue (1951) 32 TC 513.

•	is the property (e.g., a slipway) separately identifiable as a principal item of capital equipment?: Lindsay's case.

•	is the thing or structure (e.g., a timber staircase) an integral part, but only a part, of the entire premises and is it capable of providing a useful function without regard to any other part of the premises?: Case W68 89 ATC 613; AAT Case 5232 (1989) 20 ATR 3796.

•	is the thing or structure (e.g., meters and pumping plant) a separate and distinct item of plant in itself from the thing or structure (e.g., a light and power station) to which it supplied something (e.g., electric light and power) or an integral part of some larger item of plant?: Case 36 (1949) 15 TBRD (OS) 287.

•	is the property a "unit of property" as that expression is used in the depreciation provisions of the income tax law, bearing in mind that, to be such a "unit", the thing or structure must be "functionally separate and independent"?: Ready Mixed Concrete (Victoria) Pty Ltd v. FC of T (1969) 118 CLR 177; (1969) 15 ATD 215.

113.	The leading Australian case in this area is the High Court decision in the Lindsay case where slip proprietors and ship repairers reconstructed one of two slipways. The taxpayers submitted that the relevant entirety was the whole of the business premises on which the slipway existed or, alternatively, the whole of the slip (comprising the slipway, the hauling machinery that served it, the cradle on it and the dolphins and warping winches by which vessels were manoeuvred on to it). Kitto J rejected a submission that the slipway was only a subsidiary part of some larger thing or aggregation of things. His Honour held that the expenditure involved was not deductible under section 53 of the ITAA 1936 because the slipway ought to be considered as an entirety by itself (at 106 CLR 385; 12 ATD 201):

"It is separately identifiable as a principal, and indeed the principal, item of capital equipment, so that in a discussion as to whether work done in relation to it constitutes a repair or a renewal in the opposed senses abovementioned, the subject matter in relation to which the choice of description is to be made is the slipway itself, and not any larger thing or aggregation of things of which it may be suggested to form part."

114.	In the W Thomas & Co case, where the High Court considered deductions claimed for repairs to guttering, the roof, walls and two floors of a building, the view was taken that the whole building was the entirety. Windeyer J said (at 115 CLR 66; 14 ATD 83) that the relevant question is not:

" ... whether the roof or the floor or some other part of the building, looked at by itself, was repaired as distinct from being reconstructed or replaced. It is whether what was done to the roof or the floor or some other part was a repair of the building."

115.	In other examples, the floor of a house (Lister v. Lane & Nesham [1893] 2 QB 212) and the front external wall of a house (the Lurcott case) have each been held to be a subsidiary part of the whole.

Progressive restoration can involve deductible repairs

116.	It is a question of fact and degree whether a reconstruction is undertaken of the whole property (not deductible) or a series of restorations is embarked on over a period of time, progressively restoring subsidiary parts of the whole (deductible). In the Lindsay case, the expenditure on the slipway was regarded as a non-deductible expense for the reconstruction of an entirety. The expenditure would not become deductible by apportioning it into parts referable to different sections of the slipway. By contrast, in The Rhodesia Railways Ltd and Others v. Commissioner of Taxes (Southern Rhodesia) [1925] 1 SAf TC 133 the restoration of sections of a railway track was held not to be the reconstruction of an entirety.

Distinction between a repair and an improvement

NOTE:
See ruling at paragraphs 44 to 57 and examples at paragraphs 172 to 176 of this Ruling

117.	An important question in distinguishing between a repair and an improvement is whether expenditure incurred in replacing or renewing a part of property with a material of a different type from the original is a repair of the property or an improvement to it.

118.	The material used does not have to be exactly the same as the original material for the work to be a repair. Similarly, the use of different material, whether it happens to be cheaper or more expensive than the original material being replaced, does not necessarily rule out the work being a repair.

119.	It needs to be borne in mind that repairing property to some extent improves the condition it was in immediately before repair. Whether the use of a more modern material to replace the original material qualifies as a repair is a question determined on the facts of each case.

120.	What is determinative of deductibility under section 25-10, if different material is used, is whether the work done restores the efficiency of function of the property (without changing its character), not whether the same material as the original is used. We accept that use of different material may result in a minor and incidental degree of improvement in the property but still only restore the efficiency of function of the property. If the degree of improvement is more than minor and incidental, the expenditure is of a capital nature and not deductible under section 25-10.

121.	Relevant considerations, consistently with the approach taken by the High Court in the W Thomas & Co case and the Western Suburbs Cinemas case, in distinguishing generally between a repair and an improvement, are:

(a)	whether or not the thing replaced or renewed was a major and important part of the structure of the property (at 86 CLR 106; 9 ATD 454);

(b)	whether the work performed did more than meet the need for restoration of efficiency of function (at 86 CLR 106; 9 ATD 454 and at 115 CLR 72; 14 ATD 87), bearing in mind that "repair" involves a restoration of a thing to a condition it formerly had without changing its character;

(c)	whether the thing was replaced with a new and better one (at 86 CLR 106; 9 ATD 454); and

(d)	whether the new thing has considerable advantages over the old one, including the advantage that it reduces the likelihood of repair bills in the future (at 86 CLR 106; 9 ATD 454).

Expenditure to remedy defects, damage or deterioration in existence at the date of acquisition (initial repairs)

NOTE: see ruling at paragraphs 59 to 66 and examples at paragraphs 177 to 179 of this Ruling

Initial repairs are of a capital nature and not deductible

122.	A repair after acquisition of property is an "initial repair" if repair was due when the property was acquired, in the sense that there was a need for repair to restore or maintain the property's efficiency of function. In other words, the property was neither in good order when it was acquired nor suitable for use for income purposes in the way intended.

123.	The leading Australian case in this area is the High Court decision in the Thomas case. There, Windeyer J held that the costs of repairing a roof, guttering, wall, basement floor and wooden floor and painting a building in the year of income it was acquired was expenditure of a capital nature.

124.	His Honour said (at 115 CLR 72; 14 ATD 87):

"Expenditure upon repairs is properly attributable to revenue account when the repairs are for the maintenance of an income-producing capital asset. Maintenance involves the periodic repair of defects that are the result of normal wear and tear in operation. It is an expense of a revenue nature when it is to repair defects arising from the operations of the person who incurs it. But if when a thing is bought for use as a capital asset in the buyer's business it is not in good order and suitable for use in the way intended, the cost of putting it in order suitable for use is part of the cost of its acquisition, not a cost of its maintenance. The decision of the Court of Session in Law Shipping Co. Ltd. v. Inland Revenue Commissioners, [(1923) 12 TC 621] is commonly cited as authority for that proposition. The principle is obvious without the need for any supporting authority." (emphasis added)

125.	His Honour made it clear that it is immaterial whether the taxpayer knew of the defects or whether the purchase price was affected by them. Windeyer J said (at 115 CLR 74; 14 ATD 88):

"It seems to me immaterial that when the taxpayer acquired the building it did not know of some of its defects ... . That means only that the cost of obtaining an asset suitable for its purpose was greater than had been expected."

126.	In the Law Shipping Co case, the taxpayer in December 1919 bought for $97,000 a steamship ready to sail and with freight booked and loaded. As the periodical Lloyd's survey was then considerably overdue, an exemption from survey had been obtained for the voyage about to commence. On return from the voyage in May 1920, the ship underwent survey and the taxpayer had to spend over $50,000 on repairs. The Special Commissioners allowed a deduction of only $12,000 as being applicable to the period during which the taxpayer was the owner of the ship. The Court of Session, Scotland (First Division) held that the amount disallowed was of a capital nature and not deductible.

127.	More recently, the English Court of Appeal in Odeon Associated Theatres v. Jones (Inspector of Taxes) [1972] 1 All ER 681 held that expenditure of $7,969 incurred during the period 1948-56 (in respect of dilapidations which occurred before acquisition) on the Regal Cinema at Marble Arch, which was acquired for $240,000 in January 1945 in a somewhat run-down condition, was expenditure of a revenue character.

128.	A key reason for the decision was that, although the cinema was in disrepair at the date it was acquired, this had no effect on the purchase price. The purchase price was not affected because there was a war-time prohibition on repairing cinemas, causing all cinemas to be in a similarly dilapidated condition. We take the view that the decision in the Odeon Theatres case should not be followed in Australia.

Alternative view

129.	It has been suggested, however, that the Odeon Theatres case supports the view that expenditure on initial repairs is deductible under section 25-10 and not excluded as capital expenditure. On this view, repair expenditure is deductible if the property acquired – though in a state of disrepair at the time of the acquisition – is suitable for use for income purposes and if the purchase price of the property is not affected by that state of disrepair.

•	Even if the Odeon Theatres case is authority in the United Kingdom for the proposition that expenditure on initial repairs is not capital expenditure if a property's state of disrepair did not affect its suitability for use or its purchase price, we consider that it is not authority for that proposition in Australia. Such a proposition would, in our view, be inconsistent with the more persuasive precedent of the High Court of Australia in the W Thomas & Co case. In our view, the decision in the Odeon Theatres case is not likely to be followed in Australia: see Case D47 72 ATC 272 per AM Donovan (Chairman) and RK Todd (Member) at 291; (1972) 18 CTBR (NS) Case 14 at 102 and Case V83 88 ATC 580 per DJ Trowse (Member) at 583; AAT Case 4371 (1988) 19 ATR 3540 at 3542. Since the Odeon Theatres case was decided in 1972 it has not been followed in Australia by former Taxation Board of Review No 2 (Case D47; Case 14) or by the Administrative Appeals Tribunal (Case V83; AAT Case 4371).

•	We believe it is important to recognise that the proposition that expenditure on initial repairs is capital expenditure is not some unique principle. There is no general proposition that initial repair costs are not deductible for income tax purposes. Rather, the proposition that initial repair costs are of a capital nature is a particular application of the general tests set out by Dixon J in Sun Newspapers Ltd v. FC of T (1938) 61 CLR 337; (1938) 5 ATD 87 for determining what is capital expenditure. Under these tests, expenditure relating to the establishment, replacement or enlargement of the profit-yielding structure, as opposed to expenditure incurred in the operation of that structure, is of a capital nature: see Case P5 (1963) 14 TBRD 14 at 25; (1963) 11 CTBR (NS) Case 44 per RE O'Neill (Member) at 218; Case R101 84 ATC 673 per TJ McCarthy (Member) at 675; (1984) 27 CTBR (NS) Case 154 at 1209 and Case V83 88 ATC 580 per DJ Trowse (Member) at 583; AAT Case 4371 (1988) 19 ATR 3540 at 3542-3.

Initial repairs to property obtained by lease or licence

130.	Expenditure for initial repairs after property is obtained under lease or licence is of a capital nature and is not deductible under section 25-10. Initial repair costs incurred on property after it is purchased relate to the establishment of the profit-yielding structure and are therefore of a capital nature; initial repair costs incurred on property after it is obtained under a lease or licence relate to the establishment of the profit-yielding structure and are also of a capital nature. Therefore, for the same reasons that initial repairs are not deductible after the purchase of property, we take the view that expenditure for initial repairs after property is obtained under lease or licence is not deductible under section 25-10. In (1956) 6 CTBR (NS) Case 55, Taxation Board of Review No 2 held that initial repair costs incurred by a weekly tenant of premises were of a capital nature and not deductible under section 51 or 53 of the ITAA 1936.

Initial repair costs can be dissected or apportioned

131.	Subsection 25-10(3) states that you cannot deduct capital expenditure under section 25-10. The old law referred to expenditure incurred for repairs, not being expenditure of a capital nature. This, in our opinion, allowed apportionment. After property is acquired by a taxpayer, it may deteriorate more during the period it is held, etc., by the taxpayer for income purposes than it had deteriorated when it was acquired by the taxpayer. The cost of bringing the property back to the state of efficiency of function that it was in when acquired by the taxpayer is deductible as a repair not of a capital nature. In other words, provided that the whole of the expenditure is for repairs, some part of that expenditure may be of a capital nature and some part of it may be deductible.

132.	Expenditure for repairs to recently acquired property is fully deductible only if it involves the remedying of defects, damage or deterioration wholly attributable to the period in which the property is held, etc., by the taxpayer for income purposes. If, on the other hand, the expenditure involves putting the property in order suitable for use or the cost of remedying defects, or restoring damage or deterioration existing at the time of purchase, it is of a capital nature and not deductible under the old law. As a general rule of thumb, but subject to the facts in each particular case, repairs effected soon after the purchase of property often rectify defects in, damage to, or deterioration present in the property at the time of purchase.

•	Initial repair expenses can be dissected or apportioned under section 25-10 to allow a deduction to the extent to which the repair work remedies defects, damage or deterioration arising from the taxpayer's holding, etc., of the property for income purposes after it is acquired: see the Law Shipping case where the Special Commissioners allowed a deduction of $12,000 (out of a sum of $51,558 incurred on repairs) as being applicable to the period during which the company owned the ship. See also (1962) 10 CTBR (NS) Case 84; (1963) 11 CTBR (NS) Case 63; (1950) 1 CTBR (NS) Case 18 and (1959) 8 CTBR (NS) Case 137 in which purchased properties were repaired and Taxation Boards of Review allowed a portion of repair expenditure; contrast the views of Senior Member, Mr PM Roach, in Case V167 88 ATC 1107; AAT Case 12 (1986) 18 ATR 3056 and Case W7 89 ATC 161; AAT Case 4845 (1988) 20 ATR 3170.

•	We accept that Windeyer J in the Thomas case (at 115 CLR 74; 14 ATD 88) was saying nothing more than that there was insufficient evidence in relation to the items of expenditure he was considering in that particular case to permit him a basis of apportionment. Windeyer J was not saying categorically that apportionment is never possible. This approach is also suggested by his Honour citing with approval the decision in the Law Shipping case.

133.	We accept, for example, that a court might agree to apportionment if a taxpayer is able to identify the extent to which repair expenditure is necessitated by deterioration arising after property is acquired and is attributable to the taxpayer's holding, etc., of the property for income purposes.

Some specific issues in construing section 25-10

NOTE:
See ruling at paragraphs 67 to 74 and examples at paragraphs 180 and 181 of this Ruling

Expenditure incurred by a taxpayer on repairs to property that the taxpayer does not own

134.	It is not a specific requirement of section 25-10, unlike section 42-15, that property be owned by the taxpayer.

135.	Entitlement to a deduction under section 25-10 for expenditure incurred by a taxpayer for repairs to property depends on whether the taxpayer held or used the property for income purposes.

136.	A lessee of premises, or a person granted a licence to use premises, is entitled to a deduction under section 25-10 for repair expenditure if the lessee or licensee meets these requirements, i.e., holds, or uses the premises for income purposes, even though he or she does not own the premises.

Expenditure for repairs must be "incurred"

137.	Section 25-10 requires that you "incur" expenditure for repairs for it to be deductible. For this purpose, the word "incur" in section 25-10 has the same meaning as that given by the courts to the word "incurred" in subsection 51(1) of the ITAA 1936: Case Q48 (1965) 15 TBRD 229. Broadly stated, to be "incurred" there needs to be a presently existing pecuniary obligation in relation to the repairs that has become due, but not necessarily payable, at that time. The taxpayer must be definitively committed to the expenditure.

Expenditure for repairs before property is held, etc., for income purposes

NOTE:
See ruling at paragraph 75 and example at paragraph 182 of this Ruling

138.	Under section 25-10, a deduction is allowed for expenditure for repairs to property held, etc., for income purposes. Expenditure incurred in repairing property is not deductible if the property is not held, etc., nor ever has been held, etc., for income purposes. Furthermore, the expenditure is likely to be capital expenditure. If it is, the exception for capital expenditure operates to deny a deduction. As the Administrative Appeals Tribunal (Mr PM Roach, Senior Member) said in Case V167 88 ATC 1107 at 1111; AAT Case 12 (1986) 18 ATR 3056 at 3059:

"If a taxpayer buys a property with the view to letting it at a rent and immediately paints it throughout before letting it, the expenditure may be fairly characterised as capital ... "

Expenditure for repairs to property previously used for non-income producing purposes

NOTE:
See ruling at paragraphs 76 and 77 and examples at paragraphs 183 and 184 of this Ruling

139.	Repair expenditure, incurred by a taxpayer in a year of income on property held, etc., in earlier years for non-income purposes, can qualify for deduction under section 25-10 if the property is held, etc., for income purposes when the repair expenditure is incurred: see Case V167 88 ATC 1107; AAT Case 12 (1986) 18 ATR 3056 and Case W7 89 ATC 161; AAT Case 4845 (1988) 20 ATR 3170.

Expenditure for repairs to property used for the purpose of providing non-deductible entertainment

NOTE:
See ruling at paragraph 78 and example at paragraph 185 of this Ruling

140.	If:

(a)	expenditure is incurred by a taxpayer for repairs to property; and

(b)	when the expenditure is incurred the property is being used by the taxpayer in providing entertainment;

no deduction is allowable under section 8-1 or section 25-10 for the repair expenditure to the extent that the property is used for non-deductible entertainment: see section 32-15 of the ITAA 1997, when read with section 32-5 of that Act (or the former section 51AE of the ITAA 1936).

141.	By section 32-15, use of property by a taxpayer in providing entertainment (whether or not the property is also used for another purpose) is taken not to be for the purpose of producing assessable income if section 32-5 would prevent the taxpayer deducting a loss or outgoing if the taxpayer incurred it in providing the entertainment. No deduction is allowable for the repair expenditure, or it is proportionately reduced, because the property fails to satisfy the requirement that it be used for income producing purposes. Subsection 51AE(14) of the ITAA 1936 provided, in essence, the same result.

142.	Entertainment means:

(a)	entertainment by way of food, drink or recreation; or

(b)	accommodation or travel to do with providing entertainment by way of food, drink or recreation: subsection 32-10(1) of the ITAA 1997.

143.	You are taken by subsection 32-10(2) to provide entertainment even if business discussions or transactions occur.

Expenditure for repairs to property used only partly for income purposes during a year of income

NOTE:
See ruling at paragraph 79 and examples at paragraphs 186 and 187 of this Ruling

144.	Before considering the operation of subsection 25-10(2), which applies if you held or used property only partly for income purposes, it is necessary to review the history of subsection 53(3) of the ITAA 1936.

145.	Expenditure on repairs incurred before 19 April 1984 (when subsection 53(3) was inserted into the ITAA 1936 ) was deductible in full so long as the property was used to some extent for income purposes: see Case Q11 83 ATC 41; (1983) 26 CTBR (NS) Case 75 and Case Q98 83 ATC 487; (1983) 27 CTBR (NS) Case 26.

146.	Subsection 53(3) was inserted to overcome this result. By that subsection, expenditure for repairs to property held, etc., only partly for income purposes was deductible to the extent that the Commissioner considered reasonable in the circumstances of the case. According to the explanatory memorandum accompanying Income Tax Assessment Amendment Bill (No 3) 1984, subsection 53(3) meant that expenditure for repairs attributable to private or domestic use, or to earning exempt income, was not allowable.

147.	Subsection 53(3) allowed an apportionment of expenditure incurred by a taxpayer in a year of income for repairs to property held, etc., partly in that year for income purposes and partly for non-income purposes. The amount of the expenditure allowable was ordinarily an amount calculated by reference to the extent to which the property was held, etc., in the year of income for income purposes.

•	Apportionment of repair expenditure incurred in a year of income was not available, however, if the property had been held, etc., by a taxpayer in earlier years of income for purposes other than income purposes. We based this opinion on the legislative history of subsection 53(3) and, in particular, on the legislative intention to overcome the conclusions reached in Case Q11; Case 75 and Case Q98; Case 26.

•	We took the view that the correct construction of subsection 53(3) required that the relevant percentage of business use of property in a year of income be calculated as a proportion of the total use of the property in that year. Once calculated for a particular year of income, the percentage was applied to the whole repair expenditure incurred in the year. This meant, for example, that if a motor vehicle was used in a year of income 70 percent of the time for business purposes and repair expenditure was incurred on the vehicle, 70 percent of the expenditure was properly allowable. This was the case if the repair expenditure was incurred following an accident, whether the accident happened while the vehicle was being used for business or for non-business purposes.

Alternative views

148.	We acknowledge, but do not concede as producing a proper interpretation of subsection 53(3), the following alternative views.

View 1

149.	If the accident referred to in paragraph 156 happened while the vehicle was being used for income purposes, 100 percent of the repair costs were allowable. If the vehicle was being used for non-income purposes, 70 percent of the repair costs were allowable.

View 2

150.	If the accident referred to above happened while the vehicle was being used for income purposes, 100 per cent of the repair costs were deductible. If the vehicle was being used for non-income purposes, no repair costs were allowable.

151.	Turning to subsection 25-10(2), it broadly corresponds with subsection 53(3), except that the Commissioner's discretion to determine the amount of the deduction has been replaced with an objective test of what is reasonable in the circumstances. Apart from this exception, subsection 25-10(2) expresses the same ideas as subsection 53(3).

152.	We take the same views, for the purpose of the objective test in subsection 25-10(2), as those stated in paragraphs 154 to 156 of this Ruling for the former subsection 53(3).

EXAMPLES

Meaning of the word "repairs"

NOTE:
See ruling at paragraphs 12 to 30 and explanations at paragraphs 83 to 107 of this Ruling

Example 1

153.	Sam Tabernarius, a shopkeeper, decides to replace the awning of his shop with a more modern and aesthetic equivalent. The awning is in good condition before the work is done; there is nothing to be restored, no decayed or worn out parts to be renewed and nothing loose or detached which requires fixing. The expenditure involved is not for repairs – the awning being in good repair before the work was done – and no deduction is allowable under section 25-10 of the ITAA 1997.

Example 2

154.	By January 1997, Widgets Pty Ltd has used a building for a manufacturing plant for many years. Widgets Pty Ltd discovers on testing for contaminants that insulation in the roof and walls contains dangerous levels of asbestos fibres. The contaminated insulation had been placed in the building by the previous owner. The company immediately set about removing the insulation and replacing it with a safe alternative. Expenditure incurred by Widgets Pty Ltd in removing and replacing the insulation is not a "repair" and not deductible under section 25-10. However, because the expenditure is incurred entirely for an environment protection activity, namely, removing pollution from a site on which the company carries on its income producing activities (subparagraph 82BM(1)(a)(ii) of the ITAA 1936), it is deductible under subsection 82BK(1) of that Act. The expenditure is not in respect of constructing an improvement to the building so subsection 82BN(1) of that Act does not preclude a deduction under the environment protection provisions.

Repair expenditure of a capital nature

NOTE:
See ruling at paragraphs 31 to 35 and explanations at paragraphs 108 to 112 of this Ruling

Example 3

155.	Elle Bashful uses her truck for income producing purposes. She replaces the truck's worn out petrol engine with a diesel engine with a much greater economy of operation. The engine is not an entirety but a subsidiary part of truck. However, the costs relate to an improvement of the truck because the replacement of the engine involved a significantly greater efficiency in the truck's function. The engine is a major and important part of the truck and is a new and better engine with considerable advantages over the old one, including the advantage that it reduces the likelihood of future repair bills. The costs are of a capital nature and are not deductible under section 25-10: cf (1953) 3 CTBR (NS) Case 82. A deduction for depreciation under section 42-15 may be allowable.

Distinction between repair and either renewal or reconstruction – what constitutes the "entirety"

NOTE:
See ruling at paragraphs 36 to 43 and explanations at paragraphs 113 to 119 of this Ruling

Example 4

156.	Mr Fermier and Mr Agricola are neighbouring farmers affected by a severe bushfire. Mr Fermier restores his existing fencing to good condition by mending it and replacing damaged sections, e.g., the fence on the northern boundary. Mr Agricola replaces the entire fencing surrounding his property.

•	Mr Fermier is entitled to claim a deduction for the cost of repairing his fencing under section 25-10. The entirety is the total fencing so replacing the fences on the northern boundary is a replacement of a subsidiary part of the whole fencing: cf (1963) 11 CTBR (NS) Case 44.

•	However, Mr Agricola's expenditure is not deductible under section 25-10 because the whole fencing was replaced, making it a reconstruction of the entirety. The total fencing is not a subsidiary part of the rural property or of anything else. To replace entire fencing with new fencing is to replace one capital asset with another capital asset. The cost is therefore of a capital nature: cf (1962) 10 CTBR (NS) Case 58. Mr Agricola's fences are depreciable "plant" (paragraph 42-18(1)(c) of the ITAA 1997 or the former subparagraph 54(2)(b)(i) of the ITAA 1936) and are deductible under section 42-15.

Replacement or substantial reconstruction of the entirety

Example 5

157.	After recent bushfires the local State Electricity Authority inspects electricity poles on a number of properties. The Authority advises Mr Hogg, a pig farmer, that his electricity poles and overhead power lines are unsound, due to damage caused by the bushfires. To rectify the damage caused, he replaces these with underground cables. The cabling is a part of a larger system by which electricity is brought to the farm, distributed for use, and usage measured. Further, even though underground cables are better protected from future bushfires and storms, no greater efficiency of function of the electricity system is provided by the cables. Accordingly, the expenditure incurred by Mr Hogg is a repair, and deductible under section 25-10. If Mr Hogg had merely replaced the poles and cables, the expenditure incurred would also be a repair, and deductible accordingly. If the electricity connection is used for both domestic and business purposes, the deduction is limited by subsection 25-10(2) to that part of Mr Hogg's expenditure which reasonably relates to the use of the electricity connection for business purposes. (Any amount received by Mr Hogg by way of insurance or indemnity in respect of the expenditure incurred in replacing poles or overhead wires should be included in Mr Hogg's assessable income in terms of subsection 20-20(2) of the ITAA 1997 to the extent to which the expenditure is an allowable deduction.)

158.	Note that there is an alternative view that the circumstances of this example may, in fact, amount to the replacement of an "entirety", or an improvement. Although the decision in this matter is a borderline one, we consider that, on balance, the marginally better view – in keeping with our longstanding position on this matter – is that the facts of this example amount to the making of a repair.

Example 6

159.	Mr P Bowser owns a service station that is not connected to mains power supply. He has meters and a pumping plant to supply power to the service station. He has to replace both the meters and the pumping plant due to their old age. The meters and the pumping plant are entireties in their own right, separate and distinct from the service station. Their replacement is not a repair and the cost is not deductible under section 25-10: Case 36 (1949) 15 TBRD (OS) 287.

"Notional" repairs

NOTE:
See ruling at paragraph 35 and explanations at paragraph 112 of this Ruling

Example 7

160.	Ken-the-Shopfitter runs a factory in a building in which the wooden floor needs repairing. The options are either to repair the old floor or to replace it with an entirely new one of steel and concrete. Ken decides to adopt the second option because it will save future repairs and because it has distinct advantages over the old wooden floor. By choosing the second option, Ken cannot claim a deduction as if he had simply repaired the wooden floor. His actual expenditure being capital, none of it is allowable as a repair.

Distinction between a repair and an improvement

Material used different from original material

NOTE:
See ruling at paragraphs 44 to 57 and explanations at paragraphs 120 to 124 of this Ruling

Example 8

161.	Mary Fabrica owns a factory in which the bitumen floor laid on a gravel base needs repairing. She replaces it with a new floor consisting of an underlay of concrete topped with granolith (a paving stone of crushed granite and cement). The new floor, from a functional efficiency (rather than an appearance) point of view, is not superior in quality to the old floor. The new floor performs precisely the same function as the old and is no more satisfactory. In fact, the new floor is more expensive to repair than the old. Because the new floor is not a substantial improvement, it is a repair and its cost is deductible under section 25-10: Case T75 (1968) 18 TBRD 377; (1968) 14 CTBR (NS) Case 40.

Technological advances or enhancements

Example 9

162.	Switched-On Pty Ltd decides, after controlling its furnace for 25 years with electro-mechanical switches and gauges, to replace them with computerised controls. The computerised controls perform the same function as the original controls. Electro-mechanical controls are no longer mass produced and, if made to order, would cost substantially more than the computerised controls. The degree of improvement in the efficiency of the furnace's function is only minor and incidental, its character has not changed and the operation and output of the furnace have not altered. The cost of replacing the controls is deductible under section 25-10 of the ITAA 1997.

Example 10

163.	Wind Tunnel Pty Ltd has a malfunctioning vibration monitor for one of its blower fans. It replaces the old monitor with a digital monitor. The new monitor gives a more accurate reading than the old one but this is superfluous to the company's needs because it only needs to ensure that the blower operates within a certain vibration range. The facility for reading a precise vibration level is inherent in the digital technology used in the new monitor. The monitor involved no extra cost. The degree of improvement in the efficiency of the blower fan's function is only minor and incidental and its character, as a blower fan, has not changed. Bearing in mind that the additional capacity of the monitor exceeds the taxpayer's needs, and viewing the issue from the particular taxpayer's proposed use of the blower fan and monitor, the monitor's cost is deductible under section 25-10.

Example 11

164.	Gurgler Pty Ltd needs to replace the impellor in a pump it has used for five years. A new impellor made from stainless steel would cost $8,000. If the original cast iron impellor is replaced with another cast iron one, it would cost about $4,000. The stainless steel impellor is chosen because it will provide improved functional efficiency for the pump. It will perform more efficiently as an impellor and will last three to four times longer than the cast iron type. The cost of the stainless steel impellor is not deductible under section 25-10 because:

(a)	there is a substantial improvement in the functional efficiency of both the impellor and the pump;

(b)	the impellor is a major and important structural part of the pump;

(c)	the impellor is new and better than the original impellor; and

(d)	the stainless steel impellor has considerable advantages over the old cast iron one, including the advantage that it reduces the likelihood of repair bills in the future.

Repairs and improvements effected concurrently

NOTE:
See ruling at paragraphs 55 to 57 of this Ruling

Example 12

165.	Tracey owns a factory. The council has advised her to repair faulty wiring, reposition existing electrical outlets and install new power points, mains and switchboards. Only part of the expenditure is incurred on repair work. Individual parts of the work are capable of being classified as repairs, if examined in isolation from the remainder of the work. The costs of the work relating to repairing the faulty wiring only is deductible under section 25-10, provided the costs can be segregated and accurately quantified. Tracey must be able to segregate the costs of repairing the wiring from the (capital) costs of the electrical improvements. Tracey is required by section 262A of the ITAA 1936 to keep records that explain all transactions and other acts she engages in that are relevant for any purpose of the income tax law. It is advisable for Tracey to seek separate quotes and to maintain separate accounts in relation to the costs of repairing the wiring and the cost of electrical improvements.

Expenditure to remedy defects, damage or deterioration in existence at the date of acquisition (initial repairs)

NOTE:
See ruling at paragraphs 59 to 66 and explanations at paragraphs 125 to 140 of this Ruling

Example 13

166.	William Infelix purchases a house that was ostensibly in good repair. To make it more attractive to prospective tenants, minor repairs and renovations are undertaken. The minor repairs and renovations are initial repairs. Their cost is of a capital nature and not deductible. During the course of these repairs and renovations, William discovers that the woodwork is seriously affected by the ravages of white ants.

167.	Substantial expenditure is incurred to remedy the problems caused by the white ant infestation to restore the property to a state in which it is suitable for occupation by tenants.

168.	The expenditure incurred in these circumstances to fix the white ant problem existing at the date of purchase is also of a capital nature. It is therefore not deductible under section 25-10. The fact that William was unaware of the problem when he purchased the house, and the fact that he would have paid a lower purchase price if he had known of the need for repairs, do not alter the capital nature of the expense: Case 64 (1944) 11 TBRD (OS) 202 and the W Thomas & Co case.

Some specific issues in construing section 25-10

NOTE:
See ruling at paragraphs 67 to 74 and explanations at paragraphs 141 to 144 of this Ruling

Expenditure incurred by a taxpayer on repairs to property that the taxpayer does not own

Example 14

169.	Farmer Ted Kelly has poor access to one of his main paddocks. To gain access to the paddock for sowing, reaping his crops, etc., Ted uses a road over an adjoining farm owned by Ken Hall. Ted uses his neighbour's road with Ken's concurrence. Ken's road is a sand and gravel road that is not an all-weather one. Over time, Ken's road needs to be resurfaced with a grader. Ted meets the cost of grading Ken's road. The cost is deductible by Ted because he uses the road in carrying on his business to produce assessable income, even though he does not own the road.

Example 15

170.	Maureen and Pam Cook conduct a restaurant business from premises they lease. Because their landlord is reluctant to spend money on the premises, Maureen and Pam periodically undertake repairs to the premises. They are entitled to a deduction for their expenditure under section 25-10.

Expenditure for repairs before property is held, etc., for income purposes

NOTE:
See ruling at paragraph 75 and explanations at paragraph 145 of this Ruling

Example 16

171.	Mary-Ellen Walton, after the death of her spouse, decided to move out of the long-held family home and to rent it to tenants. She leaves the property on 15 July 1996. To make it more attractive for prospective tenants, Mary-Ellen undertakes major repairs and renovations to the house between August 1996 and February 1997. She places the house in the hands of a real estate agent on 15 March 1997 and lets the house to tenants on 1 April 1997. The costs of the repairs and renovations are not deductible under the old law. When the costs were incurred, Mary-Ellen was not holding or using the house to produce rental income. The costs are an expense in preparing the house for producing rent. They are of a capital nature.

Expenditure for repairs to property previously used for non-income producing purposes

NOTE:
See ruling at paragraphs 76 and 77 and explanations at paragraph 146 of this Ruling

Example 17

172.	Brenton Viator owns a motor vehicle that he bought in December 1992. On 1 July 1995 he applied for and got a job as a travelling salesperson and commenced to use his vehicle solely for income producing purposes. On 15 August 1996 Brenton incurs repair expenditure on the vehicle. The cost of the repairs is deductible under the old law because the costs were incurred in the 1996-97 year and, on 15 August 1996, the vehicle was being used for income producing purposes. This is so even though the repairs may relate, in part, to a period when the vehicle was used for private purposes.

Example 18

173.	A building has been owned by a tax exempt entity for a number of years. At the start of a new taxation year, the entity changes its operational activities so that it is now a taxable entity carrying on business for income-producing purposes. During this year, extensive repair work is done to the building. The cost of this repair work is fully deductible under section 25-10 even though some of the deterioration that is remedied is attributable to the period when the body was not taxable. Subdivision 57-G of Schedule 2D of the ITAA 1936 does not deny the deductions for the repairs.

Expenditure for repairs to property used for the purpose of providing non-deductible entertainment

NOTE:
See ruling at paragraph 78 and explanations at paragraphs 147 to 150 of this Ruling

Example 19

174.	Generous Co Ltd, a large accounting firm, uses a cruiser solely for the entertainment of its existing and prospective clients, business associates and staff by taking them on sightseeing river and ocean cruises. The company incurs $10,000 in repairing deterioration of the cruiser due to normal operating wear and tear. No deduction is allowable under section 8-1 or under section 25-10 for the repair costs.

Expenditure for repairs to property used only partly for income producing purposes during a year of income

NOTE:
See ruling at paragraph 79 and explanations at paragraphs 151 to 161 of this Ruling

Example 20

175.	Josephine Telefix, a television repairer, owns a station wagon that is used for 70% business and 30% private purposes during the taxation year. Repair costs of $10,000 are incurred on the front panels, engine and computer system in the station wagon following a car accident during the running of the business. The full amount of the repair costs of $10,000 is not deductible under section 25-10. Because Josephine uses the station wagon for private and for business purposes, subsection 25-10(2) limits the amount of her deduction to that part of the expenditure that reasonably relates to the use of the station wagon for business purposes, namely, $7,000.

Example 21

176.	Assume the facts in Example 20 are unchanged except that the accident occurs while Josephine is using the station wagon driving to Church, i.e., for private purposes. We reject the view that no part of the repair costs is deductible under section 25-10. Because Josephine uses the station wagon for private and for business purposes, subsection 25-10(2) limits the amount of her deduction to that part of the expenditure that reasonably relates to the use of the station wagon for business purposes, namely, $7,000.

Commissioner of Taxation

3 December 1997


Taxation Ruling TR 97/11 Primary production: am I carrying on a business of primary production?
Taxation Ruling TR 97/11 This incorporates erratum TR 97/11ER

Income tax: am I carrying on a business of primary production?

NOTE:
This Ruling, to the extent that it is capable of being a "public ruling" in terms of Part IVAAA of the Taxation Administration Act 1953, is a public ruling for the purposes of that Part. Taxation Ruling TR 92/1 explains when a Ruling is a public ruling and how it is binding on the Commissioner.

Contents:

What this Ruling is about

Date of Effect

Ruling

What is primary production

Some indicators of carrying on a business of primary production

Private Rulings

Explanations and examples

Indicators of a business of primary production

Significant commercial purpose or character

The intention of the taxpayer

Preparatory activities

Prospect of profit

Repetition and regularity

Is the activity of the same kind and carried on in a manner that is characteristic of the industry

Organisation in a businesslike manner and the use of system

Size or scale of the activity

Hobby or recreation

Application of all the indicators

Private rulings

Business plan

WHAT THIS RULING IS ABOUT

1.	This Ruling considers the meaning of "business" of "primary production" in the Income Tax Assessment Act 1936 ("the Act"). It provides a guide to the indicators that are relevant to whether or not a person is carrying on a business of primary production. It also indicates the extent to which the Australian Taxation Office ("ATO") is able to provide further guidance to taxpayers on this question with private rulings.

2.	The phrase "carrying on a business of primary production" appears in a number of provisions in the Act, including sections 36AAA, 70, 75AA, 75B, 75D and the "averaging provisions" (Division 16 of Part III of the Act). However, this Ruling does not consider the detailed operation of any of these provisions.

Class of person/arrangement

3.	This Ruling applies to persons who carry on activities which might be described as "primary production" in the Act (see the definition in paragraph 8 below).

4.	The Ruling does not deal with the situation of a taxpayer who receives a payment from a one-off transaction, where there is no question as to whether he/she is carrying on a business.

Other relevant Rulings and Determinations

5.	The following Taxation Rulings and Taxation Determinations consider whether specific activities come within the meaning of primary production:

•	Income Tax Ruling IT 219 – artificial breeding services;

•	Income Tax Ruling IT 289 – orchid growing; mushroom growing;

•	Income Tax Ruling IT 2006 – kelp harvesting;

•	Income Tax Ruling IT 2301 – prawn farming;

•	Taxation Ruling TR 95/6 – forest operations;

•	Taxation Determination TD 93/39 – beach worming;

•	Taxation Determination TD 93/95 – live sheep export.

6.	Taxation Ruling TR 93/26 expresses our views on a number of issues to do with the horse industry and when a taxpayer might be considered to be carrying on a business of primary production with respect to horses.

DATE OF EFFECT

7.	This Ruling applies to years commencing both before and after its date of issue. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 22 and 23 of Taxation Ruling TR 92/20).

RULING

What is primary production

8.	Subsection 6(1) of the Act defines "primary production" as production resulting directly from:

a.	the cultivation of land;

b.	the maintenance of animals or poultry for the purpose of selling them or their bodily produce, including natural increase;

c.	fishing operations, which means

o	operations relating directly to the taking or catching of fish, turtles, dugong, crustacea or oysters or other shellfish; or

o	pearling operations; and includes

o	oyster farming, but does not include whaling;

d.	forest operations, which include:

o	the planting or tending in a plantation or forest of trees intended for felling; and

o	the felling of trees in a plantation or forest; or

e.	horticulture;

and includes the manufacture of dairy produce by the person who produced the raw material used in that manufacture.

9.	A person is carrying on a business of primary production for the purposes of the Act if:

a.	he/she produces "primary production", as defined in subsection 6(1); and

b.	that activity amounts to the carrying on of a business.

10.	Subsection 6(1) defines "business" to include "any profession, trade, employment, vocation or calling, but does not include occupation as an employee". However, this definition simply states what activities may be included in a business. It does not provide any guidance for determining whether the nature, extent, and manner of undertaking those activities amount to the carrying on of a business. For this purpose it is necessary to turn to case law.

11.	The cases provide a number of indicators that are relevant to determining whether primary production activities constitute the carrying on of a business. These indicators are set out below. The indicators are no different, in principle, from the indicators as to whether activities in any other area constitute the carrying on of a business.

Some indicators of carrying on a business of primary production

12.	Whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators. Therefore, although it is not possible to lay down any conclusive test of whether a business of primary production is or is not being carried on, the indicators outlined below provide general guidance. This is explained further at paragraph 25 of this Ruling.

13.	The courts have held that the following indicators are relevant:

•	whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators (see paragraphs 28 to 38);

•	whether the taxpayer has more than just an intention to engage in business (see paragraphs 39 to 46);

•	whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity (see paragraphs 47 to 54);

•	whether there is repetition and regularity of the activity (see paragraphs 55 to 62);

•	whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business (see paragraphs 63 to 67);

•	whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit (see paragraphs 68 to 76);

•	the size, scale and permanency of the activity (see paragraphs 77 to 85); and

•	whether the activity is better described as a hobby, a form of recreation or a sporting activity (see paragraphs 86 to 93).

14.	A taxpayer does not need to derive all his/her income from the primary production activity. The taxpayer may also be employed in some other occupation or profession. What is important is that the taxpayer's primary production activity amounts to the carrying on of a business. This activity is considered separately from any other employment or business carried on by the taxpayer. The fact that another business is carried on does not necessarily mean that the primary production activity is also a business.

15.	We stress that no one indicator is decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922), and there is often a significant overlap of these indicators. For example, an intention to make a profit will often motivate a person to carry out the activity in a systematic and organised way, so that the costs are kept down and the production and the price obtained for the produce are increased.

16.	The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the "large or general impression gained" (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a "commercial flavour" (Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case.

17.	Subject to all the circumstances of a case, where an overall profit motive appears absent and the activity does not look like it will ever produce a profit, it is unlikely that the activity will amount to a business.

18.	The following table provides a summary of the main indicators of carrying on a business. The last three items shown are factors which support the main indicators.

Indicators which suggest a business is being carried on	Indicators which suggest a business is not being carried on
a significant commercial activity	not a significant commercial activity
purpose and intention of the taxpayer in engaging in the activity	no purpose or intention of the taxpayer to carry on a business activity
an intention to make a profit from the activity	no intention to make a profit from the activity
the activity is or will be profitable	the activity is inherently unprofitable
repetition and regularity of activity	little repetition or regularity of activity
activity is carried on in a similar manner to that of the ordinary trade	activity carried on in an ad hoc manner
activity organised and carried on in a businesslike manner and systematically -records are kept	activity not organised or carried on in the same manner as the normal ordinary business activity – records are not kept
size and scale of the activity	small size and scale
not a hobby, recreation or sporting activity	a hobby, recreation or sporting activity
a business plan exists	there is no business plan
commercial sales of product	sale of products to relatives and friends
taxpayer has knowledge or skill	taxpayer lacks knowledge or skill
Private rulings

19.	A person cannot obtain a private ruling under Part IVAA of the Taxation Administration Act 1953 ("TAA") on whether he/she is carrying on a business: see Taxation Determination TD 96/16. Likewise, a person cannot obtain a private ruling on whether he/she is carrying on a business of primary production. These are questions of fact, rather than questions of law.

20.	However, it is possible for a person to identify a tax law that depends for its operation on whether the taxpayer is carrying on a business of primary production. A person may seek a private ruling on the application of a tax law to a particular primary production activity.

21.	A taxpayer's application for a private ruling needs to show, if the arrangement has not already begun, that it is being "seriously contemplated": paragraph 14ZAN(h) of the TAA. The application should point out:

•	how the rulee intends to carry out the arrangement; and

•	that the rulee has the means to carry out the arrangement; or

•	that the rulee has taken or will soon take steps to obtain the means to carry out the arrangement.

22.	An application should contain "sufficient information" to enable the Commissioner to give the ruling. "Sufficient information" in relation to a private ruling, where the matter(s) in issue include the carrying on of a business of primary production, includes information which covers the indicators set out at paragraph 13 (see also paragraphs 104 to 109).

EXPLANATIONS AND EXAMPLES

Indicators of a business of primary production

23.	There are no hard and fast rules for determining whether a taxpayer's activities amount to the carrying on of a business of primary production. The facts of each case must be examined. In Martin at CLR 474; AITR 551 Webb J said:

"The test is both subjective and objective: it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and, as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained."

24.	The nature of the activity, the taxpayer's intention and the method of operation help determine whether a business of primary production is being carried on. Many of the relevant indicators are stated in the decision of the Full Federal Court in Ferguson. Bowen CJ and Franki J said in their joint judgment at FLR 314; ATC 4264-4265; ATR 876-877:

"Section 6 of the Income Tax Assessment Act defines "business", stating that it includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee. This does not afford much assistance in the present case. It is necessary to turn to the cases. There are many elements to be considered. The nature of the activities, particularly whether they have the purpose of profit-making, may be important. However, an immediate purpose of profit-making in a particular income year does not appear to be essential. Certainly it may be held a person is carrying on business notwithstanding his profit is small or even where he is making a loss. Repetition and regularity of the activities is also important. However, every business has to begin, and even isolated activities may in the circumstances be held to be the commencement of carrying on business. Again, organization of activities in a businesslike manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on. The fact that, concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business, does not preclude a finding that his additional activities constitute the carrying on of a business. The volume of his operations and the amount of capital employed by him may be significant. However, if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business, even though his operations are fairly substantial." (emphasis added)

25.	In Evans, Hill J agreed that no one indicator could determine whether a business is being carried on. He said at ATC 4555; ATR 939:

"The question of whether a particular activity constitutes a business is often a difficult one involving as it does questions of fact and degree. Although both parties referred me to comments made in decided cases, each of the cases depends upon its own facts and in the ultimate is unhelpful in the resolution of some other and different fact situation.

There is no one factor that is decisive of whether a particular activity constitutes a business. As Jessel M.R. said in the famous dictum in Ericksen v. Last (1881) 8 Q.B. 414 at p.416:

"There is not, I think, any principle of law which lays down what carrying on trade is. There are a multitude of things which together make up the carrying on of trade."

Profit motive (but see cf. I.R. Commrs v. Incorporated Council of Law Reporting (1888) 22 Q.B. 279), scale of activity, whether ordinary commercial principles are applied characteristic of the line of business in which the venture is carried on (I.R. Commrs v. Livingston (1927) 11 T.C. 538), repetition and a permanent character, continuity (Hope v. Bathurst City Council 80 ATC 4386 at p. 4390; (1980) 144 C.L.R. 1 at p. 9; Ferguson v. FC of T 79 ATC 4261 at p. 4264), and system (Newton v. Pyke (1908) 25 T.L.R. 127) are all indicia to be considered as a whole, although the absence of any one will not necessarily result in the conclusion that no business is carried on."

26.	From the judgments it is clear that the relevant indicators of whether a business of primary production is being carried on by a taxpayer are:

•	does the activity have a significant commercial purpose or character?

•	does the taxpayer have more than a mere intention to engage in business?

•	is there an intention to make a profit or a genuine belief that a profit will be made? Will the activity be profitable?

•	is there repetition and regularity in the activity? i.e., how often is the activity engaged in? How much time does the taxpayer spend on the activity?

•	is the activity of the same kind and carried on in a similar way to that of the ordinary trade?

•	is the activity organised in a businesslike manner?

•	what is the size or scale of the activity?

•	is the activity better described as a hobby, a form of recreation or a sporting activity?

27.	Note:

•	The following Explanations and Examples have generally been designed to highlight the importance or significance of one indicator or several indicators in certain situations, before considering the next indicator.

•	The Examples are not meant to detract from our view that all the relevant indicators need to be considered when deciding whether a primary production activity amounts to a business.

•	Similarly, the amount of detail contained in the Examples is well short of the amount of information needed to properly determine the question of whether the taxpayer is carrying on a business of primary production. Refer to CTC Resources NL v. FC of T 94 ATC 4072; (1994) 27 ATR 403 about the need for sufficient information, and note, for example, that the High Court in Hope could not determine the question of whether the activities amounted to a grazing business on the case stated before the court.

•	The Examples are not intended to set a minimum number of plants or animals, required by a taxpayer before he/she can show that he/she is carrying on a business of primary production.

Significant commercial purpose or character

28.	It is frequently those taxpayers, who earn income from employment or other sources and/or enter into some sort of primary production activity in a small way, who want to show that they are in a business of primary production. These taxpayers usually claim deductions for losses for taxation purposes in the first years of being involved in this activity. In showing that a business is being carried on, it is important that the taxpayer is able to provide evidence that shows there is a significant commercial purpose or character to the primary production activity, i.e., that the activity is carried on for commercial reasons and in a commercially viable manner.

29.	The phrase "significant commercial purpose" is referred to by Walsh J in Thomas v. FC of T 72 ATC 4094; (1972) 3 ATR 165, (refer to paragraph 81) and discussed further by Gibbs CJ and Stephen J in Hope. The "significant commercial purpose or character" indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity (refer to paragraphs 77 to 85), the repetition and regularity of activity (refer to paragraphs 55 to 62) and the profit indicators (refer to paragraphs 47 to 54). A way of establishing that there is a significant commercial purpose or character is to compare the activities with those of a taxpayer who is carrying on a similar activity that is a business. Any knowledge, previous experience or skill of the taxpayer in the activity, and any advice taken by the taxpayer in the conduct of the business should also be considered but are not necessarily determinative: see Thomas. In that case, Walsh J found that the taxpayer's activities in growing macadamia nut trees and avocado pear trees amounted to the carrying on of a business. The court was influenced by the scale of the activity, and the taxpayer's expectation of an ongoing financial return. Consideration should also be given to whether the taxpayer is a pioneer in the activity or has developed a new method of undertaking the activity, whether successful or not.

30.	In order to show that there is a significant commercial purpose or character we suggest that it may help to know whether the taxpayer has:

•	drawn up a business plan (refer to paragraphs 110 to 115);

•	where the taxpayer is not an expert, sought expert advice from the relevant authorities, experienced farmers or agents that work in the area of primary production that the taxpayer intends to carry on;

•	where the taxpayer is not an expert, obtained technical literature on the activity which the taxpayer intends to carry on;

•	obtained soil and water analyses of the land that will be used for the activity;

•	established that his/her land is suitable for the activity which the taxpayer intends to carry on;

•	considered whether there is a market for his/her product and looked into potential markets for the product (the taxpayer is more likely to be regarded as carrying on a business if he/she sells in a commercial market instead of casual sales to relatives, friends or the public);

•	investigated properly the capital requirement of the venture and has a plan that shows how that capital will be obtained and used;

•	conducted research into the activity. This should confirm that profits can be expected based on the market prospects, the expected level of production and the running costs of the business (support for this research by reference to authenticated source material assists the taxpayer);

•	ensured that the size and scale of the activity is sufficient for a commercial enterprise;

•	complied with any legal requirements, i.e., that he/she has obtained any necessary licences, permits and registrations required to operate on a commercial level or can show that these requirements can and will be complied with at the appropriate time, e.g., at the time that produce becomes available for sale; and

•	an intention to make a profit. (This could be shown, for example, by a business plan. Further, the taxpayer should have a reasonable belief that the activity is likely to generate a profit.)

These suggestions will assist the taxpayer to show that he/she is carrying on a business of primary production. It will assist the taxpayer if he/she is able to provide evidence in writing to support these activities and plans.

Example 1 – significant commercial purpose or character

31.	Mark, a barrister, and his wife Tina, a medical researcher, bought 8 hectares of land on which they built a home. They realised that the land was fertile and capable of producing fruit. Mark spent a year seeking advice from the Department of Primary Industries and local farmers. He collected technical literature on citrus farming and obtained soil and water analyses of the land which showed the land was fertile and suitable for the intended activity. He drew up a business plan and a budget of capital and recurrent costs. After clearing the land he and Tina planted 700 mandarin trees, 700 orange trees and 700 lemon trees. They did not expect to make a profit for eight years. Mark also installed an irrigation system. Mark and Tina spent many months investigating the market for citrus fruit and established that there would be no problems in selling their product to wholesalers if it was of good quality. They complied with all registration and licensing requirements. The trees grew well. Mark and Tina devoted a substantial part of their weekends to looking after the trees. They employed casual labour to spray for weeds and pests and to prune the trees. But, before they received any income from the sale of fruit, the trees were destroyed by fire. Were Mark and Tina carrying on a business of citrus fruit farming?

32.	Yes – despite no income being gained – because:

•	the scale of their activity was far in excess of their personal needs, and large enough to ensure the venture would be profitable;

•	there was a clear intention to make a profit, even though this would take some time to occur;

•	the intention to make a profit was based on reasonable grounds and backed up by appropriate research;

•	there were likely to be buyers for their produce for some time ahead;

•	the trees were looked after in a manner consistent with business operations;

•	they established and conducted the activity in a businesslike manner;

•	they asked for and followed advice from professionals; and

•	there was an overall permanence about their activity, and the trees would have yielded fruit for a number of years.

33.	What if Mark and Tina had not done the above research and analysis, had only planted a small number of different types of trees to test which would grow best, and were still investigating the likelihood of potential buyers? This would suggest that their activity was only of a "preliminary or preparatory" nature and did not amount to the carrying on of a business (refer to paragraph 41).

(Note: refer to paragraph 27.)

Example 2 – significant commercial purpose or character

34.	Nick, a tax lawyer and avid fisherman, owned a 60-foot yacht which he used to go fishing. Several years ago he took advantage of an opportunity to purchase a commercial fishing licence. He rescheduled other commitments so he could spend every second weekend fishing. His crew comprised his sons, David and Michael, and a couple of their acquaintances. Usually Nick and his crew were successful and caught a lot of fish. The crew were paid with fish and the remaining fish were sold to a fish wholesaler. Nick had not conducted any research into the market or methods of fishing. He fished for the best sport fish, and was not concerned with finding fish with the best market returns. Nick had no business plan and was not particularly worried whether his costs were covered by the sale of the fish or not. Further, trips were only made in sunny conditions. Was Nick carrying on a business of fishing?

35.	No, this does not appear to be a business. Where the activity is one in which many other people take part for sport or recreational purposes we believe there is a need to show a strong "commercial flavour" about the activity before it would ordinarily be regarded as a business (refer to paragraph 86). In this case:

•	there was no apparent intention to make a profit;

•	the activity lacked the degree of organisation and system that would be found in the activities of people who normally would be regarded as carrying on a business of fishing;

•	the scale of the activity was not small and exceeded the personal needs, but this did not outweigh the sporting or recreational motive behind the fishing trips; and

•	similarly, the trips were conducted regularly, as were sales of the fish, but this also could be explained by the fact that Nick just likes to go fishing often.

(Note: refer to paragraph 27.)

Example 3 – significant commercial purpose or character

36.	Naida and her family kept twelve chickens. Twelve was the minimum that she liked to have around. She knew that her relatives and friends liked her home grown eggs, especially the double yolks that were often produced. The chickens produced about six dozen eggs per week. Of these Naida and her family consumed one dozen. She sold the remaining five dozen eggs to relatives and friends. She found that after taking into account her direct feed costs she usually managed, in her estimation, to make a modest profit of $5.00 per week. Was Naida carrying on the business of egg production?

37.	No. Even though she had repetition and regularity in her operations and was making a modest gross profit:

•	she was not conducting the activity in the same way as that of a commercial poultry farmer;

•	she did not try to sell in a commercial market;

•	she did not seek the best price for her eggs;

•	she did not sell chickens that were culled because of falling productivity;

•	the scale of her operations were such that she could never produce a net profit;

•	she had not conducted any research into the egg industry; and

•	she had not looked at the full costs of production and distribution in determining the commercial viability of her enterprise.

38.	If Naida's activities changed significantly and she: had considerably more chickens; sold the eggs to the public at large at market prices or to retail egg sellers; and established by research that this level of activity was profitable after taking all her costs into account; this would point to a significant commercial character and a profit motive. She may then be carrying on a business of egg production.

(Note: refer to paragraph 27.)

The intention of the taxpayer

39.	The intention of the taxpayer in engaging in the activity is a relevant indicator: see Thomas. However, a mere intention to carry on a business is not enough. There must be activity. Brennan J in Inglis v. FC of T 80 ATC 4001 at 4004-4005; (1979) 10 ATR 493 at 496-497 said that:

"The carrying on of a business is not a matter merely of intention. It is a matter of activity. ... At the end of the day, the extent of activity determines whether the business is being carried on. That is a question of fact and degree."

See also J&R O'Kane & Co v. IR Commissioners (1920) 12 TC 303 at 347 and Case K9 78 ATC 98 at 103; 22 CTBR (NS) Case 29 at 302.

40.	This indicator is particularly related to:

•	whether the activity is preparatory or preliminary to the ultimate activity;

•	whether there is an intention to make a profit; and

•	whether the activity is better described as a hobby or the pursuit of a recreational or sporting activity.

Preparatory activities

41.	Sometimes a taxpayer may have incurred expenses before commencing a particular business of primary production. For example, expenses associated with experimental or pilot activities which do not amount to a business and do not result in any assessable income being produced are not deductible: see Softwood Pulp and Paper Ltd v. FC of T 76 ATC 4439; (1976) 7 ATR 101 and Goodman Fielder Wattie Ltd v. FC of T 91 ATC 4438; (1991) 22 ATR 26. Experimental or pilot activities of this nature should be distinguished from the activities in Ferguson, which were found to have a sufficient commercial character to be regarded as a business in their own right. However, where a business has commenced, expenses may be deductible even if no income is derived in the relevant year: see Thomas.

Example 4 – the intention of the taxpayer

42.	Pat and Laurie purchased 1,500 acres of rural land in 1980. They heard of an experimental variety of cattle which was bred on the other side of the country. Their friends told them that if this breed became successful they might make a lot of money from establishing a herd. Through friends, they arranged for the transport of one steer to their property. This steer remained on the property from 1980 to 1985 when it died due to lack of veterinary care. They took no further action with respect to the land, preferring to save for the purchase of either cows or sheep in the future. Were Pat and Laurie carrying on a business of primary production?

43.	Pat and Laurie were not carrying on a business of primary production as:

•	they had no clear purpose of how they would use the land to earn money;

•	the one steer was purely experimental;

•	the steer was incapable of breeding; and

•	the scale of this activity was insufficient to constitute a business.

44.	Pat and Laurie's experimental activities did not have a sufficient commercial character to be regarded as a business. These activities pointed to a decision not yet having been made to carry on business and a lack of commitment at that time to do so (see also the contrasting situations described in Example 1 at paragraph 31).

(Note: refer to paragraph 27.)

Example 5 – the intention of the taxpayer

45.	Lindsay and Loretta bought 700 hectares of run down rural land in 1980. They intended to start a cattle farming business. Over the next five years they spent several thousand dollars on farm machinery. They used this to clear the land, build roads and mend fences. They also bought and erected some farm buildings. No income was derived from the property until 1986 when they stocked the property with 100 cattle. Were Lindsay and Loretta carrying on a business from 1980 to 1985?

46.	No, because:

•	the activities of Lindsay and Loretta from 1980 to 1985 would be regarded as preparatory to the commencement of business;

•	whilst they had a clear purpose to engage in cattle farming, they recognised that certain things needed to be done to the land before they were able to buy the cattle and put them on the land;

•	until 1986 there was no size or scale of the relevant activity in the sense that there was no stock; and

•	there was no repetition or regularity of activity with respect to cattle farming until the land was stocked.

(Note: refer to paragraph 27.)

Prospect of profit

47.	We consider this to be a very important indicator. In Hope at CLR 8-9; ATC 4390; ATR 236, Mason J indicated that the carrying on of a business is usually such that the activities are:

"... engaged in for the purpose of profit on a continuous and repetitive basis."

In Smith v. Anderson (1880) 15 Ch D 247 at 258, Jessell MR said that:

"... anything which occupies the time and attention and labour of a man for the purpose of profit is business."

In Case H11 76 ATC 59 at 61; 20 CTBR (NS) Case 65 at 603, the Chairman of Board of Review No 1 said:

"In determining whether a business is being carried on it is, in my view, proper to consider, as one of the elements, whether the activities under consideration could ever result in a profit ..."

48.	We believe it is important that the taxpayer is able to show how the activity can make a profit. Stronger evidence of an intention to make a profit occurs when the taxpayer has conducted research into his/her proposed activity, consulted experts or received advice on the running of the activity and the profitability of it before setting up the business. This was the situation in FC of T v. JR Walker 85 ATC 4179; (1985) 16 ATR 331. However, it is not necessary for the primary production activities to make a profit in every year of income in order to classify the activities as a business of primary production. Thus, a taxpayer may be carrying on a business of primary production even though he/she is making a small profit or a loss in any given year of income.

49.	The situation may arise where a taxpayer is carrying on a business and has an intention to make a profit but the objective evidence is such that a profit is unlikely to be made in the short term. Bowen CJ and Franki J in Ferguson at ATC 4264; ATR 876 stated that "... an immediate purpose of profit-making in a particular income year does not appear to be essential ...". Thus, where short term losses are expected it may be that a business is nevertheless being carried on: see Tweddle v. FC of T (1942) 7 ATD 186; (1942) 2 AITR 360.

50.	Where an activity is carried on and the objective evidence is that it is unlikely a profit will ever be made, this fact in itself does not necessarily mean that a business is not being carried on, if the taxpayer believes that the activity will become profitable. As Walsh J said in Thomas at ATC 4100; ATR 171:

"It is not in doubt that he made mistakes. But many persons carry on a business for the competent conduct of which they have not previously acquired much knowledge or experience."

See also Tweddle's case at ATD 190; AITR 364. Taxpayers need to show that the other indicators of business are present in sufficient strength to outweigh any objective view that the activity may be inherently unprofitable. A number of Board of Review and Administrative Appeals Tribunal decisions show that a taxpayer in this situation bears a heavy onus: see Case M50 80 ATC 349; 24 CTBR (NS) Case 24; Case K9 78 ATC 98; 22 CTBR (NS) Case 29; Case L16 79 ATC 84; 23 CTBR (NS) Case 20 and Case L22 79 ATC 106; 23 CTBR (NS) Case 25.

Example 6 – prospect of profit

51.	For a number of years Peter used his four hectare property to cultivate 100 pawpaw trees on the outskirts of Fremantle. He had planted the trees on his return from a trip to the tropics. He had thought that there must be a good market for locally grown tropical fruit in Fremantle. However, he had not conducted any research into the growing conditions they would need, including climate, their care or potential markets. He had not undertaken any soil analysis. He was always unable to market the limited amount of produce that he did obtain, because of its poor quality. His only disposals of fruit were to friends and relatives for which no money was received. Expert advice was that commercially saleable fruit would never grow in the location, and that there was little likelihood of a profit ever being made. Was Peter carrying on a business of primary production?

52.	No. Not only was there no reasonable expectation that the activity would be profitable, there was also:

•	a lack of system and organisation about the activity, including inadequate preparation;

•	a lack of use of the type of methods commercial pawpaw growers use, including suitability of location for growing the fruit; and

•	a general lack of "significant commercial purpose or character" about the activity.

(Note: refer to paragraph 27.)

Example 7 – prospect of profit

53.	Fay's friends were avid growers of olive trees and were making a small profit on the sale of olive oil they produced from their olives. Fay decided to grow olive trees on her modest property. She researched the varieties and selected those best for olive oil production. Fay planted 50 olive trees on her property. She knew they were hardy trees which required minimum maintenance. She spent the minimum amount of time necessary to care for the trees. She had spoken to her friends and had calculated that after four years she would be able to make a profit on the production of olive oil from the olives she picked. The trees thrived. In the fifth year after planting, a sizeable crop was produced. Fay employed casual labour to pick the olives, borrowed a friend's trailer and took the olives to be pressed. She sold the barrels of olive oil to friends, work colleagues and members of the public who responded to her newspaper advertisements. She derived a substantial profit in that year, which she was told by her friends in the industry was typical. Was Fay carrying on a business of olive production?

54.	Yes. The activities were carried out with a purpose to make a profit, even if no income was made in the first four years of operation. In addition:

•	Fay clearly had a plan to make the activity succeed. She had conducted research by consulting friends in the industry and the local growers association;

•	though the activity was small it was organised. By its nature the activity required minimum maintenance. It was not carried on in an ad hoc manner. Rather, it was carried on in a manner similar to that of other olive producers; and

•	there was repetition and regularity of the activity.

(Note: refer to paragraph 27.)

Repetition and regularity

55.	It is often a feature of a business that similar sorts of activities are repeated on a regular basis. The repetition of activities by the same person over a period of time on a regular basis helps to determine whether there is the "carrying on" of a business. For example, in Hope the "transactions were entered into on a continuous and repetitive basis", such that the taxpayer's activities "manifested the essential characteristics required of a business". Similarly, in JR Walker the court held that there was repetition and regularity in the taxpayer's activities directed to the breeding of high quality Angora goats and to keeping up with the latest information on Angora goats.

56.	The taxpayer should undertake at least the minimum activities necessary to maintain a commercial quantity and quality of product for sale. It may be that there are no minimum levels for this activity. Where there are minimum levels necessary for this activity which the taxpayer fails to maintain, it may be that for a period the taxpayer has ceased to carry on a business of primary production.

Example 8 – repetition and regularity

57.	George owned a pastoral property, "Wytelaidee", which consisted of 600 hectares. He had acquired the property in 1970. Two hundred hectares were suitable for cultivation and the rest was open grazing country. Cattle and sheep were grazed for a number of years. George grew his own feed for the animals and also grew 200 olive trees. The cattle and sheep were the main primary production activities. The olive trees were a secondary activity because they required limited care. George did ensure that they were adequately sprayed and watered. The olives were bottled and pickled or olive oil was extracted from them, and the produce was sold on a regular basis. He usually made a profit from his primary production activities.

58.	However, George was drawn into a legal battle over "Wytelaidee" in 1990. He was unable to spend any time on the property and sold all stock, plant and equipment to finance the legal battle. The olive trees were left untended and grew wild. The olives were left to rot. No income was derived from the property from 1991 until the legal battle ended in 1995. George always intended to recommence operations on "Wytelaidee" after the legal battle. Was George carrying on a business of primary production for the years 1991 to 1995?

59.	No. As the property was left untended for the period and stock and equipment was sold there was no activity being carried on; thus there was a lack of:

•	any size or scale of activity;

•	an intention to make a profit;

•	repetition or regularity of activity;

•	a significant commercial purpose.

60.	If George had made arrangements for the olives to be picked, processed and sold, he may have been able to claim that he continued to carry on a business of olive production and sale.

(Note: refer to paragraph 27.)

Example 9 – repetition and regularity

61.	John, a commercial lawyer, owned 500 apricot trees on a weekend retreat property located 250 km from his home in Brisbane. The trees had been in commercial production when he bought the property. John knew at the outset that he could, with proper management, run the enterprise at a profit. However, due to his employment, he was busy in the city and was unable to attend to the trees on a regular basis. Thus, he did not spray the trees for pests, irrigate or prune them. He decided that he could not be bothered hiring someone to look after the trees. He picked what he could in the hope of making some return but owing to the lack of care the apricots were not of a suitable quality for the commercial market. They were rejected by a wholesaler he approached after he had picked a small quantity of the fruit. He left what fruit he had picked with an honesty box on the side of the road and estimated that he got $50. Was John carrying on a business of apricot growing?

62.	No, despite the impression given by the size and scale of his activity. Further:

•	there was no repetition and regularity of activities that would produce a commercial quantity and quality of fruit for sale;

•	there was no clear evidence that he intended to make a profit from this activity;

•	the way he conducted it meant it was extremely unlikely that he would ever cover his costs;

•	he did not adopt methods used by commercial orchardists; and

•	there was a general lack of system and organisation about his apricot growing activity.

(Note: refer to paragraph 27.)

Is the activity of the same kind and carried on in a manner that is characteristic of the industry?

63.	An activity is more likely to be a business when it is carried on in a manner similar to that in which other participants in the same industry carry on their activities. Lord Clyde in IR Commissioners v. Livingston at TC 542 said that:

"... the test, which must be used to determine whether a venture ... is, or is not, "in the nature of trade", is whether the operations involved in it are of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made."

64.	In considering this indicator the following factors might be compared with the characteristics of others engaged in the same type of business:

•	the volume of sales. If there is a small number of sales it is less likely that a business is being carried on. The volume of sales should be capable of producing a profit at some time. However, allowance is made for droughts, fires and other uncontrollable events which may effect the volume of sales. We also accept that in the early stages of an activity, sales may be low;

•	the types of customers the taxpayer sells his/her product to – wholesalers, retailers, the public at large, or friends or relatives – and the manner in which this marketing takes place;

•	the sort of expenses incurred by the taxpayer;

•	the amount invested in capital items;

•	previous experience of the taxpayer. A taxpayer who does not have any knowledge or experience may be expected to have sought advice from experts. However, it is recognised that a taxpayer may be a pioneer in the industry. The taxpayer may have conducted research into the activity, decided that the traditional approach is wrong. He/she may be trying to conduct the activity with a view to profit in a new but businesslike way; and

•	the activity should also be compared with that of a keen amateur. The sales of a keen amateur may only be a way of obtaining "new" funds to continue with the personal interest.

65.	The aspects mentioned in the above paragraph would be compared to the same aspects of how others in the industry conduct their business of primary production. The activity should also be compared to that of the activity of a keen amateur. A taxpayer who:

•	has no knowledge or experience of the primary production activity that he/she intends to enter into; and

•	does not seek advice or conduct research; and

•	starts the activity;

•	may have difficulty in proving that he/she is carrying on a business of primary production. This will be especially so when the above points add to a general impression that there is no profit motive behind the activity and that there is very little likelihood that the activity will ever be profitable.

Example 10 – activity of same kind and carried on in a manner characteristic of industry

66.	Geoff and Heather purchased a small property in the Adelaide Hills after returning from a holiday in Japan where they had noticed not only the sale price but also the remarkable size and flavour of the apples. They had determined that the land was suitable for apple trees. Both spent a considerable amount of time researching, talking to experts and collecting technical literature on apples for the Japanese market. They determined from discussion with wholesalers that if their apples were of superior quality they would have a ready market and would be able to make a substantial profit from selling them They both changed their employment from full-time to part-time so that at all times one of them was on the property. They selected varieties for the Japanese market based on their research and planted one hundred trees. Heather devised a unique irrigation system which they installed. They carefully sprayed and pruned the trees and protected the growing fruit from the elements. From their research they ensured they would meet stringent overseas market rules regarding spraying and quality, etc. They distinguished their product by individually wrapping their fruit and putting "quality one" labels on them. They made losses for four years in a row. In the fifth year, although making significant sales, their production was still insufficient to generate a profit. However, based on current market conditions and anticipated production levels, they were confident that in future years they would make a profit. Were Geoff and Heather carrying on a business of apple production?

67.	Yes, because despite the size and scale of operation and the fact that the activity was not carried on in a similar manner to that of the ordinary trade of apple growing:

•	there was an apparent significant commercial purpose or character to their activity;

•	there was a clear intention to make a profit and their research had shown that the activity would be profitable;

•	despite lacking previous experience of apple production they conducted specific research into the methods required to succeed in servicing a specialty market;

•	there was repetition and regularity of the activity given the amount of time they spent attending to the trees;

•	there was an intention to engage in business and a plan for its successful and profitable operation; and

•	unlike Peter in Example 6 (paragraph 51), Geoff and Heather are able to show that they are pioneering new methods or servicing specialty markets.

(Note: refer to paragraph 27.)

Organisation in a businesslike manner and the use of system

68.	In Newton v. Pyke the court suggested that business should be conducted systematically. A business is characteristically carried on in a systematic and organised manner rather than on an ad hoc basis. An activity should generally conform with ordinary commercial principles to amount to the carrying on of a business.

69.	In Ferguson the Full Federal Court was influenced by the systematic and organised nature of the taxpayer's activities. Fisher J said at FLR 324-325; ATC 4271; ATR 884:

"... the venture as a whole had a commercial flavour, was conducted systematically and, ... in a business like manner. It could not be said that there was anything haphazard or disorganised in the way in which he carried out the activity."

In JR Walker Ryan J was satisfied, at ATC 4182; ATR 335, that the taxpayer was in the business of goat breeding as he had "organised his activities in a business-like way through the keeping of books of account".

70.	The weight that is attached to this indicator will depend on the facts of the situation and a taxpayer may still carry on a business of primary production despite having poor organisational skills.

Example 11 – organisation in a businesslike manner and the use of system

71.	Rob had a passion for Topiary plants. He had 500 plants which he had potted and tended on his modest property. There was no local market for the plants. The nearest major city was Melbourne but it was too expensive for him to transport the plants to the city on a regular basis to sell them. He tried unsuccessfully to sell the plants, on irregular occasions, at the Melbourne markets. Rob had no credit facilities and only accepted cash. Was Rob carrying on a business of primary production?

72.	No, because:

•	his activity did not appear to have an element of commerciality;

•	he had not conducted research into the activity, potential markets, or the profitability of the activity;

•	his markets were restricted;

•	he placed restrictions on his ability to sell the plants by his inability to cater for anything other than cash;

•	he had no plan or system in place to make the activity succeed; and

•	he engaged in the activity because of his passion for the plants.

(Note: Refer to paragraph 27.)

73.	In some cases it is essential that specific records are kept, e.g., breeding records for a stud farm. Other matters that may demonstrate that a systematic approach is taken to record keeping are the keeping of records of:

•	inputs and costs of production;

•	seasonal and other conditions affecting production; and

•	how growing and market conditions have varied.

74.	For taxation purposes, certain records are required to be kept where a business is being carried on. The keeping of records which monitor the flow of cash, stock and production assists in showing that a business is being carried on (see also Taxation Ruling TR 96/7 and the record keeping provisions of section 262A of the Act).

Example 12 – organisation in a businesslike manner and the use of system

75.	Leon owned a property of twenty hectares in Queensland, an hour's drive from his home. He bred race horses and had begun with six brood mares, a stallion and a colt which he had built into a modest-sized stable. Over the years he had conducted extensive research into horse breeding activities and had collected a great deal of literature. Through his contacts with local and overseas breeders he developed a number of ideas for a successful and profitable breeding program. He had established that he could make a reasonable profit, had identified relevant markets and had a business plan. He had set up a computer system to monitor the breeding program, costs and the record keeping requirements of the Act. His activity was well organised and conducted in a systematic manner. Was Leon carrying on a business of primary production?

76.	Yes. Given the presence of the other indicators, the fact that he carried on his activity in an organised and systematic manner added weight to the conclusion that he was carrying on a business of horse breeding. See also the discussion in paragraph 9 of Taxation Ruling TR 93/26 dealing with issues relating to the horse industry.

(Note: refer to paragraph 27.)

Size or scale of the activity

77.	The larger the scale of the activity the more likely it will be that the taxpayer is carrying on a business of primary production. However, this is not always the case. The size or scale of the activity is not a determinative test, and a person may carry on a business though in a small way (Thomas at ATC 4099; ATR 171).

78.	For example, the case of JR Walker involved five Angora goats, two of which died. Whilst the scale was small, the court held that a goat breeding business was being carried on because there was a profit making purpose and repetition and regularity in the taxpayer's activities. Research, based on authenticated sources, showed that a profit could be made from the significant capital allocated to breeding stock.

79.	In JR Walker, Ryan J said at ATC 4182; ATR 334:

"... the respondent's activities had the purpose of profit making. ... There was also repetition and regularity in his activities. ... The activities of the taxpayer were limited but ... he maintained communications with the expert and he tried to make himself informed about market conditions through membership of the Angora Breed Society and reading publications ... He organised his activities in a business-like way through the keeping of books of account ..."

80.	The scale of the activities may be small but still result in more produce than is required for the taxpayer's own domestic needs. Where this is so, and there is also an intent to profit from the activities and a reasonable expectation of doing so, a business may be carried on despite the scale.

81.	Similarly, in Thomas at ATC 4099; ATR 171 Walsh J in the High Court said:

"But a man may carry on a business although he does so in a small way. In my opinion the appellant's activities in growing the trees ought not to be found to have been carried on merely for recreation or as a hobby. I leave out of account the pine trees, the growing of which did not have, I think, a significant commercial purpose or character. But the appellant in planting the avocado pear trees and the macadamia nut trees set out to grow them on a scale that was much greater than was required to satisfy his own domestic needs and he expected upon reasonable grounds that their produce would have a ready market and would yield, if the trees became established, a financial return which would be of a significant amount, with relatively small outlay of time and money, and that this return would continue for a very long time."

82.	The smaller the scale of the activity the more important the other indicators become when deciding whether a taxpayer is carrying on a business of primary production.

Example 13 – size or scale of the activity

83.	See Example 9 (John and his 500 apricot trees) at paragraph 61. In this example, despite the size/scale of activity by John, he was not carrying on a business of primary production.

(Note: refer to paragraph 27.)

Example 14 – size or scale of the activity

84.	See Example 10 (Geoff and Heather and the Japanese apple market) at paragraph 66. In this example, Geoff and Heather carried on a business of very small scale apple production for the Japanese market. Their research has shown that their activities will result in a profit.

(Note: refer to paragraph 27.)

Example 15 – size or scale of the activity

85.	See Example 3 (Naida and her chickens) at paragraph 36. The small scale of her operations counted against there being a commercial purpose or character to the activities.

(Note: Refer to paragraph 27.)

Hobby or recreation

86.	The pursuit of a hobby is not the carrying on of a business for taxation purposes. Money derived from the pursuit of a hobby is not regarded as income and therefore is not assessable. As was said in Ferguson at ATC 4265; ATR 877:

"... if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business, even though his operations are fairly substantial." (emphasis added)

Expenses incurred in relation to the hobby activity are not allowable deductions. However, we recognise that a hobby can sometimes turn into a business.

87.	Often it will be the case that there is a hobby when:

•	it is evident that the taxpayer does not intend to make a profit from the activity;

•	losses are incurred because the activity is motivated by personal pleasure and not to make a profit and there is no plan in place to show how a profit can be made;

•	the transaction is isolated and there is no repetition or regularity of sales;

•	any activity is not carried on in the same manner as a normal, ordinary business activity;

•	there is no system to allow a profit to be produced in the conduct of the activity;

•	the activity is carried on a small scale;

•	there is an intention by the taxpayer to carry on a hobby, a recreation or a sport rather than a business;

•	any produce is sold to friends and relatives and not to the public at large.

Example 16 – hobby or recreation

88.	Norm was a keen gardener. His two favourite vegetables were broccoli and pumpkin. He enjoyed growing these in his garden and exhibiting the larger specimens at vegetable shows for which he often won prizes. He had been doing this for the last twenty years. Norm always kept up with the latest advances in growing techniques of broccoli and pumpkin. He had always been keen to talk to other growers of the vegetables and had subscribed to the relevant magazines. He also stayed in regular contact with the Department of Primary Industries to keep up with the latest information about vegetable growing. Norm had no business plan. He kept no records of his expenses. His only intention was to grow the biggest and best broccoli and pumpkin. To this end he often experimented with different growing techniques. Usually he gave away his broccoli and pumpkin to relatives and friends. However, he found that in the last 12 months people approached him at the shows to purchase his prize winning specimens. He has been happy to sell these. Was Norm carrying on a business of primary production?

89.	No. Rather his activities amounted to a hobby for the following reasons:

•	the size and scale of his activity was small, as it was in his backyard;

•	he had no plan or intention to make a profit and his activities were motivated by his passion for growing broccoli and pumpkins;

•	his produce was usually given away to friends and family rather than sold to the general public; and

•	records were not kept and the activity was not carried on in the same manner as that of the ordinary business activity of commercial pumpkin and broccoli growers.

90.	As a result of being approached at shows, Norm realised that there was a potential market for his produce and that he could turn his hobby into a business. He developed a profit making intention. He worked out the economics of his activities and calculated that by using extra land he would make a profit. He rented a block of land on which he grew broccoli and pumpkins on a larger scale. He kept detailed records of his activities and established his markets mostly as a result of approaches by people to him. Was Norm carrying on a business of primary production?

91.	Yes, Norm would be regarded as carrying on a business of primary production when the nature of the activity changed being a hobby to a business. At this time, in addition to his experience and skill in the activity:

•	the activity had a profit making purpose;

•	he expanded the size of the activity;

•	he kept detailed records; and

•	he established markets.

(Note: refer to paragraph 27.)

Example 17 – hobby or recreation

92.	Richard was a musician and singer in a rock band. He was also interested in dressage. Richard owned a substantial land holding on which he bred horses to obtain better mounts for his dressage competitions. He trained his own horses. He belonged to the local dressage club and usually sold any unwanted and untrained offspring through his club and the local newspaper. The sale prices were well below the expenses associated with maintaining the horses. He conducted research into breeding and training techniques and tried to keep up to date with the latest information. He kept detailed records of breeding and all expenses associated with the horses. When the horses became too old to compete he put them out to pasture, as he could not bear to part with his old companions. Was Richard carrying on a business of horse breeding?

93.	No, despite the keeping of records, the organisation, the repetition and regularity of activity and the research conducted, because:

•	the activity was primarily motivated by his desire to compete and any returns were merely incidental to this purpose;

•	no profit was made from the activity;

•	there was no intention to carry on a business or to make a profit; the keeping of records, the research and the sales were all associated with Richard's dressage activities; and

•	there was no significant commercial purpose or character to the activity.

(Note: refer to paragraph 27.)

Application of all the indicators

Example 18 – Application of all the indicators

94.	George and Desi grew tired of living in the suburbs. They moved, with their two young children, to a 20 hectare property about 50 kilometres away from the capital city where they had lived. As part of their rural lifestyle they wanted to use their new property for primary production activities.

95.	In July 1993 they planted oats, Japanese Millet, phalaris and clover. The land was fertilised in expectation that they would be able to graze some beef cattle on it, fatten and sell them. They noted that a number of the larger properties in the area were used for this purpose.

96.	Due to a shortage of funds, it was not until May 1994 that they purchased 10 cattle. They did no analysis of whether the grazing of beef cattle on their land would be profitable. George and Desi had no clear idea of what all their costs would be for such an activity. They spoke to a number of their neighbours about the maximum number of cattle that their land could carry, but they received conflicting advice. Most of the advice suggested however that they did not have enough land to make the venture profitable.

97.	The first sale, of 5 head, was in March 1995. At that time Desi accepted a redundancy offer and applied herself full time to their cattle grazing activity. With the money from the pay-out she purchased 20 additional cattle on the advice of her neighbour (a cattle farmer for a number of years). At the same time she developed a plan based on expert advice from the Department of Primary Industries for maximising the carrying capacity of their land and achieving profitability. She travelled with neighbours and purchased 20 weaners, and she arranged to share costs with these neighbours in transporting their cattle to various markets for sale.

98.	By June 1996, 35 more cattle had been sold and 10 were on hand. Market conditions were poor and the sale prices they received had not been much greater than the price they had paid. However, Desi calculated that they could cut their costs further and noted from the rural press that long term forecasts of beef prices were good. On the basis of improved prices and a doubling of the herd size, she calculated that their activities could produce a reasonable profit. With her redundancy money she calculated that they could buy an adjoining 20 hectares for this purpose.

99.	Were George and Desi carrying on a business of cattle grazing? If so, when did this business commence?

100.	This example is meant to illustrate the importance of considering all the indicators of whether a business is being carried on and how the facts related to some of those indicators can materially change over time. In this particular case there was a marked change in the character of the cattle grazing activity after March 1995.

101.	Before March 1995 George and Desi were not carrying on a business of primary production because there was:

•	little evidence of any system or organisation about the activity;

•	doubt as to whether there was an overall profit-making purpose;

•	a strong suggestion that the activity, as it was being conducted at that time, was inherently unprofitable; and

•	little repetition or regularity about the activity, and the small scale of the activity.

102.	After March 1995 there was a considerable change in the way that the cattle grazing activity was carried on. In particular, there was then:

•	a clear focus on how to make a profit from the activity. This was demonstrated by the drawing up of a plan to make a profit based on expert advice, the search for the most profitable markets for the sale of the cattle and efforts to reduce the costs of obtaining and maintaining the cattle;

•	an increase in repetition and regularity, particularly an increase in purchases and sales of cattle;

•	more similarity between the activities of George and Desi and those of a person who would clearly be considered to be carrying on a business of cattle grazing; and

•	a greater sense of permanency, and scale of the activity as evidenced by the purchase of the neighbouring property, together with a greater capacity to make the operations profitable.

103.	We consider that from March 1995 George and Desi were carrying on a business of cattle grazing.

(Note: refer to paragraph 27.)

Private rulings

104.	A person cannot obtain a private ruling under Part IVAA of the Taxation Administration Act 1953 ("TAA") on whether he/she is carrying on a business (refer Taxation Determination TD 96/16). Likewise, a person cannot obtain a private ruling on whether he/she is carrying on a business of primary production. The reason for this is that the question does not identify a specific "tax law". Under section 14ZAF of the TAA a person can only apply for a ruling on how, in the Commissioner's opinion, a tax law will apply with respect to an "arrangement" in regard to a "year of income".

105.	A taxpayer cannot ask for a ruling on a finding of fact. A taxpayer can ask for a ruling on a tax law that depends for its operation on either:

•	the carrying on of a business of primary production, for example, section 156 of the Act; or

•	the carrying on of a business, for example, the second limb of subsection 51(1) of the Act.

106.	The notice of private ruling we give contains our answer only on how the tax law applies to the arrangement, for example, that a deduction of $x is allowable under section 70 of the Act. Normally, however, this notice will be accompanied by an "Explanation". In the Explanation we describe our reasons for the answer in the notice of ruling. For example, an Explanation accompanying a notice of ruling about the application of section 70 to an arrangement usually contains our reasons about whether the activities described in the application for private ruling amounted to the carrying on of a business of primary production. The person who applied for the ruling would then know the Commissioner's views on this point.

107.	Under paragraph 14ZAN(h) of the TAA, if it has not already begun, the taxpayer's "arrangement" must be seriously contemplated. In such cases, a taxpayer's application therefore needs to show:

•	how he/she intends to carry out the arrangement;

•	that he/she has the means to carry out the arrangement; or

•	that he/she has or will soon take steps to obtain the means to carry out the arrangement.

108.	An application should contain "sufficient information" to enable the Commissioner to give the ruling. Where insufficient information is provided the Commissioner may request the relevant information under section 14ZAM of the TAA. Where information has been requested and remains insufficient the Commissioner does not need to comply with the application: refer to paragraph 14ZAN(i) of the TAA.

109.	"Sufficient information" includes information which covers the eight indicators, and any other matter which the taxpayer considers relevant. We expect to see information about:

•	purpose and intention – the reason the taxpayer has entered into the activity; whether the taxpayer is employed in some other area;

•	profit motive and profitability of the activity – e.g., the existence of a business plan; the results of research on viability; realistic sales forecasts; cost projections until the activity is expected to become profitable; details of how capital is to be employed; the source and cost of funds; taxpayer's expertise in the activity;

•	repetition and regularity of the activity – how much time is spent on the activity; a breakdown of the tasks that are performed on a regular basis; regularity of purchases and sales;

•	activity of the same kind – such as descriptions of methods used in the activity with regard to cultivation, livestock raising, obtaining the relevant licences and complying with the relevant laws;

•	organisation – how the activity is conducted; how and what records are kept; what advice is sought;

•	the size and scale of the activity – e.g., the area of the land; details of any private residence on the land; details of improvements to the land such as fences and sheds, clearing and fertilising; details of equipment/plant purchase including depreciation schedules; the numbers of livestock involved; level of capital investment;

•	whether the activity could be viewed as a hobby or recreation;

•	significant commercial purpose – this will generally follow from all of the above.

Business plan

110.	We emphasise that, whilst a business plan will help a taxpayer to establish that he/she is carrying on a business of primary production, it is not compulsory. Nor will the existence of a business plan be conclusive evidence that the taxpayer's activity amounts to the carrying on of a business.

111.	A business plan is particularly relevant to establishing that there is an intention to make a profit, that the activity will be profitable and that the activity has a significant commercial purpose. This is especially so where it is capable of authentication by reference to texts, publications by relevant authorities or organisations and local experience in the industry. A business plan may include many things. However, we recommend that the basic elements of the business plan should include information about:

•	a description of the business;

•	the markets to which the taxpayer proposes to sell and realistic estimates of quantity and volume of sales;

•	income expected from the activity;

•	the research that has been conducted by the taxpayer – e.g., who the taxpayer has spoken to, what literature he/she has collected; what previous knowledge he/she has;

•	information about the property on which the taxpayer proposes to conduct the business – e.g., its area, distance from the taxpayer's home, whether irrigated, whether soil and water tested, whether rainfall sufficient for the activity;

•	information about expected expenses and capital outlays – e.g., cost of travel, electricity, gas and water, cost of plant and equipment and stock; and

•	information about how the taxpayer proposes to pay for the expenses and capital outlays – e.g., if the taxpayer takes out a loan what is the interest rate and how long will the loan take to repay.

Business plan example

112.	Business – Jeff's passionfruit

2000 Passion fruit vines. To be planted beginning financial year 1996.

Markets

Sell primary / A-grade fruit to Brisbane markets – up to 10 trays in good weeks, seconds, etc., for pulping and fruit juice markets.

Research

Spoke with local fruit growers about pests, etc., collected DPI information on types and spraying cycles. Passion Fruit Growers Association in Brisbane provided literature on the latest practices re growing passion fruit and which passion fruit varieties to grow given future markets. Obtained DPI copy of "Passionfruit in Queensland". Combined with my knowledge of farming from several years on a fruit tree farm I feel that I have the knowledge and time available to undertake the activity successfully.

Property

4 hectare block, 20 km from my home in Mackay, will require additional watering given varying rainfall. Existing bore water quality and quantity tested and found sufficient for my crop size. Irrigation to be installed. Soil tested and found to be suitable.

Expected expenses / outlays

Travel to block 3 times a week after work and weekends as needed. Estimate travel expenses using my existing utility will be $3,500 a year – including delivery of produce. Estimate that about half of this will be deductible, when carrying bulky farm materials. Electricity will need to be connected for pump and shed lights with an estimated running cost of $500 per year. These and other one-off expenses include:

Connection of electricity	$1,000
Purchase of vines @ $3.00 per vine	$6,000
Installation of irrigation	$1,000
Rent of tractor / post digger for trellises (from neighbour)	$500
Posts / wire / for trellises and to fix up property fencing	$1,500
Labour (brother will help on posts)	Free
Ride-on mower / spray unit (2nd hand)	$3,500
I will take out a loan of $10,000 to cover the above expenses plus use my existing savings. Given my other income I should have the loan paid out in 5 years. The vines will last 5 years from the time of planting and then I will replace them.

113.	Table of anticipated receipts and costs (in 1996 dollars)

Year	1995 /1996	1996 /1997	1997 /1998	1998 /1999	1999 /2000
Expected Sales
A Grade (avg price)	0	2500	4000	4000	3000
Seconds (pulping)	2000	3000	5000	5500	6000
Gross Receipts	2000	5500	9000	9500	9000
Running Costs
Accounting Fees	200	250	300	350	400
Bank Charges	50	50	50	50	50
Interest	1200	1000	800	600	300
Protective Clothing	50	50	50	50	50
Repairs and  Maintenance / fuel	300	500	500	500	500
Motor Vehicle	1750	1750	1750	1750	1750
Telephone	100	100	100	100	100
Sprays and Chemicals	250	250	250	250	250
Rates and Taxes	300	325	350	375	400
General Expenses	200	200	200	200	200
Total Costs	4400	4475	4350	4225	4000
Net Profit / Loss on	(2400) Loss	1025 Profit	4650 Profit	5275 Profit	5000 Profit
trading before write-off and depreciation
114.	Depreciation and capital write-offs

Depreciation on sprayer /	960	960	960	960	960
mower, fences /
improvements and trellises
Write-off of vines – Div	408	2400	2400	792
10F, starting 1 May 96
Write-off electricity	100	100	100	100	100
connection costs (10 years -
section 70A)
Write-off irrigation expense	333	333	334	Nil	Nil
(3 years – section 75B)
Total Write-off and Depreciation	1801	3793	3794	1852	1060
Net Profit / Loss on	(4201) Loss	(2768) Loss	856 Profit	3423 Profit	3940 Profit
trading after write-off and depreciation
Jeff approached his accountant who gave him some additional information on capital and equipment write-offs and depreciation. He suggested using sections 70A and 75B to write off the electricity connection and irrigation expenses and Division 10F to write-off the capital value of the vines, although he noted that this would produce timing differences compared with an accounting write-off. However, using these rates of write-off would mean that the outcome would produce a correct tax result. Jeff noted as part of his business plan that:

"I have not yet seen published any Division 10F "safe harbour" write-off rates issued by the Commissioner, so in my business plan calculation I will use a four year write-off of the cost of the vines, commencing from when they become income producing, which I estimate to be 1 May 1996."

115.	Note: This business plan example is an illustration only. It is not definitive of the deductions a taxpayer may claim or the calculation of profit.

Commissioner of Taxation

30 July 1997 (Erratum)


Taxation Ruling TR 95/25 Deductions for interest under subsection 51(1) of ITAA 1936
Taxation Ruling TR 95/25

There is an Addendum 1 for this document

There is an Addendum 2 for this document

Deductions for interest under subsection 51(1) of the Income Tax Assessment Act 1936 following FC of T v. Roberts; FC of T v. Smith

Contents:

What this Ruling is about

Ruling

General principles governing deductibility of interest

General law partnerships

Section 6(1) partnerships which are not general law partnerships

Companies

Individuals

Date of effect

Explanations

General principles

Use test

Preservation of assets test

The decision in Roberts and Smith

Statutory partnerships

Companies

Apportionment

Asset revaluation reserve

Borrowing used to repay an existing loan

Examples

WHAT THIS RULING IS ABOUT

Class of person/arrangement

1.	This Ruling outlines the implications flowing from the decision of the Full Federal Court in FC of T v. Roberts; FC of T v. Smith 92 ATC 4380; (1992) 23 ATR 494 (Roberts and Smith) for individuals, general law partnerships, section 6(1) partnerships and companies.

RULING

General principles governing deductibility of interest

2.	The deductibility of a loss or outgoing comprising interest under section 51(1) of the Income Tax Assessment Act 1936 ("the Act") depends upon satisfying the words of the subsection, that is, being able to show that the loss or outgoing (or the part of the loss or outgoing in an appropriate case of apportionment) is:

(a)	incurred by the taxpayer in gaining or producing assessable income of the taxpayer and the loss or outgoing is not capital, or of a capital, private or domestic nature ("first limb"); or

(b)	incurred by the taxpayer in carrying on a business for the purpose of gaining or producing assessable income of the taxpayer and the loss or outgoing is not capital, or of a capital, private or domestic nature ("second limb").

3.	The cases clearly indicate that whether or not a loss or outgoing incurred by a taxpayer satisfies the requirements of subsection 51(1) is dependent on all the facts and matters relating to the loss or outgoing incurred by the taxpayer in question. However, the following general principles are relevant to the question whether interest is deductible under subsection 51(1):

(a)	The interest expense must have a sufficient connection with the operations or activities which more directly gain or produce the taxpayer's assessable income and not be of a capital, private or domestic nature. The test is one of characterisation and the essential character of an expense is a question fact to be determined by reference to all the circumstances.

(b)	The character of interest on money borrowed is generally ascertained by reference to the objective circumstances of the use to which the borrowed funds are put by the borrower. However, regard must be had to all the circumstances, including the character of the taxpayer's undertaking or business, the objective purpose of the borrowing, and the nature of the transaction or series of transactions of which the borrowing of funds is an element. In some cases, the taxpayer's subjective purpose, intention or motive may be relevant in deciding the deductibility of interest.

(c)	A tracing of the borrowed money which establishes that it has been applied to an income producing use may demonstrate the relevant connection between the interest and the income producing activity. Normally this would be the case for non-business taxpayers. It might also be the case where a business makes a specific borrowing which goes to the structure of the business – for example, where a business makes a large borrowing to fund an offshore acquisition.

(d)	A rigid tracing of the borrowed money will not always be necessary or appropriate (e.g., where the borrowing finances the replacement of funds withdrawn from the business by a person entitled to be paid those funds). In such cases the relevant question is whether borrowed funds are being used to replace another source of funding for business purposes.

(e)	Interest on borrowed funds will not be deductible simply because it can be said to preserve assessable income producing assets.

(f)	Interest on borrowings will not continue to be deductible if the borrowed funds cease to be employed in the borrower's business or income producing activity.

(g)	The interest will not be deductible, to the extent to which it is private or domestic in nature, or is incurred in relation to the gaining or production of exempt income.

General law partnerships

The "refinancing principle" in Roberts and Smith in relation to common law partnerships

4.	In Roberts and Smith , Hill J said that interest on "a borrowing [by a common law partnership] to fund repayment of moneys originally advanced by a partner and used as partnership capital" will be deductible under subsection 51(1) to the extent the partnership capital was employed in a business of the partnership which was carried on for the purpose of producing or gaining assessable income (ATC at 4389; ATR at 505).

5.	"In principle [he said] such a case is no different from the borrowing from one bank to repay working capital originally borrowed from another" (ATC at 4388; ATR at 504). The same principle could apply to discharging a liability to a supplier of goods or services who extends trade credit to the partnership.

6.	Hill J said that interest on borrowings to refinance funds employed in the partnership business will be deductible if the funds represent "partnership capital in the Lord Lindley sense, undrawn profit distributions, advances by the partners or other funds which have actually been invested in the partnership and which the partners were entitled to withdraw" (ATC at 4390; ATR at 506).

7.	However, Hill J made it clear that interest on a borrowing by the partnership is not deductible to the extent that the borrowing is used to make payments to the partners which do not comprise a "refund of moneys previously invested in the partnership business" (see ATC at 4390; ATR at 505-506). On this basis, interest on borrowings to replace partnership capital which is represented by internally generated goodwill or an unrealised revaluation of assets (which are simply book entries) will not be deductible to the partnership (see ATC at 4389 and 4390; ATR at 505-506).

Section 6(1) partnerships which are not general law partnerships

8.	The "refinancing principle" in Roberts and Smith has no application to joint owners of investment property which are not common law partnerships: Case 12/95 95 ATC 175; AAT Case 10,079 (1995) 30 ATR 1169.

9.	In Yeung v. FC of T 88 ATC 4193; (1988) 19 ATR 1006 (Yeung ) the first issue was whether there was a subsection 6(1) partnership between the six family members. Davis J found that there was. He then proceeded on the basis that there was a "partnership" and that from the partnership's point of view, what occurred was a change in the capital interests which each of the partners had in the partnership. However, the "refinancing principle" in Roberts and Smith applies only where a partnership borrows to refund capital invested by partners (by way of a contribution to capital, a loan, or a share of any accumulated and undistributed realised profits which could be treated as having been distributed and lent back) or where one form of borrowing replaces another. Hill J makes it very clear (ATC at 4389-4390; ATR at 505-506) that reference to capital in this context is a reference to the capital of a partnership in the partnership law sense, that is, the "original partnership capital in the Lord Lindley sense".

10.	The joint owners of an investment property who comprise a subsection 6(1) tax law partnership in relation to the property cannot "withdraw" partnership capital and have no right to the "repayment of capital invested" in the sense in which those concepts are used by Hill J in Roberts and Smith : see also Case 12/95 (ATC at 181-182); AAT Case 10,079 (ATR at 1169-1170). In Case 12/95 ; AAT Case 10,079 the tribunal considered that the comments of Hill J (Roberts and Smith ATC at 4389; ATR at 504-505) cast considerable doubt on the application of the substitution of partnership capital principle to partnerships other than those that are partnerships at general law (see Case 12/95 ATC at 182; Case 10,079 ATR at 1175).

11.	Accordingly, it is inappropriate to describe a borrowing by the joint owners of investment property, which does not constitute a business, as a refinancing of funds employed in a business.

Companies

12.	In determining whether interest is deductible, regard must be given to the commercial context in which the company borrowed the relevant funds. For example, there will usually be a need for a business to maintain a pool of circulating capital from which to meet the expenses of that business. In these circumstances the deductibility of the interest expense cannot be determined by considering only the immediate reason for making a payment and ignoring the overall purpose with which the liability was incurred: see Dixon J in Herald and Weekly Times Ltd v. FC of T (1932) 48 CLR 113 at 118.

13.	Applying the reasoning of the Full Federal Court in Roberts and Smith to companies will mean that interest on a borrowing by a company may be deductible where the borrowing is used to fund a repayment of share capital to the shareholders in circumstances where the repaid capital was employed as capital or working capital in the business carried on by the company for the purpose of deriving assessable income. Apportionment may be necessary where exempt income is also derived from the business activities.

14.	The principle is the same as that which would apply to a replacement loan used to provide funds to meet a liability to a trade creditor or a lender of money where the relevant funds at the time of the replacement are being applied in the income producing business.

15.	Similarly, interest on a borrowing by a company is likely to be deductible where the borrowing is used to fund the payment of a declared dividend to the shareholders in circumstances where the funds representing the declared dividend are employed as capital or working capital in the business carried on by the company for the purpose of deriving assessable income. In circumstances where the liability to pay the dividend reduces the amount to the credit of the unappropriated profits account and the reduction is replaced in the company's accounts by the loan, there will usually be a nexus between the interest expense and the carrying on of a business for the purpose of deriving assessable income.

16.	As with partnerships, interest is not deductible if the borrowing finances payments to shareholders in reduction or extinguishment of share capital to the extent to which such capital represents bonus shares paid up out of an unrealised asset revaluation reserve or reduction of other equity accounts to the extent that they represent unrealised profit reserves (e.g., a reserve arising from the recognition of internally generated goodwill). Nor would interest be deductible where the borrowed moneys fund the payment of a dividend out of unrealised profit reserves. However, where the source from which bonus shares are issued and dividends are declared is a realised profit reserve, the interest on a borrowing used to repay the bonus shares or discharge the liability to pay a dividend would be deductible.

17.	The reasoning in Roberts and Smith does not extend to interest on borrowing by a company to pay subvention payments (that is, payments to another company in a wholly owned group in exchange for a loss transferred under section 80G or section 160ZP of the Act). In these circumstances there is no withdrawal and replacement of capital in the sense spoken of by Hill J in Roberts and Smith.

Individuals

18.	Tests such as the purpose of the borrowing or the use and application of the borrowed funds, although only tools in assisting in determining what is essentially a question of fact, have a more obvious application in the context of individuals than they do in a large multi-faceted and widely owned businesses.

19.	It is a well established principle of law that an individual cannot deal with and in particular cannot lend money to her/himself. It follows that where an individual carries on a business alone she/he cannot contribute capital to or lend money to such a business in such a way as to create a legal liability of the business to the individual in respect of the funds contributed or lent. The principles in Roberts and Smith cannot, therefore, apply to individuals.

DATE OF EFFECT

20.	This Ruling applies to years commencing both before and after its date of issue. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

EXPLANATIONS

General principles

21.	Expenditure will be deductible under subsection 51(1) if its essential character is that of expenditure that has a sufficient connection with the operations or activities which more directly gain or produce the taxpayer's assessable income, provided that the expenditure is not of a capital, private or domestic nature. As Hill J explained in Roberts and Smith (ATC at 4386; ATR at 501):

"In FC of T v. Riverside Road Pty Ltd (in liq) 90 ATC 4567 at 4573-4575 the full court of this court summarised the applicable principles governing deductibility under s. 51(1) of the Act. It is unnecessary to repeat them here. Suffice it to say that what is involved is a process of identifying the essential character of the expenditure to determine whether it is in truth an outgoing incurred in gaining or producing the assessable income or necessarily incurred in carrying on a business having the purpose of gaining or producing assessable income: Lunney & Anor v. FC of T (1958) 11 ATD 404 at 413; (1957-1958) 100 CLR 478 at 499; Fletcher & Ors v. FC of T 91 ATC 4950 at 4957; (1991) 22 ATR 613. The expenditure must have the necessary connection with the operations or activities which more directly gain or produce assessable income so as to meet the statutory criterion that the outgoing be incurred in gaining or producing assessable income or in carrying on a business: Charles Moore & Co (WA) Pty Ltd v FC of T (1956) 11 ATD 147 at 149; (1956) 95 CLR 344 at 351; FC of T v. DP Smith (1981) 147 CLR 578 at 586; 81 ATC 4114 at 4117; (1981) 11 ATR 538. That is to say it must be "incidental and relevant" to that end: Ronpibon Tin NL v. FC of T (1949) 78 CLR 47 at 56."

22.	It has been said that the test of deductibility under the first limb of subsection 51(1) is that:

"it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income" (Ronpibon Tin v FC of T (1949) 78 CLR 47 at 57).

23.	In determining the deductibility of a loss or outgoing regard should be had to all the objective circumstances surrounding the incurring of the loss or outgoing and in some circumstances the subjective purpose of the taxpayer may also be relevant. Fletcher v. FC of T 91 ATC 4950; (1991) 22 ATR 613. Tests such as the purpose of the borrowing or the use and application of the borrowed funds are tools to assist in what is essentially a question of fact (Kidston Goldmines Ltd v. FC of T 91 ATC 4538; (1991) 22 ATR 168).

24.	Where the taxpayer carries on a business the second limb of subsection 51(1) requires there to be a relevant connection between the outgoing and the business. In deciding whether the interest is "necessarily incurred" in the sense of "clearly appropriate" to that business (FC of T v. Snowden and Willson Pty Ltd (1958) 99 CLR 431), regard must be had to the nature of the business activity (Magna Alloys & Research Pty Ltd v. FC of T 80 ATC 4542; 11 ATR 276), the business purpose for which the outgoing was incurred (FC of T v. The Midland Railway of Western Australia Ltd (1952) 85 CLR 306), the objective circumstances surrounding the incurring of the expenditure (FC of T v. South Australia Battery Makers Pty Ltd (1978) 140 CLR 645) and the character of the expense (John Fairfax & Sons Pty Ltd v. FC of T (1959) 101 CLR 30).

25.	As was explained in Magna Alloys & Research Pty Ltd v. FC of T 80 ATC 4542 at 4545; 11 ATR 276 at 279:

"The purpose mentioned in the second limb is not a purpose imported by the phrase, incurred in carrying on; but the purpose of the business in the carrying on of which the deductible expenditure is incurred (John Fairfax & Sons Pty Ltd v. FC of T (1959) 101 CLR 30 at 49)."

Use test

26.	As Hill J stated (Roberts and Smith ATC at 4388; ATR at 504):

"As the cases, including Kidston , all show, the characterisation of interest borrowed will generally be ascertained by reference to the objective circumstances of the use to which the borrowed funds are put. However, a rigid tracing of funds will not always be necessary as appropriate."

27.	Generally, the starting point for determining the essential character of an interest expense is to determine the "use" to which the borrowed funds have been put, i.e., you trace the borrowed funds (Roberts and Smith ATC at 4388; ATR at 504; Kidston Goldmines Ltd v. FC of T 91 ATC 4538 at 4546; (1991) 22 ATR 168 at 177). However, such a tracing will not necessarily be determinative (Roberts and Smith ATC at 4388; ATR at 504). This will be particularly so in a multi-faceted and widely owned business. As Hill J warned in Roberts and Smith (ATC at 4388; ATR at 503-504), there is a danger in substituting for the words in subsection 51(1) language which does not appear in it.

Preservation of assets test

28.	It has been argued that interest is deductible provided the borrowed funds can be said to preserve the taxpayer's income producing assets. The preservation of assets test can take different forms. Often, the proposition is put in circumstances where a taxpayer has income producing assets which could be sold to generate funds to satisfy non-income producing needs. An alternative to selling the assets would be to retain them and, instead, borrow money to satisfy the non-income producing needs. When a borrowing is made, it is argued that the interest expense is incurred in producing assessable income because, without the borrowing, the income producing assets would have been sold. It follows, according to the argument, that the borrowing enables the preservation of the income producing assets and, therefore, the interest expense is sufficiently connected with the income derived from those assets to satisfy subsection 51(1).

29.	In FC of T v. Munro (1926) 38 CLR 153 (Munro ) the High Court considered whether interest incurred on a borrowing which was not used to produce assessable income, but was secured by an income producing asset, was deductible. The taxpayer argued that if the interest obligations were not discharged, the income producing asset that secured the borrowing would be in jeopardy. Thus, the discharge of the obligation to pay interest was incurred in producing assessable income. The High Court rejected this proposition.

•	In Roberts and Smith Hill J commented on the two cases usually cited as authority for the preservation of assets argument; Begg v. FC of T (1937) 4 ATD 257 or Yeung . In respect of Begg Hill J said (Roberts and Smith ATC at 4389; ATR at 505) that:

•	"The case has stood for a long time and the present is not the appropriate occasion to consider its correctness. There may, however, be thought to be some difficulties in reconciling what was there said with the decision of the High Court in Munro ."

•	In respect of Yeung Hill J said (Roberts and Smith ATC at 4389; ATR at 505) that:

"For present purposes it is sufficient to note that the result reached in Yeung seems clearly correct if the case is viewed simply as one involving a borrowing to fund the repayment of moneys originally advanced by a partner and used as a partnership capital, particularly given that the original funds were used to purchase the rental property."

30.	Hill J has clearly indicated his difficulties with the principle which has been extracted from Begg . At the same time Hill J also explained the decision in Yeung on the basis of the principle which he was applying in Roberts and Smith . The principle is that, if there is a partnership at general law, the business of that partnership could be funded by moneys originally advanced by a partner as partnership capital and interest on a borrowing to repay that capital would be deductible. The comment by Hill J on Yeung has little, if anything, to do with the preservation of assets proposition and certainly does not support it.

31.	A similar conclusion was reached by Mr K Beddoe in an unreported AAT decision given on 30 May 1995 (AAT reference QT 94/116).

The decision in Roberts and Smith

32.	Hill J stated (Roberts and Smith ATC at 4388; ATR at 504):

"The issue continues to be whether the interest outgoing was incurred in the income producing activity or, in a case falling to be tested under the second limb, in the business activity which is directed towards the gaining or producing of assessable income"; and

"The funds to be withdrawn in such a case [where a partner calls up an amount owing to him as undrawn partnership distributions] were employed in the partnership business; the borrowing replaces those funds and the interest incurred on the borrowing will meet the statutory description of interest incurred in the gaining or production by the partnership of assessable income."

•	"In principle, such a case is no different from the borrowing from one bank to repay working capital originally borrowed from another; the character of the refinancing takes on the same character as the original borrowing and gives to the interest incurred the character of a working expense. Both these cases would equally satisfy the second limb of s. 51(1). In no sense could the interest outgoing in either case be characterised as private or domestic. Similarly, where moneys are originally advanced by a partner to provide working capital for the partnership, interest on a borrowing made to repay these advances will be deductible, irrespective of the use which the partner repaid makes of the funds" (Roberts and Smith ATC at 4388; ATR at 504); and

•	"The provision of funds to the partners in circumstances where that provision is not a repayment of funds invested in the business, lacks the essential connection with the income producing activities of the partnership or, in other words, the partnership business. Likewise, the interest incurred on the borrowings will not be incidental and relevant to the partnership business" (Roberts and Smith ATC at 4390; ATR at 506).

33.	Hill J makes it clear in his discussion at ATC at 4389-4390; ATR at 504-506 that in his view a partnership cannot claim to be replacing funds contributed as partnership capital when it borrows to make a payment to a partner to the extent that the equity or capital account being reduced by the payment is represented by internally generated goodwill. Interest on borrowings used to make such a payment would not be deductible. In our view, this limitation on a partnership's entitlement to a deduction applies also where the account being reduced, represents an unrealised capital profits.

34.	The explanation for this limitation on deductibility of interest is that partnership capital must be contributed and can never exceed the amount contributed. A partnership is not entitled to describe what is, in effect, a revaluation reserve as partnership capital. Similarly, if a partnership dissipates contributed partnership capital as a result of making operating or capital losses, only the remaining part of the original partnership capital can be returned to partners as partnership capital. It is not possible to reinstate the balance of that capital by revaluing assets.

Statutory partnerships

35.	In Case 12/95 (ATC at 181); AAT Case 10,079 (ATR at 1175) the AAT was of the view that:

"...the purpose of the definition of "partnership" as it appears in section 6(1) of the Act is the application to arrangements answering that description of Division 5 of Part III of the Act and, in the circumstances of this reference, particularly sections 90, 91 and 92. Against that background, and here the words of Fisher J are repeated, the deeming provisions are required by their nature to be construed strictly and only for the purpose for which they are resorted to and it is improper to extend by implication the express application of such a statutory fiction. This fiction does not, in our opinion, cloak an arrangement of the kind now being contemplated with the additional refinements of partnership assets and liabilities and partners capital accounts. On that basis the Tribunal finds that there are no partnership assets or liabilities nor are there capital accounts capable of being accessed by the applicant or his spouse. What remains is a relationship of co-ownership as joint tenants which is more accurately described as an investment rather than as partners in a business operation. For these reasons the Tribunal concludes that the argument of the bank loan being used to replace portion of the capital accounts of the partners is not available to the applicant."

Companies

•	In principle, the approach adopted by Hill J in Roberts and Smith is not limited to partnerships and could apply to companies. For example, in Kidston Gold Mines Limited v. FC of T 91 ATC 4538; (1991) 22 ATR 168, Hill J said (ATC at 4545; ATR at 176):

•	"Where the funds are employed in a business devoted to assessable income, it may be said that monies borrowed to secure capital or working capital will be clearly deductible: The Texas Company (Australasia) Limited v. FC of T (1940) 63 CLR 382 at 468 per Dixon J."

36.	However, the limitation on interest deductibility referred to in paragraph 35 above would also apply to a company that sought to use borrowings to make payments to shareholders in reduction of an account that was represented by revaluations of assets. If the account was represented by realised capital gains, however, interest on the borrowings would not be denied on this basis.

Apportionment

37.	Under the reasoning in Roberts and Smith , interest on borrowed funds will be fully deductible provided the amount of "capital" attributable to the borrower at the time of the borrowing is equal to or greater than the amount borrowed. If the amount of capital attributable to the borrower is less than the amount borrowed it will be necessary to apportion the interest expense. Generally the proportion of interest deductible will be equal to the proportion of capital that had been used to derive assessable income.

Asset revaluation reserve

38.	In relation to paragraph 16 of this Ruling, it is noted that under Australian Accounting Standards AAS 10 on "Accounting for the revaluation of non-current assets", a revaluation reserve may represent both realised (by sale of the assets) and unrealised increases in the value of assets. In determining the deductibility of interest we will assume that in this situation the borrowings are first used to replace the part of the reserve that represents realised revaluations. However, the taxpayer must demonstrate how much of that reserve represents realised revaluations. In the absence of such evidence a deduction will not be allowed. This approach is particularly appropriate given that we understand that there is nothing in the standard which prevents the revaluation increment in respect of an asset that has been sold from being transferred to a realised capital profits reserve.

Borrowing used to repay an existing loan

39.	Interest on a new loan will be deductible if the new loan is used to repay an existing loan which, at the time of the second borrowing, was being used in an assessable income producing activity or used in a business activity which is directed to the production of assessable income (Roberts and Smith ATC at 4388; ATR at 504).

EXAMPLES

Example 1: Statutory partnership

40.	A and B are husband and wife. They own the family home and, using $50,000 of their own funds and initial borrowings of $100,000, they jointly purchase a rental property. A and B are deemed to be partners in respect of the rental property within the extended definition of partnership in subsection 6(1) of the Act as they are in receipt of income jointly, but do not in any way carry on a business so as to make them general law partners.

41.	Two years later A and B borrow $50,000 to renovate the family home, and claim that the borrowing replaces a notional withdrawal of partnership capital.

42.	There is no capital account capable of being withdrawn by A and B, and having regard to the use of the borrowed funds, the interest incurred is not deductible being of a private or domestic nature (see Case 12/95 ; AAT Case 10,079 ).

Example 2: General law partnership

43.	D borrows $25,000 which is contributed as capital to a partnership.

44.	Two years later, the partnership borrows $25,000 to return D's initial capital contribution. The use of the repaid funds in D's hands will not be determinative of the deductibility of the interest to the partnership. At the time of the borrowing by the partnership, the $25,000 previously contributed by D was being employed in the partnership's assessable income producing business. On these facts the interest expense will be deductible to the partnership as the borrowed funds can be seen to replace the partnership capital (see Roberts and Smith ).

45.	The funds borrowed by D are no longer invested in the partnership (an income producing asset). Whether or not D will continue to get a deduction for the interest expense on the original borrowings will depend on the use to which the funds returned to him by the partnership are put. If D uses those funds for a private purpose, then no further interest will be allowed.

46.	If the amount borrowed by the partnership exceeds the partnership capital (e.g., if at the time of the second borrowing the partnership had repaid most of the capital) interest would only be deductible to the extent of the partnership capital attributable to the taxpayer.

Example 3: Individual

47.	If a rental property (as in Example 1) was owned solely by an individual C, then the interest on the second borrowing would not be deductible. This would be the case even if the rental property was used as security for the second borrowing (e.g., a second mortgage) (see Munro ).

Example 4: Sole trader

48.	F is a sole trader who has built up his business over many years. His balance sheet shows his proprietorship/capital in the business as $200,000. This amount is represented by the income producing assets of the business, and there is no goodwill or revaluation of assets shown in the accounts.

49.	F decides to restructure his business. He purports to withdraw $50,000 of his capital from the business and replace it with borrowed funds. He uses the money to purchase a yacht for his family's personal use. On a strict tracing approach, the use of the funds is private and clearly the interest expense is not deductible.

50.	Despite accounting entries which show that the borrowed funds were placed into the business, it cannot be shown that the borrowings replaced F's equity in this income producing assets. An individual cannot withdraw equity from his/her own assets. Therefore, the interest expense is not deductible.

Example 5: Company

51.	A company runs a business to produce assessable income and it wants to reduce the entitlement of its shareholders to the real assets of the company (either by way of an agreement to buy back shares or otherwise reduce paid up capital, or by way of dividends from profits that arose from the company's income producing activities). It is short of liquid assets so it borrows funds which are intended to take the place of funds to be paid to the shareholders. In these circumstances the company has in effect replaced capital with debt. On the basis of the principles in Roberts and Smith the interest on the borrowing would be deductible to the extent that it replaced capital or realised gains which were used in the business to produce assessable income.

Commissioner of Taxation

29 June 1995

ADDENDUM No. 1

Taxation Ruling TR 95/25

Income tax:  deductions for interest under subsection 51(1) of the Income Tax Assessment Act 1936 following FC of T v. Roberts; FC of T v. Smith

FOI status: may be released

The Tax Law Improvement Project is restructuring, renumbering and rewriting the income tax law in plain language. The Parliament is amending the income tax law progressively to reflect these aims. As new laws come into effect, Taxation Rulings about old laws are being brought into line with them.

This Addendum amends Taxation Ruling TR 95/25, in relation to the 1997-98 or a later income year, as follows:

1. Generally

Omit "subsection 51(1)" (wherever occurring except in paragraph 4, paragraph 22, paragraph 27); substitute "section  8-1".

2. Title

Omit "subsection 51(1) of the Income Tax Assessment Act 1936 "; substitute "section 8-1 of the Income Tax Assessment Act 1997 ".

3. Paragraph 1

Omit "section 6(1) partnerships"; substitute "partnership for tax purposes only".

4. Paragraph 2

(a)	Omit "section 51(1) of the Income Tax Assessment Act 1936 ("the Act"); substitute "section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) (formerly subsection 51(1) of the Income Tax Assessment Act 1936)";

(b)	Omit "subsection"; substitute "section".

5. Subparagraph 2(b)

Insert "necessarily" before the word "incurred".

6. Subtitle before paragraph 8

Omit "Section 6(1) partnerships which are not general law partnerships"; substitute "Partnerships for tax purpose only".

7. Paragraph 9

Omit "subsection 6(1) partnership"; substitute "partnership for tax purposes".

8. Paragraph 10

Omit "subsection 6(1) tax law partnership"; substitute "partnership for tax purposes only".

9. Paragraph 15

(a)	After words "a declared dividend"(first occurring) insert
"( including a deemed unfrankable and unrebatable dividend paid from a "tainted share capital account" after 1 July 1998)";

(b)	Omit "declared" (second occurring).

10. Paragraph 17

Omit "section 80G or section 160ZP of the Act"; substitute "Subdivisions 170-A and 170-B of the ITAA 1997".

11. Paragraph 27

After words "(1991) 22 ATR 168 at 177" insert "Hayden v. FC of T 96 ATC 4797 at 4801; (1996) 33 ATR 352 at 356".

12. After paragraph 33

Insert:

33A. In Hayden the Federal Court considered whether interest incurred by an Executor on borrowings that were used to discharge an obligation of the estate. The fact that the borrowing of funds permitted income producing assets to remain as part of the estate so that the income stream to the estate was not diminished, did not bring the interest of the borrowings within a loss or outgoing under subsection 51(1).

13. Paragraph 41

Omit "AAS 10"; substitute "AASB 1010".

14. Paragraph 43

Omit "subsection 6(1) of the Act"; substitute "subsection 995-1(1) of the ITAA 1997".

15. After paragraph 54

Insert:

Cross reference of provisions

55. Section 8-1, subdivisions 170-A and 170-B and the definition of "partnership" in subsection 995-1(1) of the Income Tax Assessment Act 1997, to which this Ruling refers, express the same ideas as subsections 51(1), sections 80G and 160ZP and the definition of "partnership" in subsection 6(1), respectively, of the Income Tax Assessment Act 1936.

16. Case References:

Insert:

Hayden v. FC of T 96 ATC 4797; (1996) 33 ATR 352.

Commissioner of Taxation

26 May 1999

ADDENDUM No. 2

Taxation Ruling TR 95/25

Income tax:  deductions for interest under subsection 51(1) of the Income Tax Assessment Act 1936 following FC of T v. Roberts; FC of T v. Smith

FOI status: may be released

This Addendum amends Taxation Ruling TR 95/25 as follows:

1. Omit paragraph 33A; substitute:

33A. In Hayden the Federal Court considered whether interest incurred by an Executor on borrowings that were used to discharge an obligation of the deceased estate was deductible under subsection 51(1). The fact that the borrowing of funds permitted income producing assets to remain as part of the estate so that the income stream to the estate was not diminished, did not bring the interest of the borrowings within a loss or outgoing under subsection 51(1).

Commissioner of Taxation

23 June 1999


Taxation Ruling TR 96/7 Record keeping
Taxation Ruling TR 96/7

Income tax: record keeping – section 262A – general principles

NOTE:
This Ruling, to the extent that it is capable of being a "public ruling" in terms of Part IVAAA of the Taxation Administration Act 1953, is a public ruling for the purposes of that Part. Taxation Ruling TR 92/1 explains when a Ruling is a public ruling and how it is binding on the Commissioner.

Contents:

What this ruling is about

Ruling

Record and explain all transactions

Cash registers

Receipt books

No source records

Credit cards

"Keep"

Manner of keeping records

Date of effect

Explanations

Purpose of section 262A

Record and explain all transactions

Cash registers

Receipt books

No source records

Credit cards

"Keep"

Manner of keeping records

Examples

Previous Rulings

WHAT THIS RULING IS ABOUT

1.	Section 262A of the Income Tax Assessment Act 1936 ("the Act") requires a person carrying on a business to keep records that record and explain all transactions and other acts engaged in by the person that are relevant for any purpose of the Act. The records to be kept include any documents which are relevant for the purpose of ascertaining the person's income and expenditure and any documents that contain particulars of any elections, estimates, etc., made by the person under the Act.

2.	A person must keep the records in such a manner as to enable the person's liability under the Act to be readily ascertained. Generally, a person must keep the records for 5 years after the person prepared or obtained them, or 5 years after the completion of the transaction or acts to which they relate (whichever is the later).

Class of person/arrangement

3.	This Ruling explains the general application of section 262A to a person, including a company, carrying on a business. The Ruling sets out our views on what are sufficient records to record and explain all transactions and other acts engaged in by such persons for the purposes of the Act. A reference to "transactions" in this Ruling is to be read as also referring to "other acts engaged in" by a person.

4.	Although section 262A applies for any purpose of the Act, this Ruling considers the section as it relates to the income and expenditure of a person carrying on a business.

5.	This Ruling does not consider section 262A as it relates to Division 13 of Part III of the Act. We have dealt with this issue in Taxation Ruling TR 94/14.

6.	This Ruling does not deal with specific business record keeping provisions, e.g., Division 11 of Part X of the Act (keeping records about the operation of the Controlled Foreign Companies provisions), and Schedule 2A and Divisions 3 and 4 of Schedule 2B to the Act (the provisions relating to calculating car expense deductions and substantiating car expenses and business travel expenses).

7.	This Ruling is the first in a series of Rulings and Determinations on record keeping. We may follow it with more specific Rulings or Determinations as we identify needs. These may deal with specific industries or record keeping issues.

8.	The Australian Taxation Office ("ATO") has released a publication called A Guide to keeping your business records. This guide provides further information to persons carrying on a small business on how to use a simple accounting system and how to prepare, file and store the records created by this system.

RULING

Record and explain all transactions

9.	Subsection 262A(1) imposes the primary obligation on persons carrying on a business to keep records that record and explain all transactions engaged in by them that are relevant for any purpose of the Act. We consider that a record will "explain" transactions engaged in by a person if it contains information which will enable ATO staff with accounting skills to understand the essential features of the transactions.

10.	Subsection 262A(2) makes it clear that the records to be kept under subsection (1) include documents that are relevant for the purpose of ascertaining a person's income and expenditure. The content of the information needed in a record will depend on the circumstances of each case. Our view, generally, is that the minimum information required by ATO staff with accounting skills to understand the essential features of transactions which relate to the person's income and expenditure is the date, amount and character (e.g., sale, purchase, wages, rental, etc.) of the transactions. In some circumstances, an officer also will need other information about the essential features of transactions, e.g., the purpose of transactions and the relationships between parties to transactions, to understand the relevance of the transactions to the person's income and expenditure.

11.	The records that a person must keep under subsection 262A(1) must record every transaction that relates to the person's income and expenditure. However, we consider that to explain the essential features of every transaction, a person does not necessarily have to make a record of each individual transaction. Some records are capable of explaining the essential features of transactions when considered as a group rather than when considered individually. We believe that this is the case where any records of the individual transactions provide no additional information about the essential features of the transactions than does a record of the transactions as a group. The following examples show how we believe this principle applies.

Cash registers

12.	In the retail industry, many businesses engage in high volume/low value sales transactions. Those businesses often use a cash register to record the transactions. Where a business uses a cash register, the rolls of tape produced by the cash register record the individual transactions put through the register. We consider that the rolls of tape provide no additional information about the essential features of the transactions than do the "Z-totals" produced by the register.

13.	Therefore, we accept that a person may discard the rolls of tape after one month provided that the person has reconciled the "Z-totals" with actual cash sales and bankings for that period. The reconciliation must take into consideration any cash earned that the person used for other purposes, e.g., personal drawings, minor purchases, etc. The person must keep the reconciliation for the statutory period (5 years). We consider that it is necessary for the person to keep the one month representative sample so that ATO staff can verify that the "Z-totals" are an accurate summary of every individual transaction that relates to the person's income and expenditure. The representative sample of the rolls of tape enables ATO staff to analyse more accurately whether a person has reconciled the bankings with the "Z-totals". If a person does not do a reconciliation, the person must keep the rolls of tape for the statutory period (5 years). (See Example 1 in this Ruling).

Receipt books

14.	We believe that this general principle applies similarly to those businesses which, due to their nature, do not use a cash register. It is often the case that a person carrying on such a business individually records cash sales as they occur, e.g., in a numbered receipt book. We consider that those individual records provide no additional information about the essential features of the sales transactions than does a summary recording of all of the transactions for a particular period.

15.	Therefore, we accept that a person may discard the individual records after one month provided that the person has reconciled the summary records with the individual records and the bankings for that period. The reconciliation must take into account any cash earned that the person used for other purposes, e.g., personal drawings, minor purchases. The person must keep the reconciliations for the statutory period (5 years). As with cash sales put through a cash register, we consider that it is necessary for the person to keep the one month representative sample so that ATO staff can verify that the summary record is an accurate summary of every individual transaction that relates to a person's income and expenditure. As with "Z-totals", the representative sample enables ATO staff to analyse more accurately whether a person has reconciled the bankings with the summary records. If a person does not do a reconciliation, the person must keep the individual records for the statutory period (5 years). (See Example 2 in this Ruling).

No source records

16.	There are situations where it is clearly impractical for a person to record every individual cash transaction. This may occur where the recording of each individual transaction would seriously impair the normal conduct of the business, e.g., where a person carries on a business that deals in high volume/low value cash transactions and does not operate from a permanently fixed location. In those cases, we will accept that the keeping of summary records of the cash transactions will satisfy the person's obligations under subsection 262A(1), as long as the person can reconcile the summary records with the bankings. The person must make these summary records at regularly defined intervals, e.g., at the end of each day or shift. The reconciliation must take into consideration any cash earned that the person used for other purposes and should show at least the following details: total cash at day end + drawings + expenses – opening float. (See Example 3 in this Ruling).

Credit cards

17.	Where a person accepts payment by credit card for goods or services supplied to a customer, it is usual for a financial institution to provide the person with a summary statement of any credit transactions for a particular period. That statement records the dates when the person presents the sales transactions information to the institution for that period. Generally, we consider that the individual sales vouchers provide no additional information about the essential features of the credit transactions than do the summary statements kept by the person. However, this is not so where a person makes a credit card sale in one year of income and presents the voucher to the institution in the next year of income. We consider that the person must keep such sales vouchers until the person reconciles them with the next summary statement. Once the person records which items on that statement refer to sales made in the previous year, we accept that the person can discard the individual sales vouchers. (See Example 2 in this Ruling).

"Keep"

18.	We consider that the word, "keep", in subsection 262A(1), means both "make" and "retain". So, where a record is created in the normal course of engaging in transactions, the person carrying on the business must retain that record. In addition, where no record is created in the normal course of activities (see Example 3 in this Ruling), we consider that the person must make a record of the transactions (which could be a summary of transactions as described in paragraph 11 of this Ruling) and then retain it.

19.	Where subsection 262A(1) requires a person to make a record, we consider that this would normally require the person to make a contemporaneous record of the transactions, i.e., a record of the transactions as they occur or, if that is not possible, as soon as practical after the transactions have occurred. What is practicable will depend on the facts of the case, including the nature of the transactions.

20.	However, we recognise that, for a record which records transactions as a group, it may not always be practicable for the record to be contemporaneous. In that situation, we would accept that the making of the record is determined by the operation of the criteria referred to in paragraphs 12 to 17 of this Ruling.

21.	There may also be cases where a person who has made a contemporaneous record may not wish to retain the document in its original form. This may be the case where a person must retain large numbers of documents and wishes to retain them in a more convenient form, e.g., microfilm, microfiche or CD ROM. We accept this, provided that the substitute contains the same information about the essential features of the transactions as we would obtain from the contemporaneous records.

22.	We consider that these alternative methods of record retention contain the same information about the essential features of the relevant transactions where the conversion process, including the scanning of documents onto CD ROM, produces a true and clear reproduction of the original document. The person must provide appropriate facilities for the preservation of the records for the statutory period (5 years).

Manner of keeping records

23.	Paragraph 262A(3)(a) provides that a person must keep records in writing or so as to enable the records to be readily accessible and convertible into writing. We consider that a record made and retained in an electronic form, e.g., magnetic tape, computer disc, etc., is in a form which is readily accessible and convertible into writing.

24.	Where section 262A requires a person to keep records, paragraph 262A(3)(b) requires that the records be kept in a manner that allows the person's liability under the Act to be readily ascertained. We consider that the person's liability is readily ascertainable if ATO staff with accounting skills can determine the person's liability quickly and easily with minimal assistance from that person. Where staff cannot readily ascertain a person's liability from the records referred to in paragraphs 19 and 20 above, we believe that the person needs to make secondary records which enable transactions to be traced and verified through the accounting system of the business from the source of the transactions to the financial accounts. These secondary records, e.g., journals, ledgers and financial accounts, summarise the records that explain the transactions.

25.	Therefore, to enable ATO staff to determine a person's liability quickly and easily, we consider that the person has an ongoing obligation for the term of the statutory period (5 years) to keep:

(i)	records which record and explain all transactions (see paragraphs 9 to 17 in this Ruling); and

(ii)	those secondary records that are usual and proper to keep in the business carried on by that person. This includes documents that readily explain the person's financial position on a regular basis throughout the year, e.g., journals, ledgers, etc.

DATE OF EFFECT

26.	This Ruling applies to years commencing both before and after its date of issue.

EXPLANATIONS

Purpose of section 262A

27.	Section 262A is a procedural provision introduced into the Act by the Income Tax Assessment Act 1943. When enacted, it stated that:

"...every person carrying on a business shall keep sufficient records in the English language of his income and expenditure to enable his assessable income and allowable deductions to be readily ascertained and shall retain such records for a period of at least seven years after the completion of the transactions, acts or operations to which they relate..."

28.	The original purpose of section 262A was to assist the Commissioner in checking the correctness of income tax returns furnished by business taxpayers. This is apparent from the second reading speech of the then Treasurer, Mr Chifley, in introducing the Income Tax Assessment Bill 1943. In particular, he stated that the task of the Commissioner in discovering the true income of a taxpayer is exceedingly difficult where the taxpayer has not preserved his books and records.

29.	Several amendments were made to the original section 262A until the Taxation Laws Amendment Act 1990 introduced the existing section 262A. Clause 42 of the Explanatory Memorandum relating to the Bill makes it clear that the original requirements of section 262A were to be retained subject only to some modifications mainly necessary as a result of the introduction of self-assessment, e.g., the period for keeping records was reduced from 7 to 5 years. In particular, the clause states that:

"the purpose of subsection 262A(2) is to make it clear that all records of a type previously included in a return form but no longer required to be included under self-assessment, are to be retained by the taxpayer for the purposes of examination by the Commissioner if and when requested by the Commissioner for the purposes of the Act."

Record and explain all transactions

30.	We consider the word "explain", in subsection 262A(1), means "to enable someone to understand". As the purpose of section 262A is to assist the Commissioner in checking the correctness of business income tax returns, we believe that it is reasonable to conclude that a record can "explain" all relevant transactions engaged in by a person if it contains information which enables ATO staff with accounting skills to understand how the transactions relate to the calculation of the person's income and expenditure, i.e., it contains information about the essential features of the transactions.

31.	The range of transactions which a person carrying on a business could enter into, and which could relate to the calculation of the person's income and expenditure, is potentially unlimited. This means that the content of the information needed in a record which would enable ATO staff to understand that relevance is also potentially unlimited. The content always depends on the circumstances of each case. However, we believe that information about the date, amount and character of transactions is the minimum which is needed. This is because:

(i)	the date enables us to determine the year of income to which the transactions relate;

(ii)	the amount enables us to determine how the transactions affect the amount of the person's liability under the Act; and

(iii)	the character enables us to determine whether a person has a liability under the Act, e.g., whether a transaction is allowable expenditure (purchases, wages, rental, etc.,) or not; and whether a transaction is assessable income or not.

32.	We also recognise that there are situations where we need other information about the essential features of transactions to understand their relevance to the calculation of a person's income and expenditure. For instance, to determine whether particular expenditure is deductible under subsection 51(1) of the Act, we might need to know about the purpose for the entering into of the transactions which gave rise to that expenditure. Additionally, we might need to understand the relationship between parties to transactions to determine whether they are "associates" or dealing at "arm's length", for the purposes of the many uses of those terms in the Act.

33.	We believe that the phrase "all transactions", in subsection 262A(1), means "the whole number of every transaction". This means that a person carrying on a business must keep records of every transaction that relates to the person's income and expenditure. However, there are two views of the requirement that those records must record and explain "all transactions". One view is that to record and explain "all transactions", a person must record and explain each transaction individually. The alternative view is that, in some circumstances, a person can record and explain "all transactions" by recording and explaining groups of transactions.

34.	There are many businesses, particularly in the retail industry, that engage in high volume/low value sales transactions. In that situation, we consider that we only need to know, generally, the date, amount and character of the transactions to understand the relevance of the transactions to the calculation of the income and expenditure of the persons carrying on those businesses. We believe that it is possible for a record prepared according to either view equally to provide that minimum information about the essential features of the transactions.

35.	However, we recognise that there can be substantially higher compliance costs associated with a requirement to keep records which explain all transactions individually than with a requirement to keep records which record and explain all transactions as a group. Also, we recognise that it is important to maintain a balance between effective taxation administration and the conduct of business free from the imposition of unnecessary compliance costs. The adoption of either view of the requirement equally promotes the purpose of section 262A. We adopt the latter view because it results in lower compliance costs. Therefore, we accept that a person does not have to keep a record of each transaction individually where any such records provide no additional information about the essential features of the transactions than does a record of the transactions as a group.

Cash registers

36.	One example of the application of our view involves businesses that use a cash register to record sales transactions. The rolls of tape produced by the register record the date and amount of the individual transactions put through the register and it is possible to identify from them the sales character of the transactions. At the end of a particular business period, usually a day, the person carrying on the business makes sure that the register produces a "Z-total", i.e., a numerical summary of the total value of the sales transactions put through the register during that period. It is often the case that the keeping of the records of the "Z-totals" is less costly than the keeping of the rolls of tape. We consider that both the rolls of tape and the records of the "Z-totals" equally provide information about the essential features of the sales transactions and that the keeping of either set of records would satisfy a person's obligations under subsection 262A(1).

37.	Where a cash register is used properly, the rolls of tape and the "Z-totals" produced by the register accurately record the cash sales put through the register. However, the sales put through the register may not always represent all of the sales made by the business. In that situation, the "Z-totals" will not be an accurate record of all of the cash sales that relate to a person's income. As it is important for the effective administration of the Act that any records kept under subsection 262A(1) record all of the relevant transactions, we consider that it is necessary for us to be able to verify that the "Z-totals" are an accurate summary of the sales actually made by the business.

38.	Usually, cash from the sales made by a business is banked. Experience suggests to us that an examination of the rolls of tape produced by a cash register helps us to analyse more accurately whether the cash deposits can be reconciled with the "Z-totals" than when we only reconcile the deposits with the "Z-totals". This is because the individual records on the rolls of tape help us to identify non-sales transactions, such as personal drawings or minor purchases. However, as in paragraph 35 above, we recognise that it is important to maintain a balance between effective taxation administration and the conduct of business free from the imposition of unnecessary compliance costs. As the keeping of the rolls of tape is often a costly exercise for a business, we believe that an appropriate balance is achieved if businesses keep the rolls of tape for one month after they reconcile their "Z-totals" with actual cash sales. This provides us with a sufficient sample against which to test the accuracy of the "Z-totals".

Receipt books

39.	We believe that the discussion in paragraphs 36 to 38 above is also applicable to those businesses which, due to their nature, do not use a cash register. Businesses in that situation often individually record cash sales as they occur, e.g., in a numbered receipt book. The receipt book records the date and amount of the individual sales and it is clear that the transactions recorded are of a sales character. A person may make a summary record of the information contained in the receipt book. It is often the case that the keeping of the summary record is less costly than the keeping of the receipt books. We consider that both the receipt book and the summary record equally provide information about the essential features of the sales transactions and that the keeping of either set of records would satisfy a person's obligations under subsection 262A(1).

40.	However, as with cash sales put through a cash register, sales recorded in a summary record may not always represent all of the sales made by a business. For the reasons discussed in paragraph 37 above, we consider that it is necessary for us to be able to verify that the summary records are an accurate summary of the sales actually made by the business. For similar reasons to those discussed in paragraph 38, experience also suggests to us that an examination of the receipt books enables us to analyse more accurately whether the business' bankings can be reconciled with the summary records. As with businesses operating cash registers, we believe that the retention of receipt books, for one month after a business reconciles its summary records with actual cash sales, provides us with a sufficient sample against which to test the accuracy of the summary records.

No source records

41.	We also recognise that it is clearly impractical for some persons carrying on a business to record every individual cash transaction, particularly where the business deals with high volume/low value transactions and does not have a permanently fixed location from which to operate. However, we believe that it is practical for those persons to make accurate summaries of their cash sales at regular, definable periods, e.g., at the end of a day. In these cases, we accept that regularly produced summary records will satisfy the obligation under subsection 262A(1), as long as the person can reconcile the records with the cash which is actually banked.

Credit cards

42.	A credit card sales transaction involves contracts between a customer who is purchasing goods or services, a merchant who is selling the goods or services and a credit card provider, who is usually a financial institution. The merchant is involved in two contracts. In the first, the merchant sells goods or services to the customer and agrees to accept the customer's signature on a credit card voucher in payment of the customer's debt for the goods or services. In the second contract, the merchant agrees with the financial institution to provide goods or services to any customer who presents the institution's credit card for payment, in exchange for the institution agreeing to pay to the merchant the price of the goods or services provided. It is clear from these contracts that the merchant has an enforceable debt against the institution once the merchant has completed the sales transaction with the customer. This debt is extinguished when the institution pays the amount of the debt to the merchant, usually by way of crediting an account that the merchant has with the institution.

43.	The contract with the financial institution usually requires the merchant to present all sales transaction information and vouchers to the institution within a short period of time after the transactions. It is usual for the institution to send the merchant a regular statement summarising any credit card transactions for a particular period. The summary statement records the dates when the merchant presented the sales transaction information to the institution and the amount of all of the transactions. It is also usual practice between the merchant and the institution that the merchant keeps a copy of all credit card vouchers for a certain period and then destroys them.

44.	Generally, we accept that both the credit card vouchers and the summary statement from the institution equally provide information about the essential features of the sales transactions entered into by a business and that the keeping of either set of records would satisfy a person's obligations under section 262A(1).

45.	However, we recognise that there are some credit card sales which occur near the end of a year of income which the financial institution will record on summary statements in the following year of income. This is because the merchant does not provide the necessary information to the institution until then. In that situation, the summary statement in the current year of income does not provide an accurate picture of all of the sales of the business for that year. In maintaining the appropriate balance discussed in paragraph 35 above, we believe that a person should keep the individual sales vouchers which record sales made in the current year of income, but which the person presents to the institution in the next year of income, until the person reconciles them with the next summary statement. Once the person records which of the notations appearing on the next summary statement refers to credit sales made in the previous year of income, we would accept that the person then no longer needs to keep the individual sales vouchers.

"Keep"

46.	There are two possible views of the obligation in subsection 262A(1) to keep records. The first view is that the obligation only covers those records which a person would normally create in the carrying on of a business. This view assumes that the word "keep" means simply "retain". The second view is that the obligation covers any records which record transactions that are relevant for the purpose of ascertaining a person's income and expenditure, whether they are normally created in the person's business or not. This view assumes that the word "keep" means both "make" and "retain".

47.	We believe that the Macquarie Dictionary supports the second view. It defines "keep" as:

"to maintain in condition or order, as by care or labour; to record (business transactions, etc.,) regularly: to keep records."

Also, we prefer the second view because it is supported by the purpose of section 262A. If we relied on the first view, and a person carrying on a business would not normally create records of certain business transactions, then there is a risk that the records kept would not record all transactions that are relevant to ascertaining the person's income and expenditure.

48.	The case of Re Aarons; ex parte the Bankrupt (1977-78) 19 ALR 633 further supports our view that the word "keep" means "make and retain". The Bankruptcy Act 1966 provides in subsection 150(6) that the Court may exercise its powers under subsection 150(5) where a bankrupt has "omitted to keep and preserve such books, accounts or records as sufficiently disclose his business transactions and financial position..." It also provides in subsection 270(1) that a bankrupt who "has not kept such books as are usual and proper in any business carried on by him..." is guilty of an offence. In considering whether a bankrupt had failed to keep proper books under these subsections, Riley J said at 636 that:

"Each provision refers both to the keeping and to the preserving of books, accounts and records. Two of the meanings ascribed by the Concise Oxford Dictionary, 6th ed, to the verb "to keep" are (a) "maintain (diary, accounts, books) by making requisite entries" and (b) "retain possession of, not lose or destroy". It is clear that it is in the former sense that the verb is used in both s150(6)(a) and s270(1)."

49.	Where our view requires a person to make records, we consider that the obligation, normally, is to make contemporaneous records of all transactions. This is because contemporaneous records are more likely to accurately record the essential features of the transactions. They are also more likely to record all transactions entered into by the person.

50.	The Macquarie Dictionary defines "contemporaneous" as:

"existing or occurring at the same time".

However, we consider that, in the context of section 262A, a record will be contemporaneous if it is made as soon as practicable after the person enters into the transaction. This is because some businesses do not have a system which enables them to record transactions at the same time as they occur.

51.	It is clear that it may not always be possible for a person to record groups of transactions contemporaneously, as the grouping of transactions may take place over a period of time. In the circumstances outlined in paragraphs 12 to 17 above, we accept that the summary record still accurately records all of the transactions.

52.	We recognise the difficulties that some persons have in retaining large volumes of paper records and the compliance costs associated with this. They may want to retain the information contained in those records in a more convenient form, e.g., microfilm, microfiche and CD ROM. Section 25 of the Acts Interpretation Act 1901 defines the word "record", where it appears in any Act, as including information stored or recorded by means of a computer.

Manner of keeping records

53.	Clause 42 of the Explanatory Memorandum referred to in paragraph 29 above makes it clear that paragraph 262A(3)(a) was introduced to cover the keeping of electronic records. It states that:

"Subsection 262A(3) obliges a person who is required by the section to keep records, to keep those records:

by paragraph (a) – in the English language or, if not in written form (e.g., in an electronic medium such as magnetic tape or computer disc), in a form which is readily accessible and convertible into writing in English."

54.	We consider that the requirement in paragraph 262A(3)(b) that a person must keep records so as to "enable" the person's liability under the Act to be readily ascertained, refers to the ability of ATO staff to be able to readily ascertain that person's liability. This is consistent with the underlying purpose of section 262A to assist the Commissioner in ascertaining a person's liability. We recognise that ATO staff need to have accounting skills to be able to readily ascertain a person's liability.

55.	The Macquarie Dictionary defines "readily" as:

"1. promptly; quickly; easily."

It defines "ascertain" as:

"to find out by trial, examination or experiment, so as to know as certain; determine."

Generally, we would expect that ATO staff with accounting skills would be able to quickly and easily determine a person's taxation liability without needing too much assistance from that person. However, we recognise that because of the complexity of some businesses, ATO staff will find it useful to have the helpful assistance of the person and/or the person's representative to readily ascertain the person's liability.

56.	There are circumstances where it is possible for ATO staff to readily ascertain a person's liability from the records referred to in paragraphs 19 and 20 above. This would be the case where the simple nature of the business is such that those records easily show the person's income and expenditure (see Example 2 in this Ruling). However, in most circumstances, businesses do not operate in this kind of environment and need accounting systems which trace business transactions from their source to the financial accounts. In that situation, it would not be possible for ATO staff to readily ascertain a person's liability without referring to those secondary records, e.g., journals, ledgers and financial accounts, that provide a record of that system.

57.	Paragraph 262A(4)(a) makes it clear that the records which are to be kept under section 262A must be kept for 5 years after the records were prepared or obtained, or the completion of the transactions to which they relate, whichever is the later. We believe that this is an ongoing obligation over the retention period. This view supports the Commissioner's ability to be able to readily ascertain a person's taxation liability at any time after the completion of the transactions. This is important because the Commissioner has the power to raise an assessment at any time under section 168 of the Act.

EXAMPLES

Example 1

The facts

58.	David and Stephanie own a neighbourhood newsagency. Due to the large number of customers, they operate with the help of a part-time assistant.

59.	Most of the newsagency's sales involve small amounts of cash, except for some regular customers who have monthly accounts. They have a cash register through which they record all cash sales, including the monthly accounts. Any cash removed from the cash register for personal drawings, refunds, minor purchases, etc., is noted in a separate record used for this purpose.

60.	The newsagency makes its trade purchases through a small number of established publishing and stationery distributors. These operate on monthly invoice arrangements. They provide a delivery docket with each delivery and Stephanie reconciles this with the items delivered. David and Stephanie pay the invoices once a month by cheque after they have reconciled them with the relevant delivery docket.

61.	At the end of each business day, Stephanie reconciles the contents of the cash register with the cash register tape, taking into consideration any cash removed from the cash register for personal drawings, refunds, minor purchases, etc. After the reconciliation, Stephanie tears off the "Z-totals" at the bottom of the cash register tape and glues them into a book in chronological order, noting any discrepancies between the "Z-total" and the cash contained in the register. She then banks the cash.

62.	Once a month, Stephanie receives a statement from the bank containing details of her cash deposits. She reconciles this statement with the "Z-totals" and other records which she has kept. Stephanie retains the rolls of tape produced by the cash register for one month after she has reconciled the bank statement with the "Z-totals" and other records. She then disposes of the rolls of tape. However, Stephanie retains the "Z-totals", bank statements and other records for the statutory period.

63.	At the end of each month, Stephanie also reconciles the newsagency's sales, purchases and other expenses for that month, e.g., rent, wages, motor vehicle costs, etc., to determine whether the newsagency made a profit or a loss during that month. She summarises this information on a personal computer. This forms the basis of the information used to prepare the newsagency's income tax return at the end of the year of income.

Our view

64.	We consider that either the cash register tape or the "Z-totals" would record and explain all cash transactions relating to the income of the newsagency. This is because both the tapes and the "Z-totals" provide similar information as to the essential features of the cash transactions (see paragraph 12 of this Ruling).

65.	As Stephanie keeps the cash register tapes for one month after she has reconciled the "Z-totals" and other records with the bank statement, we consider that this would enable an officer of the ATO to verify that the "Z-totals" are an accurate record of the cash sales made by the business.

66.	For purchases, we consider that the invoices, along with proof of payment from the bank statement, would record and explain all the purchases of the newsagency.

67.	As Stephanie reconciles the newsagency's accounts every month, we consider that the monthly summary on the computer is an appropriate manner to keep the records so as to allow the newsagency's liability to be readily ascertained (see paragraphs 24 and 25 of this Ruling).

Example 2

The facts

68.	Kathy owns a small, up-market fashion boutique. Kathy only sells a small number of items per day. Due to the price of these items, the great majority of sales are by credit card. However, a small number of low price items are sold for cash. She manages the business without any assistance.

69.	Kathy does not use a cash register to record her sales. Whenever she sells an item for cash she provides the customer with a hand written receipt from a numbered receipt book and retains a duplicate in the book.

70.	For credit card sales, Kathy keeps the merchant's copy of the credit card voucher and forwards the original to the bank for payment. The bank deposits the payments directly into the business' bank account. Once a month, Kathy receives a summary statement from the bank of payments received. She reconciles this with her copies of the original credit card vouchers. She keeps the credit card vouchers for three months after the reconciliation and then disposes of them.

71.	Kathy checks the receipt book and the contents of the cash box at the end of the day, taking into consideration any cash removed for personal drawings, refunds, minor purchases, etc. She then deposits the cash in the business' bank account.

72.	Kathy's boutique relies on a wide variety of sources for the items that it sells. These sources are subject to constant change as Kathy seeks to keep up with the latest trends in fashion.

73.	The boutique's trading stock is delivered by courier and is accompanied by an invoice and a delivery docket. Kathy checks that the delivery docket and the invoice correspond to the items delivered before putting the items on the shop floor for sale. She attaches the delivery docket to the invoice and notes in a diary the due date for payment of the invoice. Kathy then places the invoice in a separate box containing all other invoices awaiting payment. She pays the invoices by cheque from the business' bank account on the due date. Once paid, she transfers the invoice into another box containing all the other paid invoices.

74.	The bank provides a statement of the business' bank account to Kathy once a month. She checks this statement against the deposit book and the cheque butts for any discrepancies.

75.	Kathy does not review the boutique's financial position on a regular basis. She keeps all the bank statements, deposit books, receipt books, invoices, credit card statements and cheque butts in a separate area in the boutique. At the end of the year of income she reviews them in order to prepare her tax return.

Our view

76.	For credit card sales, as Kathy retains the receipt book and the bank's summary statements of her credit card sales, we consider that it is not necessary for her to also retain the credit card vouchers. This is because the individual vouchers provide no additional information about the essential features of the credit transactions than do the bank's summary statements (see paragraph 17 of this Ruling).

77.	However, if Kathy makes credit card sales in the current year of income, and doesn't present the individual credit card vouchers to her bank until the next year of income, we consider that she also must retain the individual vouchers until she reconciles them with the bank's next summary statement. Once Kathy records which of the notations appearing on the next summary statement refer to credit sales made in the previous year of income, we would accept that she then no longer needs to keep the individual vouchers.

78.	We consider that it is not necessary for Kathy to prepare secondary records that summarise the boutique's financial position on a regular basis. This is because, as the boutique only sells a relatively small number of items per day, it is possible to readily ascertain the boutique's liability without referring to any secondary records.

79.	As Kathy does not do a reconciliation of her cash sales, she needs to keep the receipt books for the statutory period.

Example 3

The facts

80.	Peter has a stall at a fruit and vegetable market where he sells produce that he buys from local farmers. The market is open only on weekends where it caters mainly to the casual passing trade. Peter operates the stall without any assistance.

81.	Peter deals in cash only. All his sales are for small amounts of cash which he keeps in a bag around his waist. Peter does not provide any receipts or other records to his customers and does not have a cash register. At the end of the day Peter puts all the cash from his waist bag onto a table at home and counts it. He writes down his takings for the day (less the float) in a book which he keeps for this purpose, taking into consideration any cash earned that was used for other purposes, e.g., personal drawings, minor purchases, etc., that would have the effect of providing an incorrect figure of his total cash sales. He then deposits the cash in his bank account every Monday. Every month, Peter reconciles the amounts in the takings' book with his bank statement. Peter retains the takings' book and the bank statements as a record of his takings.

82.	Peter purchases his produce every Saturday morning. He pays for all his purchases with cash. He withdraws the cash from his bank account the day before. He retains any amount he does not use for purchases as a float. Peter makes a record of what and how much he purchased from each farmer in a book he has for this purpose. He retains this book as a record of his purchases.

Our view

83.	We consider that, although Peter does not make a contemporaneous record of each individual transaction, the daily summaries in the takings' and purchases' books of the cash received and the purchases made explain the essential features of all of his transactions and enable his taxation liability to be readily ascertained (see paragraphs 16 and 20 of this Ruling).

PREVIOUS RULINGS

84.	Taxation Ruling IT 2349 is now withdrawn. To the extent that the principles in that Ruling are still applicable, we have incorporated them into this Ruling.

Commissioner of Taxation

20 March 1996


Taxation Ruling TR 97/25 Property development - deduction for capital expenditure
Taxation Ruling TR 97/25 – This incorporates addendum 97/25A

Income tax: property development – deduction for capital expenditure on construction of income producing capital works, including buildings and structural improvements

Contents:

What this Ruling is about

Previous Rulings

Date of Effect

Ruling

Construction expenditure

Capital works purchased from a speculative builder

Apportionment – indirect costs

Apportionment – capital works partly used in deductible way

Use of estimate when actual construction expenditure is not available

Construction costs exceed purchase price

Destruction of capital works

Explanations

Examples

WHAT THIS RULING IS ABOUT

1.	This Ruling addresses a number of matters that are relevant in determining entitlement to, and the amount of, a deduction under Division 43 of the Income Tax Assessment Act 1997 ("the 1997 Act") in respect of expenditure on the construction of assessable income producing buildings and other capital works. Division 43 expresses the same ideas as and replaces Divisions 10C and 10D of the Income Tax Assessment Act 1936 ("the 1936 Act").

2.	In particular, this Ruling identifies certain expenses that are included in construction expenditure and addresses the manner in which the deduction under Division 43 is calculated when properties are not wholly used in a deductible way during an income year.

Class of person/arrangement

3.	This Ruling applies to a taxpayer who holds an income producing building or other capital works during an income year.

PREVIOUS RULINGS

4.	This Ruling replaces Taxation Rulings IT 2397 and IT 2640 as well as Taxation Determinations TD 92/177, TD 93/85, TD 93/105 and TD 94/83, which are now withdrawn. These documents considered issues involving the amount of the deduction allowable, the consequences of voluntary demolition of a building and the types of person qualified to estimate construction costs.

5.	We also outline the operation of the 1997 Act in relation to the entitlement to a deduction for property acquired from a speculative builder that was addressed in Taxation Ruling IT 2640.

DATE OF EFFECT

6.	This Ruling applies to the 1997-98 and later income years.

RULING

Construction expenditure

7.	A deduction for capital works under Division 43 is based on the amount of construction expenditure, that is, capital expenditure (including expenditure assumed, by operation of subsection 43-85(2), to be capital expenditure) incurred in respect of the construction of those capital works. Section 43-20 of the 1997 Act recognises three categories of capital works:

•	buildings or extensions, alterations or improvements to buildings;

•	structural improvements or extensions, alterations or improvements to structural improvements; and

•	environment protection earthworks.

8.	Capital works do not include structural improvements in the form of earthworks described in subsection 43-20(4). Similarly, capital expenditure on land (on which the capital works are to be constructed), including clearing, demolition and landscaping costs, is not part of construction expenditure. These are specifically excluded by paragraphs 43-70(2)(b), (c) and (d) of the 1997 Act.

9.	We consider that construction expenditure includes:

•	preliminary expenses such as architect fees, engineering fees, foundation excavation expenses and costs of building permits;

•	cost of structural features that are an integral part of the income producing buildings or income producing structural improvements, such as atriums and lift wells; and

•	some portion of indirect costs.

10.	We also take the view that, in relation to an owner/builder entitled to a deduction under Division 43, the value of the owner/builder's contributions to the works (such as labour and expertise) and any notional profit element do not form part of construction expenditure.

Capital works purchased from a speculative builder

11.	A taxpayer who purchases capital works from a speculative builder may be entitled to claim a deduction under Division 43. The 1997 Act requires an assumption to be made that the expenditure incurred by the builder on the capital works is capital expenditure. However, the limitations imposed by subsection 43-70(2) of the 1997 Act (which sets out the type of expenditure excluded from construction expenditure) apply in determining whether such capital expenditure is also construction expenditure.

12.	Where a taxpayer buys capital works from a speculative builder, that builder's contributions to capital works (such as labour and expertise) and any profit element on the sale of the capital works do not form part of construction expenditure for the purposes of Division 43 in relation to those works.

Apportionment – indirect costs

13.	Indirect costs, in the context of construction activities, are those that, by reference to accounting records or other documentation, cannot be allocated wholly to an individual element of a construction project, such as the building or plant. We take the view that, in determining construction expenditure in respect of capital works, indirect costs generally are allocated between elements to which they relate in the same proportion that the direct costs of those elements bear to one another: see BP Refinery (Kwinana) Ltd v. FC of T (1961) ALR 52; (1960) 12 ATD 204. Where any other method is employed, it must be justified by sound accounting principles and practical considerations.

Apportionment – capital works partly used in deductible way

14.	Sections 43-210 and 43-215 of the 1997 Act set out the steps to be followed in calculating the amount of the deduction allowable for capital expenditure on the construction of capital works. They require the determination of a reduced amount where capital works are used in an income year only partly for the purpose of producing assessable income or for research and development.

15.	Where only part of the capital works is used in a relevant way, we consider the reduction generally should be calculated on a floor area basis. This is done by reference to the floor area not used to produce assessable income or for research and development as a proportion of the total floor area of the capital works. However, if another basis is more appropriate in a particular situation, that other basis should be adopted.

Use of estimate when actual construction expenditure is not available

16.	Where it is not possible to ascertain the actual construction expenditure incurred on capital works, we accept an estimate provided by an appropriately qualified person.

Construction costs exceed purchase price

17.	Where a taxpayer purchases capital works at a price lower than the construction expenditure for those works, the deduction for the capital works is calculated by reference to the construction expenditure, not the purchase price.

Destruction of capital works

18.	We consider that section 43-40 of the 1997 Act applies both to voluntary and involuntary destruction of capital works.

EXPLANATIONS

Construction expenditure

19.	A deduction under Division 43 is dependent, among other things, on capital expenditure having been incurred in respect of the construction of capital works. The deduction is determined by reference to the amount of such expenditure incurred by the owner, lessee or quasi-owner of the capital works at the time those works were undertaken.

20.	In the case of capital works constructed by an owner/builder for retention as an income producing asset, the deduction is calculated with regard to capital expenditure actually incurred in respect of the construction of capital works. The value of the owner's contributions (such as labour and expertise and any notional profit element) do not form part of construction expenditure.

Capital works purchased from a speculative builder

21.	A speculative builder constructing a building for sale incurs expenditure on revenue rather than capital account. In the absence of any capital expenditure in respect of the building, the builder is not entitled to a deduction under Division 43. However, the 1997 Act, in subsection 43-75(3) and section 43-85, specifically addresses a situation in which a taxpayer purchases capital works from a speculative builder. Broadly stated, it allows a deduction to a taxpayer who purchases capital works from an entity that:

(a)	is not an associate of the taxpayer; and

(b)	incurred expenditure in constructing the capital works on land it owned or leased in the course of a business that included the construction and sale of such capital works.

In effect, the 1997 Act assumes expenditure on construction of those capital works to be capital expenditure. It allows a deduction based on that part of the expenditure that otherwise comes within the meaning of construction expenditure.

22.	Again, the construction expenditure is determined by reference to the builder's actual costs in constructing the capital works. Specifically excluded from construction expenditure are the value of the builder's own contributions to the construction process and any profit element on the sale transaction.

Use of estimate when actual construction expenditure is not available

23.	Subsection 262A(4AJA) of the 1936 Act operates upon a disposal, by way of transfer, of capital works begun after 26 February 1992 and in respect of which deductions have been allowed or are allowable under Divisions 10C or 10D of the 1936 Act or Division 43 of the new Act. Broadly stated, it requires the transferor to provide the transferee with information that enables the latter to determine any entitlement under Division 43.

24.	It is not always possible for the purchaser of a building to establish the actual cost of the building, particularly in circumstances where the builder or previous owner becomes bankrupt or is not able, for other reasons, to provide the information. In those circumstances, we accept a building cost estimate by an appropriately qualified person.

25.	We consider that an appropriately qualified person has expertise in the calculation of building construction costs and is likely to be accepted by a court or tribunal as an expert witness on the issue of calculating the cost of construction of the particular building. That expertise may have been acquired through a course of study or through relevant experience in providing building cost estimates over a significant period of time.

26.	The attainment of relevant professional qualifications or recognition by an appropriate professional association or organisation is indicative of expertise in this field.

27.	Unless they are otherwise qualified, valuers, real estate agents, accountants and solicitors generally have neither the relevant qualifications nor experience to make such an estimate.

28.	Appropriately qualified people might include:

•	a quantity surveyor, who has expertise in the relevant type of construction

•	a clerk of works, such as a project organiser for major building projects;

•	a supervising architect who approves payments at each stage in major projects and who may approve individual payments to subcontractors in smaller projects; or

•	a builder who is experienced in estimating construction costs of similar building projects.

29.	The question of whether a person has the required expertise is an issue of fact in each case.

30.	We do not accept the use of published building cost guides to estimate the actual cost of construction, unless they are used merely as a guide by an appropriately qualified person. Building cost guides typically provide a cost per square metre of a range of building projects, based on industry averages. They are not sufficiently specific to the particular building being valued.

31.	Building cost guides also include a reasonable profit margin for the builder. However, the builder's profit margin does not form part of the construction expenditure unless the original construction was commissioned from a builder whose charges for the work included such a profit. Where the original construction was carried out directly by the then owner, or by that owner using trade subcontractors and perhaps an architect, no such builder's profit was incurred as part of the capital expenditure on construction.

EXAMPLES

Capital works purchased from a speculative builder

32.	Guiseppe is a builder and land developer who constructs dwellings of standard design either on land that he owns, for sale as a house and land package, or on the client's own site. One of his more popular designs is the "Outback Manor" that costs him $95,000 to construct but has a list price of $110,000 when sold from a display village.

33.	Mary, an investor, contracts for this house to be built on a site she owns. Upon completion she lets the house. Mary can deduct an amount under Division 43 based on the construction cost of $110,000, which was the cost to her of constructing the building.

34.	Guiseppe owns a site near Mary's site that is intended for speculative development and sale as a house and land package. Because of the time he can save by overseeing two construction projects in close proximity, he decides to undertake the construction of buildings on Mary's and his own land concurrently. After the house on his land is completed, Guiseppe decides to retain it for some time, as the real estate market is sluggish and he cannot get the price he wants. He lets the property. Guiseppe is not entitled to a deduction under Division 43 as he has incurred expenditure on revenue account rather than capital account in constructing this building.

35.	After two years, house prices improve and he sells the property to Tom, an investor. In accordance with sections 43-75 and 43-85 of the 1997 Act, expenditure on the construction of the house is assumed to be capital expenditure because the house had been purchased from an entity that is not an associate and it had been built as part of a business of constructing houses for sale. Therefore, Tom is entitled to claim a deduction for capital expenditure on the building under Division 43, based on the $95,000 that it cost Guiseppe to construct the house. No amount for Guiseppe's time and profit margin for constructing the building is included in the calculation of the construction expenditure.

Apportionment – indirect costs

36.	A company undertakes the construction of a building on land it owns with a view to retaining it as an investment. In the course of constructing the building, the company incurs direct construction expenditure in respect of the building, plant and landscaping totalling $87,000, $6,000 and $12,000 respectively, and pays a further sum of $9,000 to furnish the building. In addition, it incurs costs of $1,000 for facilities erected on the building site for the use of all construction workers.

37.	The cost of the facilities for the construction workers is considered to be an indirect expense that is applicable to the cost of plant, the building and landscaping works. In calculating the construction expenditure of the building for the purposes of Division 43, this indirect cost is allocated between plant, buildings and other works in the ratio that the direct costs of those elements bear to one another. The cost of the furniture is not included for the purposes of apportionment because there is no nexus between the furniture and the indirect costs.

38.	The capital expenditure on each element of the construction project is:

	Direct Cost $	Indirect Cost  $	Capital Expenditure $
Building	87,000	829	87,829
Plant	6,000	57	6,057
Landscaping	12,000	114	12,114
Furniture	9,000	0	9,000
	114,000	1,000	115,000
Allocation of indirect expenses is calculated as follows:

Building:	(87,000 * 1,000)/(87,000 + 6,000 + 12,000) = $829

Plant:	(6,000 * 1,000)/(87,000 + 6,000 + 12,000) = $57

Landscaping:	(12,000 * 1,000)/(87,000 + 6,000 + 12,000) = $114

Apportionment – capital works partly used in a deductible way

39.	In November 1997, Dr Claude Jones commenced construction of a residence and surgery to cater specifically for his circumstances. He runs a part-time private medical practice three half days a week from his residence. He also works part-time as a consulting physician at the local bush nursing hospital. The part of the new building designed specifically for his medical practice incorporates a waiting room, a storage room and two consulting rooms. The suite of four rooms has a separate entrance, is furnished specially for the practice and is not suitable for residential accommodation for Dr Jones and his family.

40.	The building is a single construction expenditure area, only part of which is used for income producing purposes. To the extent that the building is used for residential accommodation, it is taken not to be used for the purpose of producing assessable income (section 43-170). This situation is taken into account in calculating the amount of the deduction under section 43-210. Therefore, the calculation in step 1 of section 43-210 needs to be based on a reduced amount, excluding the area used as a dwelling. Dr Jones has to reduce the amount on which to base his deduction by reference to the floor area of the residence, unless another method is more appropriate.

Construction cost exceeds purchase price

41.	Damian is a property developer who constructs a condominium of 38 units in a popular holiday resort. All units are intended for sale. During the construction period, he sells 28 of the units off the plan. After completion of the project, real estate prices drop significantly and he decides to sell the last of the units below cost.

David, an investor, buys one of the last units for $95,000. The actual construction cost of the unit to Damian was $105,000. David is entitled to a deduction under Division 43 based on construction expenditure of $105,000.

Destruction of capital works

42.	Lindsay operates a service station and garage. In 1989, he constructed a new lubrication/service bay. In 1997, due to new technology and increased business demand, the existing service bay is not adequate and he builds a larger lubrication/service bay that can accommodate more cars and also the latest tools and equipment required for the later model cars. After completing the new bay, he demolishes the 1989 extension and replaces it with a self-service car wash. In his return of income for the 1997-98 year, Lindsay can deduct an amount in respect of undeducted construction expenditure related to the 1989 extension under section 43-40 of the 1997 Act. The fact that the demolition is voluntary does not affect his entitlement to a deduction under that section.

Commissioner of Taxation

27 May 1998 (Addendum)


Taxation Ruling TR 94/27 Zone rebate for residents of isolated areas
Taxation Ruling TR 94/27

Income tax: zone rebate for residents of isolated areas

Preamble

This Ruling, to the extent that it is capable of being a "public ruling" in terms of Part IVAAA of the Taxation Administration Act 1953, is a public ruling for the purposes of that Part. Taxation Ruling TR 92/1 explains when a Ruling is a public ruling and how it is binding on the Commissioner.

Contents:

What this Ruling is about

Ruling

Date of effect

Explanations

Examples

WHAT THIS RULING IS ABOUT

1.	This Ruling provides guidelines to assist in determining whether an individual taxpayer is eligible for a zone rebate under section 79A of the Income Tax Assessment Act 1936. In particular, the Ruling:

(i)	explains how to determine whether an individual is a resident in a zone area or in a special area within a zone;

(ii)	explains the factors to be considered in determining whether a point falls within a special area in either Zone A or Zone B including:

(a)	the "shortest practicable surface route" test in subsection 79A(3D); and

(b)	the "adjacent to or in close proximity" test in subsection 79A(3E); and

(iii)	explains how the Commissioner will exercise his discretion in calculating the amount of rebate allowable under paragraph 79A(2)(f).

Previous Rulings

2.	The Ruling consolidates Taxation Ruling IT 259 with Taxation Rulings IT 343, IT 2068, IT 2118 and IT 2233. These Taxation Rulings are now withdrawn.

3.	This Ruling does not determine whether certain points fall within a zone area, or the special area of a zone. Taxation Ruling TR 94/28 provides an alphabetical list of points that fall within Zone A and Zone B, and the special areas within those zones.

RULING

Resident of zone area

4.	For a taxpayer to be entitled to a zone rebate under subsection 79A(1), the taxpayer must satisfy one of the residence tests in subsection 79A(3B).

5.	Subsection 79A(3B) provides that an individual is a resident of a particular area, being a prescribed area, Zone A, Zone B or a special area within either of those zones (referred to in this Ruling as a "relevant area"), if the individual satisfies one of the tests in paragraphs 79A(3B)(a) to 79A(3B)(e). These tests (except for the test in paragraph 79A(3B)(b)) depend on where the individual "resided" during the period or at the time specified in those paragraphs.

6.	The word "resided" in its context in subsection 79A(3B) has its ordinary meaning. According to the Shorter Oxford English Dictionary, "reside" ordinarily means to dwell permanently, or for a considerable time, to have one's settled or usual abode, to live in or at a particular place.

7.	The term "resident" in subsection 79A(3B) has a special meaning. It extends to an individual who "resided" in a relevant area in a year of income for more than one-half of the year of income. It also extends to an individual who had not so resided but who actually was in the relevant area for more than one-half of the year of income.

8.	Whether an individual "resided" in a relevant area in a year of income in the ordinary sense is a question of fact that turns on the circumstances of each particular case. No hard and fast rules apply. To assist in determining for a year of income whether an individual "resided" in a relevant area according to ordinary concepts, the following factors need to be taken into account:

(a)	the intended and actual length of the individual's stay in the relevant area;

(b)	any present intention either to leave the relevant area at some definite point in time;

(c)	the establishment of a home (in the sense of a dwelling place) in the relevant area;

(d)	whether the individual maintains a residence or place of abode outside a relevant area or has abandoned any such residence or place of abode on entering a relevant area;

(e)	the duration and continuity of the individual's presence in the relevant area; and

(f)	the durability of association that the individual has with the relevant area (in the sense that the individual, for example, has his or her personal effects in the area, maintains bank accounts or other assets in the area, has informed Government Departments such as the Department of Social Security to send family allowance payments or other benefits to the area, has children in places of education in the area, has family or business ties in the area and so on).

9.	The weight to be given to each factor varies with the individual circumstances of each case and no single factor is conclusive.

10.	For the purposes of section 79A, an individual may be a "resident" of a relevant area, even though he or she did not "reside" in the area in the ordinary sense of the word, if the individual was actually in that area, whether continuously or intermittently, for more than one-half of the year of income.

11.	In determining whether a person has resided or actually been in the relevant area for the required number of days, we consider that, for the purposes of the residence test in subsection 79A(3B), the word "day" includes any one or more parts of a calendar day.

12.	There is no definition of "day" in the Income Tax Assessment Act 1936. Whether a fraction or fractions of a day may be treated as being a whole day depends on the intention and the context of the statute in question. We accept that in its context in subsection 79A(3B), the word "day" is intended to include a fraction or fractions of a day.

13.	Paragraph 78 provides an example of how the operation of this interpretation applies in practice.

14.	We accept that an individual may have his or her settled or usual place of abode at a particular place, and therefore resides at that place, even though in a particular year of income the individual may not have lived in or at that particular place, nor was actually at that place, for more than one-half of the income year.

15.	Whether an individual derived income from sources within a relevant area is not determinative of whether the individual resided in that area in terms of subsection 79A(3B).

16.	If an individual satisfies the requirements to be a resident of more than one relevant area, we consider that the individual is entitled to the greater rebate for which he or she qualifies. For instance, if an individual is a resident of Zone B, but has spent more than 182 days in Zone A, he or she will be entitled to claim a Zone A rebate.

17.	For the purposes of subsection 79A(3B), if an individual resided on a trawler, which was at sea for more than one-half of a year of income, the individual is not a resident of either Zone A or Zone B. The individual is therefore not entitled to any zone rebate.

18.	On the other hand, an individual may have resided in a zone area (for example, Zone B) during a part of a year of income and have been at sea, say on a trawler, for the balance of the year. If the individual was physically present in other zone areas during the balance of the year and the total time spent in the zone areas exceeded more than one-half of the year of income, the individual is eligible for a zone rebate.

Subsection 79A(3D) – whether a point falls within a "special area" in either Zone A or Zone B

19.	A higher amount of rebate (than that allowable for a resident of Zone A or Zone B) is allowable if an individual resides in the "special area" in either Zone A or Zone B. The term "special area" is defined in subsection 79A(3D) as being those points in Zone A or Zone B that were not, as at 1 November 1981, situated 250 kilometres or less by the shortest practicable surface route from the centre point of the nearest urban centre with a census population, from the 1981 census, of not less than 2,500.

Subsection 79A(3D) – shortest practicable surface route

Surface route

20.	For the purposes of the "shortest practicable surface route" requirement in paragraph 79A(3D)(a), the expression "surface route" is defined in subsection 79A(4) to mean a route other than an air route. This ordinarily means a route (wholly or partly) across land or across water.

Practicable route

21.	The question may arise whether particular types of travel routes are "practicable" in terms of the "shortest practicable surface route" requirement in paragraph 79A(3D)(a).

Road Routes

22.	In the vast majority of cases, road routes are the shortest practicable surface routes to and from population centres. If the road is reasonably well defined, whether it is a sealed highway or a major or minor access road (public or private), and if it is normally used by zone residents to travel between a point in a zone and the relevant population centre, the distance by that road determines whether an individual who resided at that point is eligible for the special area zone rebate.

23.	The fact that the road in question may occasionally be impassable as a result of floods, etc., does not mean that it is not a practicable route. However, a road that is regularly impassable for a significant part of the year is not a practicable route.

Water Routes

24.	If a water route is wholly or partly the generally adopted method of travelling to and from a population centre, that route, to that extent, is the practicable route. It is not reasonable, however, to treat a water route as being practicable if it is not readily negotiable, in terms of water conditions or distance. It might be a practicable route, however, even though it is not readily negotiable, if there is a regular passenger service available.

25.	If there is a practicable water route, the fact that one or more of the residents of a particular area choose to fly rather than use the water route, does not make a point in that area a point within a special area.

Train Routes

26.	Only in exceptional cases would we accept that a train route is a practicable route in remote zone areas. In view of their infrequency, train services are not normally the means by which zone residents travel to and from a population centre. Zone residents can generally be expected to travel by road. Accordingly, if the distance by rail from a point in a zone area to the nearest population centre of 2,500 or more is less than 250 kilometres, while by road it is more than 250 kilometres, the point falls within the special area of the zone.

Distance measurement

27.	In applying subsection 79A(3D), the relevant distance to be measured is that from the point in the urban area from which distances are usually measured. In capital cities, this is usually the GPO or other designated point in the central business district of the city. In other places, the measurement is usually taken from the post office or other historical centre of the town. Some tolerance in favour of a taxpayer is permitted in the event of doubt as to the place from which distances are usually measured.

28.	To establish the shortest practicable surface route, current road maps suffice to indicate approximate distances to the centre point of an urban centre with a population of 2,500 or more. Signposted distances are also used as prima facie evidence of distances involved.

29.	In rare cases, it may be necessary to obtain an accurate measurement of the distance involved for the purpose of settling a dispute. To reduce the possibility of dispute, particularly if several alternative routes are available (e.g. in the case of a location to be measured from a capital city), a degree of tolerance in favour of a taxpayer is permitted in dealing with borderline distance situations.

30.	The shortest practicable surface route is not intended to include rough tracks or other little used roads if there is another route that is normally used. However, a route that is wholly or partly across water is the shortest practicable surface route if that is the generally adopted method of surface transport.

31.	The question to be decided in each case is whether the particular route is the generally accepted and reasonably available route taken by the relevant zone residents as a whole. The circumstances of a particular individual, (e.g. whether or not he or she owns a car or boat, and thus, what route he or she ordinarily takes), is not the determining factor.

32.	If it is established that there is no practicable surface route from a point in a zone to the nearest urban population centre, that point should be treated as being in the special area of the zone.

Subsection 79A(3E) – adjacent or close proximity test

33.	Under subsection 79A(3E), the Commissioner has a discretion to treat a point in either Zone A or Zone B that is not in a special area in that zone as being in a special area in that zone if the point is "adjacent to or in close proximity to" the special area.

34.	It must be appropriate, having regard to all the circumstances, to treat the point as being a point in the special area in the zone.

35.	If an individual lives "adjacent to" or "in close proximity to" a special area in Zone A or Zone B, the individual may qualify for the special area zone rebate if this is appropriate having regard to all the circumstances.

36.	Circumstances in which the Commissioner has accepted that it is appropriate to apply subsection 79A(3E) include the following:

(i)	If one outstation on a property is in the special area, but the homestead and/or other outstations are not. If taxpayers live on the same property but at different (though adjacent or closely proximate) points, and at least one point is in the special area of a zone, subsection 79A(3E) will generally be applied to treat the other points as also being in the special area.

There may, however, be some cases where the application of the subsection would not be appropriate. For example, the main homestead situated on a very large station, to which the general rule would otherwise extend, may itself be only a short distance from, and have ready access to, a relevant urban centre. In these circumstances, to treat the homestead as being in the special zone area would be unreasonable. This is therefore subject to a consideration of the particular circumstances in any case.

(ii)	We accept, in the case of the islands off the Northern Territory coastline, that there is no practicable surface route from any of the islands to a relevant population centre. Accordingly, points on those islands are regarded as being in the special area of Zone A.

(iii)	If the taxpayer resided in an area of extreme isolation and hardship: the following combination of factors constitutes extreme isolation or hardship:

o	the only surface route is frequently closed by climatic conditions;

o	there are no medical or hospital services in the area; and

o	the only means of communication is a weekly mail service or radio telephone.

37.	This is not an exhaustive list but, if similar factors to these are present, this may indicate extreme isolation or hardship. The question of extreme isolation or hardship is one of fact and should be decided on the circumstances of each case.

38.	If individuals reside on either side of the 250 kilometre dividing line, the adjacent or close proximity test in subsection 79A(3E) should be used to provide consistent treatment between the individuals concerned. The operation of subsection 79A(3E) is not intended to be used, however, to allow the special area zone rebate to cases other than these "borderline" cases.

Amount of rebate under paragraph 79A(2)(f)

39.	The amount of the zone rebate allowable is determined by subsection 79A(2). That subsection fixes the rebate in several situations in paragraphs 79A(2)(a) to (e).

40.	Paragraph 79A(2)(f) provides that the amount of the rebate allowable, in all situations not covered by paragraphs 79A(2)(a) to (e), is such an amount as in the Commissioner's opinion is reasonable in the circumstances.

41.	Paragraph 79A(2)(f) applies, for instance, if an individual is a resident of Zone A but has actually been in the special area of Zone A for part of the year of income, such part being less than 182 days.

42.	If the individual calculates the rebate on a proportionate basis according to the period of time the individual spends in Zone A and the special area of Zone A, he or she could expect the Commissioner to regard the amount of the rebate so calculated as reasonable.

43.	Paragraph 79A(2)(f) is similarly designed to cover cases where a taxpayer qualifies as a resident of the prescribed area, but not as a resident of Zone A, through periods of residence in both Zone A and Zone B.

44.	For example, a person may reside in Zone A for five months, and in Zone B for two months. Paragraph 79A(2)(f) provides that in such a case, the taxpayer shall be allowed such a rebate, (not more than the rebate for the special area in Zone A or B, nor less than the rebate for Zone B) as the Commissioner considers reasonable in the circumstances. In practice, such a taxpayer is allowed a rebate calculated on the basis of the number of days spent in Zone A and the number of days spent in Zone B, up to a maximum of 183 days. Example 5 at paragraph 77 is an example of exactly how the rebate is calculated in circumstances where a person does spend time in two or more zone areas.

DATE OF EFFECT

45.	This Ruling applies to years commencing both before and after its date of issue. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

EXPLANATIONS

46.	A rebate of tax (commonly referred to as a "zone rebate"), ascertained in accordance with section 79A, is granted to residents of certain areas in Australia as an income tax concession in recognition of the disadvantages that they are subjected to because of the uncongenial climatic conditions, isolation and high cost of living in comparison with other parts of Australia.. The amount of the rebate allowable depends on whether the taxpayer is a resident in Zone A, Zone B or in a special area within each of those zones. The rebate is only allowable to a taxpayer other than a company or a taxpayer in the capacity of a trustee. In essence, therefore, it is only allowable to individual taxpayers who qualify for the rebate by having resided in a relevant area.

Resident of zone area

47.	An individual is a resident of a relevant area in a year of income if any of the following tests in subsection 79A(3B) applies:

(a)	he or she resided there for more than one-half of the year of income;

(b)	he or she was actually in the relevant area for more than one-half of the income year;

(c)	he or she died during the income year and at the date of death resided in the relevant area;

(d)	in the circumstances stated in paragraph 79A(3B)(d) or 79A(3B)(e), he or she resided or was actually in the relevant area for more than 182 days in two consecutive years of income.

48.	The word "resident" in subsection 79A(3B) does not bear the same meaning as the defined term "resident" or the defined expression "resident of Australia" in subsection 6(1). The definition of "resident" or "resident of Australia" in subsection 6(1) only applies in the absence of a contrary intention appearing. A contrary intention does appear in the context in which the word "resident" appears in subsection 79A(3B). In effect, the word "resident" in subsection 79A(3B) has the particular meaning given to it in that subsection.

49.	The statutory tests of residence in section 79A, except for the test in paragraph 79A(3B)(b), depend on where an individual "resided". The term "resided" in subsection 79A(3B) bears its ordinary meaning. An individual may therefore be found to be a resident of a relevant area, broadly speaking, either because the individual:

i)	resided in that area, or

ii)	was actually in that area,

whether continuously or intermittently, during more than one-half of the relevant year of income.

50.	Taxation Board of Review No. 3 in Case P82, 82 ATC 399; Case 14 26 CTBR (NS) 111 considered the provisions of the Act relating to rebates for residents of isolated areas. Although the decision relates to the operation of section 79A as it existed in the 1978-79 income year, it has continuing application to the current section 79A.

51.	The case involved the determination of the place of residence of a taxpayer. The evidence disclosed that the taxpayer was a deckhand on a prawn fishing boat operating out of Groote Eylandt. Throughout the year of income the taxpayer lived on board the boat and did not own, rent or maintain a house or other form of residence on the island or on the mainland. The evidence further disclosed that throughout the year under review, the boat was at sea for approximately six days to each one spent in port.

52.	A majority of the Board considered the fishing boat to be the taxpayer's place of residence. Since the boat was at sea for more than one half of the year of income and therefore outside the zone area, the taxpayer could not be said to be a resident of a prescribed area as defined in former subsection 79A(4). In the result no rebate was allowable.

53.	The decision of the Taxation Board of Review No. 3 needs to be followed in comparable circumstances.

Whether a point falls within a special area of either Zone A or Zone B

54.	Since 1 November 1981 a special area zone rebate in lieu of the ordinary rebate for Zone A and Zone B has been available for people residing or spending the required period of time in particularly isolated areas. Such areas are referred to as the "special area" within either zone.

55.	"Special area" within Zone A or Zone B is defined in paragraph 79A(3D)(a) as being points in that Zone situated in excess of 250 kilometres by the shortest practicable surface route from the centre point of the nearest urban centre with a census population of 2,500 or more.

56.	If a person is a resident in the special area in Zone A or Zone B, paragraph 79A(2)(a) provides a higher amount of rebate than for a resident in either of those zones.

Subsection 79A(3E) – adjacent or close proximity test

57.	Subsection 79A(3E) gives the Commissioner a discretion to treat a point in Zone A or Zone B that is not in the special area in that Zone, as being in the special area where the point is adjacent to, or in close proximity to, the special area. In deciding whether to exercise his discretion, the Commissioner must have regard to all the circumstances.

58.	Subsection 79A(3E) introduces the concept of an adjacent to, or close proximity test. The subsection is designed to reduce anomalies that may arise through a strict interpretation of the 250 kilometre shortest practicable surface route test.

Outstations

59.	As a general rule, if taxpayers live on the same property but at different points, at least one of which is in the special area of a zone, subsection 79A(3E) will generally be applied to treat the other points as also being in the special area.

Islands off the Northern Territory coastline

60.	As to islands off the Northern Territory coast:

(a)	There are no boats registered as passenger carriers outside the confines of Darwin Harbour.

(b)	There is no service by vessel (other than cargo delivery) by barge to any of the islands, even the closer ones.

(c)	If boats are to go to the islands they would have to be small vessels, most of the islands only being accessible by barge.

(d)	There are a number of physical restrictions:

o	narrow shallow entrances; and

o	all access areas to the islands (e.g. rivers and inlets) are tidal, restricting access to two periods each day, these times varying with the tides.

(e)	Heavy seas are common even in the dry season, and the size of the boat that can land at the island runs a high risk even at that time of the year. In the wet season when the westerlies blow, any travel outside of the harbour is fraught with danger as a result of the high seas and storms, and craft of the size mentioned above can not put out to sea. The Darwin Yacht Club have a dry docking area, no member being permitted to put his or her boat in the water during the wet season.

61.	On the basis of this information, we accept that there is no practicable surface route from any of the islands off the Northern Territory coastline to a relevant population centre. Accordingly, points on those islands are regarded as being in the special area of Zone A.

Residence in an area of extreme isolation and hardship

62.	In an unreported decision of 29 August 1985, Taxation Board of Review No. 2 allowed in full a taxpayer's claim for a zone rebate applicable to the special area within Zone A on grounds of extreme isolation and hardship. We respectfully accept the correctness of that decision.

63.	The facts of the case were that at all times during the 1981-82 income year the taxpayer resided in Zone A, 238 kilometres by road from the nearest urban centre. The road, a four-wheel drive track and the only surface route to the taxpayer's residence, was frequently closed for varying periods of time due to local climatic conditions. There were no medical or hospital services in the area. The only means of communication were a weekly mail service or radio telephone.

64.	The taxpayer claimed a zone rebate applicable to an individual who resides in the special area of Zone A, and requested that the Commissioner exercise his discretion under subsection 79A(3E) to treat his residence as a point within the special area in Zone A. On assessment, the taxpayer's claim was reduced by an amount equal to the difference between the rebate for the special area within Zone A and the rebate for Zone A. This amount was disallowed on the basis that the taxpayer was unable to show that he had an adjacent, or closely proximate, neighbour within the special area, and that as a consequence subsection 79A(3E) had no application.

65.	The Board decided to allow the taxpayer's objection. The Board considered that, while the concept of an adjacent or closely proximate neighbour was a relevant consideration in the exercise of the discretion in subsection 79A(3E), it was also relevant to have regard to other factors. The Board relied on the presence in the subsection of the words "having regard to all the circumstances". The members of the Board unanimously decided that the extreme degree of isolation and hardship experienced by the taxpayer in this particular case was such that it was appropriate to exercise the discretion in favour of the taxpayer, having regard to these circumstances.

66.	We agree that the circumstances to which the Board had regard were relevant to the exercise of the discretion under subsection 79A(3E). The Board did not expressly reject the adjacent to, or close proximity, test as a determinative test, but decided that a number of other circumstances should be taken into consideration in exercising the discretion in that case. The decision reached by the Board was therefore open to it on the particular facts of the case, and it may be applied in similar fact situations involving an extreme degree of isolation and hardship.

Amount of rebate under paragraph 79A(2)(f)

67.	In paragraph 79A(2)(f) there is a discretion available to the Commissioner to allow an amount of rebate that he considers reasonable in situations not covered by paragraphs 79A(2)(a), (d) or (e).

68.	The decision of Taxation Board of Review No. 3 in Case P83, 82 ATC 407; Case 15 26 CTBR(NS) 118 illustrates the need for the discretion in paragraph 79A(2)(f) to be exercised according to the merits of each particular case. There, the Board considered the operation of section 79A as it existed in the 1978-79 year of income. However, the decision has continuing application to the current section 79A.

69.	The case involved the exercise of the discretion under the former counterpart to paragraph 79A(2)(f), i.e. paragraph 79A(2)(c).

70.	The taxpayer was a resident of a town in Zone B. He spent five months of the year there. For the remainder of the year he operated a trawler out of ports situated within Zone A, visiting the ports only to unload, to take on provisions and to refuel. Time in port was estimated to be one month. In the circumstances, we allowed an amount of rebate representing five-sixths of the Zone B rebate and one-sixth of the Zone A rebate.

71.	In exercising the discretion under former paragraph 79A(2)(c), the Board of Review decided that the taxpayer should receive the full Zone A rebate, notwithstanding that the taxpayer was physically present in Zone A for only one month. The Board was influenced by the fact that for more than six months, the taxpayer had been exposed to the uncongenial climatic conditions and isolation of Zone A areas. More importantly, the taxpayer experienced the additional burden of the high cost of living in Zone A. In this context the factual situation is not markedly different from that of a fisherman who is a resident of a zone but spends perhaps more than one-half of the year at sea in pursuit of his occupation. Despite the absence at sea, he is still faced with the disadvantages attached to the particular zone by reason of his residence there.

72.	This decision of the Taxation Board of Review No. 3 is followed in comparable circumstances.

EXAMPLES

Example 1

73.	Alison, a resident of Townsville, is absent from her residence for more than six months because of illness. This period of absence does not mean that Alison has ceased to be a resident of Townsville for zone rebate purposes.

Example 2

74.	If, as in Western Australia, a pastoral property extends into both Zone A and Zone B, and a taxpayer is engaged indiscriminately on duties in both zones, the taxpayer is to be regarded as a resident of Zone A. The same treatment should be afforded if a homestead is in one zone, and the place where the work is performed is in another zone. If a taxpayer's place of employment is in Zone B, but his or her residence is just outside the prescribed area, he or she should be regarded as "being in" Zone B within the meaning of paragraph (b) of the definition of resident in subsection 79A(3B).

Example 3

75.	Yvonne resides on Pelorus Island in Zone B. A boat or ferry is the only method of surface transport between Pelorus Island and the mainland. For the purposes of the shortest practicable surface route test in subsection 79A(3D), the route across water would be taken into consideration.

Example 4

76.	In the case of Groote Eylandt situated in the Gulf of Carpentaria, we understand that there is no passenger boat service between the island and the nearest population centre of 2,500 or more; Nhulunbuy, which is about 200 kilometres away by water. The generally adopted means of travel to and from the island is by air to more distant centres. In these circumstances, it is considered that the water route from the island to Nhulunbuy is not a practicable route. Indeed, it is accepted that there is no practicable surface route, (which does not include an air route) between the two places, and Groote Eylandt has, on that basis, been accepted as being in the special area. In any event, by virtue of subsection 79A(3F), the census population of Nhulunbuy is taken to be less than 2500.

Example 5

77.	Benjamin is an itinerant worker who earns wages from picking fruit in various parts of the country. During the year ended 30 June 1994 he spent 100 days in the special area of Zone A, 50 days in Zone A, and 60 days in Zone B. Benjamin's zone rebate is calculated so as to give him the greatest rebate, as follows:

Special area Zone A	100 days/183 days	X	$1,173	= $641
Zone A	50 days/183 days	X	$338	=  $92
Zone B	33 days/183 days	X	$57	=  $10
The total zone rebate that Benjamin can claim is $743.

Example 6

78.	Rebecca does not reside in a zone area. However, her place of employment is situated within the ordinary area of Zone A. She spends eight hours each working day in Zone A, for a total of 40 weeks each year (each working week is five days).

79.	Each period of eight hours in Zone A is regarded as one whole day. Accordingly, Rebecca has spent a total of 200 days in Zone A. As she was actually present in the zone area for more than 183 days of the year, Rebecca is entitled to claim a Zone A rebate.

NOTE:
If, on one of her working days, Rebecca returned to Zone A and spent a further two hours there, it still only counts as one day. Although she was in Zone A for two fractions of he same day, namely, for eight hours and for two hours, it does not count as two days for the purposes of the residence test.

Example 7

80.	Susan resides in the ordinary area of Zone B for the whole income year. Her employer requires her to work in the special area of Zone A, as a consequence of which, Susan was actually physically present in the special area of Zone A for 200 days.

81.	In these circumstances, Susan is entitled to the greater rebate for which she qualifies, and can therefore claim a special area Zone A rebate. Susan is not entitled to claim both the special area Zone A rebate and the ordinary Zone B rebate.

Commissioner of Taxation

25 August 1994


Taxation Ruling TR 93/32 Rental property: division of net income or loss between co-owners
Taxation Ruling TR 93/32

Rental property: division of net income or loss between co-owners

Contents:

What this Ruling is about

Ruling

Date of effect

Explanations

Co-ownership

Partnership at general law

Partnership for taxation law

McDonald's case

Effect of partnership agreement

Legal and equitable interests

Examples

WHAT THIS RULING IS ABOUT

1.	This Ruling explains the basis upon which we will accept, for income tax purposes, the division of the net income or the loss from a rental property between the co-owners of that property.

2.	The Ruling only examines the taxation position of co-owners whose activities do not amount to the carrying on of a business.

RULING

Co-ownership of rental property is a partnership for income tax purposes but is not a partnership at general law unless the ownership amounts to the carrying on of a business.

3.	Where co-ownership is a partnership for income tax purposes only, the income/loss from the rental property is derived from co-ownership of the property and not from the distribution of partnership profits/losses.

4.	Because co-owners of rental property are generally not partners at general law, a partnership agreement, either oral or in writing, has no effect on the sharing of income/loss from the property.

5.	Accordingly, the income/loss from the rental property must be shared according to the legal interest of the owners except in those very limited circumstances where there is sufficient evidence to establish that the equitable interest is different from the legal title.

DATE OF EFFECT

6.	This Ruling applies to years commencing both before and after its date of issue. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

EXPLANATIONS

Co-ownership

7.	Ownership conveys an entitlement to exercise the maximum legally permissible rights over what is owned. Generally a legal interest in land is achieved by the owner being the registered proprietor of the legal title to the land. Where there is more than one person with a concurrent legal interest in the same land, those persons are co-owners of the land.

8.	Co-owners of rental property will generally hold the property as joint tenants or tenants in common. These tenancies are a further classification of the co-owners' interests.

9.	There are some significant differences between these alternative tenancies, but most of the differences (an explanation of which can be found in Australian Real Property Law , Bradbrook A.J., MacCallum, S.V., Moore, A.P., The Law Book Company Limited, 1991 at pages 295-300) are not important for the purpose of this Ruling.

10.	An important feature of both a joint tenancy and a tenancy in common is the legal interest of the tenant. It is this legal interest which ultimately determines, among co-owners of property, the division of the net income or loss from the property.

11.	Co-owners of a property who are joint tenants of that property will hold identical legal interests in the property. That is, their interest must be the same in extent, nature and duration – e.g., A and B, who each own an identical 50% share in a property are, provided the other requisite features are present, joint tenants of that property.

12.	On the other hand, the legal interest of tenants in common need not be identical. That is, the extent, nature and duration of each co-owner's interest need not be the same – e.g., C owns a 30% share of a property while D owns a 70% share of the property. C and D are, provided the other requisite features are present, tenants in common.

Partnership at general law

13.	Partnership is defined in the various State and Territory partnership acts as "the relation which subsists between persons carrying on a business in common with a view of profit."(The Partnership Act of 1891 (Qld; SA; TAS); The Partnership Act of 1892 (NSW); The Partnership Act of 1895 (WA); The Partnership Act of 1958 (VIC); The Partnership Ordinance of 1963 (ACT)).

14.	An important ingredient of the definition is "carrying on a business". Without this ingredient, there can be no partnership at general law.

15.	In determining whether the respondent and his spouse in F.C. of T. v McDonald (1987) 18 ATR 957; 87 ATC 4541 were "true" partners under the general law, Beaumont J said at ATR p 968; ATC p 4550:

"The reference to "business" . . . indicates a "commercial enterprise as a going concern": see Hope v Bathurst City Council (1980) 144 CLR 1 at 8; 12 ATR 231 at 236 per Mason J. Purely domestic transactions are thus excluded from the definition: see Fletcher, op cit p 28. The "business" must be "carried on". This suggests some active occupation or profession: see IRC v The Marine Steam Turbine Co Ltd (1919) 12 TC 174 per Rowlatt J at 179." . . . "On the other hand, in the case of a private individual as distinct from a company, "it may well be that the mere receipt of rents from properties that he owns raises no presumption that he is carrying on a business." see American Leaf Blending Co Sdn Bhd v Director-General of Inland Revenue (1979) AC 676 per Lord Diplock at 684."

16.	Paragraphs 3 to 5 of Income Tax Ruling No. IT 2423 are also relevant in determining whether the letting of property amounts to the carrying on of a business. In particular, paragraph 5 states "An individual who derives income from the rent of one or two residential properties would not normally be thought of as carrying on a business. On the other hand if rent was derived from a number of properties or from a block of apartments, that may indicate the existence of a business."

17.	The State and Territory Partnership Acts also contain a number of rules for determining whether a partnership does or does not exist. Among them are:

"Joint tenancy, tenancy in common, joint property, common property, or part ownership does not of itself create a partnership as to anything held or owned jointly or in common, whether the tenants or owners do or do not share any profits made by the use thereof"; and

"The sharing of gross returns does not of itself create a partnership, whether the persons sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are derived".

18.	Professor Fletcher, in his book The Law of Partnership in Australia and New Zealand, 5th edition at page 43 says about these statutory rules that they "qualify the terms of the definition and provide guidance for persons interested in separating partnership from non partnership joint ventures and other relationships . . . which may exhibit similar characteristics."

19.	In relation to the first of these rules, Lindley on Partnership, 15th ed says at p 81: "If each owner does nothing more than take his share of the gross returns obtained by the use of the common property, partnership is not the result. On the other hand, if the owners convert those returns into money, bring that money into a common stock, defray out of it the expenses of obtaining the returns, but then divide the net profits, partnership is created in the profits, if not also in the property which yields them."

•	On this point, Professor Fletcher says at page 44: "To remain within the ambit of the rule [that is, that "bare" co-ownership does not of itself, constitute a partnership], it is probable that the joint activity should require minimal involvement by the co-owners, such as a decision to lease a house property for a term of years rather than operating it as a boarding house, and be designed to cover costs rather than to return profits to the participants." This approach is consistent with the approach taken in Wertman v. Minister of National Revenue (1964) 64 DTC 5158 at 5167.

•	As a general proposition, it is more accurate to describe the owners of rental property in the words of Beaumont J in McDonald's case at ATR p.969; ATC p 4552 "as co-owners in investments rather than as partners in a business operation." Consequently, co-owners of rental property are generally not partners at general law with the result that they are not subject to the general law applicable to partnerships including the division of profits and losses from the property.

20.	That is not to say that co-owners cannot carry on a business of property rental and therefore be partners at general law. As already noted, whether an activity constitutes the carrying on of a business is a question of fact to be decided on a case by case basis.

Partnership for taxation law

21.	The definition of partnership is wider for income tax purposes than it is at general law. Subsection 6(1) of the Income Tax Assessment Act 1936 (the Act) defines partnership as "an association of persons carrying on business as partners or in receipt of income jointly but does not include a company."

22.	Under the extended income tax definition of partnership, it is not necessary that persons carry on a business for their association to be treated as a partnership for income tax purposes. They need only to be in receipt of income jointly. Therefore, co-owners of rental property come within the definition of "partnership" for income tax purposes, not because they are necessarily partners at general law, but because they are in receipt of income jointly.

23.	Whether a partnership exists at general law is of significance for taxation purposes as McDonald's Case at ATR p 967; ATC p 4550 shows: "For taxation purposes, the Act takes the taxpayer's income as it finds it, that is to say, subject to the general law in all its aspects. This will pick up the position at law and in equity modified by any relevant legislation, including the provisions of the Act itself: see MacFarlane v. FCT (1986) 17 ATR 808; 67 ALR 624 at 636."

McDonald's case

24.	The taxpayer and his wife owned, both legally and beneficially, two strata title units as joint tenants. Both units were rented out. A "record of discussion" between them stated that net profits would be distributed 25 per cent to Mr McDonald and 75 per cent to Mrs McDonald. The whole of any net loss would be borne by Mr McDonald.

25.	The question in the case was whether an operating loss on the properties was wholly incurred by the taxpayer, or one-half of the loss was incurred by each of the taxpayer and his spouse. There was no question that a deductible loss had occurred.

26.	The taxpayer claimed that there was a partnership between himself and his wife both under general law and under the Act, that the two home units were partnership property, and that the net profit or net loss from the rental activity ought to be divided among them according to the partnership agreement.

27.	On the other hand, we contended that there was no partnership at general law and that the only relevant relationship between the parties was that of co-ownership. Because the parties were joint tenants at law and in equity, the loss incurred in letting the premises should be shared equally with the consequence that the respondent was entitled to a deduction for one-half only of the loss. And lastly, that the private arrangement between the taxpayer and his spouse as to the sharing of profits and losses does not alter or over-ride their respective entitlements for income tax purposes.

28.	In supporting our contentions, Beaumont J said at ATR p 967-8; ATC p 4550:

"In my opinion, no partnership under the general law subsisted between the respondent and his wife. Their relationship was one of co-ownership, and even if they were deemed to be partners by reason of subsection 6(1) of the Act, this circumstance is immaterial for our purposes. As has been noted, their notional "partnership" will carry with it the consequence that they are to be treated as a "partnership" for some purposes. It does not follow that the respondent can deduct the whole of the losses. He may only deduct his individual interest in the "partnership" loss. His "individual interest" is the interest to which a "partner" is solely entitled, as contrasted with his joint interest in the whole: see FCT v Whiting (1943) 68 CLR 199 at 204; 2 AITR 421 at 425-6. It is necessary therefore to determine whether the respondent and Mrs. McDonald were merely notional "partners" for the purposes of the Act (i.e. merely co-owners) or were "true" partners under the general law."

29.	At ATR page 969; ATC page 4552, Beaumont J continued :

"In the present case, a number of indications point to the conclusion that the parties were not carrying on a business, with the consequence that their relationship was that of co-ownership rather than partnership. Their investment involved little, if any, active participation from either party ... This was not a case of the active joint participation by the parties in a business activity. Rather, it was a case of a renting out of premises without the provision of other services of the kind discussed in Wertman, supra. In my view, there was here a mere investment in property rather than a partnership in the properties or their profits."

30.	In relation to the division of rents and profits, Beaumont J said at ATR p 967; ATC p 4550:

"It is common ground that the respondent and his wife were beneficially entitled to the premises as joint tenants. As joint tenants, they were entitled in equal shares to the rents and profits: see Helmore, The Law of Real Property in New South Wales, 2nd ed page 274."

31.	Beaumont J ultimately concluded that Mr. & Mrs. McDonald were co-owners rather than partners and that their income was derived from co-ownership of property, not from the distribution of partnership profits/losses. As there was no partnership at general law and, therefore, no distribution of profits/losses, they had to share the loss in proportion to their interest in the property. As joint tenants they owned the property in equal shares and therefore shared the profits and losses from that property in the same proportions.

Effect of partnership agreement

32.	As an alternative argument, the taxpayer in McDonald's case contended that if no partnership existed, the agreement between himself and his spouse was a lawful contract which conclusively governed the legal relations between them and that this contractual liability was itself sufficient to entitle him to deduct the total loss claimed.

33.	To this, Beaumont J responded at page 969:

"But s51 does not permit a deduction merely by virtue of the agreement. In truth, it was a term of the agreement that the respondent actually give income to his wife. That involves none of the features required as a condition of deductibility under s51(1). In fact, the transaction, so far as concerned the respondent, involved two significant detriments. In the first place, he gave away one quarter of his income entitlement; secondly, he indemnified his wife against any loss from the investments. It can not be said, as the language of s51 requires, that a payment made pursuant to such an indemnity is a loss incurred in gaining or producing assessable income or is necessarily incurred in carrying on a business for the purpose of gaining or producing such income. Rather, the assumption of liability for the losses, voluntarily made by the respondent, was a purely domestic arrangement in which the respondent sought to advance his wife's finance: cf Ure v FCT (1981) 11 ATR 484 at 493; 81 ATC 4100 at 4108; Magna Alloys & Research Pty. Ltd. v FCT (1980) 11 ATR 276 at 284; 80 ATC 4542 at 4549; FCT v llbery (1981) 12 ATR 563 at 571; 81 ATC 4661 at 4668. In any event, there is expressly excluded from deductions allowable under s51(1) losses of a private or domestic nature and the wife's share of the losses now claimed by the respondent may be so described: see Parsons, Income Tax in Australia, Principles of Income Tax, Deductibility and Tax Accounting p 452-3."

34.	The effect of all these statements is that where income from rental property is derived from the co-ownership of the property rather than from a partnership interest , an agreement, whether orally or in writing, to vary the sharing of profits or losses from the property from what it rightly is under property law, is of no effect for income tax purposes.

Legal and equitable interests

35.	It has been said that if the equitable interest does not follow the legal title, there is some basis for the profit/loss to be distributed on the equitable and not the legal basis.

•	It was explained in Calverley v Green 56 ALR 483, Dean J said(at p 500):

•	"It is simply that there are certain relationships in which equity infers that any benefit which was provided for one party at the cost of the other has been so provided by way of "advancement" with the result that the prima facie position remains that the equitable interest is presumed to follow the legal estate and to be at home with the legal title or, in the words of Dixon CJ, McTiernan, Fullagar and Windeyer JJ in Martin v Martin (1959) 110 CLR 297 at 303, that there is an "absence of any reason for assuming that a trust arose" ."

•	Cases where the title includes the name of a person who is a nominee or trustee, must be decided on an individual basis on the evidence available to establish that fact. Authority can be found in Napier v Public Trustee (Western Australia) 32 ALR 153 where the court accepted there was sufficient evidence to establish that the equitable interest was different from the legal title. Aickin J said (at p 158):

"The law with respect to resulting trusts is not in doubt. Where property is transferred by one person into the name of another without consideration, and where a purchaser pays the vendor and directs him to transfer the property into the name of another person without consideration passing from that person, there is a presumption that the transferee holds the property upon trust for the transferor or the purchaser as the case may be. This proposition is subject to the exception that in the case of transfers to a wife or a child (including someone with respect to whom the transferor or purchaser stands in loco parentis ) there is a presumption of advancement so that the beneficial as well as the legal interest will pass. Each of the presumptions may be rebutted by evidence."

36.	We consider that there are extremely limited circumstances where the legal and equitable interests are not the same and that there is sufficient evidence to establish that the equitable interest is different from the legal title. We will assume where taxpayers are related, e.g., husband and wife, that the equitable right is exactly the same as the legal title.

37.	Any capital gain or loss should also be apportioned on the same basis as the rental income or loss.

EXAMPLES

Example 1

38.	Mr. and Mrs. X purchase a rental property as joint tenants. Mr. X is the sole income producer. They agree to share profits and losses from the property as follows:

	Mr. X	Mrs. X
profits	20%	80%
losses	100%	nil
39.	Owning and renting out the one property does not amount to carrying on a business. Mr and Mrs. X are not partners at general law although their relationship is treated as a partnership for income tax purposes. Net profits and losses from the property should be shared in the same proportion as their ownership interests, i.e., 50:50. Their agreement to share the profits and losses in different proportions is a private arrangement which has no effect for income tax purposes.

Example 2

40.	If Mr. and Mrs. X each owned 50 % of the property as tenants in common, the result would be the same as that in Example 1.

Example 3

41.	If Mr. and Mrs. X owned the property as tenants in common with Mr. X holding a 30% interest and Mrs. X holding a 70% interest in the property, they would be assessed on any profits or losses from the property in accordance with their respective interest in the property, i.e., Mr. X on 30% and Mrs. X on 70%.

Example 4

42.	Mr. and Mrs. Y purchase a rental property. Mr. Y contributed 80% of the funds used to purchase the property while Mrs. Y contributed 20%. They register their purchase as joint tenants. They also sign a written agreement to share any profits or losses from the property in accordance with their capital contributions, but share interests in the property equally.

43.	Owning and renting out the one property does not amount to carrying on a business. Mr. and Mrs. Y are not partners at general law although their relationship is treated as a partnership for income tax purposes. Net profits and losses from the property should be shared in the same proportion as their legal ownership interests, i.e., 50:50. Their agreement to share the profits and losses in proportion to their capital contributions is a private arrangement which has no effect for income tax purposes.

Example 5

44.	Mr. and Mrs. Z rent out a house which they own as joint tenants. The rent is paid into a joint account from which expenses of the property are paid. The expenses of the property exceed the rental income from it each year. Mr. Z claims that as he is the sole income earner and had in effect paid all the expenses, he is entitled to claim 100% of the loss.

45.	Owning and renting out the one property does not amount to carrying on a business. Mr. and Mrs. Z are not partners at general law although their relationship is treated as a partnership for income tax purposes. Net profits and losses from the property should be shared in the same proportion as their ownership interests, i.e., 50:50. The fact that Mr. Z has paid all the expenses on the property is of no consequence for income tax purposes. We would simply treat the payment of Mrs. Z's share of the expenses by Mr. Z as no more than a loan by Mr. Z to Mrs. Z.

Commissioner of Taxation

7 October 1993


Taxation Ruling TR 95/29 Primary production: applicability of averaging provisions to beneficiaries of trust estates
Taxation Ruling TR 95/29

There is an Erratum to this ruling

Income tax: Division 16 – applicability of averaging provisions to beneficiaries of trust estates carrying on a business of primary production

NOTE:
This Ruling, to the extent that it is capable of being a "public ruling" in terms of Part IVAAA of the Taxation Administration Act 1953, is a public ruling for the purposes of that Part. Taxation Ruling TR 92/1 explains when a Ruling is a public ruling and how it is binding on the Commissioner.

Contents:

What this ruling is about

Ruling

Date of effect

Explanations

Division 16

Present entitlement to trust law income

Trusts with losses for either or both trust law and tax law purposes

Discretionary trusts

No trust law income and subsection 95A(2)

WHAT THIS RULING IS ABOUT

Class of person/arrangement

1.	This Ruling explains the circumstances in which the averaging provisions of Division 16 of the Income Tax Assessment Act 1936 (the Act), and in particular subsection 157(3), may apply to a taxpayer who is a beneficiary in a trust estate carrying on a business of primary production. This explanation is necessary to clarify the position following the decision in Case Z35 92 ATC 326; (1992) 24 ATR 1040.

Previous Rulings

2.	The relevant principles from Taxation Ruling IT 286 have been incorporated into this Ruling. Accordingly, Taxation Ruling IT 286 is now withdrawn.

RULING

3.	A beneficiary who is presently entitled, under the terms of a trust deed, to the income or part of the income of a trust estate which carries on a business of primary production may benefit from the averaging provisions. This result flows from the provisions of subsection 157(3), subject to subsection 157(3A) of the Act.

4.	Subsection 157(3A) is designed to counter schemes of tax avoidance and its application depends on the circumstances of each case. However, beneficiaries in primary production trusts of the traditional kind, for example family trading trusts, will not be affected by this provision.

5.	Present entitlement is determined by reference to trust law income of a trust estate rather than net income calculated under section 95. It requires a present vested right to demand and receive payment of the whole or part of what has been received by the trustee as income and is legally available to be distributed to those entitled to it as beneficiaries under the trust (see paragraphs 29-30).

6.	If a beneficiary is presently entitled, under the terms of a trust deed, to the income or part of the income of a trust estate which carries on a business of primary production, any year in which the trust estate incurs a loss is capable of being an average year.

Existence of trust law income

7.	A beneficiary may be presently entitled to trust law income of a trust estate notwithstanding that the trust may have incurred a loss in a year. Provided that some gross trust law income is derived in the relevant year of income by the primary production business conducted by the trustee, it does not matter that there is an overall loss for trust law or income tax law purposes. A beneficiary presently entitled to that income in such a case will be treated as carrying on a business of primary production for the purposes of Division 16.

8.	The trust deeds of some discretionary trusts contain clauses which have the effect that if the trustee has not determined to appoint income of the trust to any beneficiary or to accumulate such income before the end of the year of income, the income of the trust will fall to takers in default of appointment. Where such default beneficiaries are entitled to income of the relevant period, they will be presently entitled to that income. Consistent with the situation described in paragraph 7, a presently entitled default beneficiary will be treated as carrying on a business of primary production for the purposes of Division 16.

9.	If the discretionary trust deed contains no default or fail-safe clauses and the trustee does not exercise the discretion in favour of a beneficiary, the beneficiary is only contingently entitled to income of the trust estate. In this case, the beneficiary would not be regarded as carrying on a business of primary production for the purposes of Division 16.

10.	Should the trustee exercise his discretion in favour of a beneficiary who is contingently entitled under the trust, the interest ceases to be contingent and becomes vested (see IRC (NZ) v. Ward 69 ATC 6050; (1969) 1 ATR 287; (1970) NZLR 1). In such a case, the beneficiary will be treated as carrying on a business of primary production for the purposes of Division 16. We accept the correctness of the decision in Case Z35 on this point.

No trust law income

11.	We take the view that were it not for specific income tax law provisions deeming present entitlement, there cannot be present entitlement where there is no trust law income in a year.

12.	A beneficiary in a trust estate may have an indefeasible, absolutely vested, beneficial interest in possession in trust law income notwithstanding the trust is not in a position to generate income. This is not sufficient for the beneficiary to be regarded as presently entitled. The further essential requirement is that the beneficiary must be able to demand immediate payment of the trust income; that is, the income must, according to trust law, be legally available for distribution (see Harmer v. FC of T (1991) 173 CLR 264; 91 ATC 5000; (1991) 22 ATR 726, wherein the relevant cases were considered).

13.	However, in circumstances where a beneficiary (including a default beneficiary) has a vested and indefeasible interest in trust law income but is not presently entitled (for example, where no trust law income has come into the hands of the trustee), subsection 95A(2) deems present entitlement (see paragraphs 40-49).

14.	It follows that subsection 157(3) can have application to a beneficiary of a trust estate engaged in a business of primary production and which derives no trust law income in a particular year.

DATE OF EFFECT

15.	This Ruling applies to years commencing both before and after its date of issue. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

EXPLANATIONS

Division 16

16.	Following the decision of the Administrative Appeals Tribunal in Case Z35, several enquiries have been made concerning the application of Division 16 to a beneficiary of a trust estate carrying on a business of primary production.

17.	Taxation Ruling IT 286 outlined the operation of Division 16, in particular subsection 157(3), in relation to a beneficiary of a trust estate engaged in primary production activities. In that Ruling, it was stated that it would be most unlikely that a trustee of a discretionary trust would exercise a discretion in favour of a beneficiary where the business activities resulted in a loss for a particular year. This statement has been interpreted in many quarters to mean that a beneficiary in a trust estate which operated a primary production business at a loss could never receive the benefit of averaging although having a beneficial interest in that trust estate.

18.	Under Division 16, a person is eligible to have the rate of tax applicable to his/her taxable income determined by reference to averaging provisions if he/she is a primary producer. The application of averaging is, by section 157, confined to persons carrying on a business of primary production.

19.	Subsection 157(3) extends the ambit of the Division beyond people who themselves carry on a business of primary production. Specifically, it enables beneficiaries of a trust estate to benefit from the averaging provisions. The subsection was inserted into the Act to overcome the effect of the decision of the High Court in Doherty v. FC of T (1933) 48 CLR 1 where it was held that a beneficiary in a trust estate did not carry on the business of the estate.

20.	The broad effect of subsection 157(3) is to treat a beneficiary, who is presently entitled to a share of the trust law income resulting from the conduct of a business by the trustee of a trust estate, as if he/she were carrying on that business.

21.	The extension of the averaging provisions under subsection 157(3) to a beneficiary of a trust estate is based upon the requirements that:

(a)	a business of primary production is conducted by the trust estate in the relevant year; and

(b)	a beneficiary is presently entitled to the whole or part of the trust law income resulting from the conduct of that business.

22.	Whether a business of primary production is conducted in a particular year is a question of fact. If a trust is carrying on a business of primary production, a beneficiary presently entitled to share in the trust law income flowing from that business is deemed by subsection 157(3) to be carrying on the business carried on by the trustee.

23.	It may well be that a business carried on by a trustee produces income from primary production and other types of income (for example, interest income from investment of surplus funds). Although a beneficiary presently entitled to any of the "business" income will be eligible to benefit from the deeming provisions of subsection 157(3), this does not necessarily mean that the averaging benefits will apply to that income.

24.	In determining whether the beneficiary's share of the "business" income for the relevant year is subject to averaging benefits, a critical issue is the extent to which income can be said to be derived in consequence of carrying on a business of primary production (subsection 156(1)). This is a question which needs to be answered by reference to the particular circumstances in each instance (see Taxation Ruling IT 225 and Case X82 90 ATC 599; (1990) 21 ATR 3708 wherein the issues are discussed).

25.	Although all income derived from primary production qualifies for averaging benefits, only a limited amount of non-primary production income may so qualify. For example, non-primary production income up to $5,000 net qualifies for averaging benefits. However, this amount is reduced by one dollar for each dollar over $5,000, so that non-primary production income of $10,000 or more is not subject to any averaging benefit.

26.	Prior to 1978, a person was eligible to have the whole of his/her taxable income subject to averaging if he/she was a presently entitled income beneficiary in a trust that carried on a business of primary production, even if the interest in the trust was minimal. However, in the light of the High Court decision in Cridland v. FC of T (1977) 140 CLR 330; 77 ATC 4538; (1977) 8 ATR 169, subsection 157(3A) was inserted into the Act. This subsection ensures that the averaging system applicable to primary producers is not available to people who have no real stake in a primary production business and have become a beneficiary in a primary production trust simply to gain the benefits of tax averaging.

27.	Subsection 157(3A) acts as a screening mechanism to limit the application of subsection 157(3) in the first instance to those beneficiaries of a primary production trust estate who have a present entitlement to a share of $1,040 or more of the trust's income (i.e., trust law income) in the income year. However a beneficiary, whose entitlement to share in the trust income is less than $1,040, will also qualify for the application of subsection 157(3) if the Commissioner is satisfied that the person's interest as beneficiary in the trust estate was not acquired primarily for the purpose of having the benefit of the averaging provisions applied to his/her income.

28.	The provision is aimed at countering tax avoidance arrangements. Beneficiaries in primary production trusts of the traditional kind will not be affected by the provision. See, for example, the family arrangements discussed in Case Z35 at ATC 331; ATR 1046.

Present entitlement to trust law income

29.	The meaning of the expression "presently entitled" in subsection 157(3) is not defined in the Act but its meaning is well settled by decisions of the courts. See for example:

•	FC of T v. Whiting (1943) 68 CLR 199; 7 ATD 179;

•	Union Fidelity Trustee Co of Australia & Anor v. FC of T (1969) 119 CLR 177; 69 ATC 4084; (1969) 1 ATR 200;

•	Taylor v. FC of T (1970) 119 CLR 444; 70 ATC 4026; (1970) 1 ATR 582;

•	FC of T v. Totledge Pty Ltd 82 ATC 4168; (1982) 12 ATR 830; and

•	Harmer v. FC of T (1991) 173 CLR 264; 91 ATC 5000; (1991) 22 ATR 726.

30.	From these decisions it may be concluded that a beneficiary will be presently entitled to the income of a trust estate if:

•	the beneficiary has an indefeasible, absolutely vested, beneficial interest in possession in trust law income; and

•	the beneficiary has a present legal right to demand and receive payment of the trust law income (or would but for a legal disability), whether or not the precise entitlement can be ascertained before the end of the year of income and whether or not the trustee has the funds available for immediate payment.

Trusts with losses for either or both trust law and tax law purposes

31.	Subsection 157(3) does not require that a beneficiary be presently entitled to a share of the net income of a trust estate calculated in accordance with section 95. As noted in paragraph 30 above, present entitlement relates to the income of a trust estate (that is, trust law income).

32.	In the Union Fidelity Trustee Co case at CLR 185; ATC 4089; ATR 204, Kitto J explained present entitlement to the income of a trust estate as follows:

"At no time during the year was any beneficiary presently entitled to any part of the income of the estate (though a very small part of the income was in fact distributed to the beneficiaries). This is so because "presently entitled to any part of the income of a trust estate" refers not to the availability of any income for payment to him, but to a present title in possession in respect of any income the estate may produce..."

33.	Furthermore, in Totledge's case at ATC 4173-4174; ATR 837, the Federal Court (Bowen CJ, Deane and Fitzgerald JJ) explained a beneficiary's entitlement to income in the following words:

"A beneficiary under a trust who is entitled to income will ordinarily only be entitled to receive actual payment of the appropriate share of surplus or distributable income: the trustee will be entitled and obliged to meet revenue outgoings from income before distributing to a life tenant or other beneficiary entitled to income. Indeed, circumstances may well exist in which a trustee is entitled and obliged to devote the whole of gross income in paying revenue expenses with the consequence that the beneficiary entitled to income may have no entitlement to receive any payment at all. This does not, however, mean that a life tenant or other beneficiary entitled to income in a trust estate has no beneficial interest in the gross income as it is derived. He is entitled to receive an account of it from the trustee and to be paid his share of what remains of it after payment of, or provision for, the trustee's proper costs, expenses and outgoings..."

34.	Accordingly, it is quite consistent with the authorities that, provided there is some gross trust law income, a beneficiary may be presently entitled to income of a trust estate even if the trust:

•	has incurred a loss for the year for trust law purposes; or

•	has incurred a loss for the year for tax law purposes; or

•	has no net income for tax law purposes.

Provided a beneficiary is presently entitled to income from a primary production business carried on by the trustee, the beneficiary in such circumstances will be treated as carrying on a business of primary production for the purposes of Division 16.

35.	Case R28 84 ATC 255; (1984) 27 CTBR(NS) Case 82 provides an example of a trust (not discretionary) where the beneficiary had an indefeasible vested interest in the income of the trust. A business of primary production was carried on by the trust at a loss and, in the result, the beneficiary did not receive a distribution for the year. The Commissioner accepted on the facts of the case that subsection 157(3) operated to deem the taxpayer to be carrying on the business of primary production carried on by the trustees.

Discretionary trusts

36.	Because of otherwise adverse taxation consequences, many modern discretionary trust deeds contain clauses which have the effect that if the trustee has not determined to appoint income of the trust to any of the objects or to accumulate such income before the end of the year of income, the income of the trust will fall to takers in default of appointment. Such clauses are known as default or fail-safe clauses.

37.	The rights of a taker in default and an object of a discretionary trust may be expressed as follows:

•	a taker in default has a vested but defeasible interest in the trust fund. The interest may be defeated if the trustee appoints income to the objects. If the trustee fails to exercise the power of appointment or to determine to accumulate income by the end of the accounting year, the default beneficiary's vested interest becomes indefeasible. This is also the result if the trustee's appointment is ineffective (FC of T v. Marbray Nominees Pty Ltd 85 ATC 4750; (1985) 17 ATR 93);

•	an object has a mere expectancy and therefore has no interest until the trustee appoints income in his/her favour. If the trustee's resolution in this regard is final and irrevocable, it has the effect of vesting the income in the object. The object (beneficiary) may then be said to have a vested and indefeasible interest in income of the trust (IRC(NZ) v. Ward 69 ATC 6050; (1969) 1 ATR 287; (1970) NZLR 1).

•	Provided there is trust law income, a beneficiary (whether an object or taker in default) whose interest has become indefeasible would be "entitled" to income and presently entitled. This is so because "the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment" (Harmer's case at ATC 5004; ATR 729,730).

38.	It follows that a beneficiary in a discretionary trust who is presently entitled to income from a primary production business carried on by the trustee will be treated as carrying on a business of primary production for the purposes of Division 16 even if the trust:

•	has incurred a loss for the year for trust law purposes; or

•	has incurred a loss for the year for tax law purposes; or

•	has no net income for tax law purposes.

No trust law income and subsection 95A(2)

39.	The point has been made in paragraph 11 that if no trust law income has come into the hands of the trustee, there can be no present entitlement. However, a beneficiary may have an indefeasible, vested beneficial interest in possession in trust income and therefore be "entitled" to income but not "presently entitled".

40.	In Whiting v. FC of T (1942) 7 ATD 114, Rich J, sitting in the High Court, took the same view as he had expressed in Executor and Agency Co of SA Ltd v. FC of T (1932) 2 ATD 35 that the existence of an absolute interest vested in possession was sufficient without more to constitute present entitlement under subsection 97(1). On appeal, the Full High Court disagreed: FC of T v. Whiting (1943) 68 CLR 199; 7 ATD 179.

41.	In their joint judgment, Latham CJ and Williams J said, at CLR 216; ATD 183:

•	"A beneficiary who has a vested right to income (as in this case) but who may never receive any payment by reason of such right, is entitled to income, but cannot be said to be "presently entitled" as distinct from merely "entitled" " (emphasis added).

•	In Westminister Bank Ltd v. IRC (1957) 2 All ER 745, the House of Lords considered the question whether there could be a life interest in possession if no income was derived during the life of the settlor. In answering in the affirmative, the House of Lords held that it was immaterial that the trust property does not produce income if the beneficiary would be entitled to the income arising on the sale and reinvestment of the property.

42.	We take the view that a beneficiary may have an indefeasible, absolutely vested, beneficial interest in possession in trust income even if the trust is not in a position for the time being to generate income. However, for Australian income tax purposes, the cases show that this is not sufficient for a beneficiary to be regarded as presently entitled. The further essential requirement is that the beneficiary must be able to demand immediate payment of the trust income; that is, the income must be legally available for distribution according to trust law (see Harmer wherein the relevant cases were considered).

43.	Subsection 95A(2) provides:

"For the purposes of this Act, where a beneficiary has a vested and indefeasible interest in any of the income of a trust estate but is not presently entitled to that income, the beneficiary shall be deemed to be presently entitled to that income of the trust estate" (emphasis added).

The effect of the underlined words is to deem present entitlement in the circumstances stated for all purposes of the Act, including subsection 157(3).

44.	The meaning of the words "vested" and "indefeasible" in subsection 95A(2) was considered by Hill J in Dwight v. FC of T 92 ATC 4192; (1992) 23 ATR 236. Suffice to say for present purposes that "vested" is used in contradistinction to contingent and an interest is "indefeasible" where it cannot be brought to an end (ATC 4203; ATR 249).

45.	In the circumstances discussed at paragraphs 37-38, but where there is no trust law income coming into the hands of the trustee, the object of the trustee's discretion or the default beneficiary, as the case may be, would not be presently entitled to income although having a vested and indefeasible interest in whatever income may be derived by the trust. Subsection 95A(2) would deem present entitlement in these circumstances.

46.	It follows that subsection 157(3) can have application to a beneficiary of a trust estate engaged in a business of primary production but deriving no trust law income in a particular year.

47.	By reason of the operation of subsection 95A(2), the result contemplated by Division 16 is achieved, thereby placing beneficiaries on the same footing as partners in the case where no income from the primary production business is derived during the year (unless excluded by subsection 157(3A)).

48.	It is difficult to imagine a primary production business that would not have some trust law income. For example, if a crop fails it can be cut and sold as hay or the area used for short term agistment. The excise levied on diesel fuel is claimed back through the Australian Customs Service and is an income receipt; drought relief subsidies are income. Interest subsidies under the Rural Adjustment Scheme are income.

49.	Nevertheless, in the context of Division 16, any year in which a taxpayer was carrying on business but had no taxable income is capable of being an average year (Section 153). However it is worth noting that, as was shown in Case R28; Case82, under the averaging provisions as they now stand, a taxpayer who has no primary production income in the relevant year may well have no income to which the averaging benefits apply (for example, if that taxpayer's non-primary production income is $10,000 or more).

Commissioner of Taxation

30 August 1995

ERRATUM

At paragraph 5, line 2-3, replace "section 5" with "section 95".

At paragraph 45, the words " For the purposes of this Act" should be underlined and not in bold.

At page 11, the correct price of the Ruling should be $1.10.

Commissioner of Taxation

13 September 1995


Taxation Ruling TR 94/22 Deductibility of expenditure on conventional clothing
Taxation Ruling TR 94/22

There is an Addendum to this ruling

Income tax: implications of the Edwards case for the deductibility of expenditure on conventional clothing by employees

NOTE:
This Ruling, to the extent that it is capable of being a "public ruling" in terms of Part IVAAA of the Taxation Administration Act 1953, is a public ruling for the purposes of that Part. Taxation Ruling TR 92/1 explains when a Ruling is a public ruling and how it is binding on the Commissioner.

Contents:

What this Ruling is about

Ruling

Date of effect

Explanations

Conventional clothing

Apportionment

Examples

WHAT THIS RULING IS ABOUT

1.	This Ruling sets out our views on the effect of the Full Court of the Federal Court of Australia decision in FC of T v. Edwards 94 ATC 4255; 28 ATR 87. The matter was an appeal from the decision of Gummow J of the Federal Court reported at 93 ATC 5162; (1993) 27 ATR 293 which was an appeal from the Administrative Appeals Tribunal (AAT) decision reported as Case 31/93 93 ATC 359; AAT Case 8858 (1993) 26 ATR 1181. This case involved the deductibility under subsection 51(1) of the Income Tax Assessment Act 1936 (the Act) of expenditure on clothing of a type suitable for wear outside work referred to in this Ruling as conventional clothing. Conventional clothing can be described as ordinary clothing of a type usually worn by men and women regardless of their occupation.

2.	This Ruling does not cover the deductibility of expenditure on uniforms, protective clothing, or occupation specific clothing. These matters will be the subject of another Ruling.

3.	This Ruling withdraws Taxation Ruling IT 297 and Taxation Determination TD 93/110 because the underlying rationale of that Ruling and that Determination reflects inappropriate tests of deductibility.

RULING

4.	The decision of the Full Federal Court in the Edwards case is not authority for the deductibility of all expenditure on clothing acquired and worn at work.

5.	We accept that the proper construction of subsection 51(1) does not result in any universal proposition that conventional clothing can never attract deductibility under the Act. Each case must be approached by the application of the subsection properly construed to its particular facts.

6.	The analysis on the facts starts with ascertaining what are the income earning activities and then determining whether a sufficient nexus exists between those activities and the expenditure. Outgoings will be deductible in whole or in part where there is a clear connection between the expenditure and the actual derivation of income. It is not sufficient that the expenditure on clothing is a prerequisite to the derivation of assessable income. It must contribute to the derivation of that income.

7.	It is our view, that in most cases expenditure on conventional clothing will not be deductible.

8.	For expenditure by an employee to be deductible under the first limb of subsection 51(1) of the Act, the High Court of Australia has indicated that the expenditure must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income producing expense (Lunney v. FC of T (1958) 100 CLR 478 at 497-498). There must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of the assessable income (Ronpibon Tin N.L. v. FC of T (1949) 78 CLR 47). Consequently, it is necessary to determine the connection between the particular outgoing and the operations by which the taxpayer more directly gains or produces his or her assessable income (Charles Moore & Co (WA) Pty Ltd v. FC of T (1956) 95 CLR 344 at 353, FC of T v. Cooper 91 ATC 4396 at 4403; (1991) 21 ATR 1616 at 1624; Roads and Traffic Authority of NSW v. FC of T 93 ATC 4508 at 4520; (1993) 26 ATR 76 at 91). Whether such a connection exists is a question of fact to be determined by reference to all the facts of the particular case. In most cases a sufficient connection will not exist between expenditure on conventional clothing and the derivation of assessable income by an employee taxpayer.

9.	Nothing in the Full Federal Court's decision in the Edwards case changes the principles set out in paragraph 8. In fact the Court specifically stated that the decision does not establish a principle that clothing acquired for and worn at work will generally be deductible. The decision in the Edwards case is simply an example of a situation where, on the particular facts of the case, such a sufficient connection did exist. If an employee taxpayer incurs clothing expenditure in a directly similar way to Ms Edwards, a deduction is allowable for a proportion of the expenditure.

10.	If the connection described at paragraph 8 does exist, it may be necessary to apportion the claim for deduction. A reasonable estimate of work use relative to private use of the clothing should be applied.

DATE OF EFFECT

11.	This Ruling applies to years commencing both before and after its date of issue. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

EXPLANATIONS

Conventional clothing

12.	In the Edwards case the taxpayer was the personal secretary to the wife of a former Queensland Governor. Although there was no express condition of employment that any particular clothing be worn, the taxpayer was expected to dress in a manner compatible with the Governor's wife. The taxpayer well understood that she would not have been employed if she did not dress in accordance with the dress standards and requirements for each particular occasion at which she attended on the Governor's wife.

13.	The taxpayer was previously employed as an executive secretary and as a consequence her existing wardrobe was of the requisite quality. The new employment resulted in a need to increase the quantity and to include hats, gloves and formal evening wear. Additional clothing was necessitated by employment activities taking her outside Brisbane in circumstances where laundry facilities were not readily available. Consequently a supply of immediately wearable fresh clothing was required. The taxpayer very seldom had opportunity to wear her formal wardrobe for private purposes. When off-duty, she wore casual clothing such as jeans and T-shirts. In the course of her new employment it was normal that she change attire several times during the course of a day.

14.	The first limb of subsection 51(1) provides that:

"All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income ... shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income."

15.	In Fletcher & Ors v. FC of T 91 ATC 4950; (1991) 22 ATR 613 the Full High Court of Australia affirmed that whether an outgoing is incurred in gaining or producing assessable income under the first limb of subsection 51(1) is a question of characterisation of the expenditure. The Courts have pointed out on many occasions that an outgoing will not properly be characterised as an income-producing outgoing unless it is "incidental and relevant to that end" (i.e. incidental and relevant to the derivation of income).

16.	In FC of T v. Cooper 91 ATC 4396 at 4401-4402; (1991) 21 ATR 1616 at 1622, Lockhart J stated:

"The question whether the additional expenditure of the taxpayer is deductible under s 51(1) cannot be answered simply by a process of reasoning that, because expenditure of this kind is prerequisite to the earning of the taxpayer's assessable income (in the sense that it is necessary if assessable income is to be derived), it must be incidental and relevant to the derivation of income. It does not follow that such expenditure is incurred in or in the course of gaining or producing the income. The deductibility of the expenditure depends upon determining the essential character of the expenditure itself and not upon the fact that, unless it is incurred, the taxpayer will not be able to engage in the activity from which his income is derived."

17.	In the Edwards case the AAT and the Federal Court identified the following circumstances as relevant to their decision that the expenditure on additional clothing was of the requisite character:

•	The essential activities by which the employee gained her income involved attending on the Governor's wife as her personal secretary.

•	The clothing was necessary to properly attend on the Governor's wife at official functions and engagements.

•	The employee was required to change her clothing sometimes two or three times a day in the course of performing her income-producing activities.

•	The employee was expected to dress in a manner compatible with the Governor's wife. She well understood that she was expected to dress in accordance with an appropriate standard for each occasion.

•	In her employment, the employee had need of an extensive wardrobe of high quality clothes.

•	Additional changes of clothing did not serve a private purpose.

•	The employee lived in and her employment was a seven-days-a- week occupation. She did not have a lot of private time.

•	The infrequent use of the formal wardrobe for private purposes. The employee very seldom had occasion to wear her private clothing, which tended to be casual in nature, such as jeans and tracksuits.

•	Engagements away from the employee's home base in circumstances where laundry facilities were not promptly available required a supply of fresh changes of clothing.

•	The exposure to the public eye was in a different way from her previous work life in private enterprise.

18.	Gummow J gave the following summary of the findings of the AAT (93 ATC 5167; 27 ATR at 298):

"In the present case, the AAT held (paras. 19,25) that with the use of her wardrobe after personal requirements of modesty, decency and warmth were met by her first set of clothes of the day, there was a direct nexus between the expenditure of the taxpayer on her wardrobe and her income producing activities."

19.	It was found that the factors set out at paragraph 16 together established a sufficient connection between the expenditure on additional clothing and the activities by which the taxpayer earned her income. The establishment of the sufficient connection demonstrated that the essential character of the expenditure was the gaining or producing of assessable income. Her employment activities were to attend on the Governor's wife and the outgoings on the additional clothing were inextricably linked to the way in which she earned her income. The following passage from the decision of the AAT was cited with approval by both Gummow J at first instance (92 ATC at 5165; 27 ATR at 296) and by the Full Federal Court on appeal (94 ATC at 4258; 28 ATR at 90):

"I am satisfied on the evidence that the occasion of the outgoing operates to give it the essential character of a working expense. I am satisfied on the evidence that the expenditure on the additional clothing (including hats, gloves and black tie formal evening wear) is both incidental and relevant to the derivation of the taxpayer's income.[Emphasis supplied]"

20.	We accept the Court's finding on the facts of the case. Taxpayers who incur expenses in a directly similar way to Ms Edwards will be allowed a proportion of the expenditure on conventional clothing. There will be few if any situations that are directly analogous to the Edwards case.

21.	The decision of the Full Federal Court contains the following cautionary statement (94 ATC at 4259; 28 ATR at 91):

"It should be noted that the decision does not establish that the cost of all clothing acquired and worn at work will, because of that circumstance alone, become deductible as an outgoing incurred in deriving assessable income."

Apportionment

22.	In analysing subsection 51(1) in Fletcher's case, the Full High Court took the view that the words "to the extent to which" in the subsection make it clear that apportionment of outgoings is contemplated in at least two circumstances (91 ATC at 4957; 22 ATR at 621):

"One kind consists in undivided items of expenditure in respect of things or services of which distinct and severable parts are devoted to gaining or producing assessable income and distinct and severable parts to some other cause. In such cases it may be possible to divide the expenditure in accordance with the applications which have been made of the things or services. The other kind of apportionable items consists in those involving a single outlay or charge which serves both objects indifferently." (per Latham CJ; Rich, Dixon, McTiernan and Webb JJ in Ronpibon Tin N.L. and Tongkah Compound N.L. v. FC of T (1949) 78 CLR 47 at 59)

The Full High Court also stated in Fletcher's case, relying on Ronpibon Tin, that what represents the appropriate apportionment of such items of expenditure is essentially a question of fact in each case. There must be some fair and reasonable assessment of the extent to which the expenditure relates to assessable income.

23.	In the Edwards case the taxpayer had an executive wardrobe of similar quality for at least two years before the year of income in which the deduction was claimed. In the making of an apportionment the AAT took this and all the other particular facts into account. The AAT allowed the clothing expenditure in the year at issue less the average of the clothing expenditure for the previous two years.

24.	The Full Federal Court in the Edwards case made the following statement in relation to apportionment (94 ATC at 4259; 28 ATR 91):

"The apportionment that was made, which is not the subject of challenge in this appeal, was of a kind contemplated by s 51(1) of the Act and was made on a commonsense or practical basis: reflecting the fact that the entirety of the additional expenditure could not be said to have been incurred in the production of the assessable income but that a proportion of it was so incurred."

EXAMPLES

25.	The following examples are illustrative of the application of paragraphs 6 and 8 of this Ruling to various factual situations.

26.	Craig works as a sales assistant in an exclusive menswear store. His employer requires him to wear clothing from the labels available in the store.

What are Craig's income earning activities?

The activities by which Craig derives his income are primarily by selling menswear in the store.

Is there a sufficient connection between those activities and expenditure on clothing from the store?

No. Even if Craig's clothing expenditure is a prerequisite to the derivation of his income, there is no direct nexus between the clothing expenditure and his income-producing activities of selling clothes.

Is expenditure on the clothing deductible?

No. In the absence of a sufficient nexus, the clothing expenditure is not deductible.

27.	Neil is a professional actor who buys clothing to wear on stage as a costume in a particular production.

What are Neil's income earning activities?

Neil derives his income by assuming characters and performing on stage.

Is there a sufficient connection between those activities and expenditure on clothing?

A direct nexus exists between Neil's expenditure on clothing and his income-producing activities as an actor, even though the clothing purchased to play a part may be conventional in nature. Neil's clothing expenditure is directly related to his performing his employment activities in the clothing to earn his income.

Is expenditure on the clothing deductible?

Yes. Because the connection between the income earning activities and the expenditure exists, Neil can claim a deduction. Whether apportionment is necessary depends on the particular facts.

This example does not establish a general principle that expenditure by actors on clothing is allowable. Claims by other actors would need to be determined on their own facts.

28.	Jill is a police officer who is required as part of her law enforcement activities to wear clothing of a kind she doesn't normally wear that enables her to pose as a criminal. Jill wears other clothing to and from work.

What are Jill's income earning activities?

Jill earns her income as an undercover law enforcement officer who assumes characters to solve cases.

Is there a sufficient connection between those activities and expenditure on clothing?

Jill's expenditure on clothing worn in these activities, even though it may be conventional clothing, has a direct nexus with her income producing activities as a law enforcement officer. Jill's clothing expenditure is directly related to her performing her employment activities in the clothing to earn her income.

Is expenditure on the clothing deductible?

Yes. Because the connection between the income earning activities and the expenditure exists, Jill can claim a deduction. Whether apportionment is necessary depends on the particular facts.

This example does not establish a general principle that expenditure by police officers on clothing is allowable. Claims by other police officers would need to be determined on their own facts. In fact, it is our view that expenditure by plain clothes police officers, in most cases, will not be allowable.

29.	John and Jane are parliamentarians who decide, as a result of the televising of parliamentary proceedings, to purchase a range of high quality garments to wear on these occasions.

What are John's and Jane's income earning activities?

As parliamentarians, John and Jane earn their income by performing a range of parliamentary duties. They do not earn their income by appearing on television.

Is there a sufficient connection between those activities and expenditure on clothing?

No. There is no direct nexus between the expenditure and the activities by which they earn their income.

Is expenditure on the clothing deductible?

Their expenditure is not deductible because there is no direct nexus between the expenditure and the parliamentary activities by which they derive their income.

30.	Jim provides advice in a policy branch of a public service department. He wears trousers and a shirt to work, and keeps a suit handy in case he is needed to advise the Minister at Parliament House.

What are Jim's income earning activities?

Jim derives his income by giving advice on government policies to a wide range of people – Australian public, other departments, businesses, and sometimes, Ministers.

Is there a sufficient connection between those activities and expenditure on clothing?

No. There is no direct nexus between Jim's clothing expenditure and his income producing activities of providing advice on government policies.

Is expenditure on the clothing deductible?

No. In the absence of a sufficient nexus, the clothing expenditure is not deductible.

31.	Gail is a television game show hostess who attends a studio every Tuesday to tape multiple episodes of the show for the week. Her employer does not provide her with clothing to wear on the show. She buys evening wear and formal wear to complement the sets and prize showcases.

What are Gail's income earning activities?

Gail's income earning activities are as a spokes model on the television show.

Is there a sufficient connection between those activities and expenditure on clothing?

Gail's expenditure on clothing worn in these activities which varies and complements the various prize showcases, and segments on the television show has a direct nexus with her income producing activities as spokes model on the game show. Gail's clothing expenditure is directly related and contributes to her performing her employment activities in the clothing to earn her income.

Is expenditure on the clothing deductible?

Yes. Because the connection between the income earning activities and the expenditure exists, Gail can claim a deduction. Whether apportionment is necessary depends on the particular facts.

This example does not establish a general principle that expenditure on clothing by people who appear on television, or models is allowable. Claims by other models and people who appear on television would need to be determined on their own facts.

Commissioner of Taxation

23 June 1994

ADDENDUM

This Addendum amends Taxation Ruling TR 94/22, in relation to the 1997-98 or a later income year, as follows:

After paragraph 3

Insert:

"Cross references of provisions

3A. This Ruling considers the implications of the Edwards case, a case that explains the application of subsection 51(1) of the Act. Subsection 51(1) expresses the same ideas as section 8-1 of the Income Tax Assessment Act 1997".

Commissioner of Taxation

28 July 1999


Taxation Ruling TR 93/7 Whether penalty interest payments are deductible
Taxation Ruling TR 93/07

Income tax: whether penalty interest payments are deductible

Contents:

What this Ruling is about

Ruling

Date of effect

Explanations

Examples

WHAT THIS RULING IS ABOUT

1.	This Ruling provides guidance in determining whether a "penalty interest payment" is deductible under either subsection 51(1), section 67 or section 67A of the Income Tax Assessment Act 1936 ("ITAA"). In this Ruling the term "penalty interest payment" refers to an amount payable by a borrower under a loan agreement in consideration for a lender agreeing to accept an early repayment of a loan. The amount payable is commonly calculated by reference to a number of months of interest payments that would have been received had the premature repayment not been made.

2.	The Ruling also considers the application of the capital gains and capital losses provisions (Part IIIA of the ITAA).

RULING

3.	A penalty interest payment is generally deductible under subsection 51(1) if:

(a)	the loan moneys were borrowed for the purpose of gaining or producing assessable income or for use in a business carried on for that purpose; and

(b)	the payment is made in order to rid the taxpayer of a recurring obligation to pay interest on the loan, where such interest would itself have been deductible if incurred.

4.	Where the repayment of loan moneys borrowed for the purpose of producing assessable income is secured by mortgage, penalty interest payable on an early repayment which effects a discharge of the mortgage will generally be deductible under section 67A.

5.	Penalty interest is not expenditure incurred in borrowing money so as to be deductible under section 67.

6.	Where penalty interest is paid upon repayment of a loan incidental to the disposal of an asset, the payment is not taken into account under Part IIIA of the ITAA in calculating the amount of any capital gain or capital loss arising on the disposal.

DATE OF EFFECT

7.	This Ruling sets out the current practice of the Australian Taxation Office and is not concerned with a change in interpretation. Consequently, it applies (subject to any limitations imposed by statute) for years of income commencing both before and after the date on which it is issued.

EXPLANATIONS

8.	Subsection 51(1) provides that: "all losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or are of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income."

9.	Generally speaking, provided loan moneys were borrowed for the purpose of gaining or producing assessable income or for use in a business carried on for that purpose, penalty interest payable on early repayment of the loan will, unless it is of a capital nature, qualify for deductibility under subsection 51(1). This will commonly involve borrowings used to acquire an income-producing asset or to provide working capital to operate a business.

10.	In the case of such borrowings, the central issue is whether penalty interest payments are "losses or outgoings of capital, or of a capital...nature". If so, then they will not be deductible under subsection 51(1), but may be deductible under sections 67 or 67A.

11.	We do not consider that so-called penalty interest is, in fact, in the nature of interest. This is so even if the loan agreement uses the term "penalty interest". The description of an item used in any relevant agreement is not conclusive of its character (refer FC of T v. Sth. Aust. Battery Makers Pty. Ltd. (1978) 140 CLR 645 at 655; 78 ATC 4412 at 4417; 8 ATR 879 at 884 per Gibbs ACJ and Cliffs International Inc. v. FC of T (1979) 142 CLR 140 at 148; 79 ATC 4059 at 4064; 9 ATR 507 at 512 per Barwick CJ). To call a payment "interest" does not conclusively determine that it in fact answers that description. Nor does it prevent the payment from being an outgoing of a capital nature.

•	Interest is considered to be "compensation to the lender for being kept out of the use and enjoyment of the principal sum": see FC of T v. The Myer Emporium Ltd. (1987) 163 CLR 199 at 218; 87 ATC 4363 at 4371; 18 ATR 693 at 702). Penalty interest is not paid for the use of the lender's money. It is paid in respect of a period when the borrower has repaid the loan and does not have the use of the money (refer R.W. Parsons, Income Taxation in Australia at para. 6.330)

•	The critical factor in determining the essential character of an outgoing is the character of the advantage sought by the making of the expenditure (Sun Newspapers Ltd. v. FC of T (1938) 61 CLR 337 at 363 per Dixon J). Whether an outgoing is capital or revenue in nature "depends on what the expenditure is calculated to effect from a practical and business point of view" (Hallstroms Pty. Ltd. v. FC of T (1946) 72 CLR 634 at 648 per Dixon J).

12.	As a penalty interest payment is a cost directly attributable to obtaining early repayment of a loan, the question to be answered is effectively: "what, from a practical and business point of view, is the advantage sought from an early repayment of the loan?" This is a question of fact to be answered on a case by case basis.

13.	Where the advantage sought is the release from the contractual obligation to incur a recurrent liability to pay interest on the loan, and such interest would itself have been deductible, then the penalty interest payment is on revenue account (FC of T v. Marbray Nominees Pty. Ltd. 85 ATC 4750; (1987) 17 ATR 93, Metals Exploration Ltd. v. FC of T 86 ATC 4505; (1987) 17 ATR 786). Such a payment does display certain capital indicia in terms of the tests enunciated by Dixon J. in the Sun Newspapers case (supra); i.e. it is a once-and-for-all type lump sum which eliminates a threatened disadvantage and thus produces a benefit of a lasting character for the taxpayer. Nevertheless, where the initiating cause for early repayment of the loan is a saving in future interest outlays, the payment is essentially revenue in character.

14.	On the other hand, where the penalty interest payment is paid effectively as a price to rid the taxpayer of a burdensome capital asset or is otherwise incidental to the realisation of an asset, then it will generally be on capital account.

15.	Where repayment of a loan is secured by mortgage, penalty interest payable on early repayment may be deductible under section 67A. Section 67A provides a deduction for expenditure (excluding principal or interest payments) incurred in connection with the discharge of a mortgage securing repayment of moneys borrowed for the purpose of producing assessable income. Unlike subsection 51(1), deductibility is not affected by whether the expenditure is capital or revenue in nature. As previously discussed, so-called penalty interest is not, in fact, in the nature of interest, and is therefore not excluded on this basis from deductibility under section 67A.

16.	Borrowing expenses which are on capital account and for that reason not deductible under subsection 51(1) may qualify for deduction under section 67. However, penalty interest is not "expenditure incurred... in borrowing money" for section 67 purposes. These words, in the context of section 67(1), refer to a "cost" of borrowing; i.e. expenditure incurred in relation to the actual establishment of the relevant loan. The liability to pay penalty interest is first incurred after the money is borrowed, and is therefore not incurred in borrowing the money. The payment is not made pursuant to a contractual obligation which was incurred at the time of borrowing as an incident of establishing the loan (refer Ure v. FC of T 81 ATC 4100; (1981) 11 ATR 484).

17.	Where penalty interest is paid upon repayment of a loan incidental to the disposal of an asset, the payment is not taken into account for Part IIIA purposes in calculating the amount of any capital gain or capital loss arising on the disposal. The payment would not be included in the cost base of the asset under section 160ZH. In particular, it is not within the categories of "incidental costs" of acquisition or disposal in subsections 160ZH(5) or 160ZH(7), and, as it is not in the nature of "interest" (see paragraphs 11 and 12 above), is not a "non-capital cost" under subsection 160ZH(6A).

EXAMPLES

Example 1

18.	Two years ago, Peter obtained a loan from a financial institution to purchase a rental property. The loan is for a period of five years, with interest payable at a fixed rate of 15 per cent per annum. Because of falls in prevailing interest rates, Peter can now refinance the property with a loan at a lower rate of interest, say 11 per cent. In order to refinance, Peter pays out the first loan early. Under the loan agreement, he incurs a penalty interest payment calculated on the basis of one month's interest for each year of the loan period remaining.

19.	The advantage sought in practical terms by making the penalty payment and repaying the first loan is the future interest savings obtainable from the differential in rates charged on the two loans. The payment is therefore of a revenue character and deductible under subsection 51(1). Were the refinancing to involve the discharging of a mortgage securing repayment of the first loan, the payment would also have been deductible under section 67A.

Example 2

20.	Anne obtains a loan from a financial institution to purchase a rental property. Within the term of the loan Anne decides to sell the property. This requires her to repay the loan in order to discharge a mortgage over the property which secures the loan. In paying out the loan early Anne incurs a penalty interest payment.

21.	The repayment of the loan, and the associated incurrence of the penalty payment, is a necessary incident of the sale of the property. A payment so connected to the realisation of a capital asset will be on capital account. The payment is therefore not deductible under subsection 51(1). The payment will, however, qualify for deductibility under section 67A as expenditure incurred in discharging a mortgage.

Example 3

22.	Croydon Road Pty. Ltd. obtained an unsecured loan for a period of five years. It used the loan moneys to purchase plant and equipment with which to operate a new landscape gardening business in conjunction with its existing plant nursery business. After 12 months the new business had proven unprofitable. It was closed down so as to avoid further trading losses being incurred and the plant and equipment were sold. The loan was then repaid and a penalty interest payment incurred.

23.	The penalty payment is made in connection with ridding the company of burdensome or unprofitable assets or parts of its business operations. It is therefore of a capital nature and not deductible under subsection 51(1). As the loan is unsecured, section 67A has no possible application.

Commissioner of Taxation

18 March 1993


Taxation Ruling TR 92/18 Bad debts
Taxation Ruling TR 92/18

Income tax: bad debts

NOTE:
This Ruling, to the extent that it is capable of being a "public ruling" in terms of Part IVAAA of the Taxation Administration Act 1953, is a public ruling for the purposes of that Part. Taxation Ruling TR 92/1 explains when a Ruling is a public ruling and how it is binding on the Commissioner.

Contents:

What this Ruling is about

Ruling

Section 63

Section 51

Subsection 63(3)

Partial debt write-offs

Debt/equity swaps

Date of effect

Explanations

Section 63 (paragraphs 23-56)

Section 51 (paragraphs 57-68)

Subsection 63(3) (paragraphs 69-71)

Partial debt write-offs (paragraphs 72-83)

Debt/equity swaps (paragraphs 84-91)

WHAT THIS RULING IS ABOUT

1.	This Ruling clarifies the circumstances in which a deduction for bad debts will be allowable. In particular, the Ruling explains the operation of paragraph 63(1)(b) of the Income Tax Assessment Act 1936 (the Act) in relation to taxpayers in the business of the lending of money. The Ruling does not attempt to provide guidance on bad debts in relation to consumer lending such as small personal loans or credit card debts. A separate Ruling will issue on consumer lending.

RULING

Section 63

Debt (paragraph 25)

2.	To obtain a bad debt deduction under section 63 of the Act, a debt must exist before it can be written off as bad. A debt exists for the purposes of section 63 where a taxpayer is entitled to receive a sum of money from another either at law or in equity.

Bad debt (paragraphs 26 – 33)

3.	A debt need not necessarily be bad in the strict sense as described in paragraph 26. The question of whether a debt is bad is a matter of judgment having regard to all the relevant facts. Guidelines for deciding when a debt is bad are at paragraphs 31-32. Generally, provided a bona fide commercial decision is taken by a taxpayer as to the likelihood of non-recovery of a debt, it will be accepted that the debt is bad for section 63 purposes. The debt, however, must not be merely doubtful.

4.	Where a trustee in bankruptcy, receiver or liquidator advises a creditor of the amount expected to be paid in respect of the debt (i.e. the extent to which the amount likely to be received is less than the debt) is accepted as bad when the advice is given.

Writing-off of bad debts (paragraphs 34 – 39)

5.	The bad debt has to be written off in the year of income before a bad debt deduction is allowable under section 63. The writing-off of a bad debt does not necessarily require highly technical accounting entries. It is sufficient that some form of written record is kept to evidence the decision of the taxpayer to write off the debt from the accounts.

Debt brought to account as assessable income – paragraph 63(1)(a) (paragraphs 40 – 41)

6.	If a taxpayer is not carrying on a business of money lending, a bad debt deduction is not allowable under paragraph 63(1)(a) unless the debt has been previously included in assessable income. A taxpayer who is not a money lender and returns income on the basis of cash receipts will not be entitled to a deduction for bad debts because the debts have not been brought to account by the taxpayer as assessable income.

Money-lending business – paragraph 63(1)(b) (paragraphs 42 – 46)

7.	Paragraph 63(1)(b) applies to taxpayers who are engaged in a money lending business. The question of whether a taxpayer is carrying on a money-lending business is a question of fact. For the purposes of paragraph 63(1)(b), a money lender need not necessarily be ready and willing to lend moneys to the public at large or to a wide class of borrowers. It would be sufficient if the taxpayer lends moneys to certain classes of borrowers provided the taxpayer does so in a businesslike manner with a view to yielding a profit from it.

"In respect of" (paragraphs 47 – 48)

8.	The term "in respect of money lent" in paragraph 63(1)(b) is to be given its widest meaning and it includes not only the principal of the loan, but also any capitalised interest and associated costs, charges, fees etc. incurred in the course of lending money.

Money-lending business at the time of lending(paragraphs 49 – 52)

9.	For the purposes of paragraph 63(1)(b), the taxpayer must be carrying on a money lending business at the time the loan was made. However, it is accepted that a taxpayer does not have to be carrying on a business of money lending at the time the debt is written off in order to satisfy the requirements of paragraph 63(1)(b).

Section 51 (paragraphs 57 – 68)

10.	Certain taxpayers who fail to satisfy the requirements under section 63 may be entitled to a bad debt deduction under subsection 51(1). Any business losses or outgoings of a revenue nature are an allowable deduction under subsection 51(1) when incurred. Whether or not a loss occasioned by a bad debt is of a revenue or capital nature depends upon a consideration of the facts and circumstances in each case.

11.	A loss occasioned by a bad debt is clearly incurred when the loan is disposed of, settled, compromised or otherwise extinguished. Where a debt is not disposed of, settled, compromised or otherwise extinguished, it is accepted that the loss of the debt is incurred under subsection 51(1) when it is written off as bad in the same way as in section 63.

Subsection 63(3) (paragraphs 69 – 71)

12.	Where a taxpayer recoups an amount which has previously been allowed as a bad debt deduction under either of subsections 63(1) or 51(1) the taxpayer will have to include this amount in assessable income pursuant to subsection 63(3).

Partial debt write-offs (paragraphs 72 – 83)

13.	It is not necessary for a taxpayer to write off an entire debt to obtain a bad debt deduction under section 63. A taxpayer is entitled to a deduction for that part of a debt which is bad and is written off. The same tests for deductibility apply as for the whole of a debt.

14.	A partial bad debt deduction may arise where debt is secured by property. Where the debt is discharged only to the extent of the net amount realised from the sale of the security and the remaining debt is still outstanding, the remaining debt (i.e. any deficiency between the net proceeds of the sale of the security and the amount of the debt) would be deductible as a partial bad debt only if and when it is found that the remaining debt could not be recovered from the debtor (i.e. the requirements of section 63 are met). The same principle applies where the security is held, for example as mortgagee in possession, rather than sold. In this situation, the remaining debt that may be written off as bad is the deficiency between the market value of the security and the amount of debt.

15.	Where the security is taken in full satisfaction of the debt, no bad debt deduction is allowable under section 63 unless the bad debt is written off before the debt is extinguished.

16.	If a deduction is not available under subsection 63(1) any deficiency between the market value of the security and the amount of the debt may, depending upon the circumstances, be an allowable deduction under subsection 51(1) or taken into account as a capital loss under Part IIIA of the Act.

17.	Any profit or loss on the subsequent disposal of the security will need to be taken into account under sections 25 and 51 or Part IIIA.

Debt/equity swaps (paragraphs 84 – 91)

18.	Sections 63E and 63F are specific provisions allowing deductions for losses arising out of debt for equity swaps entered into after 26 February 1992. The allowable deduction is the amount by which the amount of the debt exceeds the value of the equity received in the swap.

19.	Prior to 27 February 1992 a bad debt deduction arising out of a debt for equity swap may, depending on the circumstances, be allowable under either of subsections 63(1) or 51(1).

20.	A deduction is allowable under subsection 63(1) if the taxpayer had written off that portion of the debt that was bad (i.e. the deficiency between the debt owed and the market value of the equity to be issued) before the equity was issued and the debt was extinguished.

21.	Where a bad debt deduction is not allowable under subsection 63(1) a deduction may, depending upon the circumstances, be allowable under subsection 51(1) for the loss arising out of a debt for equity swap.

DATE OF EFFECT

22.	This Ruling applies (subject to any limitations imposed by statute) for years of income commencing both before and after the date on which it is issued.

EXPLANATIONS

Section 63

23.	Subsection 63(1) provides that:

"Debts which are bad debts and are written off as such during the year of income, and;

(a)	have been brought to account as assessable income of any year; or

(b)	are in respect of money lent in the ordinary course of the business of the lending of money by a taxpayer who carries on that business, shall be allowable deductions."

24.	Four conditions must be satisfied in order to qualify for a bad debt deduction. First, a debt must exist. Second, the debt must be bad. Third, the debt must be written off as a bad debt during the year of income in which the deduction is claimed. Fourth, the debt must have been brought to account as assessable income in any year or, in the case of a money lender, the debt must be in respect of money lent in the ordinary course of the business of lending of money by a taxpayer who carries on that business.

What constitutes a "debt" for section 63?

25.	A debt may be defined as a sum of money due from one person to another. As a general rule where a taxpayer is entitled to receive a sum of money from another either at law or in equity, it is accepted that a debt exists for the purposes of section 63. There is a debt for the purposes of section 63 where a taxpayer has merely an equitable entitlement to the debt (G.E. Crane Sales Pty Ltd v. F.C. of T. (1971) 126 CLR 177, 71 ATC 4268, 2 ATR 692).

When will a debt be bad?

26.	Whether a debt is bad depends upon an objective consideration of all the relevant circumstances of each case. Strictly speaking, in the case of an individual debtor, a debt is not "bad" until the debtor has died without assets, or has become insolvent and his estate has been distributed, or the debt has become statute barred. In the case of a corporate debtor a similar situation would arise on receipt of the liquidator's final distribution or when the company is completely wound up.

27.	However, because subsection 63(3) contemplates that an amount may subsequently be received in respect of a debt previously written off as bad, it is considered that, for the purposes of section 63, the debt need not necessarily be "bad" in the strict sense as indicated in paragraph 26 above.

28.	In support of the view expressed in paragraph 27, Harvey ACJ in Elder Smith & Co Ltd v. Commissioner of Taxation (NSW) (1931) 1 ATD 241, (affirmed in Elder Smith v. F.C. of T. (1932) 47 CLR 471) considered a similar bad debts provision in the State Income Tax (Management) Act 1928 (NSW). He made an obiter observation that the legislation contemplated a debt being bad where it was "a conjectural bad debt for the time being" (at p. 242). Similarly, in Anderson and Halstead Ltd v. Birrell (1932) 16 TC 200 Rowlatt J, in considering the English legislative provision for bad debts, said that an "estimate" was required as to the extent a debt is bad for the purpose of a profit and loss account. Such an estimate he said "was a valuation of an asset (the debt) upon the facts and probabilities at the time the writing off of the debt takes place". The Taxation Board of Review in Case 26 (1945) 11 CTBR (OS) 94 also observed at p.94 that "[i]t may happen – although it seems quite improbable – that through some turn of fortune portion of the amount in question will yet be recovered, but any such consideration cannot affect the issue."

29.	As long as the commercial judgment pointing to the relevant facts indicates that a debt is bad for the time being, the debt is accepted as bad for section 63 purposes. It is not essential that a creditor take all legally available steps to recover the debt. What is necessary is that the creditor make a bona fide assessment, based on sound commercial considerations, of the extent to which the debt is bad.

30.	Although the debt need not be bad in the strict sense it must nonetheless be more than merely doubtful. For example, a debt will not be accepted as bad merely because a certain set period of time for payment (e.g. 180 days or 270 days) has elapsed with no payment or contact having been made by the debtor.

31.	A debt may be considered to have become bad in any of the following circumstances:

(a)	the debtor has died leaving no, or insufficient, assets out of which the debt may be satisfied;

(b)	the debtor cannot be traced and the creditor has been unable to ascertain the existence of, or whereabouts of, any assets against which action could be taken;

(c)	where the debt has become statute barred and the debtor is relying on this defence (or it is reasonable to assume that the debtor will do so) for non-payment;

(d)	if the debtor is a company, it is in liquidation or receivership and there are insufficient funds to pay the whole debt, or the part claimed as a bad debt;

(e)	where, on an objective view of all the facts or on the probabilities existing at the time the debt, or a part of the debt, is alleged to have become bad, there is little or no likelihood of the debt, or the part of the debt, being recovered.

32.	While individual cases may vary, as a practical guide a debt will be accepted as bad under category (e) above where, depending on the particular facts of the case, a taxpayer has taken the appropriate steps in an attempt to recover the debt and not simply written it off as bad. Generally speaking such steps would include some or all of the following, although the steps undertaken will vary depending upon the size of the debt and the resources available to the creditor to pursue the debt:

(i)	reminder notices issued and telephone/mail contact is attempted;

(ii)	a reasonable period of time has elapsed since the original due date for payment of the debt. This will of necessity vary depending upon the amount of the debt outstanding and the taxpayers' credit arrangements (e.g. 90, 120 or 150 days overdue);

(iii)	formal demand notice is served;

(iv)	issue of, and service of, a summons;

(v)	judgment entered against the delinquent debtor;

(vi)	execution proceedings to enforce judgment;

(vii)	the calculation and charging of interest is ceased and the account is closed, (a tracing file may be kept open; also, in the case of a partial debt write-off, the account may remain open);

(viii)	valuation of any security held against the debt;

(ix)	sale of any seized or repossessed assets. While the above factors are indicative of the circumstances in which a debt may be considered bad, ultimately the question is one of fact and will depend on all the facts and circumstances surrounding the transactions. All pertinent evidence including the value of collateral securing the debt and the financial condition of the debtor should be considered. Ultimately, the taxpayer is responsible for establishing that a debt is bad and bears the onus of proof in this regard.

33.	Subsection 63(2) provides for a debt being bad where the debtor has become bankrupt or has executed a deed of assignment or scheme of arrangement. The debt will be bad to the extent to which the amount of the debt owed to a taxpayer exceeds the amount, if any, which will be received by the taxpayer. Where the trustee in bankruptcy, receiver or liquidator advises the creditor of the amount expected to be paid in respect of the debt, the remainder of the debt can be written off as bad when the advice is given.

A deduction for a bad debt is allowable in the year of income in which the debt is written off

34.	It is not enough to simply make a provision for a bad debt. The debt has to be written off as a bad debt and it has to be written off before year's end. The question has often arisen as to what the term "written off" means. In Case 33 (1941) 10 TBRD 101 the Taxation Board of Review expressed at p.103 the view that:

"... the writing off of a bad debt does not necessitate a particular form of book entry or even a book entry at all. It is sufficient, we think, if there are written particulars – there must, of course, be something in writing – which indicates that the creditor has treated the debt as bad."

35.	There is a requirement that the debt has to be physically written off. Note the following relevant comments of the Chairman of the Taxation Board of Review in Case 28 (1947) 13 TBRD 223 at p.239:

"Bad debts written off as such in the year of income": I am unable to share the view that the condition denoted by these words can be satisfied where, in respect of a debt owed to the taxpayer concerned, there is no evidence whatever that anything was put in writing, in the year of income, from which it could be gathered that the taxpayer intended to treat the debt as bad. The words are plain and positive and they are so clearly objective that their very purpose seems to me to be to put the onus upon any taxpayer who seeks to obtain the benefit provided by the section to prove (if so required) by sufficient evidence that there was a physical writing off of the debt in the year of income..... However, the need for the condition as to the writing off of bad debts is fairly apparent. Against any suggestion that the condition that the debts must be bad makes the further condition superfluous, it has to be borne in mind that in the average case that taxpayer must be allowed a considerable latitude in the exercise of his judgment as to the extent to which any particular debt is bad, the reason being that it is frequently impossible to foresee future events which might affect the worth of the debt. The Commissioner is in no better position and, although Section 63(3) is the logical and necessarily intended corrective of the excessive writing off of bad debts by reason of errors of judgment or the unavoidable failure of careful forecasts, the statutory condition as to writing off is a necessary corrective of the difficulties which would arise ... as to which year among several a debt is to be claimed or treated as bad."

36.	The requirements of section 63 may be satisfied even though a debt is not written off in the books of account, for example, section 63 will still be satisfied in the following circumstances:

(a)	a Board meeting authorises the writing off of a debt and there is a physical recording of the written particulars of the debt and Board's decision before year end but the writing off of the debt in the taxpayer's books of account occurs subsequent to year end;

(b)	a written recommendation by the financial controller to write off a debt which is agreed to by the managing director in writing prior to year end followed by a physical writing off in the books of account subsequent to year end.

37.	No deduction will be allowed in a year, if the debt is written off after the year's end at the time when the books of account are being prepared (i.e. as a balance day adjustment made after the close of the income year). The decision of Owen J in Point v. F.C. of T. (1970) 119 CLR 453, 70 ATC 4021, 1 ATR 577 makes this requirement quite clear. At CLR p. 458, ATC p. 4023, ATR p. 580 Owen J said:

"The fact is, however, that during that year neither that nor any other figure was written off by the appellant as a bad debt. The entry purporting to write off $X as a bad debt was not made until many months after the end of that year and, in my opinion, the Commissioner rightly refused to apply section 63. For the appellant, however, it was argued that the words in the section, "written off as such during the year of income", are not to be given what appears to me to be their plain meaning and that the section is sufficiently complied with if the debt is not written off "during the year of income" but at some later date, provided that the writing off relates back to the year of income. I am unable to accept this proposition. "During the year of income" means in my opinion "in the course of the year of income". No doubt if a debt is written off as bad after a year of income has passed, it will be allowable as a deduction in the year in which the writing off takes place, provided of course that the other conditions laid down by the section are fulfilled."

38.	Furthermore, it is essential that a debt be in existence in order that it may be written off as bad. Point v. F.C. of T. (supra) also demonstrates that a debt cannot be written off after it has been settled, compromised, otherwise extinguished or assigned. In that case, the taxpayer released a debtor from a debt under a scheme of arrangement in the 1964 income year. In the following income year the taxpayer purported to write off the debt as bad under section 63. Owen J held that at the time of the purported writing off there was simply no debt in existence because it had been extinguished in the previous income year. A similar conclusion was reached in Franklin's Selfserve Pty Ltd v. F.C. of T. (1970) 125 CLR 52, 70 ATC 4079, 1 ATR 673 and G.E. Crane Sales Pty Ltd v. F.C. of T. (supra). Therefore, once a debt has been settled, compromised, otherwise extinguished or assigned no further amounts can be claimed as bad debts for the purposes of section 63. This principle equally applies where the extinguishment of the debt and the writing off of the debt occur in the same financial year. If the writing-off of the debt occurred after the extinguishment or the disposal of the debt, no deduction is allowable under section 63. It is, therefore, important that a creditor should not delay the writing-off process until after the debt is extinguished.

39.	The mere writing-off of a debt does not necessarily relieve the debtor from ever having to pay the liability. If the financial position of the debtor subsequently improves or the circumstances which led to the debt being written off alter, action may be taken to collect the debt. However, no amount is to be treated as assessable income under subsection 63(3) until such time as the debt (or part of it) is recovered.

The debt must have been brought to account as assessable income

40.	The requirement of paragraph 63(1)(a) that the debt was previously brought to account as assessable income presupposes a non-cash basis of returning income for tax purposes. For a taxpayer who operates on a cash receipts basis and lodges returns of income on that basis the taxpayer is not entitled to a deduction for bad debts. As the outstanding amount has not been received it has never been included in the assessable income of the taxpayer. Support for this view can be found in Case P78 82 ATC 381; 26CTBR(NS) Case10 (at ATC p.385, CTBR p. 92) which states that "[s]peaking generally, it is impossible for a taxpayer to properly claim a bad debt as a deduction under sec.63 if he is conducting his business on a cash basis; the requirement of sec.63(1)(a) simply cannot operate in regard to such a business.".

41.	If a taxpayer is carrying on the business of lending money, it is not necessary that the debt be previously brought to account as assessable income provided it is in respect of money lent by the taxpayer in the ordinary course of a money lending business (paragraph 63(1)(b)).

Who is a "money-lender"?

42.	Paragraph 63(1)(b) is a specific provision relating directly to taxpayers who carry on the business of lending money and in the ordinary course of that business suffer a bad debt in respect of any money lent.

•	The question of whether a taxpayer is carrying on the business of lending money is necessarily a question of fact. However, the following passage of Bowen CJ in F.C. of T. v. Marshall and Brougham Pty Ltd 17 FCR 541, 87 ATC 4522, 18 ATR 859 at ATC p. 4528, ATR p. 866 provides some useful general guidelines on determining whether a taxpayer is a money-lender:

•	"It is generally accepted that in order to be regarded as carrying on a business one must demonstrate continuity and system in one's dealings. In the case of money lending it has been said that a person must hold himself out as willing to lend money generally to all and sundry (subject to credit-worthiness): see Litchfield v. Dreyfus [1906] 1 KB 584. It is not decisive whether the lender is a registered money-lender or not, although this will be a factor to take into account. It should be mentioned that it need not be the only business or the principal business of the taxpayer. It will be insufficient, however, if it is merely ancillary or incidental to the primary business. In the end, it will be a question of fact for the court to decide by looking at all the circumstances involved: see Newton v. Pyke (1908) 25 TLR 127."

•	The frequently quoted statement of Farwell J in Litchfield v. Dreyfus [1906] 1 KB 584 at p. 589 that:

•	"Speaking generally, a man who carries on a money-lending business is one who is ready and willing to lend to all and sundry, provided that they are from his point of view eligible" should not restrict the meaning of "money-lender" for taxation purposes in light of the more recent Australian cases of Fairway Estates Pty Ltd v. F.C. of T. (1970) 123 CLR 153, 70 ATC 4061, 1 ATR 726; F.C. of T. v. Marshall and Brougham Pty Ltd (supra); and F.C. of T. v. Bivona Pty Ltd 90 ATC 4168, 21 ATR 151.

•	These recent cases have highlighted the differences between the laws relating to the control of money-lenders and the laws relating to the taxing of money-lenders. In particular, the joint judgment in FCT v. Bivona Pty Ltd (supra) at ATC p.4173, ATR p.156 concluded that "[w]hether Farwell J.'s statement (in the Litchfield case) is consistent with modern authority is not a matter for us to consider because it is used in the context of moneylending legislation, whereas a different inquiry is involved in this case.". Litchfield v. Dreyfus (supra) was a case under the Moneylenders Act 1900 (UK) and not under a taxing statute.

43.	Accordingly, for the purposes of paragraph 63(1)(b), a money lender need not necessarily be ready and willing to lend moneys to the public at large or to a wide class of borrowers. It would be sufficient if the taxpayer lends moneys to certain classes of borrowers provided the taxpayer does so in a businesslike manner with a view to yielding a profit from it.

What does "in respect of" mean?

44.	The term "in respect of" in the context of paragraph 63(1)(b) was considered by the Full Federal Court in F.C. of T. v. National Commercial Banking Corporation of Australia Ltd 83 ATC 4715,15 ATR 21. At ATC p. 4719, ATR p. 25 Bowen CJ, Fisher and Lockhart JJ in a joint judgment observed that:

"Bad debts which are "in respect of money lent in the ordinary course" of a money-lending business would in ordinary parlance encompass all constituents of the debt including principal and interest. To exclude interest from the subject matter of para. (b) is to depart from the natural and ordinary sense of the provisions. ... Once it is clear that the principal amount of the loan is within the scope of the paragraph then it becomes impossible in our view to construe the paragraph by including items such as costs and charges but excluding a basic component of the loan, namely interest."

45.	The term "in respect of money lent" in paragraph 63(1)(b) is, therefore, to be given its widest meaning, and it includes not only the principal of the loan, but also any capitalised interest and associated costs, charges, fees etc.

Money lent in the ordinary course of the business of lending money by a taxpayer who carries on that business

•	The question has been raised as to whether the test that "a taxpayer who carries on that business" in paragraph 63(1)(b) requires the taxpayer to be in the business of a money lender both at the time the loan was made and also when the bad debt is written off. It is clear that the money lending business must have been carried on at the time the loan was made. In Fairway Estates (supra) Barwick CJ (at ATC p. 4066, ATR p. 732) gave judicial support to this view. He took the view "... that the advance of the money in question should have been made by the claimant taxpayer in the ordinary course of the business of lending money then carried on by him." [emphasis added]

•	In Marshall and Brougham (supra) Bowen CJ took a similar view (at ATC p. 4528, ATR p. 866):

•	"...the taxpayer must be in the business of lending money at the time of making the advance in respect of which the deduction is claimed." [emphasis added]

•	It is not so clear that a taxpayer must also be carrying on a money lending business at the time the debt is written off. There is some support from old Board of Review decisions that paragraph 63(1)(b) requires that a business of money lending be carried on at the time of writing off the debt. However, statements by Bowen CJ in Marshall and Brougham (supra) and Barwick CJ in Fairway Estates (supra) at ATC 4063, ATR 728, indicate that a taxpayer must only be in the business of money lending at the time the loan was made.

46.	On balance we accept that a taxpayer does not have to be carrying on a business of money lending at the time the debt is written off in order to satisfy the requirements of paragraph 63(1)(b).

Sections 63A, 63B and 63C

47.	Where the taxpayer claiming the bad debt deduction is a company the deductibility under either section 63 or section 51 is subject to the operation of sections 63A, 63B and 63C.

48.	The effect of sections 63A and 63B is that a bad debt is not deductible unless there is a continuity of beneficial ownership of the company existing at all times both in the year the debt arose and in the year when the bad debt is written off or the loss is incurred.

49.	Section 63C qualifies the operation of sections 63A and 63B in that where there is a continuity of carrying on the same business existing at the time immediately before the change in ownership and in the year in which the bad debt is written off or the loss is incurred, sections 63A and 63B will not operate to deny the deduction.

50.	It is, therefore, clear that one or other of the tests outlined above must be satisfied by a company if it is to qualify for a deduction in respect of bad debts.

Section 51

51.	Where a deduction for a bad debt is not allowable under section 63 it may nevertheless be allowable under section 51. Support for this view can be found in the following comments made by Jacobs J in Marshall and Brougham Pty Ltd v. F.C. of T. 86 ATC 4469 at p. 4474; 17 ATR 834 at p. 840:

"It is now well settled that a loss being a bad debt which may not be an allowable deduction under sec. 63(1) may nevertheless be an allowable deduction under sec. 51(1)..."On appeal the Full Federal Court (87 ATC 4522, 18 ATR 859) endorsed the view of Jacobs J.

52.	For a loss to be an allowable deduction pursuant to subsection 51(1) it must have been incurred in gaining or producing assessable income or in carrying on a business for the purpose of gaining or producing assessable income. In addition, the loss must not be of a capital, private or domestic nature.

53.	In the circumstances of this Ruling the two important considerations will be whether a loss occasioned by a bad debt has been incurred and whether it is of a capital nature.

54.	If a creditor realises a loss at the time it disposes of, settles, compromises or otherwise extinguishes a debt such a loss will, for the purposes of subsection 51(1), be incurred at that time.

•	Where, however, a debt could be considered to be bad but has not been disposed of, settled, compromised or otherwise extinguished a question may arise as to whether a loss has been incurred for the purposes of subsection 51(1). Dicta of Barwick CJ and Mason J (as he then was) in AGC (Advances) Ltd. v. F.C. of T. 75 ATC 4057; 5 ATR 243 suggest that a bad debt deduction is allowable under subsection 51(1) provided that the debt has been written off.

•	In AGC (Advances) Barwick CJ observed (at ATC p. 4065, ATR p. 252) that:

"The loss from an accounting point of view must occur at the time when the appellant accepts the position that the debt is irrecoverable. If a hire purchase company decided to wind up and to discontinue the granting of hire purchase agreements in a particular year, and in a subsequent year the company in liquidation found itself unable to recover instalment of hire on the goods in circumstances which caused it to write the amount off as a bad debt, it seems to me not merely unjust but unacceptable to hold that it could not deduct that loss as a loss which it had incurred in the course of gaining assessable income."(EMPHASIS ADDED)

55.	Comments of Mason J (ATC pp. 4071-4072, ATR p. 260) are also relevant. His Honour observed that:

"a loss constituted by the writing off of a bad debt is no doubt incurred, in the sense that it is sustained, at the time when the debt is written off . . . the loss may be said to be one which was incurred in the carrying on of a business . . . notwithstanding that its true character as a loss is not finally ascertained until the debt is written off".

56.	Support for the view that a bad debt deduction is not allowable under subsection 51(1) until such time as the debt is written off can also be found in the wording of sections 63A to 63C. These sections deny a bad debt deduction to companies under subsections 51(1) and 63(1) unless certain conditions are met. These conditions include the requirements that the debt be bad and be written off as such.

57.	We are of the view, therefore, that a bad debt deduction is allowable under subsection 51(1) when it is written off. The tests in section 63 will apply in this situation (see paragraphs 31 to 36).

58.	The availability of a deduction under subsection 51(1) for a loss occasioned by a bad debt is also dependant upon the loss not being of a capital nature.

59.	The question of whether or not such a loss is of a revenue or capital nature depends upon a consideration of the facts and circumstances in each case. It is necessary to ascertain the circumstances which occasioned the loss and the relation that these circumstances bear to the taxpayer's income earning activities. If the loss is an ordinary incident of the taxpayer's income earning activities then the loss will be on revenue account. For example, a bad debt loss incurred by a financial institution would generally be expected to be a revenue loss.

60.	In Marshall and Brougham Pty Ltd v. F.C. of T. (supra), for example, the taxpayer carried on business as a building contractor. The taxpayer frequently had to handle substantial cash funds in excess of its immediate needs. It placed these surpluses in interest bearing deposits, usually at call. An amount of $500,000 was placed on deposit with a finance company which subsequently collapsed. The loss was not an allowable deduction under subsection 63(1) because the Court did not consider that the taxpayer was carrying on the business of a moneylender. The Court determined, however, that the loss was an allowable deduction pursuant to subsection 51(1) because of the connection between the loss and the activities of the taxpayer which where productive of assessable income.

Subsection 63(3)

61.	In recognition of the difficulties in determining the extent to which a debt may be bad the Act contains a specific provision in subsection 63(3) to recoup any excessive write off of a debt.

62.	Where a debt has been written off as bad but the whole debt or some portion of it is subsequently received, the receipt will constitute assessable income of the taxpayer in the year of receipt.

63.	The allowance of a bad debt deduction under section 51, in lieu of section 63, does not affect the operation of subsection 63(3) to bring into assessable income any amount of the debt recovered by the taxpayer. A recent amendment made to subsection 63(3) clarifies that where a taxpayer receives an amount in respect of a debt for which a deduction has been previously allowed under section 51, the recovered amount is assessable under subsection 63(3). Although the amendment only applies after 26 February 1992, it does no more than confirm our view of the law before the amendment was made.

Partial debt write-offs

64.	A taxpayer may write off a bad portion of a debt (partial debt) and be entitled to a deduction for that part only. Subsection 63(4) clarifies this position. Although the amendment only applies after 26 February 1992, it does no more than confirm our view of the law before the amendment was made.

Securities and partial debt write-offs

65.	Generally, property in assets may be transferred to the creditor as security against the debt, or in satisfaction of the debt when the debt or a part of the debt becomes irrecoverable. Where the property is held as security against the debt, the legal title may be transferred to the creditor or the creditor may become a mortgagee in possession and obtain an equitable interest in the security (this would occur, for example, where a creditor enters into a power of sale arrangement). The right to deal with the security property does not usually crystallise until the debt cannot be paid (i.e. generally when the debt becomes bad). On the other hand, where the property is transferred to the creditor in satisfaction of the debt, the creditor is able to deal with it upon transfer.

66.	Once the creditor is able to deal with the property, several options are open to the creditor. One option that is generally adopted is to sell the property immediately to recover the debt. The other options include the holding of the property expecting a more favourable market situation, or to further develop the property for future sale or retain for own use.

67.	In any of these situations, the provision of the property may either:

(1)	satisfy the debt only to the extent of the net amount realised from the sale or the value of the property if it is not sold immediately; or

(2)	fully satisfy the existing debt.

(1) Partial satisfaction of the debt

68.	Where property held as security against a debt is sold and the debt is discharged only to the extent of the net proceeds realised from the sale and the remaining debt is still outstanding, the remaining debt will be deductible as a partial bad debt if the requirements of section 63 are met. The remaining debt is any deficiency between the net proceeds of the sale of the property and the amount of the debt.

69.	Where the property is valued but not sold and its market value is less than the debt outstanding, the difference between the market value of the property and the amount of the debt may be allowed as a partial bad debt deduction provided also the requirements of section 63 are met.

70.	A deduction may also be available under subsection 51(1) in the circumstances outlined in paragraphs 76 & 77.. Whether or not such a deduction would be allowable under subsection 51(1) will depend upon the requirements in paragraphs 65 to 67 being met.

71.	Upon eventual sale or disposal of the property, subsection 63(3) would operate to bring to account as assessable income any amount received that was in excess of the value of the property as determined when the debt was written off as bad. The subsection 63(3) amount is, however, limited to the amount previously allowed as a deduction. If the amount received upon the sale or disposal of the property exceeds the sum of the market value of the property at the time the debt was written off and the subsection 63(3) amount, the excess would generally be assessable under the ordinary income or capital gains provisions depending on the nature of the business carried on by the taxpayer.

(2) Full satisfaction of the debt

72.	If property is taken in full satisfaction of the debt in such a way that the debt is fully discharged or extinguished (e.g. by foreclosure) and the market value of the property is less than the debt outstanding, the difference between the market value of the property and the amount of the debt is allowable as a partial bad debt deduction provided the requirements of section 63 are met. This means that a bad debt must be written off before the debt is extinguished (see paragraph 38 above). If this test is not met no deduction is allowable under section 63.

73.	Where a bad debt deduction is not allowable under section 63, the loss may nonetheless be deductible under subsection 51(1) if the loss is of a revenue nature or taken into account under the capital gains tax provisions if it is of a capital nature.

74.	When the property is subsequently sold, any profit or loss on disposal will be taken into account in the calculation of taxable income either under the general income/deduction provisions or under the capital gains tax provisions. Whether a deduction for any loss is allowable under section 51 will necessarily turn on the nature of the taxpayer's business and the property sold. The same considerations will need to be given to the inclusion of any profit on sale of the security under section 25. In the event that sections 25 and 51 do not apply the capital gains tax provisions may apply.

75.	Assume, for example, that a financial institution forecloses a debt of $150 and receives property with a market value of $100 at that time. The $50 loss will be an allowable deduction under subsection 63(1) provided that the institution has written off $50 as a bad debt prior to the foreclosure. In the circumstances of this case the loss will also be an allowable deduction pursuant to subsection 51(1), although a deduction could not be claimed twice. For the purposes of calculating any gain or loss in respect of a subsequent disposal of the property the property will have an acquisition cost of $100.

Debt for equity swaps

76.	A debt for equity swap occurs in circumstances where the debtor is unable to repay a debt, or part of a debt, and, after agreement with the lender, issues equity (usually shares) to replace the debt outstanding. The effect of the agreement is that the issue of the equity to the creditor is in full satisfaction of the debt such that the debt is discharged.

77.	Sections 63E and 63F are specific provisions allowing deductions for losses (called "swap losses") in respect of debts extinguished in this manner after 26 February 1992. The allowable loss is the amount by which the amount of the debt exceeds the value of the equity received in the swap.

78.	Sections 63E and 63F only apply in respect of debt for equity swaps in which the debtor is a company, a trading trust, or a public unit trust and the debtor issues shares or units, as the case may be. The explanatory memorandum accompanying the introduction of sections 63E and 63F contains step by step examples which illustrate the operation of these provisions.

79.	Prior to 27 February 1992 a bad debt loss arising out of a debt for equity swap may, depending on the circumstances, be an allowable deduction under either of subsections 63(1) or 51(1).

80.	A deduction is allowable under subsection 63(1) provided that the requirements of section 63 are met, i.e., if the taxpayer had written off that portion of the debt that was bad (the deficiency between the debt owed and the market value of the equity to be issued) before the debt was discharged under the debt for equity swap agreement.

81.	The following examples demonstrate the application of section 63 to debt for equity swaps carried out before 27 February 1992.

A.  A financial institution has a debt of $150, none of which has been written off as a bad debt. The institution and the borrower agree to enter into a debt for equity swap whereby $100 of the debt is to be applied in issuing the institution with 100 shares, with a par value of $1.00 each, in the borrower. These shares have a market value of $25.00 at the time of the swap. The remaining $50 of debt, which is not involved in the debt for equity swap, is clearly a bad debt. The tax treatment of the institution is:

•	$50 can be written off as a bad debt and a deduction claimed under paragraph 63(1)(b).

•	a further deduction would be allowable under paragraph 63(1)(b) for $75 (the difference between the amount of the debt involved in the debt for equity swap and the market value of the equity obtained in the swap) if the debt was written off as bad prior to the discharge of the debt under the debt for equity swap agreement.

•	for the purposes of determining whether a gain or loss is made on the subsequent disposal of the shares, the shares will have a cost of $25.

B.  A financial institution has a debt of $150 which has been written off as bad and in respect of which a deduction has been allowed under section 63. Subsequently the institution and the borrower enter into a debt for equity swap agreement whereby $100 of the debt is applied in issuing the institution with 100 shares, with a par value of $1.00 each, in the borrower. These shares have a market value of $25.00 at the time of the swap. In this case the tax treatment of the institution is:

•	$25 will be included in the institution's assessable income pursuant to subsection 63(3). The market value of the shares ($25) received in the debt for equity swap is a recovery in respect of a debt for the purposes of subsection 63(3).

•	the shares, the shares will have a cost of $25.

82.	Where a bad debt deduction is not allowable under subsection 63(1) a deduction may be allowable under subsection 51(1) for the loss arising out of a debt for equity swap. The availability of a deduction in these circumstances depends upon considerations such as the nature of the taxpayer's business and the degree of connection between the loss and the activities of the taxpayer which are productive of assessable income. For example, it is expected that a financial institution would generally be entitled to a deduction under subsection 51(1).

83.	The explanation at paragraphs 80 to 83 above is also applicable to debt for equity swaps undertaken before 27 February 1992.

Commissioner of Taxation

17 December 1992


Taxation Ruling TR 2004/6 Substantiation exception for reasonable travel and meal expenses
Taxation Ruling TR 2004/6

Income tax: substantiation exception for reasonable travel and overtime meal allowance expenses

See also: TR 2004/6 Addendum

Contents:

What this Ruling is about

Date of effect

Previous rulings

Ruling

Explanation

Definitions

Detailed contents list

Preamble

The number, subject heading, What this Ruling is about (including Class of person/arrangement section), Date of effect, Ruling and Definition parts of this document are a "public ruling" for the purposes of Part IVAAA of the Taxation Administration Act 1953 and are legally binding on the Commissioner. Taxation Rulings TR 92/1 and TR 97/16 together explain when a Ruling is a "public ruling" and how it is binding on the Commissioner.

WHAT THIS RULING IS ABOUT

1.	Some of the key terms used in this Ruling (as indicated by the use of bold italic text) are defined in paragraphs 86 to 92.

Class of person/arrangement

2.	This ruling applies to individuals who incur work-related deductions for travel expenses or overtime meal expenses where these expenses are covered by an allowance paid by the person’s employer. An employer includes a person who makes a withholding payment of a kind set out in subsection 900-12(3) of the Income Tax Assessment Act 1997 (ITAA 1997).

Substantiation of travel expenses and overtime meal expenses

3.	Subdivision 900-B of the ITAA 1997 sets out substantiation rules for work-related deductions, and provides for exceptions in the case of some types of expenses.

4.	This Ruling explains the way in which the substantiation exception operates for work expenses of employees that are either reasonable travel allowance expenses or reasonable overtime meal allowance expenses.

5.	In addition to this Ruling, for each income year the Commissioner publishes amounts that are considered to be reasonable for the purposes of this substantiation exception (reasonable amounts). It is the Commissioner’s practice to publish these reasonable amounts in a Taxation Determination issued before the start of each income year. (For the 2004-2005 income year refer to Taxation Determination TD 2004/19.)

DATE OF EFFECT

6.	This ruling applies to the 2004-05 income year and subsequent income years. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20.

PREVIOUS RULINGS

7.	This ruling supersedes earlier rulings on Reasonable Allowances Amounts that have been issued in previous years.

RULING

Claiming and substantiating travel and overtime meal expenses

8.	Under Subdivision 900-B of the ITAA 1997, a deduction is not allowable for a work expense, including a meal allowance expense or travel allowance expense, unless the expense qualifies as a deduction under a provision of the Act and written evidence of the expense has been obtained and retained by the employee taxpayer.

9.	Subdivision 900-B also provides that the substantiation requirement to obtain written evidence does not apply to claims by employee taxpayers for expenses covered by:

•	an overtime meal allowance paid under an industrial instrument; or

•	a domestic travel allowance or overseas travel allowance, whether or not the allowance is paid under an industrial instrument,

if the amount of the claim for losses or outgoings incurred does not exceed the reasonable amounts.

10.	The exceptions from substantiation for claims for these expenses apply to employees, which includes individuals to whom subsection 900-12(1) of the ITAA 1997 applies. This includes company directors, office holders and religious practitioners.

11.	An expense must be actually incurred before a claim can be made. A taxpayer cannot automatically claim a deduction just because they receive an allowance. If an expense is incurred partly for work purposes and partly for private purposes, only the work-related portion is deductible.

12.	Unless the following exception applies, all allowances must be shown as assessable income in the employee’s tax return. However where:

•	the allowance received is a bona fide overtime meal allowance or a bona fide travel allowance;

•	the allowance received does not exceed the reasonable amount; and

•	the allowance has been fully expended on deductible expenses,

the allowance received is not required to be shown as assessable income in the employee’s tax return. Where the allowance is not required to be shown as assessable income in the employee’s tax return, and is not shown, a deduction for the expense cannot be claimed in the tax return. (See Pay As You Go (PAYG) Bulletin No. 1 – Taxing of allowances for the 2000/01 and future years).

Substantiation exception

13.	The objective of the substantiation exception for travel and overtime meal allowance expenses provided for in Subdivision 900-B of the ITAA 1997 is to relieve taxpayers covered by the exception from the requirement to substantiate claims for deductible expenses by using detailed calculations, records or receipts. If a claim for expenses that are covered by a travel allowance or overtime meal allowance qualifies for exception from substantiation, it is not necessary to keep written evidence as would otherwise be required under Subdivision 900-E of the ITAA 1997.

14.	A taxpayer can choose not to use the exception from substantiation. Each taxpayer can decide between maintaining fewer records and limiting a claim to the reasonable amount, which in some circumstances may be lower than the amount actually incurred, or keeping written evidence and claiming the full amount of deductible expenses incurred, which may be higher than the reasonable amount.

15.	If a taxpayer relies on the exception from substantiation, they may still be required to show the basis for determining the amount of their claim, that the expense was actually incurred, and that it was for work-related purposes. What counts as evidence for a claim subject to the substantiation exception will vary according to individual circumstances and the nature of the expense.

Common situations

16.	Where a taxpayer receives a bona fide travel allowance or a bona fide overtime meal allowance and incurs deductible expenses in relation to it:

•	Where the deduction claimed is more than the reasonable amount, the whole claim must be substantiated with written evidence, not just the excess over the reasonable amount.

•	Where the allowance received is not greater than the reasonable amount and it is fully expended on deductible expenses, the allowance received is not required to be shown as assessable income in the employee’s tax return. Where it is not shown, a deduction for the expense cannot be claimed in the tax return – refer to paragraph 12.

•	Where the allowance paid by the employer is greater than the reasonable amount the taxpayer may still use the exception from substantiation if the claim for deduction is not greater than the reasonable amount. In that case the allowance must be shown as assessable income and written evidence is not required to support the claim.

•	Where the deductible expense is less than the allowance received, the taxpayer must show the allowance as assessable income in the tax return, and claim only the amount of the deductible expenses incurred.

Overtime meal allowance expenses

17.	For overtime meal expenses to be considered under the exception from substantiation, the overtime meal allowance must be a "bona fide overtime meal allowance" paid or payable under a law of the Commonwealth or of a State or Territory, or an award, order, determination or industrial agreement in force under such a law (section 900-60 of the ITAA 1997).

Travel allowance expenses

18.	For domestic or overseas travel allowance expenses to be considered for exception from substantiation, the employee must be paid a bona fide travel allowance. The allowance must be paid to cover work-related travel expenses incurred for travel away from the employee’s ordinary residence, undertaken in the course of performing duties as an employee (subsection 900-30(3) of the ITAA 1997) and which involves sleep away from home. The work-related travel expenses must be for accommodation, or food or drink, or expenses incidental to the travel.

19.	A travel allowance that is not paid or payable to cover specific work-related travel is not considered a travel allowance for the purposes of the exception from substantiation.

20.	The exception does not apply to accommodation expenses for overseas travel.

Reasonable domestic and overseas travel allowance expenses

21.	A domestic or overseas travel allowance expense claim is considered to be reasonable if the amount of the claim covered by the allowance received by an employee, does not exceed the relevant reasonable amounts.

22.	Subsection 900-50(2) of the ITAA 1997 requires that, in determining what is reasonable, the Commissioner must consider what it would be reasonable for the employee to incur for the travel.

23.	It is the Commissioner’s practice to publish reasonable amounts for accommodation at daily rates, meals (showing breakfast, lunch and dinner), and deductible expenses incidental to travel. These amounts are set out for various travel destinations and employee categories as considered appropriate by the Commissioner.

24.	The amounts set for domestic accommodation expenses represent amounts that could reasonably be expected to be incurred at commercial establishments such as hotels, motels and serviced apartments. The relevant amounts for accommodation are only considered reasonable amounts to claim if the expense is incurred for accommodation at these types of establishments, generally at daily rates. If alternative accommodation is used, these rates do not apply.

25.	In determining the reasonable amount to claim for meals, reference should be made to the period of the travel. That is, what meals (breakfast, lunch and/or dinner) would it be reasonable for that employee to incur during the period from the commencement to the end of the travel that are covered by the allowance, given the individual employment circumstances of the employee. The reasonable amount for incidental expenses applies in full to each day of travel, including the first and last day.

Office holders covered by the Remuneration Tribunal

26.	Daily domestic travel allowance expense claims made by office holders covered by the Remuneration Tribunal are considered to be reasonable if they do not exceed the rate of allowances set by the Remuneration Tribunal for that office holder (see also paragraphs 66 to 69).

27.	The travel allowances paid to Federal Members of Parliament and Federal Parliamentary Secretaries, under the arrangements that commenced on 14 April 1998, are considered reasonable amounts for the recipients of those allowances to claim for the purposes of the exception from substantiation in section 900-50 of the ITAA 1997. This includes the Capital City and Canberra travel allowances rates for domestic travel, having regard to the circumstances under which those allowances are paid (see paragraphs 70 and 71).

Part-day travel allowance amounts

28.	Australian Public Service (APS) employees receive an allowance for travel that necessitates their being absent from their normal workplace and away from their region, on official business, for not less than 10 hours, but which does not require an overnight absence (Part-day travel allowance).

29.	The APS Part-day travel allowance is not paid for travel away from the taxpayer’s ordinary residence that is the travel does not involve sleeping away from home. This allowance is, therefore, not a travel allowance for the purposes of the exception from substantiation in section 900-50 of the ITAA 1997. Part-day travel allowances received by members of the APS, and similar allowances received by other taxpayers, should be shown as assessable income in the employees’ tax returns. Any claim for work-related expenses incurred for travel that does not involve sleeping away from home is subject to the normal substantiation requirements.

Reasonable overseas travel allowance expense claims

30.	The exception from substantiation for work-related expenses covered by an overseas travel allowance applies only to expenses for food, drink and incidentals. The exception does not apply to accommodation costs. Where an overseas travel allowance is received, the amount claimed for work-related expenses is considered reasonable if it does not exceed the relevant food or drink or incidentals component that is covered by an overseas travel allowance determined by the Commissioner.

EXPLANATION

Object of this ruling

31.	The object of this Ruling is to provide information for employees to decide whether they can rely on the exception from substantiation for the keeping of written evidence for travel and overtime meal allowance expenses. They will need to consider the type of allowance they receive and what the allowance is expected to cover. If they are eligible to use the exception from substantiation they can decide between maintaining fewer records and claiming up to the reasonable amount, for those deductible expenses actually incurred that are covered by the allowance, or keeping written evidence to substantiate their claim.

32.	The deductibility of losses and outgoings incurred is not discussed in detail in this Ruling. However, it remains a requirement of the law that, before the exception from substantiation can apply in respect to claims for the losses or outgoings incurred, the losses or outgoings must be deductible under some provision of the ITAA 1997.

Reasonable expenses determined only for tax purposes

33.	In setting the reasonable amount for the purposes of this Ruling the Commissioner does not determine the amount of allowance an employee should receive or an employer should pay their employees. The amount of an allowance is a matter to be determined between the payer and the payee. The Commissioner determines the reasonable amount of travel and meal allowance expenses only for the purposes of the tax law that is the amount that will be accepted for exception from the requirement to obtain and keep written evidence for substantiation purposes. It is not provided for the purpose of being used for employment or industrial relations purposes in setting the amount of allowances paid. The Commissioner is not entitled under the tax law to have any specific regard to the fairness or appropriateness of the allowance paid as part of any remuneration arrangement.

Withholding obligations of employers

34.	This Ruling also has application to employers for determining whether or not amounts required to be withheld from payments of overtime meal allowances or travel allowances, can be varied where special circumstances exist. That is, where it is reasonable to expect that:

•	expenses up to at least the amount of the allowance will be incurred by the employee;

•	the expenses will be incurred for the purpose for which the allowance is paid;

•	the expenses will be tax deductible to the employee; and

•	the amount and nature of the allowance is shown separately in the accounting records of the employer.

•	(see Pay As You Go (PAYG) Bulletin No. 1 – Taxing of allowances for the 2000/01 and future years)

Requirement to substantiate expenses

35.	Under Subdivision 900-B of the ITAA 1997, a deduction is not allowable for a work expense, including a meal allowance expense or a travel allowance expense, unless the expense qualifies as a deduction under a provision of the ITAA 1997 and written evidence of the expense has been obtained and retained by the employee taxpayer.

36.	Broadly speaking, written evidence is a receipt, invoice or similar document that sets out the particulars outlined in Subdivision 900-E of the ITAA 1997. Where overseas or domestic travel involves being away for 6 or more nights in a row, a travel record must also be kept in accordance with Subdivision 900-F of the ITAA 1997. The Commissioner considers that a travel diary is an appropriate travel record for this purpose.

Substantiation exception available

37.	There are exceptions where written evidence or a travel record is not required. Exceptions apply to claims for expenses which are considered by the Commissioner to be reasonable and which are covered by a travel allowance or by an overtime meal allowance. It is the amount claimed as a deduction that must be reasonable, rather than the amount of the allowance.

38.	If the travel allowance expense or overtime meal allowance expense claimed qualifies for exception from substantiation, it is not necessary to keep written evidence as would otherwise be required under Subdivision 900-E of the ITAA 1997. The objective of the exception is to relieve taxpayers, who are covered by the exception from substantiation, from the requirement to determine claims relying on detailed calculations based on records or receipts.

39.	However, a taxpayer may still be required to show the basis for determining the amount of their claim and that the expense was actually incurred for work-related purposes. What counts as evidence for a claim subject to the substantiation exception will vary according to individual circumstances and the nature of the expense. If necessary, it is acceptable for a reasonable estimate to be the basis for claims having regard to the taxpayer’s occupation and the types of expenses that would be expected to be incurred. This is a significantly lesser requirement than the need to keep written evidence.

40.	A taxpayer can choose not to use the exception from substantiation. Each taxpayer can decide between maintaining fewer records and claiming the reasonable amount, which in some circumstances may be lower than the amount actually incurred, or keeping written evidence and claiming the full amount of deductible expenses incurred, which may be higher than the reasonable amount.

Claiming a deduction

41.	The receipt of a travel allowance or an overtime meal allowance does not automatically entitle an employee to a deduction, nor does the amount of an allowance received determine if the claim is reasonable. Only the actual amount incurred on work-related travel expenses or overtime meal allowance expenses can be claimed as a deduction.

42.	Where there is an exception from substantiation, it remains a requirement of the law that the relevant expenditure covered by the overtime meal allowance or travel allowance qualifies as a deduction under another provision of the ITAA 1997 (subsection 900-15(1) of the ITAA 1997). For example, an overtime meal allowance or travel allowance expense must satisfy the requirements of section 8-1 of the ITAA 1997 before a claim for a deduction can be made. As incidental expenses are work expenses, any amount claimed as an incidental expense must be deductible under the ITAA 1997.

43.	In the case of a domestic or overseas travel allowance, deductibility can generally be shown by reference to the employer’s arrangements for payment of allowances. The circumstances under which the employer pays the allowance should be considered, for example is the allowance paid only in circumstances involving deductible travel? If the allowance is paid in circumstances involving deductible and non-deductible travel, appropriate adjustments should be made.

Setting reasonable allowance amounts

44.	In setting the reasonable allowance amounts, the Commissioner takes into account the costs of accommodation (domestic travel only), food and drink in a range of regions and establishments, based on surveys of actual costs produced by a number of organisations including Department of Employment and Workplace Relations (DEWR) and the Remuneration Tribunal. The domestic accommodation rates are based on the results of surveys conducted by DEWR which takes into account the costs that are likely to be incurred at a range of commercial establishments at rates generally available to most business travellers.

45.	The Commissioner also considers salary levels, the circumstances for payment of the relevant allowance, the more common destinations travelled to and occupational aspects.

46.	The reasonable amounts reflect accommodation expenses incurred in commercial establishments for short term daily accommodation and the relevant food and drink expenses incurred during the period of that travel. The reasonable amount for incidentals applies to deductible incidental travel expenses incurred for each day the employee travels if those expenses are covered by the travel allowance.

47.	In determining the overtime meal allowance amount, consideration is given to surveys conducted in a range of areas and establishments to ascertain the costs of food and drink. These surveys take into account a variety of food and drink from different establishments and regions where it would be reasonable to purchase food and drink during a meal break while working overtime.

48.	Any variation to the Commissioner’s reasonable amount would be considered only in unique or unusual circumstances where there are strong grounds for departure from the reasonable amount published. We would need to be satisfied that the Commissioner’s reasonable amount is unreasonable in the particular circumstances of the employee. Some unique circumstances may be when a taxpayer travels for work to an area where there has been a natural disaster or where, at the time of the travel, a significant event such as the Olympic Games or World Expo is being held. In these circumstances, there may be grounds for departure from the Commissioner’s published reasonable amounts for those journeys.

49.	The fact that a travel allowance or overtime meal allowance amount has been approved by an Industrial Relations Commission or indexed in accordance with the CPI movement is not, on its own, considered sufficient basis for an application to vary the reasonable amounts shown in this Ruling.

Overtime meal allowance expenses

50.	For overtime meal expenses to be considered under the exception from substantiation, the overtime meal allowance must be paid to enable the purchase of food or drink in connection with a specific occasion when overtime is worked. The expense must also be covered by that allowance. The overtime meal allowance must be paid or payable under a law of the Commonwealth or of a State or Territory, or an award, order, determination or industrial agreement in force under such a law: section 900-60 of the ITAA 1997.

51.	An amount for overtime meals that has been folded-in as part of normal salary or wages, for example under a workplace agreement, is not considered to be an overtime meal allowance.

52.	The following table is a summary of the substantiation requirements for claims for overtime meal allowance expenses:

	Is written evidence needed?
An eligible* bona fide overtime meal allowance is paid and the claim for expenses incurred does not exceed the reasonable amount set per meal	No
An eligible* bona fide overtime meal allowance is paid and the claim for expenses incurred exceeds the reasonable amount set per meal	Yes, for whole claim
*	To be eligible, the allowance must be paid or payable under a law of the Commonwealth or of a State or Territory, or an award, order, determination or industrial agreement in force under such a law.

Travel allowance expenses

Must sleep away from home

53.	For domestic or overseas travel allowance expenses to be considered for exception from substantiation, the relevant allowance must qualify as a travel allowance. The allowance must be paid to cover work-related travel expenses incurred or to be incurred for travel away from the employee’s ordinary residence, undertaken in the course of performing duties as an employee (subsection 900-30(3) of the ITAA 1997). The Commissioner takes the view that the term "travel away from the employee’s ordinary residence" means that the employee must sleep away from their home.

Must cover cost of accommodation, food or drink, or incidentals

54.	The travel allowance must be paid to cover the cost of accommodation (domestic travel only) or food or drink or expenses incidental to the travel (paragraph 900-30(3)(b) of the ITAA 1997).

Example 1

55.	Joe works for a national telecommunications company. Joe’s employer provides him with an accommodation allowance to cover the costs of accommodation when Joe stays away from home. Joe does not receive an allowance for meals or incidental expenses. Joe may rely upon the exception from substantiation only in respect of the cost of the accommodation. He must have written evidence to support any deductions he claims for meals and any incidental costs.

Must cover specific journeys

56.	The travel allowance must be paid for specific journeys undertaken or to be undertaken for work-related travel. A travel allowance that is not paid to cover relevant expenses for specific journeys undertaken or to be undertaken for work-related travel, is not a travel allowance for the purposes of the exception from substantiation.

57.	Examples of expenses relating to allowances that would not qualify for the exception from substantiation because they are not travel allowances paid to cover deductible expenses for specific journeys are:

•	where a fixed annual travel allowance amount of, say, $2,000 a year is paid, regardless of how often or even whether travel is actually undertaken; or

•	where a travel allowance is paid at a certain rate per hour for hours worked, even if deductible work-related travel is not undertaken.

58.	However, a fixed annual entitlement for travel expenses may be a travel allowance where the allowance is based on a specified number of overnight stays and there is a requirement for recipients to repay that part of the entitlement referrable to trips not undertaken.

Must be paid as an allowance

59.	An amount for travel expenses that has been folded-in as part of normal salary/wages, for example under a workplace agreement, is not considered to be an allowance. If an allowance has been folded-in as part of normal salary/wages the exception from substantiation contained in this Ruling does not apply. The necessary written evidence must be kept to support claims for deductible expenses incurred.

Must be for a bona fide travel allowance

60.	For the substantiation exception to apply, the allowance must be a bona fide travel allowance. That is, the amount paid must be an amount that could reasonably be expected to cover accommodation, or meals or expenses incidental to the travel.

61.	A token amount of allowance, for example $5 per day to cover meals for travel that involves sleeping away from home, would not be considered a payment that is expected to cover the purchase of three meals per day while travelling for work. The payment would not be considered a travel allowance for the purposes of the exception from substantiation.

62.	What is a bona fide amount to cover accommodation or meals or expenses incidental to the travel depends on the facts of each case, including the arrangements for payment of the allowance.

Reasonable amount for meals

63.	Subsection 900-50(2) of the ITAA 1997 requires that, in determining what is reasonable, the Commissioner must take into account the total losses or outgoings that it would be reasonable to incur for accommodation, food or drink, or expenses incidental to the travel. In determining the reasonable amount of a claim for meals, reference should be made to the period of the travel. That is, what expenses on meals (for example breakfast, lunch, dinner) it is reasonable to incur from the time the travel commences to the end of the travel period that are covered by the allowance, given the individual employment circumstances of that taxpayer.

Example 2

64.	Shena travels from her normal work place in Sydney to attend a meeting in Canberra. She leaves Sydney at 5.00 pm on Monday and stays 1 night in Canberra, returning to Sydney at 4.30 pm on the Tuesday. It is reasonable to expect Shena to incur the following meal expenses while travelling for work: Monday – dinner; Tuesday – breakfast and lunch. The amount of Shena’s allowance covers these meals.

Example 3

65.	Kim is a truck driver who is based in Brisbane. She regularly drives her truck from Brisbane to Maryborough. After unloading the truck she sleeps in the cabin for 5 or 6 hours before returning home. If Kim leaves Brisbane at 3.00 pm and returns home at 9.00 am the next day, it is reasonable for Kim to incur expenses on 2 meals while away – dinner and breakfast. The amount of Kim’s allowances is intended to cover at least those meals.

Office holders covered by the Remuneration Tribunal

66.	Daily domestic travel allowance expense claims made by office holders covered by the Remuneration Tribunal are considered reasonable if they do not exceed the rate of allowances set by the Remuneration Tribunal for that office holder.

67.	The Tribunal inquires into the allowances to be paid to Ministers, other Members of Parliament, officers of the Parliament, holders of office of Justice, judges of a Federal Court and certain public office holders such as Secretaries of Departments. The Inquiry receives submissions from interested parties, examines relevant salary movements and takes account of price movements relevant to the kinds of expenditures for which the allowances are paid.

68.	The Tribunal rate covers accommodation, meals and incidental expenses incurred when travelling within Australia. With the exception of the special Canberra travel allowance for Federal Members of Parliament, the rate set by the Tribunal for the cost of accommodation covers accommodation at commercial establishments such as hotels, motels and serviced apartments.

69.	Where accommodation is provided, the Commissioner accepts as reasonable, the amount for meals and incidentals for relevant office holders as determined by the Tribunal. If the amount for meals and incidentals is not specified by the Tribunal, the reasonable amounts are those given in the yearly Taxation Determination that apply in the circumstances of the office holder.

Travel allowances for Federal MPs

70.	The Canberra travel allowance recognises that most Federal Members make "more settled accommodation arrangements in Canberra". This travel allowance is paid at a rate below that for full commercial accommodation, meals and incidentals. The Capital City travel allowance for commercial accommodation reflects the costs associated with taking up accommodation in commercial establishments such as hotels, motels and serviced apartments in capital cities other than Canberra.

71.	The Capital City travel allowance for non-commercial accommodation is paid if accommodation is not taken up in a commercial establishment. The rate for this travel allowance is one-third of the commercial rate to cover the cost of meals and incidental travel expenses. Having regard to the circumstances under which Canberra and Capital City travel allowances are paid to Federal Members, the Commissioner accepts as reasonable, claims for expenses incurred up to the amount of allowance received.

Employee truck drivers who receive a travel allowance

72.	An employee truck driver who, in the course of earning his or her income, is required to sleep away from home, is considered to be travelling for work and may incur meal expenses as part of a work-related travel expense. Truck drivers generally do not incur accommodation expenses when travelling for work, as they sleep in their truck. Accommodation expenses incurred as part of work-related travel must be substantiated with written evidence as described in Subdivision 900-E of the ITAA 1997. The Commissioner sets out each year the reasonable amounts for food and drink expenses incurred by employee truck drivers as part of a travel allowance expense.

73.	Subsection 900-50(2) of the ITAA 1997 requires that, in determining what is reasonable, the Commissioner must take into account the total losses or outgoings it would be reasonable to incur for accommodation, food or drink, or expenses incidental to the travel. In determining the reasonable amount to claim for meals, reference should be made to the period of the travel. That is, what meals (for example breakfast, lunch, dinner) would it be reasonable to incur from the time the travel commences to the end of the travel period, given the individual employment circumstances of the taxpayer.

74.	If an employee truck driver, who receives a travel allowance and incurs work-related meal expenses, claims as a deduction an amount greater than the amount considered to be reasonable, the whole claim, not just the excess over the reasonable amount, must be substantiated by written evidence. Travel records also need to be kept for work-related travel of 6 or more nights in a row. Taxation Ruling TR 95/18 "Income tax: employee truck drivers – allowances, reimbursements and work-related deductions" provides detailed information on the written evidence and travel records required to substantiate travel expenses, including meal expenses, for employee truck drivers.

75.	The receipt of a travel allowance does not automatically entitle the employee truck driver to a deduction for travel expenses, nor does the amount of a travel allowance received determine if the claim is reasonable. Only the actual amount incurred on work-related travel expenses can be claimed as a deduction.

Employee truck drivers who do not receive a travel allowance

76.	Claims for work-related travel expenses by employee truck drivers who are required to sleep away from home and who do not receive a travel allowance, must be substantiated. Written evidence is required to substantiate accommodation, meal and other work-related travel expenses. Travel records must be kept for work-related travel of 6 or more nights in a row. Taxation Ruling TR 95/18 provides detailed information on the written evidence and travel records required to substantiate travel expenses for employee truck drivers.

Truck drivers who are owner-drivers

77.	Subdivision 900-D of the ITAA 1997 refers to the substantiation of business travel expenses and requires that travel records and written evidence be kept in accordance with Subdivision 900-E and Subdivision 900-F of the ITAA 1997. Travel records (for example a travel diary or similar record of activities undertaken during the travel) must be kept for travel of 6 or more nights in a row.

78.	An owner-driver who, in the course of earning his or her income, is required to sleep away from home, is considered to be travelling on business and may incur meal expenses as part of a travel expense. As owner-drivers do not receive a travel allowance, travel records and written evidence are required to substantiate accommodation, meal and other travel expenses.

79.	In most cases a receipt can be obtained for the cost of a meal, for example, where it is purchased from a roadhouse with dining or takeaway facilities. It is considered reasonable for a truck driver to obtain receipts for meal expenses incurred in roadhouses or similar food outlets (for example fast food chains or diners).

80.	It may not be reasonable for a truck driver to obtain receipts for some food and drink purchases from vending machines or outlets, such as roadside caravans, that do not normally provide receipts. These expenses are considered "otherwise too hard to substantiate" (section 900-130) and must be supported by a diary or similar record providing details in accordance with subsection 900-125(3) of the ITAA 1997.

Reasonable overseas travel allowance expense claims

81.	For overseas travel covered by an allowance, reasonable amounts are determined for food or drink or incidental expenses only. Under section 900-55 of the ITAA 1997, taxpayers must still obtain written evidence for accommodation expenses. A travel record must also be kept if the overseas travel involves being away from the taxpayer’s ordinary residence for 6 or more nights in a row, whether or not the substantiation exception for written evidence for food, drink and incidental expenses applies.

82.	A travel record is a record of activities undertaken during the travel (Subdivision 900-F of the ITAA 1997). It is not a record of expenses incurred during the travel. The purpose of a travel record is to show what activities were undertaken in the course of producing assessable income, so that expenses or portions of those expenses can be attributed to those income-earning activities.

83.	Under section 900-65 of the ITAA 1997 crew members of international flights need not keep travel records (that is a record of activities undertaken during the travel). The exception is from keeping travel records only. It is not an exception from keeping written evidence for travel expenses if required. The exception from keeping travel records applies if:

•	the allowance covers travel by the taxpayer as a crew member of an aircraft;

•	the travel is principally outside Australia; and

•	the total of the losses or outgoings claimed for the travel that are covered by the allowance does not exceed the allowance received.

84.	If an employee, who receives an overseas travel allowance and incurs work-related travel expenses, claims a deduction in excess of the reasonable meal and incidentals amount that are covered by the allowance, the whole claim must be substantiated, not just the excess over the reasonable amount. Written evidence must be obtained for overseas accommodation expenses regardless of whether an overseas travel allowance is received.

Summary of substantiation requirements for travel allowance expenses

85.	The following table is a summary of the substantiation requirements for claims for those work-related travel allowance expenses covered by the allowance where the taxpayer is required to sleep away from home when travelling on work:

		Domestic Travel		Overseas Travel
Travel allowance received and:		Written Evidence	Travel Diary		Written Evidence	Travel Diary
the amount claimed does not exceed the reasonable allowance amount
• travel less than 6 nights in a row		No	No		No*	No
• travel 6 or more nights in a row		No	No		No*	Yes**
the amount claimed exceeds the reasonable allowance amount
• travel less than 6 nights in a row		Yes – for the whole claim	No		Yes	No
• travel 6 or more nights in a row		Yes – for the whole claim	Yes		Yes	Yes**
*	Regardless of the length of the trip, written evidence is required for overseas accommodation expenses – but not for food, drink and incidentals (see paragraph 81).

**	Members of international air crews do not need to keep a travel diary (travel record) if they limit their claim to the amount of the allowance received (see paragraph 83).

DEFINITIONS

Bona fide travel allowance

86.	A "bona fide travel allowance" is an amount that could reasonably be expected to cover accommodation, or meals or expenses incidental to travel. This does not require that the amount paid by the employer must equate dollar for dollar to the employee's actual expenditure. However there must be relativity between the quantum of the travel allowance and the purpose for which it is said to be paid. A token amount, or a general payment, is not a bona fide travel allowance. In this context the words "cover" and "covered" refer to the nature of the expenses, for which the allowance is provided, that is the subject matter to be dealt with by the allowance paid, namely accommodation and applicable meal expenses. (See Re McIntosh and F.C. of T. [2001] AATA 702; 47 ATR 1242).

Bona fide overtime meal allowance

87.	A "bona fide overtime meal allowance" is an amount that could reasonably be expected to cover, that is provide for, the costs of food and drink in connection with overtime worked. There must be relativity between the quantum of the overtime meal allowance and the purpose for which it is said to be paid. A token amount, an amount paid without regard to likely expenses is not a bona fide overtime meal allowance.

Employee

88.	The term "employee" or "employees" as it is used in this Ruling, applies to individuals who are employees as commonly understood and individuals to whom subsection 900-12(1) of the ITAA 1997 applies. These individuals include a common law employee, a director of a company and an office holder, but do not include labour hire workers as described in section 12-60 of Schedule 1 of the Taxation Administration Act 1953.

Sleep away from home

89.	We consider the term "travel away from the employee’s ordinary residence" means, for most employees, that the travel involves an overnight stay; that is, the occupation of accommodation or the occasion of an outgoing on accommodation, for example sleeps in a motel/hotel or, for a truck driver, sleeps in their truck. Some employees may work at night and sleep during the day; therefore, the term "sleep away from home" is used in this Ruling.

Travel allowance

90.	A travel allowance is an allowance an employer pays or is to pay to cover losses or outgoings:

•	that an employee incurs for travel away from their ordinary residence that is undertaken in the course of their duties as an employee; and

•	that are losses or outgoings for accommodation, food, drink or expenses incidental to the travel.

(see paragraphs 53 to 65 in respect to the requirements for the exception for travel allowance expenses.)

Travel record

91.	A travel record is a record of activities undertaken during the travel (Subdivision 900-F of the ITAA 1997). It is not a record of expenses incurred during the travel. A travel record can be a diary or similar document, which specifies the activities as required in section 900-150 of the ITAA 1997. The purpose of a travel record is to show which activities were undertaken in the course of producing assessable income, so that expenses or portions of those expenses can be attributed to those income-earning activities.

Written evidence

92.	The term written evidence when used in this ruling refers to documentation and records described in Subdivision 900-E of the ITAA 1997.

DETAILED CONTENTS LIST

93.	Below is a detailed table of contents for this Taxation Ruling:

	Paragraph
What this Ruling is about	1
Class of person/arrangement	2
Substantiation of travel expenses and overtime meal expenses	3
Date of effect	6
Previous Rulings	7
Ruling	8
Claiming and substantiating travel and overtime meal expenses	8
Substantiation exception	13
Common situations	16
Overtime meal allowance expenses	17
Travel allowance expenses	18
Reasonable domestic and overseas travel allowance expenses	21
Office holders covered by the Remuneration Tribunal	26
Part-day travel allowance amounts	28
Reasonable overseas travel allowance expense claims	30
Explanation	31
Object of this ruling	31
Reasonable expenses determined only for tax purposes	33
Withholding obligations of employers	34
Requirement to substantiate expenses	35
Substantiation exception available	37
Claiming a deduction	41
Setting reasonable allowance amounts	44
Overtime meal allowance expenses	50
Travel allowance expenses	53
Must sleep away from home	53
Must cover cost of accommodation, food or drink,or incidentals	54
Example 1	55
Must cover specific journeys	56
Must be paid as an allowance	59
Must be for a bona fide travel allowance	60
Reasonable amount for meals	63
Example 2	64
Example 3	65
Office holders covered by the Remuneration Tribunal	66
Travel allowances for Federal MPs	70
Employee truck drivers who receive a travel allowance	72
Employee truck drivers who do not receive a travel allowance	76
Truck drivers who are owner-drivers	77
Reasonable overseas travel allowance expense claims	81
Summary of substantiation requirements for travel allowance expenses	85
Definitions	86
Bona fide travel allowance	86
Bona fide overtime meal allowance	87
Employee	88
Sleep away from home	89
Travel allowance	90
Travel record	91
Written evidence	92
Detailed contents list	93

Commissioner of Taxation

23 June 2004

Previous draft:	Not previously released in draft form
Related Rulings /Determinations:	TR 92/1; TR 95/18; TR 97/16
Previous Rulings /Determinations:	TR 1995/26; TR 1996/21; TR 1997/14; TR 1998/10; TR 1999/7; TR 2000/13; TR 2001/4; TR 2002/12; TR 2003/7
Subject references:	-  accommodation allowances
	-  allowances
	-  award overtime and allowances
	-  domestic travel allowance
	-  exception from substantiation
	-  judges
	-  meal allowance
	-  meals
	-  members of parliament
	-  overseas travel allowance
	-  overseas travel expenses
	-  overtime meal allowances
	-  owner drivers
	-  parliamentarians
	-  reasonable allowances
	-  reasonable claim
	-  substantiation
	-  travel
	-  travel allowances
	-  travel diary
	-  travel expenses
	-  travel record
	-  truck drivers
	-  work-related expense
	-  written evidence
Legislative references:	-  ITAA 1997  8-1
	-  ITAA 1997  900-12(1)
	-  ITAA 1997  900-12(3)
	-  ITAA 1997  900-15(1)
	-  ITAA 1997  Subdiv 900-B
	-  ITAA 1997  900-30(3)
	-  ITAA 1997  900-30(3)(b)
	-  ITAA 1997  900-50
	-  ITAA 1997  900-50(2)
	-  ITAA 1997  900-55
	-  ITAA 1997  900-60
	-  ITAA 1997  900-65
	-  ITAA 1997  Subdiv 900-D
	-  ITAA 1997  Subdiv 900-E
	-  ITAA 1997  900-125(3)
	-  ITAA 1997  900-130
	-  ITAA 1997  900-150
	-  ITAA 1997  Subdiv 900-F
	-  TAA 1953  Pt IVAAA
	-  TAA 1953  Sch 1 12-60
Case references:	Re McIntosh and FC of T [2001] AATA 702; 47 ATR 1242
ATO References	NO:	2000/10583
	ISSN:	1039-0731


TR 2004/6 Addendum
Addendum

Taxation Ruling 2004/6

Income tax:  substantiation exception for reasonable travel and overtime meal allowance expenses

Paragraph 12 of Taxation Ruling TR 2004/6 contains an administrative concession which permits taxpayers to not include certain allowances on their income tax returns. When a taxpayer does not include such an allowance on their return but it is shown on their payment summary, the Tax Office Income Matching systems may generate a query to the taxpayer. This addendum modifies the administrative concession so that it does not apply to allowances which are shown on the taxpayer’s payment summary. This will eliminate the Income Matching queries. It also aligns the Ruling with the directions in TaxPack.

The change is prospective from 1 July 2006.

Following advice from the Remuneration Tribunal of changes to its role, paragraphs 44 and 67 have been modified to reflect these changes.

Taxation Ruling TR 2004/6 is amended as follows:

1.	Paragraph 12

Insert as the first dot point:

•	the allowance is not shown on the employee’s payment summary;

2.	Paragraph 16

At the second dot point, after ‘received’, insert:

is not shown on the employee’s payment summary and

3.	Paragraph 44

Omit:

and the Remuneration Tribunal

4.	Paragraph 67

Omit:

such as Secretaries of Departments. The Inquiry receives submissions from interested parties, examines relevant salary movements and takes account of price movements relevant to the kinds of expenditures for which the allowances are paid

This Addendum applies on and from 1 July 2006.

Commissioner of Taxation

21 June 2006


Taxation Ruling TR 2003/6 Attribution of personal services income
Taxation Ruling TR 2003/6

Income tax: attribution of personal services income

Preamble

The number, subject heading, What this Ruling is about (including Class of person/arrangement section), Date of effect, and Ruling parts of this document are a "public ruling" for the purposes of Part IVAAA of the Taxation Administration Act 1953 and are legally binding on the Commissioner. The remainder of the document is administratively binding on the Commissioner of Taxation. Taxation Rulings TR 92/1 and TR 97/16 together explain when a Ruling is a "public ruling" and how it is binding on the Commissioner.

Contents:

What is this Ruling about

Related Rulings

Class of person/arrangement

Background

Definitions

Personal services income

Personal services entity (entity)

Service Acquirer

Test Individual

Associate

Distribution

Derives income

Ruling

Attributable income

No double taxation

Companies

Trusts and partnerships

Interposed entities

Head entity is a company

Head entity is a partnership or a trust estate

Dealings between personal services entities

Date of effect

Explanation

Attribution of income

Attribution flowchart

Attribution of personal services income

Reductions of the attributed amount

Apportionment of entity maintenance deductions

No double taxation

Personal services entity not taxed on the attributed amount

Distributions of, or out of, attributed amount not taxed again

Determining whether a distribution of income is, or is attributable to, attributed personal services income

Interposed entities

Distributions to an interposed entity from a personal services entity conducting a personal services business

Head entity is a company: distribution does not retain character as personal services income

Head entity is a partnership or a trust estate: distribution may retain character as personal services income

Distributions of personal services income: no attribution when the head entity is conducting a personal services business

Dealings between entities

Examples

Example 1

Example 2

Example 3

Example 4

Example 5

WHAT THIS RULING IS ABOUT

1.	This Ruling deals with the alienation of personal services income measure (the alienation measure) contained in Part 2-42 of the Income Tax Assessment Act 1997 ("ITAA 1997"), and explains:

•	how the attribution of personal services income rules apply to a personal services entity that is not conducting a personal services business;

•	how amounts distributed, from a personal services entity not conducting a personal services business that are, or are attributable to, attributed personal services income are not taxed twice;

•	how the attribution of personal services income rules will not apply to interposed entity arrangements when the income derived by the head entity (that is the entity contracting with the services acquirer) is earned in the course of conducting a personal services business; and

•	when an entity’s income that is derived from a dealing or transaction with a personal services entity, other than by way of distribution, will be personal services income (and therefore potentially subject to the alienation measure).

RELATED RULINGS

2.	TR 2001/7: the meaning of personal services income. TR 2001/8: what is a personal services business.

Class of person/arrangement

3.	This Ruling applies to those companies, partnerships or trusts whose ordinary or statutory income includes income that is mainly a reward for the personal efforts or skills of an individual (an individual’s personal services income).

Background

4.	The New Business Tax System (Alienation of Personal Services Income) Act 2000 (Alienation of Personal Services Income Act) amended the ITAA 1997 by inserting new Part 2-42 into that Act and amended the Taxation Administration Act 1953 ("TAA 1953") by inserting new Division 13 in Schedule 1 to that Act.

5.	The alienation measure contained in Part 2-42 applies from the 2000-2001 income year. However, it does not apply until the 2002-2003 income year for those individuals or personal services entities who:

•	were in the former prescribed payments system and were entitled to and had made a payee declaration to a payer;

•	the payee declaration was in force as of 13 April 2000; and

•	the Commissioner had received the payee declaration for the payee from the payer on or before 13 April 2000.1

6.	The measure was introduced following the recommendations made in the report of the Review of Business Taxation: A Tax System Redesigned (commonly called the Ralph Report).2 The relevant recommendations that relate to this measure are recommendations 7.2, 7.3 and 7.4. Those recommendations were aimed at improving the integrity and equity in the tax system. The recommendations arose out of concerns that:

•	substantial erosion of the income tax base had occurred as a consequence of the alienation of personal services income through the use of interposed companies, partnerships and trusts; and

•	there was a perception that individuals, as contractors, and interposed entities were claiming a greater range of deductions than those available to individuals who provided personal services as employees.3

7.	The measure is intended to:

•	limit and clarify the deductions available against personal services income at both the individual and interposed entity level; and

•	ensure that, after allowing certain deductions to the interposed entity, any income remaining is attributed to the individual.4

8.	The application of Part 2-42 of the ITAA 1997 is predicated on the view that, contractually, income from personal services can be the income of any entity. However, subsection 84-5(2) of the ITAA 1997 ensures that for tax purposes, only an individual can have personal services income (as defined).

9.	The application of Part 2-42 of the ITAA 1997 does not result in a change in the nature of contractual relationships between parties to an arrangement that involves the rendering of personal services. Individuals do not become employees of service acquirers as a consequence of the application of that Part. Nor does it affect an individual’s or a personal services entity’s entitlement to an Australian Business Number, or to be registered for the purposes of A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

10.	Note also that the general anti-avoidance provisions of Part IVA of the Income Tax Assessment Act 1936 ("ITAA 1936") may still apply to cases of alienation of personal services income that fall outside the alienation measure.5

11.	The following flowchart explains how Part 2-42 applies.6

12.	Note that you can apply for a Personal Services Business Determination (PSBD) from the Commissioner to confirm that you are not within the measure, or if you are not sure whether you are within the measure, or if you are subject to unusual circumstances. However, unless you are subject to unusual circumstances you cannot apply for a personal services business determination on the basis of the unrelated clients test. If you believe that the alienation measure should not apply to you, you can request a PSBD from the Commissioner (see diagram above).

13.	If:

(a)	you have personal services income; and

(b)	you or the personal services entity do not satisfy the "results test"; and

(c)	you or the personal services entity get 80% or more of the personal services income from one source,

you will be subject to the alienation measure, unless you have a PSBD.

DEFINITIONS

Personal services income

14.	Personal services income is income which is mainly a reward for an individual’s efforts or skills (or would mainly be such a reward if it had been derived by the individual) (subsection 84-5(1)).

Personal services entity (entity)

15.	A personal services entity is a company, partnership or trust whose ordinary income or statutory income includes the personal services income of one or more individuals (see subsection 86 15(2)).

Service Acquirer

16.	A service acquirer is the entity (or entities) that acquires the personal services of an individual, directly from the individual or through a personal services entity. The service acquirer is the client of an individual or personal services entity and is the source of the income of the individual or the personal services entity that constitutes an individual’s personal services income.

Test individual

17.	A test individual is the individual whose personal services income is included in a personal services entity’s ordinary or statutory income, and to whom that income will be attributed under Division 86, unless one of the exceptions in that Division applies. A personal services entity may have more than one test individual. Part 2-42 applies on an individual by individual basis.

Associate

18.	The word "associate" has the same meaning as in section 318 of the ITAA 1936.7

19.	For an individual an associate includes:

•	a relative of the individual;

•	a partner of the individual or a partnership in which the individual is a partner;

•	if a partner of the individual is an individual, the spouse or child of that partner;

•	a trustee of a trust estate under which the individual or an associate benefits; or

•	a company under the control of the individual or associate.

20.	For a company an associate includes:

•	a partner of the company or a partnership in which the company is a partner;

•	a trustee of a trust estate under which the company or associate benefits;

•	another individual or associate who controls the company; or

•	another company which is under the control of the company or the company’s associate.

21.	For a trustee an associate includes an entity or associate of the entity that benefits or is capable of benefiting under the trust.

22.	For a partnership an associate includes each partner of the partnership or associate of the partner.

23.	Section 87-35 specifically excludes the following from being associates of each other for the purposes of subsection 87-15(3) (the 80% rule) and paragraph 87-20(1)(a) (the unrelated clients test):

(i)	Australian government agencies, which are:

o	the Commonwealth, a State or a Territory; or

o	an authority of the Commonwealth, a State or a Territory.

(ii)	Commonwealth government agencies within the meaning of the Public Service Act 1999.

(iii)	Each part of an authority of a State or Territory that has, under a law of a State or Territory, a status corresponding to a Commonwealth government agency within the meaning of the Public Service Act 1999.

Distribution

24.	In relation to a company, distribution refers to a dividend that is paid to a shareholder.

25.	In relation to a trust estate, distribution refers to the share of the net income of the trust estate to which a beneficiary is presently entitled, or deemed to be presently entitled, or to an amount that is (or but for Division 86 would be) included in the assessable income of a beneficiary under section 99B of the ITAA 1936.

26.	In relation to a partnership, distribution refers to the individual interest of a partner in the net income or net loss of the partnership.

Derives income

27.	"Derives income" includes "has ordinary or statutory income".

RULING

Attributable income

28.	If an entity ("the personal services entity") has income that constitutes personal services income of an individual ("the test individual"), the amount of the income after certain reductions (see section 86 20 and TR 2002/D5: deductions that relate to personal services income) is included in the assessable income of the test individual by sections 86-15 and 86-20. This amount is referred to as the net personal services income. The net personal services income is also excluded from the assessable and exempt income of the personal services entity by section 86-30.

29.	In this ruling the inclusion of the net personal services income in the assessable income of the test individual, and its exclusion from the assessable or exempt income of the personal services entity, is called attribution. The amount of net personal services income included in the assessable income of the test individual in this way is called the attributed amount. The attributed amount cannot be less than nil.

30.	Attribution will not occur where the personal services entity:

•	has income from conducting a personal services business and the relevant income is from conducting that personal services business (subsection 86-15(3));

•	pays the personal services income promptly to the test individual as salary or wages (subsection 86-15(4)); or

•	is not assessable on the personal services income of the personal services entity under other provisions in the tax law (subsection 86 15(5)).

31.	The attributed amount is included in the test individual’s assessable income at the end of the year of income of the personal services entity. This means if the personal services entity has, say, a substituted accounting period ending on 31 December 200X, the attributed amount is included in the test individual’s assessable income for the year ended 30 June 200X+1.

No double taxation

Companies

32.	A personal services entity that is a company may still have accounting profits even if all of its profits are personal services income and the net personal services income has been attributed. The profits may be distributed by the personal services entity. If distributed to the test individual or to an associate of the test individual, to the extent that the distribution represents personal services income of the test individual that has been or will be attributed to the individual under subsection 86-15(1), the distribution will not be assessable or exempt income of the recipient (see subsection 86-35(1)).

33.	The question of whether a dividend is a payment of an attributed amount for the purposes of subsection 86-35(1) is to be decided by reference to the account of profits debited by the company, and not by reference to the moneys with which the dividend is actually paid. In this regard Ardmona Fruit Products Co-Operative Company Ltd v. Federal Commissioner of Taxation (1952) 86 CLR 530 is to be distinguished. If a company keeps a separate account of profits that contains only attributed personal services income of a test individual, a dividend will be paid out of those profits to the extent that it is debited to that account. If a company does not keep a separate account of profits containing only attributed personal services income of test individuals, a dividend will be taken to be paid out of attributed personal services income of a test individual, in the proportion of profits consisting of such income compared to profits consisting of other income. However, if the dividend is paid out of a special fund (e.g. an asset revaluation reserve) there should be no apportionment.

Trusts and partnerships

34.	Subsection 86-35(2) applies to an entitlement of net income of a partnership or a trust estate. It is intended to ensure that to the extent that the test individual or an associate of the test individual is entitled to a share of net income of the personal services entity that is attributed personal services income, or attributable to such income, then it will not be assessable or exempt income of the partner or beneficiary entitled. Subsection 86-35(2) is unlikely to have any practical application. This is because as a result of section 86-30 (and the treatment of interposed entities explained below) an entitlement to net income of a partnership or trust estate will not include income that is attributed personal services income or income that is attributable to such income. Section 86-30 ensures that attributed personal services income is excluded from the personal services entity’s assessable income and exempt income. Therefore attributed personal services income will not form part of the net income of the personal services entity and thus there can be no-one entitled to a share of that income.

35.	Any amount distributed by a unit or fixed trust that represents personal services income attributed to the test individual under subsection 86-15(1) does not reduce the cost base of the trust interest under section 104-70. This is due to the operation of paragraph 104 71(1)(d).

Interposed entities

Head entity is a company

36.	The following consequence arises if a company ("the head entity") derives income that is personal services income and the income is not derived in the course of conducting a personal services business. A distribution of or out of that income to a shareholder that is not an individual ("the interposed entity") will be excluded from the assessable and exempt income of the interposed entity, provided the shareholder is an associate of the test individual (subsection 86-35(1)).

37.	In other words, subsection 86-35(1) ensures that a distribution will not be taxed again to the extent that the distribution is paid to an associate of the test individual and consists of income of the head entity that has been or will be attributed to the test individual under subsection 86-15(1).

38.	In the case of a chain of interposed entities consisting of companies, provided that each interposed company is an associate of the test individual, each successive distribution of income representing the attributed amount will be excluded from the assessable and exempt income of the interposed entities under section 86-35.

39.	In the case of a chain of interposed entities where the head entity is a company and an interposed entity is a trust estate or partnership (and also an associate of the test individual) and the interposed entity receives a distribution of, or attributable to, the attributed amount, subsection 86-35(1) will exclude the distribution from the assessable and exempt income of the partnership or trust estate. Thereafter each successive distribution of income by a partnership or trust estate representing the attributed amount to another partnership or trust estate will not be included in the assessable income of the recipient. This is regardless of whether the recipient is an associate (see paragraph 42). However, if a partner or beneficiary is a company, a distribution paid out of profits by that company representing the attributed amount to a non-associate of the test individual will not be excluded from assessable income or exempt income of the shareholder by reason of subsection 86-35(1).

40.	In a case where a head entity that is a company makes a distribution to an interposed entity, which in turn makes a distribution, the question of the extent to which the distribution of the interposed entity is a payment of an amount that is attributable to the personal services income that was attributed income of the head entity is one of fact. In a practical sense it will be open for the interposed entity to make a distribution from a particular source provided its constitution or governing instrument so permits but, if it does not, any distribution it makes which is not out of a special account (e.g. an asset revaluation reserve or share capital) should be taken to consist proportionately of personal service income and other income.

41.	The head entity may be a company that derives income that is personal services income in relation to the test individual from conducting a personal services business. If the entity makes a distribution out of that income to an interposed entity, the interposed entity will not be a personal services entity solely because of the dividend paid to it. This is because a dividend is not personal services income. Therefore subsection 86-15(1) will not apply. Note that Part IVA may apply where the head entity or the interposed entity pays a dividend to a shareholder other than the test individual: see paragraphs 101, 102 and 261 to 267 of TR 2001/8 Income Tax: what is a personal services business.

Head entity is a partnership or a trust estate

42.	The following consequence applies if a personal services entity that is a partnership or trust estate ("the head entity") derives income that is personal services income and the income is not derived in the course of conducting a personal services business. A distribution of or out of that income to a partner or beneficiary that is an interposed entity will not be included in the assessable or exempt income of the interposed entity because under section 86-30 the amount is neither assessable nor exempt income, and thus not net income, of the head entity. Because it is not net income, each successive distribution of income representing an attributed amount in a chain of partnerships and trust estates will not be included in the assessable income of each successive partner or beneficiary. If the head entity distributes income that is, or represents, the attributed amount to an interposed entity that is a company, and that company in turn distributes to an interposed entity, the company is a head entity in relation to the second interposed entity and paragraphs 36 to 41 apply.

43.	A personal services entity ("the head entity") may derive income that is personal services income in relation to the test individual from conducting a personal services business. If the entity distributes that income to an interposed entity then the interposed entity may be a personal services entity if the head entity is a partnership or a trust estate. This is because the distributed income may be personal services income (whether it actually is personal services income will depend on the facts of each case). However, by reason of subsection 86-15(3), subsection 86-15(1) will not apply. Note that Part IVA may apply where the head entity or the interposed entity being a partnership or trust makes a distribution to an entity other than the test individual: see paragraphs 101, 102 and 261 to 267 of TR 2001/8.

44.	In the case of a chain of interposed entities, the foregoing paragraphs apply to each successive distribution of income representing the attributed amount.

Dealings between personal services entities

45.	An entity ("the first entity") may derive income from a dealing or transaction with another entity ("the second entity") that is a personal services entity in relation to the test individual, other than by way of distribution of income from the second entity to the first entity. Whether the first entity is a personal services entity (in such a case) depends on whether the income is, in its hands, personal services income of the test individual. That is, it depends on whether the income of the first entity is mainly a reward for the personal efforts or skill of the test individual. For example, interest on a loan is not personal services income even if the loan moneys are used by the second entity in gaining or producing personal services income. Nor would income from providing plant and equipment be personal services income.

46.	If the income of the first entity was a payment that the second entity could not deduct by reason of subsection 85-20(1), the income will not be assessable or exempt income of the first entity by reason of subsection 85-20(3). Having regard to the enactment of subsection 85-20(3), the operation of subsection 86 35(1) is considered to be confined to the following:

•	payments by personal services entities and associates that are distributions;

•	payments made by personal services entities and associates that are not disallowed as deductions under subsection 85-20(1) but nevertheless are attributable to personal services income that has been included in the test individual’s assessable income eg payments of salary or wages to the test individual made 14 days or more after the end of the PAYG period.

DATE OF EFFECT

47.	This Ruling first applies to the 2000-2001 income year and later income years. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

EXPLANATION

Attribution of income

48.	Division 84 of Part 2-42 of the 1997 Act sets out the meaning of personal services income, and Division 86 contains the provisions that deal with the alienation of personal services income through the use of a personal services entity if that entity is not conducting a personal services business within the meaning of Division 87.8

Attribution flowchart

49.	The following flowchart outlines the process of attributing personal services income from the personal services entity to the individual.

Attribution of personal services income

50.	Under subsection 86-15(1), an individual’s assessable income includes that part of the ordinary or statutory income of a personal services entity that is the individual’s personal services income.

51.	There are three exclusions to the general attribution rule under section 86-15. These exclusions are where:

•	The personal services income of the test individual is earned in the course of the personal services entity conducting a personal services business (subsection 86 15(3))9.

•	The personal services income is promptly paid by the personal services entity to the test individual, as an employee, as salary or wages. Promptly in this context means that the salary or wages must be paid within 14 days after the end of the PAYG payment period in which that income became the ordinary or statutory income of the personal services entity (subsection 86 15(4)).

•	The income is not assessable income of the personal services entity (subsection 86-15(5)).

52.	For example if a personal services entity receives personal services income for a service, and GST is payable on the supply of that service, the GST component of the payment will not be included in the amount attributed to the test individual under subsection 86 15(1). This is because under section 17-5 of the ITAA 1997, the GST payable on a supply is neither assessable income nor exempt income of an entity.10

Reductions of the attributed amount

53.	The amount to be attributed may also be reduced (but not below nil) by the amount of deductions to which the personal services entity is entitled that relate to the test individual’s personal services income (subsection 86-20(1)).11 In the case of a personal services entity that is a partnership, if the amount of the deductions exceeds the amount of the personal services income the partners may still be entitled to a deduction under subsection 92(2) of the ITAA 1936: see note 2 of section 86-20.

Apportionment of entity maintenance deductions

54.	Where a personal services entity’s ordinary or statutory income includes personal services income of more than one individual, section 86-25 requires any entity maintenance deductions of the entity to be apportioned between the individuals whose personal services income is included in the ordinary or statutory income of the personal services entity. The total of the entity maintenance deductions is apportioned in proportion to the ratio of the amount of each individual’s personal services income to the total amount of personal services income included in the entity’s assessable income.

No double taxation

Personal services entity not taxed on the attributed amount

55.	The amount attributed to the test individual under subsection 86-15(1) still remains income or profits of the personal services entity. In order to prevent double taxation of the personal services entity, section 86-30 provides that ordinary income or statutory income of a personal services entity is neither assessable income nor exempt income of the entity, to the extent that it is personal services income included in the income of an individual under subsection 86-15(1). Subsection 118-20(4) prevents this income being treated as a capital gain.

56.	Because of the operation of section 86-20, only the net amount of personal services income of the entity is attributed to the individual under subsection 86-15(1). The net amount is also excluded from the assessable income of the personal services entity under section 86-30. The term "to the extent that" in section 86 30 means that the assessable income of the personal service entity continues to include amounts of income that were sheltered from attribution under subsection 86-15(1) because there were allowable deductions taken into account under section 86 20. However, that assessable income will be offset, in calculating the personal services entity’s taxable (or net) income, by the amount of the allowable deductions taken into account under section 86-20.

Distributions of, or out of, attributed amount not taxed again

57.	A personal services entity that is a company may still have accounting profits, even if all of the personal services income has been attributed. The accounting profit could be distributed as a dividend. Consequently, the ordinary operation of the income tax law could result in a shareholder to whom the company’s income is distributed being subjected to tax in respect of which the test individual has been or will be taxed.

58.	In order to prevent double taxation of the test individual or his or her associates, subsection 86-35(1) operates to exclude attributed income from the assessable and exempt income of the test individual or his or her associates. It applies to both a distribution of the actual attributed income and to amounts that are attributable to such income; that is to say, amounts representing such income. This subsection will usually apply to shareholders in respect of dividends paid by companies.

59.	Subsection 86-35(1) applies to distributions from both the original personal services entity whose income was attributed ("the head entity"), and to distributions from interposed entities, provided the interposed entity is an associate of the test individual (usually also an associate of the head entity). Likewise it applies to distributions to persons other than the test individual, provided the person is an associate of the test individual.

60.	Subsection 86-35(2) applies to partners and beneficiaries in respect of their share of the net income of a partnership or trust estate. The provision is intended to ensure that where a test individual or an associate of the test individual is entitled to a share of the net income of the personal services entity, to the extent that the share of the net income has been, or will be, attributed to the test individual under subsection 86-15(1), or is attributable to such income (that is to say represents that income), then that amount is neither assessable income nor exempt income of the entity receiving it nor of the entity entitled to receive it. The provision is unlikely to have any practical application. This is because section 86-30 ensures that attributed personal services is excluded from the ordinary or statutory income of the personal services entity. Accordingly attributed personal services income will not form part of the net income of a partnership or trust estate that is a personal services entity and there will be no net income to which subsection 86-35(2) could apply.

Determining whether a distribution of income is, or is attributable to, attributed personal services income

61.	Where a personal services entity that is a company has both income that is personal services income of the test individual and income from other sources, and pays its shareholders a dividend, it will be necessary to determine whether, and to what extent, a distribution of income is, or is attributable to, attributed personal services income rather than the other income (or, in some cases, rather than capital). This is necessary so that the amount that is excluded from the assessable or exempt income of the recipient under section 86-35 can be calculated.

62.	For personal service entities that are companies, the allocation of a distribution to attributed income and other income is done by having regard to the account debited with the distribution: the source of the actual money or property used to make the distribution is immaterial. Where a company appropriates profits by debiting an account of profits and distributing money in satisfaction of the dividend, the appropriation is binding between company and shareholder, and, subject to some exceptions, determinative of the quality of the distribution for tax purposes in the hands of the taxpayer. The entitlement of the shareholder is to the sum of money that the company has decided to distribute. The shareholder is not entitled to the actual moneys or other assets of which profits consists, for these are the property of the company. The decision of the High Court in Ardmona Fruit Products Co-Operative Company Ltd v. Federal Commissioner of Taxation (1952) 86 CLR 530, a case on section 120 of the ITAA 1936, is to be distinguished. Section 120 gives a deduction where the assessable income of a year of income is distributed or applied in certain ways in that year of income. In that case the question of whether "the assessable income" had been distributed among the shareholders was held to be a question of whether the actual moneys of which that income consisted had been distributed, rather than the account of profits debited. However, this decision turns on considerations unique to the statutory context of section 120.

63.	As a practical matter, it is open for companies to determine the source of any distribution, whether of personal services income or other income. If no special provision is made for personal services income, and what is distributed is general profits (and not some special fund, such as the profits from revaluation of assets), then it would be appropriate to treat the amount distributed as consisting proportionately of both kinds of profits, personal services and other. For example, if half the profits of a company consists of attributed personal services income of a test individual and half consists of other income, half of a dividend paid to that individual, or his or her associates, will be excluded from the assessable and exempt income of that individual, or his or her associates, by subsection 86-35(1). When determining what proportion of a dividend is personal services income, the proportion would be determined by reference to profits comprising attributed personal services income for all years of income to profits comprising other income for all years of income.

64.	As noted above, for personal services entities that are not companies it is "for practical purposes" not necessary to make an allocation of distributions to attributed income and other income to avoid double taxation of partners and beneficiaries, or to apply subsection 86-35(2), since by reason of section 86-30 the net income of a partnership or trust estate will not include attributed income. Therefore, attributed income will not be included in the assessable income of a partner or beneficiary again by the operation of Divisions 5 or 6 of the ITAA 1936.

Interposed entities

65.	Personal services income of an individual may be earned by an entity and subsequently passed through one or more other entities before being received by the individual actually performing the services for the service acquirer, or by his or her associate. In determining how the income should be treated as it passes from one entity to another, it is necessary to ascertain whether or not the income being passed to an entity still has the character of being mainly a reward for the personal efforts or skill of the test individual, that is, whether it is still personal services income.

66.	It is important to distinguish between income that is personal services income, and income that merely represents, or is attributable to, such income; for the latter is not personal services income. An entity receiving a distribution will be a personal services entity by virtue of the distribution only if the distribution is itself personal services income. Subsection 86 15(1) will not apply to an entity unless it is a personal services entity. However section 86-35 will apply to income of an entity that is not a personal services entity (provided it is an associate of the test individual) even if its income has lost its character as personal services income, as long as it is still attributable to such income. Where it is no longer possible to attribute income to personal services income, section 86-35 will no longer apply. It is therefore necessary to characterise the income at every stage in the chain of entities to determine whether the entity has personal services income of the test individual, or income attributable to such income, included in its income.

67.	Under subsection 86 35(1) a payment is not included in the ordinary or statutory income of either an individual or their associate to the extent that it is a payment of personal service income attributed to the individual under subsection 86-15(1). Consequently, any distribution through a chain of companies of an amount previously attributed under subsection 86-15(1) will not be attributed again as a result of being passed through the chain of companies, provided that each of the companies through which the amount is passed is an associate of the individual whose activities produced the personal services income (subsection 86-35(1)). The amount so passed on is not included in the ordinary or statutory income of each of the companies receiving it. A distribution from a partnership or a trust estate of an attributed amount or a distribution representing an attributed amount will not be included in the assessable income of the recipient because it is a non-assessable and exempt amount in the hands of the partnership or the trust estate and therefore not included in its net income.

Distributions to an interposed entity from a personal services entity conducting a personal services business

68.	In some cases a personal services entity ("the head entity") will have personal services income that is derived from conducting a personal services business. Because it is conducting a personal services business, no amount will be attributed to the test individual under subsection 86-15(1): see subsection 86-15(3). The question arises, what happens when it distributes income to another entity ("the interposed entity"), if that entity is not conducting a personal services business? Section 86-35 will not apply to distributions of personal services income to the interposed entity because subsection 86-15(1) did not apply to the head entity: no personal services income will previously have been attributed.

Head entity is a company: distribution does not retain character as personal services income

69.	If the head entity is a company, a dividend that it pays to the interposed entity will not be personal services income of the test individual therefore subsection 86-15(1) will not apply in respect of that distribution. The income of a company is not the income of a shareholder. When income is distributed by a company to a shareholder by way of dividend, a new item of income is created in the hands of the shareholder by the appropriation and detachment of profits; and it will have its own character in the hands of the shareholder. The dividend is a gain from property derived as a result of the right to dividends that is represented by the share. It is not a distribution of personal services income or a reward for the personal efforts or skill of the shareholder. Consequently, although a dividend paid out of profits consisting wholly or in part of personal services income may be income "attributable" to personal services income for the purposes of section 86-35, it will not itself be personal services income in terms of subsection 84-5(1).

70.	Under the alienation measure it was intended that the characterisation of personal services income be broader than it might otherwise be under the common law, ie an amount could be personal services income even though under the common law it would be otherwise characterised. However, the common law in this case provides the intended outcome. It ensures that the exemption from subsection 86-15(1) conferred on a company that is conducting a personal services business will not be reversed as soon as the company distributes personal services income to the interposed entity.

Head entity is a partnership or a trust estate: distribution may retain character as personal services income

71.	If the head entity is a partnership, it is less clear whether the interest that each partner has in the assets and income of the partnership requires the conclusion that the entitlement of the partner to a share of the partnership profits containing personal services income is therefore an entitlement to personal services income. The entitlement that a partner has is to have an account of profits and to have their share paid to them after the partnership assets have been converted into money (by obtaining, if necessary, a winding up order). "(A partner’s share) in the partnership consists of a right to a proportion of the surplus after the realisation of the partnership and the payment of the debts and liabilities of the partnership": see Federal Commissioner of Taxation v. Everett 80 ATC 4076 at 4079. This entitlement is an entitlement to be paid a sum of money regardless of the nature of the assets of the partnership which are to be converted into money. Also, the right to a surplus after assets are realised and debts paid is not the same as an entitlement to one of the elements from which the surplus is computed, i.e. personal services income.

72.	In other words, the character of the rights of a partner may differ from the character of the rights of the partnership. Moreover, jurisprudentially the income of a partner derived under a contract of partnership is a gain flowing from property, that is, the partnership property: see Everett. Consequently, it is arguable that the character of the income of a partner is not determined by the character of the income of a partnership. If the partnership has substantial capital that has been provided by the partner, in at least these cases, depending on the facts, it would generally not be appropriate to characterise the income from the partnership as personal services income. However, in other cases one might conclude that the entitlement of a partner to partnership net profit is itself mainly a reward for the personal efforts or skill of the test individual, or would be if it were the test individual’s income, and therefore personal services income.

73.	If the head entity is a trust estate and the interposed entity is presently entitled to a share of the income of that trust estate consisting wholly or in part of personal services income, the statutory income of the interposed entity (usually arising under section 97 of the ITAA 1936) is personal services income. The entitlement of the beneficiary is to the very income of the trust that is personal services income: see Baker v. Archer-Shee [1927] AC 844 and Charles v Federal Commissioner of Taxation (1954) 90 CLR 598; 28 ALJ 117; 10 ATD 328. However, in the rare cases to which section 99B applies, the entitlement may only be to corpus attributable to the accumulation of such income and, in these cases, the statutory income of the beneficiary would not generally constitute personal services income (although it would still be attributable to it).

Distributions of personal services income: no attribution when the head entity is conducting a personal services business

74.	In cases where an entity has personal services income included in its ordinary or statutory income by reason of a distribution to it by the head entity, the interposed entity will be a personal services entity, and subsection 86-15(1) prima facie applies.

75.	Subsection 86-15(3) provides, however, that subsection (1) does not apply if an amount of ordinary or statutory "income that is personal services income of the test individual is income from the personal services entity conducting a personal services business". The term "from" governs "personal services business", not "personal services entity". While the sub-section might, on a literal construction, be thought to apply only to the entity that is conducting the personal services business (because the section refers to "the" entity), so to read the subsection would defeat its apparent intention, since the benefit of the exemption conferred would be reversed as soon as the entity made a distribution of personal services income to an interposed entity. Having regard to the scheme of Division 86, and the express indication in section 87-1 that the Division does not apply to personal services income that is income from conducting a personal services business, the Commissioner considers that subsection 86-15(3) covers "income from a personal services business conducted by a personal services entity".

76.	Following this approach, if the head entity is a trust, and the trust is conducting a personal services business, a distribution of personal services income from the trust to a beneficiary will be, in the hands of the beneficiary, personal services income from an entity conducting a personal services business.

77.	If the head entity is a partnership, and the partnership is conducting a business that is a personal services business, it will follow that the interposed entity is also conducting that personal services business. The business of a partnership is conducted by the partners as agents for each other and for the partnership. Therefore the personal services income of the partner is income from conducting a personal services business.

78.	In summary, when a personal services entity that is conducting a personal services business distributes income to an interposed entity that is personal services income earned in the course of conducting that personal services business, subsection 86-15(1) will not apply to the interposed entity in relation to that personal service income.

Dealings between entities

79.	Sometimes an entity ("the first entity") that is an associate of the test individual will derive income, being mainly a reward for the personal efforts or skill of the test individual, from a dealing or transaction with another entity ("the second entity"), also an associate of the test individual, that, for the second entity, is an allowable deduction from income of the second entity (because the payment is for principal work), which also happens to be personal services income of the same test individual. For example, a test individual may control two companies, one of which, the second entity, has contracted with a service acquirer to provide the services of the first entity, which in turn has contracted with the test individual to provide the services. In this case the gross income of the second entity is personal services income, as is the gross income of the first entity. Both entities will be personal service entities, and, unless they are conducting a personal services business, prima facie subsection 86 15(1) will apply to attribute the net personal services income of each. The net personal services income of the second entity, reduced by the deduction for the amount paid to the first entity, will be attributed to the test individual. In other words, the attributed income of the second entity will not include the amount paid to the first entity. (Note that if arm’s length rates are used, then, unless the second entity is adding some commercial value to the first entity’s services, the profit it retains for itself should be minimal.) Then the net personal services of the first entity, reduced by its own deductions, will be attributed. In these cases the income is not attributed income in the hands of the second entity, and therefore section 86-35 does not apply to the income of the first entity (though it may apply to the shareholders of the first entity). See example 5 for an illustration of how the alienation measure would apply to a case where there are dealings between two personal services entities.

80.	Where the first entity derives income from a dealing or transaction with a personal services entity (that is, the second entity), otherwise than by way of distribution of income from the second entity, the circumstance that the second entity has personal services income that has been attributed to the test individual is irrelevant to the question of whether the income of the first entity is personal services income of the test individual. In these cases the second entity is to be treated as (potentially) the service acquirer in relation to the first entity, and the question is whether the first entity’s income is mainly a reward for the personal efforts and skill of the test individual; whether the second entity in turn has its own dealings with another service acquirer is immaterial except insofar as it helps clarify what the income of the first entity is for.

81.	It should be noted that if the first entity is providing, for example, capital equipment to the second entity, its income will not be personal services income (because it is a reward for the provision of equipment), and it will not be a personal services entity; therefore its income will not be attributed to the test individual. This will be true even if the second entity goes on to provide both equipment and personal services to a service acquirer, and its income, having regard to the relative importance of equipment and personal services, is personal services income of the second entity. Similarly, if the first entity lends money at interest to the second entity, and the second entity uses the money in gaining or producing personal services income, the interest income of the first entity will not be personal services income.

82.	In many cases, income of the first entity derived from payments by the second entity will in any event be neither assessable nor exempt income of the first entity. This will be the case where the income is from a payment that is not deductible in the hands of the second entity by reason of section 85-20. That section denies a deduction for payments and amounts incurred in gaining or producing personal services income if the entities are associates of the test individual. (That is, unless the outgoing relates to engaging the first entity to perform work that is part of the principal work of the second entity: see TR 2002/D5.) An amount or payment that the second entity cannot deduct under that section is neither assessable nor exempt income of the first entity: subsection 85-20(3). Consequently, losses and outgoings incurred in gaining or producing income to which subsection 85-20(3) applies will not be deductible under section 8-1. For example, if the first entity has borrowed money at interest and on-lent it at interest to the second entity, which has in turn employed it in gaining or producing the personal services income of the test individual, the second entity cannot deduct the interest paid to the first entity, the interest so paid is not assessable income of the first entity, and therefore the interest which the first entity in turn pays to its lender is not an allowable deduction. Therefore it is inadvisable for interposed entities to borrow and on-lend to personal service entities.

83.	A dividend to which section 86-35(1) applies is still a frankable dividend even though it is neither assessable income nor exempt income. However, if the distribution is not assessable, a rebate is not available to the taxpayer.

EXAMPLES

Example 1

84.	Robyn is an environmental management expert who provides consulting services through her private company RedRobyn Pty Ltd. RedRobyn receives a payment of $33,000 for Robyn’s personal services provided to a paper mill, which includes the GST payable on the services. The GST component of this payment is $3,000. Only the amount of $30,000, which is the amount of the payment less the GST component, will be attributed to Robyn under subsection 86 15(1) because subsection 86-15(5) excludes amounts that are neither assessable income nor exempt income of the entity from the attribution amount.

Example 2

85.	Keith controls two private companies C Pty Ltd and PS Pty Ltd. There is a contract between PS Pty Ltd and Ultimate Acquirer which specifies that Keith will perform computer consultancy services for that company. The work is carried out on the premises of Ultimate Acquirer and Keith does not employ or engage anyone to assist him with his work. Ultimate Acquirer is the only client of PS Pty Ltd and the company does not have a personal services business determination.

86.	As Keith is nominated in the contract to provide the services, the ordinary or statutory income derived by PS Pty Ltd as a result of the services performed by Keith is the personal services income of Keith. The income derived by the company can be characterised as a reward for Keith’s personal effort and the application of his skill and knowledge in providing consulting services to Ultimate Acquirer.

87.	As the income of PS Pty Ltd is personal services income of Keith, PS Pty Ltd must then determine whether the income is earned in the course of conducting a personal services business. In this scenario, the income is not taken to be from conducting a personal services business.

88.	Accordingly, PS Pty Ltd will have to attribute the income (less any reductions pursuant to section 86-20) to Keith under subsection 86-15(1). If PS Pty Ltd pays any dividends to C Pty Ltd or to Keith out of the company’s profit which has been attributed to Keith, it will not be assessable or exempt income in the hands of C Pty Ltd or Keith due to the application of subsection 86-35(1). Subsection 86-35(1) would apply because the dividends are paid to Keith and C Pty Ltd out of income that has been attributed to Keith. C Pty Ltd is an associate of Keith.

Example 3

89.	The D&T partnership has two partners: Don and Tim. The partnership has been engaged by Efficient Workers to perform consulting services. Efficient Workers has agreed to pay the partnership $150,000 for the services provided in the income year ending 30 June 2004. Don performs all the work for Efficient Workers on behalf of the partnership. The partnership’s ordinary and statutory income for the 2004 income year is $500,000 and the partnership’s allowable deductions are $150,000.

90.	The amount of $150,000 from Efficient Workers that is included in the partnership’s ordinary or statutory income is Don’s personal services income. It is a reward for the efforts and skills of Don. If the income is not earned in the course of conducting a personal services business, the income, reduced by any deductions allowable to D&T that relate to gaining or producing that income, will be attributed and included in Don’s assessable income under subsection 86-15(1).

91.	Assuming that the personal services income is not earned in the course of conducting a personal services business and there are $40,000 of allowable deductions that relate to gaining or producing that assessable income, $110,000 will be attributed to Don. Therefore, the partnership’s assessable income will be $390,000 and the net income will be $240,000. Don and Tim will each be entitled to $120,000. Subsection 86-35(2) will not apply to either Don or Tim’s entitlement given that the net income does not include the income attributed to the test individual.

Example 4

92.	Assume the same facts as in Example 3 but Don and Tim are employed by a unit trust called D&T trust instead of a partnership. The trust conducts a business of providing consultancy services. Don’s family trust and Tim’s family trust each hold half of the units in the D&T trust. For the purposes of this example, assume Don’s personal services income is earned in the course of conducting a personal services business. Subsection 86-15(1) will not apply and Don’s personal services income will not be attributed to him.

93.	At the end of the 2004 income year, Don’s family trust is presently entitled to half of the net income of the D&T trust: $175,000 of which $110,000 is personal services income ($150,000 less personal services income deductions $40,000). Don’s family trust has personal services income and is therefore a personal services entity. However, the income is from the conducting of a personal services business (for the purposes of section 86-15(3)). The personal services income included in the net income of Don’s family trust will not be attributed to Don under subsection 86 15(1) because of the operation of subsection 86-15(3). Note that Part IVA may apply where an entity makes a distribution to an entity other than the individual performing the services: see paragraphs 101, 102, 261 to 267 of TR 2001/8.

Example 5

94.	Zany Computers Games has engaged PP Computer Services Pty Ltd to provide the services of PP2 Contractors Pty Ltd, which has in turn contracted with Peter to provide services in relation to developing new computer games. Neither PP Computer Services Pty Ltd nor PP2 Contractors Pty Ltd are conducting a personal services business.

95.	In the relevant income year Zany Computer Games has agreed to pay $80,000 to PP Computer Services Pty Ltd for the services provided, while PP Computer Services Pty Ltd has agreed to pay PP2 Contractors Pty Ltd $70,000. In turn PP2 Contractors Pty Ltd has agreed to pay Peter a salary amounting to $50,000.

96.	The amount of $80,000 paid to PP Computer Services Pty Ltd is the personal services income of Peter. Therefore the company is a personal services entity. Since PP Computer Services Pty Ltd is not conducting a personal services business, subsection 86-15(1) will apply. The amount attributed to Peter under subsection 86-15(1) will be $10,000. This is because subsection 86-20 provides that the gross amount of personal services income, i.e. $80,000, is reduced by $70,000 (a deduction to which the personal services entity is entitled for the performance of principal work that relates to gaining and producing personal services income).

97.	The income of PP2 Contractors Pty Ltd, i.e. $70,000 is also Peter’s personal services income. Given that the company is not conducting a personal services business, subsection 86-15(1) will apply and $20,000 will be attributed to Peter (assuming that the salary is paid to Peter promptly and subsection 86-15(4) applies). In the relevant income year, the total amount of $80,000 will be included in the assessable income of Peter.

Commissioner of Taxation

16 July 2003


The Commissioner’s declaration in relation to this deferral was published on 30 August 2000 in the Commonwealth of Australia Gazette No GN 34.


See also Treasurer’s Press Release No 74 of 11 November 1999.


See also paragraphs 1.5-1.14 of the Explanatory Memorandum.


Explanatory Memorandum at page 3.


See Note to section 86-10.


See Treasurer’s Press Release No.51 of 9 July 2001.


"Paragraphs 19 to 22 is not a comprehensive list of what entities are associates under section 318. An examination of section 318 is required for a full account of what entities are associates under this provision."


See TR 2001/8: what is a personal services business.


See TR 2000/8: what is a personal services business.


Section 17-5 provides that an amount is not assessable income, and is not exempt income, to the extent that it includes an amount relating to GST payable on a taxable supply.


The Government announced on 13 May 2003 that the law will be amended with effect from 1 July 2000, to allow a test individual a deduction in a year of income if the personal services entity has deductions that relate to the test individual’s personal services income which exceed personal services income for that income year.


Taxation Ruling TR 98/22 Linked or split loan facilities
Taxation Ruling TR 98/22

There is an Addendum for this document

Income tax: the taxation consequences for taxpayers entering into certain linked or split loan facilities

Contents:

What this Ruling is about

Ruling

Is interest incurred on the investment account deductible under section 8-1?

Application of Part IVA

Identification of the scheme

The tax benefit test

Dominant purpose

Calculation of cost base for capital gains tax purposes

Date of effect

Explanations

Is interest on the investment account deductible under section 8-1?

Application of Part IVA

Identification of the scheme

The tax benefit test

Dominant purpose

The matters referred to in paragraph 177D(b)

Calculation of cost base for capital gains tax purposes

Alternative view

Calculation of cost base for capital gains tax purposes

Example

Facts

How does section 8-1 apply?

How does Part IVA apply?

Calculation of the cost base for capital gains tax purposes

WHAT THIS RULING IS ABOUT

Class of person/arrangement

1.	This Ruling considers the taxation consequences for those taxpayers who enter into certain linked or split loan facilities. It considers what part of the interest incurred on the loans is deductible under subsection 51(1) of the Income Tax Assessment Act 1936 ("ITAA 1936") or section 8-1 of the Income Tax Assessment Act 1997 ("ITAA 1997"). It also considers whether Part IVA of the ITAA 1936 would apply to disallow interest otherwise deductible. Finally, it considers whether a taxpayer would include any amounts of interest in the calculation of the cost base or indexed cost base of an asset financed by a linked or split loan facility for the purposes of Parts 3-1 and 3-3 of the ITAA 1997 (formerly Part IIIA of the ITAA 1936) (the capital gains tax provisions). This Ruling does not consider the potential application of Part IVA to an arrangement entered into for the sole or dominant purpose of reducing or eliminating a net capital gain that might otherwise be expected to be included in assessable income.

2.	While the cases cited in this Ruling consider deductibility under subsection 51(1) of the ITAA 1936, the decisions in these cases and the discussion in this Ruling have equal application to section 8-1 of the ITAA 1997. All references to subsection 51(1) should, therefore, be taken as including a reference to section 8-1, and vice versa.

3.	For the purposes of this Ruling, a linked loan is a credit facility taken out with a financial institution under which there are two or more loans with an account being maintained in respect of each loan. A split loan is a credit facility taken out with a financial institution under which there is one loan with sub-accounts being maintained in respect of that loan.

4.	There are many different loan facilities available that could be described as linked or split loan facilities. This Ruling applies only to linked or split loan facilities as described in paragraphs 5 and 6 below. In this Ruling we refer to these loans as "the facility".

5.	The facility has a number of broad features. There may be one or more borrowers within that facility. A taxpayer borrows an amount or amounts of money ("the loan amount"). The contract/s between the taxpayer and the lender provides that the loan amount is allocated between two or more accounts or loans. The contract further provides that at least one account or loan is for private purposes ("private account") and the other/s is for business or income producing purposes ("investment account"). The lender sets the minimum loan payment at the amount required to pay back the loan amount on a principal and interest basis over the nominated period. The taxpayer applies the payments first to pay the principal and interest on the private account and, when the private account is extinguished, the payments are then made against the investment account. As a result, the taxpayer pays off the private account much faster, and the total amount of interest paid on the private account is less than would have been the case if the taxpayer had applied the payments to the separate accounts. Correspondingly, the investment account takes longer to pay off and more interest is payable on that account. The difference between the interest incurred on the investment account under the facility and the interest that would have been incurred if the taxpayer had applied the payments to the separate accounts is referred to as "additional interest".

6.	Interest in respect of the investment account is accumulated and capitalised during the period that the private account is being repaid. The interest calculation for each month uses a higher balance as its starting point. In consequence, the account balance grows at ever increasing rates as interest on principal and interest on interest is added to the loan. Generally, the additional interest (which is claimed to be tax deductible) that is payable on the investment account is equal to or approximate to the extra amount of non-deductible interest the taxpayer would have paid on the private account if a payment had not been redirected from the investment account to the private account. The taxpayer's total outstanding debt does not increase. In the early years of the facility the taxpayer claims a deduction for the capitalised interest even though no payments are made in respect of the investment account.

7.	Where a taxpayer does not make any payments on the investment account, interest accrues on both the unpaid principal sum and the unpaid interest. In this Ruling, we refer to the total interest that has accrued on the investment account during the period that all payments are directed to the private account as "capitalised interest", and the portion of this interest that has accrued on the unpaid interest in the relevant year as "the further interest amount".

RULING

Is interest incurred on the investment account deductible under section 8-1?

8.	Where the funds advanced under the investment loan are used to purchase an income producing asset, interest that accrues on the original principal sum is deductible under section 8-1 for the period in which the property is used solely for income producing purposes.

9.	However, we consider that, in the context of the facilities, there is no obvious commercial explanation for incurring the further interest amount. Therefore, in order to characterise the further interest amount, a wide ranging consideration of the whole set of circumstances surrounding the incurring of the further interest amount, including the direct and indirect advantages sought by the taxpayer, is called for.

10.	The object of the facility is to enable the taxpayer to reduce the principal amount outstanding on the private account at a faster rate than would be the case in the absence of capitalisation on the investment account. To the extent interest on the investment account is capitalised, a corresponding reduction in the amount of principal outstanding on the private account is made.

11.	The incurring by the taxpayer of a liability or liabilities comprising the further interest amount is a direct consequence of the capitalisation of interest on the investment account. The character of such liabilities is determined by reference to the advantages arising out of such capitalisation.

12.	The advantage arising to the taxpayer on capitalisation of interest on the investment account is the reduction of the principal amount outstanding under the private account. Having regard to this advantage, we take the view the further interest amount does not have the necessary character required for it to be deductible under section 8-1.

13.	Alternatively, having regard to all the circumstances relating to the facility, we take the view that a single liability incurred in respect of interest on the investment account in any particular period serves more than one end, activity or object. We consider the further interest amount is incurred for the purpose of enabling a corresponding reduction in the private account.

14.	On this basis, an apportionment of the interest incurred on the investment account in the relevant year is warranted. A fair and reasonable apportionment would be to allow as a deduction under section 8-1 the interest to the extent to which the interest incurred on the investment account in that year exceeds the further interest amount.

Application of Part IVA

15.	Part IVA is a provision of last resort. If any part of the additional interest incurred on the investment account is deductible under section 8-1, we would then consider whether the general anti-avoidance provisions of Part IVA are applicable. As the application of Part IVA depends on the facts, the observations below are necessarily subject to the facts of any particular case.

Identification of the scheme

16.	Where a taxpayer enters into a facility, the scheme may vary from case to case, but the scheme always includes:

•	entering into a facility with one lender;

•	acceptance by the lender of capitalisation of interest on the investment account on the basis that the lender receives another predetermined amount in reduction of the private account;

•	application of any payments to the private account (until the private account is repaid) including those that would have otherwise been paid against the investment account;

•	consequential incurring of an amount of additional interest (by reason of the process of capitalising interest) on the investment account;

•	an understanding or agreement as to how the facility is to operate, including the linking of the private and investment accounts; and

•	the overall indebtedness not exceeding the loan amount.

17.	The scheme may also include some or all of the following:

•	refinancing of an existing private loan arrangement or the advancing of funds for a private loan;

•	refinancing of an existing business or investment loan or the advancing of funds for a business or investment loan;

•	securing both loans or accounts by the same assets; and

•	often, the charging of additional fees and interest.

18.	While some of the features listed in paragraph 17 above may be common to other loan arrangements, when combined with the features listed in paragraph 16 above, they make up a scheme to which Part IVA may apply.

19.	The scheme involves taking steps to increase the tax deduction available on the investment account by means of a corresponding reduction of principal and, therefore, interest on the private account through a pre-ordained course of conduct. This course of conduct includes the redirecting of payments made on the total debt outstanding under the facility to repay the private account while allowing additional interest to capitalise on the investment account.

The tax benefit test

20.	A tax benefit arises because the deduction for interest actually incurred on the investment account is greater than the amount of interest (if any) that might reasonably be expected to have been allowable but for utilising the facility in the manner outlined in paragraphs 16 and 17 above.

21.	Calculation of the tax benefit depends on the facts of a particular case. Where all of the interest incurred on the investment account in the relevant year is deductible under section 8-1, the tax benefit is greater than when the further interest amount is not deductible under section 8-1.

22.	If all of the interest incurred on the investment account in the relevant year is deductible under section 8-1, the tax benefit is the difference between:

(i)	the interest incurred on the investment account; and

(ii)	the interest that would have been incurred on the investment account if the taxpayer had allocated the total minimum payment proportionally across both accounts (i.e., the portion of the total principal and interest payments that had been calculated with reference to the investment account were, in fact, allocated to the investment account).

This means the taxpayer would only be entitled to a deduction equal to the amount of interest that would have been incurred on the investment account if the taxpayer had operated the investment account as a separate conventional principal and interest loan in that year.

23.	If the further interest amount is not deductible under section 8-1 in the relevant year (i.e., the taxpayer is only entitled to a deduction for interest as if the taxpayer had operated the investment account as a conventional interest only loan), the tax benefit is the difference between:

(i)	the interest the taxpayer would have incurred on the investment account if the taxpayer had a conventional interest only investment loan; and

(ii)	the interest the taxpayer would have incurred on the investment account if the taxpayer had operated the account as a separate conventional principal and interest loan in that year.

24.	A tax benefit does not arise in relation to additional repayments of principal made over and above the minimum payments required on the facility.

Dominant purpose

25.	Some or all of the following factors are present in a case to which Part IVA might apply:

•	a planned course of conduct designed to produce a tax benefit;

•	establishment fees associated with the restructuring of existing loan facilities;

•	the structure of these facilities is designed to produce additional interest deductions;

•	the facility is marketed in a manner that emphasises the associated tax benefits;

•	an accelerated payment of the private account and a corresponding increase in the amount owing on the investment account;

•	an absence of commercial reasons for capitalising the interest;

•	the rates of interest charged on loans under the facilities may be higher than the rates available under a separate loan structure.

26.	Each case must be considered on its own merits. However, having regard to the factors listed above, when considered against the eight items listed in paragraph 177D(b), it is open to a reasonable person objectively to conclude that a taxpayer, who has entered into a scheme with some or all of the characteristics outlined in paragraphs 16 and 17 above, did so for the dominant purpose of enabling that taxpayer to obtain a tax benefit. In such a case, it would be appropriate for the Commissioner to exercise his discretion under section 177F to determine that the whole or a part of the interest deduction otherwise allowable shall not be allowable to the taxpayer.

Calculation of cost base for capital gains tax purposes

27.	Where a taxpayer disposes of an income producing asset that has been financed by the facility (i.e., CGT event A1 occurs in relation to that asset), the taxpayer needs to calculate the cost base or indexed cost base of that asset for the purpose of calculating whether a capital gain or capital loss is made on that disposal in terms of Parts 3-1 and 3-3. It is necessary to consider what amounts of interest, if any, incurred on the income producing asset, may be included in the cost base or indexed cost base.

28.	Subsection 110-25(1) states the cost base of a CGT asset consists of five elements. Subsection 110-25(4) states the third element is the non-capital costs of ownership of the CGT asset. Expenditure of a non-capital nature cannot be included in this third element of the cost base to the extent to which it has been deducted or can be deducted (subsection 110-25(7)).

29.	Having regard to the advantages the taxpayer obtains under these facilities, the further interest amount can only be properly characterised in these circumstances as a cost incurred for the purpose of enabling a reduction in the principal amount outstanding under the private account. We do not consider the further interest amount is a "cost of ownership" of the relevant investment asset for the purposes of subsection 110-25(4).

30.	We are also of the view the further interest amount cannot be regarded as "interest on money you borrowed to acquire the asset" for the purposes of paragraph 110-25(4)(a). When interest on an investment account is capitalised, interest incurred on the investment account accrues both in respect of the original principal sum and in respect of the unpaid interest (the "further interest amount" referred to in paragraph 7 above). All interest accruing retains its character as interest and never becomes part of the principal sum (see Bank of New South Wales v. Brown (As Official Liquidator of Tom the Cheap (WA) Pty Ltd (In Liquidation)) (1983) 151 CLR 514 ("Tom the Cheap"). The further interest amount is not interest on money borrowed but is interest on interest.

31.	Interest on the principal sum is a cost of ownership of the asset. Such interest is also "interest on money you borrowed to acquire the asset" within paragraph 110-25(4)(a).

32.	Interest on the principal sum is deductible under section 8-1. Under section 8-1, the taxpayer is entitled to claim interest equal to that which would have been incurred under a conventional interest only investment loan. However, the Commissioner will seek to use Part IVA to disallow the difference between the interest allowable under section 8-1 and the interest the taxpayer would have incurred under a conventional principal and interest investment loan. Therefore, the interest disallowed under Part IVA includes an amount that is interest on principal (see paragraphs 22 and 23 above). This amount forms part of the cost base or indexed cost base.

33.	Notwithstanding the absence of a Part IVA determination in a particular case, e.g., where the taxpayer has not claimed a deduction in the relevant tax return for that part of interest on principal described in the paragraph above, the amount that exceeds the further interest amount may be included in the cost base.

DATE OF EFFECT

34.	This Ruling applies to years commencing both before and after its date of issue. While we have issued a small number of favourable responses to taxpayers in relation to these types of facilities, we do not consider this to constitute "communicating consistently to a wide range of taxpayers" in terms of paragraph 16 of Taxation Ruling TR 92/20. Taxpayers who have a favourable private ruling and who have begun to carry out the arrangement to which it applies, may rely on the private ruling, notwithstanding it may be inconsistent with this Ruling (see Taxation Ruling TR 93/1). However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of TR 92/20).

EXPLANATIONS

Is interest on the investment account deductible under section 8-1?

35.	For an expense or outgoing to be deductible under section 8-1 it must be characterised as an outgoing that is incurred for the purpose of gaining or producing assessable income or is necessarily incurred in carrying on a business of gaining or producing assessable income. Outgoings of interest draw their character from the use of the borrowed funds (see Fletcher & Ors v. FC of T 91 ATC 4950; (1991) 22 ATR 613).

36.	The term "use" in this context does not necessarily require a strict tracing approach to the application of the borrowed money (see FC of T v. JD Roberts; FC of T v. Smith 92 ATC 4380; (1992) 23 ATR 494). Rather, the characterisation of interest on money borrowed is ascertained by reference to the advantages sought from the use of the borrowed funds.

37.	Gibbs ACJ in FC of T v. South Australian Battery Makers Pty Ltd (1978) 140 CLR 645 at 660; 78 ATC 4412 at 4420; (1978) 8 ATR 879 at 887 states:

"... it is the advantage which the expenditure was intended to gain, directly or indirectly, for the taxpayer that is relevant in determining the character of the expenditure ..."

38.	It is not possible to prescribe exhaustively all the factors that may be relevant considerations in determining the advantages sought from the use of the borrowing. A guide, however, is given by Brennan J in Ure v. FC of T 81 ATC 4100 at 4104; (1981) 11 ATR 484 at 489 ("Ure") where he says "the purpose for which money is paid is an issue of fact, turning upon the objective circumstances which human experience would judge to be relevant to the issue".

39.	In Ure, Deane and Sheppard JJ noted at ATC 4109; ATR 494 that where an outgoing was voluntarily incurred, characterisation would ordinarily be determined by reference to the object the taxpayer had in view in the context of the relevant facts and circumstances. They, however, continued:

"In the ordinary case where the income which is expected to flow from an outgoing offers an obvious commercial explanation for incurring it the relevant characterisation can readily be determined by reference to the gaining or producing of that income. In the more complex case however, where there is no such obvious commercial explanation, the solution of the problem of characterisation must be derived from a weighing of the many aspects of the whole set of circumstances including direct and indirect objects and advantages which the taxpayer sought in making the outgoing."

40.	In a case where there is no obvious commercial explanation for incurring the liability, the weighing of all relevant advantages in this way determines if there is sufficient connection with the gaining of assessable income.

41.	The character of interest on capitalised interest is not necessarily determined in accordance with the use made of the original borrowed funds. This is because interest, even when capitalised and added to the overall indebtedness of the borrower for the purpose of calculating future interest, continues to retain the character of interest (see Tom the Cheap).

42.	The further interest amount is incurred on the additional liability that arises when interest is capitalised under the facility. The advantage obtained by the taxpayer when interest is capitalised under this facility is the reduction, by an equivalent sum, of the principal amount outstanding on the private account. In the absence of any commercial explanation for capitalising the interest on the investment loan, the further interest amount does not have the necessary character required under section 8-1.

43.	This approach is predicated on the basis that one can determine the deductibility of the further interest amount in isolation from the balance of the interest that accrues in respect of the investment account in the relevant year.

44.	An alternative approach is to consider the deductibility of a single liability representing interest that accrues on the investment account in respect of the relevant period and to determine the extent to which the interest qualifies as a deduction under section 8-1.

45.	Because these facilities always involve the capitalisation of interest on the investment account and the direction of all payments in reduction of the private account, it is open to conclude that a taxpayer who, in the relevant period, incurs a single liability representing interest on the investment account has sought to obtain more than one advantage. In these circumstances, an apportionment of the total expense is warranted.

46.	Where an amount equal to the interest capitalised in a particular period is applied in reduction of a private borrowing, a fair and reasonable apportionment of the interest liability as between the two or more advantages sought would result in a deduction being allowed to the extent to which that interest exceeds the further interest amount.

47.	In effect, the taxpayer is allowed a deduction for interest equal to that which would have been incurred if the taxpayer had entered into a conventional interest only investment loan.

48.	We accept the arguments in relation to section 8-1 are finely balanced. Our arguments are based on the view the facilities are arrangements that are out of the ordinary.

Application of Part IVA

49.	Part IVA operates where:

(i)	there is a scheme as defined in section 177A;

(ii)	there is a "tax benefit" that, in relation to allowable deductions, is defined in paragraph (b) of subsection 177C(1) as a deduction being allowed to the taxpayer in relation to a year of income where the whole or part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to the year of income if the scheme had not been entered into or carried out;

(iii)	having regard to the eight matters identified in paragraph (b) of section 177D, it would be concluded there was the necessary dominant purpose of enabling the taxpayer to obtain the tax benefit;

(iv)	the Commissioner makes a determination that the whole or part of the amount of the tax benefit that is referable to the deduction shall not be allowable: paragraph 177F(1)(b).

Identification of the scheme

50.	A prerequisite to the operation of Part IVA is the identification of a "scheme" (section 177A). The Commissioner can identify alternative schemes for the purposes of Part IVA. The term "scheme" is defined very broadly in section 177A. We consider the circumstances described in paragraphs 16 and 17 above fall within this definition.

The tax benefit test

51.	The tax benefit test in subsection 177C(1) requires a predication as to what would have been, or what might reasonably be expected to have been, the case in the absence of the scheme. The High Court in FC of T v. Peabody 94 ATC 4663; (1994) 28 ATR 344 stated that a reasonable expectation is more than a possibility. This does not mean there should be no assumption involved in the hypothesis or all alternatives must be disproved or all areas of doubt removed. Where different scenarios produce different results a view needs to be taken as to which is the most likely outcome.

52.	Subject to all the facts, where a taxpayer enters into and utilises a facility in the manner described in paragraphs 16 and 17 above, it might reasonably be expected that, if the taxpayer had not utilised the facility in this manner, the taxpayer would have applied that part of the overall payment referable to the investment account to that account rather than to the private account.

Dominant purpose

53.	The High Court in FC of T v. Spotless Services Limited & Anor 96 ATC 5201; (1996) 34 ATR 183 ("Spotless") considered the meaning of "dominant purpose". The majority said at ATC 5206; ATR 188:

"In its ordinary meaning, dominant indicates that purpose which was the ruling, prevailing, or most influential purpose."

54.	A person may enter into or carry out a scheme, within the meaning of Part IVA for the dominant purpose of obtaining a tax benefit, where that dominant purpose is consistent with the pursuit of commercial gain: see Spotless at ATC 5206; ATR 188. Further, the High Court stated at ATC 5206; ATR 188:

"A particular course of action may be, to use a phrase found in the Full Court judgements, both "tax driven" and bear the character of a rational commercial decision."

The matters referred to in paragraph 177D(b)

(i) the manner in which the scheme was entered into or carried out

55.	These facilities involve pre-ordained steps that have the effect of producing additional tax deductions over and above those available under separate principal and interest loan arrangements. The facilities are marketed using material that emphasises the tax benefit. A taxpayer who has entered a facility often has been made aware of computer projections that highlight the additional tax deductions available from that loan facility. A taxpayer might also incur higher interest charges or fees in renegotiating loans or other additional costs associated with choosing a particular loan facility over another facility. Taxpayers often pay additional fees to intermediaries to enter into these facilities.

(ii) the form and substance of the scheme

56.	The inherent structure of these facilities is an overall principal and interest payment arrangement provided by one financier, incorporating the form of two separate loans or loan accounts. The facilities have a commercial purpose (i.e., the provision of funds to borrowers to assist in the acquisition of an investment). However, they contain additional steps that are contrived in the context of the arrangement (the capitalisation of interest on the investment account and redirection of repayments to the private account) that are principally designed to produce a tax benefit for the taxpayer.

57.	The substance of the scheme is the interest payable on the total loan funds advanced is to the greatest extent possible converted into deductible interest. Interest that would normally relate to the private account, generally a home loan, is, in effect, transferred to the investment account, thereby becoming tax deductible. In reality, there is a conversion of non-deductible interest to tax deductible interest. In many cases, the scheme purports to enable taxpayers to "own their homes" more quickly. However, in the majority of cases, the home remains security for the total borrowing.

58.	The before tax financial position of the taxpayer and lender is substantially the same as where there are separate principal and interest loans. From the lender's perspective, the loan amount is the same as if there were separate loans. The security and the borrower are also the same. The lender requires repayments which would represent the aggregate of repayments required to repay each loan or the total loan amount. The taxpayer has no greater liquidity under the facility than under a conventional principal and interest loan with similar terms apart from any resulting additional income tax deductions.

59.	Invariably there is an agreement or understanding reached between the taxpayer and the lender as to the steps designed to produce a tax benefit.

60.	These facilities may have other commercial advantages but, on balance, we consider, in many cases, the acquisition of these advantages is not the prevailing or most influential purpose for using these facilities in this way.

(iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out

61.	This depends on the facts of each case. Once the structure is put in place it is utilised over a number of years. The tax benefits from effectively converting the private interest to deductible interest (by increasing the debt on the investment account) continue beyond the stage of paying out the home loan until the taxpayer repays the total debt.

(iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme

62.	Subject to the arguments canvassed above in relation to section 8-1, a tax deduction would be allowable for all of the interest incurred on the investment account, which is greater than the interest that would be deductible if the loan accounts had not been linked.

(v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme

63.	In some cases, the taxpayer incurs higher fees and higher interest rates in respect of the facility than would be the case in a conventional principal and interest loan arrangement.

64.	Often, the taxpayer applies against the private account any funds generated through the lodging of a section 221D variation or any extra taxation refund paid to the taxpayer that was referable to the extra interest deductions claimed on the investment account. This additional cash flow may help to reduce overall interest paid on the facility. In short, the taxpayer is financially better off because of the tax deduction.

65.	The capitalising of interest can be a legitimate commercial arrangement between borrowers and lenders. A major commercial reason put forward for borrowers to choose to capitalise interest charges is to free up their liquidity so funds that would normally be expected to be used in paying monthly interest charges can be redirected to another use. Under this facility, the taxpayer has no additional liquidity where the funds that would otherwise have been paid or applied to the investment account are credited or paid to the private account. Prima facie, this is not explicable by reason of ordinary commercial dealings.

66.	If the interest is accruing at the same rate, the extra interest paid on the investment account equals the reduction in the interest that would otherwise have been paid on the private account.

(vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or might reasonably be expected to result, from the scheme

67.	From the lender's perspective, the financial benefit, if any, relates mainly to commercial fees and charges and, in some cases, increased interest where the interest rates are higher than conventional loans. The lender is indifferent to the type of interest it receives because the interest is assessable to it. The characterisation of the interest is, however, relevant from the taxpayer's perspective.

68.	The lender is receiving repayments calculated by reference to the total indebtedness over the term of the loan. If the interest is accruing at the same rate, the extra interest paid on the investment account equals the reduction in the interest that would have been paid on the private account. Therefore, it generally receives the same cash flow as it would have received if the loans were not linked. However, this depends on the terms of the facility.

69.	Any extra repayments made, as outlined in paragraph 64 above, may have the effect of reducing the total interest received by the lender (and the term of the loan/s).

(vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out

70.	The taxpayer finalises the private account in a substantially shorter time than would otherwise have been the case. However, the debt on the investment account grows at an increasing rate during this time. The mortgage on the private home, where the home is security, generally remains in place until the taxpayer clears the total liability.

(viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi)

71.	We would not expect there to be any connection between the taxpayer and the lender beyond the commercial relationship of lender and borrower. Where there is a relevant connection, e.g., where the taxpayer is an employee or associate of the lender, this connection may also be a relevant consideration.

Calculation of cost base for capital gains tax purposes

72.	Subsection 110-25(4) states the third element of the cost base is "the non-capital costs of ownership of the CGT asset you incurred". The subsection then lists in paragraphs (a) to (e) five specific types of expenditure which are non-capital costs of ownership for the purposes of subsection 110-25(4).

73.	We have discussed the characterisation approach to determining the deductibility of the further interest amount in paragraphs 35 to 48 above. We consider, in the context of these facilities, the characterisation approach is equally applicable in determining whether the further interest amount is a "cost of ownership" for the purpose of subsection 110-25(4). The further interest amount is not interest on money borrowed to acquire that asset but is interest on unpaid interest. It does not relate to the cost of acquiring the asset but to the cost of not paying the interest on the loan used to acquire the asset. It is a liability that has been incurred as a consequence of not paying the interest on principal and redirecting a loan payment calculated with regard to such interest in reduction of a private borrowing. Therefore, in such circumstances, we conclude interest does not fall within the opening sentence of subsection 110-25(4), and it should not be considered a cost of ownership of the CGT asset.

74.	While interest on the principal sum is interest on money borrowed to acquire the asset for the purposes of paragraph 110-25(4)(a), the further interest amount is not. This is because the further interest amount is interest on interest.

75.	Interest always retains its character as interest and does not form part of the principal sum. It is only the principal sum borrowed that can be said to be "money you borrowed to acquire the asset". Therefore, it is only the interest which accrues in relation to that principal sum that can be said to be "interest on money you borrowed to acquire the asset". The further interest amount is not interest which accrues in relation to the principal sum. It is interest that accrues in relation to unpaid interest. This is the case notwithstanding the terms of the loan agreement permit interest to be calculated on the basis that the capitalised interest and principal sum form part of the capital indebtedness of the borrower.

76.	Authority for this view is to be found in Inland Revenue Commissioners v. Oswald [1945] AC 360, where Lord Macmillan said at 373:

"The unpaid interest never ceases to retain its character as interest, although it has from time to time been added to the capital indebtedness and has carried interest in turn."

77.	This observation was approved of by the High Court in Tom the Cheap at 522, 531, 545 and 554.

78.	The amount of interest disallowed because of the application of Part IVA represents the "tax benefit" as defined in subsection 177C(1). This amount exceeds the further interest amount (see paragraphs 22 and 23 above) and is interest on a loan taken out to finance the acquisition of an asset. Therefore, it can be included in the cost base or indexed cost base.

Alternative view

79.	It has been submitted all the interest accrued on a capitalising basis on the investment account is fully deductible under the terms of section 8-1. This is because the interest has the necessary connection with the acquisition of the income producing asset. It is only where there is a disproportion between the income and the interest that regard can be had to wider objects (see Fletcher). It has also been submitted, after an objective examination of all relevant circumstances surrounding the capitalisation of interest on the facility, the provisions of Part IVA should not apply to deny any interest deduction accrued on the investment account.

80.	This is because:

(a)	the mere presence of a planned course of conduct is not necessarily indicative that a borrower has the requisite dominant purpose. The facilities are merely designed to facilitate the choice of the taxpayer to pay off personal debts in preference to business or investment debts;

(b)	many of the features of the scheme are common to ordinary private business and investment loans in the market place and there are significant commercial purposes for entering into the facilities, e.g., administrative savings from combining two separate loans; and

(c)	the most influential purpose of these arrangements is to enter a financial plan that will increase wealth by way of cash flow management and investment in income producing property. In general, it is argued the dominant purpose of the arrangements is to pay off the private debts more quickly or to allow investors to access the equity in the home to acquire more income generating investments.

81.	It is argued it is not appropriate or correct when calculating the tax benefit for us to assume that principal and interest payments would have been paid off the investment loan.

82.	It has been suggested a taxpayer could get around the application of Part IVA by using more than one lender. While the Ruling is directed at facilities offered by one lender, we will consider whether Part IVA applies where a taxpayer has a similar arrangement but operates it through two lenders who are associates or members of the one group and achieves the same outcome.

83.	We accept each case must be considered on its merits and, in the absence of other considerations, the choice of repaying non-deductible debt before deductible debt is a normal commercial decision. However, we have examined the way these particular facilities are structured and have concluded they are not ordinary arrangements and they bear the stamp of tax avoidance.

Calculation of cost base for capital gains tax purposes

84.	There is an alternative view that all of the additional interest should be included in the calculation of the cost base or indexed cost base.

85.	It is arguable the further interest amount is a cost of ownership of the relevant investment asset because, on its face, it is a liability that is incurred in connection with the money borrowed to acquire that asset. For the reasons outlined in paragraph 73 above, we do not consider the further interest amount is a cost of ownership.

86.	Although interest on the principal sum is interest on money borrowed to acquire the asset for purposes of paragraph 110-25(4)(a), the further interest amount cannot be included in the third element of the cost base under this paragraph. This is because the further interest amount is not interest on money borrowed, but is interest on interest.

EXAMPLE

87.	The application of both section 8-1 and Part IVA depends on all the facts of a case. A shorthand example is unlikely to provide adequately the full factual context on which to determine the possible application of section 8-1 or Part IVA. However, the circumstances below illustrate a case where the full amount of interest may not be deductible under section 8-1. Alternatively, if section 8-1 allowed a deduction for the full amount of interest on the investment sub-account, it would be reasonable to conclude under Part IVA that the dominant purpose of entering into the arrangement below would be the gaining of a tax benefit.

Facts

88.	Lawrie is buying his home on which he has an outstanding mortgage debt of $100,000. At the same time he has considerable equity in the home. He sees an advertisement in his local paper for a seminar on negative gearing. He attends the seminar and is given a brochure by Lender X entitled "A less taxing way to pay off your home-investment loan". This brochure sets out the details of a facility where "you pay off your home loan portion many years sooner, and you increase the negative gearing benefits on your investment property". Lawrie visits his financial adviser, who recommends he see Lender X with a view to purchasing a rental property utilising the facility.

89.	Lawrie approaches Lender X about borrowing the funds and is offered two options. He could borrow the $100,000 at the current rate for investments. Alternatively, he could take advantage of the split loan facility. Under the facility Lender X would lend Lawrie $200,000 which would be divided into two sub-accounts. $100,000 would be used to pay out his current home loan (which is at the same variable rate) and $100,000 would be used to acquire the investment property. The term of the loan would be 25 years and the interest rate on both the private and investment loan accounts would be 7.5% being the current variable home loan interest rate.

90.	Lawrie would be required to make minimum monthly repayments of $1,477.98, which represent $738.99 principal and interest referable to each loan account. Under the facility, he would be given the option of applying the total minimum payment against the private loan and allowing the interest on the investment loan to capitalise. He would be required to provide the certificates of title on both properties as security and these would be held until the total funds advanced were repaid in full.

91.	Lender X provides Lawrie with an example that illustrates the advantages of utilising the facility in this way compared to a separate loan structure at the same interest rates.

92.	The example shows the total amount repaid over the 25 years would be the same, i.e., $443,396.07. The total interest charged is $243,396.07 of which $212,999.24 would relate to the investment loan account and could be claimed as a tax deduction. The purported deductible amount of $212,999.24 is $91,301.20 more than it would be under a separate loan structure with the same interest rate. Assuming Lawrie's marginal tax rate is 48.5%, the total tax saving over the period of the loan would be $44,281.08.

93.	Lawrie enters the loan facility and applies the repayments to the private loan account. He continues to do this until the private account is repaid. In the meantime interest charged to the investment loan account is capitalised. Lawrie claims a deduction for interest on the investment loan account that has been shown on him financial statement from the lender. The interest calculation for the first two years is as follows:

Investment loan account

	Debit (interest and charges) $	Credit (payments) $	Balance  $
Loan funds			100,000.00
Year 1	7,763.26	nil	107,763.26
Year 2	8,365.94	nil	116,129.20

Private loan account

	Debit  $	Credit  $	Balance  $
Loan funds			100,000.00
Year 1	7,140.71	17,735.76	89,404.95
Year 2	6,318.19	17,735.76	77,987.38
How does section 8-1 apply?

94.	The advantage arising to Lawrie on capitalisation of interest on the investment account is the reduction of the principal amount outstanding under the private account. Therefore, the further interest amount does not have the necessary character required for it to be deductible under section 8-1. Lawrie is only entitled to claim the interest he would have incurred if he had not redirected payments and capitalised interest, i.e., equal to that he would have incurred under an interest only investment loan.

95.	Alternatively, Lawrie incurred the liability for interest to achieve two ends, one of which was to acquire an investment property and derive assessable income, and the other to enable him to pay off his private loan more quickly. In such circumstances apportionment is required on a fair and reasonable basis. In this case, the amount of interest that would be disallowed is the further interest amount.

96.	If Lawrie had paid the interest incurring on the investment account each month he would have incurred $7,500 in interest in years 1 and 2. The amount of interest that would be disallowed is $263.26 in year 1 and $865.94 in year 2.

97.	In the case where the further interest amount has been disallowed under section 8-1, we will still consider whether Part IVA would apply to disallow any of the remaining interest that is deductible under section 8-1. Alternatively, if the full amount of interest was deductible under section 8-1, we would also consider whether Part IVA would apply.

How does Part IVA apply?

98.	Applying Part IVA, Lawrie is not entitled to a deduction for all the interest charged on the investment loan under the facility. In each year the difference between the interest actually incurred on the investment loan and the interest that would have been incurred if Lawrie had applied that part of the payment referable to the investment loan ($738.99 per month) against the investment loan account rather than the private loan account, is not allowable. This amount exceeds the further interest amount.

99.	Lawrie would be entitled to a deduction in year 1 of $7,451.98. He would not be entitled to a deduction for the extra $311.28 charged to the investment loan account. In year 2, he would be entitled to a deduction for $7,342.06 but not for the extra $1,023.88 charged on the investment loan account.

100.	If section 8-1 had disallowed the further interest amount, i.e., $263.26 in year 1 and $865.94 in year 2, Part IVA would apply to disallow the balance of the additional interest, i.e., $48.02 in year 1 and $157.94 in year 2.

Calculation of the cost base for capital gains tax purposes

101.	When Lawrie disposes of the investment property, CGT event A1 occurs. Lawrie needs to calculate the cost base or indexed cost base of the asset for the purpose of calculating whether a capital gain or capital loss is made in terms of Parts 3-1 and 3-3. In calculating the cost base, the further interest amount ($263.26 in year 1, $865.94 in year 2, etc.) is not included in the third element of the cost base (subsection 110-25(4)). To the extent the additional interest exceeds the further interest amount, it is included in the cost base ($48.02 in year 1, $157.94 in year 2, etc.).

Commissioner of Taxation

16 December 1998

ADDENDUM

Taxation Ruling TR 98/22A

Income tax:  the taxation consequences for taxpayers entering into certain linked or split loan facilities

FOI status: may be released

This Addendum partially withdraws Taxation Ruling TR 98/22 following the decision of the High Court in FC of T. v Hart [2004] HCA 26. That decision confirms the application of the general anti-avoidance provisions of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) to linked or split loan facilities to which the Ruling applies.

The Commissioner is revising his view in relation to the deductibility of interest incurred under these facilities and whether the interest disallowed pursuant to Part IVA forms part of the cost base of assets financed by these facilities. The Commissioner’s existing opinions on these matters are withdrawn and will be replaced once this review is complete. The Ruling is also currently being reviewed in relation to its discussion of Part IVA in light of the decision.

This addendum applies from today 11 August 2004.

Taxation Ruling 98/22 is amended as follows:

1. Paragraph 1

Omit the paragraph and replace it with:

1.	This ruling applies to persons who enter into certain linked or split loan facilities as described in paragraphs 3 to 6 of this Ruling. This Ruling considers whether Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to disallow interest that would otherwise be deductible on these linked and split loan facilities. The ruling does not consider the deductibility of interest incurred under these facilities and whether the interest disallowed pursuant to Part IVA forms part of the cost base of assets financed by these facilities.

2. Paragraph 2

Omit the paragraph.

3. Heading before paragraph 8

Omit the heading.

4. Paragraphs 8 to 14

Omit the paragraphs.

5. Paragraph 15

Omit the paragraph and replace it with:

15.	The general anti-avoidance provisions of Part IVA apply to disallow any additional interest incurred on the investment account that is deductible under s 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997): FC of T. v Hart [2004] HCA 26.

6. Heading before paragraph 27

Omit the heading.

7. Paragraphs 27 to 33

Omit the paragraphs.

8. Heading before paragraph 35

Omit the heading.

9. Paragraphs 35 to 48

Omit the paragraphs.

10. Heading before paragraph 72

Omit the heading.

11. Paragraphs 72 to 78

Omit the paragraphs.

12. Paragraphs 79 and 80

Omit the paragraphs.

13. Paragraph 81

Omit "not appropriate" and replace with "not always appropriate".

14. Heading before paragraph 84

Omit the heading.

15. Paragraphs 84 to 86

Omit the paragraphs.

16. Heading before paragraph 87

Omit the heading.

17. Paragraphs 87 to 101

Omit the paragraphs.

Addendum to ADDENDUM

TR 98/22AA

This Addendum updates the Addendum to Taxation Ruling TR 98/22 which issued 11 August 2004 to the extent that it deals with whether interest incurred under linked or split loan facilities can be included in the cost base of assets financed by these facilities, where the interest has been disallowed pursuant to Part IVA of the Income Tax Assessment Act 1936.

As foreshadowed in that Addendum, the Commissioner has reviewed his opinion on this issue. The Commissioner's views are now expressed in Taxation Determination TD 2005/33 which issued on 3 August 2005.

Commissioner of Taxation

19 October 2005


Taxation Ruling TR 95/34 Employees carrying out itinerant work
Taxation Ruling TR 95/34

Income tax: employees carrying out itinerant work – deductions, allowances and reimbursements for transport expenses

Income Tax Rulings do not have the force of law. Each decision made by the Australian Taxation Office is made on the merits of each individual case having regard to any relevant Ruling.

This Ruling, to the extent that it is capable of being a "public ruling" in terms of Part IVAAA of the Taxation Administration Act 1953, is a public ruling for the purposes of that Part. Taxation Ruling TR 92/1 explains when a Ruling is a public ruling and how it is binding on the Commissioner.

Contents:

What this Ruling is about

Date of effect

Previous Rulings

Ruling

When is an employee's work itinerant?

Transport expenses

Allowances

Reimbursements

Explanations

When is an employee's work itinerant?

Travel is a fundamental part of the employee's work

Web' of work places – employee has no fixed place of work

Continual travel from one work site to another

Examples

WHAT THIS RULING IS ABOUT

Class of person/arrangement

1.	This Ruling provides guidelines for establishing whether an employee is carrying out itinerant work.

2.	This Ruling discusses the tax treatment of transport expenses incurred by employees carrying out itinerant work which are claimed under subsection 51(1) of the Income Tax Assessment Act 1936 (the Act). Transport expenses include public transport fares and the running costs associated with using motor vehicles, motor cycles, bicycles, etc., for work-related travel.

3.	This Ruling discusses the assessability of transport allowances and reimbursements received by employees carrying out itinerant work under subsection 25(1) and paragraphs 26(e) and 26(eaa) of the Act.

4.	The substantiation provisions are not discussed in depth in this Ruling.

DATE OF EFFECT

5.	This Ruling applies to years commencing both before and after its date of issue except to the extent that it applies to employees in the building and construction industry, where the date of effect is 1 July 1996 and employee shearers, where the date of effect is 8 July 1996. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

PREVIOUS RULINGS

6.	This Ruling replaces Taxation Ruling IT 2273 to the extent that it applies to employee shearers. To the extent replaced, IT 2273 is withdrawn.

RULING

When is an employee's work itinerant?

7.	There have been a number of cases considered by the Courts, Boards of Review and Administrative Appeals Tribunal where deductions for transport expenses were allowed on the basis of the taxpayers' "shifting places of work". "Shifting places of work" is another term for itinerancy. In these cases the obligation to incur the transport expenses arose from the nature of the taxpayers' work, such that they were considered to be travelling in the performance of their duties from the moment of leaving home. The following characteristics have emerged from these cases as being indicators of itinerancy:

a)	travel is a fundamental part of the employee's work (paragraphs 22 to 27 below);

b)	the existence of a "web" of work places in the employee's regular employment, that is, the employee has no fixed place of work (paragraphs 28 to 33 below);

c)	the employee continually travels from one work site to another. An employee must regularly work at more than one work site before returning to his or her usual place of residence (paragraphs 34 to 45 below);

d)	other factors that may indicate itinerancy (to a lesser degree) include:

(i)	the employee has a degree of uncertainty of location in his or her employment (that is, no long term plan and no regular pattern exists) (paragraphs 47 to 55 below);

(ii)	the employee's home constitutes a base of operations (paragraphs 56 to 62 below);

(iii)	the employee has to carry bulky equipment from home to different work sites (paragraphs 63 to 71 below);

(iv)	the employer provides an allowance in recognition of the employee's need to travel continually between different work sites (paragraphs 72 to 75 below).

8.	Whilst the above characteristics are not exhaustive, they provide guidelines for determining whether an employee's work is itinerant. It is considered that no single factor on its own is necessarily decisive.

9.	The question of whether an employee's work is itinerant is one of fact, to be determined according to individual circumstances. It is the nature of each individual's duties and not their occupation or industry that determines if they are engaged in itinerant work. Further, itinerant work may be a permanent or temporary feature of an employee's duties.

Transport expenses

10.	A deduction is generally not allowable for the cost of transport between home and the normal work place. However, a deduction is allowable for the cost of travelling between home and work if an employee's work is itinerant (see paragraphs 76 to 86 below).

Allowances

11.	The receipt of an allowance does not automatically entitle an employee to a deduction. The term "allowance" does not include a reimbursement (see paragraphs 13 to 15 below).

12.	Allowances paid to cover transport expenses fall into the following categories:

(a)	fully assessable to the employee with a deduction possibly allowable for expenses incurred, depending upon individual circumstances;

(b)	fully assessable to the employee with no deduction allowable even though an allowance is received;

(c)	fully assessable to the employee with a deduction possibly allowable for expenses incurred, depending upon individual circumstances, but subject to special substantiation rules (see Award transport (fares) payments, paragraphs 87 to 91 below).

Reimbursements

13.	If an employee receives a payment from his or her employer for actual expenses incurred, the payment is a reimbursement. In this instance the employer may be subject to Fringe Benefits Tax. Generally, if an employee receives a reimbursement, the amount is not required to be included in his or her assessable income and a deduction is not allowable (see Taxation Ruling TR 92/15).

14.	However, if motor vehicle expenses are reimbursed by the employer on a cents per kilometre basis, the amount is included as assessable income of the employee under paragraph 26(eaa) of the Act. A deduction may be allowable in relation to motor vehicle expenses incurred.

15.	If a payment is received from an employer for an estimated expense, the amount received by the employee is considered to be an allowance (not a reimbursement) and is fully assessable to the employee (see Allowances, paragraph 11 and 12 above).

EXPLANATIONS

When is an employee's work itinerant?

16.	The Act does not provide a definition of the word "itinerant". In the absence of a statutory definition, we must look to the ordinary usage of the word. The Macquarie Dictionary defines "itinerant" as "travelling from place to place" or "one who travels from place to place especially for duty or business".

17.	In FC of T v. Genys (1987) 17 FCR 495; 87 ATC 4875; (1987) 19 ATR 356 (Genys' case), the Federal Court held that the taxpayer's employment was not itinerant. The taxpayer was a registered nurse who used an employment agency to seek relief work with various hospitals. She was not continuously employed by any one hospital. When a hospital was in need of additional staff they contacted the agency which would then contact the taxpayer. It was integral to the decision in this case that the taxpayer did not travel after the commencement of her duties. She merely travelled to work and home again. Northrop J (FCR at 498; ATC at 4879; ATR at 359) described itinerant as "shifting places of work":

"...where the taxpayer travels between home and shifting places of work, that is, an itinerant occupation."

18.	The question of whether an employee's work is itinerant is one of fact, to be determined according to individual circumstances. It is the nature of each individual's duties and not their occupation or industry that determines if they are engaged in itinerant work. Further, itinerant work may be a permanent or temporary feature of an employee's duties.

19.	Example: Mary is employed as a plumber's labourer and is dispatched to several sites each day. Mary usually travels directly from home to a different site each day to start work. As her duties require her to travel between sites on a regular basis, travel is an inherent part of her employment. Mary's employment is regarded as itinerant.

20.	Example: Joe is also employed as a plumber's labourer, but normally works at a single site. Joe is temporarily assigned other duties for three months that require him to travel between several sites on a daily basis. As travel is not an inherent feature of Joe's regular duties his usual employment is not itinerant. However, his employment would be considered itinerant for the three months he undertakes the temporary assignment.

21.	The existence of the following characteristics would not necessarily be determinative, but would be a strong indication that an employee is engaged in itinerant work.

Travel is a fundamental part of the employee's work

22.	Travel must be an essential feature of an employee's duties in order for that work to be classified as itinerant. In Taylor v. Provan [1975] AC 194 Lord Simon (discussing the rule established in Ricketts v. Colquhoun [1926] AC 1) said at 221:

"...the obligation to incur the expenses of travelling in question must arise out of the nature of the office or employment itself, and not out of the circumstances of the particular person appointed to the office or employed under contract of employment – two different classes of travelling expenses readily come to mind. The first is where the office or employment is of itself inherently an itinerant one. ...In such cases the taxpayer may well be travelling in the performance of the duties of the office or employment from the moment of his leaving home to the moment of his return there – a visit to any head office might well be purely incidental or fortuitous."

23.	In FC of T v. Wiener 78 ATC 4006; (1978) 8 ATR 335 (Wiener's case) a teacher was required to teach at a minimum of four different schools ("web" of work places) each day, and comply with a strict timetable that kept her on the move throughout each of these days. Smith J, in the Supreme Court of Western Australia, concluded that travel was inherent in her employment because the nature of the job itself made travel in the performance of her duties essential, and said (ATC at 4010; ATR at 339):

"...that travel was a fundamental part of the taxpayer's work, is not open to challenge. Viewed objectively, it does not seem to me to be open to question that the taxpayer would not have been able to perform her duties without the use of her motor vehicle. ...it was a necessary element of the employment that on those working days transport be available at whichever school the taxpayer commenced her teaching duties and that transport remained at her disposal throughout each of those days."

24.	In Genys' case (FCR at 502-503; ATC at 4882; ATR at 362-363), Northrop J quotes Brightman J's statement of this principle in Horton v. Young [1972] 1 Ch 157 at 164:

"...where a person has no fixed place or places at which he carries on his trade or profession but moves continually from one place to another, at each of which he consecutively exercises his trade or profession on a purely temporary basis and then departs, his trade or profession being in that sense of an itinerant nature, the travelling expenses of that person between his home and the places where from time to time he happens to be exercising his trade or profession will normally be, and are in the case before me, wholly and exclusively laid out or expended for the purposes of that trade or profession. I have used the adverb "normally" because every case must to some extent depend on its own facts."

25.	The very nature of an employee's work must make it necessary to carry out the duties in several places. It is not sufficient for an employee to choose to perform his or her duties in an alternative location for convenience (e.g., a home office). In Taylor v. Provan, Lord Wilberforce said at 215:

"It is only if the job requires a man to travel that his expenses of that travel can be deducted, i.e. if he is travelling on his work, as distinct from travelling to his work. ...But for this doctrine to apply, he must be required by the nature of the job itself to do the work of the job in two places: the mere fact that he may choose to do part of it in a place separate from that where the job is objectively located is not enough."

26.	Example: Concetta has supervisory responsibilities for a chain of fashion stores. Her duties require her to travel to several stores each day to assess each store's performance and to attend head office weekly to file reports. Concetta does not visit the stores in a regular pattern. Travel is a fundamental part of Concetta's employment because the nature of the job itself makes travelling a necessary element of her duties. She is considered to be engaged in itinerant employment.

27.	Example: Eleni is an agency nurse who travels to several hospitals to relieve staff shortages. She is employed by the hospital for whom she performs the duties. Eleni remains at the one hospital until completion of her shift. Travel is not a fundamental part of Eleni's employment, as she is not required to travel in the performance of her work once she commences duty. Eleni's employment is not considered to be itinerant.

"Web" of work places – employee has no fixed place of work

28.	An employee may earn income by performing his or her duties at several work sites. The location of those sites may make it necessary to travel to the various sites. If an employee performs work at a single site and then moves to other sites on a regular basis, it would be considered that a "web" of work places exists. In Wiener's case, the taxpayer was required to attend four to five schools each day. This constituted a "web" of work places.

29.	In Case U97 87 ATC 584; AAT Case 68 (1987) 18 ATR 3491 (Case U97), the taxpayer was employed as a fireman. He was attached to a fire station located close to his home in a northern suburb of Sydney, but for some years worked as a relief fireman. In that capacity, he was commonly sent to other fire stations in the Sydney fire district. The only distinguishing feature of his claim was that he travelled to one outer station regularly for a number of days then another outer station for another period. In deciding that the taxpayer was not itinerant, Senior Member McMahon stated (ATC at 588; ATR at 3495-3496):

•	"There is not the web of workplaces that one looks for as a structure for the applicant's working life if that life is to be regarded as itinerant."

30.	Example: Elio sells equipment and supplies for a pharmaceutical company. He is required to travel to many clients each day to obtain sales of his company's products. He attends the employer's office monthly to complete paperwork. Elio's work requires him to travel to several workplaces (a "web" of work places). As he performs his duties at many different locations, his employment would be regarded as itinerant.

31.	Although an employee may perform duties at more than one work location, this fact in itself may be insufficient to constitute a "web" of work places for the purpose of itinerancy. Each work place may be regarded as a regular or fixed place of employment. If the teacher in Wiener's case had attended only one school each day, each school would be regarded as a regular place of employment.

32.	In Case U29 87 ATC 229; AAT Case 32 (1987) 18 ATR 3181 (Case U29), a carpenter was held not to be engaged in itinerant employment. Senior Member Roach said at (ATC at 233; ATR at 3185):

"It was argued for this applicant that he too should be characterised as an itinerant worker even though for periods of several months in succession he had as a matter of routine but one place of employment for four days of the week and a second place of employment on a fifth day; and that at intervals of several months, there would be a change in the principal place of duty. Without more I am not satisfied that the applicant should be categorised as an itinerant worker..."

33.	Example: Leo works for an accountancy firm and attends head office three days a week. He works the remaining two days at a suburban office. Leo's work does not display a "web" of work places because:

(a)	upon commencement he is not required to travel in the course of his duties; and

(b)	Leo has two regular places of work.

Continual travel from one work site to another

34.	In certain work situations continual unsettled travel from one work place to another is a common factor. In some instances, an employee's ongoing engagement may require him or her to attend various sites in different localities nominated by the employer. In most such cases the need to travel from place to place would be a necessary condition of employment.

35.	In Case T106 86 ATC 1192; AAT Case 17 (1987) 18 ATR 3093 (Case T106), a taxpayer employed as an "off-sider" in the building industry was continuously dispatched to sites at various locations. On any one day it was not unusual for the applicant to attend two sites and he often attended different sites on successive days. The Tribunal agreed that the taxpayer's employment was of an itinerant nature.

36.	Example: Susan works as a repairer for a manufacturer of office equipment. She is advised by mobile phone throughout the day of further clients to visit, and attends the employer's office weekly to complete paperwork and re-stock spare parts. Susan's work involves continuous travel from one location to another and her work is itinerant.

37.	Continual travel refers to the frequency with which an employee moves from one work site to another. It envisages that the employee regularly works at more than one work site before returning to his or her usual place of residence. If an employee stays at a particular work site for a short period (e.g., several days or a few weeks) they may still be regarded as engaged in itinerant employment provided their usual pattern of work involves continual travel to more than one work site before returning to their usual place of residence.

38.	In Case U97 the Tribunal stated that although the taxpayer was not required to serve at the same station for every day during the course of the year, his employment was not itinerant. Senior Member McMahon contrasted the taxpayer's travel with that of the teacher in Wiener's case and stated (ATC at 587-588; ATR at 3494-3495):

"...this was regarded by the court as an essential feature of her employment. Had she not been required to attend at more than one school on any one day, it would seem that the court may well have taken a different view of the expenses claimed. The position of the taxpayer in that situation where "the office or employment is of itself inherently an itinerant one and that the taxpayer may be said to be travelling in the performance of her duties from the moment of leaving home to the moment of return there" may be contrasted with the position of the applicant in the present case. Once having arrived at his outer station, he remained there until the end of his shift before returning home. ...There was no evidence that his duties required him to use his car from an outer station as a base during the course of his shift. The nature of his employment while there certainly could not be said to be itinerant."

39.	Further, in Genys' case, Northrop J, in determining that the taxpayer was not required to travel in the course of her duties, said (FCR at 503-504; ATC at 4882-4883; ATR at 364):

"The main distinction, which I draw, between this case and the factual situations referred to in Horton v Young and Wiener is that here, the taxpayer does not travel between two places of work after the commencement of her duties; she simply drives from home to work and back again.

By contrast, in the situations referred to in Horton v Young, the taxpayer...travels from home to work, but also travels from that first place of work to other places of employment throughout the course of the day before his return home.

...the mere fact that the taxpayer in this case does not have a regular place of employment in the sense of a permanent employment at one hospital is not sufficient to take her outside the general principles expressed in Lunney."

40.	In Genys' case, each employment contract undertaken by the taxpayer constituted a separate engagement. However, the nature of a taxpayer's employment arrangements, i.e., whether they have one employer or several employers, is not sufficient to alter the characterisation of the transport expenses incurred. In both Genys' case and Wiener's case, consideration of whether the taxpayers travelled during the course of their duties was integral to the Courts' findings. These decisions did not turn upon the significance of the taxpayers' employment arrangements.

41.	In Case R8 84 ATC 157; (1984) 27 CTBR (NS) 523 Case 59, the taxpayer was also a nurse, but was employed by the agency rather than each hospital. The Board held that the taxpayer's travel pattern was not comparable to the facts in Wiener's case and could not be distinguished from Lunney's case. In Genys' case, Northrop J, in considering Case R8, stated (ATC at 4882; ATR at 363):

"In addition to deciding whether or not the taxpayer's employment involves sufficient travel to warrant giving it the description "itinerant", it is necessary to determine what difference, if any, arises from the fact that the respondent is employed on a casual basis by several employers...

The Board did not explicitly address its reasons to where a taxpayer has more than one employer, but presumably did not accord much weight to this fact."

42.	Example: Ryan is a shearer who works at various farms. Ryan is usually contacted at short notice and advised which property he is required to attend. The farms are located at varying distances from his residence. Each day Ryan travels to a single farm and returns to his normal place of residence each night.

Ryan is not engaged in itinerant employment because:

(a)	travel is not a fundamental part of his duties; and

(b)	there is no continual movement between farms. He merely travels to work and returns home each day.

43.	Example: Valerie is a fruit picker. She does not have a regular circuit, but organises her next job before completing the work at the current farm. Valerie normally works and lives at many properties before returning home, remaining at each farm for two to three weeks. Valerie is engaged in itinerant employment because:

(a)	her employment has a web of work places; and

(b)	there is continual travel from one farm to another before returning to her normal place of residence.

44.	Although each case must be considered on an individual basis, the frequency of travel between work sites is an important element. What needs to be determined is whether the length of time spent at a work site qualifies it as a regular or fixed place of employment. This will be a matter of fact.

45.	Example: Jason is employed as a builder's labourer. He generally works at a single building site for two to three months before moving to another site. Jason is not engaged in itinerant work because:

(a)	each work site is considered to be a regular or fixed place of employment;

(b)	there is no continual travel between work sites;

(c)	travel is not a fundamental part of his duties; and

(d)	there is no web of work places in his employment.

Other factors

46.	A deduction may be allowable for the cost of transport between home and work if an employee's home is a base of operations or the transport expenses are attributable to carrying bulky equipment. While this applies irrespective of itinerancy, the following factors are often present in itinerant employment:

(i)	the employee has a degree of uncertainty of location in his or her employment, (that is, no long term plan and no regular pattern exists ) (paragraphs 47 to 55 below);

(ii)	the employee's home constitutes a base of operations (paragraphs 56 to 62 below);

(iii)	the employee has to carry bulky equipment from home to different work sites (paragraphs 63 to 71 below);

(iv)	the employer provides an allowance in recognition of the employee's need to continually travel between different work sites (paragraphs 72 to 75 below).

These factors, on their own, do not establish itinerancy. However, they may support the classification of an employee's work as itinerant.

Uncertainty of location

47.	The element of uncertainty of location is generally another distinct characteristic of itinerant employment. Unlike an ordinary worker who makes the daily journey to his or her regular place of work, the itinerant worker often cannot be certain of the location of their work sites.

48.	'Uncertainty" in this context, relates only to uncertainty of location, and not to uncertainty of employment. A deduction is not allowable for transport or travel expenses incurred in obtaining new employment. This is because the expenditure is:

"...incurred in getting, not in doing, work as an employee. It would come at a point too soon to be properly regarded as incurred in gaining assessable income." (see FC of T v. Maddalena 71 ATC 4161; (1971) 2 ATR 541 at ATC 4163; ATR 549).

49.	Example: Hai is a fruit picker who travels around with the view of finding work. When he finds work, he will stay in that location until the work is completed, and then move on in search of other jobs in the industry. Hai is not engaged in itinerant employment and his travelling and transport costs are not an allowable deduction because the expenses are incurred too early to be regarded as being in the course of carrying out the duties of his employment.

50.	The concept of uncertainty was highlighted in Case T106 where the taxpayer was often uncertain about the work site he would be required to attend until the actual day of work. Senior Member Roach said (ATC at 1194; ATR at 3095):

"He does not work according to any regular pattern as to work site; there is no long-term plan by which he can predict what will be required of him in the future; and there is no certainty as to the range of work sites he may be called on to attend over a period. In my view his occupation is that of an itinerant worker."

51.	This can be contrasted with a worker who has a fixed place of employment and is aware of the location of the work place.

52.	The fireman's duties in Case U97 did not demonstrate the characteristic of uncertainty, although he was not required to serve at the same station for every day during the year. He was generally aware of his commitments well in advance.

53.	Uncertainty of location is a feature that is generally found in itinerant work. However, instances may arise where an employee's work may be itinerant although the degree of uncertainty is minimal or non-existent.

54.	In Wiener's case there was no uncertainty of location as the taxpayer was aware of the locations and times to attend each school in advance. However, the taxpayer was successful in being characterised as engaged in itinerant work by establishing other fundamental elements relevant to her case, including:

(a)	travel was a fundamental part of her work;

(b)	there was a "web" of workplaces in her employment structure and continual movement from one work site to another (she attended at least four schools each day);

(c)	she carried bulky teaching equipment in her car; and

(d)	her employer paid her an allowance in recognition of the need to travel in the course of her duties.

55.	Example: Ian is a shearer who has agreements with various property owners and therefore travels on a circuit to the same farms each year returning home only periodically. When he finishes work at a property, he travels directly to the next property on his circuit. Although there is no uncertainty in Ian's employment pattern, his work is considered itinerant. This is because:

(a)	travel is a fundamental part of his work;

(b)	his work structure displays a "web" of workplaces; and

(c)	he continually moves from one place of work to another before returning home.

Home as a base of operations

56.	An employee's home may constitute a base of operations if the work is commenced at or before the time of leaving home to travel to work and the responsibility for completing it is not discharged until the taxpayer attends at the work site. Whether an employee's home constitutes a base of operations depends on the nature and the extent of the activities undertaken by the employee at home.

57.	In FC of T v. Collings 76 ATC 4254; (1976) 6 ATR 476 the taxpayer was a highly trained computer consultant whose employment required her to be on call 24 hours a day. She was involved in supervising a major conversion of the computer facilities that her employer provided to its clients.

58.	The taxpayer was provided with a portable terminal that was connected to the computer through the telephone line. It was common for her to receive telephone calls at home and give advice to workers at the office any time a problem arose. If she was unable to resolve the problem over the telephone or through the portable computer she would return to the office in order to get the computer working.

59.	The Court accepted that there were two separate and distinguishable facets of her employment. While she commuted regularly to her work, she was also required to be ready on call at all other times. The Court held that, on the occasions the taxpayer returned to work after hours:

(a)	she had commenced performance of her duties before leaving home and travelled to work to complete those duties. Her obligation was more than just being on stand-by duty at home; and

(b)	she did not choose to do part of the work in two separate places. The two places of work were a necessary obligation arising from the nature of the special duties of her employment.

60.	Rath J said (ATC at 4262; ATR at 484):

"I am not concerned with those normal daily journeys that have their sole relation to a person's choice of his place of residence; I am concerned with journeys which begin as a result of performance of the duties of the employment at the taxpayer's home. The journey from home to the office is undertaken, not to commence duty, but to complete an aspect of the employment already under way before the journey commences."

61.	The mere receipt of telephone calls from an employment agency or an employer is not sufficient to allow the home to be classed as a base of operations.

62.	In Genys' case the taxpayer was contacted by the nursing agency when work was available. The taxpayer argued that her work instructions were received from the agency over her home telephone – the only method of contacting the taxpayer and thus the home constituted a work base. The Court held that the taxpayer's duties did not commence at the time of receipt of the phone calls but upon arrival at the relevant hospital. Northrop J said (FCR at 501; ATC at 4881; ATR at 362):

"I am of the opinion that the mere receipt of telephone calls from the agency requesting the respondent to work a particular shift is not sufficient to constitute the respondent's home a place of work. ...Nor does the respondent commence her duties upon receipt of the call, ...the taxpayer's duties did not commence until her arrival at the hospital."

Requirement to carry bulky equipment

63.	A deduction may be allowable if the transport costs can be attributed to the transportation of bulky equipment rather than to private travel between home and work. If the equipment is transported to and from work by the employee as a matter of convenience or personal choice, it is considered that the transport costs are private and no deduction is allowable.

•	A deduction is not allowable if a secure area for the storage of equipment is provided at the work place (see Case 59/94 94 ATC 501; AAT Case 9808 (1994) 29 ATR 1232).

•	In FC of T v. Vogt 75 ATC 4073; (1975) 5 ATR 274 the taxpayer was a musician who kept his instruments and related equipment at home for storage and practice. He would generally transport all of his instruments, including an acoustic bass and electric bass (each with their own amplifying equipment), trumpet and flugel horn, to each place of performance. The Court held that (ATC at 4078; ATR at 279):

"...in a practical sense, the expenditure should be attributed to the carriage of the taxpayer's instruments rather than to his travel to the places of performance. The mode of his travel was simply a consequence of the means which he employed to get his instruments to the place of performance, that is by carrying them in the motor vehicle which he drove."

64.	The extreme bulk of the equipment was a decisive factor in this case. Justice Waddell considered the analogy of a violinist who kept his violin at home for safe-keeping and practice, and stated (ATC at 4078; ATR at 280) that the cost of travelling from his home to the place of performance:

"...would not be deductible...it could not be said to arise from, nor could it be attributed to, the necessity of getting the violin to the place of performance."

65.	In Case 43/94 94 ATC 387; AAT Case 9654 (1994) 29 ATR 1031 the taxpayer was a flight sergeant with the Royal Australian Air Force. He was supplied with a locker in which to store various items of uniform clothing and flying equipment. By personal choice, he kept only a full dress uniform in the locker, preferring to keep the equipment in the boot of his car in which he travelled to and from work. The equipment was carried in a duffle bag which, when packed, weighed 20kg. He usually took home a navigational bag containing charts, work manuals and study materials and, on occasions, he carried another bag which weighed 10kg when packed.

66.	The Tribunal found that (ATC at 390; ATR at 1034-1035):

"...all of the items...when removed from the bag, were capable of satisfactory storage in the locker; the decision to keep the equipment in the boot of the car was driven by personal choice; the duffle bag with its contents was not of a size or weight to impede facile transportation."

The Tribunal decided that the cost of the taxpayer's travel to and from work was not incurred in earning his assessable income.

67.	The requirement to incur transport expenses to carry bulky equipment is a reflection of the practical necessity for the employee's tools of trade to be readily available at each work site. For example, in Case T106 the taxpayer was required to transport shovels, a brick-rake and other minor equipment to each site. The teacher in Wiener's case transported paperwork, texts, film cassettes, tape recorders and sometimes a film projector to the various schools attended.

68.	Example: Enrico is a bricklayer who is employed at a building site for six months. He carries a cement mixer, a ladder, shovels, trowels and other equipment to and from the site each day. A secure storage area is not provided at the work site. Enrico is not engaged in itinerant employment. However, a deduction is allowable for the cost of travelling between home and work due to the carriage of bulky equipment.

69.	Example: Suzette is employed as an electrician. She travels daily between several work sites, carrying a small tool box. Suzette would not be allowed a deduction for the cost of transport between home and work on the basis that she is required to carry bulky equipment. However, she would qualify for a deduction on the basis that her employment is itinerant. The carriage of equipment may support characterisation of Suzette's employment as itinerant because it arises from the practical necessity for her tools of trade to be readily available for use at each work site.

The employer provides an allowance

70.	Official recognition by an employer may indicate that travelling is a necessary element of the employment. However, receipt of an allowance does not, in itself, indicate that the employee's work is of an itinerant nature or that the travel is deductible. A particular employer may pay an allowance irrespective of whether the employee is required to travel in the course of their duties. Alternatively, an allowance may be paid to compensate the employee for the time or distance involved in travelling to and from work, the lack of public transport or for travel at inconvenient times. The payment of an allowance in such circumstances would not indicate that the employment is itinerant in nature.

71.	Therefore, the payment of an allowance is, by itself, insufficient to prove itinerancy, and must be considered together with the other characteristics of the employee's work. The deductibility of an expense covered by an allowance is determined by subsection 51(1) of the Act together with the substantiation provisions (see Taxation Ruling IT 2543).

72.	In Wiener's case the school teacher was paid an allowance for travelling. This was one of the factors that assisted the Court to infer that travelling was an essential part of her duties. In Case U97, B J McMahon (discussing Wiener's case) said (ATC at 587; ATR at 3494):

"It is to be noted that she was paid an allowance for travelling. From this, inter alia, the court was prepared to infer that travelling was a necessary element of her employment."

73.	In Case U97 the Tribunal was of the opinion that the taxpayer's employment lacked itinerant characteristics. Among those inherent elements which the Tribunal reviewed in making its decision, the absence of official recognition by the employer, through the provision of a travel allowance, was unfavourable to the taxpayer's claim. The Tribunal said (ATC at 588; ATR at 3495-3496):

"There is not the web of workplaces that one looks for as a structure for the applicant's working life if that life is to be regarded as itinerant. There is not the constant unsettled despatch from one workplace to another, the element of uncertainty, the official recognition by the employer through allowances of the essential nature of the travel, or even the requirement to carry tools of trade, all of which have played some part in assisting one to recognise categories of itinerant workers when they arise."

Transport expenses

74.	Transport expenses include public transport fares and the running costs associated with using motor vehicles, motor cycles, bicycles, etc., for work-related travel. They do not include the cost of travel expenses (i.e., accommodation, meals and incidental expenses).

Travel between home and work

75.	A deduction is generally not allowable for the cost of transport by an employee between home and his or her normal work place as it is generally considered to be a private expense. The cost of travelling between home and work is generally incurred to put the employee in a position to perform duties of employment, rather than in the performance of those duties. This principle is not altered by the performance of incidental tasks en route (paragraph 34 of Miscellaneous Taxation Ruling MT 2027) or use of a car because using public transport is impracticable.

76.	The High Court considered transport expenses incurred between home and work in Lunney v. FC of T (1957-1958) 100 CLR 478; (1958) 11 ATD 404 (Lunney's case). In a joint judgment, Williams, Kitto and Taylor JJ (CLR at 498-499; ATD at 412-413) stated the following:

"The question whether the fares which were paid by the appellants are deductible under s.51 should not and, indeed, cannot be solved simply by a process of reasoning which asserts that because expenditure on fares from a taxpayer's residence to his place of employment or place of business is necessary if assessable income is to be derived, such expenditure must be regarded as "incidental and relevant" to the derivation of such income. ...But to say that expenditure on fares is a prerequisite to the earning of a taxpayer's income is not to say that such expenditure is incurred in or in the course of gaining or producing his income."

77.	The fact that the transport is outside normal working hours or involves a second or subsequent trip does not change this principle. For more information see paragraph 6 of Taxation Ruling IT 2543, Taxation Ruling IT 112 and Taxation Determination TD 93/113.

78.	Example: Graeme is a primary school teacher who travels daily to and from school. Occasionally, he is required to attend parent-teacher meetings at the school outside normal working hours. The cost of this travel between his home and the school is not an allowable deduction.

79.	An employee may be regularly employed at one site on some days and another on other days. In both cases, the normal work place is where the employee performs normal duties.

80.	Example: Rani is a doctor who works at three medical clinics. Over a period of two weeks she works four days at one clinic and three days each at the other clinics. The travel between home and any of these locations is travel to and from her normal work place. It is private and no deduction is allowable.

•	A deduction is allowable for the cost of travelling between home and work for an employee who is engaged in itinerant work as outlined in this Ruling. Lord Wilberforce in Taylor v Provan, at 215, stated:

•	"To do any job, it is necessary to get there: but it is settled law that expenses of travelling to work cannot be deducted against the emoluments of the employment. It is only if the job requires a man to travel that his expenses of that travel can be deducted, i.e. if he is travelling on his work, as distinct from travelling to his work. The most obvious category of jobs of this kind is that of itinerant jobs, such as a commercial traveller. ...But for this doctrine to apply, he must be required by the nature of the job itself to do the work of the job in two places: the mere fact that he may choose to do part of it in a place separate from that where the job is objectively located is not enough."

81.	A deduction is also allowable for the cost of transport between an employee's home and the employer's office where the employee is engaged in itinerant work and periodically (e.g., once a week) attends the office to undertake administrative tasks. These would commonly include the completion or filing of reports, collection of supplies or organisation of future trips, etc., (see paragraph 27 of Miscellaneous Taxation Ruling MT 2027).

82.	However, a deduction is not allowable for the cost of transport between an employee's home and the employer's office where the employee attends the office at the commencement and end of each day. This travel falls within the general rule of Lunney's case.

83.	Example: Tom is an employee truck driver. He travels to his employer's depot at the beginning and end of each shift to collect and deliver his truck. Although travel is an inherent part of Tom's duties, the cost of transport between his home and the depot is not an allowable deduction. The travel is private because it is between Tom's home and his regular place of employment (see paragraphs 77 to 82 above and Taxation Determination TD 94/17).

Award transport (fares) payments

84.	Award transport (fares) payments are allowances paid to employees under an award that was in force on 29 October 1986. These payments recognise that employees may incur transport costs for travel undertaken in the course of performing the duties of employment. Award transport (fares) payments do not cover the cost of accommodation, meals and incidentals incurred when travelling.

85.	The receipt of an allowance, whether paid under an award or not, does not mean that an employee is automatically entitled to claim a deduction. Regardless of the level of the claim, the tests of deductibility in subsection 51(1) of the Act must be met (see Taxation Ruling IT 2543 and Taxation Determination TD 93/174).

86.	A deduction is allowable only to the extent to which the expenses are incurred by an employee in earning assessable income. A deduction is not allowable for amounts that have not been incurred, or for expenditure that is not incurred in earning assessable income.

87.	In addition to the tests in subsection 51(1), the rules of substantiation must be met in relation to claims made for transport expenses covered by award transport (fares) payments.

88.	Employees who claim deductions in excess of the amount of the award transport payment payable under the award as at 29 October 1986, must substantiate the whole of the claim, not just the excess. Deductions claimed that do not exceed the award rate as at 29 October 1986 are excluded from the substantiation requirements.

EXAMPLES

Example 1

89.	Cathy is a bank employee attached to a central branch. Apart from her regular duties she also performs relief work at nominated branches within a given area. Cathy is normally aware of the branches she must attend for relief duties well in advance, although she may occasionally be called at short notice. Cathy is not engaged in itinerant employment because:

(a)	travel is not a fundamental part of her employment;

(b)	there is no continual travel from one work site to another. Upon commencement of her duties at a branch she is not required to travel;

(c)	the uncertainty in her employment is minimal. She is generally aware in advance of the branch she must attend; and

(d)	she has several regular places of employment.

Example 2

90.	Brian is a bank employee who works at the same branch each day. In addition to his normal duties, Brian is rostered on stand-by duty after hours to attend automatic telling machines (ATMs) within a given area when break-downs occur. If Brian is called to attend an ATM his employer pays him an allowance from the time he leaves home until his return.

91.	Brian has two distinct parts of his employment. The first requiring daily travel between his home and his usual branch, and the second requiring travel between his home and the ATMs within his area. Brian's usual pattern of travel involves attendance at several ATMs before returning home.

92.	A deduction is not allowable for the cost of transport between his home and his usual branch. It is a private expense and falls within the general rule of Lunney's case (see paragraph 77 to 82 above). A deduction is allowable for the cost of transport between Brian's home and the ATMs because this part of his employment is inherently itinerant for the following reasons:

(a)	travel is a fundamental part of Brian's stand-by duties;

(b)	the various ATMs within Brian's given area are a web of work places;

(c)	there is usually continual travel from one ATM to another;

(d)	Brian's stand-by duties have a degree of uncertainty; and

(e)	an allowance is paid by his employer in recognition of the need to travel.

Commissioner of Taxation

8 July 1996


Taxation Ruling TR 2002/10 Captial gains tax asset register
Taxation Ruling TR 2002/10

Income tax: capital gains tax: asset register

Preamble

The number, subject heading, Class of person/Arrangement, Date of effect and Ruling parts of this document are a "public ruling" for the purposes of Part IVAAA of the Taxation Administration Act 1953 and are legally binding on the Commissioner. The remainder of the document is administratively binding on the Commissioner. Taxation Rulings TR 92/1 and TR 97/16 together explain when a Ruling is a public ruling and how it is binding on the Commissioner.

Contents:

What this Ruling is about

Class of person/arrangement

Date of effect

Ruling

Explanation

What is not an asset register

Certification

Levels of Information

Examples

Example 1 – Contents of a simple asset register

Example 2 – Asset register for a depreciating asset

WHAT THIS RULING IS ABOUT

1.	This Ruling is about:

a)	the use of asset registers under Division 121 of the Income Tax Assessment Act 1997 ("ITAA 1997") for keeping records about Capital Gains Tax ("CGT") assets, acts, transactions and events;

b)	valid entries in an asset register;

c)	valid certification of asset register entries; and

d)	entries made either in paper registers or electronically.

CLASS OF PERSON/ARRANGEMENT

2.	This Ruling applies to taxpayers who wish to maintain asset registers in meeting their obligations to keep CGT records.

3.	The Ruling considers the minimum requirements necessary to satisfy the statutory requirements in respect of asset registers to permit original records to be discarded after the period specified in section 121-25 of the ITAA 1997.

4.	The Ruling does not address the question of what evidence it may be advantageous or prudent for a taxpayer to keep if any dispute with the Commissioner subsequently arises.

DATE OF EFFECT

5.	This Ruling applies to entries made in an asset register under Division 121 of ITAA 1997 that are certified by a tax agent or a person approved by the Commissioner, on or after 1 January 1998. Subsections 160ZZU(6) and (9) of the Income Tax Assessment Act 1936 ("ITAA 1936") also indicate that taxpayers may include in an asset register details of an asset acquired before commencement of those subsections provided that the information is certified on or after 1 January 1998.

RULING

6.	Asset registers must comply with the general record keeping requirements expressed in section 121-20 of the ITAA 1997. The asset register must contain all of the information that can reasonably be expected to be relevant to working out whether you have made a capital gain or capital loss, otherwise you must retain your original documents.

7.	Your asset register must contain essential information about CGT assets, acts, transactions, events or circumstances that you transferred from your original documents. Original documents include, for example, invoices, receipts, contracts and valuations, or other records, including taxpayer created records such as elections, options or choices made and evidenced in writing. These represent the most elementary entries and it may be necessary for taxpayers to include more information, depending upon the complexity of the arrangement.

8.	Taxpayers may maintain the register themselves, or have someone else, such as a tax agent, maintain it for them.

9.	Provided that a person who is a registered tax agent or another person approved by the Commissioner certifies the entries as being a true record of information contained in the original documents, taxpayers may dispose of original documents five years after certification.

10.	The act of certification reflects a commitment to records integrity and/or copying in a similar fashion to the procedures adopted with legal documents or certifications by Commissioners of Declarations etc. For example, in respect of a paper version of an asset register, in addition to certifying a particular entry or series of entries for a particular date, the tax agent or other person approved by the Commissioner would ensure that the register is:

•	typed, printed or completed in ink;

•	page numbered sequentially; and

•	initialled on each folio.

11.	Certification does not represent some sort of verification of the truth of the information added to the register.

12.	The following is an example of an appropriate form of words for certification:

I, [full name], Registered Tax Agent [No.], certify that this and the preceding pages signed by me for identification are a true and faithful transcription of information contained in the original documents which I have sighted.

[Signature]

[Date]

13.	The asset register may be formatted as a table, schedule or some other form. Taxpayers may copy information verbatim or as a summary of the information contained in the original document. However, it is mandatory that an entry contains all of the information in the original document relevant to establishing and/or calculating any capital gain or capital loss, be certified and of sufficient integrity to satisfy the requirements of Division 121 ITAA 1997.

14.	An asset register may be a paper record or in electronic form. Taxpayers opting to use electronic systems must ensure that whatever system is used complies with all of the provisions of the legislation governing record keeping. Like paper based systems, and consistent with the policy of the legislation, an electronic asset register needs to be sufficiently secure to ensure that each entry provides an accurate transcription of information from the original records and certification of entries. The format of the system should be such that entries cannot be easily altered once entered. For example, the software should incorporate audit trails to track additions and deletions to the register. Records generated and stored in a computer are documents for the purposes of federal legislation: section 25 Acts Interpretation Act 1901; sections 47, 48, 149 Evidence Act 1995.

15.	An asset register will not satisfy the record keeping legislation if the information stored is in an electronic form that can be easily altered e.g., a mere spreadsheet. A spreadsheet that does not incorporate adequate security measures to prevent unauthorised access and data manipulation lacks the security and integrity that an asset register must have.

16.	Asset register entries must satisfy the provisions of paragraph 121-20(2) ITAA 1997. The records must be in English, or be readily accessible and convertible into English. The records must also include whatever material is necessary for liability to pay CGT to be easily identified and calculated.

EXPLANATION

17.	Division 121 ITAA contains the record keeping provisions relating to capital gains and capital losses. Section 121-25 ITAA 1997 requires taxpayers to retain records not only until the end of 5 years after a CGT event happens, but also 5 years after any further relevant CGT event can happen which would be relevant to determining whether you have made a capital gain or capital loss from the event. Taxpayers will also need to keep those records to substantiate any carry forward capital loss which is intended to be applied to a future capital gain.

18.	Section 121-15 Income Tax (Transitional Provisions) Act 1997 requires that taxpayers continue to keep records in accordance with Division 121 ITAA 1997 if they had been keeping records under section 160ZZU ITAA 1936.

19.	Relevantly, Division 121 ITAA 1997 also permits taxpayers to maintain an asset register in place of original records relevant to calculating a capital gain or a capital loss arising out of a CGT event. Section 121-35 ITAA 1997 and its predecessor subsection 160ZZU(9) ITAA 1936, provide the legislative foundation for taxpayers to use an asset register in lieu of retaining original documents in discharging their responsibility to maintain records. Subsection 160ZZU(9) ITAA 1936 applied to asset register entries certified on or after 1 January 1998 until the introduction of Division 121 ITAA 1997. The legislation stipulates that you must keep your original documents for at least five years after certification of the asset register entry.

Example

James is an investor who specialises in rental properties. On 30 June 2000, he decides to transfer the property details to an asset register. On 01 July 2000, his tax agent sights the original documents and certifies that all of the details contained in the asset register match the details contained in the original documents. James cannot dispose of the original documents yet. He must still wait until 01 July 2005 before he can discard the originals.

20.	Paragraph 121-35(2)(a) ITAA 1997 stipulates that taxpayers must make asset register entries in English. The entries must contain all of the information contained in the original record that would be necessary to establish whether taxpayers made a capital gain or a capital loss from a CGT event.

WHAT IS NOT AN ASSET REGISTER

21.	An asset register will not meet the requirements of Division 121 ITAA 1997 if it is stored in a form e.g., in an electronic form such as spreadsheet programme, that can be altered. In the absence of adequate security measures to prevent unauthorised access and data manipulation, a mere spreadsheet lacks the security and integrity measures that an asset register must have. For an electronic document without such measures it would then be prudent to print the document for certification in hard copy form. Taxpayers can then either retain the paper record or transfer it to electronic media.

CERTIFICATION

22.	Paragraph 121-35(2)(b) ITAA1997 provides that another person who is a registered tax agent or some other person approved by the Commissioner must certify in the register that the information entered is correctly transcribed information from the original documents. If the register contains material other than that transcribed from the original records, the certifier should clearly identify what is being certified and what is not.

23.	A person other than a tax agent seeking approval to certify asset register entries would need to demonstrate a sound understanding of taxation law.

24.	The act of certification does not represent some sort of verification of the truth of the record entered. Certification does not mean that the person certifying the record is certifying any more than the existence of the original document or taxpayer created record and that the entry in the register reflects that document.

Example

Michael arranges for a contractor to build a shed for $50,000 to protect farm machinery from the weather. Michael’s accountant sights the original receipt supplied by the contractor in respect of the machinery shed. The accountant certifies that the information from the receipt has been properly transcribed into the asset register, not that $50,000 was actually spent or that the shed was actually used as stated.

25.	In this respect the act of certification supplements other fundamental components of standard records handling and ensures that asset register entries are appropriately made and stored.

26.	Taxpayers may dispose of original documents five years after certification in the asset register, although it is not compulsory to do so. Taxpayers may choose to retain the original documents for reasons unrelated to their responsibilities under CGT. However, it is essential that taxpayers retain original records for the period prescribed in section 121-25 ITAA 1997 if they have not transferred all relevant information to the asset register.

27.	Taxpayers may choose to record original documents relating to a CGT asset in an asset register but retain other original documents recording other information relevant to the same CGT asset. The general record keeping requirements established by Division 121 ITAA 1997 also apply in relation to information not maintained in an asset register. In particular, you must retain your original documents if you do not include information in your asset register which is relevant to calculating a capital gain or a capital loss.

28.	There is no prescribed format on how to set out entries in an asset register. The layout may take the form of a table, schedule or some other form, but must be certified. The nature and type of information to be included in the asset register will vary depending on the type of asset owned, the CGT event that happened to the CGT asset and the parties involved in the transaction.

LEVELS OF INFORMATION

29.	Taxpayers may find it prudent to retain documents, such as valuation reports, in addition to the information contained in the asset register. The following represent the minimum levels of information taxpayers should transfer from their original documents to an asset register in order to satisfy section 121-20 ITAA 1997:

•	date of acquisition of the asset;

•	cost of the asset;

•	description, amount and date for any incidental costs you incurred to acquire the CGT asset or that relate to a CGT event that happens to the asset (e.g., legal fees or valuation fees);

•	description, amount and date for any non-capital costs of ownership of the CGT asset you incurred if you acquired the asset after 20 August 1991 (e.g., interest on borrowings, rates or land tax);

•	description, amount and date for expenses incurred to increase the asset’s value that is reflected in the state or nature of the asset at the time of the CGT event (e.g., expenses incurred to erect a garage on residential property);

•	description, amount and date for expenses incurred to preserve or defend your title or rights to the asset (e.g., legal fees);

•	other information contained in a record that may be relevant in calculating your CGT obligation including decisions about elections, choices and options;

•	date the CGT event happened to the asset; and

•	capital proceeds received when the CGT event occurred.

30.	Entries in an asset register must be either a direct copy or a summary of all relevant information contained in the original record. Taxpayers may provide comments to clarify entries, but it must be clear in the entry that the information is only commentary and not part of the record.

31.	Taxpayer created records about taxation matters may constitute separate information or records from other records. This may include elections or choices, some of which may be contained primarily in amounts reflected in tax returns. Taxpayers may also need to retain such records for other reasons as separate documents outside an asset register. If there is some doubt about the precise details of the asset then you should keep your original documents.

32.	Taxpayers may add comments to asset register entries to assist them to accurately calculate a capital gain or a capital loss. The entries must clearly indicate that the information is commentary, for example, by using footnotes, italics or attaching an appendix stating that the information is in the form of a comment.

Example

John receives his 2001/2002 rates notice from the shire council for a holiday home. The council rates on John’s rental property for the 2001/2002 income year were $2,500. In the 2002/2003 income year, John was advised that an error had been made in relation to his rates notice and he received a refund from the council of $500. As John has now partially recouped rates which he previously included in his cost base he will need to create some record to that effect and he may amend his asset register to reflect the recoupment of this expenditure. John will need to ensure that this entry is certified.

33.	Taxpayers opting to store information electronically face difficulties as digital technology evolves. In particular, taxpayers need to consider the implications of upgrading from an early version of digital software to a more recent version. If information cannot be transferred to the new system without corrupting the existing stored data, then the records must be retained in the existing certified electronic database or printed and retained in paper format. Taxpayers may also transfer an existing asset register kept in paper form to digital storage by scanning the documents into an electronic form. However, whatever system taxpayers choose must reflect integrity, accuracy and reliability in electronic record keeping.

EXAMPLES

Example 1 – Contents of a simple asset register

34.	Jasmine is approaching retirement and buys an investment unit. She intends to use the unit as a source of funds for her old age and that it should pass to her child, Sarita, as part of her estate. She wants Sarita to be able to ascertain easily the cost base of her unit after her death.

35.	Jasmine records the purchase price of the unit, date of acquisition, stamp duty and legal fees incurred in acquiring the unit. She records the details in an asset register. Jasmine’s tax agent certifies the entry.

Example of a CGT Register

Asset	Two bedroom home unit with underground lock-up garage (single vehicle)
Address	3/21 Blackacre Street JONESVILLE NSW 1234
Taxpayer	Jasmine JONES
Vendor	[name of home unit developers]
Date of Contract	Contract of purchase signed on 02 January 1990
Consideration	$150,000
Settlement	Settlement date of 05 February 1990
Conveyancing fee	$1,500 paid to [name of conveyancer].  Letter dated 05 February 1990 outlining fee for conveyancing of home unit.  Fee paid and receipt dated 05 February 1990
Stamp Duty	$2,000 paid to NSW Office of State Revenue on 05 February 1990.  Receipt dated 05 February 1990
Certification	I, [full name], Registered Tax Agent [No.], certify that this and the preceding pages signed by me for identification are a true and faithful transcription of information contained in the original documents which I have sighted. [Signature] [Date]
Example 2 – Asset register for a depreciating asset

36.	Bill buys a powerful laptop computer on 1 July 2001 for $11,000 while still in his final year of graphic design at university. The effective life of the laptop is three years and Bill’s diminishing value rate is determined to be 50%. He starts work on 1 January 2002 with an internet service provider designing web pages. On 30 June 2002 Bill estimates that he used the laptop 50% for private and 50% for income related purposes. On 30 June 2002 Bill sells his laptop for $5,600. His accountant certifies the entries. Bill should include

•	a balancing adjustment amount of $50 as income;

•	a deduction to the value of 50% of $5,500; and

•	a capital gain on disposal of a depreciating asset of $50.

His asset register could be as follows:

Date	Description	Amount	Comment
01 July 2001	Purchase of laptop computer (Serial Number 1234567) from [name of supplier] as per supplier’s tax invoice and receipt.	$11,000	Used from 01 July to 31 December 2001 for private study. Diminishing value rate of 50% (150%/effective life of 3 years)
01 January 2002			Commenced work with [name of employer] as web page designer, using the laptop at work.
30 June 2002	Private sale of laptop as per receipt provided to buyer.	$5,600
		$2,750	Year 1 deduction for decline in value (50% estimate as private use
		$5,500	Written Down Value
		$50	Balancing adjustment amount (50% estimate as private use)
		$50	Capital gain on disposal of declining value asset (50% estimate as private use)
I, [full name], Registered Tax Agent [No.], certify that this and the preceding pages signed by me for identification are a true and faithful transcription of information contained in the original documents which I have sighted.

[Signature]

[Date]

Commissioner of Taxation

19 June 2002


The ATO is unaware of any software currently available commercially that meets the requirements of section 121-35 ITAA 1997.


Applicants seeking approval as a person approved by the Commissioner for the purposes of paragraph 121-35(2)(b) ITAA 1997 should write to the Australian Taxation Office in their capital city, quoting TR 2002/10 and indicating the basis for consideration.


Taxpayers may include references to cheque butts, bank statements and details of other events or circumstances relevant to the assets listed.


Taxation Ruling TR 2002/6 Simplified Tax System: eligibility - grouping rules (STS affiliate, control of non-fixed trusts)
Taxation Ruling TR 2002/6

Income tax: Simplified Tax System: eligibility – grouping rules (STS affiliate, control of non-fixed trusts)

Preamble

The number, subject heading, Class of person/arrangement, Date of effect and Ruling parts of this document are a "public ruling" for the purposes of Part IVAAA of the Taxation Administration Act 1953 and are legally binding on the Commissioner. The remainder of the document is administratively binding on the Commissioner. Taxation Rulings TR 92/1 and TR 97/16 together explain when a Ruling is a public ruling and how it is binding on the Commissioner.

Contents:

What this Ruling is about

Legislative framework

Ruling

Date of effect

Explanations and Examples

Detailed contents list

WHAT THIS RULING IS ABOUT

1.	This Ruling considers the application of:

(a)	the non-fixed trust control rule in paragraph 328-380(4)(c) of the Income Tax Assessment Act 1997 ("ITAA 1997"); and

(b)	the definition of *STS affiliateF1 in subsection 328-380(8) of that Act.

2.	These rules affect whether an entity is eligible to be an *STS taxpayer for the purposes of the Simplified Tax System ("STS") in Division 328.

3.	Specifically, the Ruling considers:

(a)	when a trustee of a non-fixed trust is accustomed or might reasonably be expected to act in accordance with an entity's directions, instructions or wishes for the purposes of paragraph 328-380(4)(c); and

(b)	the role and scope of the *STS affiliate definition in subsection 328-380(8).

4.	Special consideration is given to the following aspects of the *STS affiliate definition:

(a)	when an entity could reasonably be expected to act in accordance with a second entity's directions or wishes or in concert with the second entity; and

(b)	when two entities will be viewed as acting "in concert".

Class of person/arrangement

5.	This Ruling applies to an entity that satisfies the STS eligibility rules in Subdivision 328-F for a relevant income year and has made an election in the *approved form to become an *STS taxpayer for that year under Subdivision 328-G of the ITAA 1997.

LEGISLATIVE FRAMEWORK

Introduction to Division 328 – Simplified Tax System

6.	The STS arose as a result of the Government's adoption of Recommendation 17.1 of the Ralph Committee's report, Review of Business Taxation: A Tax System Redesigned. This recommended the introduction of a simplified tax system to reduce the income tax compliance costs faced by small business.

7.	Division 328 of the ITAA 1997 provides the legislative framework for the STS. In implementing the recommendation of the Ralph Committee, Division 328 offers eligible small businesses the choice of using modified accounting, capital allowance and trading stock regimes. An entity that chooses to become an *STS taxpayer will also be able to claim a full deduction for certain prepaid expenditure through the combined operation of section 8-1 of the ITAA 1997 and section 82KZM of the Income Tax Assessment Act 1936 ("ITAA 1936").

Outline of the STS eligibility rules

8.	Before the rules in Division 328 can apply to an entity, the entity must be an *STS taxpayer for the relevant income year. Section 328-435 requires that to be an *STS taxpayer, the entity must:

(a)	be eligible to be an *STS taxpayer under Subdivision 328-F; and

(b)	notify the Commissioner in the *approved form of its choice to be an *STS taxpayer for the income year.

9.	Under Subdivision 328-F, an entity is eligible to be an *STS taxpayer for an income year if:

(a)	it carries on a *business in that year; and

(b)	it has an *STS average turnover for that year of less than $1 million; and

(c)	the sum of the *adjustable values of the *depreciating assets held by it and other entities with which it is grouped is less than $3 million at the end of that year: section 328-365.

10.	Subsection 328-50(2) describes the purpose of these eligibility rules as being to prevent entities other than eligible small businesses from taking advantage of the benefits offered by the STS.

Outline of the STS grouping rules

11.	The STS is directed towards small business, with particular focus on the smallest business sector. In recommending the introduction of the STS, the Ralph Committee's report, Review of Business Taxation: A Tax System Redesigned identified the need for the STS to contain rules preventing larger businesses from gaining access to the benefits of the STS. Of particular concern was the potential for a larger business to be structured or restructured into several smaller operations, one or more of which would be eligible to be an *STS taxpayer.F2

12.	Subdivision 328-F addresses these concerns through the grouping rules in section 328-380 which operate to group "related" entities. Section 328-365 then applies so that the turnover and depreciating assets of the broader group are taken into account when determining whether an individual member of the group is eligible to enter the STS.

13.	Section 328-380 operates by grouping entities that can be seen as related because of transparent connections such as shareholding or fixed entitlements under a trust deed. It also operates to group entities which may superficially appear unrelated but which in substance cannot be viewed as independent of each other. This is achieved through the *STS affiliate concept in subsection 328-380(8). The *STS affiliate concept looks to the underlying relationship between two entities to determine whether in substance, one can properly be viewed as carrying on a business independently of the other. Similarly, the grouping test for trusts that are not *fixed trusts in paragraph 328-380(4)(c) examines the underlying relationship between an entity and the trustee.

Eligibility as an STS taxpayer – STS average turnover less than $1 million

14.	To be eligible to be an *STS taxpayer for an income year, an entity must have an *STS average turnover for the income year of less than $1 million: paragraph 328-365(1)(b).

Calculating STS average turnover for a year

15.	Under the general rule in subsection 328-370(1), an entity's *STS average turnover for an income year is the average of its *STS group turnovers for any three out of the four previous income years (not including the current year). This is known as the "look back" method of calculating *STS average turnover for a year.

16.	However, an entity may not satisfy the *STS average turnover test under the look back method, or it may find that it cannot use this method because it did not carry on a business in any of the four previous income years. In either case, under subsection 328-370(3) it can instead calculate its *STS average turnover for an income year using the average of its *STS group turnover for the current income year and reasonable estimates of its *STS group turnovers for the following two income years. This is known as the "look forward" method of calculating *STS average turnover.

17.	To work out its *STS average turnover for an income year, an entity's first step therefore is to identify which income years it is going to take into account in working out this average under section 328-370.

18.	The next step is to work out its *STS group turnover for each of those years.

STS group turnover

19.	The term *STS group turnover is defined in section 328-375. Under this definition, an entity's *STS group turnover for an income year is the sum of the *value of the business supplies made by the entity in the income year and the *value of the business supplies made in that year by the entity's "grouped entities". This figure is reduced by the *value of the business supplies made between the entity and its grouped entities, and between the grouped entities themselves.

20.	To work out its *STS group turnover for an income year, an entity will therefore need to know which entities, if any, are its grouped entities for that year.

21.	For example, if the entity is working out its *STS average turnover for a year using the average of its *STS group turnovers for three out of the four past income years, the entity will need to work out which entities (if any) were its grouped entities in each of those previous three income years.

22.	This is done by applying the grouping rules in section 328-380 to the entity and to the relevant surrounding circumstances, as they existed in each of those years.

23.	An entity working out its *STS average turnover using the average of its *STS group turnovers for the current and following two income years will need to work out which entities are its grouped entities in the current year and which entities will be its grouped entities in the following two income years. This is done by applying the grouping rules in section 328-380 to the entity and to the relevant surrounding circumstances as they exist in the current year and as they are reasonably expected to exist in each of the following two income years.

Grouped entities under section 328-380

24.	Under paragraph 328-365(1)(c), an entity's "grouped entities" for an income year are the entities whose *value of the business supplies is grouped with its own under section 328-380.

25.	The *value of the business supplies made by an entity will be grouped with that of another under section 328-380 if:

(a)	either entity controls the other in the way described in section 328-380: paragraph 328-380(1)(a);

(b)	both entities are controlled in that way by the same third party: paragraph 328-380(1)(b); or

(c)	the entities are *STS affiliates of each other: paragraph 328-380(1)(c).

Role of the STS affiliate definition

26.	The term *STS affiliate is defined in subsection 328-380(8) as follows:

"An entity is an STS affiliate of yours if the entity acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the entity's *business."

27.	The definition of *STS affiliate plays a two-fold role in identifying which entities were the entity's grouped entities in a previous income year or which entities will be its grouped entities for the current and following two income years.

28.	The first role is in relation to the rule in paragraph 328-380(1)(c). Under that paragraph a grouped entity will be one that is an *STS affiliate of you, if you are also an *STS affiliate of it. (i.e., two entities in what might loosely be called a "joint venture".)

29.	The second role relates to the rules in paragraphs 328-380(1)(a) and 328-380(1)(b). Under these rules, a grouped entity will be one that "controls" you or is "controlled" by you, or one where you both are "controlled" by the same third entity. Subsections 328-380(3), (4), (5) and (6) set out certain of the rules under which it is determined whether one entity "controls" another. Under these rules, an entity "controls" another if it and/or its *STS affiliate(s) "control" that other entity in one of the ways specified in section 328-380.

30.	To work out its grouped entities in a previous income year, an entity will firstly need to consider which entities, if any, were its *STS affiliates in that past year. To determine this, the *STS affiliate definition needs to be applied to the entity and to the relevant surrounding circumstances as they existed in that past year. To work out its grouped entities for the current and each of the following two income years, the entity will need to determine which entities, if any, are or will be its *STS affiliates in each of those years. To determine this, the *STS affiliate definition will need to be applied to the entity and to the relevant surrounding circumstances as they exist and are reasonably expected to exist in the current and following two income years.

RULING

The scope of the STS affiliate definition

31.	The *STS affiliate definition in subsection 328-380(8) does not apply where the potential *STS affiliate acts or could reasonably be expected to act as another directs or wishes, or in concert with it, only in relation to isolated transactions or on an irregular, ad hoc basis. For the definition to apply, the potential *STS affiliate must act in accordance with the entity's directions or wishes or in concert with it, or could reasonably be expected to so act, in relation to all or a substantial part of the affairs of the potential *STS affiliate's business.

32.	This reflects the intended effect of the *STS affiliate definition. This is to group entities that may superficially appear unrelated but which in substance have a high degree of connection and involvement with each other. The *STS affiliate definition is intended to apply where that degree of connection is such that, in substance, one business cannot be seen as being carried on independently of the other. (See paragraphs 2.38 and 2.40 of the Explanatory Memorandum to the New Business Tax System (Simplified Tax System) Act 2001.)

33.	Significantly, it follows from the definition that an entity that does not carry on a business cannot be an *STS affiliate.

Non resident entities

34.	The *STS affiliate definition applies to both resident and non-resident entities. Neither this definition, nor the definition of "entity" in subsection 960-100(1), contain any restrictions that would operate to preclude a non-resident entity being an *STS affiliate. This means that in determining which entities it is grouped with, an entity will need to consider its relationship, and the relationships of its *STS affiliates, with both resident and non-resident entities.

Partnerships

35.	Subsection 328-380(9) ensures that partners in a partnership are not *STS affiliates of each other simply because they act in concert with each other in relation to the affairs of the partnership business. To be *STS affiliates of each other, the partners would need to act in the relevant way in relation to a business activity external to the partnership business.

36.	However the question of whether the partnership itself is an *STS affiliate of the individual constituent partners is not affected by the rule in subsection 328-380(9). The partnership will be an *STS affiliate of a partner in that partnership if the partnership acts in accordance with the individual partner's directions or wishes, or in concert with it or could reasonably be expected to do so in relation to all or a substantial part of the partnership's business affairs.

37.	A partner or other entity may also be taken to control the partnership and be grouped with it on that basis under subsection 328-380(5). The partnership itself may be grouped with another entity if the partnership controls it under subsection 328-380(6).

Applying the two limbs of the STS affiliate definition – "acts" or "could reasonably be expected to act"

38.	The first limb of the *STS affiliate definition looks at the actual acts of the potential *STS affiliate to see if it acts, or has acted, in accordance with the entity's directions or wishes or in concert with the entity in relation to the potential *STS affiliate's business affairs (i.e., "acts in the relevant way").

39.	Where the STS affiliate definition is being applied to a past income year, the second limb of that definition looks at whether the potential *STS affiliate "could reasonably be expected" to have acted in the relevant way in that year despite not actually having done so.

40.	Where the *STS affiliate definition is being applied to the current or a future income year, the second limb of that definition looks at whether the potential *STS affiliate "could reasonably be expected" to act in the relevant way in any of those years.

41.	The three categories of behaviour caught by the *STS affiliate definition (that is, acting according to the directions, wishes or in concert with an entity) represent alternatives in terms of control, influence or cooperation. Only one of these alternatives needs to be present for the definition to apply.

Applying the STS affiliate definition to past years – the first limb

42.	For an entity to determine whether another entity was its *STS affiliate in a previous income year (for example, in calculating its *STS group turnover for that year), it needs to consider whether the potential *STS affiliate acted in the relevant way during that year.

43.	Whether the potential *STS affiliate did act in the relevant way in the past year will be a matter of historical record for the purposes of the first limb of the definition.

Applying the STS affiliate definition to past years – the second limb

44.	Even if the potential *STS affiliate did not act in the relevant way in that past year, it still needs to be considered, for the purposes of the second limb of the definition, whether it could reasonably be expected to have acted in the relevant way in relation to that past year.

45.	Whether it could reasonably have been expected to act in that way is to be determined based on evidence of events, transactions or relationships present in that earlier year. It can also be determined by reference to evidence of this kind from years before the past year in question where the effect of those events, transactions or relationships could reasonably be expected to have continued into the year in question. The process of arriving at a reasonable expectation that a potential *STS affiliate will act in a relevant way is explained below at paragraphs 49 to 56.

Applying the STS affiliate definition to current or future years

46.	Where an entity is working out its *STS average turnover for the current income year using the average of its *STS group turnovers for the current and following two income years, it will need to determine:

(a)	whether the potential *STS affiliate acts or has acted in the relevant way in the current year;

(b)	if it has not, whether it could reasonably be expected to have done so; and

(c)	whether it could reasonably be expected to act in the relevant way in each of the following two income years.

47.	Again, whether the potential *STS affiliate acts or has acted in the current year in the relevant way will be a matter of historical record.

48.	Whether the potential *STS affiliate could reasonably be expected to have acted in that way in the current year even though it did not actually do so, and whether it can reasonably be expected to do so in either or both of the following income years is examined below.

Meaning of "could reasonably be expected"

49.	In FC of T v. Peabody (1994) 181 CLR 359; 94 ATC 4663; (1994) 28 ATR 344 the full High Court, in considering the meaning of the phrase "might reasonably be expected" as it appears in section 177C of the ITAA 1936, heldF3 that "[a] reasonable expectation requires more than a possibility". In the High Court's view the phrase involves a prediction that must be sufficiently reliable for it to be regarded as reasonable.F4

50.	The requirement that the expectation as to the entity's actions be capable of description as "reasonable" was also adopted in News Corporation Ltd v. National Companies and Securities Commission (1984) 5 FCR 88; (1984) 57 ALR 550 and A G's Dept v. Cockcroft (1986) 10 FCR 180; (1986) 64 ALR 97; (1986) 12 ALD 468.

51.	It can reasonably be expected that a potential *STS affiliate will act, or would have acted, in the relevant way where the entity stands in a relationship of control or influence over the potential *STS affiliate in the relevant income year.

52.	The conclusion that such a relationship exists or existed in the relevant year may be based on:

(a)	inferences drawn from events, transactions or patterns of behaviour which show that the entity has been, is, or will be able to direct or influence the potential *STS affiliate's behaviour; and

(b)	the presence of a relationship between the two entities which enables or has enabled the entity to influence or direct the potential *STS affiliate.

53.	The types of relationships that may constitute a relationship of control or influence include:

(a)	family or other close personal relationships;

(b)	financial relationships and dependencies; and

(c)	relationships created through links such as common directors, partners or shareholders.

54.	However even where such a relationship is present, it must be of sufficient strength to enable the entity to direct or influence the potential *STS affiliate's actions in relation to all or a substantial part of the affairs of the latter's business. If, having regard to the full facts and circumstances of the particular case, it is evident that, despite that relationship the potential *STS affiliate cannot reasonably be expected to act in the relevant way, then it will not come within this particular part of the *STS affiliate definition.

55.	The kinds of considerations, which may show that a potential *STS affiliate cannot reasonably be expected to act in the relevant way, notwithstanding the strength of a particular relationship include:

(a)	a pattern of conduct which shows that despite the presence of a relevant relationship, it is the entities' practice not to involve themselves in each other's business affairs;

(b)	a pattern of conduct which shows that despite the presence of a relevant relationship and attempts to influence or direct the potential *STS affiliate, it is the potential *STS affiliate's practice not to act as the other entity wishes or directs;

(c)	whether the potential *STS affiliate has an overriding relationship with another entity that will prevent it from acting as the entity directs or wishes;

(d)	whether the potential *STS affiliate is bound by obligations which prevent it from acting as the other entity wishes in relation to the overall affairs of the business; and

(e)	whether to act as the other entity wishes would be inconsistent with the interests of the potential *STS affiliate.

56.	This is discussed further at paragraphs 103 to 139 in the Explanations and Examples part of this Ruling.

Meaning of "in concert"

57.	Under the definition of *STS affiliate, an entity will be your *STS affiliate if it acts in concert with you, or could reasonably be expected to do so, in relation to the affairs of its *business.

58.	The term "in concert" is not defined in Division 328 or elsewhere in the ITAA 1997. It therefore needs to be interpreted according to its ordinary meaning and legislative context.

59.	To ensure that the "in concert" test in the *STS affiliate definition only operates to group entities that are sufficiently related to warrant grouping, a potential *STS affiliate will only be regarded as acting "in concert" with another entity for the purposes of subsection 328-380(8) where:

(a)	it is acting together with the other entity in pursuit of a common goal or objective; and

(b)	that common goal or objective is the carrying on of a business by the potential *STS affiliate with a substantial degree of connection with or dependence on the business carried on by the other entity.

60.	The overall degree of that connection must be such that the potential *STS affiliate cannot be viewed as operating independently of the other entity.

Franchises

61.	The term "in concert" does not automatically operate to group franchisees and franchisors.

62.	To be grouped with each other as *STS affiliates under paragraph 328-380(1)(c) it is necessary that each entity is the *STS affiliate of the other. A franchisee and a franchisor will therefore not be grouped under that provision where only one of those entities is the *STS affiliate of the other. Whether a franchisee acts in concert with the franchisor in the conduct of the franchisee's business, or whether a franchisor's business is conducted in concert with a franchisee will in each case depend on the nature of the franchise agreements between the two parties and any other relevant factors such as those described in the table at paragraph 65.

Determining if two entities are acting in concert

63.	The following table describes some factors that are relevant to determining whether the potential *STS affiliate's business has the required degree of dependence and/or connection with the other entity's business.

64.	Under the *STS affiliate definition it is sufficient if the potential *STS affiliate's business has the required degree of connection with or dependence on the other entity's business. It is not necessary for the other entity's business to also have a substantial degree of connection with, or dependence on, the potential *STS affiliate's business.

65.	No factor is decisive, nor does each one necessarily have to be given the same weight. Rather, determining whether the potential *STS affiliate is acting in concert with the entity in relation to the business affairs of the former will be a matter of overall impression. Nonetheless, factors (G) to (I) inclusive will not be sufficient in themselves, to conclude that two entities are relevantly acting in concert with each other.

Factor	"for" there being a substantial connection	"against" there being a substantial connection
A. Nature and extent of commercial dealings between the two entities	Goods and/or services supplied by the potential *STS affiliate to the other entity account for a large percentage of the potential *STS affiliate's business and/or a large proportion of its income.	No supplies or a low level of supplies from the potential *STS affiliate to the other entity.
B. Common resources, facilities or services	The two entities share a number of facilities or services necessary for the operation of the businesses. For example, the entities share business premises, or staff, or management and accounting services, or income producing assets. The more facilities or resources that are shared, the stronger the indication that the two businesses have a substantial connection.	The two entities share no or few common resources and operate from separate business premises, use different assets, employ different staff, are managed by different individuals and/or use different accounting services.
C. Involvement in managerial decisions and day to day management	The entity actively participates in the potential *STS affiliate's day to day management and/or decision making processes. For example, it actively takes part in meetings of a company's board of directors or a partnership's partners' meetings.	The entity plays no part in the management of the potential *STS affiliate's business.
D. Financial interdependencies	The potential *STS affiliate is dependant on the other entity for access to loans or guarantees. Alternatively, the two entities could share common banking facilities such as a joint accounts or the same account signatories.	The potential *STS affiliate obtains its financial support from other sources. The entities maintain separate banking arrangements.
E. Common flow of profits	The profits from the businesses carried on by the two entities are ultimately received by the same entities.	The profits from the businesses carried on by the two entities are received by unconnected entities.
F. Common ownership/capital	The entities share the same owners, for example the same shareholders. The source of the capital underpinning the two entities is the same. For example, two partnerships sharing the same partners.	The ownership or capital backing of the two businesses can be traced to different sources.
G. Shared purchasing of goods or services	The two entities coordinate their orders for goods or services. Alternatively, the potential *STS affiliate is under an obligation to order through the other entity. A further alternative is where the entity determines which goods or services the potential *STS affiliate should order and/or orders on its behalf.	The two entities purchase goods or services independently of each other.
H. Common customers	The entities agree to share a customer's overall business. The entity directs customers to the potential *STS affiliate or uses it to obtain custom.	The entities maintain a separate client base. The entities do not seek to pursue marketing opportunities through each other.
I. Similar kind of business	The entities provide identical or similar goods or services.	The nature of the business carried on by the potential *STS affiliate is inherently different to that of the other entity.
The non-fixed trust control rule

66.	Paragraph 328-380(4)(c) provides that an entity will control a trust that is not a *fixed trust where a trustee of the trust is accustomed, or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the entity, its *STS affiliates or the entity together with its *STS affiliates.

Accustomed to act

67.	For the purposes of this test, a trustee will only be regarded as accustomed to act in accordance with the other entity's directions, instructions or wishes where it has done so on a recurrent basis. Isolated instances of such behaviour will not be a sufficient basis on which to conclude that an entity is accustomed to act as another directs, instructs or wishes. The relative importance of the matters in relation to which the trustee has acted as directed or instructed are also relevant to determining whether the trustee can be regarded as accustomed to act as another directs, instructs or wishes. The more important the matter, the stronger the grounds for concluding that the trustee is accustomed to act as the other entity directs, instructs or wishes. (Case 29/96, 96 ATC 330; Case 10,898 (1996) 32 ATR 1259).

Might reasonably be expected to act

68.	For the purposes of determining whether a trustee "might reasonably be expected to act" as directed, the approach outlined at paragraphs 51 to 55 for the *STS affiliate definition should be taken. The entity will need to determine whether it stands in a position of control or influence over the trustee.

69.	In the context of paragraph 328-380(4)(c), this will involve considering the past or current actions of the trustee together with any relevant dealings or transactions involving the entity and the trustee. This may show that the entity has been or is able to direct or influence the actions of the trustee.

70.	The relationship between the entity and the trustee also needs to be examined. The trustee may be a relative or associate of the entity, or an independent professional advisor, or a professional trustee. The nature of the relationship will affect whether it can be viewed as of sufficient strength to enable the entity to direct or influence the trustee's actions in relation to all or a substantial part of the trust's business. For example, if the trustee is a corporate trustee and the entity controls that company, the inference of control or influence will be stronger than if the trustee is a professional trustee engaged at arm's length.

71.	The entity's own standing in relation to both the trustee and the trust will also be relevant. For example, under the trust deed the entity may be the settlor and/or a beneficiary of the trust or it may act as an appointor.

72.	The use by an entity of a "memorandum of wishes" such as that discussed in Wily v. Fuller [2000] FCA 1512, or a similar document, to formalise its relationship with the trustee of a trust will also be relevant. In that case, a "memorandum of wishes" had been sent to the trustee with its agreement requesting it wherever possible to exercise its powers and discretions in accordance with the wishes of the other entity.

73.	When considering if the relationship with the trustee alone constitutes a reasonable basis for expecting the trustee to act as the entity directs, instructs or wishes, it will be relevant to consider whether to act in that way would cause the trustee to breach any of its obligations as trustee at law and/or under the trust deed.

74.	Generally, a professional trustee operating at arm's length would not be expected to act in accordance with the other entity's directions, instructions or wishes if to do so would breach its obligations as trustee. (See for example Hill J's remark in Wily v. Fuller at paragraph 66 of the decision.)

75.	However, in cases where the trustee is closely related to or controlled by the entity, it may be that because of that relationship and/or the motives of those parties, for example the obtaining of a tax benefit, the trustee may more readily be expected to act in breach of its obligations as trustee. See, for example, the arrangements considered in Case X58 90 ATC 430; Case 6021 (1990) 21 ATR 3466 where a corporate trustee was held to have acted in excess of power and in breach of trust in pursuit of a tax benefit with another entity. In that case each of the entities involved, including the relevant corporate trustee, were all ultimately controlled and/or owned by one individual or members of his family.

76.	Where the trustee is a professional advisor it will also be relevant to consider, among other things, whether the professional advisor is financially dependent on fees derived from providing trustee services, together with whether a failure to act in accordance with the entity's directions, instructions or wishes would jeopardise the continuation of that fee income.

77.	The presence in the trust deed of a requirement that the trustee should have no regard to such directions, instructions or wishes will not remove the need for the entity to consider the actual circumstances of the case to determine whether the trustee acts, or could reasonably be expected to act, in the relevant way.

78.	Under paragraph 328-380(4)(c) an entity needs to determine whether or not the trustee of a trust is accustomed, or under an obligation (whether formal or informal), or might reasonably be expected to act in accordance with the entity's directions or wishes, as set out in the Ruling above. However, paragraph 328-380(4)(c) will also apply to say that the entity exercises control over the trust where this behaviour, or expected behaviour, on the part of the trustee occurs in relation to the directions or wishes of any of the entity's *STS affiliates, or in relation to the combined directions or wishes of any of the entity's *STS affiliates, or in relation to the combined directions or wishes of the entity together with its *STS affiliates. In considering the relationship between its *STS affiliates and the trustee, the entity should take into account the same range of considerations as are taken into account for itself under paragraphs 69 to 77of this Ruling.

DATE OF EFFECT

79.	This Ruling applies to assessments for income years starting on or after 1 July 2001 to which Division 328 applies.

EXPLANATIONS AND EXAMPLES

STS average turnover

80.	To be eligible to be an *STS taxpayer for an income year, an entity must have an *STS average turnover for that income year of less than $1 million.F5

81.	The way in which the entity must work out its *STS average turnover for an income year is explained above at paragraphs 14 to 30.

82.	As those paragraphs explain, an entity's *STS average turnover for a year will be worked out by reference to its *STS group turnovers for a number of years.

83.	An entity's *STS group turnover for an income year is made up of the *value of the business supplies it has made during that year and the *value of the business supplies its grouped entities made in that year.

84.	To work out its *STS group turnover for a year an entity therefore needs to know:

(a)	which entities (if any) are its grouped entities for that year; and

(b)	the *value of the business supplies made by those entities in that year.

85.	To work out which entities are its grouped entities for a particular year, an entity will need to apply the STS grouping rules in section 328-380. Importantly, those rules will need to be applied to the entity and to the relevant surrounding circumstances as they exist or existed in that particular year.

86.	This means that where the entity is working out its *STS group turnover for a past income year, the STS grouping rules will need to be applied to the entity and to the relevant surrounding circumstances as they existed in that past income year. If the entity is working out its *STS group turnover for the current or a future income year, the STS grouping rules will need to be applied to the entity and to the relevant surrounding circumstances as they exist in the current year and are reasonably expected to exist in the future year.

Non-resident entities

87.	The STS grouping rules, including the *STS affiliate definition, apply to both resident and non-resident entities. This is because no aspect of the wording of these rules, or of the definition of "entity" in subsection 960-100(1), restricts their application to resident entities. Where it is grouped with a non-resident entity, an entity will need to include the *value of the business supplies made by that non resident entity when working out its own *STS group turnover for the relevant year.

The STS grouping rules

88.	To work out its grouped entities for an income year under the STS grouping rules, the entity needs to determine which entities, if any, are its *STS affiliates for that year.

89.	This is because the *STS affiliate concept has a twofold role in the STS grouping rules. This twofold role is explained above at paragraphs 27 to 30.

STS affiliate

90.	The term *STS affiliate is defined in subsection 328-380(8). Under this definition, an entity will be your *STS affiliate if it acts, or could reasonably be expected to act, as you direct or wish, or in concert with you, in relation to the affairs of its business.

91.	The definition does not however specify when an entity could reasonably be expected to act as another directs or wishes or in concert with it.

Meaning of "could reasonably be expected"

92.	In FC of T v. Peabody (1994) 181 CLR 359; 94 ATC 4663; (1994) 28 ATR 344 the full High Court held that "[a] reasonable expectation requires more than a possibility".F6 In the High Court's view, the phrase involves a prediction that must be sufficiently reliable for it to be regarded as reasonable.

93.	Hill J in the Federal Court decision of Peabody v. FC of T F7 also considered the reasonable expectation test in the context of section 177C of the ITAA 1936. His Honour held that the word "reasonable" must be understood as distinguishing what is required from an expectation that is "unreasonable, irrational or absurd". He further held that the word "expectation" requires the hypothesis to be one that proceeds beyond the level of a mere possibility to become one which is the expected outcome.

94.	The requirement that the expectation be reasonable, as distinct from something irrational, absurd or ridiculous, was also emphasised by the Full Federal Court in A-G's Dept v. Cockcroft (1986) 10 FCR 180, at 190; (1986) 64 ALR 97, at 106; (1986) 12 ALD 468, at 470 when considering subsection 43(1) of the Freedom of Information Act 1982 (Cth) and the phrase "could reasonably be expected to prejudice". Bowen CJ and Beaumont J held, at FCR 190; ALR 106; ALD 470, that the proper inquiry is whether the expectation claimed was reasonably based.

95.	The Courts considered these principles to accord with both the ordinary meaning of the words "might reasonably be expected" and the purpose of the legislative schemes in which they appeared. These principles are equally applicable when considering the reasonable expectation test in the *STS affiliate definition.

96.	As explained above at paragraphs 38 to 48, the second limb of the *STS affiliate definition looks at whether the potential *STS affiliate could reasonably be expected to act in the relevant way in the income year in question.

97.	Where the entity is applying the *STS affiliate definition to a past income year, the potential *STS affiliate can reasonably be expected to have acted in the relevant way in that year, despite not actually having done so, if the entity stood in a relationship of influence or control over the potential *STS affiliate in that past year.

98.	Where the entity is applying the *STS affiliate definition to the current or a future income year, it will be reasonable to expect that the potential *STS affiliate will act in the relevant way in one or more of those years if the entity stands or expects to stand in a relationship of influence or control over the potential *STS affiliates in any of those years.

99.	To determine if the entity stands in a position of control or influence over the potential *STS affiliate in a year, the past or current actions of the potential *STS affiliate should be considered together with any relevant transactions or dealings it and the entity have entered into. In the context of the definition of *STS affiliate, relevant actions will be those to do with the interaction between the entity and the potential *STS affiliate concerning the operation of all, or a substantial part of, the potential *STS affiliate's business. These may support or rebut the inference that the entity stands in a position of control or influence by showing that the potential *STS affiliate acts, has acted, or will act as the entity directs or wishes.

100.	The entity should also consider the nature of any relationships between the entity and the potential *STS affiliate to determine whether the entity stands in a position of control or influence over the potential *STS affiliate by virtue of that relationship.

101.	In considering the relationship between the two, the entity should examine whether there are other factors present which indicate that the potential *STS affiliate cannot reasonably be expected to act in the relevant way despite the presence of that relationship. The entity must evaluate whether the relationship is of sufficient strength to outweigh any other circumstances which might cause the potential *STS affiliate to act contrary to its wishes or instructions or in concert with it in relation to the affairs of the potential *STS affiliate's business.

102.	Where there is such a relationship between the entity and the potential *STS affiliate, and no overriding circumstances are present, there will be more than a chance or possibility that the potential *STS affiliate will act as the other entity directs or wishes or in concert with it. As a result, there is a sufficient basis on which to conclude that the potential *STS affiliate could reasonably be expected to act in the relevant way.

The relationship between the entities

Family or other close personal relationships

103.	In considering whether it can direct or influence the actions of the potential *STS affiliate, the entity will need to consider whether it has a familial or other close personal relationship with the potential *STS affiliate. This is because that relationship may give the entity the ability to influence or direct the way in which the potential *STS affiliate conducts its business. This is due to the emotional ties and sense of duty, obligation or loyalty that are commonly seen as flowing from familial or other close personal relationships. Similarly, the potential *STS affiliate may reasonably be expected to comply with the entity's wishes or directions because of this sense of duty, obligation or loyalty. The strength of this expectation will be affected by matters such as:

(a)	whether the two parties enjoy trusting and harmonious relations; and

(b)	whether the potential *STS affiliate is subject to a more powerful source of influence or control.

Financial relationships

104.	Any financial relationships or dealings between the two entities should also be taken into account, particularly where these render the potential *STS affiliate financially dependent on the entity on an on-going basis. A finding that the potential *STS affiliate is financially dependant on the entity is a factor that would support a conclusion that the potential *STS affiliate might reasonably be expected to act as the entity wishes or directs. This is because it can reasonably be expected to comply with these directions or wishes to avoid jeopardising the financial support it needs to maintain its profitability or simply to continue in business. Typically, arm's length loans from unassociated third party lenders do not involve this sort of control.

Relationships based on other common links

105.	The entity should also consider any other relevant relationships or links between it and the potential *STS affiliate that may support a conclusion that the potential *STS affiliate will act as the entity directs or wishes. Examples of such links include common directors, shareholders or partners. This type of relationship is relevant because it may reveal that each entity is ultimately controlled or owned by the same group of individuals. Depending on the circumstances of the case, this may provide a mechanism by which one entity can seek to direct or influence the activities of the other entity in the relevant way.

What type of entity is the potential STS affiliate?

106.	In considering its relationship with the potential *STS affiliate, the entity should take into account whether the potential *STS affiliate is a company, individual, partnership or trust. This may affect whether the entity stands in a position of control or influence over the potential *STS affiliate. The entity should also take into account its own entity type.

Companies

107.	If the potential *STS affiliate is a company, whether or not it can reasonably be expected to act as the entity directs or wishes will depend on whether the majority shareholders and/or directors of the company can reasonably be expected to act as the entity wishes or directs. This requires an examination of the nature of the relationships between the entity and the majority shareholders and/or directors, together with the nature of the relationships between those shareholders/directors.

108.	It then needs to be determined whether the nature of these relationships suggest that the entity has a relationship with the majority shareholders/directors on the basis of which it can seek to direct or influence the actions of the company.

Individuals

109.	Where the potential *STS affiliate is an individual, the entity will only need to consider the nature of its relationship with that individual. The question to be determined remains the same: is the relationship between the two such that the entity can direct or influence the actions of the potential *STS affiliate?

Partnerships

110.	Where an entity that is not a partner in a partnership is determining whether that partnership is its *STS affiliate, it will need to examine its relationship with each of the partners in the partnership, together with the relationships between the partners, to determine whether it has a relationship with the partnership whereby it is able to influence or direct the activities of the partnership.

111.	The entity will need to have such a relationship with a sufficient number of partners able to control, either formally or informally, the partnership, before it could reasonably be expected that the partnership will act as the entity wishes or directs.

Trusts

112.	Where the potential *STS affiliate is a trust, the entity will need to have a relationship with a trustee of the trust on the basis of which it could reasonably be expected that the trustee would act as the entity directs or wishes.

Other considerations

113.	A consideration of the full facts and circumstances of the case may show that despite the presence of a particular kind of relationship between the entity and the potential *STS affiliate, the entity cannot be shown to be in a position of control of influence over the potential *STS affiliate.

114.	The following are examples of the kinds of considerations which may show that a potential *STS affiliate cannot reasonably be expected to act in the relevant way notwithstanding its relationship with that entity.

Independent business affairs

115.	The manner in which the two entities have conducted their respective businesses in the past may show that despite the relevant relationship between them, the entity does not take an interest in the affairs of the business conducted by the potential *STS affiliate.

116.	Past conduct may also show that while the entity has sought to direct or influence the business affairs of the potential *STS affiliate on the basis of its relationship with the potential affiliate, the potential affiliate's practice is to ignore or disregard those wishes or instructions notwithstanding the relationship.

117.	If a review of the previous behaviour of the entities shows that either of the situations above exists, it will not generally be reasonable to expect that the potential *STS affiliate will act as the other entity wishes, directs or in concert with it notwithstanding the relevant relationship. This is so provided the entity has no reasonable cause to believe or expect that:

(a)	it will depart from its past practice of not seeking to direct or influence the potential *STS affiliate's business affairs during the relevant income year; or

(b)	the potential *STS affiliate will change its past practice of ignoring the entity's wishes or directions during that income year.

Other relationships

118.	While the entity may have a relationship with the potential *STS affiliate which could reasonably be expected to enable that entity to direct or influence the potential *STS affiliate's business affairs, the potential *STS affiliate may also have a relationship with another entity which can be expected to prevent it acting in accordance with the first entity's wishes or directions or in concert with it.

119.	An example of the above would occur where the first entity has a close familial relationship with the potential *STS affiliate. However the potential *STS affiliate is also commercially dependent on continuing financial support from a second entity. Depending on the facts of the particular case, it may be reasonable to expect that the potential *STS affiliate will ignore the first entity's wishes or directions if these are inconsistent or incompatible with the wishes or directions of the second entity upon which it is financially dependent.

Other obligations

120.	While the entity may have a relationship with the potential *STS affiliate that would enable the entity to direct or influence the potential *STS affiliate's business, the potential *STS affiliate may be prevented from acting in accordance with the entity's wishes or directions because of its other obligations.

121.	For example, where the potential *STS affiliate is the trustee of a trust estate its duty as a trustee to avoid a conflict of duty and interest or its duty of impartiality may prevent it from acting as the other entity wishes or directs in relation to the business affairs of the trust where following those wishes or directions will cause breaches of the trustee's legal or fiduciary obligations.

Competing interests

122.	An entity may have a relationship with a potential *STS affiliate that would enable it to direct or influence the business affairs of that potential *STS affiliate. However where the business interests of that entity conflict with the business interests of the potential *STS affiliate, it may not be reasonable to expect that the potential *STS affiliate will act as the other entity wishes or directs. This is because, on the facts of the case, it is reasonable to expect that the potential *STS affiliate will act according to its own best interests rather than the other entity's.

Example 1 – *STS affiliates of the one entity

123.	Nick owns three snack bars. During the 2001-2002 income year, he decided to sell two of these snack bars to two of his children. Nick now owns just one of the snack bars. It has an average annual turnover of $200,000. Nick also owns a wholesale food business.

124.	Nick wants to know if either of the children he sold his snack bars to will be his *STS affiliates for the 2001-2002, 2002-2003 and 2003-2004 income years.

125.	A review of the children's actions during the 2001-2002 year show that they usually act as Nick directs or wishes in relation to a substantial part of their respective business affairs. During that year, Nick's practice was to tell his children the quantities and lines of stock they were to order, together with the prices to be paid. The children did not source stock from suppliers other than Nick's wholesale business without first consulting him. Occasionally each of the children have ignored Nick's instructions and sourced stock from more competitive suppliers.

126.	Overall, it can be seen that during the 2001-2002 income year Nick's children are acting in accordance with Nick's directions and wishes in relation to a substantial part of their respective business affairs. On this basis, the children will be *STS affiliates of Nick for the 2001-2002 year.

127.	The children's business practices in relation to stock during the 2001-2002 year will also be relevant to deciding if the children can reasonably be expected to act in accordance with Nick's directions or wishes or in concert with him in the 2002-2003 and 2003-2004 income years. This past practice shows that Nick actively seeks to influence the affairs of his children's businesses and that his children are accustomed to following his directions and wishes in this regard. The fact that Nick is the father of the individuals carrying on these businesses is also relevant to deciding if they can reasonably be expected to act in the relevant way.

128.	A review of Nick's past behaviour in relation to his children's businesses shows that he has consistently sought to influence or direct a significant aspect of their affairs, namely the purchase and pricing of stock. There is nothing in the facts to suggest that Nick's active interest in these affairs is likely to cease in the near future. However, it also seems that in the past the children have sometimes been prepared to go against Nick's wishes where this has been to their commercial benefit. It is unclear whether this practice will increase.

129.	Despite these uncertainties, it can be concluded that:

(a)	in the past each of the children have generally complied with Nick's wishes or directions;

(b)	none of the children appear to have a relationship with another entity which may also wish to influence the affairs of their respective businesses; and

(c)	Nick's interests generally do not appear to be inconsistent with those of his children's businesses or incompatible with his children's financial interests.

130.	On balance, Nick's familial relationship with these individuals, together with the other considerations above support the conclusion that his children can reasonably be expected to act as Nick wishes or directs or in concert with him in relation to the affairs of their respective businesses in the 2002-2003 and 2003-2004 income years. Therefore, they will also be his *STS affiliates for those years.

Example 2 – no *STS affiliates

131.	Assume the same facts as in Example 1, except in this case a review of the children's actions during the 2001-2002 year shows that they are increasingly ignoring Nick's instructions in relation to their businesses.

132.	Nick has regularly told his children which stock they should be ordering from his wholesale business and the prices they will be paying for this stock. While Nick's children have continued to source particular types of stock from Nick at the prices he has set, they have also begun to source the bulk of their supplies from other sources. This is because it is more profitable for the businesses to do so. They have also begun to change the range of food offered by their snack bars and Nick's wholesale business is unable to supply some of the new lines they require.

133.	Against the background of this familial relationship are the actions of the children during the year. These show that while Nick has tried to govern a significant aspect of his children's businesses, the children have chosen when they will act in accordance with these wishes and when they will not. They have only chosen to act as Nick directs in relation to a limited aspect of their stock purchasing. As a result, the children cannot be described as acting as Nick directs or wishes in relation to all or a substantial part of their business affairs. On this basis, they will not be his *STS affiliates for the 2001-2002 year.

134.	This pattern of behaviour also suggests that despite their familial relationship, Nick does not stand in a position of control or influence over the children in relation to their business affairs. It also appears that his children's commercial interests are better served by not acting as he directs or wishes. On this basis, assuming that they do not act, or could not reasonably be expected to act, in concert with him, in relation to the affairs of their respective businesses, they will not be his *STS affiliates for the 2002-2003 or 2003-2004 years.

Example 3 – no reasonable expectation of acting in accordance with directions or wishes

135.	Felicia and her younger sister Rosa run a market gardening business with an average annual turnover of $350,000. They operate this business in partnership with each other and their husbands. Their older sister, Ileana, owns and manages an office stationery business with an average annual turnover of $800,000.

136.	The partnership has suffered from severe cash flow problems. To assist her sisters' business, Ileana has made several large informal loans to their partnership. These are repaid at a non commercial rate of interest whenever a repayment can be managed. Ileana does not actively pursue the repayment of the amounts loaned. Ileana also advanced her sisters much of the start up capital needed to establish their partnership.

137.	Ileana has taken an active interest in the affairs of the partnership business throughout the three years in which it has been carried on. She regularly expresses firm views as to the way in which things should be run, demands to see the partnership's accounts and expresses dismay at the decisions made by Felicia and Rosa together with their husbands. However Ileana's views are unsolicited and are usually not followed by Felicia and Rosa. Despite the continued failure to act in keeping with her views, Ileana has continued to support the partnership financially.

138.	In this example, there is a family connection between the parties. On the basis of that relationship, Ileana has been a continuing source of funds for the business carried on by Felicia and Rosa in partnership with their husbands. She has also sought to influence the way in which the partnership's business is run. However, notwithstanding their financial dependency on Ileana, the usual practice of Felicia and Rosa has been to disregard Ileana's views on the partnership.

139.	Accordingly, while the partnership has a significant degree of financial dependence on Ileana, the past conduct of the sisters shows that it cannot reasonably be expected that the partnership's business will be carried on as Ileana directs or wishes either because of its financial dependence on her or because it is run by her sisters. As a result, neither Ileana nor the partnership are *STS affiliates of each other, and so will not be grouped entities on this basis. If Ileana does not formally control the partnership under subsection 328-380(5), then none of the grouping rules apply. Neither she nor the partnership have to take into account the turnover of the other, when calculating their *STS average turnover.

Meaning of "in concert"

140.	Under the definition of *STS affiliate, an entity can be your *STS affiliate if it acts or could reasonably be expected to act in concert with you in relation to the affairs of its business.

141.	The term "act in concert" is not defined in Division 328 or elsewhere in the income tax law. In the absence of any definition, the term must be interpreted both according to its ordinary meaning and in keeping with the purpose and scope of Subdivision 328-F.

142.	The Macquarie Dictionary (Second Edition) defines the term "in concert" to mean:

"in a coordinated or organised way; together".

143.	This ordinary meaning suggests that the term "in concert" is used in the *STS affiliate definition to describe an entity that cannot be seen as independent of another because of the degree to which its business activities are combined or organised together with those of another.

144.	The term "in concert" has not been considered judicially in an income tax context. However in IPT Systems v. MTIC Corporate Pty Ltd (2000) 158 FLR 349; (2000) 36 ACSR 454; (2001) 19 ACLC 386, Owen J considered the meaning of the term "acting in concert" for the purposes of paragraph 15(1)(a) of the Corporations Act 1989 . This provides that the definition of "associate" in that Act includes a person in concert with whom the primary person is acting, or proposes to act. His Honour referred to his earlier consideration of this term in Bank of Western Australia v. Ocean Trawlers Pty Ltd (1995) 13 WAR 407; (1995) 16 ACSR 501 and the decision in Adsteam Building Industries Pty Ltd v. Queensland Cement & Lime Co Ltd (No 4) [1985] 1 QdR 127; (1984) 14 ACLR 456; (1984) 2 ACLC 829. His Honour identified the following key principles from those cases:

(a)	the words "in concert" take their meaning from the context and the scope and the purpose of the legislative framework they appear in;

(b)	the term "acting in concert" involves at least an understanding between the parties as to a common purpose or object; and

(c)	the common purpose or object can be established by inference as much as by direct evidence.

145.	Further support for the principles described above can be found in the decisions of the Federal Court in National Union of Workers v Davids Distribution Pty Ltd (1999) 91 FCR 463; (1999) 165 ALR 550; J-Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers (WA) (1992) 111 ALR 502; (1993) ATPR 46-099; (1992) 46 IR 263 at ALR 535-536; Re Australasian Meat Industry Employees Union and Allied Trades Federation of Australia (1991) 32 FCR 318; (1991) 104 ALR 199; (1991) ATPR 41-151, at ALR 208 and 215.

146.	Consistent with these views and the ordinary meaning of this term, an entity will only be viewed as acting in concert with another entity for the purposes of the *STS affiliate definition where it and the other entity act together in pursuit of a common goal or purpose.

147.	In the context of the *STS affiliate definition, that goal or purpose must be that all or a substantial part of the potential *STS affiliate's business is carried on with a substantial degree of connection with or dependence on the business of the other entity. The degree of that connection must be such that the business carried on by the potential *STS affiliate cannot be viewed as separate or independent from the business carried on by the other entity. This degree of connection and/or dependence is necessary to ensure that the *STS affiliate definition does not apply to group unrelated businesses that genuinely operate in isolation, or independently, of each other.F8

148.	The table under paragraph 65 sets out some factors which should be considered when determining whether the potential *STS affiliate conducts its business with a substantial degree of connection with the business carried on by the other entity.

Example 4 – acting in concert with each other

149.	Bill and Maria are married. Bill and his father are equal shareholder/directors of a company which runs a milk bar attached to Bill and Maria's house. The company has an average annual turnover of $700,000. Maria and her sister are equal shareholder/directors in another company which operates a separate milk bar several suburbs away. This second company has an average annual turnover of $750,000. The capital used to start up the milk bar run by Maria's company came from the profits of the milk bar run by Bill's company. Each company maintains a separate bank account although both use the same accountant who prepares the accounts of each business at the same time each year. Each company employs a different shop assistant to help serve customers during the busiest part of the day. Maria is responsible for hiring the staff for both companies. She also arranges the wages for the staff of both companies. The companies want to know whether they are *STS affiliates of each other and therefore grouped with each other.

150.	Bill and Maria always make decisions about the business affairs of each milk bar in consultation with each other. For example, they usually place joint orders for stock with various suppliers although sometimes they will source stock from different suppliers. They also transfer stock between the milk bars where one is short of a particular line and the other has an excess. They also make joint decisions about the stock each shop should carry, the mark up for each line of goods and any expansions into new types of goods.

151.	The overall conclusion is that the two companies are operating in concert with each other. While they are separate companies with different director/shareholders and employ different staff, an examination of the day to day management and operation of the business affairs of the two companies shows there is a high degree of connection between the companies' businesses. For example, they generally place joint orders and there is a regular exchange of stock between the businesses. There also appears to be a high degree of consultation on the range of goods to be stocked and the profit margins to be set for each company. Maria is also responsible for the staffing affairs of Bill's company. As they are *STS affiliates of each other, each company will need to include the turnover of the other when working out its *STS average turnover.

Example 5 – two partnerships not acting in concert

152.	Simon and Judy are married. Simon runs a dry cleaning business in partnership with his sister. They have equal shares in the partnership business. The average annual turnover of the partnership is $500,000. Judy runs a dry cleaning business in partnership with her friend Won. Judy and Won also have equal shares in their partnership business. The average annual turnover of their partnership is $600,000. The businesses carried on by each partnership are located in the same suburb and each is operated under a franchise agreement with the same national dry cleaning franchise chain. Each partnership maintains its own bank accounts although the accounts for each are handled by Won's sister who is an accountant. Simon and Judy discuss business with each other and each understands the financial position of the other's partnership. However, decisions affecting the affairs of each partnership are made separately by the partners in each partnership. The partnerships have never made joint decisions about their respective business affairs. They do not share stock, equipment or staff, although some customers use both dry cleaning shops as the promotional vouchers offered by the franchise chain are redeemable at either shop. There are no financial interdependencies between the two.

153.	On these facts, the two partnerships are not acting in concert. There are a number of features common to both partnerships. They both offer dry cleaning services, are part of the same franchise chain, are located in the same suburb and to an extent have shared customers. However, despite these links the partnerships are in substance still operated as distinct and independent businesses. They are operated through differently constituted partnerships, each of which maintains separate financial affairs. It is also clear that business decisions affecting each partnership are taken separately and that the day to day management of each partnership's business is independent from that of the other. As they are not *STS affiliates of each other, the two partnerships will not be grouped and will not need to include each other's turnover when calculating their respective *STS average turnovers.

Example 6 – ostensibly independent businesses acting in concert with each other

154.	Ross' Trading Trust ("RTT") is a fixed unit trust which carries on a business supplying and installing minibars to hotels and motels. It has an average annual turnover of $600,000. Ross' Refrigerators Pty Ltd ("RR") acts as the trustee of RTT. Ross and David are the only two directors and shareholders of RR, holding 50% of the shares each. Three quarters of the units in RTT are held by Ross' Family Trust ("RFT") which is a discretionary trust. The potential beneficiaries of RFT are Ross, his wife and their children. The remaining quarter of the units are held by David's Family Trust ("DFT"). DFT is also a discretionary trust, the potential beneficiaries being David, his wife and their children.

155.	Nufridg Trading Trust ("NTT") is a fixed unit trust that carries on a business providing maintenance and upgrade services for commercial refrigeration units. It has an average annual turnover of $600,000. Nufridg Pty Ltd ("NPL") is trustee of the NTT. Ross and David constitute one half of the board of NPL and each holds 25% of the issued shares in that company. The other two directors are David's wife and Ross' wife, who each hold 25% of the remaining shares. Three quarters of the units in NTT are held by DFT. The remaining quarter are held by RFT.

156.	The business carried on by NTT was established without any capital of substance. It was originally funded by loans from RTT that are still being repaid. Ross and David have also made additional loans of smaller amounts to help NTT acquire critical items of new plant for the business. Since it started trading, NTT has made use of its connection with Ross together with RTT's name and goodwill and has regularly called on the services of two experienced employees of RTT to assist with complex maintenance and upgrade work.

157.	NTT trades from the same premises as RTT, sharing reception and administrative staff, warehouse facilities and work vans. David is responsible for the day to day management of NTT's business, but key business decisions are put to NPL as trustee for formal approval. NPL as trustee has never gone against the recommendations of David or Ross.

158.	In return for the shared premises and facilities, and the use of two of its employees, NTT pays a fee to RTT each year. The amount of this fee is determined at the time RTT accounts for the year are prepared. In years where NTT's income has been higher than RTT's income, the fee has been increased.

159.	NTT agrees to feature the name of RTT prominently in its promotional material and RTT does the same for NTT. Both endeavour to obtain business for each other. Approximately a quarter of RTT's sales are from customers referred through NTT. However, the customers of one are not always the customers of the other. Although both work in the same market-place, they are regarded by the market-place as distinct businesses.

160.	The two trusts share the services of one accountant. They maintain different bank accounts but Ross and David are the joint signatories of each business's accounts.

161.	A consideration of the factors in the table under paragraph 65 shows that:

(a)	while the two entities do not supply goods or services to each other, each actively promotes the services of the other to potential customers;

(b)	NTT trades out of RTT's business premises and uses the services of RTT's reception and administrative staff, warehouse and transport vans, and regularly uses two experienced employees of RTT;

(c)	NTT's accounts are attended to at the same time and by the same individual as RTT's and the two signatories of RTT's bank accounts are also the signatories of NTT's bank accounts;

(d)	NTT's capital backing is sourced from the same individuals that provide the capital backing behind RTT;

(e)	NTT has looked to those individuals rather than a commercial banking institution for any loans it has required in the past;

(f)	David and Ross hold all of the shares in RTT's corporate trustee RR and 50% of the shares in NTT's corporate trustee NPL. Their wives hold the remaining 50% of the shares in NPL;

(g)	The directors of RR comprise half of NPL's board of directors, the wives of those directors making up the other half;

(h)	The day to day management of NTT is performed by one of the two directors of RR; and

(i)	25% of NTT's profits flow to the same individuals as ultimately receive 75% of the profits of RTT.

162.	Viewed together, these factors suggest that there is a substantial connection between the ownership, management and business infrastructure of NTT and that of RTT to the degree that NTT cannot be seen as genuinely independent of and separate from the business carried on by RTT. Accordingly, NTT will be RTT's *STS affiliate.

163.	Whether RTT is the *STS affiliate of NTT will depend on whether there is a substantial connection between RTT's business and the business carried on by NTT.

164.	In determining this, the following considerations are relevant:

(a)	RTT uses the business activities of NTT to promote itself and obtains approximately a quarter of its business from customers referred through NTT;

(b)	RTT shares its business premises, warehouse, transport vehicle and staff with NTT;

(c)	The signatories to RTT's bank account are the same as the signatories to NTT's bank account. The accounting for the two businesses is also done by the same individual at the same times;

(d)	The two shareholder/directors of RR also own 50% of the shares in NPL and comprise half of NPL's board;

(e)	One of RTT's directors is responsible for the day to day management of NTT's business;

(f)	RTT has made significant loans to NTT with substantial amounts still to be repaid;

(g)	The two businesses operate in a similar market offering services that can be seen as complementary to each other.

165.	When viewed overall, these factors indicate that there are sufficient common threads and links between these two businesses to conclude that a substantial connection exists between them. As a result, RTT will be an *STS affiliate of NTT. Given that each of these businesses is the *STS affiliate of the other, they will be grouped under paragraph 328-380(1)(c). RTT will therefore need to include NTT's turnover when working out its *STS average turnover for an income year. NTT will need to include RTT's turnover when working out its *STS average turnover for the year.

166.	Even if RTT and NTT were not *STS affiliates of each other, it would be necessary to determine whether they were grouped entities as a result of the operation of the grouping rules in subsections 328-380(3) and (4). In this example, they would not be because neither "controls" the other under those rules, nor are they both "controlled" by the same third entity.

The non-fixed trust control rule

167.	Paragraph 328-380(4)(c) provides that an entity will control a trust that is not a *fixed trust where a trustee of the trust is accustomed, or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the entity, its *STS affiliates or the entity together with its *STS affiliates.

168.	In Case 29/96, 96 ATC 330; Case 10,898 (1996) 32 ATR 1259 the Administrative Appeals Tribunal considered whether a trustee of a trust estate was accustomed to acting as directed by a non-resident for the purposes of subsection 159GZE(3) of the ITAA 1936. Under that provision, a non resident was a foreign controller of a trust if (among other things) the trustee of the trust was accustomed, or under an obligation, or might reasonably be expected, to act in accordance with the directions or wishes of the non resident or associates of the non resident.

169.	The Tribunal held that a trustee cannot be viewed as "accustomed" to act in the relevant way where the conduct in question is isolated, or even occasional. In its opinion, the term required recurrent conduct on the part of the trustee. The Tribunal also considered that the question of recurrence could be linked to the importance or the relevant behaviour. Where the behaviour was in connection with relatively important matters affecting the affairs of the trust it was more likely that the trustee could be viewed as acting in the relevant way.

170.	These principles also apply when determining whether a trustee is accustomed to act as directed for the purposes of the control test in paragraph 328-380(4)(c).

171.	The test in paragraph 328-380(4)(c) also requires the entity to consider whether a trustee of the relevant trust estate might reasonably be expected to act as it directs, instructs or wishes. To decide this question, the entity should take the same approach as outlined at paragraphs 51 to 54 for determining if an entity could reasonably be expected to act in the relevant way for the purposes of the *STS affiliate definition.

172.	Unlike the *STS affiliate definition, however, paragraph 328-380(4)(c) requires an examination of not only the relationship between the entity and the trustee, but also the relationship between the *STS affiliates of the entity and the trustee.

Example 7 – no control of non-fixed trust

173.	The Benevolent Family Trust has an average annual turnover of $2 million. Its potential beneficiaries are George, his brother, sister, mother and any company in which either of those individuals holds at least 25% of the issued shares. George holds 50% of the shares in Widgets Pty Ltd which has an average annual turnover of $200,000. George wants to know if either he or Widgets Pty Ltd will be considered to control the Benevolent Family Trust. If he does, Widgets Pty Ltd will be grouped with the trust as both entities will be controlled by him. Widgets Pty Ltd would then need to include the trust's turnover with its own when working out its *STS average turnover for the year.

174.	The trustees of the trust are Ann, the solicitor of George's late father, and Jenni, a close family friend of George and his late father. When he settled the trust shortly before his passing, George's father told Ann and Jenni that they were only to distribute the trust monies when they considered it to be prudent and necessary to do so. Over the past few years Ann and Jenni have been cautious when making distributions and have regularly declined to distribute moneys to any of the potential beneficiaries, even when direct requests have been made. However, on a handful of occasions in the past they have made substantial distributions to another company of which George is a majority shareholder following a request from him.

175.	In this scenario, George has known the trustees for many years, is a beneficiary of the trust, and is a 50% shareholder of a company that is also a beneficiary. In this sense, he has both a personal relationship with the trustees and a financial relationship as a potential beneficiary. However, the past conduct of the trustees shows that despite these relationships they have maintained an arm's length relationship in relation to the trust affairs with all the potential beneficiaries including George and Widgets Pty Ltd throughout the life of the trust.

176.	The conclusion that the trustees have exercised an independent mind as to whether or not the trust should make any particular distributions is supported by the fact that they have declined direct requests for distributions on numerous occasions. Nothing in the facts suggests that this practice could be expected to change over the course of the relevant year. On this basis, it cannot reasonably be expected that the trustees of the trust will act in accordance with the directions or wishes of Widgets Pty Ltd or George.

177.	Accordingly, neither George or Widgets Pty Ltd will be taken to control the trust and Widgets will not need to include the trust's turnover when working out its *STS average turnover for the year.

DETAILED CONTENTS LIST

178.	Below is a detailed contents list for this Taxation Ruling:

What this Ruling is about	1
Class of person/arrangement	5
Legislative framework	6
Introduction to Division 328 – Simplified Tax System	6
Outline of the STS eligibility rules	8
Outline of the STS grouping rules	11
Eligibility as an STS taxpayer – STS average turnover less than $1 million	14
Calculating STS average turnover for a year	15
STS group turnover	19
Grouped entities under section 328-380	24
Role of the STS affiliate definition	26
Ruling	31
The scope of the STS affiliate definition	31
Non resident entities	34
Partnerships	35
Applying the two limbs of the STS affiliate definition – "acts" or "could reasonably be expected to act"	38
Applying the STS affiliate definition to past years – the first limb	42
Applying the STS affiliate definition to past years – the second limb	44
Applying the STS affiliate definition to current or future years	46
Meaning of "could reasonably be expected"	49
Meaning of "in concert"	57
Franchises	61
Determining if two entities are acting in concert	63
The non-fixed trust control rule	66
Accustomed to act	67
Might reasonably be expected to act	68
Date of effect	79
Explanations and Examples	80
STS average turnover	80
Non resident entities	87
The STS grouping rules	88
STS affiliate	90
Meaning of "could reasonably be expected"	92
The relationship between the entities	103
Family or other close personal relationships	103
Financial relationships	104
Relationships based on other common links	105
What type of entity is the potential STS affiliate?	106
Companies	107
Individuals	109
Partnerships	110
Trusts	112
Other considerations	113
Independent business affairs	115
Other relationships	118
Other obligations	120
Competing interests	122
Example 1 – *STS affiliates of the one entity	123
Example 2 – no *STS affiliates	131
Example 3 – no reasonable expectation of acting in accordance with directions or wishes	135
Meaning of "in concert"	140
Example 4 – acting in concert with each other	149
Example 5 – two partnerships not acting in concert	152
Example 6 – ostensibly independent businesses acting in concert with each other	154
The non-fixed trust control rule	167
Example 7 – no control of non-fixed trust	173
Detailed contents list	178

Commissioner of Taxation

13 March 2002


[F1]

1 Terms that are defined in the Income Tax Assessment Act 1997, and identified with an asterisk in that Act, are similarly identified in this Ruling and have the same meaning as in that Act.


[F2]

2 Ralph Committee's report, Review of Business Taxation: A Tax System Redesigned, page 576.


[F3]

3 FC of T v. Peabody (1994) 181 CLR 359 at 385; 94 ATC 4663 at 4671; (1994) 28 ATR 344 at 353.


[F4]

4 See also Woodard J's consideration of this phrase in News Corporation Ltd v. National Companies and Securities Commission (1984) 5 FCR 88, (1984) 57 ALR 550 where his Honour held at FCR 101, ALR 561: "A reasonable expectation of an event requires more than a possibility, risk or chance of the event occurring."


[F5]

5 See paragraph 328-365(1)(b).


[F6]

6 FC of T v. Peabody (1994) 181 CLR 359 at 385; 94 ATC 4663 at 4671; (1994) 28 ATR 344 at 353.


[F7]

7 Peabody v. FC of T (1993) 40 FCR 531, at 541; 93 ATC 4104, at 4112; (1993) 25 ATR 32, at 40.


[F8]

8 Paragraphs 2.38 and 2.40 of the Explanatory Memorandum to the New Business Tax System (Simplified Tax System) Act 2001.


Taxation Ruling TR 2002/11 Simplified Tax System eligibility - STS average turnover
Taxation Ruling TR 2002/11

Income tax: Simplified Tax System eligibility – STS average turnover

Contents:

What this Ruling is about

Legislative framework

Ruling

Date of effect

Explanations and Examples

Appendix

Detailed contents list

Preamble

The number, subject heading, Class of person/Arrangement, Date of effect and Ruling parts of this document are a "public ruling" for the purposes of Part IVAAA of the Taxation Administration Act 1953 to the extent to which they rule on the way in which a tax law applies. To that extent they are legally binding on the Commissioner. The remainder of the document is administratively binding on the Commissioner. Taxation Rulings TR 92/1 and TR 97/16 together explain when a Ruling is a public ruling and how it is binding on the Commissioner.

WHAT THIS RULING IS ABOUT

1.	This Ruling considers the definition of *STS average turnoverF1 in section 328-370 of the Income Tax Assessment Act 1997 ("ITAA 1997"). *STS average turnover is relevant to determining whether an entity is eligible to be an *STS taxpayer for an income year under the Simplified Tax System ("STS") in Division 328. Specifically, the Ruling considers:

(i)	which amounts an entity should include when working out its *STS average turnover for an income year under section 328-370;

(ii)	when an entity may base its *STS average turnover for an income year on relevant information in past Business Activity Statements (BASs) or income tax returns; and

(iii)	how to make a reasonable estimate of *STS group turnover under section 328-370.

Class of person/arrangement

2.	This Ruling applies to an entity that satisfies the STS eligibility rules in Subdivision 328-F for a relevant income year and has made an election in the *approved form to become an *STS taxpayer for that year under Subdivision 328-G of the ITAA 1997.

LEGISLATIVE FRAMEWORK

Introduction to Division 328 – Simplified Tax System

3.	The STS arose as a result of the Government's adoption of Recommendation 17.1 of the Ralph Committee's report, Review of Business Taxation: A Tax System Redesigned . This recommended the introduction of a simplified tax system to reduce the income tax compliance costs faced by small business.

4.	Division 328 of the ITAA 1997 provides the legislative framework for the STS. In implementing the recommendation, Division 328 offers eligible small businesses the choice of using the modified accounting, capital allowance and trading stock regimes. An entity that chooses to become an *STS taxpayer will also be able to claim a full deduction for certain prepaid expenditure through the combined operation of section 8-1 of the ITAA 1997 and section 82KZM of the Income Tax Assessment Act 1936 ("ITAA 1936").

Outline of the STS eligibility rules

5.	Before the rules in Division 328 can apply to an entity, the entity must be an *STS taxpayer for the relevant income year. Section 328-435 requires that to be an *STS taxpayer for an income year the entity must:

(iv)	be eligible to be an *STS taxpayer for that year under Subdivision 328-F; and

(v)	notify the Commissioner of its choice to be an *STS taxpayer for that year in the *approved form.

6.	Under Subdivision 328-F, an entity is eligible to be an *STS taxpayer for an income year if:

(i)	it carries on a business in that year;

(ii)	it has an *STS average turnover for that year of less than $1 million; and

(iii)	the sum of the *adjustable values of the *depreciating assets held by it and other entities it is grouped with is less than $3 million at the end of that year: section 328-365.

Working out an entity's STS average turnover: the look back method and the look forward method

7.	To be eligible to be an *STS taxpayer for an income year an entity must have an *STS average turnover for that year of less than $1 million: paragraph 328-365(1)(b). Subsection 328-370(1) provides that an entity's *STS average turnover for an income year is the average of its *STS group turnovers for any three out of the four previous income years (not including the present year). This is referred to as the look back method of working out *STS average turnover. In some cases an entity may also work out its *STS average turnover by making a reasonable estimate of its *STS group turnovers for the present and following two income years. This is known as the look forward method of working out *STS average turnover.

8.	To work out its *STS average turnover for an income year an entity will therefore need to understand the concept of *STS group turnover.

STS group turnover

9.	The term *STS group turnover is defined in section 328-375. Under this definition, an entity's *STS group turnover for an income year is the sum of the *value of the business supplies made by the entity in the income year and the *value of the business supplies made by the entity's "grouped entities". This figure is reduced by the *value of the business supplies made between the entity and its grouped entities, and between the grouped entities themselves. Section 328-380 governs when an entity will be grouped with another for STS purposes. The process of establishing an entity's "grouped entities" for an income year under section 328-380 is examined in Taxation Ruling TR 2002/6.

10.	The term *value of the business supplies is defined in subsection 995-1(1) (see paragraph 59 in the Explanations part of this Ruling). The effect of this definition is that before the value of a supply will be included in the *value of the business supplies made by an entity, the supply must have been made by the entity in the "ordinary course of carrying on its business". Supplies not made in the ordinary course of carrying on the business will not be included in the entity's *STS group turnover and will therefore not affect its *STS average turnover.

Making a reasonable estimate of STS group turnover

11.	Under the look back method in subsection 328-370(1), an entity's *STS average turnover for an income year is the average of its *STS group turnovers for any three out of the four previous income years (not including the present year).

12.	Where the entity, or one of its grouped entities, carried on a business for only part of one of those previous income years, subsection 328-370(2) requires the entity to make a "reasonable estimate" of what its *STS group turnover for that year would have been if the business had been carried on for the whole of the year.

13.	An entity may not satisfy the *STS average turnover test under the look back method, or it may be unable to rely on this method because it did not carry on a business in any of the previous four income years.

14.	In either case, the entity can calculate its *STS average turnover for the year by making a reasonable estimate of its *STS group turnovers for the present and following two income years: subsection 328-370(3). This is known as the look forward method of calculating *STS average turnover.

15.	If it prefers, an entity using this look forward method to work out its *STS average turnover can use its actual *STS group turnover for the present year rather than a reasonable estimate for that year, together with reasonable estimates of its *STS group turnovers for the following two income years. Where the entity, or one of its grouped entities, carried on a business for only part of the present year, the entity needs to make a reasonable estimate of what its *STS group turnover would have been had the business been carried on for the whole year: subsection 328-370(4).

RULING

Working out an entity's STS average turnover

Applying the look back method using past years' Business Activity Statements or assessable income

16.	An entity working out its *STS average turnover using the look back method in subsection 328-370(1) will need to calculate its *STS group turnover for one or more past income years. Section 328-375 provides the method for working out an entity's *STS group turnover for an income year. Generally, an entity can expect that its *STS group turnover for a year under section 328-375 will approximate the total of the amounts shown on that year's Business Activity Statements as the entity's total salesF2 It can also generally expect that its *STS group turnover for that year under section 328-375 will approximate its assessable income for the year.F3 In light of this, the Commissioner will in most cases accept the use by an entity of either of these amounts as its *STS group turnover for an income year for the purposes of determining if it satisfies paragraph 328-365(1)(b).

17.	The appendix to this Ruling sets out the method to be used by an entity wishing to rely on its assessable income or information in its Business Activity Statements to work out its *STS group turnover for a year. It also explains when the Commissioner will not accept an *STS group turnover figure based on these amounts.

Applying the look back method using section 328-375

18.	An entity that cannot, or decides not to, follow the approach in paragraph 16 of this Ruling to work out its *STS average turnover using the look back method, will need to work out its *STS group turnover for each of the relevant past income years by applying the definition of *STS group turnover in section 328-375. This definition is explained at paragraph 57 of this Ruling.

19.	Under the definition of *STS group turnover in section 328-375 and the definition of *value of the business supplies in subsection 995-1(1), the value of a supply will only be included in an entity's *STS group turnover for a year if the supply was made in the ordinary course of carrying on a business.

"in the ordinary course of carrying on a business"

20.	The phrase "in the ordinary course of carrying on a business" is not defined in the ITAA 1997 or the income tax law generally. It must therefore be interpreted according to its ordinary meaning and its legislative context.

21.	For the purposes of the "value of the business supplies" definition in subsection 995-1(1), a supply is made in the ordinary course of carrying on a business if it is a supply of the kind regularly or customarily made by the entity in the course of carrying on its business, arising out of no special circumstance or unusual event.F4

22.	A supply can be made in the ordinary course of carrying on a business even though it is not the main type of supply made by the entity. Similarly, the supply does not need to account for a significant part of the entity's overall receipts. It is sufficient that the supply is of a kind made regularly or customarily in the carrying on of a business.F5

23.	Determining whether a supply is of the kind regularly or customarily made by an entity in the course of its business will be a question of fact to be determined on the circumstances of the particular case. See Examples 1A to 2B in the Explanations and Examples section of this Ruling.

Investment income

24.	Amounts such as interest on an investment or rental income will only be included in an entity's *STS group turnover if they constitute the value of a supply made by the entity in the ordinary course of carrying on a business.

25.	The use by a company of its assets to produce profits for its shareholders prima facie amounts to the carrying on of a business by the company.F6 The effect of this presumption is that where a company uses its assets to produce investment income such as interest or rental income, the activities giving rise to that income will be regarded as activities occurring in the course of the carrying on of the company's business. As a result, the interest or rental income arising from those activities will need to be included in the company's *STS group turnover unless the presumption can be rebutted, or the relevant supply can be shown to have occurred outside of the ordinary course of the company's business.

26.	If the entity is a trust, investment income such as interest or rental receipts will generally not constitute the value of a supply made by the trust in the ordinary course of carrying on a business. This is because the activities of the trustees of a trust in their capacity as trustees do not prima facie constitute the carrying on of a business.F7 Investment income derived by a trust from the activities of its trustees will therefore only need to be included in *STS group turnover if the trust carries on a business and the investment income constitutes the value of a supply made by the trustees in the ordinary course of carrying on that business.

27.	If the entity is an individual or a partnership, the question of whether investment income constitutes the value of a supply made in the ordinary course of a carrying on a business, will depend on the facts of the particular case.

Dividends

28.	Generally, an entity will not need to include a dividend in its *STS group turnover for a year. This is because it is unlikely that a dividend will constitute the value of a supply made by the entity in the ordinary course of carrying on its business.

Capital gains

29.	The definition of *STS group turnover in section 328-375 has the effect of excluding from *STS group turnover the value of a supply which constitutes the "mere realisation of an investment". This is because the "mere realisation of an investment" is regarded as a transaction occurring outside the course of the carrying on of a business. A common example of an amount resulting from the mere realisation of an investment would be the sale of business premises. Another example is the proceeds from the sale of a capital asset previously used in a business, provided the business does not dispose of its capital assets on a regular basis. See Examples 3 and 4 in the Explanation and Examples section of this Ruling.

Government grants

30.	An entity needs to include a government grant in its *STS group turnover for an income year if that grant:

(i)	constitutes consideration for a supply made by the entity or one of its grouped entities in that year;F8 and

(ii)	that supply was made in the ordinary course of carrying on a business.

31.	The test in paragraph 21 above should be used by the entity to determine if a supply, the consideration for which is a government grant, was made in the ordinary course of carrying on a business.

Supplies made but consideration not yet received

32.	An entity needs to include the value of a supply in its *STS group turnover for an income year if the supply is made during that income year in the ordinary course of business either by the entity or its grouped entities.F9 The entity must do so even if it or the grouped entity does not receive the consideration for the supply in the same income year in which the supply is made. This means that an entity's *STS group turnover for an income year may include the value of supplies that have been made, but for which the entity or the grouped entity has not yet been paid.

Making a reasonable estimate of STS group turnover

What is a reasonable estimate of STS group turnover?

33.	Paragraphs 11 to 15 of this Ruling explain when an entity using the look back or look forward method may need to make a reasonable estimate of its *STS group turnover for an income year.

34.	The term "reasonable estimate" is not defined in Division 328 or the ITAA 1997 generally. In the absence of any definition, these words must be interpreted in a manner consistent with both their ordinary meaning and legislative context.

35.	Whether or not a particular estimate is reasonable will depend on the circumstances of the individual case at the time the estimate was made. In some cases there will also be more than one method open to a particular entity that can be regarded as producing a reasonable estimate of its *STS group turnover.

36.	In general, an estimate of *STS group turnover will be reasonable where it:

(a)	takes into account factors and considerations likely to affect the particular entity's *STS group turnover;

(b)	has been undertaken in good faith;

(c)	results from a rational and reasoned process of estimation; and

(d)	is capable of explanation to a third party.

37.	Normally, subject to special circumstances, it makes sense to expect that an entity experiencing a pattern of annually increasing *STS group turnovers, such that it has an *STS average turnover of $1 million or more under subsection 328-370(1), will ordinarily also have an *STS average turnover of $1 million or more using the look forward test in subsection 328-370(3). An exception to this would be if the entity has a genuine and reasonable expectation that its *STS group turnovers will decline materially in the coming years.

Accepted methods of making a reasonable estimate

38.	The following are methods of producing reasonable estimates of *STS group turnover in a variety of situations. Other methods may also be used by an entity in these situations provided they have the characteristics of a reasonable estimate as set out above.

Part year businesses

39.	An entity may be required to make a reasonable estimate of *STS group turnover under subsection 328-370(2) or subsection 328-370(4) because it or a grouped entity has only carried on a business for part of a year. This estimate will be reasonable where it is worked out as a pro rata calculation of the *STS group turnover for the part of the year when the business was carried on.

40.	However, in some cases the *STS group turnover for the part of the year in which the entity carried on the business will not be typical of the *STS group turnover that would be received over the course of a full year. This kind of situation may occur, for example, in industries with significant seasonal fluctuations in turnover. It may also occur where the entity is starting a business in an industry in which a lead time of several months or more between the commencement of activities and the generation of sales income from those activities is typical. In these cases, an adjustment should be made to the amount worked out on the pro-rata basis above to a produce a reasonable estimate. Refer to Example 6 at paragraph 105 below.

Estimate for present and future years

41.	An entity using the look forward method to calculate its *STS average turnover for a year will need to make a reasonable estimate of its *STS group turnover for each of the present and following two income years, or just each of the following two income years. These estimates will be reasonable if they are based on a bona fide business plan or accounting budget. Where a business has been recently acquired, these estimates will also be reasonable if based on the historic turnover figures provided by the vendor of the business. See Example 7 at paragraph 107.

42.	In some cases these types of information may be unavailable, or the entity may consider them to be an unsuitable basis for estimating its future *STS group turnover. In these cases, an estimate of *STS group turnover is reasonable where it has taken into account such relevant factors as:

(a)	planned expansions or contractions in the business' activity and levels of investment in the business;

(b)	future orders placed or contracts entered into;

(c)	the loss of present orders or contracts;

(d)	the arrival or departure of direct competitors in the relevant marketplace;

(e)	typical levels of turnover for similar sized businesses in the same industry and area;

(f)	whether a lead time between the commencement of business and the receipt of sales income is typical in the relevant industry; and

(g)	government initiatives affecting the demand for goods or services supplied by the entity.

See Example 8 at paragraph 109 below.

Estimating the turnover of grouped entities

43.	An entity must include the *value of the business supplies made by its grouped entities when working out its *STS group turnover for an income year. This means that when making a reasonable estimate of its *STS group turnover under subsection 328-370(3), the entity will need to include a reasonable estimate of the value of business supplies its grouped entities will make in the present and/or following two income years. To do this the entity will firstly need to know which entities will be its grouped entities in the following two years.

44.	For the purposes of making a reasonable estimate under subsection 328-370(3), normally an entity can assume that its grouped entities in the present year will be its grouped entities in the coming years. The process of establishing an entity's "grouped entities" for an income year is examined in Taxation Ruling TR 2002/6.

Reasonable estimates that prove to be incorrect

45.	An entity will make its reasonable estimate(s) of *STS group turnover at the time it makes its election to become an *STS taxpayer in the *approved form or at the time it reviews its eligibility for the relevant income year. So, for example, where the *approved form for STS elections is part of, or in, the income tax return, the entity will typically make its reasonable estimate(s) of *STS group turnover at the time it prepares its return for that year. Whether its estimated *STS group turnover is regarded as reasonable will then depend on the circumstances of the entity at the time of preparing its return.

46.	If the estimate can be regarded as reasonable when made, then the estimate will continue to be regarded as reasonable even if it later proves to be wrong.

47.	For example, under subsection 328-370(3) an entity may work out its *STS average turnover by using the average of its *STS group turnover for the present year, and estimated *STS group turnovers for the following two income years.

48.	The entity may determine during the course of the following two income years that the *STS group turnover it originally estimated for one or both of those years is materially different from the actual *STS group turnover for one or both of those years. In some cases the amount of the difference may be such that if the actual amount of *STS group turnover had been estimated originally, the entity would have had an *STS average turnover of $1 million or more in the earlier year.

49.	In these cases, the entity will remain eligible to be an *STS taxpayer for that earlier income year provided the original estimates of turnover were reasonable at the time they were made. The fact that these estimates later prove to be materially different from the actual *STS group turnover for the year(s) will not operate retrospectively to render the entity ineligible for that earlier year. However, the entity may find that while it remains eligible for the earlier year, it ceases to have an *STS average turnover below $1 million in one or more of the following income years. See Example 5 at paragraph 101 below.

Unreasonable estimates

50.	An estimate of *STS group turnover will be unreasonable where it:

(a)	has been arrived at arbitrarily, without due regard to the full range of material factors and considerations; and

(b)	is reasonably likely to produce a materially inaccurate and misleading account of the entity's *STS group turnover for the relevant years.

DATE OF EFFECT

51.	This Ruling applies to assessments for income years starting on or after 1 July 2001 to which Division 328 applies.

EXPLANATIONS AND EXAMPLES

WORKING OUT AN ENTITY'S STS AVERAGE TURNOVER : THE LOOK BACK METHOD AND THE LOOK FORWARD METHOD

52.	To assess whether it is eligible to be an *STS taxpayer for an income year, an entity will need to determine if its *STS average turnover for that income year is less than $1 million.

53.	Subsection 328-370(1) establishes the look back method of calculating an entity's *STS average turnover for a year. Under the look back method, an entity's *STS average turnover for an income year is the average of its *STS group turnovers for any three of the previous four income years (excluding the present income year). If the entity has not carried on a business in each of the four previous income years, its *STS average turnover will be the average of its *STS group turnovers for each of the previous four income years in which it did carry on a business. If the entity or its grouped entities (if any) carried on a business for only part of a relevant past income year, it must make a reasonable estimate of what its *STS group turnover would have been had it or the grouped entity carried on the business for the whole income year.

54.	If an entity has an *STS average turnover of $1 million or more using the look back method it can recalculate its *STS average turnover for the income year using the look forward method in subsection 328-370(2). The look forward method should also be used by an entity that cannot use the look back method because it has not carried on a business in any of the previous four income years.

55.	Under the look forward method, an entity makes a reasonable estimate of its *STS group turnovers for the present and following two income years. Its *STS average turnover will be the average of those *STS group turnovers. If it prefers, the entity can use the average of its actual *STS group turnover for the present year plus the reasonably estimated *STS group turnovers for the following two income years. If the entity or its grouped entities (if any) carried on a business for only part of the present income year it must make a reasonable estimate of what its *STS group turnover would have been had it or the grouped entity carried on a business for all of the present year.

56.	So, to work out its *STS average turnover for an income year an entity needs firstly to decide which income years' *STS group turnovers it is going to take into account. Having done this it then needs to work out its *STS group turnover for each of those years.

STS group turnover

57.	The term *STS group turnover is defined in section 328-375. This measures an entity's *STS group turnover for an income year by reference to the *value of the business supplies made by the entity and its "grouped entities" during that income year.

58.	An entity's "grouped entities" are the entities whose *value of the business supplies made is grouped with that of the entity under section 328-380. The process of establishing an entity's "grouped entities" for an income year under section 328-380 is examined in Taxation Ruling TR 2002/6.

Value of the business supplies

59.	Under the definition in subsection 995-1(1), the *value of the business supplies made by an entity in an income year is the sum of:

(a)	the value of any *taxable supplies made by the entity in the ordinary course of carrying on a *business during the year. The value of a *taxable supply is defined in section 9-75 of the A New Tax System (Goods and Services Tax) Act 1999 ("the GST Act"); and

(b)	the prices of any other supplies made by the entity during the year in the ordinary course of carrying on a business. ("Price" is defined in section 9-75 of the GST Act.)

60.	*Taxable supply has the meaning given by the GST Act and means a supply on which GST is payable. The value of a *taxable supply is worked out using the following formula:

Price * 10 / 11

This has the effect that the *value of the business supplies is calculated using the GST exclusive price of a *taxable supply.

61.	For other supplies, the value is simply the price.

62.	The price of a supply is generally the amount of consideration for the supply expressed as an amount of money.

63.	To work out its *STS group turnover for an income year an entity therefore needs to calculate the value of the supplies made during that year by itself and any grouped entities in the ordinary course of carrying on a business.

Working out an entity's STS average turnover: applying the look back method using section 328-375

64.	As discussed at paragraph 16, an entity may be able to rely on information in its Business Activity Statements, or its assessable income, for a past income year to work out its *STS group turnover for that year. If an entity does not or cannot follow the approach in paragraph 16, it will need to calculate its *STS group turnover for that year under section 328-375. As explained at paragraphs 57 to 63, under that section an entity's *STS group turnover for a year is worked out using the *value of the business supplies made by the entity and its grouped entities (if any) during that year.

65.	The definition of *value of the business supplies in subsection 995-1(1) only includes the value of supplies made by the entity in the ordinary course of carrying on its business . If an amount does not constitute the value of a supply made in the ordinary course of carrying on a business it will not be included in *STS group turnover.

"in the ordinary course of carrying on a business"

66.	The phrase "in the ordinary course of carrying on a business" is not defined in Division 328 or the ITAA 1997 generally. In the absence of any defined meaning, the term must be interpreted according to its ordinary meaning and legislative context.

67.	The Macquarie Dictionary (3rd ed.) defines "ordinary" to mean:

"1. such as is commonly met with; of the usual kind . . . 3. customary; normal . . . 7. something regular, customary or usual . . ."

It defines "course" to mean:

"5. customary manner of procedure; regular or natural order of events. 6. a mode of conduct; behaviour. 7. a particular manner of proceeding . . ."

These definitions emphasise that to be regarded as in the ordinary course of carrying on a business the supply needs to be of a kind that it is usual, regular or customary for the entity to make in the course of carrying on a business.

68.	This accords with the interpretation given by the Courts to similar phrases in other relevant contexts. These have been viewed as describing the activities that the entity engages in on a regular day to day basis, or as part of the general flow of the business.

69.	For example, in Downs Distributing Co Pty Ltd v. Associated Blue Star Stores Pty Ltd (in liq) (1948) 76 CLR 463, at 477; (1948) 22 ALJR 286, at 288, Rich J, when considering the phrase "ordinary course of business" in section 95 of the Bankruptcy Act 1924-1933 (Cth) said:

"It means that the transaction must fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary business as carried on, calling for no remark and arising out of no special or particular situation.F10

70.	In Taylor v. White (1963-64) 110 CLR 129, Dixon CJ observed at CLR 136:

"The time honoured phrase "in the ordinary course of business" is meant to refer to transactions regularly taking place in a sustained course of activity or some usual process naturally passing without examination."

71.	In keeping with these authorities and the ordinary meaning of the words, a supply will be made in the ordinary course of carrying on a business for the purposes of the *value of the business supplies definition in subsection 995-1(1) if the supply is of the kind regularly or customarily made by the entity in the course of carrying on its business, arising out of no special circumstance or unusual event.

Investment income

72.	An entity will need to include investment income such as interest on invested funds or rental income in its *value of the business supplies for the relevant year if that income constitutes the value of a supply made by the entity in the ordinary course of carrying on its business. This will be a question of fact to be determined in light of the facts of the particular case.

73.	If the entity is a company, this question needs to be approached bearing in mind that any exploitation by a company of its assets for the benefit of its shareholders prima facie amounts to the carrying on of a business by the company. See for example the following remarks of Lord Diplock in American Leaf Blending Co Sdn Bhd v. Director-General of Inland Revenue [1978] 3 All ER 1185 at 1189:

"…in the case of a company incorporated for the purpose of making profits for its shareholders any gainful use to which it puts any of its assets prima facie amounts to the carrying on of a business. Where the gainful use to which a company's property is put is letting it out for rent, their Lordships do not find it easy to envisage circumstances that are likely to arise in practice which would displace the prima facie inference that in doing so it was carrying on a business.F11

74.	The effect of this presumption is that where a company makes a supply giving rise to investment income such as rental or interest income, that supply can generally be presumed to be a supply made by the company in the course of carrying on a business. The value of that supply (i.e., the interest or rental income) will therefore need to be included in the company's STS group turnover. This is unless the presumption can be rebutted or it can be demonstrated that the exploitation of the asset is a supply occurring outside of the ordinary course of the company's business. Paragraphs 66 to 71 of this Ruling consider when a supply occurs in the ordinary course of carrying on a business.

75.	If the entity is a trust, the question needs to be approached bearing in mind that, prima facie, income received from trust assets is not received in the course of the carrying on of a business by the trustees of the trust. This presumption is based on the general principle that the actions of the trustees giving rise to that income are caused by the trustee's fiduciary obligations to maintain the trust assets for the benefit of the beneficiaries. They are not generally to be characterised as transactions directed toward or resulting from the carrying on of a business by the trustees using the trust assets. See Gibbs J in London Australia Investment Co Ltd v. FC of T (1977) 138 CLR 106; (1977) 7 ATR 757; 77 ATC 4398 at CLR 118; ATR 769; ATC 4410; also Charles v. FC of T (1954) 90 CLR 598; 6 AITR 85 and FC of T v . Radnor Pty Ltd 91 ATC 4689; (1991) 22 ATR 344; 102 ALR 187.

76.	The effect of this presumption is that amounts received by a trust, for example interest on invested funds or rental income, will only give rise to an *STS group turnover on the part of the trust if the trust is shown to be carrying on a business and to have made the supplies giving rise to those amounts in the ordinary course of that business. In considering this last point it is noted that a trustee will be in breach of trust if it carries on a business unless expressly authorised to do so by the trust deed or a court.F12

77.	If the entity is an individual or partnership, the question will need to be approached having regard to the nature of the business in question and whether the supply giving rise to the investment income occurred in the ordinary course of that business.

Dividends

78.	For the reason given at paragraph 28 of this Ruling, generally entities will not need to include dividends in their *STS group turnovers.

Capital gains

79.	The Courts have drawn a distinction between a transaction that is a "mere realisation or change of investment and a transaction that is an act done in what is truly the carrying on, or carrying out, of a business.F13 This distinction is based on the following statement by the Lord Justice Clerk in Californian Copper Syndicate v. Harris (Surveyor of Taxes) (1904) 5 TC 159, at 165-166:

"…enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business. What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts."

80.	In London Australia Investment Co Ltd v. FC of T (1977) 138 CLR 106, (1977) 7 ATR 757, 77 ATC 4398 Gibbs J, when considering the criterion of whether a sale was a business operation carried out in the course of the business of profit-making, remarked:

"To apply this criterion it is necessary to make both a wide survey and an exact scrutiny of the taxpayer's activities. Different considerations may apply depending on whether the taxpayer is an individual or a company. In the latter case it is necessary to have regard to the nature of the company, the character of the assets realised, the nature of the business carried on by the company and the particular realisation which produced the profit.F14

81.	In working out its *STS group turnover, an entity will therefore need to determine whether an amount relates to the mere realisation of an investment, or a supply made in the ordinary course of carrying on its business. It will then need to exclude amounts that can be properly described as merely relating to the realisation of an investment from the calculation of its *STS group turnover.

82.	A common example of the mere realisation of an investment would be the sale of a capital asset used previously in the business by an entity that does not regularly dispose of its capital business assets. Another example is the sale of an entity's business premises. As mere realisations of an investment, these transactions are not regarded as taking place in the ordinary course of an entity's business and their value will therefore not need to be included in *STS group turnover.

Example 1A – general bank interest

83.	The Smith Family Partnership runs a residential building business. Payments from customers for building work by the partnership are deposited in the partnership's bank account twice a week. The interest paid by the bank on the funds deposited will be included in the partnership's *STS group turnover. The interest paid by the bank on the funds deposited constitutes the value of supplies made by the partnership to its bank as a regular part of carrying on its business.F15

Example 1B – interest on an investment account excluded from STS group turnover

84.	Following on from Example 1A, recently the partnership sold several old pieces of equipment which it no longer needed or wished to replace. It hadn't sold any items of plant or equipment for about four years. The partners had assumed that they would simply have to scrap any items they could not sell. The partners agreed to deposit the sale proceeds in a short term cash deposit account to earn some interest until payment for the replacement equipment became due in a few months time. The partnership had not followed this practice before and is unlikely to do so again as it has no further assets planned for sale or scrapping in the next year or so. The partnership will not need to include the interest paid on this account in its *STS group turnover. The interest is the value of an unusual, irregular supply made outside of the ordinary course of the partnership's business.

Example 1C – interest on an investment account included in STS group turnover

85.	Following on from Example 1B, the partnership later finds that it routinely has more funds at hand than needed to discharge its present liabilities. Encouraged by the interest paid on the sale proceeds that had been deposited, the partnership decides to place all its surplus business funds in a short term money market account. Amounts are transferred from the partnership's general banking account to this investment account whenever the partnership's managing partner decides that the partnership has a temporary surplus of funds. Over the course of the past year this has happened about once a month. The partnership will need to include this interest in its *STS group turnover as the interest paid on this investment account represents the value of supplies made on a regular and recurrent basis, i.e., supplies made in the ordinary course of carrying on the partnership business.

Example 2A – rental income included in STS group turnover

86.	Greg runs a gardening centre. His business premises are made up of the customer centre, a number of greenhouses and two warehouses. Greg has only ever had a need to use one of these warehouses. Several years ago he decided to lease the spare warehouse on a yearly basis to another business as a way of generating some extra income. Greg will need to include the income he receives under the lease each year in his *STS group turnover. This is because the leasing of the spare warehouse is a supply which Greg's business makes on a regular basis. The rental income therefore constitutes the value of a supply made in the ordinary course of Greg's business.

Example 2B – rental income excluded from STS group turnover

87.	Assume the same facts as in Example 2A, except Greg does not lease out his second warehouse. The normal pattern is for him to use both of his warehouses to store stock that will be sold in the gardening centre. However, Greg determines in late May 2002 that he will not need a large part of his second warehouse for all of the month of June. This is because a supplier will not be able to deliver the consignment of ceramic pots Greg ordered until July. Greg's friend has mentioned to him that he is in need of some temporary storage space. To help overcome a temporary cashflow problem Greg offers his friend the use of his spare warehouse space for a month for a fixed sum. Greg will not need to include the rent he receives from his friend in the value of supplies made by his business. This is because Greg has not supplied the storage space in the ordinary course of operating his garden centre business. The supply of rental storage space is not a supply Greg's business usually makes.

Example 3 – disposal of capital assets outside of the ordinary course of business

88.	Mustafa's business ordinarily includes the supply of printing services and printed goods. To keep up with advances in printing technology, Mustafa replaces certain parts of his printing system every three years or so. He generally sells the old parts to other businesses. Mustafa will not need to include any proceeds from these sales in his *STS group turnover. This is because the supply of capital assets such as commercial printing equipment is not an ordinary part of Mustafa's business. Such items do not form part of the business's trading stock and they are not acquired by Mustafa with the intention of on-selling them for profit.

Example 4 – disposal of capital assets in the ordinary course of business

89.	Computers Pty Ltd is a distributor of computer hardware and software. Primarily it leases computer hardware to corporate clients. On expiration of a lease, the hardware is either re-leased to the client or taken back by Computers Pty Ltd. Every year Computers Pty Ltd also sells leased hardware to a number of clients at the expiry of the lease. Computers Pty Ltd's business strategy is to use the computers in whichever way will result in profits for the company. Its *STS group turnover will include both the lease payments and the sale proceeds for leased hardware sold during the year to a client at the expiry of a lease. The sale of previously leased hardware forms part of Computers Pty Ltd's overall profit making strategy and is a supply of a kind which Computers Pty Ltd makes as a regular and ordinary part of carrying on its business.

Supplies made but consideration not yet received

90.	Under subsection 328-375(1), an entity's *STS group turnover for an income year consists of the *value of the business supplies made by an entity in the income year and the *value of the business supplies made by its grouped entities (if any) in that year.

91.	To determine if the value of a particular supply needs to be included in its *STS group turnover for an income year, an entity therefore needs to determine if it or the relevant grouped entity made that supply in that income year. Once it is established that the supply was made in the year, its value is included in the entity's *value of the business supplies for the year provided it was made in the ordinary course of business.

92.	The term "made" is not defined in section 328-375 or in the ITAA 1997 generally. Accordingly, the term needs to be interpreted according to its ordinary meaning and legislative context.

93.	The Macquarie Dictionary (Third Edition) defines made to mean the past tense and past participle of make. It defines make to mean:

"1. to bring into existence by shaping material, combining parts, etc. 2. to produce by any action or causative agency. 3. to cause to be or become; render . . . 5. to put into proper condition for use. 6. to bring to a certain form or condition."

94.	It is important to note that under the definition of *STS group turnover in section 328-375 the value of a supply is included in *STS group turnover for the income year in which the supply is made, not the income year in which the entity receives payment or another form of consideration for the supply.

95.	The effect of this is that an entity may need to include the value of supplies it has made in a year but not yet been paid for in its *STS group turnover for that year.

Making a reasonable estimate of STS group turnover

What is a reasonable estimate of turnover?

96.	Paragraphs 11 to 15 of this Ruling set out the situations in which an entity may need to make a reasonable estimate of its *STS group turnover for a year.

97.	The requirement to make a reasonable estimate of a value, proportion or amount appears in numerous places throughout the income tax law. For example, to calculate the taxable income of a general insurer for a year of income it is necessary to deduct from the premiums derived that year an appropriate amount, arrived at by reasonable estimate, in respect of claims outstanding at the end of the year. In Mercantile Mutual (Workers Compensation) Ltd v. FC of T (1998) 39 ATR 467; 98 ATC 4814, Foster J when considering this estimation process noted the reference by Fullagar J in Ballarat Brewing Co Ltd. v. FC of T (1951) 82 CLR 364; (1951) 25 ALJR 220; (1951) 9 ATD 254 to the comments of Lord Loreburn in Sun Insurance Office v. Clarke (1912) AC 443, at 454; [1911-13] All ER Rep 495, at 498; 6 TC 57, at 77:

"There is no rule of law as to the proper way of making an estimate. There is no way of estimating which is right or wrong in itself. It is a question of fact and figures whether the way of making the estimate in any case is the best way for that case."

98.	In Australia and New Zealand Banking Group Ltd v. FC of T (1994) 48 FCR 268; 94 ATC 4026; (1994) 27 ATR 559, the Full Federal Court in a similar context considered an argument from the Commissioner that the estimates in question there related to claims for which no reasonable estimate was possible or, if an estimate was possible, it was unreasonable. Hill J said (Northrop and Lockhardt JJ agreeing) at FCR 280; ATC 4035-4036; ATR 571:

"The concept of "estimate" does not involve arbitrarily seizing upon any figure. What is involved is the formation of a judgment or opinion based upon reason. That judgment or opinion must necessarily be made bona fide but it need not be exact for the process of estimation involves a process of approximation."

99.	It is clear from these remarks that while a reasonable estimate need only be an approximation, it must be based on a sound and reasoned process of estimation that has been undertaken in good faith. Conversely, an unreasonable estimate is one that is not based on a sound and reasoned process of estimation.

100.	Whether or not an estimate will be regarded as reasonable will also depend on the circumstances of the entity at the time it makes its estimate(s) of *STS group turnover. As an entity's *STS group turnover relates to its eligibility to be an *STS taxpayer, an entity estimating its *STS group turnover for a year or years will make this estimate at the time of assessing or reviewing its eligibility. In our view this will be at the time the entity is required to make its election to become an *STS taxpayer or notify the Commissioner if it is ceasing to be an *STS taxpayer.

Example 5

101.	Annette wants to become an *STS taxpayer in the 2001-2002 income year. When preparing her income tax return for that year Annette assesses her eligibility to become an *STS taxpayer. Annette has just opened her business and therefore works out her *STS average turnover by using the average of her *STS group turnover for the 2001-2002 year and reasonable estimates of her *STS group turnovers for the 2002-2003 and 2003-2004 income years. These were $750,000, $800,000 and $850,000 respectively. On this basis Annette has an *STS average turnover of $800,000 for the 2001-2002 year and she elects to become an *STS taxpayer for that year.

102.	When preparing her tax return for the 2002-2003 income year, Annette reviews whether she will be eligible to be an *STS taxpayer for that year. However, as her business now has a past turnover record she calculates her *STS average turnover for the 2002-2003 income year under subsection 328-370(1), using just the actual *STS group turnover for the 2001-2002 income year. This produces an *STS average turnover of $750,000 and she therefore remains eligible to be an STS taxpayer for the 2002-2003 year.

103.	At the end of the 2003-2004 year, Annette realises that her actual *STS group turnover for that year is going to be considerably higher than the amount she estimated when completing her 2001-2002 return. However, Annette could not have foreseen the circumstances that have led to this increase and her estimate of turnover for the 2003-2004 was reasonable at the time she prepared her 2001-2002 return. Annette will therefore remain eligible to be an *STS taxpayer for the 2001-2002 income year. She will also remain eligible for the 2002-2003 year because her calculation of *STS average turnover under the look back method for that year was not affected by her estimate of *STS group turnover for the 2003-2004 year.

Accepted methods of making a reasonable estimate

104.	Paragraphs 38 to 44 provide accepted methods for making a reasonable estimate of *STS group turnover in various situations. The following examples demonstrate the application of those methods.

Example 6 – Part year businesses

105.	Kathy opens her own business on 1 December 2001. Her business has an *STS group turnover for December of $110,000. In each of the following months the *STS group turnover is as follows:

2002

January	$68,000
February	$65,000
March	$61,000
April	$59,000
May	$60,000
June	$63,000
106.	Kathy wishes to work out a reasonable estimate of her *STS group turnover for the year using a pro-rata calculation based on her turnover for the months she was in business. She believes these are broadly representative of what her turnover for the months July to November would have been had she been in business in those months. However, she knows that December's turnover was not typical of her general monthly turnover. Industry experience confirms that December is always significantly busier than any other month of the year. Given its atypical nature, it would not be reasonable to base the pro rata calculation of Kathy's *STS group turnover for the full year on the turnover for December. Instead, Kathy should work out the average turnover for the months January to June, multiply this by eleven, and add her turnover for December. This would give Kathy an estimated *STS group turnover for the whole year of $799,333.

Example 7 – New businesses

107.	Tom has recently obtained a franchise to operate a gym using the name of a nationwide chain of specialist gyms. Tom's business officially begins trading on 1 July 2001. Information provided to Tom as part of the franchise process shows the typical annual turnover for gyms of the same size and in similar locations to Tom's gym that operate under the franchise name. On average this turnover is shown to be $750,000 for the 1998 income year, $800,000 for the 1999 income year and $850,000 for the 2000 year. From his own research, Tom knows this growth pattern is broadly consistent with the fitness industry generally.

108.	The business plans and budgets that Tom was required to prepare for the bank that has financed his acquisition of the franchise show projected turnover figures for the 2003 and 2004 income years of $850,000 and $900,000. These were accepted as sound projections by Tom's bank and reflect the past growth pattern from gyms operated under this franchise. They are therefore a reasonable basis on which Tom can make an estimate of his *STS group turnovers for the 2003 and 2004 income years. Tom's *STS group turnover for the 2002 year is $800,000. Based on these figures, Tom will have an * STS average turnover for the 2002 year of $850,000. He will therefore be eligible to enter the STS in that year. Given this proximity to the $1 million threshold however, Tom will need to take particular care when calculating his *STS average turnover in later years.

Example 8 – Existing businesses

109.	Janet has run a small motel for the past eight years. The business' *STS group turnover for 2000-2001 year was $1,100,000. In the 1999-2000 year it was $1,050,000, in the 1998-1999 year it was $1,000,000 and in 1997-1998 it was $960,000. Janet works out her *STS average turnover for the 2001-2002 year by using the average of her *STS group turnovers for the 2000, 1999 and 1998 years. This produces an *STS average turnover of $1,003,333. On this basis Janet will be ineligible to become an *STS taxpayer. Janet can, however, recalculate her *STS average turnover by making a reasonable estimate of her *STS average turnover for the present and following two income years.

110.	In making this estimate, Janet will need to have regard to any factors likely to affect her future *STS group turnovers. Janet knows that:

(a)	her *STS group turnover has increased in each of the last four income years;

(b)	she has no plans to reduce the present operations of the motel business in the next three years;

(c)	an existing corporate client has just renewed its arrangement with her for the continued provision of services for its staff for the next two years. This client has provided 20% of her business in each of the previous five years;

(d)	there is no expectation in the industry that demand will decline over the coming years in her region; and

(e)	another motel in the town has recently closed for a three month period of refurbishment.

111.	All of these considerations are matters likely to affect Janet's future *STS group turnovers. On the basis of these, Janet could not reasonably estimate that her *STS group turnover is likely to decline materially below $1 million in either the present year or the following two years. As a result, Janet will not satisfy the *STS average turnover test in paragraph 328-365(1)(b).

APPENDIX

Calculating STS group turnover using past years' Business Activity Statements or income tax returns

112.	As outlined at paragraph 16 of this Ruling, in most cases you will be able to base your STS group turnover for an income year on amounts in your income tax return or Business Activity Statements for that year. The following table sets out the amount the Commissioner will generally accept as your STS group turnover for a particular year.

Income year	Type of taxpayer	Amount that can be used as the taxpayer's STS group turnover for that income year
2000-2001  and later income years	Taxpayer using GST reporting Option 1 or Option 2	The sum of the amounts shown at label G1 in each Business Activity Statement lodged by the taxpayer for that year.
2000-2001  and later income years	Taxpayer paying and reporting GST monthly	The sum of the amounts shown at label G1 in each Business Activity Statement lodged by the taxpayer for that year.
2000-2001  and later income years	Taxpayer using GST reporting Option 3	The amount shown at label G1 in the taxpayer's annual GST return for that year.  Note: for 2000-2001 only, taxpayers using GST reporting Option 3 need to use the sum of the amounts shown at label G1 in any BAS lodged for that year and the amount shown at label G1 in their 2001 annual GST return.
1999-2000  1998-1999  1997-1998	Company	amount shown at the "Total income" label in that year's income tax return.
1999-2000  1998-1999  1997-1998	Partnership or trust	amount shown at "Total business income" plus any amount shown at "Gross interest" and/or "Gross rent" in that year's income tax return.
1999-2000  1998-1999  1997-1998	Sole trader (i.e., an individual)	amount shown at "Total business income" in the Business and professional items schedule to that year's income tax return plus any amount shown at "Gross rent" in the supplementary section to that return plus any amount shown at "Gross interest" in that return.
The amount must be less than $1 million

113.	You can only use the amount worked out using the table above as your STS group turnover for the relevant year if that amount is less than $1 million.

114.	If the amount is $1 million or more, you need to confirm your STS group turnover for the relevant year by applying the legislative definition of STS group turnover discussed at paragraphs 18 to 30 of this Ruling. You may find that your STS group turnover for that year is lower if worked out by applying this definition. This is because various amounts taken into account in your income tax return or BASs may not be taken into account in calculating your STS group turnover under the legislative definition. For example, proceeds from the sale of capital assets are generally excluded under the definition of STS group turnover.

Important note

115.	Using the amount shown in the table above as your STS group turnover for one or more past income years may cause you to exceed the $1 million STS average turnover eligibility threshold sooner than if you had worked out your STS group turnover for each of those past years applying the legislative definition of STS group turnover discussed at paragraphs 18 to 30 of this Ruling. This is due to the cumulative effect of using the potentially higher amounts from your BASs or income tax return as your STS group turnover rather than an amount worked out using the legislative definition. If this happens, you can recalculate your STS group turnovers for the relevant years applying the legislative definition of STS group turnover.

Taxpayers that are grouped under the STS grouping rules

116.	You can still work out your STS group turnover for an income year using the table above if you are grouped with another taxpayer for that year under the STS grouping rules.

117.	In this case you will need to identify the relevant amounts from both your own and the grouped taxpayer's BASs, annual GST return or income tax return as applicable using the table above. You can use the sum of all of these amounts as your STS group turnover for the year. See Example Two below.

118.	If you are grouped with another taxpayer for an income year in which that taxpayer did not lodge BASs, you need to include the relevant amount from the following table in your STS group turnover for that year. See Example Three below.

Grouped taxpayer	Amount to include in your STS group turnover
Company	amount shown at the "Total income" label on that company's income tax return for the relevant year.
Partnership or trust	amount shown at "Total business income" plus any amount shown at "Gross interest" and/or "Gross rent" on that partnership's or trust's income tax return for the relevant year.
Sole trader (i.e. an individual)	amount shown at "Total business income" on the Business and professional items schedule to that sole trader's income tax return for the relevant year plus any amount shown at "Gross rent" in the supplementary section to that return plus any amount shown at "Gross interest" on that return.
Businesses carried on for only part of a year

119.	As discussed at paragraphs 11 and 12 of this Ruling, if you are working out your STS group turnover for a past income year and you or a taxpayer you are grouped with only carried on a business for part of that year, you need to make a reasonable estimate of what your STS group turnover would have been if the business was carried on for the full year.

120.	You can still use the BAS or income tax return amounts detailed above when making this reasonable estimate. As explained at paragraphs 39 and 40 of this Ruling, this estimate will generally be regarded as reasonable if it is worked out as a pro rata calculation of your STS group turnover for the part of the year when the business was carried on. This pro rata calculation can be based on the total of the relevant amounts shown on the BASs lodged for the part of the year in which the business was carried on. If an income tax return is being used, the pro rata calculation can be based on the amount shown in that income tax return as set out in the table under paragraph 112.

Example One – Using a past year's Business Activity Statements

121.	Kim owns and operates a retail clothing business in partnership with her sister. She wants to work out the partnership's STS group turnover for the 2000-01 income year using its Business Activity Statements for that year. The partnership used GST reporting Option 1 in the March and June 2001 quarters. The following table shows the amounts shown at label G1 on the partnership's BASs for that year.

The partnership's 2000-01 Business Activity Statements

Sept 2000 quarter	Dec 2000 quarter	March 2001 quarter	June 2001 quarter
$200 000	+ $230 000	+$215 000	+$190 000	= $835 000
122.	The total of the amounts shown at label G1 of the partnership's BASs for the 2000-01 year is $835 000. As this is less than $1 million, Kim can use this figure as the partnership's STS group turnover for the 2000-01 year.

Example Two – using a grouped taxpayer's Business Activity Statements

123.	Marco is a sole trader. Marco is grouped with Alpha Pty Ltd under the STS grouping rules because he can exercise 40% of the voting power in Alpha Pty Ltd. To work out his STS group turnover for the 2000-01 year Marco needs to include Alpha Pty Ltd's turnover with his own turnover. The following tables set out the amounts shown on the BASs for Marco and Alpha Pty Ltd for the 2000-01 year. Both use GST reporting Option 1.

124.	Marco's Business Activity Statements

Marco's Business Activity Statements

Sept 2000 quarter	Dec 2000 quarter	March 2001 quarter	June 2001 quarter
$20 000	+ $25 000	+ $22 000	+ $26 000	= $93 000

Alpha Pty Ltd's Business Activity Statements

Sept 2000 quarter	Dec 2000 quarter	March 2001 quarter	June 2001 quarter
$170 000	+ $220 000	+ $190 000	+ $180 000	= $760 000
125.	The total of the amounts at label G1 on all of Marco's BASs for the 2000-01 year is $93 000. The total of the amounts shown at label G1 on all of Alpha Pty Ltd's BASs for the 2000-01 year is $760 000. The sum of these amounts is $853 000. As it is less than $1 million, Marco can use the $853 000 figure as his STS group turnover for the 2000-01 year.

Example Three – using a grouped taxpayer's income tax return

126.	Following on from Example Two, Marco wants to work out his STS group turnover for the 1999-2000 income year. Marco is also grouped with Alpha Pty Ltd for that year under the STS grouping rules. Marco takes the amount of $49 000 shown as his "total business income" in the business and professional items schedule to his 1999-2000 income tax return. The amount shown on Alpha Pty Ltd's income tax return for that year as "Total income" was $600 000. As the sum is less than $1 million, Marco can use that amount, i.e., $649 000, as his STS group turnover for the 1999-2000 income year.

127.	To work out his STS average turnover for the 2001-02 income year, Marco then works out the average of this 1999-2000 STS group turnover figure ($649 000) and the STS group turnover worked out for the 2000-01 income year ($853 000). He does not need to consider the 1997-98 or 1998-99 income years as he did not carry on a business in those years. The average of these two STS group turnovers is $751 000. Marco can use this as his STS average turnover for the 2001-02 income year.

Example Four – making a reasonable estimate using your Business Activity Statements

128.	Beta Pty Ltd began business on 1 January 2002. It wants to work out its STS group turnover for the 2001-02 income year. As it only carried on a business for part of that year, it needs to make a reasonable estimate of its STS group turnover for the full year. It lodged BASs for the March and June 2002 quarters using GST reporting Option 1. The amount shown at label G1 on the March BAS was $180 000. The amount shown at that label in the June BAS was $215 000. Beta Pty Ltd considers the total of the label G1 amounts, i.e. $395 000, to be a reasonable indication of what its turnover would have been for the period July to December 2001 had it traded in those months. It makes a reasonable estimate of its STS group turnover for the 2001-02 income year of $790 000. Beta Pty Ltd can use $790 000 as its STS group turnover for the 2001-02 income year.

DETAILED CONTENTS LIST

129.	Below is a detailed contents list for this Ruling:

	Paragraph
What this Ruling is about	1
Class of person/arrangement	2
Legislative framework	3
Introduction to Division 328 – Simplified Tax System	3
Outline of the STS eligibility rules	5
Working out an entity's STS average turnover: the look back method and the look forward method	7
STS group turnover	9
Making a reasonable estimate of STS group turnover	11
Ruling	16
Working out an entity's STS average turnover	16
Applying the look back method using past years' Business Activity Statements or assessable income	16
Applying the look back method using section 328-375	18
" in the ordinary course of carrying on a business"	20
Investment income	24
Dividends	28
Capital gains	29
Government grants	30
Supplies made but consideration not yet received	32
Making a reasonable estimate of STS group turnover	33
What is a reasonable estimate of STS group turnover ?	33
Accepted methods of making a reasonable estimate	37
Part year businesses	38
Estimate for present and future years	40
Estimating the turnover of grouped entities	42
Reasonable estimates that prove to be incorrect	44
Unreasonable estimates	49
Date of effect	50
Explanations and Examples	51
Working out an entity's STS average turnover : the look back method and the look forward method	51
STS group turnover	56
Value of the business supplies	58
Working out an entity's STS average turnover: applying the look back method using section 328-375	60
"in the ordinary course of carrying on a business"	62
Investment income	68
Dividends	74
Capital gains	75
Example 1A – general bank interest	79
Example 1B – interest on an investment account excluded from STS group turnover	80
Example 1C – interest on an investment account included in STS group turnover	81
Example 2A – rental income included in STS group turnover	82
Example 2B – rental income excluded from STS group turnover	83
Example 3 – disposal of capital assets outside of the ordinary course of business	84
Example 4 – disposal of capital assets in the ordinary course of business	85
Supplies made but consideration not yet received	86
Making a reasonable estimate of STS group turnover	92
What is a reasonable estimate of turnover ?	92
Example 5	97
Accepted methods of making a reasonable estimate	100
Example 6 – Part year businesses	101
Example 7 – New businesses	103
Example 8 – Existing businesses	105
Appendix	108
Calculating STS group turnover using past years' Business Activity Statements or income tax returns	108
The amount must be less than $1 million	109
Important note	111
Taxpayers that are grouped under the STS grouping rules	112
Businesses carried on for only part of a year	115
Example One – Using a past year's Business Activity Statements	117
The partnership's 2000-01 Business Activity Statements	118
Example Two – using a grouped taxpayer's Business Activity Statements	119
Alpha Pty Ltd's Business Activity Statements	121
Example Three – using a grouped taxpayer's income tax return	122
Example Four – making a reasonable estimate using your Business Activity Statements	124
Detailed contents list	125

Commissioner of Taxation

26 June 2002


[F1]

Terms that are defined in the Income Tax Assessment Act 1997 , and identified with an asterisk in that Act, are similarly identified in this Ruling.


[F2]

If the *value of the business supplies made by an entity in an income year is grouped with the *value of the business supplies made by another entity under section 328-380, the entity can expect that its *STS group turnover for that year will approximate the total of the relevant amounts on the entity's BASs for the year plus the total of the relevant amounts on the other entity's BASs for that year.


[F3]

If the *value of the business supplies made by an entity in an income year is grouped with the *value of the business supplies made by another entity under section 328-380, the entity can expect that its *STS group turnover for that year will approximate the sum of its assessable income for that year and the assessable income of the other entity for that year.


[F4]

Downs Distributing Co Pty Ltd v. Associated Blue Star Stores Pty Ltd (in liq) (1948) 76 CLR 463; (1948) 22 ALJR 286; Taylor v. White (1963-64) 110 CLR 129; Bradford Roofing Industries Pty Ltd (in liq) & Companies Act, Re [1966] 1 NSWR 674.


[F5]

Memorex v. FC of T 1987 77 ALR 299 at 301; 87 ATC 5034 at 5036; (1987) 19 ATR 553 at 554-555.


[F6]

Lord Diplock in American Leaf Blending Co Sdn Bhd v Director-General of Inland Revenue [1978] 3 All ER 1185 at 1189. See also Income Tax Ruling IT 2423.


[F7]

FC of T v. Radnor Pty Ltd 91 ATC 4689, (1991) 22 ATR 344, 102 ALR 187; London Australia Investment Co Ltd v. FC of T (1977) 138 CLR 106; (1997) 7 ATR 757; 77 ATC 4398; Charles v. FC of T (1954) 90 CLR 598; 6 AITR 85.


[F8]

Goods and Services Tax Ruling GSTR 2000/11 considers when a grant constitutes consideration for a supply that is taxable supply under the A New Tax System (Goods and Services Tax) Act 1999 .


[F9]

However, the entity does not include the value of the supplies made between it any of its grouped entities or between its grouped entities: paragraphs 328-375(1)(c) to (e).


[F10]

Similarly in Bradford Roofing Industries Pty Ltd (in liq) & Companies Act, Re [1966] 1 NSWR 674 Street J, when considering a similar phrase in subsection 207(1) of The Companies Act 1961 (NSW), held at 681: "The transaction must be one of the ordinary day-to-day business activities, having no unusual or special features."


[F11]

See also paragraph 3 of Income Tax Ruling IT 2423 which states that "Generally, it is easier for a company that derives income from the letting of property to show that it carries on a business that it is for an individual. If a company's objects are business objects and are, in fact, carried out it carries on a business . . .". Ruhamah Property Co Ltd v. FC of T (1928) 41 CLR 148 provides an example where the character of a company, the purpose of its formation and the ends to which its profits were put were enough to displace this prima facie presumption.


[F12]

Meagher RP & Gummow WM, Jacobs Law of Trusts (Sixth edition), Butterworths, 1997, Sydney at 591.


[F13]

Memorex Pty Ltd v. Commissioner of Taxation (1987) 77 ALR 299; 87 ATC 5034; (1987) 19 ATR 553; FC of T v. GKN Kwikform Services Pty Ltd (1991) 21 ATR 1532; 91 ATC 4336; FC of T v. The Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; (1987) 18 ATR 693; RAC Insurance Pty Ltd v. FC of T (1990) 95 ALR 515; (1990) 21 ATR 709; 90 ATC 4737; Jennings Industries Ltd v. FC of T (1984) 2 FCR 273; (1984) 15 ATR 577; 84 ATC 4288.


[F14]

at CLR 116; ATR 762; ATC 4403.


[F15]

See FC of T v. Marshall and Brougham Pty Ltd (1987) 17 FCR 541, at 549; 87 ATC 4522, at 4529; (1987) 18 ATR 859, at 866 where the Full Federal Court held that: " . . . placing money in the bank is part of any business carried on involving payments in and out in the ordinary course of business."


Taxation Ruling TR 2001/8 What is a personal services business
Taxation Ruling TR 2001/8

Income tax: what is a personal services business

Preamble

The number, subject heading, Class of person/arrangement, Date of effect and Ruling parts of this document are a "public ruling" for the purposes of Part IVAAA of the Taxation Administration Act 1953 and are legally binding on the Commissioner. The remainder of the document is administratively binding on the Commissioner. Taxation Rulings TR 92/1 and TR 97/16 together explain when a Ruling is a public ruling and how it is binding on the Commissioner.

Contents:

What this Ruling is about

Definitions

Related Rulings

Ruling

Date of effect

Explanations

Further examples

Detailed contents list

WHAT THIS RULING IS ABOUT

1.	This Ruling deals with the alienation of personal services income measure (the alienation measure) contained in Part 2-42 of the Income Tax Assessment Act 1997 (ITAA 1997), and explains what is a personal services business. In particular it explains:

•	the "results" test in subsections 87-60(5) and 87-65(5);

•	the three personal services business tests contained in Subdivision 87-A of the ITAA 1997; and

•	the grounds for the Commissioner, making a determination under Subdivision 87-B of the ITAA 1997 that an individual's personal services income is from that individual or a personal services entity conducting a personal services business.

2.	It also explains that the alienation measure does not apply to personal services income that is income from conducting a personal services business. However, the ruling reminds taxpayers who qualify as personal services businesses that they are in exactly the same position that they would have been prior to the enactment of the alienation measure. For example, Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) may apply where income splitting occurs.

3.	This Ruling incorporates the proposed legislative amendments announced in Treasurer's Press Release No. 47 of 29 June 2001 and Treasurer's Press Release No. 51 of 9 July 2001. Those aspects of the ruling that relate to those announcements are not public rulings for the purposes of the Tax Administration Act 1953 (TAA 1953).F1

Class of persons

4.	This ruling applies to:

•	those individuals whose ordinary income or statutory income includes income that is mainly a reward for their personal efforts or skills; and

•	those companies, partnerships or trusts whose ordinary or statutory income includes income that is mainly a reward for the personal efforts or skills of an individual (an individual's personal services income).

Background

5.	The New Business Tax System ( Alienation of Personal Services Income ) Act 2000 (Alienation of Personal Services Income Act) amended the ITAA 1997 by inserting new Part 2-42 into that Act and, amended the TAA 1953 by inserting new Division 13 in Schedule 1 to that Act. Part 2-42 of ITAA 1997 contains the alienation measure that sets out the income tax treatment of the ordinary or statutory income of an individual or a personal services entity that is an individual's personal services income.

6.	The measure contained in Part 2-42 applies from the 2000-2001 income year. However, it does not apply until the 2002-2003 income year for those individuals or personal services entities who:

•	were in the former prescribed payments system and were entitled to and had made a payee declaration to a payer; and

•	the payee declaration was in force as of 13 April 2000; and

•	the Commissioner had received the payee declaration for the payee from the payer on or before 13 April 2000.F2

7.	The alienation measure was introduced following recommendations made in the report of the Review of Business Taxation : A Tax System Redesigned (commonly called the Ralph Report) F3. The relevant recommendations that relate to this measure are recommendations 7.2, 7.3 and 7.4. Those recommendations were aimed at improving the integrity and equity in the tax system. The recommendations arose out of concerns that substantial erosion of the income tax base had occurred as a consequence of the alienation of personal services income through the use of interposed companies, partnerships and trusts; and that there was a perception that individuals, as contractors, and interposed entities were able to claim a greater range of deductions than those available to individuals who provided personal services as employeesF4.

8.	The measure is intended to:

•	Limit and clarify the deductions available against personal services income at both the individual and interposed entity level; and

•	Ensure that, after allowing certain deductions to the interposed entity, any income remaining is attributed to the individualF5.

9.	The application of Part 2-42 of the ITAA 1997 is predicated on the view that, contractually, income from personal services can be the income of any entity. However, subsection 84-5(2) of the ITAA 1997 ensures that for tax purposes, only an individual can have personal services income (as defined).

10.	The application of Part 2-42 of the ITAA 1997 does not result in a change in the nature of contractual relationships between parties to an arrangement that involves the rendering of personal services (subsection 84-10. Individuals do not become employees of service acquirers as a consequence of the application of Part 2-42. Nor does the operation of Part 2-42 affect an individual's or a personal services entity's entitlement to an Australian Business Number, or entitlement to be registered for the purposes of the A New Tax System ( Goods and Services Tax ) Act 1999 (GST Act).

The following flowchart explains how Part 2-42 applies.

Diagram showing the operation of the Alienation MeasuresF6

11.	Note that you can apply for a Personal Services Business Determination (PSBD) to confirm that you are not within the measure, or if you are not sure whether you are within the measure, or if you are subject to unusual circumstances. If you believe that the alienation measure should not apply to you, you can request a PSBD from the Commissioner (see diagram above).

12.	If:

(a)	you or the personal services entity do not satisfy the "results test"; and

(b)	you or the personal services entity get 80% or more of the personal services income from one source.

you will be subject to the alienation measure, unless you have a PSBD.

The effect of the alienation measure

13.	If the alienation measure applies to an individual or a personal services entity, the amount of the personal services income is included in the assessable income of the individual whose personal efforts or skills generate the income.

14.	If the alienation measure applies, the individual or personal services entity will not be able to claim certain deductions. For example, rent expenses, mortgage interest payments, rates and land tax paid in respect of the individual's private residence will not be allowable deductions to the extent that those expenses are incurred in gaining or producing the individual's personal services income. Also, payments made to the individual's spouse (or any other associate) will not be deductible when the payment relates to non-principal work, such as bookkeeping for an individual who is a builder.

15.	If the alienation measure applies, a personal services entity may also have additional withholding obligations in relation to personal services income that is attributed to an individual under the alienation measure.

DEFINITIONS

Personal services entity (entity)

16.	A personal services entity is a company, partnership or trust whose ordinary income or statutory income includes the personal services income of one or more individuals (subsection 86-15(2)).

Personal services income

17.	Personal services income is income which is mainly a reward for an individual's efforts or skills (or would mainly be such a reward) if it had been derived by the individual) (subsection 84-5(1)).

Service acquirer(s)

18.	The service acquirer is/are the entity or entities that acquire the personal services of an individual directly from the individual or through a personal services entity. The service acquirer is the client of an individual or personal services entity and is the source of the ordinary or statutory income of the individual or the personal services entity that is an individual's personal services income.

Test Individual

19.	A test individual is an individual whose personal services income is included in a personal services entity's ordinary or statutory income, and to whom that income will be attributed under Division 86 unless one of the exceptions in that Division applies. A personal services entity may have more than one test individual. Part 2-42 applies on an individual by individual basis.

A diagrammatical representation of the above definitions is as follows:

Associate

20.	The word "associate" has the same meaning as in section 318 of the Income Tax Assessment Act 1936 (ITAA 1936).

21.	For an individual an associate includes:

•	a relative of the individual;

•	a partner of the individual or a partnership in which the individual is a partner;

•	if a partner of the individual is an individual, the spouse or child of that partner;

•	a trustee of a trust estate under which the individual or an associate benefits; or

•	a company under the control of the individual or associate.

22.	For a company an associate includes:

•	a partner of the company or a partnership in which the company is a partner;

•	a trustee of a trust estate under which the company or associate benefits;

•	another individual or associate who controls the company; or

•	another company which is under the control of the company or the company's associate.

23.	For a trustee an associate includes an entity or associate of the entity that benefits or is capable of benefiting under the trust.

24.	For a partnership an associate includes each partner of the partnership or associate of the partner.

25.	Section 87-35 specifically excludes the following from being associates of each other for the purposes of subsection 87-15(3) (the 80% rule) and paragraph 87-20(1)(a) (the unrelated clients test):

(i)	Australian government agencies which is defined to mean:

o	the Commonwealth, a State or a Territory; or

o	an authority of the Commonwealth, a State or a Territory;

(ii)	Commonwealth government agencies within the meaning of the Public Service Act 1999;

(iii)	Each part of an authority of a State or Territory that has; under a law of a State or Territory, a status corresponding to a Commonwealth government agency within the meaning of the Public Service Act 1999.

RELATED RULINGS

•	Taxation Ruling TR 2001/7 deals with the meaning of personal services income (Division 84) and

•	Taxation Rulings IT 2121, IT 2330, IT 2503 and IT 2639 deal with the application of Part IVA to the alienation of income from rendering personal services.

RULING

Who is covered by the Alienation Measure?

26.	The alienation measure only applies to personal services income. Personal services income is income earned mainly from the provision of a person's labour or skills.

27.	You will not be within the alienation measure and can self-assess accordingly if you come within ONE of the following four situations:

•	You satisfy the "results test", that is:

(a)	You work to produce a result(s); and

(b)	You provide the tools and equipment necessary (if any) to produce the result(s); and

(c)	You are liable for the cost of rectifying any defective work.F7

OR

•	None of your clients pay you 80% or more of your personal services income in the year of income and you have two or more unrelated clients (who were obtained as a result of you making offers to the public at large or to a section of the public)F8.

OR

•	None of your clients pay you 80% or more of your personal services income in the year of income and

(d)	You engage an individual(s) or an unrelated entity(ies) to perform 20% or more (by market value) of the principal work (i.e. the work that generates the personal services income) or

(e)	You employ an apprentice for at least half the year

OR

•	None of your clients pay you 80% or more of your personal services income in the year of income, and you exclusively use business premises that are physically separate from your home, or from the premises of the person for whom you are working.

28.	If you cannot satisfy any of the tests outlined in the previous paragraph (for example, because you do not meet one of the three personal services business tests or the results test, and 80% or more of your personal services income comes from one source, you may be able to obtain a Personal Services Business Determination (PSBD) from the Commissioner that you are conducting a personal services business. You can also apply for a PSBD if you are not sure whether you satisfy any of the tests. If the Commissioner is satisfied that you are entitled to a PSBD, you will not be subject to the alienation measure.

29.	If the alienation measure applies to an individual or a personal services entity, the amount of the personal services income is included in the assessable income of the individual whose personal efforts or skills generate the income.

30.	In addition, the individual or personal services entity will not be able to claim certain deductions. For example, rent expenses, mortgage payments, rates and land tax paid in respect of the individual's private residence will not be allowable deductions to the extent that those expenses are incurred in gaining or producing the individual's personal services income. Also, payments made to the individual's spouse (or any other associate) will not be deductible when the payment relates to non-principal work, such as bookkeeping for an individual who is a builder.

31.	A personal services entity may also have additional withholding obligations in relation to personal services income that is attributed to an individual under the alienation measure.

32.	Note that the general anti-avoidance provisions of Part IVA of the ITAA 1936 may still apply to cases of alienation of personal services income that fall outside the alienation measure: see section 86-10 of the ITAA 1997.

The Results Test

33.	The alienation measure does not apply to an individual or personal services entity if, having regard to the custom or practice in the relevant industry, when work of that kind is performed by an entity other than an employee:

(a)	the work is for producing a result;

(b)	the individual or personal services entity supplies the equipment or tools, if any, that are necessary to do the work; and

(c)	the individual or personal services entity is liable for the cost of rectifying any defective work.

34.	The "results test" will be met where:

(a)	The contract is to produce a specified outcome or result and payment is based on performance of the contract (i.e., for producing the outcome or result);

(b)	You provide the equipment and tools, if any, necessary for doing the work; and

(c)	You bear the commercial risks, including liability for defective work.

35.	Paragraphs 87-60(5)(b) and 87-65(5)(b) are not failed merely because plant and equipment, or tools of trade are not needed to do the work. These paragraphs require the provision of the equipment or tools, if any, necessary to perform the work where, having regard to custom and practice in that particular industry, it would be expected that the equipment normally used to undertake the work will be provided by whoever performs the work. Where no plant and equipment or tools of trade are necessary to perform the work, this condition would be satisfied.

36.	Paragraphs 87-60(5)(c) and 87-65(5)(c) will be satisfied where there is a liability for the cost of rectifying any defect in the relevant work performed, including situations where action is taken to rectify the error at the individual's or personal services entity's own cost prior to completion of the task or prior to the taking of legal action. This sort of voluntary action reflects the custom and practice in some industries, and is indicative of the entrepreneurial risk of an independent contractor in contrast to the "employee-like" contractor.

37.	In addition, being liable for the cost of rectifying any defect is inclusive of rectification achieved by the service acquirer pursuing a legal remedy for damages, in circumstances where the defect is incapable of physical repair.

38.	The liability for the cost of rectifying defective work covers only the cost of rectifying the defective work performed by the service provider.

The Three Personal Services Business Tests

39.	You are not within the alienation measure and you can self-assess accordingly if none of your clients pay you 80% or more of your personal services income and you satisfy one of the three personal services business tests.

40.	Section 87-15 sets out the three personal services business tests. That section reads as follows:

'(1)	An individual or a personal services entity conducts a personal services business during an income year if the individual or entity meets at least one of the 3 personal services business tests.

(2)	The 3 personal services business tests are:

(a)	the unrelated clients test under section 87-20;

(b)	the employment test under section 87-25;

(c)	the business premises test under section 87-30.

(3)	However, if 80% or more of an individual's personal services income during the income year is income from the same entity (or from the same entity and that entity's associates), the individual's personal services income is not taken to be from conducting a personal services business unless:

(a)	when the personal services income is gained or produced, a personal services business determination is in force relating to the individual's personal services income; and

(b)	if the determination was made on the application of a personal services entity – the individual's personal services income is income from the entity conducting the personal services business.'

Where none of your clients pay you 80% or more of your personal services income

41.	Where 80% or more of an individual's personal services income is not from the same entity (or from the same entity and that entity's associates), then the individual or personal services entity can self-assess as to whether they meet one of the 3 personal services business tests.

42.	Income is derived from the entity with whom the individual or personal services entity has contracted to do the work. In other words, it is the entity that can sue the service provider for defective work, or an associate of that entity, that is taken into account in determining whether 80% or more of the personal services income is from the same entity.

Unrelated clients test

43.	The unrelated clients test is set out in section 87-20 and reads as follows:

(1)	An individual or a *personal services entity meets the unrelated clients test in an income year if:

(a)	during the year, the individual or personal services entity gains or produces income from providing services to 2 or more entities that are not *associates of each other, and are not associates of the individual or of the personal services entity; and

(b)	the services are provided as a direct result of the individual or personal services entity making offers or invitations (for example, by advertising), to the public at large or to a section of the public, to provide the services.

(2)	The individual or *personal services entity is not treated, for the purposes of paragraph (1)(b), as having made offers or invitations to provide services merely by being available to provide the services through an entity that conducts a *business of arranging for persons to provide services directly for clients of the entity.

During the year

44.	The reference in paragraph 87-20(1)(a) to "during the year, the individual or personal services entity gains or produces income from providing services to 2 or more entities" does not require the services to be provided continuously and concurrently to two or more unrelated clients for the whole of the income year. If at any time during the year, either concurrently or sequentially, the individual or the personal services entity gains or produces income from providing services to two or more unrelated clients, the requirement of paragraph 87-20(1)(a) would be satisfied.

"Gains or produces income from providing services to 2 or more unrelated clients" F9

45.	The individual or personal services entity must, during the income year, gain or produce income from providing services to two or more unrelated clients. As the application of the test is only relevant in those cases where income is an individual's personal services income, the reference in paragraph 87-20(1)(a) to "gains or produces income" can only be a reference to gaining or producing an individual's personal services income.

46.	In cases where the personal services income is the ordinary or statutory income of the individual, it is the "entities" with whom the individual has contracted to provide services, and which gives rise to the ordinary or statutory income that is the individual's personal services income, that is contemplated in paragraph 87-20(1)(a) in terms of the phrase, "providing services to 2 or more entities".

47.	In cases where the personal services income is the ordinary or statutory income of a personal services entity, it is the "entities" with whom the personal services entity has contracted to provide services, and which gives rise to the ordinary or statutory income of the personal service entity which is the individual's personal services income, that is contemplated in paragraph 87-20(1)(a) in terms of the phrase, "providing services to 2 or more entities".

Associates

48.	Associates are defined in section 318 of the ITAA 1936. If an independent contractor does not know or could not reasonably be expected to know that the service acquirers are associates, then the fact that the clients are associates of each other will not of itself be regarded as causing the test to be failed.

What is meant by "direct result"?

49.	The reference in paragraph 87-20(1)(b) to "direct result" means that a clear link or a causal connection is required between the activities of making offers or invitations to the public and the provision of personal services to unrelated clients. However, a "direct result" does not imply that there can be no step between the cause and effect. The question to be asked is whether the offers made to the public can reasonably be said to have given rise to the work.

What is meant by "Making offers or invitations to the public at large or to a section of the public"?

50.	The phrase "making offers or invitations" is not restricted to the contract law usage but is to be given a broad meaning to include any form of solicitation to the public or a section of the public.

51.	The manner in which the offer or invitation to the public may be made is not limited to activities like advertising, and can extend to any activity which demonstrates a willingness to enter into agreements to provide services to service acquirers generally, including a competitive public tender process. The essential character of those activities that constitute making offers or invitations to the public is to convey a holding out and the preparedness of the individual or personal services entity to provide services to members of the public generally.

What is "a business of arranging for persons to provide services"?

52.	In sub-section 87-20(2) "a business of arranging for persons to provide services" includes employment agencies, labour hire firms, personnel agencies or any similar arrangement involving an entity entering into a contract with a service acquirer to supply the services of an individual or personal services entity to that service acquirer.

Employment test

53.	The employment test is set out in section 87-25, which reads as follows:

(1)	An individual meets the employment test in an income year if:

(a)	the individual engages one or more entities (other than *associates of the individual that are not individuals) to perform work; and

(b)	that entity performs, or those entities together perform, at least 20% (by market value) of the individual's principal work for that year.

(2)	A *personal services entity meets the employment test in an income year if:

(a)	the entity engages one or more other entities to perform work, other than:

(i)	individuals whose *personal services income is included in the entity's *ordinary income or *statutory income; or

(ii)	*associates of the entity that are not individuals; and

(b)	that other entity performs, or those other entities together perform, at least 20% (by market value) of the entity's principal work for that year.

(3)	An individual or a *personal services entity also meets the employment test in an income year if, for at least half the income year, the individual or entity has one or more apprentices.

Engages

54.	The reference to "engages" in subsections 87-25(1) and (2) takes its ordinary meaning and is not limited to employment type relationships. "Engages" includes making a contractual arrangement or agreement for the services of another entity.

55.	Any company, partnership or trust that would be considered to be an associate of either the individual or the personal services entity, according to the meaning in section 318 of the ITAA 1936, cannot be counted for the purposes of the employment test. This exclusion is contained in paragraph 87-25(1)(a) and subparagraph 87-25(2)(a)(ii), but does not apply to individuals who are associates of the test individual (e.g., a spouse).

One or more other entities

56.	Where the personal services entity is a partnership, the partners are not "other entities" for the purposes of paragraph 87-25(2)(a).

Individuals whose personal services income is included in the entity's ordinary or statutory income

57.	The reference in sub-paragraph 87-25(2)(a)(i) to "individuals whose personal services income is included in the entity's ordinary or statutory income" means the test individual(s) cannot be counted for the purpose of determining whether the personal services entity passes the employment test.

Principal work

58.	The term "principal work" in paragraphs 87-25(1)(b) and (2)(b) can be described as that work which fulfils the obligations under the agreement with the service acquirer. It is the work that generates the personal services income of the test individual or personal services entity under the contract.

59.	The concept of principal work does not include work which is ancillary such as helping or aiding the work of the test individual, unless this directly contributes to the generation of the relevant personal services income under the agreement. Work that is associated with administration such as bookkeeping, answering telephones or other clerical work is ancillary and is not principal work (unless the work to be performed for the service acquirer includes that administrative work).

At least 20% (by market value)

60.	The formula for determining whether at least 20% (by market value) of the principal work is performed by the entity (or entities) engaged is as follows:

% = (market value amount / contract price) x 100

61.	The "contract price" is the total amount paid under the agreement between the individual or personal services entity and the service acquirer.

62.	The "market value amount" is dependant upon whether all parties are dealing with each other at arm's length.

63.	If the parties are dealing with each other at arm's length and the amount paid is at least 20% of the contract price, then it is the amount paid that is to be used as the "market value amount" in the above formula. This represents an arm's length charge-out rate for the relevant work.

64.	If the parties are not dealing with each other at arm's length, then the "market value amount" is the market rate for the principal work performed by the entity (or entities).

65.	In those cases where there are multiple contracts, the "market value amount" and "contract price" must be determined for each contract and those amounts separately aggregated. It is these aggregates which are used in the above formula to determine whether the entity(or entities) engaged perform at least 20% by market value of the principal work in the income year.

Apprentice

66.	For the purposes of sub-section 87-25(3), an apprentice is a natural person who works for another for a fixed period of time with obligations to learn a trade, business or skill.

67.	Apprenticeships or traineeships regulated by State and Territory Vocational Education and Training legislation have a primary object of education and therefore satisfy the common law meaning of apprentice.

68.	The apprentice need not be apprenticed to the contractor. A series of apprentices supplied by a Group Apprenticeship Scheme to work for the contractor as part of their trade training would meet the requirement.

69.	The employment test is satisfied where an individual or entity has, for at least half the income year, one or more apprentices. The test does not require that the same apprentice be engaged or that the qualifying period comprises consecutive days.

Business premises test

70.	The business premises test is in section 87-30 and reads as follows:

(1)	An individual or a *personal services entity meets the business premises test in an income year if, at all times during the income year, the individual or entity maintains and uses business premises:

(a)	at which the individual or entity mainly conducts activities from which *personal services income is gained or produced;

(b)	of which the individual or entity has exclusive use;

(c)	that are physically separate from any premises that the individual or entity, or any *associate of the individual or entity, uses for private purposes; and

(d)	that are physically separate from the premises of the entity to which the individual or entity provides services and from the premises of any associate of the entity to which the individual or entity provides services.

(2)	The individual or entity need not maintain and use the same business premises throughout the income year.

Maintain and use

71.	Business premises are maintained where there is a right to occupy the premises that enables the individual or personal services entity to conduct activities which generate the individual's personal services income. In this context, business premises may be maintained by way of occupancy under a lease, sublease, licence or mere possession. However, not all of these occupancy arrangements satisfy the requirement of exclusive use – see paragraphs 221-230 below).

At all times in the income year

72.	For the purposes of the business premises test the phrase "at all times in the income year" is taken to mean the whole period during which activities are conducted for the purposes of generating personal services income.

73.	The context in which the phrase is used in the business premises test requires the individual or personal services entity to have business premises on each day during the income year in which activities are conducted which produce the individual's personal services income.

74.	Where the individual or personal services entity commences or ceases activities during the income year, it is sufficient that the individual or personal services entity maintains and uses business premises for that part of the income year in which the activities are conducted.

75.	Where the individual or personal services entity conducts activities which produce the individual's personal services income regularly on particular days in each week of the income year, it is sufficient if the individual or personal services entity has business premises on each of those days. For example, if the activities are conducted on each Monday and Tuesday in the income year, it is sufficient if the individual or personal services entity has business premises on those days.

Mainly

76.	Business premises may be used for other activities and still satisfy the paragraph 87-30(1)(a) requirement provided the premises are predominantly used (i.e., more than half the use) for activities from which personal services income is gained or produced.

Business premises

77.	The phrase "business premises" in sub-section 87-30(1) means premises which, from a business and commercial perspective, are apt for the purpose of carrying on a business.

Exclusive use

78.	Paragraph 87-30(1)(b) requires the individual or personal services entity to have exclusive use of the business premises. Where an individual or personal services entity leases premises together with another individual or entity on the basis that the total premises are shared, neither lessee has exclusive use of the premises. However, the relevant aspect of exclusive use is the business premises in relation to the relevant work and the relevant lease or other arrangements that deal with those particular premises. The exclusive use requirement does not disqualify the shared use of common areas if they are the subject of separate arrangements.

79.	An individual or personal services entity does not have exclusive use of premises where the premises are occupied under licence or mere possession.

Physically separate

80.	The reference in paragraphs 87-30(1)(c) and 87-30(1)(d) to "physically separate" means the business premises test will not be satisfied where the business premises are:

•	within the premises of the individual or personal services entity (or associates of the individual or personal services entity) that are used for private purposes; or

•	within the premises of the service acquirer (or associates of the service acquirer).

81.	In deciding whether business premises are disqualified premises, the issue to be determined is whether the physical impression or character of the business premises causes those premises to be seen as physically distinct from any adjoining or surrounding premises. This requirement is implicit in examples 1.14 and 1.15 of the Explanatory Memorandum.

82.	Where business premises are within a larger building, the implication is that the business premises are not physically separate. This will also be the case where the business premises are within the curtilage of private premises. However, in both cases, this implication is not necessarily determinative and in situations where other factors sufficiently influence the overall impression, an alternative conclusion may be reached. For example, where an individual or personal services entity leases a discrete floor or part of a floor in a high rise building and those premises are not incorporated functionally with those where the services acquirer carries on business, the impression would be that the business premises are physically separate.

83.	The factors listed below are to be considered in combination to reach a conclusion regarding the physical impression (or character) of the business premises as physically separate from any adjoining or surrounding premises and curtilage:

•	the extent of physical separation of the premises;

•	whether the physical appearance of the business premises makes them distinct and separate from adjoining or surrounding premises and curtilage;

•	whether the business premises are detached from other building structures on the land and are not within the curtilage of those other premises;

•	whether the business premises have discrete access for the individual and clients;

•	whether the business premises are incorporated functionally into the surrounding premises, including the extent to which facilities and staff are shared with occupants of adjoining or surrounding premises.

Changing business premises

84.	Subsection 87-30(2) does not require an individual or entity to maintain and use the same business premises throughout the whole year. This means that the individual or entity can change business premises during the year; however, they need to have business premises at all relevant times during the year.

Personal Services Business Determination (PSBD)

85.	You can apply to the Commissioner for a PSBD even if none of your clients pay you 80% or more of your personal services income if you do not wish to self-assess in relation to the alienation measure, or if you think unusual circumstances apply to you. F10

86.	If you (a) get personal services income; (b) you do not satisfy the "results test"F11; and (c) you get 80% or more of your personal services income from one source, you will need to get a PSBD from the Commissioner or the alienation measure will apply to you.

The 80% or more from one source rule

87.	The source of income is determined by reference to the entity that has entered into the contractual obligation with the individual or personal services entity which gives rise to the relevant amount of ordinary or statutory income that is the personal services income of the individual or personal services entity.F12

88.	In the case of an individual or personal services entity engaged by a labour hire firm (where the labour hire firm is not a personal services entity), it is the labour hire firm which is the source of the item of ordinary or statutory income as it is the labour hire firm which has the contractual obligation to make payment to the individual or personal services entity. The contractual obligation on the part of the service acquirer is to make payment to the labour hire firm and accordingly the service acquirer is not the source of the individual's personal services income.

89.	Subsection 87-15(3) requires that the personal services business determination relating to an individual's personal services income be in force when that personal services income is gained or produced. It would be prudent for affected individuals and personal services entities to consider making an application for a personal services business determination at the commencement of the relevant income year on the basis of there being a "reasonable expectation" that, during the income year, 80% or more of an individual's personal services income will be from one source. In any event, under subsection 87-65(2), the Commissioner can specify the day on which the PSBD or variation takes effect or took effect. The Commissioner will specify that a PSBD took effect at an earlier time in the income year where it is reasonable to do so.

90.	In the case of a personal services entity, where a determination in relation to an individual's personal services income does not take effect or is not in force in a particular PAYG payment period in which the income was gained or produced, a PAYG withholding obligation may arise.

91.	The Commissioner is not able to make a determination unless satisfied that the requirements in subsections 87-60(3) for individuals, and 87-65(3) for personal services entities, are met.

92.	The "reasonable expectation" mentioned in paragraphs 87-60(3)(c) and 87-65(3)(c) may be arrived at having regard to factors such as:

•	whether in previous years 80% or more of an individual's personal services income was from one source;

•	whether, on the basis of the existing contractual arrangements, there is an expectation that the contract will span the whole of the income year;

•	where a contract is for a period of less than 12 months, whether there is an expectation that the contract will be "rolled over"; and

•	whether the individual or the entity will continue to provide services to the same service acquirer under a new contract.

Requirements for a PSBD

93.	For the Commissioner to grant a PSBD, you will need to be able to answer "yes" to ONE of the following (or have unusual circumstances):

(1)	Do you (or your personal services entity) pass the "results test"?F13

OR

(2)	Do you (or your personal services entity)engage other individuals (which may include your spouse) or non-related entities to do at least 20% of the principal work for that year?

OR

(3)	Do you (or your personal services entity) have an apprentice for at least half the year?

OR

(4)	Are you (or your personal services entity) the sole user of business premises that are physically separate from your home or from the premises of the person for whom you are working?

OR

(5)	Even if you (or your personal services entity) do not pass any of the above tests, you (or your personal services entity) can still get a PSBD if unusual circumstances exist in that year. That is, the Commissioner will grant a Determination if, but for unusual circumstances, you (or your personal services entity) could reasonably be expected to:

(a)	Have been able to answer yes to any one of the above 4 questions; or

(b)	Have two or more unrelated clients in the current income year (for example, where you (or your personal services entity) only commenced operations during the year and you (or your personal services entity) reasonably expected to have more clients next year, or where you (or your personal services entity) had more clients last year and you (or your personal services entity) reasonably expect to have more clients next year).

Reasonable expectation

94.	Subsections 87-60(3), (4) and (5) and 87-65(3), (4) and (5) have regard to whether the relevant criteria could reasonably be expected to be met.

95.	There would be a reasonable expectation if the criteria were as likely as not to be met.

Unusual circumstances

96.	The term "unusual circumstances" used in subparagraphs 87-60(3)(a)(ii) and 87-65(3)(a)(ii) refers to exceptional circumstances that are temporary, with the likelihood that the usual circumstances will resume in the short term.

97.	Unusual circumstances that exist (or are likely to exist) for less than 12 months would not be regarded as having become usual circumstances, except where that time period is significant having regard to the nature of the activity.

Operation of Division 87

98.	Division 87 operates to ascertain whether personal services income is income from conducting a personal services business during an income year. The tests can be applied at any stage throughout the income year based on activities that have already occurred or on the reasonable expectation that certain activities will occur or continue to occur.

99.	If you have personal services income and you conduct a personal services business (either by satisfying the results test or one of the three personal services business tests, or you have a PSBD), the alienation measure does not apply to you.

100.	If you have personal services income and you do not conduct a personal services business (because you do not satisfy the results test or one of the three personal services business tests and you do not have a PSBD), the alienation measure applies to you.F14

The tax effect where an individual or personal services entity is conducting a personal services business

101.	Where an individual or a personal services entity is conducting a personal services business (either by satisfying the results test or one of the three personal services business tests, or the individual or personal services entity has a PSBD), Divisions 85 and 86 of the ITAA 1997 and Division 13 in Schedule 1 to the TAA 1953 have no operation in relation income derived from that business.

102.	It is important to note, however, that all relevant provisions in the remainder of the ITAA 1997 and those in the ITAA 1936 continue to operateF15. This means that other provisions of the ITAA 1997 and ITAA 1936 as discussed in Income Tax Rulings such as IT 2121, IT 2330, IT 2503 and IT 2639 may still apply to cases that fall outside Part 2-42 of the ITAA 1997. For example, Part IVA of the ITAA 1936 might apply in appropriate cases. The same applies where an individual or entity has a Personal Services Business Determination (PSBD). A PSBD accepts that an individual or entity is conducting a personal services business. This does not mean that Part IVA could not apply where the dominant purpose of an arrangement was the splitting of income.

DATE OF EFFECT

103.	This Ruling first applies to the 2000-2001 income year. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

EXPLANATIONS

104.	The alienation measure applies only to income from personal services. Moreover, even where there is personal services income, the alienation measure does not affect individuals or other entities that conduct personal services businesses.F16 Division 87 defines the three personal services business tests and the "results test". If one of these tests is satisfied, there is a personal services business and, therefore, the alienation measure does not apply.

105.	The object of Division 87 is to define personal services businesses in a way that ensures the measure in Part 2-42 does not apply to genuine businesses but applies to those situations that are merely arrangements for dealing with personal services income of individuals.F17

The Results Test

106.	The "results test" is found in subsection 87-60(5) for an individual and in subsection 87-65(5) for a personal services entity.F18

107.	The test comprises the following three conditions, all of which must be satisfied, in order for the individual to be taken to be conducting a personal services business:

(1)	the individual's personal services income or the personal services entity's income (that is an individual's personal services income) is income for producing a result;

(2)	the individual or the personal services entity is required to supply the plant and equipment, or the tools of trade (if any) needed to perform the work from which the individual or the personal services entity produces the result; and

(3)	the individual or personal services entity is, or would be, liable for the cost of rectifying any defect in the work performed.

108.	In determining whether you meet the above tests in relation to particular work, it is appropriate to have regard to the custom or practice when work of that kind is performed by an entity other than an employee.F19 The Commissioner may also have regard to the custom and practice when work of a particular kind is performed by an entity other than an employee [subsections 87-60(6) and 87-65(6)] in considering whether the "results test" is satisfied for the purposes of making a PSBD.

109.	As subsections 87-60(7) and 87-65(7) are linked to situations where the Commissioner is considering whether the individual or the personal services entity or the individual meets the "results test", the requirements of paragraphs 87-60(3)(a) and (b) and 87-65(3)(a) and (b)F20 do not need to be met where taxpayers self-assess on the basis of the "results test". Similarly, the Commissioner may make a PSBD where the "results test" is satisfied even where the requirements of paragraphs 87-60(3)(a) and (b) and 87-65(3)(a) and (b) are not met.

110.	The "results test" is based on the traditional criteria for distinguishing independent contractors from employees. Guidance on this distinction is provided in Taxation Ruling TR 2000/14. In summary, the following factors are relevant to this distinction:

1. The contractual  obligations	An independent contractor enters into a contract for a specific task or series of tasks.
2. How the work is  performed	The independent contractor maintains a high level of discretion and flexibility as to how the work is to be performed. However, the contract may contain precise terms as to materials used and methods of performance and still be one for a result.
3. Risk	An independent contractor stands to make a profit or loss on the task. They bear the commercial risk. The independent contractor bears the responsibility and liability for any poor workmanship or injury sustained in performance of the task. Often an independent contractor would carry their own insurance and indemnity policies.
4. Tools and Equipment	An independent contractor provides the assets, equipment and tools, if any, necessary for the work.
5. Hours of work and  Place of Work	An independent contractor may set their own hours of work, or place of work, depending on the contract or the nature of the work.
6. Leave and other entitlements	A contract for a result usually does not contain leave provisions, or allowances.
7. Payment	Payment to an independent contractor is often based upon performance of the contract rather than being paid a hourly rate, piece rates or award rates.
8. Expenses	An independent contractor usually incurs their own expenses.
9. Appointment	An independent contractor is likely to advertise their services to the public at large, and the contract for a result is often the direct result of this activity.
10. Termination	An independent contractor is contracted to complete a set task. The payer may only terminate the contract without penalty where the worker has not fulfilled the conditions of the contract. The contract usually contains terms dealing with defaults made by either party.
11. Delegation	An independent contractor may delegate all or some of the tasks to another person, and may employ other persons.
111.	While these factors are indicative of there being a results-based contract, not all of the factors need to be present for the purposes of the results test.

112.	The results test is based on the tests used to distinguish independent contractors from employees. Accordingly, there is significant overlap and the totality of the relationship between the parties will be relevant to whether the contract is properly to be construed as one for the production of a result. This approach accords with paragraph 1.114 of the Explanatory Memorandum, which says:

"An individual will not satisfy the test in paragraph 87-60(5)(a) merely because the contract states that the personal services income is for producing a result."

Personal Services Income is for producing a result

113.	Sheller JA in World Book ( Australia ) Pty Ltd v . FC of T 92 ATC 4327; 23 ATR 412 at ATC 4334; ATR 420, said as follows in relation to "the production of a given result":

"In the present case it could be said that Mr Maiden contracted by use of his own resources and the resources of others and worked to achieve a given result, namely the sale of the appellant's books. He was by the terms of the agreement, amongst other things, authorised to act by himself or through his approved employees as a selling agent for the appellant's products, he was entirely free to choose the areas in which and the times at which he solicited purchasers for the product, he was free to employ whatever legal style or method of selling he deemed suitable and the appellant agreed that it should not have any right to direct or control him in any respect whatsoever."

114.	Therefore, the meaning of the phrase "producing a result" means the performance of a service by one party for another where the first-mentioned party is free to employ his/her own means (i.e., third party labour, plant and equipment etc) to achieve the contractually specified outcome. As the cases show, the essence of the contract has to be to achieve a result and not to do work.F21

115.	The consideration often is a fixed sum on completion of the particular job as opposed to an amount paid by reference to hours worked.

116.	This also accords with paragraph 1.114 of the Explanatory Memorandum where it says:

"The individual must actually be paid on the basis of achieving a result, rather than for example, for hours worked." F22

117.	In results-based contracts, payment is often made for a negotiated contract price, as opposed to an hourly rate. For example, in Vabu Pty Ltd v . FC of T , the couriers were "paid a prescribed rate for the number of successful deliveries" they made and not per time period engaged.F23

118.	Similarly, in Stevens v . Brodribb Sawmilling (1985 – 1986) 169 CLR 16 payment was determined by reference to the volume of timber delivered, and in Queensland Stations Pty Ltd v . FC of T (1945) 70 CLR 539 where it was a fixed sum per head of cattle delivered. On the other hand, the payments in Wright v . Attorney – General for the State of Tasmania and Ors were hourly rates adjusted by a mileage allowance over certain specified mileages, and in Humberstone v . Northern Timber Mills payment was based on a weight-mileage basis.

119.	The provision of labour for an hourly wage is to be distinguished from cases where, during performance of a result based contract, there is a variation in the contract. Such scenarios are common in the building industry. For example, a result based contract might specify only the replacement of plaster board, however, in the course of performing that contract, the tradesperson identifies the need for rotten framework to be replaced. The contract itself may cater for such circumstances, or the contract may be varied, or a supplementary contract might be negotiated to perform that work.

120.	Similarly, if remuneration is payable when, and only when, the contractual conditions have been fulfilled, the remuneration is for producing a given result.F24

121.	Where there is a contract, regard should be had to its true essenceF25 and the circumstances surrounding the formation of the contract may be of assistanceF26 to determine the true character of the contract. Having regard to the true essence of the contract, the manner in which payment is structured will not of itself exclude genuine result based contracts. For example, there are results based contracts where the contract price is based on an estimate of the time and labour cost that is necessary to complete the task, or may even be calculated on that basis, subject to reasonable completion times.

Required to supply the plant and equipment, or tools of trade, needed to perform the work

122.	In Brodribb Sawmilling the Court observed that working on one's own account F27 often involves "the provision by him of his own place of work or of his own equipment , the creation by him of goodwill or saleable assets in the course of his work, the payment by him from his remuneration of business expenses of any significant proportion and payment to him of remuneration without deduction for income tax." (emphasis added) F28

123.	Similarly in Queensland Stations the droving contractor was required to find and pay for all the men, plant, horses and rations necessary and sufficient for the task. In Vabu Pty Limited v . FC of T F29 the carriers supplied their own vehicles and the necessary plant and equipment (and bore the considerable expenses of providing for and maintaining those vehicles). In other words, they employed their own means to accomplish a result.F30

124.	Having regard to the custom and practice in relation to particular work there may be an expectation that a genuine independent contractor would be required to supply the plant and equipment or tools of trade necessary to perform the work. Where such an expectation exists, or where the contractual arrangements require the supply of necessary equipment or tools, such equipment or tools have to be supplied in order to meet the "results test".

125.	The plant and equipment or tools of trade that may be required to be provided are those that are necessary to do the actual work that the individual or the personal services entity is contractually required to perform. This is to be distinguished from those circumstances where a service acquirer provides plant and equipment that are not needed by the individual or the personal services entity to perform the work. For example, the construction, by a builder, of scaffolding at a large, commercial building site does not result in carpenters, who use that scaffolding in getting to that part of the site where they do their work, failing the second condition. Whilst the scaffolding permits them to have access to the particular part of the site where they do their work, it would not constitute plant and equipment needed by them to do their particular work.

126.	This condition is to be considered on a substantive basis and de minimus usage of the tools or equipment of others will not of itself disqualify the taxpayer. For example, the use of the service acquirer's pen or telephone by an electrician or even the temporary use of tools (where it is more convenient to do so because, for example, the electrician's tool kit is not readily available at a particular time) would not cause this condition to be failed. In relation to the work more generally, the common practice and requirement in such a case may be that the electrician would be expected to supply and would be required, as a practical matter, to supply the necessary tools for the job.

127.	There are situations where, having regard to the custom and practice of the work, or the practical circumstances and nature of the work, no plant or equipment or tools of trade are necessary to perform the work from which the individual or personal services entity produces the result. In policy and logic, a strict condition requiring the supply of tools or equipment in order for the test to be met is not apt for work of this nature, nor is it apt for an integrity measure which operates across the whole spectrum of economic activity.

128.	However, the Explanatory Memorandum provides at 1.115

"To satisfy the test in paragraph 87-60(5)(b), the individual must be able to demonstrate that he or she is required to provide all necessary plant, tools and other equipment to produce the result. If no plant and equipment or tools of trade are needed to perform the work, the condition is not satisfied."

129.	Nevertheless, having regard to the words of the law and the purpose of the provision, a different interpretation is open. For example, the individual is required to supply "the" equipment or tools "needed" to perform work. So, if no equipment or tools are needed, it is arguable that the provision will always be met in these circumstances. Also, subsections 87-60(6) and 87-65(6) allow regard to the custom or practice of individuals or entities (other than employees) "to be required to supply" the equipment or tools "needed to perform the work", "as the case requires" suggesting that equipment and tools are not required if they are not needed to perform the work. They also highlight the distinction between independent contractors and employees. This reflects the purpose of the "results test", the object of the condition in subsections 87-60(5) and 87-65(5) being to ensure that individuals or personal service entities who claim to be independent contractors do in fact provide the necessary equipment or tools where genuine independent contractors would be expected to do so.F31

130.	Having regard to these considerations, it is considered open and appropriate to adopt an interpretation of paragraphs 87-60(5)(b) and 87-65(5)(b) which reads the test as requiring an individual or personal services entity to supply plant and equipment or tools of trade, if any, needed to perform the work from which the individual or personal services entity produces the result.F32 Accordingly, the Commissioner adopts that construction rather than the alternative view suggested in the Explanatory Memorandum.F33

Liable for the cost of rectifying any defect in the work performed

131.	The emphasis here is on "liability for the cost" of rectifying faulty work. That is, the key underlying consideration is whether the individual or entity is exposed to commercial risk in terms of a liability to cover the cost of rectifying defective work. This is consistent with the focus on "the chance of profit and the risk of loss" as a traditional indicator that a taxpayer is an independent contractor conducting their own business.F34

132.	Paragraphs 87-60(5)(c) and 87-65(5)(c) make it a requirement of the "results test" that the individual or entity must meet the costs associated with rectifying the defect. It is only the cost of rectification of their defective work that must be met by the individual or entity. There is no requirement that the individual or entity actually perform the work which rectifies the defect so long as they pay for it. Nor does it matter whether the relevant exposure to a liability for the cost of defective work arises before or after payment by the service acquirer or delivery of the result.

133.	The existence of a term in an agreement that the individual or personal services entity is liable for the cost of rectifying any defect in the work performed would support the conclusion that liability to make good any faulty workmanship exists, particularly where the individual or personal services entity and the service acquirer are dealing with each other at arm's length. However, the term in the agreement should not be merely "window dressing", and regard may be had to all the circumstances of the case in determining whether the relevant liability really exists.

134.	The phrase "rectifying any defect" literally means to put right any fault or imperfection. Clearly, not all work of any individual or entity is capable of rectification if that phrase is given its narrow literal meaning. It is arguable on this narrow view that if the work is not capable of rectification then the "results test" cannot be passed.

135.	The Explanatory Memorandum is more ambivalent on this point than it is in relation to equipment and tools. At paragraph 1.116 the Explanatory Memorandum provides:

"To satisfy the test in paragraph 87-60(5)(c), the individual must actually cover the cost of rectifying defects to the work that he or she performs – not merely have a term in a contract including such an obligation."

136.	The purpose of the "results test" (and the other personal services business tests) is to distinguish genuine business undertakings from arrangements that are merely arrangements for dealing with the personal services income of individuals.F35 If the emphasis in paragraphs 87-60(5)(c) and 87-65(5)(c) is on the liability for the cost of defective work, the reference to "rectifying" any defect in the work performed may be capable of a wider meaning, particularly where the "results test" is intended to cover a wide spectrum of economic activity.

137.	For example, the Macquarie Dictionary definition of "rectify" includes to "remedy" which can mean "legal redress or the legal means of enforcing a right or redressing a wrong". Consequently, being liable to rectify the cost of any defect could be inclusive of a rectification achieved by the acquirer of the services pursuing a legal remedy for damages, in circumstances where the defect is incapable of physical repair.F36

138.	Consistent with the approach adopted in relation to paragraphs 87-60(5)(b) and 87-65(5)(b), there is no compelling rationale for construing paragraphs 87-60(5)(c) and 87-65(5)(c) in a narrow way.F37 The policy underlying the alienation measure, as stated in section 87-10 would support a wider interpretation. An independent contractor in a genuine business undertaking assumes the entrepreneurial risks associated with the relevant activities. This will include liability for the cost of rectifying defective work, where rectification in the narrow sense is possible, and/or would be liable to an action for damages for negligent performance of the contract, Where physical rectification is not possible, the purpose of the provision would be satisfied where a right to claim for damages exists in respect of faulty or negligent performance of contractual obligations and the individual or personal services entity is or would be liable for the relevant component of damages awarded for the faulty or defective work.F38

139.	Consistent with the approach adopted in relation to paragraphs 87-60(5)(b) and 87-65(5)(b), the wider interpretation of paragraphs 87-69(5)(c) and 87-65(5)(c), explained above, is preferred to the narrower view.

80% or more of personal services income from one source

140.	Subsection 87-15(3) uses the "80% or more of an individual's personal services income during the year from the same entity (or from the same entity and that entity's associates)" benchmark as the criterion requiring the test individual or personal services entity to have in force a PSBD if the alienation measure is not to apply.F39

141.	The source of derivation (as distinct from the timing of derivation) is determined by reference to the contract under which the obligation to provide the services and to make the payment arises. The party who physically makes the payment is not necessarily the source of an amount of ordinary income. The party who makes the payment will be the source where they are also the party with whom the individual or personal services entity has contracted. This means that, where payment is made by an agent on behalf of their principal, the source of the item of ordinary income is the principal and not the agent. This is because the individual or personal services entity has contracted with the principal and it is the principal which is ultimately obligated to make the payment.F40

Example 1

142.	Bob is a mining engineer who enters into discrete contracts for the provision of his personal services with 3 joint venture partners (Pebble Ltd, Rock Ltd and Boulder Ltd). On completing each of his contracts, Bob invoices the relevant company for payment. Pebble Ltd, Rock Ltd and Boulder Ltd have an agreement between themselves whereby Pebble Ltd makes payment on all invoices received by any venture partner in relation to joint venture activities. Rock Ltd and Boulder Ltd reimburse Pebble Ltd for payments made on their behalf. In each case, the source of Bob's personal services income is the company which has been invoiced. This is because in each case it is the company with which Bob has contracted and who he will need to pursue in the event of non-payment.

Example 2

143.	Dr Paul is a medical practitioner operating in private practice who returns his income on a "accruals basis". When Dr Paul sees a patient, the patient is either invoiced or bulk billed. Those who are invoiced may make payment entirely from their own funds and then seek a Medicare refund or may make payment partly out of their own funds and partly by way of cheque from Medicare. Those who are bulk billed complete the appropriate forms and make payment for their consultation by assigning their Medicare refund entitlement to Dr Paul in accordance with the relevant provisions of the Health Insurance Act.

144.	In all these cases Dr Paul has contractual relations with each of his patients. The terms of the contract are that Dr Paul will provide a medical consultation in return for an agreed payment. In each case, the patient discharges their obligation to Dr Paul albeit in different ways and it is the performance of this discharge which causes Dr Paul's personal services income to be derived. The source of Dr Paul's personal services income is each of his patients as these are the parties with whom he has contracted and who are obligated to make payment.

Example 3

145.	Don is a solicitor in sole practice. Don engages Donna Pty Ltd to invoice clients in his name and collect payments on his behalf. Don pays Donna Pty Ltd a commission for those services. The source of Don's personal services income is each of Don's clients and not Donna. This is because Don has contracted with each of his clients to provide services and it is his clients who Don must pursue in the event of non-payment. Donna Pty Ltd is merely acting as Don's agent in invoicing and collecting payments on Don's behalf.

None of the clients pays you 80% or more of the personal services income

146.	Where none of the clients of an individual or personal services entity pays the individual or personal services entity 80% or more of the personal services income, the individual or personal services entity conducts a personal services business (and, therefore, is outside the scope of the alienation measure) if ONE of the 3 personal services business tests are met.F41

147.	The 3 personal services business tests are:

(a)	the unrelated clients test under section 87-20;

(b)	the employment test under section 87-25;

(c)	the business premises test under section 87-30.

The Unrelated Clients Test

During the year

148.	The term "during the year" in paragraph 87-20(1)(a) refers to the period over which the test applies without imposing constraints on the timing of the contracts over the course of the year. "During" takes the meaning "in the course of" rather than requiring the provision of services throughout the year. Providing services "during the year" means the services can be provided:

•	continuously throughout the year,

•	sequentially over the period of the year, or

•	concurrently during the year.

Gains or produces income from providing services to 2 or more entitiesF42

149.	The individual or personal services entity must, during the income year, gain or produce income from "providing services" to two or more unrelated clients. As the application of the test is only relevant in those cases where income is an individual's personal services income, the reference in paragraph 87-20(1)(a) to "gains or produces income" can only be a reference to gaining or producing an individual's personal services income.

150.	In cases where the personal services income is the ordinary or statutory income of the individual, it is the "entities" with whom the individual has contracted to provide services, and which gives rise to the ordinary or statutory income that is the individual's personal services income, that is contemplated in paragraph 87-20(1)(a) in terms of the phrase, "providing services to 2 or more entities".

Example 4

151.	In this example, Richard has contracted to 3 clients "A", "B" and "C" for the provision of his personal efforts and skills and the consideration under each contract is the personal services income of Richard. Assuming that "A", "B" and "C" are not associates of each other or of Richard, Richard would satisfy the requirements of paragraph 87-20(1)(a). The reference to "entities" in the phrase "providing services to 2 or more entities", is a reference to each of "A", "B" and "C".

152.	In cases where the personal services income is the ordinary or statutory income of a personal services entity, it is the "entities" with whom the personal services entity has contracted to provide services, and which gives rise to the ordinary or statutory income of the personal services entity that is an individual's personal services income, which is contemplated in paragraph 87-20(1)(a) in terms of the phrase "providing services to 2 or more entities".

Example 5

153.	In this example, Dick Pty Ltd has contracted with 3 clients "D", "E" and "F" to provide the personal efforts and skills of an individual and Richard has contracted with Dick Pty Ltd to provide the personal efforts and skills which enables Dick Pty Ltd to fulfil its contractual obligations with each of "D", "E" and "F". Dick Pty Ltd is a personal services entity because it has ordinary income which is mainly a reward for the personal efforts or skills of Richard. Assuming that "D", "E" and "F" are not associates of each other or of Richard or Dick Pty Ltd, Dick Pty Ltd would satisfy the requirements of paragraph 87-20(1)(a). Again, the reference to "entities" in the phrase "providing services to 2 or more entities" is a reference to each of "D", "E" and "F".

154.	In cases where the individual or personal services entity has contracted with a labour hire firm, and the labour hire firm is not a personal services entity, it is the clients of the labour hire firm to which the word, "entities" is a reference in paragraph 87-20(1)(a).

Example 6

155.	In this example, the labour hire firm (a business structure) has contracted with 3 clients "G", "H" and "K" to provide the personal efforts and skills of an individual. Tom has contracted with the labour hire firm to provide his personal efforts and skills and his labour is utilised to fulfil the labour hire firm's contractual obligations with each of "G", "H" and "K".

156.	The consideration on the contract between the labour hire firm and Tom is Tom's personal services income. Assuming "G", "H" and "K" are not associates of each other or of Tom, then Tom satisfies the requirements of paragraph 87-20(1)(a). However, Tom does not satisfy the requirements of paragraph 87-20(1)(b) because of the operation of subsection 87-20(2) which has particular application to labour hire firms: see further discussion below under the heading, "What is "a business of arranging for persons to provide services"".

Associates

157.	Whether two entities or individuals are "associated" within the meaning of section 318 of the ITAA 1936 is a matter of fact. However, for the purposes of section 87-20, where the fact of that association is not known or could not reasonably be expected to be known to a contractor, the clients will be treated as unrelated. This approach is taken because of arm's length nature of the contractual arrangements contemplated by the unrelated clients test, and the (unintended) compliance costs associated with a strict literal construction of the word associate.

158.	The statutory context, the (unintended) compliance costs and uncertainty that would otherwise arise for genuine independent contractors in the application of the unrelated clients test provides good cause, whether in law or practice, to read a purposive limitation into the requirement that the clients must not be associates.F43

159.	For example, where a contractor works for two apparently unrelated companies during the year with different names, different business premises and different managers, but both of which are, in fact, controlled by a third company or another individual, the contractor could still pass the unrelated clients test if the contractor did not know, or could not reasonably be expected to know, of the fact of common control.

Direct result

160.	FC of T v . Dixon [1952] 86 CLR 540 at 553-554 provides guidance on the meaning of the word "direct":

"A direct relation may be regarded as one where the employment is the proximate cause of the payment, an indirect relation as one where the employment is a cause less proximate, or indeed, only one contributory cause."

161.	The term "direct result" was examined in Boiler Inspection and Insurance Co of Canada v . Sherwin – Williams Co. of Canada [1951] AC 319 at 333:

"Whatever meaning the word "direct" may have in qualifying the word "result", it does not imply that there can be no step between the cause and the consequence."

162.	Taken together, the comments in Dixon's case and those in the Boiler Inspection and Insurance Co. case, provide guidance on the term "direct result". In short, it requires a traceable and substantive connection between the offer to the public (or a section of the public) and the engagement for the work.

What is meant by "making offers or invitations"?

163.	For the purposes of paragraph 87-20(1)(b), making an offer or invitation to the public in general or to a section of the public is an indication by the individual or personal services entity of their willingness to perform services for anyone within a group or class of persons or to any member of the public. The intention of the individual or personal services entity in such activity is to attract or solicit members of the public to enter into agreements for their services. Relevant activities, such as advertising, points to the commerciality and independence of the enterprise conducted by the individual or the personal services entity. Advertising and similar activities are factors that point to the existence of a genuine business, in contrast to arrangements contemplated to be within Part 2-42 of the ITAA 97 (see section 87-10).

164.	As the meaning of the phrase "making offers or invitations" is not given in the ITAA 1997, for the purposes of the unrelated clients test the meaning is based on the ordinary usage of the terms and may include a wide variety of activities, including word of mouth attempts to attract general business.

165.	The Macquarie Dictionary defines an offer as "to present for acceptance or rejection; to put forward for consideration; to propose or volunteer; to make a proposal or suggestion; a bid; etc".

166.	An invitation is the mechanism by which an individual or personal services entity holds out to or informs the public or a section of the public the services that the individual or personal services entity is able to provide. The Macquarie Dictionary defines invitation as "to attract, allure or tempt." An invitation may be made in written or spoken form.

167.	Advertising is an example of making an offer or invitation to the public given in the legislation. The ordinary meaning of the word "advertise" is "to make generally or publicly known, or to give public notice of" ( Deputy Commissioner of Taxation v Rotary Offset Press Pty Ltd 71 ATC 4170; (1971) 45 ALJR 518; 1971) 2 ATR 411). Advertising may be effected by providing information to the public, by the making of public announcements, by publications in periodicals or professional journals, by printed posters, by broadcasting over the radio, television, Internet etc, or by placing an advertisement in a newspaper, magazine, or business directory.

168.	Other types of activities or actions that are considered to be "making offers or invitations" in this context include:

•	public tender;

•	maintaining an Internet web site on which the availability of services are advertised; and

•	word of mouth referrals.

What is meant by "to the public or a section of the public"?

169.	An offer or invitation is made to "the public at large" where any interested member of the public is capable of accepting it ( Lee v . Evans (1964) 112 CLR 276 at 287).

170.	An offer or invitation to "a section of the public" is made in situations where only a select group is chosen to whom the invitation is made. Making an offer or invitation to a "section of the public" could include offering to provide services to one entity ( Nash v . Lynde [1929] AC 158; Corporate Affairs Commission ( South Australia ) & Anor v . Australian Central Credit Union (1985) 3 ACLC 792), for example in relation to competitive tenders.

171.	In Corporate Affairs Commission ( South Australia ) & Anor v Australian Central Credit Union , the High Court provided some guidance on the factors for determining whether an offer or invitation is to a "section of the public". That case was concerned with the making of offers or invitations to the public to subscribe for securities. While the statutory context is different from the alienation measure, the approach is useful for the purposes of section 87-20 in situations where it is not apparent that the offer or invitation is of a genuine commercial nature. In the context of the facts of that case, the High Court commented at page 795:

"If ... there is some subsisting special relationship between offeror and members of a group or rational connection between the common characteristic of members of the group and the offer made to them, the question whether the group constitutes a section of the public for the purposes of the offer will fall to be determined by reference to a variety of factors of which the most important will ordinarily be: the number of persons comprising the group, the subsisting relationship between the offeror and the members of the group, the nature and content of the offer, the significance of any particular characteristic which identifies the members of the group and any connection between that characteristic and the offer..."

172.	For the purpose of the unrelated clients test, where there is a prior or subsisting relationship between the parties to an offer or invitation, the following factors are relevant when determining whether the offer or invitation is made to a section of the public:

•	The number of persons or entities to which the offer or invitation is made. While not determinative, it is likely to be a public offer or invitation if more entities are involved;

•	The nature and content of the offer or invitation. Where the offer or invitation is made as part of a competitive commercial process, such as a public tender, a prior relationship may not detract from the offer being made to the public;

•	The nature of the particular relationship between the parties to the offer or invitation. Where the parties to the relationship deal with each other on an arm's length basis, the commercial character of the transaction is maintained. Accordingly, the fact that an individual or personal services entity may have worked for/provided services to an entity sometime in the past does not necessarily operate to exclude the individuals or personal services entity from satisfying this test.

173.	The question of whether providing services, as a result of a tender, is rendering services to the public was considered in Behmer & Wright Pty Ltd v . Commissioner of State Revenue (Vic ) 94 ATC 2067; (1994) 28 ATR 1082. Section 3C(1)(e)(v) of the Pay – roll Tax Act 1971 (Vic) exempts payments made under a contract for services where those services are rendered by a person who "ordinarily renders services of that kind to the public generally". The contractor in this case undertook a small number of relatively large contracts and was one of a few contractors selected to tender to carry out specific carpentry work for the applicant. While the contractor had previous contracts with the applicant, he was considered to be genuinely independent of the applicant because the tendering process was competitive, other parties were invited to tender for the contracts, the applicant was not the only significant client of the contractor, and the successful tenderer was chosen on commercial grounds. Such a public tender process would satisfy the requirements of subsection 87-20(2).

What is "a business of arranging for persons to provide services"?

174.	The operation of paragraph 87-20(1)(b) is subject to subsection 87-20(2) which provides that an offer or invitation is not made by an individual or personal services entity who is merely available to provide services through an entity that conducts a business of arranging for persons to provide services to its clients. As a consequence of this provision, individuals or personal services entities who obtain clients merely through registration with employment agencies, labour hire firms, personnel agencies or any arrangement involving an entity hiring the services of a individual or personal services entity in a manner similar to that of a labour hire firm, are taken not to have made an offer or invitation to provide services to the public at large or to a section of the public.

175.	This is to be contrasted with the situation where an individual or personal services entity makes offers or invitations to the public at large (e.g., by newspaper advertisement) as well as registering with a labour hire firm. The test would be met in this case if two or more unrelated clients engaged the individual or personal services entity as a result of the advertisement.

Employment test

Engages

176.	The first requirement in order to meet the employment test is that there is the actual engagement of another entity by the individual or personal services entity. In paragraphs 87-25(1)(a) and (2)(a) the word "engages" takes the ordinary meaning. The Macquarie Dictionary defines "engage" variously. The most appropriate Macquarie Dictionary meanings of "engage" in the context of section 87-25 are:

•	"to secure for aid, employment, use, etc; hire: to engage a workman, to engage a room."

•	"to bind as by pledge, promise, contract or oath: make liable: be engaged verbally or in writing to do it."

The different meanings of the word "engages" are discussed in Benninga ( Mitcham ) Limited v . Bijstra [1946] KB 58 at page 62:

"An employer "engages" a servant when he makes an agreement with him for his services. A workman is "engaged" on work when he is actually carrying it out."

"Engages" in the employment test context specifies the action taken by the individual or personal services entity to contract with another entity to perform work.

177.	For the employment test the term "engages" is not limited to employment type relationships but may also include contractual arrangements for the services of another entity. In this regard "engages" does not bring a requirement for payment to the entity that performs the principal work. The critical element in satisfying the employment test is the market value of the principal work performed by an entity or entities engaged by the individual or personal services entity, not whether remuneration is made for the performance of the work.

Who can be "engaged"?

178.	Paragraph 87-25(1)(a) and sub-paragraph 87-25(2)(a)(ii) state that individuals and personal services entities cannot engage associated entities, other than individuals, as a means of passing the employment test. This excludes any company, partnership or trust that would be considered an associate of the individual or personal services entity under section 318 of the ITAA 1936.F44 Related individuals (e.g., a spouse of the relevant individual) are able to be taken into account for the purpose of satisfying the employment test. However, the test requires the person or entity engaged to perform 20% (by market value) of the principal work.

Individuals whose personal services income is included in the entity's ordinary or statutory income

179.	Sub-paragraph 87-25(2)(a)(i) states that a personal services entity cannot engage "individuals whose personal services income is included in the entity's ordinary or statutory income" to pass the test. The phrase "individuals whose personal services income is included in the entity's ordinary or statutory income" refers to the test individual(s). A test individual's personal services income is only included in the ordinary or statutory income of a personal services entity where there is an amount of ordinary or statutory income of the entity which is mainly a reward for that test individual's efforts or skills.

Partnerships

180.	In Ellis v . Joseph Ellis & Co . [1905] 1 KB 324 it was concluded that a partnership cannot legally employ a partner and that a partner cannot be an employee of the other partners because the individual cannot be both master and servant. Even though "engages" is a more neutral term than employment, the ordinary meaning of "engages" connotes the action taken by one entity to contract with another entity to perform work. Accordingly, it is considered that individual partners in a partnership are not engaged by that partnership for the purposes of the employment test.

Principal work

181.	Principal work can be described as that work that is central to meeting the individual's obligations under agreements between the individual or a personal services entity and the acquirer of the services. It is work that produces a given result or outcome and which generates the personal services income of the relevant individual.

182.	The term "principal work" refers to the work that an individual or a personal services entity is required to perform to meet the key contractual obligations to the service acquirer and for which the individual or personal services entity is paid. It is the work that directly gains or produces personal services income, and as such would often be specifically required under a contract.

183.	The nature of the activity being undertaken may be such that the principal work to be carried out may not be the sole activity required or done in the course of undertaking the work. The aim of using the adjective "principal" in the legislation is to exclude work that is not (in a commercial sense) integral to the fulfilment of the contractual obligation from consideration of the relevant work for the purposes of Part 2-42 of the ITAA 1997. In other words it is not integral to the work that generates the income.

184.	Activities such as clerical or administrative work that do not have the relevant connection with the generation of the personal services income do not form part of the principal work from which personal services income is derived.

Example 7

185.	Glenn is a house builder. He contracts with a major company to build houses using an industry standard form contract which provides for progressive payment claims, allowances for Prime Cost items, and Provisional Sums for work which may be needed but cannot be ascertained until construction commences. He engages contractors at arm's length, but they do not perform 20% of the principal work during the income year.

186.	While Glenn does the physical building work, his wife Nan performs the task of contract administration, paying subcontractors, keeping track of costs, recording times worked, recording agreed or automatic variations, and making progress payment claims on clients. Such contract administration activities are not part of Glenn's principal work, as they are not integral to and part of the principal work.F45

187.	These types of activities are to be contrasted with work that is integral to and part of the principal work. For example, the work associated with building a brick wall includes, the mixing of the sand and cement, the laying of the bricks and the cleaning of the brickwork. It would not include clerical or administrative activities. However, there are situations where the provision of clerical or administrative activities is the principal work required under a contract: for example, see Wells v . FC of T 2000 ATC 2077; (2000) 45 ATR 1145 where it was a requirement of the arrangement between Mr Wells and the Bank of Melbourne that, in order to earn the commission on a loan application, he would provide to the bank a fully detailed and set out loan application, including all documentation, so that the bank was presented with a file of documents in the form required by the bank and set up as required by the bank. Solicitors charged a fee of $300 if the documentation had to be retyped because of errors.F46

20% (by market value)

188.	The market value of the principal work will depend on the nature and components of the principal work. The payment by a service acquirer will, in an arm's length dealing, reflect the total value of all the principal work to be performed under the contract. However, different components of this principal work performed by the entity (or entities) engaged may have different market values.

189.	In an arm's length dealing, the market value of all the principal work is the total of the payments made by a service acquirer to the individual or personal services entity (i.e., the contract price)).

190.	The market value of the work performed by the entity or entities engaged by an individual or personal services entity is what the individual or personal services entity would charge the service acquirer on an arm's length basis for the principal work performed by the entity (or entities) engaged (i.e., the "charge-out" rate). This is consistent with the approach adopted in relation to the market value of "all the principal work" discussed above.

191.	For example, where a bricklayer contracts with a service acquirer to lay bricks and engages a labourer to cart the bricks and mix the mortar etc, the market value of the work performed by the labourer is what the bricklayer would charge the service acquirer on an arm's length basis for the work performed by the labourer. This amount would normally exceed the amount the bricklayer actually pays to the labourer because it would include recoupment of the "on costs" relating to engagement of the labourer as well as a profit margin to the bricklayer.

192.	Therefore, in cases where the contractor and the entity (or entities) engaged are dealing with each other at arm's length and the amount actually paid to the entity (or entities) engaged for the performance of principal work is greater than 20% of the contract price, the amount actually paid is sufficient to establish that the employment test is passed. In such cases, it is unnecessary to consider what the individual or personal services entity would have charged the service acquirer for the principal work performed by the entity (or entities) engaged.

193.	It is only in cases where the parties are not dealing with each other on an arm's length basis, or the amount actually paid to the entity (or entities) engaged for the performance of principal work is less than 20% of the contract price, that one might want to consider what would have been charged to the service acquirer on an arm's length basis.F47

194.	In cases where it is necessary to determine what the individual or personal services entity would have charged the service acquirer on an arm's length basis, and the entity (or entities) engaged is a natural person, a suitable proxy for that amount would be what a labour hire firm would charge to provide the labour of the natural person(s). This is because the amount charged by a labour hire firm incorporates not only the cost of labour but also the "on costs" of employment and the profit margin to the labour hire firm. This is broadly consistent with what the individual or personal services entity would charge the service acquirer (i.e., the remuneration of the natural person for performing the principal work, an amount to cover the "on costs" of employment and a profit margin), and provides an acceptable arm's length benchmark.

195.	In cases where multiple entities are engaged by the individual or personal services entity to perform principal work, and each entity performs different types of tasks, the market value of these tasks may vary depending on the level or types of skills required and the market remuneration for those particular skills. That is, the market would charge the service acquirer different amounts for the discrete principal work components performed by each entity engaged.

196.	This is demonstrated in the case of a personal services entity which contracts with a service acquirer for performance of work which requires a combination of conventional bricklaying, tuck pointing and general site labour (and the personal services entity engages separate entities to perform each type of work). The majority of the work is standard bricklaying and this would have a particular market value. However, tuck pointing is usually remunerated higher than conventional bricklaying and general labour lower in the market place.

197.	While these considerations of different market values for different components of the principal work may be relevant in marginal cases, it will usually be a relatively simple task to determine whether 20% or more of the value of the principal work is done by others.

198.	In relation to this and the other tests, a reasonable and commercial approach based on the substance of the arrangements is what is required.

Apprentice

199.	The employment test is satisfied if, for at least half the income year, the individual or entity has one or more apprentices. The legislation uses the word "apprentices".

200.	The meaning of apprenticeship is discussed in Halsbury's Laws of Australia as follows:

"An apprenticeship is an agreement by which an employee is bound to serve an employer in an acknowledged trade, business or skill for a fixed period of time in return for which the employer undertakes to instruct the apprentice in the trade and pay his or her wages. The special contractual form of apprenticeship is traditionally known as an indenture; an indentured apprentice is simply an employee serving a period of training under an indenture in order to become qualified in a particular industry. The indenture must conform to the requirements laid down in either the relevant industrial award, the provisions of the State and Territory apprenticeship legislation, or both. In some jurisdictions and awards a distinction is made between an apprenticeship and a traineeship, generally depending on whether the vocation in which the employee is engaged is a trade or a calling."

201.	Similar guidance on the meaning of "apprentice" is provided by Halsbury's Laws of England (4th ed):

"At common law a contract of apprenticeship is something more than a contract of service. By a contract of apprenticeship a person is bound by another for the purpose of learning a trade or calling, the apprentice undertaking to serve the master for the purpose of being taught, and the master undertaking to teach the apprentice. Where teaching on the part of the master or learning on the part of the other person is not the primary but only an incidental object, the contract is one of employment rather than of apprenticeship."

202.	In determining whether persons engaged in non-regulated contracts satisfy the common law meaning of apprentice the critical considerations are the teaching and learning aspects of the arrangement, together with other attributes such as a "period of the learning" so as to become "qualified" in a particular industry, trade or vocation.

203.	An apprentice need not be apprenticed to the contractor. A series of apprentices supplied by a Group Apprenticeship Scheme to work for the contractor as part of their trade training would meet the requirement.

Business premises test

Maintain and use

204.	The Explanatory Memorandum at paragraph 1.97 provides:

"this means that the individual or entity must do more than merely have leased premises in its name to pass the test. The premises should actually be used to produce the personal services income."

205.	The Macquarie Dictionary definition of the word "maintain" includes:

"1. to keep in existence or continuance; preserve; retain."

206.	The context in which the word "maintained" is used merely requires that the individual or personal services entity keeps in existence or continuance, preserves or retains the business premises. An individual or personal services entity may satisfy this requirement by occupying business premises by way of ownership, lease, licence or possession (but see discussion on "exclusive use" at paragraphs 221-230). There is no requirement that the individual or personal services entity bear running costs associated with the premises such as cleaning or utility costs.

At all times in the income year

207.	The requirement that the individual or personal services entity have business premises at all times in the income year is aimed at ensuring there are business premises at all times during which activities are conducted to produce the individual's personal services income. The business premises test is not aimed at discriminating against cases where activities are commenced or ceased in the income year or in cases where the activities are conducted on a part-time basis, even though the wording of the legislation is open to a more restrictive interpretation.

208.	Nevertheless, the meaning of "income year" is to be determined by reference to the context in which the phrase is used in the particular provision. Having regard to the context of the alienation measure, a purposive interpretation of the phrase "at all times in the income year" is adopted because it avoids the anomalous result referred to above that would arise under the alternative view.

Business premises at which the individual or entity mainly conducts activities producing personal services income

209.	The use of the word "mainly" means the generation of personal services income must be the primary usage to which the business premises are put. More than 50% of the activities conducted at the business premises by the individual or entity must be directed at producing personal services income.

Example 8

210.	Byte Pty Ltd contracts with Net Pty Ltd to provide information technology services to Net Pty Ltd. The contract requires Byte Pty Ltd to engage Ralph to provide the services. Byte Pty Ltd leases business premises at the local shopping mall, but 90% of the time uses the premises for retail sale of computing hardware and software. Byte Pty Ltd does not "mainly" conduct, at those premises, activities that gain or produce personal services income. The premises are mainly used for the purposes of the retail sale activities.

Example 9

211.	Colin, a professional geologist, contracts through his personal services entity Col Pty Ltd to provide services to Big Mining Co Ltd. Colin spends 70% of his time in the field retrieving ore samples but performs the analysis in business premises leased by Col Pty Ltd from the local Council. Col Pty Ltd has exclusive use of the premises and uses them only to undertake the technical analysis of the ore samples. Col Pty Ltd uses the business premises to mainly conduct activities that gain or produce personal services income and would pass the business premises test.

Premises

212.	The word "premises" is not defined and therefore takes its meaning in ordinary concepts and usage. The Macquarie Dictionary defines premises as follows:

"a. the property forming the subject of a conveyance. b. a tract of land. c. a house or building with the grounds, etc., belonging to it."

213.	The meaning of "premises" is variable. For example, in Frost v . Caslon ; Frost v . Wilkins [1929] 2 KB 138 it was given a wide meaning to cover "any kind of structure or building (or part thereof) capable of being occupied.

214.	For the purposes of the business premises test in subsection 87-30(1) there is no reason to limit the ambit of the word "premises" provided they are "business premises" as explained below. Accordingly, premises may merely comprise land, merely buildings or both.

215.	In Re Alloway [1916] NZLR 433, Edwards J said:

"The words "the premises" of a man engaged in business signify the place in which he carries on his business. Such premises may be wholly buildings, as in the case of many shopkeepers; or wholly land, as in the case of a timber yard; or partly buildings and partly land, as in the case of a timber yard used in conjunction with a large joinery business; or, more aptly as applied to the present case, large stables erected upon land part of which is used as a paddock."

216.	Even on this wide and practical view of premises a caravan situated in a public place under licence may be a "premise" in the relevant sense, but a car (for example of a travelling salesman) would not.

Business Premises

217.	The requirement in paragraph 87-30(1)(a) is that the individual or personal services entity has "business premises" at which the individual or entity conducts income earning activities.F48

218.	The inclusion of paragraph 87-30(1)(a) suggests that the adjective "business" adds more to the word "premises" than just the notion of a place where business is carried on.F49 Rather, to give it meaning in the context of section 87-30 which includes paragraph 87-30(1)(a), it is arguable that it describes premises which have the usual physical attributes and fixtures associated with commercial or business usage.

219.	A broader construction which does not draw such a stark distinction between business premises and residential premises is also open for the meaning of "business premises". For example, it is arguable that "business premises" refers to premises from which a business is conducted.F50 Drawing a distinction between business premises and premises used for private purposes lends some support to this broader construction. In any event, the requirements of the business premises test in subsection 87-30(1) would, in many cases, produce a similar result under either interpretation. As Example 1.14 of the Explanatory Memorandum shows, the use of Rose's brother's garden shed does not satisfy the business premises test:

"Rose leases the shed in her brother's back garden from which to conduct her business. As the shed is part of the premises used by Rose's brother for private purposes, Rose does not meet the business premises test."

220.	The Commissioner takes the view that the critical distinction between business premises and other premises is that, viewed from a business and commercial perspective, business premises must be apt for carrying on a business. This character of business premises is relevant in considering whether the conditions in paragraphs 87-30(1)(a) to (d) are satisfied. Paragraph 87-30(1)(a) requires that the individual or entity mainly conducts activities at those business premises from which personal services income is gained or produced.

Exclusive use of business premises

221.	The Macquarie Dictionary defines "exclusive" as:

"not admitting of something else; incompatible, limited to the object or objects designated, shutting out all other activities, single or sole...."

222.	Where premises are occupied under ownership or lease, the legal nature of the proprietary interest allows the holder to determine who may or may not enter upon the premises. An individual or personal services entity who occupies their premises under ownership or lease may ensure others do not use the premises and, therefore, have exclusive use in the relevant sense.

223.	In the case of joint lessees, neither lessee has exclusive use of the premises.F51 This is confirmed by paragraph 1.99 of the Explanatory Memorandum which provides as follows:

"The individual or entity must also have exclusive use of the premises. This means that the individual or entity cannot lease premises together with another individual or entity on the basis that they share the premises."

224.	Occupancy by way of ownership or lease is to be contrasted with occupancy by way of licence or possession. With each of the latter, the individual or personal services entity does not have a proprietary interest in the land which allows the individual or personal services entity to ensure that others may not use the premises.F52

225.	The rights attaching to a licence were discussed by the High court in Radaich v . Smith (1959) 33 ALJR 214. A relevant extract from the judgment of Windeyer J at 218 is as follows:

"What then is the fundamental right which a tenant has which distinguishes his position from that of a licensee. It is an interest in land as distinct from a personal permission to enter the land and use it for some stipulated purpose or purposes. And how is it to be ascertained whether such an interest in land has been given? By seeing whether the grantee was given a legal right of exclusive possession ... A right of exclusive possession is secured by the right of a lessee to maintain ejectment, and after his entry, trespass."

226.	The salient point in the present context is that an individual or personal services entity cannot have exclusive use of premises if they do not have exclusive possession of those premises.F53 If an owner of premises grants permission for an individual or personal services entity to occupy premises on such terms that the agreement amounts to a licence and not a lease, the owner may also use the premises as he/she sees fit and as such the individual or personal services entity cannot be said to have exclusive use of the premises. What the individual or personal services entity has is exclusive use of the premises against all parties except for the owner.F54

227.	On the basis of the comments in Burt v . Commissioner of Taxation (see footnote 50 above), it is arguable that reception areas and waiting rooms are part of the business premises. However, the context of the alienation measure focuses on those principal activities that generate the personal services income. Having regard to this focus, areas such as reception and waiting rooms are ancillary to the business premises which the individual or entity has exclusive use of for the generation of the relevant personal services income. The nature of the contractual lease or proprietary arrangements dealing with shared services are different from those applying to those areas where the taxpayer has exclusive possession. A distinction can, therefore, be made between shared facilities and the relevant business premises. Accordingly, and consistent with modern commercial and business practices, it is considered that facilities of this kind are not the relevant business premises referred to in section 87-30.

Example 10

228.	Dale is an insurance agent who has an office in commercial premises leased by Hill Pty Ltd. The agreement between Dale and Hill Pty Ltd does not give Dale exclusive possession of the room. Hill Pty Ltd reserves the right to use the room if the need arises. Dale does not have exclusive use of the room. In order to have exclusive use, Dale would need to lease the room from Hill Pty Ltd.

Example 11

229.	Norm is a draftsman who leases an office from Morn Pty Ltd. Norm's office is adjacent to a suite of offices occupied by other professionals. Each occupant also jointly leases a shared reception/waiting area from Morn Pty Ltd. Norm has exclusive use of the relevant premises for the purposes of section 87-30 of the ITAA 1997 because he has a discrete lease over his office and all or substantially all of the principal work is carried out in the office.

230.	The requirement that the individual or the personal services entity has exclusive use of the business premises refers to exclusive use at the time that the individual or the entity conducts, at those business premises, activities that gain or produce personal services income.

Physically separate

231.	The Macquarie Dictionary defines "separate", in the relevant sense, as "being or standing apart; cut off from access: separate houses". Similarly, the New Shorter Oxford English Dictionary defines it as:

"Detached, set apart, (from something), not incorporated or joined. Existing or regarded as a unit by itself."

232.	Neither the Macquarie or Oxford Dictionaries give a definition of the word "physically" which may be applied in the relevant sense.

233.	Example 1.14 of the Explanatory Memorandum (see paragraph 219 above) gives guidance on the requirement that the business premises have to be physically separate from any premises used for private purposes of the individual, the personal services entity or an associate of the individual or entity.

234.	In this example even though the garden shed is detached from the building structure which comprises the brother's residence, it is not physically separate because the physical impression of the property is that the shed forms part of the dwelling and curtilage which comprises the brother's private residence. The entire property has the visual impression of being a private residence (as distinct from business premises).

235.	Where business premises are incorporated into a dwelling employed for private purposes by the individual or an associate, the physical impression of the dwelling and curtilage does not usually allow for any division of the property into two parts. This accords with the ordinary notion that one thing which is incorporated into another, does not usually constitute two physically separate things.

236.	A distinction may be made in the case of conjoint buildings such as in Truscott v . Repatriation Commission , AAT (Veteran's Appeals Division) W96/51, 1997. In these cases, there is legal and physical division of the structure into two parts. That is, conjoint buildings are usually on separate title and have a dividing wall which prevents internal access between premises. Such buildings also have discrete access and often have further physical divisions such as fencing. In these type of cases it is valid to conclude that one conjoined half is not incorporated into the other and, therefore, that each is physically separate from the other.

237.	Similarly, if, for example, premises apt for the conduct of a business are located in one part of a corner block and that part has its own entry and egress from the road and is blocked off from a separate private dwelling of the individual or personal services entity on the same block of land by a fence with no entry or egress between the two, then the business premises would be regarded as being physically separate from premises that are used for private purposes. In this instance, the physical impression enables the land to be divided into two parts, the first being the dwelling with curtilage employed for private purposes and the second being the building premises and curtilage employed for business purposes. In these circumstances, the physical impression is that the business premises are not within the private premises of the individual or an associate, and are, therefore, physically separate.

238.	An example of business premises that are not physically separate from the premises of the entity (or associate) to which the individual or entity provides personal services is covered in the Explanatory Memorandum (Example 15):

"Rose provides personal services, through her personal services entity, to BOR Pty Ltd. Rose leases a room at BOR's premises from which to conduct her business. Rose does not meet the business premises test, as her business premises are not physically separate from the entity that she is providing services to."

239.	The reference to "premises" in paragraph 87-30(1)(d) is taken as a reference to premises at which the service acquirer or an associate of the service acquirer conducts their business activities. A narrow interpretation might otherwise have disqualified an individual or personal services entity from satisfying the business premises test merely because the service acquirer or an associate owned the commercial property.

240.	The position where premises are within a high rise building follows along similar lines to the approach taken for private premises. For example, where an individual or personal services entity operates from a room within the premises of the service acquirer, the premises are incorporated both physically and functionally into the premises of the service acquirer and, therefore, the entire floor space has the physical impression of being that of the service acquirer's premises. The room of the individual or personal services entity is, therefore, not physically separate from the premises of the service acquirer.

241.	Where an individual or personal services entity leases a discrete floor or part of a floor in a high rise building from the service acquirer, and another floor is occupied by the service acquirer, the question of physical separation needs to be looked at on an objective basis having regard to the extent to which the floors or parts of floors are functionally and physically integrated with each other, entry and egress facilities, and other indicators of physical separation such as signage and security arrangements. In addition, the occupancy rights are likely to be different and would provide for exclusive possession albeit that this is more relevant to the "exclusive use" requirement.

Changing business premises

242.	The individual or personal services entity does not have to maintain and use the same business premises throughout the whole year. This means that the individual or entity can change business premises during the year as long as at all relevant times during the income year, the individual or personal services entity has business premises which satisfy the requirements in subsection 87-30(1).

Personal Services Business Determination

243.	Subsection 87-15(3) provides if 80% or more of the personal services income of an individual during the income year is from one source, F55 the individual's personal services income is not from conducting a personal services business unless, when the income is gained or produced, a personal services business determination is in force relating to the individual's personal services income.

244.	The Commissioner may make a personal services business determination relating to an individual's personal services income if he is satisfied about a number of matters set out in section 87-60 (for individuals) or 87-65 (for personal services entities). If the Commissioner is satisfied that an individual or a personal services entity met or could reasonably be expected to meet either the employment test or the business premises test or both, a determination may be made.F56

245.	The Commissioner may also make a determination in those cases in which he is satisfied that, but for unusual circumstances applying to the individual or to the personal services entity, the individual or the entity would have met or could reasonably have been expected to meet at least one of the three personal services business tests set out in subsection 87-15(2).F57

246.	The use of the word "may" often grants a power to a person which would otherwise not be available. Whether this is the case should be discerned from the purpose of the provision and the overall intent of the relevant Act: see Finance Facilities Pty Ltd v . FC of T (1971) 127 CLR 106, where Windeyer J cites from Macdougall v . Paterson (1851) 11 CB 755 the proposition that the word "may", when used of a person having an official position:

"is a word of permission, an authority to do something which otherwise he could not lawfully do. The authority must be exercised, if the circumstances are as such to call for its exercise."

247.	Having regard to the specific criteria which the Commissioner must have regard to in considering an application for a PSBD, where an individual or personal services entity applies for a PSBD and the Commissioner is satisfied that the requirements for the making of a PSBD have been met, the Commissioner will make a determination.

248.	A personal services business determination only remains in force for the period specified in the Notice of Personal Services Business Determination and for the period in which the conditions specified in the Notice remain satisfied. The Commissioner may also revoke or vary a PSBD where material facts relevant to the issue of the personal services business determination are varied or altered (see sections 87-60 and 87-65). This means a PSBD may come to an end in one of two ways and a formal revocation is not required in cases where the conditions specified in the Notice cease to be satisfied.

249.	It is also important to note that a PSBD is limited in its consideration to the criteria specified in Part 2-42. Accordingly, it does not preclude the application of Part IVA in appropriate cases (see paragraphs 261 – 267 below).

Reasonable expectation

250.	In News Corporation Ltd v . National Companies and Securities Commission (1984) 57 ALR 550; (1984) 5 FCR 88 at ALR 561; FCR 101, Woodward J said:

"A reasonable expectation of an event requires more than a possibility, risk or chance of the event occurring."

251.	See also FC of T v . Peabody (1994) 181 CLR 359; (1994) 28 ATR 344; 94 ATC 4663.

252.	The test is an objective test; see FC of T v . Arklay (1989) 85 ALR 368; (1989) 20 ATR 276; 89 ATC 4563; Eastern Nitrogen Ltd v . FC of T [1999] FCA 1536; (1999) 43 ATR 112; 99 ATC 5163.

Unusual circumstances

253.	The Macquarie Dictionary defines "unusual" as "not usual, common, or ordinary; uncommon in amount or degree; of an exceptional kind." In Re Beadle v . Director – General of Social Security (1984) 6 ALD 1 the Tribunal said (at page 3):

"An expression such as "special circumstance" is by its very nature incapable of precise or exhaustive definition. The qualifying adjective looks to circumstances that are unusual, uncommon or exceptional. Whether circumstances answer any of these descriptions must depend upon the context in which they occur. For it is the context which allows one to say that the circumstances in one case are markedly different from the usual run of cases. This is not to say that the circumstances must be unique but they must have a particular quality of unusualness that permits them to be described as special."

254.	Similarly in Re Z (1970) 15 FLR 420 at 421, Joske J commented that ""exceptional" and "unusual" have much the same meaning". He then held, following Martin v . Martin [1941] NI 1 at 14, that "exceptional" meant simply "out of the ordinary" and thus concluded that "the legislation enables the judge to exercise his discretion in a case which appears to him to be "out of the ordinary""; and in Re S . G . (1968) 11 FLR 326 at 328, Blackburn J. held that:

"... exceptional and unusual circumstances ... must relate to the particular parties concerned and not merely to the class or kind of persons to which they belong."

255.	Subsections 87-60(4) and 87-65(4) of the ITAA 1997 provide two examples of "unusual circumstances" in the context of the unrelated clients test:

"unusual circumstances include providing services to an insufficient number of entities to meet the unrelated clients test under section 87-20 if:

(a)	the individual or entity starts a business during the income year, and can reasonably be expected to meet the test in subsequent income years; or

(b)	the individual or entity provides services to only one entity during the income year, but met the test in one or more preceding income years and can be reasonably expected to meet the test in subsequent income years."

When unusual circumstances become usual circumstances

256.	Subparagraph 87-60(3)(a)(ii) and subparagraph 87-65(3)(a)(ii) refer to unusual circumstances applying to the individual or to the personal services entity in the income year during which the determination first has effect. Situations may arise where circumstances that might be considered to be unusual in an income year become the normal or usual. An example may be where an individual, who normally enters into monthly contracts with clients, enters into a 12 month contract with one client. At the conclusion of that contract, the contract is rolled over for a further period of 12 month with the possibility of further rollovers. It is considered that, whilst the first 12 months contract may give rise to unusual circumstances in the relevant income year, the subsequent rollover of that contract may result in the circumstances ceasing to be unusual.

257.	The legislative benchmark requires the change in circumstances to be temporary and unusual, rather than a new mode of operation. The more temporary the circumstances are and the greater the likelihood that normal conditions will resume the easier it will be to satisfy the unusual circumstances requirement.

Further Grounds

258.	Further grounds for determination set out in subsections 87-60(5) and 87-65(5) are referred to in this Ruling as the "results test", which is explained in paragraphs 106-139 above.F58

Applying the tests in Division 87

259.	The tests in Division 87 (i.e., the 3 personal services business tests and the "results test") operate to ascertain whether, during the income year, that individual's personal services income is income from conducting a personal services business. The tests can be applied at any stage throughout the income year based on activities that have already occurred or on the reasonable expectation that certain activities will occur or continue to occur. In these circumstances, where the relevant tests are satisfied, the individual or the personal services entity can be considered to be conducting a personal services business for the whole of the income year. The Commissioner may make a determination in these circumstances that takes effect as from 1 July in the relevant income year.

Example 12

260.	Jack operates through a personal services entity called JJ Pty Ltd. Less than 80% of Jack's personal services income is from one source. JJ Pty Ltd employs an apprentice on 1 September 2000 for a period of 9 months JJ Pty Ltd meets the employment test and will be taken to be conducting a personal services business for the whole of the relevant income year, 1 July 2000 to 30 June 2001.

Application of Part IVA to Independent Contractors

261.	The application of a general anti-avoidance provision, such as Part IVA, is more likely where the income derived under the contract is predominantly from the provision of an individual's personal services. This is because the courts and tribunals have often disallowed arrangements which have as their dominant purpose the alienation of personal services income. Income Tax Rulings IT 2121, IT 2330 and IT 2639 explain the factors that are relevant to this issue.

262.	The question whether a particular situation is one where the income of an independent contractor, whether carried on as a sole trader or through an interposed entity, is in reality produced predominantly from the personal services of an individual or in reality from income producing assets of the entity or the entity's business structure is subject to the factual circumstances of the case. Taxation Ruling TR 2001/7 outlines the factors that are relevant.

263.	Assessable income is generated from a very wide spectrum of activities, ranging from income derived solely as a result of the taxpayers personal skill and effort to income derived solely from the use or sale of assets, or from a business structure. The courts have not articulated a clear dividing line between personal service income and income from property (assets) or from a business structure, other than that the more substantial the assets (and investment) the more likely that they are to be the main generators of the income. Where only an asset exists (and there is no other indicator of a business structure), the contribution of the asset has to be balanced against the skills and effort of the relevant individual to determine the main source of the income.

264.	The ATO will not seek to apply Part IVA to make adjustments in cases where the nature of the equipment and other factors, relative to the skills and efforts of the individual, do not clearly indicate that the income is generated predominantly from the personal activities of the independent contractor, rather than from the use or the sale of property or from a business structure. However, the ATO will seek to do so where other factors clearly indicate that the dominant purpose of the arrangement is income splitting.F59

265.	An example of a situation where there may be income splitting to which Part IVA could apply would be where an independent contractor, who conducts his or her business through an interposed entity, is paid substantially less than the market value for his or her work, and the profit made by the entity as a result of paying less than a market value salary is distributed to those of the contractor's relatives who are on a lower marginal tax rate, or accumulated in the interposed entity at a lower marginal rate of tax. Take for example a taxpayer who was deriving wages of $600 per week for driving a truck, and then enters into an arrangement through his personal company with his former employer under which he is paid $1000 per week, but has to provide his own truck. If the taxpayer's personal company paid the taxpayer less that the market value of his service (e.g., paid only $100 per week, rather than $600) then the arrangement could be subject to challenge. This would be particularly the case if the company distributed to the taxpayer's wife and children, by way of dividend, the profit made as a consequence of the low salary paid to the taxpayer, or if the profits were retained by the interposed company.

266.	Relevant factors in determining whether Part IVA applies include the following.

(a)	The interposed entity derives income from sources other than from the services provided by an individual who controls, or is associated with that entity, that is, the service provider. This may be the case for example where the interposed entity employs other individuals at arm's length to provide services or labour to the other contracting party (the service acquirer). Similarly, the interposed entity may have substantial assets, or a substantial business structure, which are used in the production of assessable income. However, equipment of a minor nature, for example, the drawing board of an architect, or the personal computer of a computer programmer, or the tool kit of a tradesperson will not usually be regarded as sufficient on its own to characterise the income as being other than mainly from the efforts or skills of an individual. Similarly, the extent to which the interposed entity deals with and provides its services to the public at large or is limited to contracting with one party is also a relevant consideration.

(b)	The expenses claimed by the interposed entity may demonstrate the existence of a business operation or structure. For example, if the interposed entity operates from rented premises, employs others to provide services, and/or uses raw materials or stock as part of the income producing activity, then this points to there being a business structure in existence.

(c)	The services provided may be unique to the taxpayer in that the services are of a type which cannot be provided by any other person, or alternatively, the contract with the interposed entity may stipulate who is to provide the services, such that the "force of attraction" in generating the income is the individual providing the services rather than the assets or goodwill of the interposed entity.F60

(d)	Whether the interposed entity is, at law, unable to provide the services to the service requirer (where, for example, the law prevents incorporation of particular types of practices).

267.	As previously stated another possible relevant consideration, independent of the factors outlined above, is the extent, if any, of income splitting activities. In deciding whether there is income splitting some or all of the following considerations are relevant.

(a)	Whether the salary or wages paid to the service provider is commensurate with the skills exercised or services provided and with the income received by the interposed entity for those services.

(b)	The interposed entity distributes income only to the service provider and the arrangement has been implemented only for the purpose of providing additional superannuation benefits for the service provider (in these circumstances Part IVA will generally not apply, see IT 2503).

(c)	The interposed entity distributes income to family members or an associated person of the service provider, and/or does not distribute any income to the employee who provided the actual services.

(d)	In a "Friday night / Monday morning" F61 situation the profits of the interposed entity are accumulated.

(e)	Whether there has been a substantial change in the activities which the individual performed prior to incorporation or any other significant external indicators that the arrangements have changed.

FURTHER EXAMPLES

Example 13

268.	The Jones Trucking Company (the "Company") enters into contracts, not being contracts of employment, with a single arm's length third party to transport goods within the Sydney metropolitan area. The third party insists on contracting with a company, rather than a sole trader. The main assets of the company are a truck and the contract with the third party. Mr Jones is the only employee of the company, and drives the truck. The Company's name is prominently displayed on the truck.F62

269.	On balance it would be reasonable to conclude that the income of the company is predominantly derived from the use of the truck in the company's freight business.

270.	Mr Jones is paid a market value salary by the Company. The payment of a market value salary is one indication that income splitting is not the purpose of the arrangement. The small amount of profit remaining after paying all the operating expenses of the company, including Mr Jones' salary and income tax, is retained in the company for the purpose of replacing the truck when it wears out. Mr and Mrs Jones each own half the shares in the Company and are the two directors.

271.	Having regard to all the circumstance of the case the most reasonable expectation is that in the absence of the scheme the trucking business would still have been conducted by a corporate entity, as this was a requirement of the arm's length third party. Given that Mr Jones is already paid a market value salary it also seems reasonable to expect that the company, but for the scheme, would have continued to retain the small profit for re-investment. Consequently, Part IVA would not apply.

Example 14

272.	JB, a computer systems analyst, was employed by XYZ Pty Ltd until the end of the 2001 financial year at a remuneration of $80,000. Due to reorganisation and cost-cutting, XYZ Pty Ltd changes its management and employee arrangements.

273.	As part of the changes, JB is told that he will cease as an employee. Instead the company would be prepared to use his services from 1 July 2001 through a company structure.

274.	JB seeks advice from a solicitor and sets up a family trust; JB Pty Ltd, as trustee, and his wife and three children as beneficiaries. JB Pty Ltd enters into an agreement with XYZ Pty Ltd to provide computing services, which are substantially the same as JB had previously performed as an employee. The understanding is that JB will personally provide these services.

275.	XYZ Pty Ltd pays JB Pty Ltd a total fee of $100,000 for computer services provided to it by JB. JB Pty Ltd pays JB a salary of $38,000 and claims deductions amounting to $24,000. Just before 30 June 2002, JB Pty Ltd distributes the remaining $38,000 – $36,000 to JB's wife and $400 to each child. No income is distributed to JB.

276.	In this case, the Commissioner would regard the distribution made to the wife and children, as being part of an income splitting arrangement to which Part IVA applies.

Example 15

277.	A general practitioner incorporates her practice to enable her to access improved superannuation benefits. She sets up a company, which employs her.

278.	All income received by the company is paid to the doctor in salary, except a superannuation contribution and management fees to a service trust (which meets the requirements of Federal Commissioner of Taxation v . Phillips 78 ATC 4361 and Income Tax Ruling IT 25).

279.	The Commissioner has accepted this type of arrangement in Income Tax Ruling IT 2503.

Example 16: Courier DriversF63

280.	Courier Co engages individuals under written agreements to collect and deliver goods and other items. Courier Co receives orders at a central location. CC then arranges for one of its individual couriers to collect the goods or items and deliver them to their intended destination. The couriers engaged by CC are required to use their own vans (to a specified level in terms of size, type, age and fit-out). A courier is paid a prescribed rate for each successful delivery. A term of the contract between CC and each individual courier requires the individual to indemnify CC for any damage or loss for which CC is liable as a result of the failure by the individual to deliver the goods or items by a specified time or any loss or damage to the goods or items as a result of the negligence of the individual. If goods are delivered to the wrong address, the courier own/driver is required at their own cost to correct the mistake, by collecting the parcel and delivering it to the correct address. While there is no requirement that the van has to be driven by a particular driver, each of the individual couriers is engaged exclusively by CC and, therefore, receives 80% or more of their personal services income from the same entity.

281.	Is an individual receiving personal services income for producing a result?

282.	The courier enters into a contract for a specific series of tasks (i.e., delivery of the packages). The contract provides that the courier is entitled to be paid a fixed amount for each particular delivery. The individual does not receive any payment if the goods or items are not in fact successfully delivered to their intended destination. The courier works to achieve the result (collection and delivery of goods etc.) in terms of the contract and is working on his/her own account. This aspect of the test would be satisfied in this case.

283.	Is the individual required to supply the plant and equipment or tools of trade needed to perform the work from which the individual produces the result?

284.	In this case, each individual courier is required to provide their own van (as specified). The courier is providing the plant and equipment necessary to do the work, as would be expected from an independent contractor doing this kind of work. This aspect of the test would be satisfied in this case.

285.	Is the individual liable, or would the individual be liable, for the cost of rectifying any defect in the work performed?

286.	The individual courier is liable to indemnify CC for any damage or loss sustained by CC as a result of delay or negligence attributable to the individual courier, and/or has to rectify mistakes at their own costs. This aspect of the test would be satisfied in this case.

287.	In this example, the individual courier bears the commercial and entrepreneurial risk – he/she supplies substantial assets that are required and are essential and apt to perform the work, takes the chance of making a profit and takes the risk of making a loss in the carriage of goods or items for the principal contractor, Courier Co, and is liable for the cost of defective work. An individual owner/driver courier in these circumstances is not subject to the alienation measure.

Example 17: IT Worker

288.	A government department enters into a contract with Consultant Co for the provision of services by an individual who is nominated in the contract. The terms and conditions of the contract are that the individual works for a maximum number of hours per day (e.g., 8 hours). The contract specifies an hourly or daily rate payable in respect of the work undertaken by the individual. Tasks performed by the individual are at the request of and the manner of performance of the work is subject to the direction of departmental officers. The individual uses the plant and equipment provided by the department for carrying out the tasks required. If the work performed by the individual is unsatisfactory, the department is entitled to terminate the contract, but the company is not required under the contract to rectify any defects in the work performed.

289.	Consultant Co is a personal services entity because its income includes the personal services income of the individual who does the work.

290.	Is the income of a personal services entity that is the personal services income of an individual income for producing a result?

291.	The contract specifies an hourly or daily rate for the performance of work required. The department is required to pay that rate to the entity for each hour or day worked by the individual, irrespective of the work being performed by the individual. The entity is not contracted to produce a specific outcome or result. This aspect of the test would not be satisfied in this case.

292.	Is the personal services entity required to supply the plant and equipment or tools of trade needed to perform the work from which the entity produces the result?

293.	The custom and practice for independent contractors in relation to undertaking work under this type of arrangement is that the department provides the equipment needed to perform the work, including access to office facilities. If the entity is not required to provide the assets and equipment needed to perform the work, having regard to custom and practice when work of that kind is performed by an entity other than an employee, then this aspect of the test would be satisfied.

294.	Is the personal services entity liable, or would the entity be liable, for the cost of rectifying any defect in the work performed?

295.	The department is entitled to terminate the contract if the performance of the individual is unsatisfactory, but the personal services entity does not have any responsibility or liability to rectify any faulty work done by the individual. If the individual is requested to remedy defects in the work performed, the time taken to complete that rectification would be subject to payment at the hourly or daily rate specified in the contract. This aspect of the test would not be satisfied in this case.

296.	In this example, the personal services entity is not contracted to produce a result, nor is there exposure to any commercial risk – the entity is entitled to payment for each hour or day the individual works for the department, with no risk of making a loss as a result of undertaking the work. Nor is the worker liable for the cost of defective work, such as the cost of rectifying that work. An entity engaged in these circumstances is not an independent contractor for the purposes of the personal services income legislation.

Example 18: IT Independent Contractor

297.	A government department enters into a contract with Consultant Co for the provision of services by an individual who is nominated in the contract. The terms and conditions of the contract are that the individual is required to develop a product for use on the department's IT system in accordance with functional specifications provided by the department. The contract specifies a fixed amount by way of payment to Consultant Co for the development of the product which is required to be produced within 12 months of the commencement of the contract. Instalments of the contract price are payable upon achievement of specified milestones. The individual maintains a high level of discretion and flexibility as to how the work is to be performed. From time to time, the individual uses departmental equipment to access the department's IT system. However, the development work is undertaken primarily on the individual's own equipment located at his/her business premises. If the final product does not satisfy the functional specifications, the contract requires the work to be rectified.

298.	Consultant Co is a personal services entity because its income includes the personal services income of the individual who does the work.

299.	Is the income of a personal services entity that is the personal services income of an individual income for producing a result?

300.	The contract is for the performance of a specific task that produces an outcome or result, with the individual maintaining a high level of discretion and flexibility as to how the work is to be performed. A fixed amount is to be paid upon completion of the work. Payment is not made until the work is performed, although instalments are payable upon the achievement of particular milestones. The contract requires the product to be prepared in accordance with functional specifications. If the product delivered by the individual does not meet the specifications, the individual is required to undertake further work without additional payment. This aspect of the test would be satisfied in this case.

301.	Is the personal services entity required to supply the plant and equipment or tools of trade needed to perform the work from which the entity produces the result?

302.	In this case, relevant assets and equipment required to perform the work are provided by the entity. The need to access the department's IT system by using their equipment is incidental to the development of the product and does not cause the entity to fail this requirement. Even if the task requires a result to be produced (e.g., development of a software program, or devising a fix for a software problem) that could only be done using the department's equipment and/or mainframe, if there is no requirement under the contract for the entity to provide the assets and equipment needed to perform the work, or there is no expectation, having regard to custom and practice when work of that kind is performed by an entity other than an employee, this aspect of the test would be satisfied.

303.	Is the personal services entity liable, or would the entity be liable, for the cost of rectifying any defect in the work performed?

304.	The contract requires the entity to produce a product that complies with the functional specifications of the department. The department would also be able to seek a remedy in damages if the entity fails to deliver the product in accordance with those specifications. The department would not be liable to pay for any additional work required by the entity to rectify any defects in the product. This aspect of the test would be satisfied in this case.

305.	In this example, the personal services entity is contracted to produce a result and is exposed to the commercial risk – where necessary, the entity provides the assets to enable the individual to perform the work, takes the chance of making a profit and takes the risk of making a loss in the performance of the contract, including liability for the cost of rectifying defective work. An entity engaged in these circumstances is not subject to the alienation measure.

Example 19: Civil Engineer

306.	Mick is a civil engineer and operates through his company, Mick Smith Pty Ltd. In June 1997, the company entered into a contract for an 18 month period to carry out assigned planning projects, such as highway upgrades, for a Government department. The contract was renewed in December 1998 and June 2000. The contract stipulates that Mick is to perform the work and Mick actually performs all the principal work under the contract. During the course of each contract, Mick is assigned responsibility for overseeing various projects. The majority of the work is undertaken at the Government department's premises or on the job site. Mick has access to secretarial support and the use of the department's equipment as required.

307.	The fee specified in the contract is a fixed fee of $210,000. The fee is calculated on a time basis of 2800 hours (40 hours per week for 70 weeks) at a fixed rate of $75 per hour. Payment is made upon submission of a fortnightly invoice which includes a time sheet certified by a government department officer.

308.	Mick is not required to remedy defects at his own expense or to indemnify the department for the cost of remedying such defects. If Mick is required to remedy defects in the work he has performed, that is performed in the normal course of his work and the time taken to fix the defects would be subject to payment at the usual hourly rate, with no penalty. The contract can be terminated by the department if Mick's performance is unsatisfactory.

309.	Is the income of a personal services entity that is the personal services income of an individual for producing a result?

310.	Although payment is fixed prior to the contract being undertaken, the payment of the amount is not contingent on a result being produced. Mick is paid fortnightly for hours worked and Mick must work on projects that are assigned to him by the department. Mick may cease working on a project before the project is completed to start work on another project. This aspect of the results test would not be satisfied.

311.	Is the personal services entity required to supply the plant and equipment or tools of trade need to perform the work from which the entity produces the result?

312.	It is the custom or practice that the department (and other departments who engage engineers) provide the necessary equipment, including access to office facilities, needed by non-employee engineers contracted to perform this sort of work. As a result this aspect of the test is satisfied.

313.	Is the personal services entity liable, or would be liable, for the cost of rectifying any defect in the work performed?

314.	Mick Smith Pty Ltd is not liable for the cost of rectifying any defect in the work performed by Mick and thus this aspect of the test is not met.

Example 20: Building Industry – Independent Contractor

315.	Joe installs air conditioning ducts. Joe offers his services to the public. Joe is engaged to install specific duct work in accordance with a set of plans. The contract price is based on installation of the duct work in accordance with those plans, and any changes are subject to the variation clauses in the contract. Joe is not subject to the control of the person who engages him (over and above the degree of control specified in the contract) and Joe has the say as to how the work is to be performed. Joe assumes the risk of not being able to complete the work to specification or for defective work, (e.g., Joe has to rectify any defective work at his own cost). Joe brings the tools required to do the work (e.g., hammer, tin-snips, dolly, hacksaw, electric drill, pop-rivet gun, ladder etc). Joe sets his own hours of work. The contract does not provide for annual leave, long service leave, sick leave and other benefits or allowances. Joe incurs his own expenses for duct tape, glue, pop-rivets, nuts and bolts, drill bits etc. Joe satisfied the results test because he is contracted to produce a result, i.e., he is paid upon installation of ducts, he brings his own tools to do the work, and he is liable for rectifying defects.

Example 21: Unrelated Clients Test

316.	Kevin is an engineer. He was an employee of Mud Mining Pty Ltd until last year when his employment contract was terminated and at the instigation of Mud Mining he entered into a contract for the provision of his engineering services. Kevin also produces income from providing services to his brother's company, Lost Exploration Pty Ltd (an associate of Mud Mining Pty Ltd). Kevin regularly places an advertisement in a mining industry periodical. As a result of his advertising activities Kevin provides services to two unrelated entities, Pebbles Pty Ltd and GemCo Pty Ltd, neither of which is an associate of Kevin, or of each other, or either Mud Mining or Lost Exploration Pty Ltd. Less than 80% of Kevin's income is from each source.

317.	Kevin's contract with Mud Mining was not as a direct result of making an offer or invitation to the public, but rather a result of Mud Mining changing the working arrangements (paragraph 87-20(1)(b) is not satisfied in this regard). Gaining income from providing services to Lost Exploration Pty Ltd does not satisfy paragraph 87-20(1)(a) because Lost Exploration would be considered an associate of Kevin.

318.	Kevin meets the requirements of the unrelated clients test because Pebbles Pty Ltd and GemCo Pty Ltd are unrelated clients obtained as a direct result of Kevin making offers to the public. Therefore, the alienation measure does not apply to Kevin.

Example 22: Labour Hire Arrangements

319.	Ian is a geologist who derives 70% of his personal services income from Rock Pty Ltd. Ian entered into a contract with Rock Pty Ltd as the result of advertising to the public at large. The remaining income is gained as a result of Ian being registered with a labour hire firm. During the course of the income year Ian has performed services for five service acquirers as a result of his registration with the labour hire firm.

320.	Due to the operation of subsection 87-20(2), Ian's registration with the labour hire firm is not treated as making an offer or invitation to provide services and therefore paragraph 87-20(1)(b) is not satisfied. Ian does not meet the requirements of the unrelated clients test because he has only one entity (Rock Pty Ltd) to whom he is providing personal services as a direct result of making offers or invitations to the public.

Example 23: Principal Work

321.	Kate and Lawrence have established a company. The company has entered into a contract with Palatial Pty Ltd to provide drafting services. Although both Kate and Lawrence are qualified to do the drafting work, Kate actually drafts the plans for residential dwellings as stipulated in the agreement. Lawrence performs clerical duties such as banking and bookkeeping. In addition to clerical duties, Lawrence prepares all variations that are required and checks all of Kate's work against the clients specifications. Lawrence makes any corrections that are required. Lawrence's work in preparing variations, checking Kate's work and making corrections using a drafting software package forms part of the principal work. The drafting work he undertakes is the principal work that will produce the personal services income under this agreement. Lawrence's banking and bookkeeping work does not form part of the principal work.

Example 24: Market Value

322.	Jack is a contract engineer who contracts with Big Mining Co. to provide his services. He is paid a daily rate of $480.00 for his services. He occasionally hires Tom, who is not his associate, to assist him in his engineering work and pays Tom a daily rate of $160.00. The arm's length rate Jack would charge Big Mining Co for the work performed by Tom is $180.00 a day. Tom works a total of 200 days for Jack during the year of income. Jack's contract lasts for the whole year. He worked for 250 days during the year. The market value of Jack's work for Big Mining Co. for the whole year is $120,000 (250 days x $480) of which $36,000 (200 days x $180.00) is gained or produced from the work that Tom does.

323.	The market value of Tom's work for Jack is $36,000 (200 days x $180). This represents 30% of the total value of the principal work required to fulfil Jack's contract. As this is more than 20% (by market value) of the principal work, Jack meets the employment test.

Example 25: Market Value

324.	Jodie is a draftsperson who contracts with Big House Pty Ltd for the provision of drafting services. Jodie engages her spouse Ian, who is also a draftsperson, to correct errors and make any variations to plans that are required by the clients. Ian performs principal work that is to be performed under the contract for a total of 5 hours per week. Ian performs a total 240 hours work for Jodie. Jodie derives $70,000 from the performance of principal work that is the object of the contract. Jodie's hourly rate is approximately $40 per hour and this is the same rate Jodie would charge Big House Pty Ltd on an arm's length basis for Ian's labour. Jodie pays Ian $32,000 per year. The market value of the work performed by Ian is $9,600 calculated as follows: 240 hours x $40.

The portion of Jodie's principal work performed by Ian is:

$9,600 / $70,000 X 100 = 13.71%

325.	Jodie does not meet the requirements of the employment test as Ian performs less than 20%, by market value, of Jodie's principal work.

DETAILED CONTENTS LIST

326.	Below is a detailed contents list for this Ruling:

What this Ruling is about	1
Class of persons	4
Background	5
Diagram showing the operation of the Alienation Measures	10
The effect of the alienation measure	13
Definitions	16
Personal services entity (entity)	16
Personal services income	17
Service acquirer(s)	18
Test Individual	19
Associate	20
Related Rulings	Page 8
Ruling	26
Who is covered by the Alienation Measure?	26
The Results Test	33
The Three Personal Services Business Tests	39
Where none of your clients pay you 80 % or more of your personal services income	41
Unrelated clients test	43
During the year	44
" Gains or produces income from providing services to 2 or more unrelated clients"	45
Associates	48
What is meant by " direct result" ?	49
What is meant by " Making offers or invitations to the public at large or to a section of the public" ?	50
What is " a business of arranging for persons to provide services"?	52
Employment test	53
Engages	54
One or more other entities	56
Individuals whose personal services income is included in the entity's ordinary or statutory income	57
Principal work	58
At least 20 % ( by market value )	60
Apprentice	66
Business premises test	70
Maintain and use	71
At all times in the income year	72
Mainly	76
Business premises	77
Exclusive use	78
Physically separate	80
Changing business premises	84
Personal Services Business Determination (PSBD)	85
The 80% or more from one source rule	87
Requirements for a PSBD	93
Reasonable expectation	94
Unusual circumstances	96
Operation of Division 87	98
The tax effect where an individual or personal services entity is conducting a personal services business	101
Date of effect	103
Explanations	104
The Results Test	106
Personal Services Income is for producing a result	113
Required to supply the plant and equipment , or tools of trade , needed to perform the work	122
Liable for the cost of rectifying any defect in the work performed	131
80% or more of personal services income from one source	140
Example 1	142
Example 2	143
Example 3	145
None of the clients pays you 80% or more of the personal services income	146
The Unrelated Clients Test	148
During the year	148
Gains or produces income from providing services to 2 or more entities	149
Example 4	151
Example 5	153
Example 6	155
Associates	157
Direct result	160
What is meant by " making offers or invitations" ?	163
What is meant by " to the public or a section of the public" ?	169
What is " a business of arranging for persons to provide services"?	174
Employment test	176
Engages	176
Who can be " engaged"?	178
Individuals whose personal services income is included in the entity's ordinary or statutory income	179
Partnerships	180
Principal work	181
Example 7	185
20 % ( by market value )	188
Apprentice	199
Business premises test	204
Maintain and use	204
At all times in the income year	207
Business premises at which the individual or entity mainly conducts activities producing personal services income	209
Example 8	210
Example 9	211
Premises	212
Business Premises	217
Exclusive use of business premises	221
Example 10	228
Example 11	229
Physically separate	231
Changing business premises	242
Personal Services Business Determination	243
Reasonable expectation	250
Unusual circumstances	253
When unusual circumstances become usual circumstances	256
Further Grounds	258
Applying the tests in Division 87	259
Example 12	260
Application of Part IVA to Independent Contractors	261
Further Examples	268
Example 13	268
Example 14	272
Example 15	277
Example 16 : Courier Drivers	280
Example 17 : IT Worker	288
Example 18 : IT Independent Contractor	297
Example 19 : Civil Engineer	306
Example 20 : Building Industry – Independent Contractor	315
Example 21 : Unrelated Clients Test	316
Example 22 : Labour Hire Arrangements	319
Example 23 : Principal Work	321
Example 24 : Market Value	322
Example 25 : Market Value	324
Detailed contents list	326

Commissioner of Taxation

31 August 2001


[F1]

After the enactment of the proposed amendments, the ruling will be reviewed and will be modified, if necessary.


[F2]

The Commissioner's declaration in relation to this deferral was published on 30 August 2000 in the Commonwealth of Australia Gazette No. GN 34.


[F3]

See also Treasurer's Press Release No.74 of 11 November 1999.


[F4]

See also paragraphs 1.5 to 1.14 of the Explanatory Memorandum.


[F5]

See Explanatory Memorandum at page 3.


[F6]

See Treasurer's Press Release No.47 of 20 June 2001 and Treasurer's Press Release No.51 of 9 July 2001.


[F7]

See Treasurer's Press Release No.51 of 9 July 2001.


[F8]

See Treasurer's Press Release No.47 of 29 June 2001. If an agent satisfies the four conditions set out in that Press Release, they will not be subject to the alienation measure. The four conditions are that an agent:

•	Receives personal services income from providing services (on behalf of the principal) to customers, and less than 80 per cent of that income is from services provided to each customer;

•	Receives at least 75 per cent of that income as commission or results-based payments, (as opposed to retainers or salary-like payments);

•	Actively seeks customers for their principal; and

•	Does not provide services from the premises of their principal (or the principal's associate).


[F9]

See Treasurer's Press Release No.47 of 29 June 2001. If an agent satisfies the four conditions set out in that Press Release, they will not be subject to the alienation measure. The four conditions are that an agent:

•	Receives personal services income from providing services (on behalf of the principal) to customers, and less than 80 per cent of that income is from services provided to each customer;

•	Receives at least 75 per cent of that income as commission or results-based payments, (as opposed to retainers or salary-like payments);

•	Actively seeks customers for their principal; and

•	Does not provide services from the premises of their principal (or the principal's associate).


[F10]

Treasurer's Press Release No 51 of 9 July 2001.


[F11]

Treasurer's Press Release No 51 of 9 July 2001.


[F12]

See Treasurers Press Release No 47 of 29 June 2001 in relation to agents (refer to footnote 9).


[F13]

Currently the results test is in subsections 87-60(5) and 87-65(5), but see Treasurer's Press Release No.51 of 9 July 2001. Also, under that announcement, taxpayers will be able to seek a PSBD where they are not sure whether the alienation measure applies to them.


[F14]

The Commissioner proposes to issue draft rulings dealing with deductions relating to personal services income (Division 85 and Subdivision 86-B) and the attribution rules (Subdivision 86-A).


[F15]

See Note to section 86-10, paragraph 1.17 of the Explanatory Memorandum, and page 292 of the Ralph Report.


[F16]

Section 84-1.


[F17]

Section 87-10.


[F18]

Note the Treasurer's Press Release No 51 of 9 July 2001 which announces that the Government will make the "results test" available irrespective of whether 80% or more of their income derives from one source.


[F19]

Subsections 87-60(6) and 87-65(6) are drafted on the basis that it is the Commissioner that can take these matters into consideration. As the Government has announced that taxpayers can now self-assess on the basis of the "results test" (Treasurer's Press Release No 51 of 9 July 2001), it is logical that in those circumstances taxpayers should also have regard to similar considerations.


[F20]

These requirements are that the individual or personal services entity could reasonably be expected to meet, or met, the "employment" or "business premises" test, or, but for unusual circumstances, could reasonably have been expected to meet, or would have met, at least one of the 3 personal services business tests ("unrelated clients", "employment" or "business premises" test); that the personal services income could reasonably be expected or was from the individual conducting activities that met these requirements.


[F21]

Meagher JA in World Book ( Australia ) Pty Ltd v FC of T 92 ATC 4327 at p4331.


[F22]

However, the Commissioner recognises that there may be situations where the amount payable by a service acquirer for the result contracted for is not determined until after the work has been completed: eg "do and charge" contracts. There may also be situations where the service acquirer may be able to negotiate a reduction in the amount payable after completion of the work by the service provider.


[F23]

Cf Hollis v . Vabu Pty Ltd [2001] HCA 44, 9 August 2001.


[F24]

Neale v . Atlas Products ( VIC ) Proprietary Limited (1955) 94 CLR 419 at 424-425.


[F25]

Re Porter: re Transport Workers Union of Australia (1989) 34 IR 179.


[F26]

For example, Readon Smith Line Ltd v . Hansen – Tangen [1976] 1 WLR 989 at 997; Codelfa Construction Pty Ltd v . State Rail Authority of New South Wales (1982) 149 CLR 337 at 347-352. See also Taxation Rulings TR 2000/14 at paragraph 26.


[F27]

See Australian Timber Workers Union v . Monaro Sawmills Pty Ltd (1980) 29 ALR 322 at 329 and FC of T v . Barrett (1973) 129 CLR 395 at 407.


[F28]

Stevens v . Brodribb Sawmilling (1985 – 1986) 160 CLR at 36-37.


[F29]

96 ATC 4898; (1996) 33 ATR 537.


[F30]

Rich J in Queensland Stations Pty Ltd v . FC of T (1945) 70 CLR 539 at 548.


[F31]

Note also that the Treasurer's Press Release No 51 of 9 July 2001 which indicates the Government's intention that plant and equipment or tools of trade only need to be supplied "if required".


[F32]

Whether on the words of the legislation having regard to considerations of logic, policy and purposive intent, or having regard to these considerations to correct a drafting mistake – see Cooper Brookes ( Wollongong ) Pty Ltd v . FC of T 81 ATC 4292; (1981) 11 ATR 949; (1981) 147 CLR 297.


[F33]

Tax professional bodies agree with this interpretation. They argue that "where two possible interpretations are available the ruling should adopt the more beneficial, rather than the more restrictive... Perhaps an interpretation which uses the concept of the contractor providing the equipment normally used in undertaking his services would be more appropriate, and in line with the objectives of the provisions." (Joint Submission of Institute of Chartered Accountants in Australia, the Taxation Institute of Australia, CPA Australia, Taxpayers Australia Inc and the National Institute of Accountants of 18 May 2001).


[F34]

Ready Mixed Concrete ( South East ) Limited v . Minister of Pensions and National Insurance [1968] 2 QB 497 at 526; and Vabu Pty Limited v . FC of T 96 ATC 4898 at 4901; (1996) 33 ATR 537 at 539.


[F35]

Section 87-10 and paragraph 1.14 of the Explanatory Memorandum.


[F36]

The Joint Submission of the professional bodies supports this interpretation


[F37]

They should both be construed narrowly or they should both be construed more liberally.


[F38]

A requirement to have indemnity insurance is an indicator that the individual or personal services entity is liable for rectification, where the indemnity insurance is part of the contractual arrangements between the parties. However, the fact that a person may be subject to disciplinary action by a professional body for misconduct is not sufficient to satisfy the rectification element of the results test.


[F39]

The legislative changes announced by the Government in the Treasurer's Press Release No 51 of 9 July 2001 will allow independent contractors who satisfy the "results test" to self-assess on the basis of that test (without needing a PSBD) even where 80% or more of the income is from the same entity.


[F40]

However see the Treasurer's Press Release No 47 of 29 June 2001 in relation to agents (refer to footnote 9).


[F41]

The legislative change announced by the Government in the Treasurer's Press Release No 51 of 9 July 2001 means that there will in practical effect be 4 personal services business tests, but the "results test" is covered separately in this ruling.


[F42]

See Treasurer's Press Release No.41 of 29 June 2001.


[F43]

However, as "associates" is an asterixed term, there is a strong alternative view.


[F44]

The context of section 87-25 does not require any limitation to the exclusion of associates from the employment test.


[F45]

It has been argued that the work undertaken by Glenn's wife in this example should be regarded as principal work. The Commissioner does not accept that argument. However, in this example, Glenn would be able to satisfy the "results" test, and therefore there is no need to consider the employment test.


[F46]

It should be noted that the decision in Wells was not in relation to the distinction between principal work and other work. It relates only to the deductibility of an expense and its nexus to the derivation of assessable income.


[F47]

Where, the individual or personal services entity is able to pass one of the other tests (i.e., the unrelated client, or business premises, or "results" test) then there would be no need to consider the employment test.


[F48]

The Explanatory Memorandum provides at 1.98:

"The business premises must be used mainly by the individual or entity to conduct activities producing personal services income. This means that the individual or entity must do more than merely have leased premises in its name to pass the test. The premises should actually be used to produce the personal services income". [ Schedule 1 , item 3 , paragraph 87 – 30 ( 1 )( a )].


[F49]

The operation of the word "business" on the word "premises" in the context of section 87-30 of the ITAA 1997, could be compared with the operation of the word "business" in relation to the word "profits" in the different context discussed by the High Court in Thiel v Federal Commissioner of Taxation (1990) ATC 4717; (1990) 21 ATR 531; (1990) 171 CLR 338. In that case the High Court held the phrase "business profits" did not mean profits from carrying on a business.


[F50]

See Burt v . Commissioner of Taxation (1912) 15 CLR 469 at 475, where Griffith CJ said at page 475:

"A good definition of "business premises" may be taken from the New Zealand case which has been cited to us, where one learned Judge said it meant land or buildings or land and buildings used for the actual purposes of business."

However, the emphasis there was on the meaning of premises rather than business premises, the Court concluding that in relation to business premises there is no fixed area to begin with (for example, in the case of a laundry, the drying ground is part of the business premises). Esso Australia Limited v . FC of T 98 ATC 4953; (1998) 40 ATR 76 also considered the term "business premises" but the term "business purposes" was specifically defined in subsection 136 of the Fringe Benefits Tax Assessment Act 1986 (FBT Act) to mean "premises, or part of the premises used, in whole or in part for the purpose of business operations". In that case Merkel J found that the Commissioner in Taxation Ruling TR 96/27 correctly adopted a broad view of the meaning of "business operations" for the purpose of the definition of "business premises" in s 136(1) of the FBT Act. However, as "business premises" are a defined term for the purposes of s 136(1) of the FBT Act, the case is not directly relevant to the interpretation of "business premises" in subsection 87-30 of the ITAA 1997.


[F51]

In Esso Australia Limited v FC of T 98 ATC 4953; (1998) 40 ATR 76 one of the issues was whether the premises were those "of" an employer. Merkel J held that there was no requirement that Esso's possession in that case had to be "exclusive" for the purposes of s 136(1) and s 47(2) of the FBT Act. However, subsection 87-30(1)(b) of the 1997 Act specifically requires that the individual or entity maintains and uses business premises "of which the individual or entity has exclusive use".


[F52]

For example, the use of a site shed on a building site would not satisfy the requirement for "exclusive use".


[F53]

We do not agree with the alternative argument that it is not necessary to have exclusive possession in order to satisfy the exclusive use requirement.


[F54]

An alternative construction might be to read "exclusive use" as referring to exclusive use in practice. However, there is little contextual support for this view.


[F55]

The Government has announced that even where 80% or more of the personal services income comes from the same entities taxpayers can self assess as a personal services business where they pass the "results test" (i.e., "where they derive income from producing a result, where they supply their plant and equipment or tools of trade (if required), and where they are liable for rectification. These are traditional tests for independent contractors": Treasurer's Press Release No 51 of 9 July 2001


[F56]

Note that the "unrelated clients test" is not able to be used for this purpose, but it may be relevant where there are unusual circumstances.


[F57]

The 3 personal services business tests are the unrelated clients; employment and business premises tests.


[F58]

The Government has announced that it will amend the law so that paragraphs 87-60(5)(d) and 87-65(5)(d) can be disregarded: Treasurer's Press Release No 51 of 9 July 2001


[F59]

See Income Tax Rulings IT 2121, IT 2330 and IT 2639.


[F60]

See for example Egan v . F C of T (2000) 47 ATR 1180.


[F61]

See for example Tupicoff v . F C of T 84 ATC 4851.


[F62]

Similarly see Humberstone v . Northern Timber Mills (1949) 79 CLR 389.


[F63]

It is recognised that the form of legal entity used by couriers may vary; that there is flexibility in relation to the basis of payment (including the payment of a minimum hourly rate for idle time, or the use of incentive rates), the ability of a courier to delegate the work to be performed, and in determining the hours worked. It is also recognised that payment for performance-based contracts can be calculated by reference to hourly rates, piece rates, award rates, or on the basis of deliveries made. In concluding that bicycle couriers are employees the High Court in Hollis v . Vabu Pty Ltd said that "a different conclusion might be appropriate where the investment in capital equipment was more significant." The High Court in Hollis v . Vabu Pty Ltd did not overturn the Full Federal Court decision in Vabu Pty Ltd v . FCT regarding the independent contractor status of owner/driver couriers.


Taxation Ruling TR 2003/10 Deductions that relate to personal services income
Taxation Ruling TR 2003/10

Income tax: deductions that relate to personal services income

Preamble

The number, subject heading, What this Ruling is about (including Class of person/arrangement section), Date of effect, and Ruling parts of this document are a "public ruling" for the purposes of Part IVAAA of the Taxation Administration Act 1953 and are legally binding on the Commissioner. The remainder of the document is administratively binding on the Commissioner of Taxation. Taxation Rulings TR 92/1 and TR 97/16 together explain when a Ruling is a "public ruling" and how it is binding on the Commissioner.

Contents:

What is this Ruling about

Class of person/arrangement

Background

Date of effect

Related Rulings

Definitions

Personal services entity (entity)

Personal services income

Salary or wages promptly paid

PAYG payment period

Service acquirer(s)

Associate

Test Individual

Ruling

When Division 85 (and this ruling) does not apply

Deductions for individuals being non-employees relating to personal services income

General deduction rule

The specific rules that stop certain deductions

Deductions for rent, mortgage interest, rates or land tax

Deductions for payments to associates

Deductions for superannuation for associates

Personal services entities’ entitlement to deductions relating to an individual’s personal services income

General deduction rule for personal services entities

Specific exceptions to the general deduction rules for personal services entities

Entity maintenance deductions

Car expenses

Superannuation

Salary or wages to the individual

Explanation

Deductions for the individual non-employees relating to personal services income

Exceptions to subsection 85-10(1)

The specific rules that prevent certain deductions

Deductions for a residence

Deductions for payments to associates

Deductions for superannuation for associates

Personal services entities’ entitlement to deductions relating to an individual’s personal services income

General deduction rule for personal service entities

More detailed explanation

Transactions between test individual and personal services entity

The main disentitling provisions applicable to entities through section 86-60

Wages

Attribution does not affect entitlement to a deduction

The exceptions to paragraph 86-60(a)

Entity maintenance deductions

Examples

Example 1: General entitlement to deductions

Example 2: Payments to associates

Example 3: Superannuation contributions

Example 4: Personal services entity’s entitlement to deduction

Example 5: Personal services entity’s entitlement to deduction

Example 6: Payment of salary to a test individual

Example 7: Car expenses

Example 8: Entity maintenance deductions

Example 9: Administration fee

Example 10: Administration fee

Example 11: State payroll tax and workers compensation

Example 12: Exempt Fringe Benefits

Example 13: Entity maintenance deductions

WHAT THIS RULING IS ABOUT

1.	This Ruling explains the alienation of personal services income measure (the alienation measure) in Part 2-42 of the Income Tax Assessment Act 1997 (ITAA 1997).

2.	This Ruling focuses on the key concepts that underpin the operation of Division 85 (deductions for individuals) and Subdivision 86-B (deductions for entities) of Part 2-42 of ITAA 1997.

Class of person/arrangement

3.	This ruling applies to:

•	those individuals whose ordinary income or statutory income includes income that is mainly a reward for their personal efforts or skills; and

•	those companies, partnerships or trusts whose ordinary or statutory income includes income that is mainly a reward for the personal efforts or skills of an individual (an individual’s personal services income).

Background

4.	The New Business Tax System (Alienation of Personal Services Income) Act 2000 (Alienation of Personal Services Income Act) amended the ITAA 1997 by inserting new Part 2-42 into that Act and amended the Taxation Administration Act 1953 (TAA 1953) by inserting new Division 13 in Schedule 1 to that Act.

5.	The alienation measure contained in Part 2-42 applies from the 2000 2001 income year. However, it does not apply until the 2002 2003 income year for those individuals or personal services entities who were in the former prescribed payments system and were entitled to and had made a payee declaration to a payer where:

•	the payee declaration was in force as of 13 April 2000; and

•	the Commissioner had received the payee declaration for the payee from the payer on or before 13 April 2000.1

6.	The measure was introduced following the recommendations made in the report of the Review of Business Taxation: A Tax System Redesigned (commonly called the Ralph Report).2  The relevant recommendations that relate to this measure are recommendations 7.2, 7.3 and 7.4. Those recommendations were aimed at improving the integrity and equity in the tax system. The recommendations arose out of concerns that:

•	substantial erosion of the income tax base had occurred as a consequence of the alienation of personal services income through the use of interposed companies, partnerships and trusts; and

•	there was a perception that individuals, as contractors, and interposed entities were able to claim a greater range of deductions than those available to individuals who provided personal services as employees.3

7.	The measure is intended to:

•	limit and clarify the deductions available against personal services income at both the individual and interposed entity level; and

•	ensure that, after allowing deductions to the interposed entity, any income remaining is attributed to the individual.4

8.	The application of Part 2-42 of the ITAA 1997 is predicated on the view that, contractually, income from personal services can be the income of any entity. However, subsection 84-5(2) of the ITAA 1997 ensures that for tax purposes, only an individual can have personal services income (as defined).

9.	The application of Part 2-42 of the ITAA 1997 does not result in a change in the nature of contractual relationships between parties to an arrangement that involves the rendering of personal services. Individuals do not become employees of service acquirers as a consequence of the application of Part 2-42. Nor does the measure affect an individual’s or a personal services entity’s entitlement to an Australian Business Number, or to be registered for the purposes of A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

10.	Note also that the general anti-avoidance provisions of Part IVA of the Income Tax Assessment Act 1936 ("ITAA 1936") may still apply to cases of alienation and personal services income that fall outside the operation of the alienation measure.5

11.	The following flowchart explains how Part 2-42 applies.

Diagram showing the operation of the Alienation Measure6

12.	Note that you can apply for a Personal Services Business Determination (PSBD) from the Commissioner to confirm that you are not within the measure, or if you are not sure whether you are within the measure, or if you are subject to unusual circumstances. However, unless you are subject to unusual circumstances you cannot apply for a personal services business determination on the basis of the unrelated clients test. If you believe that the alienation measure should not apply to you, you can request a PSBD from the Commissioner (see diagram above).

13.	If:

(a)	you have personal services income; and

(b)	you or the personal services entity do not satisfy the "results test"; and

(c)	you or the personal services entity get 80% or more of the personal services income from one source,

you will be subject to the alienation measure, unless you have a PSBD.

DATE OF EFFECT

14.	This Ruling first applies to the 2000-2001 income year. The Ruling does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

RELATED RULINGS

15.	This Ruling should be read in conjunction with Taxation Ruling TR 2001/7 the meaning of personal services income, Taxation Ruling TR 2001/8 what is a personal services business and TR 2003/6 attribution of personal services income.

DEFINITIONS

Personal services entity (entity)

16.	A personal services entity is a company, partnership or trust whose ordinary or statutory income includes the personal services income of one or more individuals (subsection 86-15(2)).

Personal services income

17.	Personal services income is income which is mainly a reward for an individual’s efforts or skills (or would mainly be such a reward if it had been derived by the individual) (subsection 84-5(1)).

Salary or wages promptly paid

18.	The phrase "salary or wages promptly paid" refers to an amount paid before the end of the 14th day after the PAYG payment period during which the amount became ordinary or statutory income of the personal services entity.

PAYG payment period

19.	The PAYG payment period:

•	is each quarter for small withholders; or

•	each month for medium and large withholders.

Service acquirer(s)

20.	A service acquirer is the entity (or entities) that acquires the personal services of an individual directly from the individual or through a personal services entity. The service acquirer is the client of an individual or personal services entity and is the source of the income of the individual or the personal services entity that constitutes an individual’s personal services income.

Associate

21.	The word "associate" has the same meaning as in section 318 of the ITAA 1936.7

22.	For an individual an associate includes:

•	a relative of the individual;

•	a partner of the individual or a partnership in which the individual is a partner;

•	if a partner of the individual is an individual, the spouse or child of that partner;

•	a trustee of a trust estate under which the individual or an associate benefits; and

•	a company under the control of the individual or associate.

23.	For a company an associate includes:

•	a partner of the company or a partnership in which the company is a partner,

•	a trustee of a trust estate under which the company or associate benefits,

•	another individual or associate who controls the company; and

•	another company which is under the control of the company or the company’s associate.

24.	For a trustee an associate includes an entity or associate of the entity that benefits or is capable of benefiting under the trust.

25.	For a partnership an associate includes each partner of the partnership or associate of the partner.

26.	Section 87-35 specifically excludes the following from being associates of each other for the purposes of subsection 87-15(3) (the 80% rule) and paragraph 87-20(1)(a) (the unrelated clients test):

(i)	Australian government agencies, which are:

o	the Commonwealth, a State or a Territory; or

o	an authority of the Commonwealth, a State or a Territory.

(ii)	Commonwealth government agencies within the meaning of the Public Service Act 1999; and

(iii)	Each part of an authority of a State or Territory that has under a law of a State or Territory a status corresponding to a Commonwealth government agency within the meaning of the Public Service Act 1999.

Test Individual

27.	A test individual is the individual whose personal services income is included in a personal services entity’s ordinary or statutory income, and to whom that income will be attributed under Division 86, unless one of the exceptions in that Division applies. A personal services entity may have more than one test individual. Part 2-42 applies on an individual by individual basis.

RULING

When Division 85 (and this ruling) does not apply

28.	Division 85 (and this ruling) does not apply to an individual or a personal services entity if:

•	the individual or the personal services entity is taken to be conducting a personal services business under Division 87;

•	the individual is an employee and therefore excluded under section 85-35 from the operation of the deduction rules contained in Division 85 (and the application of the general deduction rule in subsection 85-10(1)); or

•	the individual is a member of an Australian legislature; a person who holds or performs duties of an appointment, office or position under the Constitution or an Australian law or a person who is otherwise in the service of the Commonwealth, a state or a territory; a member of the defence force; a member of the police force; or a member of a local governing body that has unanimously resolved that it be treated as an "eligible local governing body" and the resolution has not been cancelled. Such persons are excluded from the operation of the deduction rules contained in Division 85 under section 85-35.

Deductions for individuals being non-employees relating to personal services income

General deduction rule

29.	Subsection 85-10(1) denies a deduction for a loss or outgoing to the extent that:

•	the loss or outgoing satisfies the requirements of paragraph 8 1(1)(b) but not paragraph 8-1(1)(a); and

•	the loss or outgoing relates to the gaining or producing of that part of your assessable income that is your personal services income.

That is, subsection 85-10(1) applies to losses and outgoings that are only deductible under the second positive limb of section 8-1. This means that if a loss or outgoing satisfies, in whole or in part, the first limb of subsection 8-1 (paragraph 8-1(1)(a)), which is the limb applicable to employees, you can deduct the loss or outgoing to the extent that it satisfies the first limb (unless one of the specific rules explained below or subsection 8-1(2) wholly or partly prevents you from deducting that amount).

Apart from paragraph 8-1(1)(b), no other provision of the Act, as at the date of issue of this Ruling, is affected by section 85-10, other than a provision dependent on the operation of paragraph 8-1(1)(b).

There are exceptions to the operation of subsection 85-10(1) listed in subsection 85-10(2). An amount satisfying one of these exceptions is not deductible just because it satisfies the exception. The amount must be deductible under paragraph 8-1(1)(b). If it is deductible under paragraph 8-1(1)(b) and satisfies an exception, subsection 85-10(2) will ensure that subsection 85-10(1) does not deny the deduction.

The specific rules that stop certain deductions

30.	Sections 85-15 to 85-25 may deny a deduction even though an outgoing would otherwise be deductible under another provision of the Act (such as paragraph 8-1(1)(a)).

Deductions for rent, mortgage interest, rates or land tax

31.	Section 85-15 denies a deduction for an amount of rent, mortgage interest, rates or land tax for some or all of an individual’s (or an associate’s) residence to the extent that the amount relates to gaining or producing the individual’s personal services income.

32.	Section 85-15 does not apply to an amount of rent, mortgage interest, rates or land tax to the extent that it is paid in respect of the individual’s business premises where such premises do not form part of the individual’s residence. This means a deduction will be denied where the business premises are within the house or dwelling in which the individual resides. Paragraph 77 in Taxation Ruling TR 2001/8 explains what is meant by the term "business premises".

33.	 "Mortgage interest" means interest the payment of which is secured by a mortgage, whether or not over the residence of the individual. "Mortgage" has its ordinary meaning and not the meaning provided by section 6 of the ITAA 1936. Mortgage interest is for a residence if it is for the use of money borrowed to acquire the residence, or expended in relation to the residence, or for the use of money representing such money (e.g. a refinanced home loan).

34.	Interest is mortgage interest even if the mortgage is not over the residence for which interest is incurred. Conversely, even if payment of interest is secured by a mortgage over the residence, section 85-15 does not apply if the interest so secured is incurred in gaining or producing assessable income other than personal services income.

35.	Amounts of mortgage interest, rates, or land tax for a residence that are not deductible may form part of the cost base of the residence for capital gains tax (CGT) purposes. This reduces the amount of any capital gain upon disposal of the residence. However, the "main residence exemption" may apply to the residence subject to the requirements of Part 3-1 of the ITAA 1997.

36.	Section 85-15 does not prevent a deduction for amounts incurred by the individual for running expenses for using a room in the individual’s home as a home office or study, for example amounts incurred for heating and lighting. Taxation Ruling TR 93/30 explains when such amounts are deductible.

Deductions for payments to associates

37.	As a consequence of the operation of section 85-20, a payment or an amount incurred arising from an obligation to an associate will not be deductible to the individual to the extent the payment or amount relates to gaining or producing the individual’s personal services income, unless the payment made or the amount incurred is in relation to the performance of principal work. The meaning of "principal work" is explained in paragraphs 181 to 184 in Taxation Ruling TR 2001/8.

38.	Subsection 85-20(3) prevents direct double taxation by providing that where a payment or amount is denied as a deduction under section 85-20, the payment or amount is neither assessable income nor exempt income of the associate.

39.	The phrase "any payment" in paragraph 85-20(1)(a) includes, amongst other items, remuneration such as a salary or commission, an allowance, a reimbursement of an expense, an amount for rent and an amount for interest on a loan.

40.	Under paragraph 85-20(1)(b) an amount arises from an obligation if it results from a binding promise or the like that an individual made to an associate. However, it is not sufficient that something merely relates to or is connected to this obligation. The paragraph is intended to apply to, among other things, salary packaged amounts such as child care, car parking and school fees.

Deductions for superannuation for associates

41.	The effect of section 85-25 is that any contribution to a superannuation fund or Retirement Savings Account (RSA) made by an individual on behalf of an associate will not be an allowable deduction to the extent that:

(a)	the associate is engaged by the individual to perform work which relates to gaining or producing the individual’s personal services income and the contribution is made in respect of that work; and

(b)	the work performed by the associate is not principal work.

42.	The deduction is only denied to the extent the work for which the contribution is made relates to gaining or producing the individual’s personal services income. Thus, if the contribution is made in respect of work done by the associate in relation to the earning of other income, entitlement to a deduction is not affected by section 85-25.

43.	Where the work performed by the associate is wholly or partly principal work and an unallocated contribution is made in respect of the whole of the associate’s work for the individual, the deduction available is the lesser of:

(a)	that part of the amount contributed by the individual to the superannuation fund or RSA that represents the same proportion of the amount as the associate’s principal work bears to the associate’s total work for the individual8 ; and

(b)	the deduction limit set by section 82AAC of the ITAA 1936; and

(c)	the deduction limit set by subsection 85-25(3).

44.	The limit set by subsection 85-25(3) is the amount the individual would have to contribute in order to avoid an individual superannuation shortfall in respect of the employee. This amount is calculated by reference to all the salary or wages9 paid to the employee (including salary or wages relating to non-personal services income work), as adjusted in accordance with subsection 85-25(4), rather than so much of the salary or wages as relates to the performance of principal work gaining or producing personal services income.

45.	Whether a contribution is in respect of principal work, non-principal work, or other work, is a matter open for the individual and associate to determine by the terms of any arrangement between them. If a single contribution is in respect of two or more kinds of work, section 85-25 requires an apportionment of the contribution according to the respective market values of the different types of work done.

Personal services entities’ entitlement to deductions relating to an individual’s personal services income

46.	The deductibility of losses and outgoings incurred by a personal services entity (other than one conducting a personal services business) are affected by Division 86. They are affected to the extent they are incurred in gaining or producing the entity’s assessable income that is an individual’s personal service income.

General deduction rule for personal services entities

47.	Section 86-60 contains the general deduction rule for personal services entities. Under that provision, for an outgoing to be deductible to the personal services entity, the outgoing must first be an allowable deduction under another provision in the Act, such as section 8-1 because the outgoing was incurred in the course of gaining or producing the personal services entity’s income.

48.	In addition, a deduction is only available to the entity for an amount to the extent that it relates to gaining or producing an individual’s personal services income if the individual would have been entitled to deduct that amount if the same loss or outgoing had been incurred by the individual in the same circumstances as the personal services entity. "[T]he individual" referred to in paragraph 86-60(a) is the individual whose activities earn the personal services income.

49.	Section 86-60 hypothesises that the circumstances giving rise to the entitlement to a deduction applied instead to the individual. The acts of the entity, and all the surrounding facts, that give rise to the entitlement to a deduction are treated as if they are the acts of the individual. Other circumstances are ignored. Only one circumstance is changed: the taxpayer is deemed to be the individual, not an entity. This means that generally the individual would be viewed as incurring an expense in order to earn the relevant assessable income (ie. the individual’s personal services income) in the same way as the entity had.

50.	Section 86-60 has the effect of applying provisions to the personal services entity that would otherwise only disentitle individuals to a deduction. Hence in determining whether a deduction would have been available to the individual regard must be had to the operation of Division 85 (discussed above). In principle, section 86 60 also prevents an entity from claiming deductions that are available only to companies, trusts or partnerships; such deductions, however, rarely relate to personal services income. Other than that it has little effect.

Specific exceptions to the general deduction rules for personal services entities

Entity maintenance deductions

51.	Section 86-65 ensures that entity maintenance deductions that might otherwise be thought to be denied under section 86-60, on the basis that an individual in the same circumstance could not have claimed such deductions, remain deductible to the personal services entity. Entity maintenance deductions are defined in section 86-65 and include expenditure such as bank fees, tax-related expenses, outgoings incurred in relation to preparation or lodgement of a document prepared to comply with the Corporations Act 2001, and any fee or charge payable by the entity to an Australian government agency for any licence or the like that is granted under an Australian law.

52.	Section 86-65 is generally declaratory in effect in terms of allowing deductions. However, subsection 86-65(3) is intended to prevent an entity from deducting any payment it makes to an associate of the personal services entity (not the test individual) for the preparation or lodgement of any document the entity is required to lodge under the Corporations Act 2001.

53.	However, apart from the limitation in subsection 86-65(3) in respect of an expense covered by paragraph 86-65(2)(c), a personal services entity will be entitled to a deduction for payments made to an associate of the test individual for work that comes within the meaning of "entity maintenance deduction", for example, the preparation of tax returns.

Car expenses

54.	A personal services entity is entitled to a deduction for car expenses in respect of one, or more, cars provided to the test individual where there is no personal use of those cars. Even though section 86-60 by itself achieves this effect, subsection 86-70(1) puts the issue beyond doubt.

55.	Subsection 86-70(2) means that a personal services entity can potentially claim deductions for car expenses for one car for which there is private use. This is the case regardless of whether the car is provided to the test individual, or his or her associate. In the case of an associate the deduction is available notwithstanding that the deduction would otherwise be denied by subsection 85-20(1). Car expenses for a second car for which there is private use are not deductible, notwithstanding that all or part of the expense relates to gaining or producing personal services income.

56.	If the entity provides more than one car that has private use, the entity must nominate the car for which it wants to claim the deductions (subsection 86-70(3)). Once the entity makes its choice of car for which it wants to claim deductions, that choice remains in force for as long as the entity holds that vehicle. This ensures that the entity cannot vary the cars for which it claims deductions and thereby obtain a greater amount of deductions.

Superannuation

57.	Subsection 86-75(1) provides that section 86-60 does not prevent a personal services entity from deducting a contribution to a superannuation fund or RSA for the test individual. The subsection is merely declaratory except in those cases where the personal services entity is relying on subparagraphs (a)(ii) and (a)(iii) and paragraph (b) of the definition of eligible employee in subsection 82AAA(1) of the ITAA 1936.

58.	The interpretation of subsection 86-75(2) is not without difficulties. However, having regard to the overall context of the provisions and their intended purpose, the Commissioner considers that the provision has an effect where an associate of the test individual performs less than 20% by market value of the entity’s principal work, including where the associate’s work that is entirely non-principal work. The deduction allowed to the personal services entity is capped (or in the case of entirely non-principal work it is not allowed at all) at the amount necessary to avoid an individual superannuation shortfall. The cap is calculated by assuming for the purposes of section 19 of the Superannuation Guarantee (Administration) Act 1992 that the associate’s salary or wages is the amount which remains deductible after applying section 85-20 (section 85-20 is indirectly applied as a result of section 86-60.) The cap is therefore calculated by reference to the salary or wages attributable to the principal work performed by the associate plus any salary or wages paid to the associate for work performed in gaining or producing other income (ie., non-personal services income) of the entity.

59.	In a practical sense, this means the deduction is limited to the lesser of the following:

•	the amount contributed by the entity to the superannuation fund or RSA;

•	the deduction limit set by section 82AAC of the ITAA 1936; and

•	the deduction limit set by subsection 86-75(2) as discussed in the paragraph above.

60.	The provision does not cap a deduction for superannuation contributions made in respect of an associate of the test individual where the superannuation contribution is in respect of work performed by the associate that is 20% or more (by market value) of the principal work of the entity. However, in such a case, the personal services entity would generally satisfy the employment test and not be subject to Division 86.

Salary or wages to the individual

61.	Salary or wages promptly paid to the individual whose activities generate the personal services income are deductible. Consequently, section 86-80 was inserted for the avoidance of doubt in cases where salary or wages are promptly paid.

EXPLANATION

Deductions for individual non-employees relating to personal services income

62.	The provisions of Part 2-42 are broadly directed at putting taxpayers who earn income in ways analogous to those of employees in the same tax position as employees. In effect, employee-like cases are treated as actual cases of employment. In some instances, however, employees and employee-like workers are not treated differently by the existing law. Nevertheless provisions have been inserted into the law that cover such cases, merely to remove any doubt. Section 85-10 is one such provision.

63.	Section 85-10 ensures that in applying the general deduction provision, section 8-1, to individuals, the same criterion of deductibility is applied to the employed and the self-employed. There was a widespread, but largely erroneous, view that section 8-1 allows losses and outgoings incurred in gaining assessable income for the self-employed as deductions where, in exactly the same circumstances, an employee would not be allowed a deduction. However, generally it is only the different factual circumstances of the employed and the self employed which result in different entitlements to deductions.

64.	Section 8-1 is the main provision that allows deductions for amounts relating to gaining or producing "that part of your ordinary income or statutory income that is your personal services income". The purpose of section 85-10 is to make it clear there is no legal difference in the entitlement of employees and individuals subject to the alienation measure to deductions for amounts incurred in gaining or producing personal services income. It does this by requiring an individual who derives personal services income otherwise than as an employee to treat the income as notionally from employment for the purposes of section 8 1.

65.	Section 8-1 contains a paragraph applicable only to taxpayers who carry on business. The term business is defined to exclude occupation as an employee. Subsection 85-10(1) requires one to inquire whether an amount would be deductible if one derived income as an employee. In effect, subsection 85-10(1) denies the individual deductions that would only have been allowable under paragraph 8 1(1)(b). However, in a number of court decisions, it has been stated that the first limb of the general deduction provision is almost as wide as the second limb. In FC of T v. Snowden and Willson Pty. Ltd. (1958) 99 CLR 434 it was pointed out that the scope of the first limb is wide enough to cover most of the ground covered by the second limb:

No doubt the expression "carrying on a business for the purpose of gaining or producing" lays down a test that is different from that implied by the words "in gaining or producing". But these latter words have a very wide operation and will cover almost all the ground occupied by the alternative.

66.	Fullagar J supported such a view in John Fairfax and Sons Ltd v. FCT (1959) 101 CLR 30 when he said:

The two categories of section 51(1) are clearly not mutually exclusive and it has been said that "in actual working" the addition of the second category can add but little to the operation of the leading words "losses or outgoings to the extent to which they are incurred in gaining or producing assessable income".

See Example 1 below at paragraphs 111 and 112 for an illustration of the operation of section 85-10.

Exceptions to subsection 85-10(1)

67.	Subsection 85-10(2) provides exceptions to subsection 85 10(1). Because subsection (1) has little practical operation, neither does subsection (2). It was considered prudent to provide some exceptions to subsection (1), lest the provision was misinterpreted as having an effect beyond merely confirming that section 8-1 provides the same criterion for deductions by employees and non-employees alike.

68.	An amount satisfying the description in one of the paragraphs of section 85-10(2) is not necessarily deductible. Whether an amount is deductible depends on whether it satisfies section 8-1 or another deduction provision of the ITAA 1997 or ITAA 1936, not subsection 85-10(2). For example, a cost of gaining work may be on capital account and not deductible under section 8-1 where it is the cost of winning a single contract that constitutes substantially the whole of the profit yielding subject of an enterprise.

The specific rules that prevent certain deductions

69.	The other sections of Division 85 affect the entitlement of individuals and, through the operation of section 86-60, other taxpayers, to deductions which would otherwise be allowable.

Deductions for a residence

70.	The purpose of section 85-15 is to prevent an individual from obtaining a deduction for certain costs in respect of their residence, or the residence of an associate, to the extent that the entitlement to the deduction arises from gaining or producing the personal services income of the individual.  The provision applies directly only to individuals, but has an indirect effect for companies, trusts and partnerships as a result of section 86-60: see paragraph 97.

71.	 "Residence" means one’s dwelling place, usual abode, or home. In general, losses and outgoings in respect of a taxpayer’s residence would not be incurred in gaining or producing the assessable income of the taxpayer: see Handley; Forsyth v. Federal Commissioner of Taxation (1981) 148 C.L.R. 182; 55 ALJR 345; 81 ATC 4165. However, there are exceptions: see Swinford v. Federal Commissioner of Taxation 84 ATC 4803; 15 ATR 1154 (the effect of section 85-15 reverses this decision to the extent it would allow a deduction for the expenses covered by the section). Losses and outgoings in respect of the residence of an associate might be deductible under section 8-1 either because they represent remuneration for the services of that associate rendered in the course of gaining or producing assessable income, being the personal services income of the individual (in which case there will usually be a taxable fringe benefit), or for example because the residence is owned or leased by the taxpayer and let or sublet to the associate for rent. The former but not the latter case is affected by section 85-15. In the latter case the losses or outgoings will be incurred in gaining or producing assessable income from rent, which is not personal services income.

72.	The only losses and outgoings affected by section 85-15 are those in respect of rent, mortgage interest, rates or land tax. These terms are not defined in the ITAA 1997 and therefore have their ordinary meaning. The definitions of the ITAA 1936 do not apply: see subsection 6(1AA). In particular, the definition of mortgage in section 6 of the ITAA 1936 does not apply.

73.	"Rent" means the rent reserved under a lease, and does not include a premium for the grant of a lease. Mortgage interest means interest secured by a mortgage properly so called, which includes a registered mortgage under Torrens Title, a common law mortgage, and an equitable mortgage (such as a second mortgage or a mortgage by the deposit of title deeds). It does not include a rent charge, an equitable charge, an equitable lien, or statutory encumbrances, charges, liens, or hypothecations.

74.	Interest on an unsecured loan is also unaffected by section 85 15. The section applies if the mortgage interest "for" the residence is wholly or partly incurred in gaining or producing assessable income, being personal services income: for the deductibility of interest see TR 2000/17 – Deductions for interest following the Steele and Brown decisions. An outgoing for interest is relevantly connected with the gaining or producing of the assessable income according to the purpose of the borrowing or other financial transaction and the use of the funds borrowed or raised. The nature of the assets mortgaged to secure payment of the interest is not relevant.

75.	"Rates" means the amount of an assessment on property for local purposes, and here refers to such a tax in respect of the residence or the land on which the residence is erected. "Land tax" means a tax on the land on which the residence is erected.

76.	Expenses for the lighting and heating of a residence, depreciation of plant in the residence, and like expenses are not affected by section 85-15. Such expenses, when incurred for the use of a home study in connection with the gaining or producing of assessable income, including personal services income, will generally be deductible.

Deductions for payments to associates

77.	Section 85-20 deals with payments made to associates in the course of gaining or producing assessable income, being personal services income, where the "payment" is for non-principal work. Typically, such a payment will be by way of salary or wages for services rendered by the associate. However, the term "payment" would also include interest on a loan from an associate where the loan moneys were invested in a business from which personal services income is derived, or for the rent of business premises leased from an associate. (The indirect effect of section 85-20 on companies, trusts and partnerships because of section 86-60, is discussed below.) Most employees are not in a position to claim deductions under section 8-1 for payments to associates. The provision has the effect of placing both the self employed and a personal services entity, who are otherwise entitled to a deduction for a payment to an associate, in the same position as the typical employee. The section applies even if an amount is reasonable for the purposes of section 26 35.

78.	Paragraph 85-20(1)(a) provides that an individual cannot deduct any payment made to an associate to the extent the payment relates to gaining or producing the individual’s personal services income.

79.	As the term "payment" is not defined in the ITAA 1997, it is to be given its ordinary meaning. The definition in the Macquarie Dictionary is broad and states it is "that which is paid; compensation; recompense." In addition the inclusion of the word "any" before the word "payment" indicates that the term should be read broadly.

80.	Paragraph 85-20(1)(b) operates to deny a deduction when the deduction under section 8-1 is not for a payment as such, but for a liability to make an outgoing (or loss) which has been incurred.  The provision also operates to deny a deduction for an amount that the individual incurs in respect of a party other than an associate which arises from an obligation to the associate to the extent that the amount relates to gaining or producing that individual’s personal services income.

81.	For paragraph 85-20(1)(b) to apply an amount must arise from an obligation an individual has to his or her associate. The Macquarie Dictionary defines an "obligation" as a "binding promise or the like". The phrase "arise from" is defined in the Macquarie Dictionary, to mean, "to result or proceed [from]". In addition, it is not sufficient that something merely relates to or is connected to an obligation. In Hi Fert Ltd & Anor v. Kiukiang Maritime Carriers Inc & Anor (1998) 90 FCR 1 when the expression "or relate to this agreement" was compared to the expression "arising from this charter [contract]", Beaumont J stated that the latter phrase (FCR at 19): "does not include that wider expression but is limited to the expression "arising from"". For example, if the individual has borrowed money from an associate, the interest incurred by the individual may be said to arise from the obligation to repay principal and the promise to pay interest to the associate. Similarly, rent arises from the covenant to pay rent. The Commissioner considers that the provision extends to deductions in respect of the obligation itself, that is to say, where a person incurs a liability to make an outgoing of a particular amount, a deduction for the amount incurred arises from an obligation, namely, the liability.

82.	Subsection 85-20(2) limits the application of the rule so that an individual can still deduct an amount to the extent that it relates to engaging an associate to perform the individual's principal work.

83.	Subsection 85-20(3) provides that to the extent a payment or amount is denied as a deduction under section 85-20, the payment or amount is not assessable income or exempt income of the associate. This provision was inserted by Taxation Laws Amendment Act (No 6) 2001 (enacted as No 169 of 2001) which received Royal Assent on 1 October 2001.

Deductions for superannuation for associates

84.	Section 85-25 has the overall effect of limiting the deductions an individual is entitled to in respect of superannuation contributions made in respect of an associate of that individual.

85.	A deduction for superannuation contributions in respect of associates arises under section 82AAC (and not section 8-1: see section 82AAR). An entitlement to a deduction arises when one makes a contribution in respect of an eligible employee, as defined in section 82AAA: it does not depend on a nexus to assessable income. Also, as explained below, the deduction is not proportionate to work done by, or salary or wages paid to, the employee.

86.	Having regard to the general scheme of Division 85, including section 85-1, the Commissioner considers that section 85-25 operates only when the superannuation contribution is in respect of work that relates to personal services income (and only to that extent).

87.	Thus to apply the section, one first works out in respect of what work a contribution has been made to a superannuation fund or RSA. It is up to the taxpayer and the associate to decide for what work a contribution is to be made, but if the contribution is for all the work an associate does, the section requires an apportionment of the contribution based on the work done by the associate. A memorandum of the agreement between the taxpayer and the associate recording the basis upon which the superannuation contributions are made would be sufficient evidence of the work in respect of which the contributions have been made.

88.	If the associate is engaged in work that produces assessable income other than personal services income and the contribution is wholly in respect of that work then the whole contribution is deductible up to the deduction limit provided by subsection 82AAC(2A). In such cases section 85-25 is irrelevant.

89.	If the associate is engaged in producing assessable income that is personal services income, and the work performed is solely non-principal work, and the contribution is wholly in respect of that work, then no deduction is allowable. Conversely, if the associate is engaged wholly to perform principal work and thereby the contribution is solely for that work, a deduction is allowable up to the cap provided by subsection 85-25(3).

90.	If the contribution is in respect of a combination of work types, an apportionment is required to determine the allowable deduction. The apportionment is to be done on the basis of the market value of each type of work done. See paragraphs 58 and 59 in TR 2001/8 for an explanation of what is meant by the market value of principal work. See also example 3 which illustrates apportionment of a contribution in respect of different types of work.

91.	The deduction is allowable up to the cap provided by subsection 85-25(3). The cap or limit is that amount necessary to avoid an individual superannuation guarantee shortfall in respect of the associate. In calculating this amount, one notionally treats the salary or wages used in the calculation required by the Superannuation Guarantee (Administration) Act 1992 (see subsection 19(2)) as the amount one is not prevented from deducting by sections 85-10 and 85-20. In other words, if one is prevented from deducting some or all of an amount by those sections, the salary or wages are reduced accordingly in making the shortfall calculation, so the cap is lower (subsection 85 25(4)). There is no requirement to reduce the salary or wages in calculating the shortfall amount where the associate performs only principal work relating to personal services income or work relating to earning income other than personal services income.

92.	If wages are paid to an associate for non principal work and they are deductible but for section 85-20, the wages would be disregarded, and the contribution necessary to avoid a shortfall reduced accordingly. Thus the extent of the allowable deduction is reduced. It is otherwise irrelevant whether salary or wages are deductible. If salary or wages are not deductible for some reason other than section 85-10 or section 85-20 (e.g. because of the operation of section 26 35) they still count for the purposes of calculating the shortfall.

93.	Note that subsection 85-25(4) does not relieve a taxpayer of his or her actual liability under the Superannuation Guarantee (Administration) Act 1992 (SGAA). That Act requires contributions to be made to the required extent even if the salary or wages, or contribution, are not deductible. Also, this provision does not cause any taxable contribution to a superannuation fund to cease to be taxable.

94.	If the deduction limit set by subsection 85-25(3) is less than the deduction limit set by section 82AAC, a further deduction in respect of contributions made for non-personal services income work is only available to the extent the former is less than the latter. For example, if the deduction limit under subsection 85-25(3) is $5,000 and the deduction limit under section 82AAC is $11,388, a deduction in respect of contributions for non-personal services income work is only available to the extent of $6,388. Therefore, if the actual contribution for non-personal services income work were, say, $8,000, only a further $6,388 would be allowable as a deduction.

Personal services entities’ entitlement to deductions relating to an individual’s personal services income

95.	Division 86 of the ITAA 1997 contains rules which affect the entitlement of a personal services entity (that is, a company, trust or partnership deriving personal services income) to deductions. The primary object of the Division is to include the net assessable income of a personal services entity that is mainly a reward for the personal efforts or skill of the test individual (i.e., the personal services income of the test individual) in the individual’s own assessable income, and to exclude it from the assessable income of the entity (see subsection 86-15(1) and section 86-30). Consequently, the net income is taxed at the individual’s marginal rate of tax. This is part of a wider object of ensuring what is in effect disguised or quasi-employment income is taxed no more favourably than actual employment income. The Division does not affect a personal services entity’s assessable income that is not personal services income, nor does it affect its entitlement to deductions from assessable income that is not personal services income.

General deduction rule for personal services entities

96.	The central provision of Subdivision 86-B is section 86-60. Section 86-60 indirectly causes the personal services entity to be subject to provisions which would otherwise disentitle only the test individual to a deduction, had the test individual directly derived the personal services income (e.g. section 85-20).

97.	In essence, section 86-60 notionally puts the test individual in the shoes of the personal services entity and asks whether that individual would be entitled to a deduction. Since, in the absence of section 86-60, the personal services entity would be entitled to a deduction, the test individual is prima facie also entitled to a deduction. However, there are provisions applicable only to individuals which might disentitle the individual to a deduction to which the individual would otherwise be entitled. The most important of these are sections 85-15, 85-20, and 85-25. If a provision disentitling an individual to the whole or part of a deduction is applicable, the test individual would not get the whole deduction, or only part of the whole or part of the deduction. Where this is so, section 86-60 denies the personal services entity the deduction. In other words, it puts the entity in the same tax position as the individual, thereby furthering the objective of putting disguised or quasi employment income in the same tax position as actual employment income.

More detailed explanation

98.	Section 86-60 applies only to the extent that the relevant amount relates to gaining or producing the test individual’s personal services income. Under section 86-60, for an outgoing to be deductible to the personal services entity, the outgoing must first be an allowable deduction under another provision in the Act, e.g. section 8 1 because the loss or outgoing was incurred in the course of gaining or producing the personal services entity’s assessable income. Thus, section 86-60 applies to losses or outgoings relating to the gaining or producing of assessable income of the entity that is personal services income of the test individual.

99.	Secondly, a deduction is only available to the entity if the individual would have been entitled to deduct that amount if the same outgoing had been incurred by the individual in the same circumstances as the personal services entity. "[T]he individual" referred to in paragraph 86-60(a) is the individual whose activities earn the personal services income.

100.	Section 86-60 hypothesises that the circumstances giving rise to the entitlement to a deduction by the personal services entity apply instead to the individual. (It is important to note that this does not mean the individual’s circumstances are applied to the entity.) It is only the circumstances giving rise to the entitlement of the entity to a deduction that are to be treated as applying instead to the individual. The acts of the entity that give rise to the entitlement to a deduction are treated as if they are the acts of the individual. Thus, if the personal services entity is carrying on a business, and that is a circumstance from which the entitlement to a deduction arises (as it usually is), the individual is treated as notionally carrying on that business. If incurring an outgoing is relevant to entitlement to a deduction, the individual is taken to have incurred an outgoing. If the character of the outgoing is relevant, as again it usually is, and the outgoing is not capital, private or domestic in character in the circumstances of the personal services entity, neither is it taken to be capital, private or domestic in character for the individual. Section 86 60 does not permit any change in the circumstances of entitlement to a deduction, with the sole exception of the substitution of an individual taxpayer for the entity.

101.	Consequently, section 86-60 will most commonly only prevent a deduction where it causes a disentitling provision applicable only to individuals to be applied to the relevant loss or outgoing. However, the section also potentially applies where the loss or outgoing is made deductible by a provision only applicable to a company, trust or partnership. (There are such provisions, but they are unlikely to apply in respect of personal services income, and therefore are not discussed further.)

Transactions between test individual and personal services entity

102.	Section 86-60 does not have the effect of denying a deduction to the personal services entity in respect of a transaction between the entity and the test individual merely because it is with the test individual. Generally, where a company, for example, pays or incurs a liability to pay an amount to an individual and claims a deduction for it, the identity of the individual is not a circumstance relevant to the entitlement to the deduction. Thus if a company is entitled to a deduction for a payment for services rendered, it is nearly always irrelevant who rendered them.  This means if a company is entitled to a deduction for wages paid to the test individual one is not required to suppose that the test individual is paying himself or herself a wage. Rather, one is required to assume that the test individual is paying a wage to an employee of his or hers who renders the service that he or she in fact rendered. Besides, denying a deduction to the personal services entity in such a case would have no practical effect, since it merely results in the test individual deriving more personal services income and less wages with the same taxable income resulting.

The main disentitling provisions applicable to entities through section 86-60

103.	Section 85-15 will apply to the personal services entity in a case where it would otherwise be entitled to a deduction for rent, mortgage interest, rates or land tax for the residence of the test individual and his or her associates on grounds related to the gaining or producing the personal services income (see paragraphs 70 to 76). Usually this would be on the basis that it was remuneration for the services rendered by the test individual or the associate (and therefore would usually be a taxable fringe benefit).10

104.	Section 85-20 will apply to disallow a deduction for a payment, or a liability incurred to make a payment, to an associate of the test individual for non-principal work.11  In this case subsection 85-20(3) applies to exclude income resulting from that payment from the assessable income of the associate. The effect therefore is to transfer the income from the associate to the test individual (unless the remaining deductions which may reduce the personal services income are equal to or exceed the personal services income – in such a case, there is no personal services income attributed to the test individual). Section 26 35 operates in respect of personal services entities to disallow so much of a payment by the personal services entity to a relative of the test individual as the Commissioner does not consider reasonable. Having regard to section 85-20, which simply denies a deduction for non-principal work, section 26-35 operates to disallow excessive payments for principal work.

Wages

105.	To the extent salary or wages are promptly paid to the test individual by a personal services entity in respect of personal services income the attribution amount under Division 86 is reduced12. Under the provisions of Division 86, there are technically a number of different ways salary or wages can be treated. However, with the exception of section 86 40, none of these ways affects the taxable income of the test individual or the personal services entity.

106.	Taxable income is also not affected if the salary or wages are not promptly paid, as the amount of salary or wages will be attributed to the test individual under subsection 86-15(1). Any later payment of the attributed amount that is salary or wages is excluded from the test individual’s assessable income because of subsection 86-35(1). The attributed amount is not assessable income of the personal services entity by virtue of section 86-30 and under paragraph 86-35(1)(d) a deduction is denied for the payment of salary or wages which have already been attributed to the test individual. Subsection 86-15(4) provides that if salary or wages are promptly paid to the test individual in certain circumstances, Division 86 does not apply. With one exception this does not change the outcome, for the test individual and the personal services entity will have the same taxable income.

107.	The one exception arises where section 86-40 deems salary or wages paid to a test individual in a particular income year to have been received by the individual in the preceding income year. Subsection 86-15(4) then operates to prevent the salary or wages from also being attributed to the taxpayer, under subsection 86-15(1), for that income tax year.  This is on the proviso that the salary or wages represents income derived by the personal service entity during the PAYG period ending 30 June of the first income tax year (subsection 86 15(4)(b)). In these limited circumstances the personal services entity may not be entitled to a deduction in the year in which the salary or wages are treated as received by the test individual (rather the deduction may be obtained in the following year). This is because subsection 86 40(2) expressly states that the provision does not alter the time at which the personal services entity is treated as having paid the salary or wages. An employer incurs salary or wages (for the purposes of the deduction provision in section 8-1) when there is a presently existing legal obligation to pay the amounts. The existence of such an obligation is a question of the proper interpretation of the relevant employment contract, having regard to the particular factual circumstance. As a general rule, the obligation would not come into existence until the end of the work period in respect of which the salary or wages are paid. If the relevant period of work finished after the end of the first year of income, a personal services entity would generally be entitled to a deduction for the salary or wages in the year in which the amount is paid. Conversely, if the work period ended on 30 June and the salary or wages are paid on 6 July, the outgoing will generally be incurred in the year ended 30 June.

108.	Section 86-80 is effectively consequential on subsection 86 15(4) and like that section does not have a practical significance, since the same outcome would ensue with respect to the taxable income of the personal services entity and the test individual if it did not apply.

Attribution does not affect entitlement to a deduction

109.	Section 86-85 makes it clear that if the personal services entity has income excluded from its assessable income as a result of section 86 30, the deductions to which the entity would be entitled under section 8-1 or section 42-15, after applying sections 86-60 to 86-75, are unaffected.

The exceptions to paragraph 86-60(a)

Entity maintenance deductions

110.	Section 86-65 allows a personal services entity to deduct amounts that are entity maintenance deductions. The following table sets out the expenses that are defined in subsection 86 65(2) to be entity maintenance deductions:

Entity Maintenance Deduction	Examples
Fees or charges payable by the entity for opening, operating or closing an account with an authorised deposit taking institution (e.g. a bank)	Financial Institutions Duty  Debits Tax  General Account Keeping Fees
Tax-related expenses deductible under section 25-5	Completion of Returns Compliance with an audit by the ATO
losses or outgoings associated with the lodgement of a document required under the Corporations Act 2001	Annual Returns Financial Returns
Statutory Fees	Licence Renewals Registration Fees
EXAMPLES

Example 1: General entitlement to deductions

111.	Melissa operates a computer consultancy and all of her income is personal services income from one firm. Melissa has a registered business name being, "Melissa’s Computing Services". Melissa must pay an annual fee to maintain this business name. Subsection 85 10(1) does not prevent a deduction for such an expense, although the expense is not usually incurred by an employee. While subsection 85 10(1) prevents the application of paragraph 8-1(1)(b), the expense is deductible through the application of paragraph 8-1(1)(a), as it is incurred in the gaining or producing of assessable income.

112.	Melissa also engages an accountant who is not an associate of hers to complete the consultancy’s profits and loss account for the year. The fee is deductible under paragraph 8-1(1)(a) and subsection 85-10(1) does not prevent the deduction for the fee for such work.

Example 2: Payments to associates

113.	Sam is an accountant who is providing accounting services to only one client for the relevant income year. He has engaged his sister Sally to perform the administrative work associated with providing those services and also some work in relation to the preparation of his client's financial statements. The work for the client involves the coding of income and expenses for the purposes of producing the general ledger. Sam is not conducting a personal services business. The market value of the administrative work is $20,000 and the market value of the general ledger work is $30,000; these amounts accord with what Sam actually pays Sally. As Sally is Sam’s associate, section 85-20 prevents Sam from claiming a deduction for the $20,000 paid to Sally for the administrative work and section 85 20(3) ensures Sally pays no tax on that same amount ($30,000 is deductible because it relates to principal work).

Example 3: Superannuation contributions

114.	Jim derives both personal services income and other income. Jim is not conducting a personal services business within the meaning of Division 87. In the 2001 income year, Jim engages Jan (an associate) to perform work which generates both personal services income of Jim and non-personal services income (other income). Jim contributes $5,000 to a superannuation fund in respect of Jan.

115.	The market value of the salary attributable to the personal services income is $40,000 and the market value attributable to the other income is $20,000. Of the $40,000, $30,000 represents the market value of principal work, and $10,000 the market value of non principal work.

116.	The cap under subsection 85-25(3) is determined as follows:

Market value salary for Jan (PSI)	$40,000
Market value salary for Jan (other income)	$20,000
Less: reduction under subsection 85-25(4)	($10,000)
Notional Super Guarantee wages	$50,000
Notional Super Guarantee payable @ 9%	$4,500
Subsection 85-25(1), when read in conjunction with subsection 85 25(2), denies Jim a deduction for the superannuation contribution to the extent that Jan’s work for him relates to non-principal personal services work, namely $10,000/$60,000 or 1/6. Therefore Jim is denied a deduction of 1/6 of $5,000, leaving the total amount available for a deduction of $4,166.67.

117.	Jim’s actual liability under the SGAA to avoid a shortfall is $60,000 @ 9% which equals $5,400.

Example 4: Personal services entity’s entitlement to deduction

118.	Jack operates through a personal services entity Practical Solutions Pty Ltd which is not conducting a personal services business within the meaning of Division 87. Practical Solutions Pty Ltd buys stationery and other consumables and gives it to Jack to do work that generates the assessable income of Practical Solutions Pty Ltd which is the personal services income of Jack.

119.	Section 86-60 places Jack in the shoes of Practical Solutions Pty Ltd and asks whether Jack would be entitled to a deduction had Jack purchased pens and stationary and given it to an employee for an identical purpose to that of Practical Solutions Pty Ltd. As Jack would be entitled to a deduction under section 8 1 for such an outgoing, Practical Solutions Pty Ltd will not be denied a deduction for its outgoing under section 86-60.

Example 5: Personal services entity’s entitlement to deduction

120.	Pip Pty Ltd is a personal services entity whose ordinary or statutory income represents the personal services income of Paula. The personal services entity has engaged Paula’s daughter Pam to perform non-principal work. Pip Pty Ltd is not conducting a personal services business within the meaning of Division 87 and is therefore subject to the operation of section 86-60. Section 86-60 places Paula in the shoes of Pip Pty Ltd and disallows a deduction if Paula could not claim a deduction in identical circumstances to Pip Pty Ltd. Subsection 85-20(1) would apply in such circumstances and would deny Paula a deduction. Therefore section 86-60 through the operation of subsection 85-20(1) denies Pip Pty Ltd a deduction for the wage paid to Pam. Pam is not assessable on her wage from Pip Pty Ltd due to the operation of subsection 85-20(3). The incidence of taxation is in effect merely transferred from Pam to Paula.

Example 6: Payment of salary to a test individual

121.	Mick is an IT contractor who operates through a company Mick Pty Ltd. Mick Pty Ltd commenced operations on 1 April 2002. The alienation measure applies to Mick. The company paid a salary to Mick of $20,000 on 15 July 2002 from its ordinary or statutory income which represents the personal services income of Mick for the year ended 30 June 2002. As the salary is paid after the 14th day following the period in which the ordinary or statutory income is derived, the $20,000 is attributable to Mick as personal services income under section 86-15(1).

122.	In terms of Mick Pty Ltd, the attributed amount is excluded from its assessable income under section 86-30. Mick Pty Ltd cannot deduct that amount because of paragraph 86 35(1)(d) nor is Mick assessable on the salary when paid, because of paragraph 86-35(1)(c).

Example 7: Car expenses

123.	Craig, an engineer, and Karen, an architect, work though their entity CJ Pty Ltd. Craig and Karen do not work on the same contracts and as such each has personal services income. CJ Pty Ltd is not conducting a personal services business in relation to either Craig or Karen, so is subject to the alienation measure in respect of both individuals. CJ Pty Ltd provides one car to Craig and one car to Karen for private purposes. Although CJ Pty Ltd has two cars, subsection 86-70(2) allows as a deduction one car of which there is private use, for each individual whose personal services income is included in the ordinary or statutory income of the entity. The amount of tax payable under the Fringe Benefits Tax Assessment Act 1986 for the car fringe benefits provided to Craig and Karen will be allowable deductions to CJ Pty Ltd. The fringe benefits tax deductions will reduce the amount of personal services income that is included in Craig’s and Karen’s assessable income because they relate to gaining or producing Craig and Karen’s personal services income.

Example 8: Entity maintenance deductions

124.	Joanne is a computer consultant. She provides her consulting services through her personal services entity, Jo Pty Ltd, which for the relevant income year is not conducting a personal services business. The company has contracted with B Pty Ltd for Joanne to provide consulting services for software development and network design maintenance. The income derived by Jo Pty Ltd is Joanne’s personal services income and will be attributed to Joanne and included in her assessable income.

125.	The income and deductions of Jo Pty Ltd for the period 1 July 2000 to 30 June 2001 consist of:

Personal Services Income (PSI)	$100,000
Other Income	$4,000
Entity Maintenance Deductions	$5,000
PSI Deductions (not salary or wages)	$55,000
Other Income Deductions	$500
126.	To determine the amount by which the personal services income should be reduced, the steps in the method statement at subsection 86-20(2) should be followed, that is:

Step 1 – 	Work out the amount of any deductions (other than entity maintenance deductions or deductions for amounts of salary or wages paid to you) to which the entity is entitled that relate to the individual’s personal services income.

Step 2 – 	Work out the amount of the entity maintenance deductions to which the entity is entitled.

Step 3 – 	Work out the entity’s assessable income, disregarding the individual’s personal services income or the personal services income of anyone else.

Step 4 – 	Step 2 less step 3. That is, subtract from the entity maintenance deductions the non personal services income first.

Step 5 – 	If the amount under step 4 is greater than zero, the amount of the deduction against the personal services income is the sum of the amounts under steps 1 and 4.

Sept 6 – 	If the amount under step 4 is equal to or less than zero, the amount of the deduction against the personal services income is the amount under step 1.

Step 1	PSI Deductions	$55,000
Step 2	Entity Maintenance Deductions	$5,000
Step 3	Other Income	$4,000
Step 4	Entity Maintenance Deductions minus Other Income (step 2 minus step 3)	$1,000
Step 5	PSI is reduced by the sum of step 1 and step 4 ($55,000  +  $1,000)	$56,000
Step 6	This step does not apply as the amount under step 4 is greater than zero.
127.	Under step 5, Joanne’s personal services income will be reduced by $56,000. The amount attributed to Joanne is:

$100,000  –  $56,000  =  $44,000

128.	Therefore, $44,000 is included in Joanne’s assessable income under section 86-15.

129.	The balance of the other income of the entity is reduced by the other income deductions:

$0 –  $500  =  ($500)

130.	The personal services entity has a loss of $500. This loss is retained in the entity to be offset against future non-PSI (assessable and exempt) income that the entity earns subject to the loss carry forward rules in Division 36 of ITAA 1997.

Example 9: Administration Fee

131.	Doctor Drake is a medical practitioner who through his entity Duck Pty Ltd performs contract work for a public hospital. Doctor Drake also has a private practice which he conducts after hours from his home surgery. Over 80% of Doctor Drake's personal service income comes from the public hospital and he has not obtained a personal services business determination from the Commissioner for the relevant income year.

132.	Due to time constraints, Duck Pty Ltd engages an unassociated third party, Doris, to perform various administrative tasks including the invoicing, banking and record keeping for his private practice.

133.	In determining whether the amounts Duck Pty Ltd pays to Doris in consideration for performing those tasks, regard must be had to section 86-60. The provision Section 86-60 places Doctor Drake in the shoes of Duck Pty Ltd and asks whether Doctor Drake would be entitled to a deduction had he engaged a non-associate employee for an identical purpose to that of Duck Pty Ltd. As Doctor Drake would be entitled to a deduction under section 8 1 for such an outgoing, Duck Pty Ltd will not be denied a deduction for its outgoing under section 86-60.

Example 10: Administration Fee

134.	Tom is an IT professional who provides his personal services through an entity HAS Pty Ltd (HAS). HAS obtains its clients through Finder Pty Ltd (Finder) which is in the business of arranging contracts between IT professionals and service acquirers. For the relevant income year, the personal services income derived by HAS is not taken to be earned in the course of conducting a personal services business and HAS is not an associate of Finder. Finder's fee for arranging and administering the relevant contracts is an amount calculated as a percentage per hour worked by Tom and is paid by HAS.

135.	In determining whether the fee paid to Finder is deductible, regard must be had to section 86-60. In applying the provision one must place Tom in the shoes of HAS and ask whether Tom would be entitled to a deduction had Tom incurred Finder's fee for an identical purpose to that of HAS. As Tom would be entitled to a deduction under section 8 1 for such an outgoing, HAS will not be denied a deduction for it’s outgoing under section 86-60. However, if Finder and HAS were associated, a deduction would be denied because of the operation of section 85-20 through section 86-60.

Example 11: State payroll tax and workers’ compensation

136.	Small Time Pty Ltd (Small) is a personal services entity. Its ordinary income includes the personal services income of Tom. For the relevant income year, Tom’s personal services income is not taken to have been earned in the course of conducting a personal services business.

137.	In the relevant income year, Small incurs expenses in relation to payroll tax and workers’ compensation in relation to Tom's employment.

138.	In determining whether Small can claim a deduction for these expenses, Small must consider whether section 86-60 denies the deduction. The provision places Tom in the shoes of Small and asks whether Tom would be entitled to a deduction had Tom incurred outgoings for payroll tax and workers’ compensation had Tom incurred the expense in relation to his employee. As Tom would be entitled to a deduction under section 8 1 for such an outgoing, Small will not be denied a deduction for its outgoing under section 86-60.

Example 12: Exempt Fringe Benefits

139.	Andrew is an engineer who is required by his service acquirer to provide his services through a personal services entity Drew Pty Ltd (Drew). For the relevant income year, Andrew’s personal services income is not taken to have been earned in the course of Drew conducting a personal services business.

140.	During the income year, Drew reimburses Andrew for the purchase of a laptop computer, mobile phone and electronic organiser, all of which are essential for Andrew’s work. This reimbursement is a minor and incidental component of his salary package. The relationship between Drew and Andrew is one of employer and employee and the reimbursements are exempt fringe benefits under section 58X of the FBTAA 1986.

141.	In determining whether Drew can claim a deduction for the amount reimbursed regard must be had to whether the outgoing is denied under section 86-60. That is, Drew must determine whether Andrew would be entitled to a deduction had Andrew himself reimbursed an employee for the cost of a laptop computer, mobile phone and electronic organiser for work related use. As Andrew would be entitled to a deduction under section 8 1 for such an outgoing, Drew will not be denied a deduction under section 86-60.

142.	Note that it is assumed in this case that the fringe benefits are not provided in circumstances indicating there is a scheme with a dominant purpose of obtaining a tax benefit. If they were, Part IVA would need to be considered. See also Taxation Determination TD 95/34 concerning the provision of exempt fringe benefits by certain "practice companies".

Example 13 Entity maintenance deductions

143.	Continuing Example 8: Carlo, who is a computer consultant, joins Joanne’s company, which derives his personal services income. Jo Pty Ltd incurs entity maintenance expenses to the same extent in relation to both Carlo and Joanne and is entitled to a deduction for the amounts incurred. The income and deductions for the personal services entity consist of:

Total PSI of the entity	$200,000
PSI of Carlo	$100,000
Assessable Income of the Entity (Other Income)	$4,000
Entity Maintenance Deductions	$6,000
PSI Deductions(Carlo’s only and not salary or wages)	$55,000
Other Income Deductions	$1,000
144.	To determine how much of the entity maintenance deductions Carlo can claim, steps 1 to 4 of the method statement in subsection 86 20(2) should be followed:

Step 1	PSI Deductions	$55,000
Step 2	Entity Maintenance Deductions	$6,000
Step 3	Assessable Income of the Entity (Other Income)	$4,000
Step 4	Entity Maintenance Deductions minus Other Income (step 2 minus step 3)	$2,000
145.	The amount of $2,000 has to be apportioned between Carlo and Joanne using the formula in section 86-25:

Original step 4 amount  X  Your Personal Services Income

Total Personal Services Income

$2000  X  $100,000

$200,000

=  $1,000

146.	Carlo can claim $1,000 for entity maintenance deductions.

147.	To determine the total amount that Carlo’s income is reduced by, the remaining steps in the method statement should be followed:

Step 5	As the amount in step 4 is greater than zero, the PSI is reduced by the sum of step 1 and the new amount worked out under section 86-25 ($55,000  +  $1,000)	$56,000
Step 6	This step does not apply as the amount in step 4 is not greater than zero.
148.	Carlo’s personal services income is reduced by the amount in step 5:

$100,000  –  $56,000  =  $44,000

149.	Therefore, $44,000 is attributed to Carlo and included in Carlo’s assessable income under section 86-15.

Commissioner of Taxation

13 August 2003


The Commissioner’s declaration in relation to this deferral was published on 30 August 2000 in the Commonwealth of Australia Gazette No GN 34


See also Treasurer’s Press Release No.74 of 11 November 1999


See also paragraphs 1.5 to 1.14 of the Explanatory Memorandum


See Explanatory Memorandum at page 3


See Note to section 86-10


See Treasurer’s Press Release No.47 of 20 June 2001 and Treasurer’s Press Release No.51 of 9 July 2001.


Paragraphs 19 to 22 do not contain a comprehensive list of what entities are associates under section 318. An examination of section 318 is required for a full account of what entities are associates under this provision.


Example 3 at paragraphs 114-117 below provides an example of this approach.


within the meaning of the Superannuation Guarantee (Administration) Act 1992


On 13 May 2003, the Government announced that Part 2-42 of the ITAA 1997 will be amended with effect from 1 July 2000 to ensure that fringe benefits tax will only be payable on the value of the benefit that is deductible to the provider.


What constitutes principal work is explained in  paragraphs 58 and 59 in TR 2001/8 – what is a personal services business


See TR 2003/6 for an explanation of how the attribution of personal services income rules in Division 86 operate.


Taxation Ruling TR 2003/16 Deductibility of protective items
Taxation Ruling TR 2003/16

Income tax: deductibility of protective items

Preamble

The number, subject heading, What this Ruling is about (including Class of person/arrangement section), Date of effect, and Ruling parts of this document are a "public ruling" for the purposes of Part IVAAA of the Taxation Administration Act 1953 and are legally binding on the Commissioner. The remainder of the document is administratively binding on the Commissioner of Taxation. Taxation Rulings TR 92/1 and TR 97/16 together explain when a Ruling is a "public ruling" and how it is binding on the Commissioner.

Contents:

What is this Ruling about

Class of person/arrangement

Date of effect

Previous Rulings

Ruling

Explanation

Deductibility of protective items

Deductibility of expenditure of a capital nature on protective items

You incurred the expense

Sufficient connection between expenditure and income earning activities

Expenditure of a private or domestic nature on protective items

Examples

Example 1

Example 2

Example 3

Example 4

Example 5

Example 6

Example 7

Example 8

Example 9

Example 10

Example 11

Example 12

Definitions

Alternative views

WHAT THIS RULING IS ABOUT

Class of person/arrangement

1.	This Ruling applies to you if you claim work-related expenses.

2.	The Ruling sets the Commissioner’s views on the deductibility, under the Income Tax Assessment Act 1997 (ITAA 1997), of expenses incurred in protecting yourself from the risk of illness or injury in the course of carrying out your income earning activities, following the decision in Morris & Ors v. FC of T (2002) 50 ATR 104; 2002 ATC 4404; [2002] FCA 616 (the Morris Case).

3.	In this Ruling the term "protective items" means things that, according to their design, properties and practical application, protect you against illness or injury.

4.	This Ruling does not deal with the following matters in relation to the deductibility of protective items:

•	substantiation rules – the requirement to substantiate certain work expenses is dealt with in other rulings, in particular Taxation Rulings TR 98/5 and TR 95/18;

•	payment or reimbursement of an expense you incur where the payment or reimbursement constitutes a fringe benefit – this matter is dealt with in the various occupational rulings (see for example, Taxation Ruling TR 95/18);

•	protective clothing, such as overalls and aprons, when worn to prevent damage or soiling of your ordinary clothing rather than to protect you against illness or injury – this matter is dealt with in Taxation Ruling TR 97/12; and

•	vaccinations against diseases – this matter is dealt with in other Taxation Rulings.

DATE OF EFFECT

5.	This Ruling applies to years of income commencing both before and after its date of issue. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

PREVIOUS RULINGS

6.	This Ruling replaces the following Taxation Rulings and Determinations (all of which were withdrawn on 11 June 2003):

•	Taxation Ruling TR 96/17;

•	Taxation Ruling TR 97/12 (in relation to clothing and footwear when used for protection against illness or injury);

•	Taxation Determination TD 92/157;

•	Taxation Determination TD 93/244; and

•	Taxation Determination TD 94/48.

RULING

7.	You can deduct expenditure on a protective item you use to protect you from the risk of illness or injury if:

•	you incurred the expense;

•	there is a sufficient connection between the expenditure and earning your assessable income so that the outgoing is incidental and relevant to the gaining of assessable income; and

•	the expenditure has the essential character of an outgoing incurred in gaining your assessable income.

8.	Expenditure on a protective item will have a sufficient connection with the earning of your assessable income where:

•	you are exposed to the risk of illness or injury in the course of carrying out your income earning activities;

•	the risk is not remote or negligible;

•	the protective item is of a kind that provides protection from that risk and would reasonably be expected to be used in the circumstances; and

•	you use the item in the course of carrying out your income earning activities.

9.	You cannot claim a deduction for expenditure that is of a private or domestic nature. Such expenditure does not have the essential character of an outgoing incurred in gaining your assessable income, even if there is a connection between that expenditure and your income earning activities. This applies particularly to conventional clothing. When you use conventional clothing to protect you while at work, your expenditure on the clothing in most cases will still be of a private or domestic nature because the essential character of the expenditure is that of meeting personal requirements of modesty, decency and warmth. Exceptions to this general rule are outlined in the following paragraphs.

10.	Although a protective item may be of a kind normally associated with private or domestic use, the nature of your use of that item will in some instances give your expenditure on it the essential character of an outgoing incurred in gaining assessable income. This is a question of fact and depends on the degree to which your work place poses a risk of illness or injury and the degree to which the item protects you against that risk.

11.	The following are indicators of the degree of risk and of protection against that risk referred to in paragraph 10:

•	you are required to work in an environment which could be harmful if adequate safety precautions are not taken;

For example – do you work in extreme weather conditions?

•	the use of the item in the work place makes it unsuitable for private or personal use;

For example – does your protective work clothing become so soiled in protecting you at work that it is unsuitable to wear to and from work?

•	expenditure on the item is additional to your normal private or domestic expenditure on such items;

For example – do you need to wear additional protective clothing at work to guard against risk or injury from extreme weather or other potentially unsafe conditions?

•	the item is qualitatively different to items of a comparable nature used privately or domestically;

For example – is the item made to cope with more rigorous work conditions?

•	you use the item principally for income producing activities;

For example – do you use the item only at work or, if there is some private or domestic use, is this use only incidental to its main use at work?

•	it is a requirement of your employer, work-related safety laws or an industrial agreement for you to use protective items;

For example – does your industrial award provide for payment of an allowance for you to purchase protective items for use at work?

•	the use of the item adds to your workplace productivity; and

For example – does your use of the protective item enable you to work for more sustained periods?

•	any other feature of your use of the item for protective purposes which may further indicate your expenditure on that item has the essential character of an outgoing incurred in gaining your assessable income.

12.	It will usually be the case that more than one of the above indicators will exist for expenditure on a protective item normally associated with private or domestic use to have the essential character of an outgoing incurred in earning assessable income.

13.	You must apportion the expenditure on protective items which you also use partly for private or domestic purposes or to earn exempt income. You can only claim a deduction for the portion of the expenditure attributable to earning your assessable income.

14.	Where expenditure for protective items is of a capital nature and an immediate deduction for the whole amount is not permitted under the general deduction provisions, the expenditure will be deductible, generally over time, in accordance with the applicable capital allowance provisions.

EXPLANATION

Deductibility of protective items

15.	The tests for deductibility of losses or outgoings are in section 8-1 of the ITAA 1997, which provides:

8-1 General Deductions

(1)	You can deduct from your assessable income any loss or outgoing to the extent that:

(a)	it is incurred in gaining or producing your assessable income; or

(b)	it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

(2)	However, you cannot deduct a loss or outgoing under this section to the extent that:

(a)	it is a loss or outgoing of capital, or of a capital nature;

(b)	it is a loss or outgoing of a private or domestic nature;

(c)	it is incurred in relation to gaining or producing your exempt income; or

(d)	a provision of this Act prevents you from deducting it.

(3)	A loss or outgoing that you can deduct under this section is called a general deduction.

16.	Expenditure on protective items falls for consideration under paragraph 8-1(1)(a) – the "first positive limb". This limb applies to all taxpayers, including employees and those carrying on a business.

17.	The courts have established that for a loss or outgoing to be deductible under paragraph 8-1(1)(a):

•	it must have the essential character of a loss or outgoing incurred in gaining your assessable income or, in other words, of an income producing expense: Lunney v. FC of T; Hayley v. FC of T (1958) 100 CLR 478; (1958) 11 ATD 404;

•	there must be a sufficient connection between the loss or outgoing and the activities by which you gain your assessable income – so that the outgoing is incidental and relevant to the gaining of your assessable income: Ronpibon Tin NL v. FC of T (1949) 78 CLR 47; (1949) 8 ATD 431; Charles Moore & Co (WA) Pty Ltd v. FC of T (1956) 95 CLR 344; (1956) 11 ATD 147; 6 AITR 379; FC of T v. Hatchett (1971) 125 CLR 494; 71 ATC 4184; (1971) 2 ATR 557; and

•	it must not be expenditure that is private or domestic in nature or that produces exempt income: FC of T v. Cooper (1991) 29 FCR 177; 91 ATC 4396; (1991) 21 ATR 1616 (the Cooper Case); Mansfield v. FC of T (1996) 31 ATR 367; 96 ATC 4001 (the Mansfield Case) and the Morris Case.

Deductibility of expenditure of a capital nature on protective items

18.	You cannot claim under section 8-1 a deduction for expenditure if it is an outgoing of a capital nature. Expenditure may be of a capital nature if, amongst other things, it brings into existence an asset or advantage of an enduring benefit for the income earning activities: British Insulated and Helsby Cables Ltd v. Atherton (1926) AC 205.

19.	Most work-related protective items (such as hats, clothing and sunglasses) are used more or less continuously in the course of income producing activities. In addition, they are often subject to particularly harsh wear and tear because of their protective use. As a result, they need to be replaced reasonably frequently and are of little enduring benefit. In these circumstances, where you use such items in the course of gaining your assessable income, the expenditure will be treated as being of a revenue and not of a capital nature.

20.	If expenditure on a protective item that you use in the course of earning your assessable income is of a capital nature (for example, an X-ray technician’s expenditure on a lead apron) you can still deduct an amount in relation to the item. The capital allowance provisions of Division 40 provide a deduction for the decline in value of the item. Under Subdivision 40-B, a deduction is worked out over the effective life of the item. Under Subdivision 40-E a deduction is worked out at a rate of 37.5% using a pooling mechanism or, if the item costs no more than $300 and certain other conditions are met, an immediate deduction is available. The simplified tax system also provides a deduction if those provisions apply. Subdivision 328-D provides an immediate deduction for items costing less than $1,000 or a deduction at a rate of 30% using a pooling mechanism.

You incurred the expense

21.	You must have personally incurred the expense. If, for example, your employer or another person, such as a head contractor by whom you are engaged, paid for the protective items which you use, you would not be able to claim a deduction because you did not incur the expense.

Sufficient connection between expenditure and income earning activities

22.	You need to show that there is a sufficient connection between your expenditure on the protective items and your income earning activities for the expense to be deductible. That connection must be a real connection rather than just a perceived one: Martin v. FC of T (1984) 84 ATC 4513; 15 ATR 808, FC of T v. Smith (1981) 147 CLR 578; (1981) 11 ATR 538; 81 ATC 4114. The connection must be more than just remote or minor, and also more than merely peripheral to your income earning activities.

23.	It does not necessarily follow that there is a sufficient connection between your expenditure on a protective item and your income earning activities just because you use or wear the item while at work. Whether or not there is a sufficient connection will depend upon the facts of the case, including the nature and scope of the income producing activities and the nature and character of the expenditure: the Morris Case.

24.	In the Morris Case, Goldberg J found that the fact that a protective item enables a taxpayer to be more productive in their work output is a further indicator of a sufficient connection between expenditure on protective items and income earning activities. However, it does not automatically follow that a deduction is allowable for expenditure on a protective item where its use results in increased productivity. Nor is it a requirement that the use of the protective item produce this outcome for a deduction to be allowable: the Morris Case.

25.	In determining whether there is a sufficient connection between your use of protective items and your income earning activities, it does not matter whether the risk of illness or injury against which you need to take protection is posed by an artificial environment, such as a machine in a factory, or an element of the natural environment, such as the sun: the Morris Case.

26.	For examples which focus on determining whether there is a connection between expenditure on protective items and income earning activities, see paragraphs 43 to 45.

Expenditure of a private or domestic nature on protective items

27.	The High Court in John v. FC of T (1989) 166 CLR 417 at 431; (1989) 20 ATR 1 at 6, 89 ATC 4101 at 4105 said that it is possible to incur an expense in gaining or producing assessable income, but a deduction not be allowed because the expense is of a private or domestic nature. Thus, it is necessary to first consider whether a loss or outgoing falls within one or other of the inclusory limbs of section 8-1, and if it does, then consider whether it falls within the section 8-1 limb which excludes as a deduction losses or outgoings of a private or domestic nature: the Cooper Case per Hill J.

28.	The essential character test outlined at paragraph 17 is relevant to determining whether expenditure is of a private or domestic nature: Handley v. FC of T (1981) 148 CLR 182 at 191-2; per Stephen J, at 194 per Mason J, 11 ATR 644 at 648, 651, 81 ATC 4165 at 6169, 6171 and FC of T v. Forsyth (1981) 148 CLR 203 at 216 per Wilson J, 11 ATR 657 at 664, 81 ATC 4157 at 4164.

29.	In applying the essential character test, expenditure on a broad range of items where the protection provided is only incidental to their main use is not deductible.

30.	Expenditure on conventional clothing usually falls into expenditure of a private or domestic nature because the clothing serves the private purpose of meeting personal requirements of modesty, decency and warmth. However, as FC of T v. Edwards 28 ATR 87, 94 ATC 4255; (the Edwards Case) and the Mansfield Case indicate, the courts in considering all the facts of a taxpayer’s expenditure have consistently looked for any additional features in deciding whether this characterisation applies in the circumstances.

31.	In Case A45, 69 ATC 270; Case 24 15 CTBR (NS) 161, a blast furnace worker was allowed a deduction for expenditure on protective woollen clothing, largely because of additional features present in relation to its use. The clothing was found to be:

•	a "practical necessity intended for the protection of the taxpayer’s body" in the presence of extreme heat and flying sparks;

•	put on at the place of work and taken off after duty, and not used for private purposes;

•	entirely unsuitable for private use; and

•	in summary, of a distinct occupational character.

32.	Overalls to protect a person from grease and dirt have been held to be deductible: Case R80 (1966) 16 TBRD 388; Case 107 12 CTBR (NS) 622. In addition, protective boots and overalls worn solely for work purposes, white coats for doctors and boiler suits for boilermakers have been described as sufficiently peculiar to take them out of the normal character of conventional clothing (Case T103 86 ATC 1182).

33.	The additional features listed in paragraph 11 which give expenditure on a protective item the essential character of a working expense where the use of that item might usually be regarded as private or domestic in nature are not intended as an exhaustive list. The principal purpose of the paragraph is to set out some factual situations relevant to deductibility that could result in the expenditure not being excluded by the private and domestic expenditure provisions of paragraph 8-1(2)(b) and, in relation to depreciating assets, the non taxable purpose provisions of subsection 40-25(2).

34.	Expenditure on sunglasses, sunhats and sunscreen is not of a private or domestic nature when those items are used to protect you from the risk of illness or injury in the course of carrying out your income earning activities. This view also applies to other protective items which are clearly identifiable as principally protective items, such as heavy duty occupational wet weather gear.

35.	Expenditure on items you use to protect yourself against the risk of illness or injury is private or domestic in nature if it is incurred merely as part of your normal personal requirements. For instance, you cannot claim a deduction for the cost of prescription glasses to protect yourself against the risk of injury where the risk arises only because of your short-sightedness.

36.	However, expenditure on prescription sunglasses, including photochromatic glasses which have filtering and glare reducing qualities similar to sunglasses which protect you from the risk of illness or injury at work is not of a private or domestic nature. If you do claim a deduction, you need to apportion the amount to take account of your private use of the glasses.

37.	Conventional clothing you wear at work, such as jeans, drill shirts and shorts, trousers and socks, may have some protective qualities. However, this in itself is not necessarily sufficient to give your expenditure on these items the character of a working expense. The limited level of protection against illness or injury in the workplace which this clothing gives you usually means that the essential character of the expenditure is private.

38.	Expenditure on clothing which you wear at work will have the character of a working and not a private expense if the kinds of factors listed at paragraph 11 indicate that:

•	there is a material risk of injury or illness at your workplace; and

•	the protective clothing you wear provides a sufficient degree of protection against that risk.

39.	Examples of indicators that clothing provides a degree of protection sufficient to characterise expenditure on it as work related rather than private are that the clothing:

•	is made to cope with more rigorous conditions, where conventional clothing would be inadequate;

•	is designed to protect you – for example heavy duty shirts and trousers, as distinct from ordinary cotton drill trousers, shorts and short sleeve shirts that may be regarded as work wear but do not offer the degree of protection necessary to give expenditure on such items the character of a working expense; and

•	has a density of weave which gives a UV rating sufficient to protect you from the sun where your job requires you to work outdoors.

40.	The following are examples of clothing worn to protect you from the risk of injury or illness in the course of carrying out your income earning activities. A deduction is allowable in these situations because there is a sufficient connection between the expenditure and income earning activities and because the expenditure is not of a private or domestic nature:-

•	fire-resistant woollen clothing for protection against intense heat and flying sparks of metal from a blast furnace and which were so soiled as to be unsuitable for use outside work: Case A45 69 ATC 270; Case 24 15 CTBR (NS) 161;

•	waterproof jacket, woollen jumper and thick socks which were worn only when working outdoors during winter in an alpine area: Case V79 88 ATC 550; AAT Case 4353 (1988) 19 ATR 3504;

•	special cold room gear or thermal clothing for working in cold rooms;

•	sunhats for protection from the risk of injury or illness from exposure to the sun while carrying out income earning activities: the Morris Case;

•	safety coloured shirts or vests (e.g. when used to direct vehicles in a road works area);

•	aprons and overalls worn to stop you coming into contact with harmful substances; and

•	lead aprons worn to prevent exposure to X-rays.

41.	For further examples which focus on determining whether or not expenditure on protective items is of a private or domestic nature, see paragraphs 46 to 55.

EXAMPLES

42.	The following are examples to help explain when expenditure on protective items is or is not deductible, depending on the circumstances in which the expenditure is incurred. Where the example does not state whether there is also private use of the protective item, it is implicit that any allowable deduction would need to be apportioned to take into account any private use.

Example 1

43.	Trevor, an outdoor worker in a horticulture business, uses sunglasses, a sunhat and sunscreen to protect himself from exposure to the sun when at work. As there is the necessary connection between the expenditure and Trevor’s income earning activities, he can claim a deduction for the cost of these items.

Example 2

44.	Alison is an office worker. Her employer’s offices are located in two buildings, a short walk apart.  She wears sunglasses when walking to the other office. The facts in Alison’s case indicate that the risk of illness from the environment in which she works is not sufficient to make it necessary for her to use protective items to counter that risk. Consequently, there is not the necessary connection between Alison’s expenditure on the sunglasses and her income earning activities. Any protection provided by the sunglasses is not incidental and relevant to her income earning activities. Therefore Alison cannot claim a deduction for the sunglasses.

45.	If the walking distance between the offices was sufficient to require Alison to take protection from the sun, she would be able to claim a deduction for the protective items. An indication that there was a sufficient requirement for Alison to take protection when walking between the offices would be that, in addition to wearing sunglasses, Alison also found the need to apply sunscreen lotion and to wear a hat.

Example 3

46.	William, who drives a truck for a living, finds it necessary to wear sunglasses to protect him against the glare of the sun while driving the truck. He also needs to wear glasses while driving, for his short sightedness. He buys a pair of prescription sunglasses which counter the glare during day driving. He also buys a pair of untinted prescription glasses for night driving. William can claim a deduction for the prescription sunglasses, but not for the untinted prescription glasses.

Example 4

47.	Bob works on a building site. He wears jeans with T-shirts or long sleeve shirts at work. These items are acceptable for work as they are comfortable and, although not very durable, they afford Bob some protection from skin abrasions when handing tools and building materials at the building site. The jeans and shirts resemble clothes commonly worn as conventional clothing and Bob finds them suitable also for wearing when travelling to and from work. The cost of Bob’s jeans and shirts is not an allowable deduction. Even if Bob wore the items only at work, a deduction would still not be allowable. The clothing provides only limited protection from injury and so the expenditure is concerned principally with his personal needs of modesty, decency and warmth. Such expenditure is of a private nature.

Example 5

48.	Bob from the previous example at other times wears heavy denim trousers, steel capped boots and a hard hat when working at the building site. The inherently protective nature of these items means that the essential character of their use is more concerned with meeting Bob’s needs for protection at work than with his requirements of modesty, decency and warmth. As the expenditure is not private or domestic in nature and there is the necessary connection between the expenditure and Bob’s income earning activities, he can claim a deduction for the cost of these items.

Example 6

49.	Christine is an outdoor worker. She starts work early in the morning and works in an area where the winters are quite cold, but not extreme. To protect her from the cold, both in getting to work and while at work, Christine wears warm clothing which, nevertheless is conventional clothing. As the character of the expenditure is to clothe Christine in the ordinary sense as part of daily life, the expenditure is of a private or domestic nature and so a deduction is not allowable. If Christine were to wear the clothes only at work, a deduction would still not be allowable because, being conventional clothes, the character of the expenditure essentially is still concerned with meeting her personal needs of modesty, decency and warmth.

Example 7

50.	Liz’s job as a parking inspector requires her to continue working outside even in wet weather. The winter months are normally wet and cold where Liz works. Liz uses a raincoat and umbrella to keep dry and reduce the risk of illness that can result from being wet and cold. While the raincoat and umbrella are the same kind commonly used by people generally for protection from wet weather, in Liz’s case, the risk of illness from the work environment is such that there is a need for the protection provided by the items. There is a sufficient connection between her expenditure and her income producing activities. Liz’s expenditure on the raincoat and umbrella is an allowable deduction.

Example 8

51.	Nadia, a construction site manager, spends most of her working day engaged on outdoor tasks. The construction sites are located in a mountainous region where the temperature often falls to extreme lows during winter. To combat these conditions, Nadia wears a heavily insulated waterproof coat over her ordinary clothes while at work. While broadly comparable to coats purchased for private use, the expenditure on the coat is an allowable deduction, having regard to:

•	the serious health risk presented by Nadia’s work environment;

•	the appropriateness of the coat for addressing that risk; and

•	the fact that the coat is additional to the ordinary clothing which Nadia wears at work and is used exclusively for work.

Example 9

52.	Fabia, a shop assistant, works in the refrigerated cold-room of the local supermarket. She purchases a down parka and polar-fleece gloves. She only ever wears this clothing in the cold room. The thermal clothing protects Fabia from the risk of illness or injury from the cold-room environment. There is the necessary connection between the expenditure and Fabia’s income earning activities and so a deduction is allowable.

Example 10

53.	Kathleen, a hydrotherapy assistant, works in a chlorinated pool. She wears a wet suit and uses moisturisers and rehydrating conditioners to combat the drying effects of being in the pool. The wet suits, moisturisers and rehydrating conditioners protect Kathleen from illness or injury caused by constant immersion in the pool. The expenditure has the necessary connection with Kathleen’s income earning activities and a deduction is allowable for the cost of each of the items.

Example 11

54.	Jane, a clerk, works in an air conditioned building and applies moisturiser to her face and hands while at work. The risk of illness from the environment in which Jane works is not sufficient to make it necessary for her to use moisturiser to counter that risk. Consequently, Jane is not entitled to a deduction for the cost of her moisturiser because there is not the necessary connection between the expenditure and her income earning activities. Further, the expenditure is of a private or domestic nature because it is directed to meeting personal needs of appearance and comfort.

Example 12

55.	Len is a shearer. He bought items specially designed for shearers to protect them while shearing. The items consisted of jeans which repel lanolin, singlets with leather inserts at the point where sheep are held to protect against lanolin and grease; boots with special lacing and flaps to keep out wool clippings and shearers’ moccasins which prevent slipping on greasy shearing shed floors. As all these items are made specially for shearers, they are clearly identifiable as occupational in character. The expenditure on these items has the necessary connection with Len’s income earning activities and so Len can claim a deduction. If, however, the jeans and singlet which Len purchased were ordinary clothing rather than protective types made specially for shearers, he would not be able to claim a deduction for the cost of that clothing.

DEFINITIONS

56.	A reference to the Income Tax Assessment Act 1997 should be read as incorporating the provisions of the Income Tax Assessment Act 1936.

ALTERNATIVE VIEWS

57.	It has been suggested that the cost of all items which provide any degree of protection at work should be deductible. This view relies on statements by Goldberg J in the Morris Case. We consider that this view goes further than the decision of Goldberg J, who made it clear that, in the case of items which are normally associated with private use, there must be a sufficient connection between the expenditure on the use of those items and the taxpayer’s income earning activities if such expenditure is not to be considered private or domestic in nature.

58.	The Mansfield Case and the Edwards Case also make it clear that it does not automatically follow that the cost of conventional clothing worn at work, such as ordinary cotton drill shorts and trousers, should be deductible just because it also serves a work related purpose.

Commissioner of Taxation

17 December 2003


Taxation Ruling TR 2000/6 Substantiation rules: calculation of balancing adjustments for cars
Taxation Ruling TR 2000/6 – Withdrawn

Income tax: substantiation rules: calculation of balancing adjustments for cars

Preamble

The number, subject heading, Class of person/arrangement, Date of effect and Ruling parts of this document are a "public ruling" for the purposes of Part IVAAA of the Taxation Administration Act 1953 and are legally binding on the Commissioner. The remainder of the document is administratively binding on the Commissioner. Taxation Rulings TR 92/1 and TR 97/16 together explain when a Ruling is a public ruling and how it is binding on the Commissioner.

Contents:

What this Ruling is about

Date of effect

Previous Rulings

Definitions

Ruling

Explanations

Examples

WHAT THIS RULING IS ABOUT

1.	This Ruling replaces Taxation Ruling IT 2493 following the rewriting of the relevant provisions of the income tax law.

Class of persons

1.	This Ruling provides guidance on the application of Subdivisions 42-F and 42-G of Part 2-10 of the Income Tax Assessment Act 1997 ("the ITAA 1997").

2.	Subdivision 42-F of the ITAA 1997 sets out the rules for calculating a balancing adjustment for depreciable plant. These rules apply to a car that is subject to a balancing adjustment event, in respect of which a taxpayer has:

(a)	deducted or can deduct an amount for depreciation of the car in one or more years of income; and has not

(b)	chosen the "cents per kilometre" method or the "12% of original value" method for deducting their car expenses for one or more other income years.

3.	Subdivision 42-G of the ITAA 1997 sets out the rules for calculating a balancing adjustment for a car that is subject to a balancing adjustment event, in respect of which a taxpayer has:

(a)	deducted or can deduct an amount for depreciation of the car in one or more years of income; and has also

(b)	chosen the "cents per kilometre" method or the "12% of original value" method for deducting their car expenses for one or more other income years.

4.	The depreciation referred to in paragraphs 3(a) and 4(a) may have been claimed under the tax laws prior to and/or after the introduction of the substantiation rules in 1986. From the date of application of the substantiation rules, depreciation of a car only arises under the "log book" and "1/3 of actual expenses" methods. Neither Subdivision 42-F nor 42-G applies where a taxpayer has, since the use of the car began, only used the "cents per kilometre" method or the "12% of original value" method for calculating the amount of deduction claimed for car expenses, in respect of that car. In these situations no balancing adjustment is made.

Cross-references

5.	Taxation Ruling IT 2493 deals with subsection 82KY(6) of the Income Tax Assessment Act 1936 ("the ITAA 1936"). That subsection was rewritten as section 59AAA, which was introduced into the ITAA 1936 with effect from 1 July 1994. Section 59AAA has since been restructured, renumbered and rewritten in the ITAA 1997. Subdivision 42-G now expresses the same ideas in the ITAA 1997 as subsection 82KY(6) and section 59AAA did in the ITAA 1936. The following table cross-references provisions in the ITAA 1997 to the corresponding provision in the ITAA 1936.

	1997 Act	1936 Act
Years	1998 and later	1995, 1996 and 1997	1994 and earlier
Statute	Income Tax Assessment Act 1997	Income Tax Assessment Act 1936	Income Tax Assessment Act 1936
Ruling	This Ruling	IT 2493	IT 2493 on subsection 82KY(6)
Balancing adjustment for cars for which depreciation has been claimed and cents per kilometre or 12% of cost methods chosen	Subdivision 42-G	Section 59AAA	Subsection 82KY(6)
Cents per kilometre method	Subdivision 28-C	Division 3 of Schedule 2A	Subsection 82KX(1)
12% of cost method	Subdivision 28-D	Division 4 of Schedule 2A	Subsection 82KW(3)
1/3 of actual expenses method	Subdivision 28-E	Division 5 of Schedule 2A	Subsection 82KW(2)
Log book method	Subdivision 28-F	Division 6 of schedule 2A	Section 82KUD
DATE OF EFFECT

6.	This Ruling applies to years commencing both before and after its date of issue. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

PREVIOUS RULINGS

7.	This Ruling rewrites and replaces Taxation Ruling IT 2493, which is now withdrawn. There is no change in the policy stated in IT 2493. However, this Ruling is broader in that it covers circumstances not covered in IT 2493.

DEFINITIONS

8.	Some of the terms used in this Ruling are explained below: Balancing adjustment event in relation to plant is defined in subsection 42-30(3). Such an event occurs when the owner (Note that the term "owner" here can include situations where a person or entity has some right or interest in the car, other than sole ownership.) of the plant (in this Ruling, a car):

(i)	disposes of the car;

(ii)	is taken to have ceased to be the owner of the car;

(iii)	is taken to have disposed of the car;

(iv)	the car is lost or destroyed; or

(v)	there is a change in ownership of the car, or in the interests of entities in the car, and one of the entities that owned the car before the change retained some interest after the change.

9.	Cost in relation to plant and a car that is subject to depreciation is generally the cost incurred by a taxpayer in acquiring the car. However, there are certain specific situations where a different concept of cost may apply, e.g., it may be:

(i)	the amount of the overall cost reasonably attributable where the taxpayer acquired the car with other assets, without a specific value being allocated to the car;

(ii)	the transferor’s cost where rollover relief applies;

(iii)	the arm’s length cost if sold in the ordinary course of business where the taxpayer previously held the car as trading stock; or

(iv)	the amount required by the relevant rules if it is a luxury car.

10.	Further, cost in the general case and the specified exceptions may be subject to adjustment in certain circumstances, i.e. where car discount, non arm’s length, car limit, double deduction or previous depreciation limit rules apply (Section 42-65 of the ITAA 1997).

Depreciation days

11.	This means the total number of days that a taxpayer owned a car in each income year for which an amount of depreciation was deducted or can be deducted for that car. In cases where the depreciation claims commenced post introduction of the substantiation rules, this will be the number of days that the taxpayer used the log book method or the 1/3 of actual expenses method (Section 42-250 of the ITAA 1997).

Non-depreciation days

12.	This means the total number of days that a taxpayer owned a car in each income year for which the "cents per kilometre" method or the "12% of original value" method for deducting car expenses was chosen (Section 42-250 of the ITAA 1997).

Notional depreciation amount

13.	This is the sum of the amounts that a taxpayer could have deducted for depreciation of the car for the income years under the "cents per kilometre" method or the "12% of original value" method for the car assuming that:

(i)	neither the "cents per kilometre" method or "12% of original value" method were chosen;

(ii)	Division 28 (car expenses) of the ITAA 1997 had not applied to the car; and

(iii)	the car was used for the purpose of producing assessable income:

•	to the extent of 20% if you used the "cents per kilometre" method; or

•	to the extent of one-third if you used the "12% of original value" method (Section 42-255 of the ITAA 1997).

Notional written down value

14.	This is the car’s written down value less its notional depreciation amount (Section 42-260 of the ITAA 1997).

Reduction rule

15.	This is the requirement for the amounts calculated in subsections 42-240(2) and 42-245(3) of the ITAA 1997 to be multiplied by the fraction:

Depreciation days/(Depreciation days + Non-depreciation days)

 (Section 42-250 of the ITAA 1997)

Termination value

16.	In the following situations, this means:

(i)	where the car has been sold for a specific price – the sale price less the reasonably attributable expenses of sale;

(ii)	where the car has been disposed of other than by sale – the market value of the car immediately before its disposal;

(iii)	where the car is lost or destroyed – the amount or value received or receivable under an insurance policy or otherwise for the loss or destruction.

Note that these values may be adjusted where the "car limit" applies (see section 42-215). Situation (i), above, may also be adjusted where the sale is not an arm's length transaction (see section 42-210). A different termination value may also be applicable where the disposal event varies from those described above. See section 42-205 of the ITAA 1997.

Undeducted cost

17.	In respect of a car means the cost of the car less the sum of the amounts that could have been deducted for depreciation for any period that a taxpayer owned and used it, or had it installed ready for use, assuming that:

(i)	it was used wholly for the purpose of producing assessable income during that period; and

(ii)	the same calculation formula was used for that period as was used for the income year in which a depreciation deduction was first allowable to the taxpayer for the car; and

(iii)	no provision of the ITAA 1997 denied a depreciation deduction for it; and

(iv)	Division 28 (car expenses) of the ITAA 1997 did not apply.

See paragraph 42-175(1)(c) of the ITAA 1997.

Written down value

18.	This is the cost of the car less the sum of the amounts that have been deducted or can be deducted for depreciation in respect of that car. If the rules regarding "roll-over relief" for related entities applied to your acquisition of the car, the written down value is the sum of the amounts that the transferor and earlier successive transferors deducted or can deduct for depreciation of the car.

Section 42-200 of the ITAA 1997.

RULING

Situations in a year of income in which a balancing adjustment event arises:

A.	Where depreciation has been claimed for a car in one or more years and no claims have been made in respect of that car using either the "cents per kilometre" method or the "12% of original value" method in respect of any year:

(These are illustrated in Example 1 in the Explanations segment of this ruling.)

There is assessable income

19.	An amount is assessable if the termination value of the car exceeds its written down value. To calculate the amount of the assessable income it is necessary to compare the amount by which the termination value exceeds the written down value to the sum of the amounts deducted or deductible for depreciation of the car for it is the lesser of these two amounts is the amount that must be included.

There is a deductible amount

20.	An amount is deductible if the termination value of the car is less than its undeducted cost. To calculate the deduction, subtract the termination value from the undeducted cost and then reduce the remainder to reflect the extent to which the car was used, or installed ready for use, other than for the purpose of producing assessable income.

There is no assessable income or deductible amount

21.	No balancing adjustment is made if:

(i)	the termination value of the car is less than its written down value but equal to or more than its undeducted cost; or

(ii)	the termination value of the car is equal to its written down value.

B.	Where depreciation has been claimed for a car in one or more years and deduction claims have also been made in respect of that car using either the "cents per kilometre" method or the "12% of original value" method in one or more other years:

These are illustrated in Example 2 in the Explanations segment of this ruling.

There is assessable income

22.	An amount is assessable if the termination value of the car exceeds its notional written down value. To calculate the amount of assessable income compare:

(i)	the amount by which the termination value of the car exceeds its notional written down value to;

(ii)	the sum of the notional depreciation amount and the amounts that have been deducted or can be deducted for depreciation of the car.

23.	The lesser of these amounts is then reduced by applying the reduction rule.

There is a deductible amount

24.	An amount is deductible if the termination value of the car is less than its undeducted cost. Two steps must be taken to calculate the deductible amount:

Step 1: Determine the difference between the termination value and the undeducted cost of the car, then reduce that difference to reflect the extent to which the car was used, or installed ready for use, other than for the purpose of producing assessable income. Any reasonable basis for the calculation of this reduction that is based upon the following two assumptions is acceptable:

(i)	that the taxpayer used the car for income producing purposes to the extent of 20%, for years where deductions were calculated using the "cents per kilometre" method; and

(ii)	that the taxpayer used the car for income producing purposes to the extent of 1/3, for years where deductions were calculated using the "12% of original value" method.

A simple method for calculating this reduction is to multiply the difference by the following fraction:

(A + B)

C

where:

A =	is the notional depreciation amount

B = 	is the amounts that have been deducted or can be deducted for depreciation of the car

C = 	is the car’s cost less its undeducted cost .

Step 2:  Apply the reduction rule to the amount calculated in Step 1

There is no assessable income or deductible amount

25.	No balancing adjustment arises if:

(i)	the termination value of the car is less than its notional written down value but equal to or more than its undeducted cost; or

(ii)	the termination value of the car is equal to its notional written down value.

EXPLANATIONS

26.	Depreciation allows taxpayers to obtain deductions for the cost of plant over the period that it is used in income producing activities. Depreciation is only allowed to the extent that the plant is used for income producing purposes. Consequently, if plant, eg a car, is used partly for business purposes and partly for private purposes, only a partial depreciation deduction, based on the percentage of business use, is allowed. However, depreciation based on the effective life of the plant is only an estimate which is used to spread its cost over time.

27.	When plant for which you have claimed depreciation is sold, lost or destroyed, it is necessary to compare its termination value on the sale, loss or destruction with its undeducted cost and its written down value at the time. This comparison shows whether the taxpayer has recovered some or all of the depreciation claimed, or whether a further amount should be allowed in the light of the termination value.

28.	If the termination value for an item of plant is more than its written down value, then the taxpayer has recovered some of the depreciation previously claimed. In that case, the excess, up to the total amount of depreciation deductions claimed, is treated as assessable income. Conversely, if the termination value of the plant is less than its undeducted cost, a loss results, and the taxpayer may claim a deduction for the difference less the proportion for private use. These income or deduction amounts are referred to as balancing adjustments.

29.	Subsection 42-30(2) of the ITAA 1997 requires balancing adjustment calculations to be performed in accordance with the rules set out in Subdivision 42-F or Subdivision 42-G where the balancing adjustment event occurs in respect to certain cars.

30.	Subdivision 42-F sets out the standard rules for calculating balancing adjustments. These rules apply to a car, in respect of which a taxpayer has:

(a)	deducted or can deduct an amount for depreciation of the car in one or more years of income; and has not

(b)	chosen the "cents per kilometre" method or the "12% of original value" method for deducting their car expenses for one or more other income years.

31.	To avoid distortion of the balancing adjustments calculated for cars, allowance must be made for years where depreciation was not claimed in respect of the car, because the taxpayer chose to calculate the car expenses by using the "cents per kilometre" or the "12% of original value" method.

32.	Subdivision 42-G sets out the special rules for calculating a balancing adjustment for a car, in respect of which a taxpayer has:

(a)	deducted or can deduct an amount for depreciation of the car in one or more years of income; and has also

(b)	chosen the "cents per kilometre" method or the "12% of original value" method for deducting their car expenses for one or more other income years.

33.	The rules in Subdivision 42-G make allowance for the income years when actual depreciation was not claimed. The effect of these special rules is that any balancing adjustment (assessable or deductible) relates only to the actual depreciation allowed.

34.	No balancing adjustments are made where a taxpayer has, since the use of a car began, only used the "cents per kilometre" method or the "12% of original value" method for calculating the amount of deduction claimed for car expenses, in respect of that car. This is because no depreciation is claimed when these methods are used, and balancing adjustments only apply where depreciation has been claimed.

EXAMPLES

Example 1

35.	This example illustrates the method used to calculate balancing adjustments for a depreciated asset. In the case of a car, this example would apply where depreciation has been claimed using only the "logbook" or "1/3 actual expenses" method, and no deductions have been claimed for the car using the "cents per kilometre" or "12% of original value" method.

See also Guide to depreciation*!IE(IsMark(`TAXREF'),"JI(`ATOPublications2007.hlp>main',`Guide_to_depreciation')","PI(`',`No_ATO_Publications')") for further information on these rules.

Calculations to reflect use of an asset only partly for business purposes

36.	Assume that Shelley:

(i)	purchases an asset on 1 July 1997 for $1,000; and

(ii)	sells it on 30 June 1999; and

(iii)	used the "log book" method to determine that she used the asset evenly for both business and private purposes for both years; and

(iv)	elected to use the prime cost method to work out her depreciation; and

(v)	the relevant prime cost depreciation rate is 24%.

The relevant calculations are:

	undeducted cost ($)		written down values ($)
Cost on 1.7.97	1,000		1,000
Less: Depreciation (24%) to 30.6.98	240	(50% business)	120
	760		880
Less: Depreciation to 30.6.99	240	(50% business)	120
	520		760
Closing Balance	520		760
Example 1A

Where there is assessable income

37.	If the termination value on disposal is more than the written down value , the difference is to be included in assessable income. However, the assessable amount cannot be more than the sum of deductions actually allowed for depreciation on the asset.

38.	Therefore, if Shelley sold the asset for $800, she recovers $40 in depreciation she has already claimed – the amount by which the termination value is more than the written down value of $760. The amount of $40 is treated as assessable income.

Example 1B

Where there is a deductible amount

39.	Where the termination value is less than its undeducted cost, the difference between termination value and the undeducted cost represents a loss. However, a taxpayer is are only eligible for a deduction for the business or other income producing percentage of that loss.

40.	Therefore, if Shelley sold the asset for $400, she would calculate a loss of $120 – the amount by which the undeducted cost of $520 exceeds the termination value. Shelley could claim a deduction of $60 – that is, 50% of the loss.

Example 1C

Where there is no assessable income or deductible amount

41.	Where the termination value is between the written down value and undeducted cost, no adjustment is made.

42.	Thus, if Shelley sold the asset for $700, there would be no adjustment because the termination value is less than the written down value of $760 but greater than the undeducted cost of $520.

Example 2

43.	This example illustrates the method used to calculate balancing adjustments for a car where depreciation has been claimed using the "logbook" or "1/3 actual expenses" method for one or more years, and deductions have been claimed for the car using the "cents per kilometre" or "12% of original value" method in one or more other years.

44.	Assume that Carol:

(i)	purchases a car on 1 August 1995 for $13,898; and

(ii)	sells it on 30 April 1999; and

(iii)	uses the "log book" method to claim car expenses for the years ended 30 June 1996 and 30 June 1997. During those years 20% of the car’s use was for income producing use; and

(iv)	for the years ended 30 June 1998 and 30 June 1999 elected to claim car expenses under the "12% of original value" method.

The relevant calculations are:

	undeducted cost ($)		written down value s ($)
Cost on 1.8.95	13,898		13,898
Less: Depreciation (22 1/2 %) to 30.6.96	2,866	(20% business)	573
/+11,032?+13,325
Less: Depreciation (22 1/2 %) to 30.6.97	2,482	(20% business)	496
	8,550		12,829
Less: Depreciation (22 1/2 %) to 30.6.98	1,924	(deemed 33 1/3% business)	641
	6,626		12,188
Less: Depreciation (22 1/2 %) to 30.4.99	1,242	(deemed 33 1/3% business)	414
Closing Balance	5,384		11,774
The following values are derived from the above calculations:

Item	Amount ($)	Calculation      ($)
written down value	12,829	13,898 – 573 – 496
notional depreciation amount	1,055	641 + 414
The amounts that have been, or could have been, deducted for depreciation of the car	1,069	573 + 496
notional written down value	11,774	12,829 – 1,055
undeducted cost	5,384	13,898 – 2,866 – 2,482 – 1,924 – 1,242
Cost less undeducted cost	8,514	13,898 – 5,384
Example 2A

Where there is assessable income and termination value is less than cost

45.	Assuming Carol sold her car for $13,000 then an assessable amount would be calculated as follows:

	$
termination value	13,000
Less: notional written down value	11,774
	1,226
46.	As the amount of $1,226 is less than the sum of the notional depreciation amount and the amounts that have been deducted or could have been deducted for the car ($1,055 + $1,069 = $2,124) then the amount of $1,226 is taken and reduced by applying the reduction rule.

47.	Carol claimed depreciation in respect of the car for 700 days, and chose to use the "12% of original value" method to calculate her deduction claim in respect of the car for another 669 days. Therefore, the calculation for the reduction is:

$1,226 * 700 / (700 + 669) i.e., $626

The amount to be included in assessable income is $626

Example 2B

Where there is assessable income and termination value is more than cost

48.	Assuming Carol sold her car for $15,000 then an assessable amount would be calculated as follows:

	$
termination value	15,000
Less: notional written down value	11,774
	3,226
49.	As the amount of $3,226 is more than the sum of the notional depreciation amount and the amounts that have been deducted or could have been deducted for the car ($1,055 + $1,069 = $2,124) then the amount of $2,124 is taken and reduced by applying the reduction rule.

$2,124 x 700 / (700 + 669) i.e., $1,086

The amount to be included in assessable income is $1,086.

50.	Any excess of the sale price over the original cost (i.e., $1,102) would usually constitute a capital gain but for the specific exclusion of most motor vehicles from the definition of "asset" for capital gains tax purposes. Hence, the excess of the sale price over the original cost, in the case of most motor vehicles, is usually not assessable as a capital gain or as ordinary income. Where the disposal occurs after 11.45 am on 21 September 1999, the $1,102 will also not be assessable under sections 42-192 or 42-223 (See subsection 42-198(1)). These sections include in assessable income, as a balancing adjustment, any amount that would have constituted a capital gain had the disposal occurred on or before that time. The exclusion of this amount from assessability under these sections maintains the capital gains treatment for cars.

Example 2C

Where there is a deductible amount

51.	Assuming Carol sold her car for $4,000 then, as the termination value ($4,000) is less than the notional written down value ($11,774) and the undeducted cost ($5,384), a deductible amount would be calculated as follows:

	$
undeducted cost	5,384
Less: termination value	4,000
	1,384
52.	The amount of $1,384 must now be reduced to reflect the extent to which the car was used, or installed ready for use, other than the purpose of producing assessable income, as required by subsection 42-245(3).

$1,384 x ($1,055 + $1,069) / $8,514 i.e., $345

The reduction rule is then applied.

$345 x 700 / (700 + 669) = $176

The deductible amount is $176.

Example 2D

Where there is no assessable income or deductible amount

53.	Assuming Carol sold her car for $9,500 then no adjustment would be made as the termination value exceeds the undeducted cost ($5,384) but is less than the notional written down value ($11,774).

Commissioner of Taxation

29 March 2000

TR 2000/6W – Withdrawal

Income tax: substantiation rules: calculation of balancing adjustment for cars

NOTICE OF WITHDRAWAL

Taxation Ruling TR 2000/6 is withdrawn with effect from today.

1. Taxation Ruling TR 2000/6, which issued on 29 March 2000, provided guidance on the application of the balancing adjustment rules in Subdivisions 42-F and G of the Income Tax Assessment Act 1997 (ITAA 1997) to cars. The former Division 42 of the ITAA 1997 was repealed with effect from 1 July 2001. The depreciation rules in the former Division 42 of the ITAA 1997 were replaced with general effect from 1 July 2001 with the uniform capital allowance system contained in Division 40 of the ITAA 1997.

2. Some of the matters dealt with in TR 2000/6 are now dealt with in the notes to section 40-370 of the ITAA 1997. Other matters in the Ruling are now addressed in Draft Taxation Determination TD 2006/D17.

3. As TR 2000/6 is no longer current and its subject matter is dealt with in other forms, the Ruling is withdrawn.

3 May 2005


Taxation Ruling TR 2001/7 The meaning of personal services income
Taxation Ruling TR 2001/7

Income tax: the meaning of personal services income

Preamble

The number, subject heading, Class of person/arrangement, Date of effect and Ruling parts of this document are a "public ruling" for the purposes of Part IVAAA of the Taxation Administration Act 1953 and are legally binding on the Commissioner. The remainder of the document is administratively binding on the Commissioner. Taxation Rulings TR 92/1 and TR 97/16 together explain when a Ruling is a public ruling and how it is binding on the Commissioner.

Contents:

What this Ruling is about

Definitions

Related Rulings

Ruling

Date of effect

Explanations

Examples

Detailed contents list

WHAT THIS RULING IS ABOUT

1.	This Ruling explains the meaning of personal services income contained in Division 84 of Part 2-42 of the Income Tax Assessment Act 1997 (ITAA 1997) (the alienation measure).

2.	This Ruling incorporates the proposed legislative amendments announced in Treasurer's Press Release No. 47 of 29 June 2001 and Treasurer's Press Release No. 51 of 9 July 2001. Those aspects of the ruling that relate to those announcements are not public rulings for the purposes of the Tax Administration Act 1953 (TAA 1953).F1

Class of person/arrangement

3.	This ruling applies to:

•	individuals whose ordinary income or statutory income includes income that is mainly a reward for their personal efforts or skills; and ·

•	companies, partnerships or trusts whose ordinary or statutory income includes income that is mainly a reward for the personal efforts or skills of an individual (an individual's personal services income). Such entities are called personal service entities.

The Relevance of Personal Services Income

4.	The alienation measure only applies to income earned mainly from the provision of an individual's labour or skills (personal services income) rather than being generated by the use of assets, the sale of goods, the granting of a right to use property or by a business structure.F2

5.	By definition, income earned by an employee is personal services income. However, the measure does not apply to employees, except where an individual is an employee of an interposed entity.F3 The alienation measure will not apply where the income is earnt in the course of conducting a personal services business. The meaning of personal services business is explained in Taxation Ruling TR 2001/8.

6.	You will not be within the alienation measure and can self-assess accordingly if you come within ONE of the following four situations:

•	You satisfy the "results test", that is:

(a)	You work to produce a result(s); and

(b)	You provide the tools and equipment necessary (if any) to produce the result(s); and

(c)	You are liable for the cost of rectifying any defective work.F4

OR

•	None of your clients pay you 80% or more of your personal services income in the year of income and you have two or more unrelated clients (who were obtained as a result of you making offers to the public at large or to a section of the public)F5.

OR

•	None of your clients pay you 80% or more of your personal services income in the year of income and

(d)	You engage an individual(s) or an unrelated entity(ies) to perform 20% or more (by market value) of the principal work (i.e. the work that generates the personal services income) or

(e)	You have an apprentice for at least half the year

OR

•	None of your clients pay you 80% or more of your personal services income in the year of income, and you exclusively use business premises that are physically separate from your home, or from the premises of the person for whom you are working.

7.	If you cannot satisfy any of the tests outlined in the previous paragraph (for example, because you do not meet one of the three personal services business tests, or the results test, and 80% or more of your personal services income is from one source), you may be able to obtain a Personal Services Business Determination (PSBD) from the Commissioner that you are conducting a personal services business.F6 You can also apply for a PSBD if you are not sure whether you satisfy any of the tests. If the Commissioner is satisfied that you are entitled to a PSBD, you will not be subject to the alienation measure.

The effect of the alienation measure

8.	If the alienation measure applies to an individual or a personal services entity, the amount of the personal services income is included in the assessable income of the individual whose personal efforts or skills generate the income.

9.	If the alienation measure applies, the individual or personal services entity will not be able to claim certain deductions. For example, rent expenses, mortgage interest payments, rates and land tax paid in respect of the individual's private residence will not be allowable deductions to the extent that those expenses are incurred in gaining or producing the individual's personal services income. Also, payments made to the individual's spouse (or any other associate) will not be deductible when the payment relates to non-principal work, such as bookkeeping for an individual who is a builder.

10.	If the alienation measure applies, a personal services entity may also have additional withholding obligations in relation to personal services income that is attributed to an individual under the alienation measure.

Background

11.	The New Business Tax System (Alienation of Personal Services Income) Act 2000 (Alienation of Personal Services Income Act) amended the ITAA 1997 by inserting new Part 2-42 into that Act and amended the TAA 1953 by inserting new Division 13 in Schedule 1 to that Act.

12.	The alienation measure contained in Part 2-42 applies from the 2000-2001 income year. However, it does not apply until the 2002-2003 income year for those individuals or personal services entities who:

•	were in the former prescribed payments system and were entitled to and had made a payee declaration to a payer; and

•	the payee declaration was in force as of 13 April 2000; and

•	the Commissioner had received the payee declaration for the payee from the payer on or before 13 April 2000.F7

13.	The measure was introduced following recommendations made in the report of the Review of Business Taxation: A Tax System Redesigned (commonly called the Ralph Report).F8 The relevant recommendations that relate to this measure are recommendations 7.2, 7.3 and 7.4. Those recommendations were aimed at improving the integrity and equity in the tax system. The recommendations arose out of concerns that substantial erosion of the income tax base had occurred as a consequence of the alienation of personal services income through the use of interposed companies, partnerships and trusts; and that there was a perception that "employee-like" individuals and interposed entities were able to claim a greater range of deductions than those available to employees.

14.	Note that the general anti-avoidance provisions of Part IVA of the ITAA 1936 may still apply to cases of alienation of personal services income that fall outside the alienation measure: see section 86-10 of the ITAA 1997, paragraph 1.17 of the Explanatory Memorandum and page 292 of the Ralph Report. Further guidance on this matter is provided in Taxation Ruling TR 2001/8, and in Taxation Rulings IT 2121, IT 2330, IT 2503 and IT 2639.

DEFINITIONS

Personal services entity

15.	A company, partnership or trust whose ordinary or statutory income includes the personal services income of one of more individuals (subsection 86-15(2)).

Service acquirer(s)

16.	The entity or entities that acquire the personal services of an individual directly from the individual or through a personal services entity.

Diagram showing the operation of the Alienation Measures F9

17.	Note that you can apply for a Personal Services Business Determination (PSBD) to confirm that you are not within the measure, or if you are not sure whether you are within the measure, or if you are subject to unusual circumstances. If you believe that the alienation measure should not apply to you, you can request a PSBD from the Commissioner (see diagram above).

18.	If:

(a)	If you have personal services income; and

(b)	you or the personal services entity do not satisfy the "results test"; and

(c)	you or the personal services entity get 80% or more of the personal services income from one source,

you will be subject to the alienation measure, unless you have a PSBD.

RELATED RULINGS

•	Taxation Ruling TR 2001/8 deals with the meaning of personal services business (Division 87) and

•	Taxation Rulings IT 2121, IT 2330, IT 2503, IT 2639 and TR 2001/8 deal with the application of Part IVA to the alienation of income from rendering personal services.

RULING

19.	Personal services income is income that is mainly a reward for an individual's personal efforts or skills (or would be mainly such a reward if it was the income of the individual who did the work).

20.	The definition of personal services income requires an analysis of the statutory or ordinary income of an individual or a personal services entity to determine those amounts or items that are mainly a reward for an individual's personal efforts and skills. It is only the income that has that character that may be subject to Part 2-42.

21.	The reference to " income of any other entity " in the definition in subsection 84-5(1) is a reference to an amount or item that would be income of the other entity but for the operation of Division 86.

22.	The phrase " or would mainly be such a reward if it was your income " in subsection 84-5(1) ensures that the character of the income as being mainly a reward for an individual's personal efforts or skills is not altered in those circumstances where it is legally derived by another entity. The phrase requires a determination as to whether the income, if it was derived by an individual, would be mainly a reward for that individual's personal efforts or skills rather than being generated by the use of assets, the sale of goods, or by a business structureF10. If, as a practical matter, the income is mainly a reward for the individual's efforts or skills, then that amount or item of that entity's ordinary income or statutory income is an individual's personal services income.

23.	Subsection 84-5(2) ensures that for tax purposes only individuals can have personal services income. The fact that income is payable under a contract does not prevent the income being mainly a reward for an individual's personal efforts or skills (subsection 84-5(4)).

24.	The use of "mainly" in the definition means that the income referred to needs to be "chiefly", "principally" or "primarily" a reward for the provision of the personal efforts of, or for the exercise of the skills of, an individual. Therefore, the use of tools of trade or plant and equipment does not of itself preclude the income from being personal services income, if they are ancillary to the generation of the income.

25.	Implicit in the word "mainly" is that more than half of the relevant amount of the ordinary or statutory income is a reward for the personal efforts or skills of an individual.

26.	In interpreting Division 84 it is relevant to ask whether the income is mainly a reward for an individual's personal efforts or skills. If it is, then it is personal services income. If it is not, then that particular amount of income is not personal services income, and not within the alienation measure.

27.	Whether or not payments are mainly a reward for personal efforts or skills is determined having regard to the commercial substance of the arrangements between the parties. Where the commercial substance of the arrangement is that there is one set of obligations (different components of which are integral or common to each other) they are looked at together. For example, the sale and installation of an article would be looked at as one obligation rather than separate sources of income, where they are integral components of one transaction. Similarly, when you are providing plumbing services all the activities associated with these services are considered to be provided under a single contractual obligation giving rise to one amount of income. In these cases, there is, in substance, the primary obligation and the other components of the contract are ancillary to the primary obligation. Those obligations, looked at as a whole, are the source of the relevant amount of income and are to be considered as a whole to determine whether the income is mainly a reward for the individual's personal efforts or skills.F11

28.	This is contrasted with the situation where the contract deals with obligations which are completely separate and distinct, in which case each is, in substance, the source of the separate amounts of income. For example, where an individual derives income from plumbing activities and also from the sale of household cleaning products, the two activities are not related and give rise to separate amounts of income. Similarly, where, under a contract, different individuals do the work, the practical source of the income is the work of each individual.

29.	The meaning of personal services income is wider than that which might otherwise be the case under the common law, but it does not include income that is mainly:

•	from an entity supplying goods or granting a right to use property;

•	generated by assets an entity holds; or

•	generated by the business structure.

30.	Where personal services are provided that are ancillary to:

(a)	the sale or supply of goods;

(b)	the granting of a right to use property;

(c)	the supply and use of assets that have a significant role in the generation of the income; or

(d)	the generation of the income by the business structure,

the income so generated is not personal services income.

31.	The determination of whether income is mainly a reward for the personal efforts or skills of an individual or is income generated from the circumstances outlined in paragraph 30(a) to (d) above, requires the exercise of practical judgment as to whether the value contributed by the efforts or skills of the individual exceeds the value of the other inputs, such as the efforts of other workers, and the use of plant and equipment or machinery, or intellectual or other property or goodwill. In making that judgement, regard may be had to factors including:

•	the nature of the activities being conducted that generate the income;

•	the extent to which the amounts paid or payable or particular amounts paid or payable by a service acquirer to an individual or a personal services entity under an agreement is primarily for the personal efforts or skills of a particular individual;

•	the extent to which the contract price has been calculated having regard to the costs to be borne by an individual or a personal services entity in providing and using assets or plant and equipment in the performance of the obligations of the individual or the personal services entity to the service acquirer;

•	the market price of using any equipment, plant or tools in comparison with the market price of hiring the relevant labour or skills for the same period;

•	the nature, size and significance of the plant and equipment or other assets that are used by the individual or the personal services entity in relation to the income-producing activity;

•	the value of the asset in relation to the total income generated in the performance of obligations under an agreement;

•	the uniqueness and degree to which an asset is specialised in the performance of a particular function;

•	the uniqueness, level of skill or degree of specialisation of an individual to provide the particular services contracted for by the service acquirer;F12

•	whether the contractual payments made to an individual or a personal services entity is for the transfer of the ownership or a right in respect of an item that is produced by the individual or personal services entity;

•	the existence of goodwill; F13

•	the existence of substantial income-producing assets;

•	the size of the business operation; and

•	the contribution of other workers to the income-earning activities.

32.	Whilst the above is a list of factors that are relevant, no one factor may be decisive, nor is the list exhaustive. Their individual weighting will depend on the circumstances of each case.

33.	Even if an amount of income is personal services income, the alienation measure will not apply where that personal services income is earnt in the course of conducting a personal services business (i.e., where you meet one of the tests in paragraph 6 or you have a PSBD).

Individuals affected are not employees

34.	Section 84-10 ensures that the application of the alienation measure (Part 2-42) to an individual does not make the individual an employee. The application of the alienation measure does not result in a change in the nature of contractual relationships between parties to an arrangement involving the rendering of personal services. Nor does the operation of Part 2-42 affect an individual's or a personal services entity's entitlement to an Australian Business Number, or entitlement to be registered for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

DATE OF EFFECT

35.	This Ruling first applies to the 2000-2001 income year. The Ruling does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

EXPLANATIONS

Meaning of Personal Services Income

36.	Division 84 of Part 2-42 of the ITAA 1997 sets out the meaning of personal services income.

37.	Section 84-5 provides:

"(1)	Your *ordinary income or *statutory income, or the ordinary income or statutory income of any other entity, is your personal services income if the income is mainly a reward for your personal efforts or skills (or would mainly be such a reward if it was your income).

Example 1: NewIT Pty. Ltd. Provides computer programming services, but Ron does all the work involved in providing those services. Ron uses the clients' equipment and software to do the work. NewIT's ordinary income from providing the services is Ron's personal services income because it is a reward for his personal efforts or skills.

Example 2: Trux Pty. Ltd. Owns one semi-trailer, and Tom is the only person who drives it. Trux's ordinary income from transporting goods is not Tom's personal services income because it is produced mainly by use of the semi-trailer, and not mainly as a reward for Tom's personal efforts or skills.

Example 3: Jim works as an accountant for a large accounting firm that employs many accountants. None of the firm's ordinary income or statutory income is Jim's personal services income because it is produced mainly by the firm's business structure, and not mainly as a reward for Jim's personal efforts or skills.

(2)	Only individuals can have personal services income.

(3)	This section applies whether the income is for doing work or is for producing a result.

(4)	The fact that the income is payable under a contract does not stop the income being mainly a reward for your personal efforts or skills."

Does the statutory definition widen the common law meaning of personal services income?

38.	The scheme of the alienation measure is to draw a wide net as to what constitutes personal services income but then to exclude from the measure situations where the individual or personal services entity conducts a personal services business.

39.	As section 84-1 explains, under the alienation measure, personal services income that is being diverted to other entities is attributed to the individual providing the labour or skill, except where one of the tests outlined at paragraph 6 above is satisfied or a PSBD is obtained.F14 The Examples in subsection 84-5(1) reflect this view. This view also underlies subsection 84-5(1) which specifically includes income of any other entity as personal services income even where it may not legally be the income of the individual.

40.	Similarly, subsections 84-5(2), (3) and (4) make it clear that a wide concept of personal services income is intended. For example, while the alienation measure is predicated on the view that personal services income can be the income of an individual or of a personal services entity, subsection 84-5(2) ensures that for tax purposes only an individual can have personal services income. Similarly, subsection 84-5(3) provides that it is personal services income even if the income is for producing a result, which has been considered to be the mark of an independent contractor at common law (see World Book (Australia) Pty Ltd v. FC of T 92 ATC 4327 at 4334; (1992) 23 ATR 412 at 419-420). The wording of paragraphs 87-60(5)(a) and 87-65(5)(a) also support this conclusion.

41.	According to paragraph 1.25 of the Explanatory Memorandum subsection 84-5(4) is intended to "overcome any argument that particular income does not fall within the definition of personal services income because it results from a contractual right".

42.	Division 87 provides that Divisions 85 and 86 do not apply to personal services income that is income from conducting a personal services business. Division 87 then sets out a number of tests for determining if the income is from the conduct of a personal services business, including the "results test" in subsections 87-60(5) and 87-65(5). The personal services business tests and the "results test" are based on the traditional tests of who is an independent contractor and in business on their own: see for example Stevens v. Brodribb Sawmilling Co. Pty Ltd (1985-86) 160 CLR 16, Queensland Stations Pty Ltd v. FC of T (1945) 70 CLR 539 and Hollis v. Vabu Pty Ltd [2001] HCA 44, 9 August 2001.

43.	The "results test" in subsections 87-60(5) and 87-65(5) also reflects the legislative scheme outlined above, and would be otiose if personal services income was given a construction in line with the dicta in the cases referred to at paragraph 51 below.

Does the definition refer to all the income or to specific items or amounts of income?

44.	The definition of personal services income in subsection 84-5(1) requires an analysis of the ordinary or statutory income of an individual or a personal services entity to work out which amounts are mainly a reward for the rendering or provision by that individual, or an individual, of his or her personal efforts or skills. This is because the assessable income rules in Division 6 (e.g., subsection 6-5(4)) operate on particular amounts of income. In addition, Division 86, and in particular subsection 86-15 which refers to "an amount" of ordinary income or statutory income, reinforces this conclusion. The Commissioner does not agree with the alternative construction which reads the definition as applying to all the income of the individual or personal services entity, because such a construction would attribute to an individual income that is not personal services income, which is clearly not intended (see for example, subsection 86-30).

45.	To decide whether an entity's income is your personal services income, assume that it is your income, and ask yourself whether it would mainly be a reward for your personal efforts or skills. If the character of the income is mainly a reward for your personal efforts or skills and is not mainly from the use of assets, sale of goods, or a business structure, it will be personal services income within the meaning of subsection 84-5(1), although it may legally have been derived by the personal services entity.

46.	The reference to the income that is "mainly" a reward for an individual's personal efforts or skills requires a conclusion as to the substance of the arrangements between the relevant parties and whether, as a practical matter, the income is mainly generated by the efforts or skills of an individual.

47.	The Macquarie Dictionary defines "mainly" as " chiefly; principally; for the most part." In Fawcett Properties Ltd v. Buckingham County Council [1961] AC 636 the term mainly was discussed, by Lord Morton of Henryton who stated (AC at 669):

"The word "mainly" at once gives rise to difficulties. Probably it means "more than half" and this was the meaning which this House gave to the phrase in Bromley v. Tryon [1952] AC 265."

48.	The use of the word "mainly" in this context does not preclude the use of some materials, tools or plant and equipment in the rendering or provision of personal services. For example, the use of:

•	a personal computer by a computer consultant to perform work under a contract that is essentially for his or her personal skills;

•	hand or electrical tools by a tradesperson;

•	off-the-shelf computer software packages used by individuals; or

•	the drawing board of a draftsperson,

will not alter the character of the income as personal services income if as a practical matter the income is mainly generated by the personal efforts or skills of an individual.

49.	Implicit in the word "mainly" is that more than half of the relevant amount of the ordinary or statutory income is a reward for the personal efforts or skills of an individual.

50.	Paragraph 1.27 of the Explanatory Memorandum provides the following examples of personal services income:

•	salary or wages;

•	income of a professional person practising on his or her own account without professional assistance – for example, a medical practitioner in a sole practice;

•	income payable under a contract which is wholly or principally for the labour or services of a person;

•	income derived by a professional sports person or entertainer from the exercise of his or her professional skills. This does not include income from endorsement by the person of a sponsor's products; and

•	income derived by consultants, for example, computer consultants or engineers from the exercise of personal expertise.

Alternative view

51.	It could be argued that a reward mainly for personal efforts or skills covers similar ground as a payment that is wholly or principally for labour which is the definition used in section 221A of the ITAA 1936. This is not considered to be the case. However, if this were the case, it might be arguable that income derived by an independent contractor (see Neale v. Atlas Products Ltd (1955) 94 CLR 419 at 425 and World Book (Australia) Pty Ltd v. FC of T 92 ATC 4327 at 4333-4335; (1992) 23 ATR 412 at 418-421) is not personal services income. A further argument based on comments in Liedig v. FC of T 94 ATC 4269 at 4279; (1994) 28 ATR 141 at 153-154 might be that income derived by a personal services entity is not personal services income. However, both arguments are at odds with the purpose and statutory context of the alienation measure.

Contracts for labour and skills where some materials are used

52.	The issue of contracts that are for the work and labour of an individual, where the supply of some materials occurs, was discussed by Slesser LJ in Robinson v. Graves [1935] 1 KB 579. At page 591 Slesser LJ expressed the view, in the context of the facts of that case, that

"... it is here shown that the material, the paint and the canvas, were merely ancillary to the technical work of producing the work of art and that therefore this is a contract for work and labour".

53.	It is important, therefore, to distinguish between cases where the supply of materials is ancillary to the work to produce a result and those where the supply of materials is the principal obligation under the contract and where the use of labour to do some work in connection with that supply is ancillary.

54.	If the supply of materials is ancillary to the doing of work, then the contract would be for work and labour and income under that contract would be regarded as being mainly a reward for personal efforts or skills. If the supply of labour or the doing of work is ancillary to the supply of materials, then any income under a contract where the principal obligation is the supply of materials would not be personal services income within the meaning of subsection 84-5(1).

55.	"Ancillary" in various contexts, has been held to mean "not necessary thereto or a primary part thereof" ( Pearce v. London & South Western Railway [1900] 2 QB 100), or "auxiliary or appurtenant to the purpose for which the business is carried on" ( Green v. Britten [1904] 1 KB 350). So skill and effort can be a significant component, just as long as it is not the main component of the obligations under a contract.

56.	Some instances where the supply of materials may be regarded as ancillary to the rendering of personal services are:

•	the supply of art supplies by a graphic designer in doing design work for a service acquirer;

•	the supply of nails and glue by a carpenter in carrying out repairs on behalf of a building company;

•	the supply of paint by a painter in carrying out his work for a painting company;

•	the supply of wiring by an electrician in connection with the installation of wiring into a building; and

•	the supply of paints, canvas and other consumables by an artist who has been commissioned to paint a portrait.

What is not personal services income

57.	While the meaning of personal services income may be wider than might otherwise have been the case under the common law, the definition of personal services income in section 84-5 includes examples which indicate that distinctions still need to be made.

58.	Paragraph 1.23 of the Explanatory Memorandum explains that income which is:

•	ancillary to an entity supplying goods or granting a right to use property; or

•	principally generated by assets an entity holds,

is not personal services income as it is not paid mainly as a reward for the individual's personal effort.

59.	Example 2 in section 84-5(1) provides an example of income from the use of an asset (i.e., a semi-trailer). The underlying assumption for this example was that the main component of the contract was the use of the semi-trailer rather than the personal services that were also provided.F15

60.	In addition, Example 3 in subsection 84-5(1) indicates that income produced mainly by an entity's business structure is not mainly a reward for an individual's personal efforts or skills. The income is generated from the business structure and not the personal services of an individual.F16

61.	There is some overlap between the distinctions drawn out in the Examples in subsection 84-5(1) and the personal services business and "results" tests available in Division 87. On the basis of the legislative structure, a logical reconciliation is that the Examples in subsection 84-5(1) are intended to illustrate what is or what is not personal services income, and alleviate the need to go further and consider the tests in Division 87. The reference to the use of income-producing assets in Example 2 in subsection 84-5(1) is also explicable in these terms.

62.	In any event, genuine business undertakings that are in receipt of personal services income would be excluded from the alienation measure under Division 87 by satisfying one of the tests outlined in paragraph 6, or by obtaining a PSBD from the Commissioner.

Income mainly from the supply or sale of goods is not personal services income

63.	Even where personal efforts or skills are used in the production of something that is to be sold, then any later contract for the sale of that item or property would be for the sale or supply of goods. The payments made to the individual or personal services entity would not be in respect of an individual's personal efforts or skills in relation to the sale of goods but, rather, to acquire ownership (legal and beneficial) of the item produced.F17

64.	Where, however, the substance of a contract or related contracts is for the personal labour or efforts, or the exercise of the skills of an individual for a service acquirer, the fact that ownership of materials that are used passes to the service acquirer does not alter the substance of the contract, which is mainly for the efforts and skills of the individual.

Income mainly from the supply and use of income-producing assets is not personal services income

65.	Distinctions will need to be drawn between those cases where plant and equipment or tools of trade are used by an individual or a personal services entity under an agreement that is for the personal efforts or skills of an individual, and those where the supply and use of the plant or equipment or other assets is the main source of the income of the individual or the entity. This will be relatively simple where there are separate contracts dealing with the supply or use of the assets and the provision of personal services, such that these are separate and distinct obligations that give rise to separate amounts of income.

66.	Where components of a contractual obligation are integral to the performance of that obligation, judgment is required to determine whether the income is mainly the result of the use or supply of assets, or the provision of personal efforts or skill.

67.	In determining if income is from the supply and use of income-producing assets in these circumstances, the following factors are relevant considerations:

•	the market value of the supply and use of the asset, compared with the market value of the personal services;F18

•	the basis on which the contract price has been calculated and the extent to which the contract price relates to the costs borne by the individual or personal services entity in supplying and using the plant and equipment or other assets in the income-producing activity;

•	the significance or uniqueness of the assets in the income-producing activity;

•	the gross value of the asset in relation to the income of the individual or personal services entity from the particular activity; and

•	the role the asset plays in generating the income.

68.	The alternative view that there is no personal services income where the supply and use of an asset is a pre-condition for generating income is not accepted, because it is inconsistent with the examples provided in the Explanatory Memorandum. For example, the use of equipment such as a personal computer or the general programming software of a computer programmer does not suffice to alter the character of income from being mainly a reward for personal efforts or skills into one for the supply and the use of income-producing assets.F19 Rather it is considered that the statutory provisions require an analysis of the relative contribution of the personal services and of the assets used, to the generation of the income.

Income from a business structure is not personal services income

69.	The alienation measure does not apply to businesses that have a substantial profit-yielding structure. The distinction between income that is mainly a reward for personal efforts or skills and income from a business structure will need to be made having regard to factors such as the number of arm's length employees or others engaged to perform work, the presence of goodwill, the extent to which income-producing assets are used to derive the income, the nature of the activities carried out, the size of the operation and the extent to which the income is dependent upon a particular individual's own personal skills, efforts or expertise.

70.	Example 3 in subsection 84-5(1) provides an illustration of a situation where income is considered to be from a business structure. Examples in this ruling provide other illustrations of when income is or is not generated by a business structure.

EXAMPLES

71.	It is important to note that even if there is personal services income, the alienation measure will not apply if the individual or personal services entity satisfies one of the tests outlined in paragraph 6 or has a PSBD, so that the relevant personal services income is income from conducting a personal services business.

What is personal services income?

Example 1

72.	Chris is a computer consultant who provides his personal services through a family company, ChrisCom Pty Ltd. The company has a contract with Megabite Computer Ltd to provide the services of Chris. Chris provides those services at the premises of Megabite. The contract requires Chris to be at the premises of Megabite between 9.00am and 5.00pm Monday to Friday and the company is paid at an hourly rate of $75.00.

73.	ChrisCom Pty Ltd also operates a computer spare parts business that sells both computer hardware and software. Chris provides his personal services to install software for clients of that business. He provides these services in the evening. The cost of installation is usually built into the price for the hardware, and represents a relatively small proportion of the price.

74.	In this situation, income of the company that is from the contract with Megabite Computer Ltd is the personal services income of Chris. This is personal services income because it is mainly a reward for Chris's personal skills and efforts in providing computer consulting services to Megabite. The income is not from a business structure or mainly a reward for:

•	the sale or supply of goods;

•	the granting of a right to use property;

•	the supply and use of assets; or

•	other inputs, such as the efforts of other workers,

•	as the income is generated mainly from the labour and skill required to fulfil the contract.

75.	The income is, therefore, personal services income as defined in subsection 84-5(1).

76.	However, the income that the company gets from the provision of Chris's services to install software is ancillary to the sale of hardware and software. Therefore, income from those services would mainly be for the sale and supply of goods. It would not be personal services income of Chris, but would properly be regarded as income of the company.

Example 2

77.	Norm is a carpenter who operates in partnership with his wife. He is a qualified tradesman. The partnership contracts with Major Works Pty Ltd, a large building contractor, to do maintenance work on various sites for Major Works. The partnership supplies the tools of trade and provides some materials e.g., nails, glue and occasionally buys timber to do the work that it is contracted to do. The majority of materials are supplied by the building contractors. The partnership invoices the building contractor at the completion of each job (which usually takes about a week). The invoices are calculated on an hourly basis for the labour component of the work, plus the cost of materials supplied by the partnership. Norm's efforts and skills represent approximately 90% of the amount charged on each invoice.

78.	In this instance, although some materials are supplied in doing the work, the substance of the contract is for Norm's personal labour, and it is Norm's personal skills and effort which predominantly generate the relevant income. This conclusion has been reached by having regard to the factors listed in paragraph 31 of this ruling. In particular, the value of the labour contributed by Norm exceeds the value of other inputs, being the use of the tools of trade and the supply of materials. Therefore, the income is mainly a reward for Norm's personal efforts or skills or for producing a result from Norm doing the work. The income, therefore, is Norm's personal services income as defined in subsection 84-5(1).

Distinction between personal services income and income from a business structure or from the use of assets

Example 3

Example 1.3: Explanatory Memorandum

79.	Michelle is a draftsperson who operates through a family trust of which Mich Pty Ltd is the trustee. Michelle is the sole shareholder in Mich Pty Ltd. An agreement is entered into between Big Drafting Co. Ltd and Mich Pty Ltd to supply Michelle's services for a period of 18 months starting on 1 July 2000. The agreement does not specify what assets are to be used by Michelle or Mich Pty Ltd in doing the work. Mich Pty Ltd has an AUTOCAD machine and computer equipment that is used by Michelle in doing the work.

80.	As the contract is only for the provision by Mich Pty Ltd of the services of Michelle, the use of the AUTOCAD machine and the computer equipment would be regarded as ancillary to the provision of the personal efforts and skills of Michelle. The use of that equipment is common to that professional environment, but, nevertheless, the income is being generated mainly as a result of Michelle's personal skill. Income received by Mich Pty Ltd under the agreement with Big Drafting Co. Ltd is Michelle's personal services income.

Example 4

81.	Russell is a courier driver who operates through a company, Russell Pty Ltd. The company has a contract with a large courier company to collect and deliver parcels and goods from one place to another. Under the terms of the contract with the courier company, Russell Pty Ltd is specifically required to provide a vehicle with a carrying capacity of one tonne. Russell Pty Ltd is responsible for the payment of all statutory costs and fees payable in respect of the vehicle (e.g., registration and comprehensive motor vehicle insurance) and to keep the vehicle in a mechanically sound, roadworthy and clean condition. The courier company supplies and fits the vehicle with a mobile radio and arranges to paint and/or signwrite the vehicle with the colours of the courier company (both at the courier company's expense).

82.	Russell Pty Ltd is paid a specified rate per kilometre for each task allocated to Russell during the day (subject to a minimum safety net payment rate per hour from the time Russell commences to travel in order to pick up the first job of the day until the time he makes his final delivery on the same day). Russell Pty Ltd is permitted to engage the services of another driver for the vehicle, subject to the approval of the courier company. Nevertheless, Russell is the only person engaged by Russell Pty Ltd to drive the vehicle.

83.	For the purposes of undertaking its contractual obligations, Russell Pty Ltd purchases a commercial vehicle (e.g., a one tonne courier van) that is suitable for what is known as "taxi truck work". The vehicle is generally not suitable and is not normally used for domestic purposes (e.g., it does not have rear passenger seats and only has limited safety features).

84.	Importantly, the vehicle represents a sizeable asset, it is purpose built for the relevant work, and it is not generally suitable for domestic purposes. This factor points to the income being generated mainly from the use of the vehicle. In addition, based on the NSW Courier and Taxi Truck Contract Determination 2000, the remuneration paid by the courier company varies depending on the carrying capacity of the vehicle. The larger the carrying capacity, the higher the remuneration paid. This is indicative of the greater costs borne by an individual or personal services entity in supplying and maintaining a commercial vehicle for the income-producing activity. It also reflects what the service acquirer is paying for under the contract and the importance of the commercial vehicle to the derivation of income. These factors also point to the income being generated mainly from the use of the vehicle. Even though for all practical purposes Russell is the only driver, he does not have specialised skills above being well presented and a holder of an appropriate driver's licence. Accordingly this factor is neutral in this case. Another factor is that the market value of the supply and use of the one tonne commercial vehicle is, according to the transport industry, higher than the value of the personal services of the driver of the vehicle, but the differential between the market value of the use of such a vehicle and the cost of hiring a driver for the period of its use is not substantial. This factor points to the income being mainly generated by the personal services business, but the narrow differential between the relevant contributions reduces the persuasive weight of this factor.

85.	Weighing up the above factors, particularly the nature of the vehicle and the consideration paid by the courier company, it would be reasonable to conclude that the amounts payable to Russell Pty Ltd for the taxi truck work are not mainly for the personal efforts or skills of Russell and, therefore, are not the personal services income of Russell within the meaning of subsection 85-4(1). The conclusion that the income is not mainly personal services income would be reinforced where Russell Pty Ltd had other indicators of a business structure (e.g., other vans, drivers, business premises, goodwillF20 or other clients).

Example 5

86.	Francis is a courier driver who operates through a company, Francis Pty Ltd. The company has a contract with a large courier company to collect and deliver parcels and goods from one place to another. Under the terms of the contract with the courier company, Francis Pty Ltd is specifically required to provide a vehicle with a carrying capacity of up to 750 kilograms. Francis Pty Ltd is responsible for the payment of all statutory costs and fees payable in respect of the vehicle (e.g., registration and comprehensive motor vehicle insurance) and to keep the vehicle in a mechanically sound, roadworthy and clean condition. The courier company supplies and fits the vehicle with a mobile radio and arranges to paint and/or signwrite the vehicle with the colours of the courier company (both at the courier company's expense). Francis Pty Ltd is paid a specified rate per kilometre for each task allocated to Francis during the day (subject to a minimum safety net payment rate per hour from the time Francis commences to travel in order to pick up the first job of the day until the time he makes his final delivery on the same day). Francis Pty Ltd is permitted to engage the services of another driver for the vehicle, subject to the approval of the courier company. Nevertheless, Francis is the only person engaged by Francis Pty Ltd to drive the vehicle.

87.	For the purposes of undertaking its contractual obligations, Francis Pty Ltd purchases an ordinary passenger motor vehicle (e.g., a hatchback, sedan or station wagon) that is suitable for what is known as "courier work". The vehicle is also suitable and is used for domestic purposes.

88.	Importantly, the motor vehicle, although a substantial asset, is not a commercial vehicle and is not considered to be specifically adapted or purpose built for the relevant work. Nor is it exclusively used for business purposes. In addition, based on the NSW Courier and Taxi Truck Contract Determination 2000, the remuneration paid by the courier company varies depending on the carrying capacity of the vehicle. For smaller vehicles, the remuneration paid is significantly less than for larger commercial vehicles. This is indicative of the lower costs borne by an individual or personal services entity in supplying and maintaining a passenger motor vehicle for the income-producing activity. Another relevant factor is that, according to the transport industry, the market value of the supply and use of an ordinary passenger motor vehicle may be less than the value of the personal services of the driver of the vehicle. This will vary depending on the size and nature of the vehicle. It may also vary because the costs of hiring a vehicle are related to the kilometres travelled, fuel and other running costs and the profit margin associated with the particular vehicle and the nature of the work. These factors point to the income being mainly from the personal services of Francis, even though Francis does not possess special skills other than being well presented and holding an appropriate driver's licence.

89.	While the vehicle is a necessary requirement for fulfilling the contractual obligations, the statutory provisions require an analysis of the relative contribution of the personal services and of the assets used, to the generation of the income. Having regard to the nature of the vehicle, the consideration paid by the courier company and the market value of the components of the activity (where this points to the personal services as providing the greater value), it is reasonable to conclude that the amounts payable to Francis Pty Ltd for the courier work are mainly for the personal efforts or skills of Francis and, therefore, are the personal services income of Francis within the meaning of subsection 85-4(1). If Francis Pty Ltd had a business structure (e.g., other vans and drivers, business premises and/or goodwill or other clients) and the vehicle was an asset of that business, then the income would not be characterised as personal services income.

90.	Even where it is personal services income, the alienation measure will not apply if Francis is able to satisfy the results test, the unrelated clients test, the employment test, or the business premises test. As Example 16 in Taxation Ruling TR 2001/8 shows, an individual or personal services entity that provides courier services would usually be able to satisfy the results test.

Example 6: Income from a business structure

91.	Bob owns an earthmoving company, Bob's Earthworks Pty Ltd, with assets including two trucks, a backhoe tractor and small grader. The company has six employees, five of whom are plant operators. Bob is employed by Bob's Earthworks Pty Ltd as the managing director and he also performs some of the principal work that generates the income of his company. The assets that are operated by the other employees are the means by which the company generates its income even though the plant operators use their personal skills to contribute to income production. The income of the company is not reliant on the skills of any one individual; it can derive income as long as it owns or has access to the necessary equipment.

92.	In this example, the income of the company is derived from a business structure. A business structure is determined by a number of collective factors including the extent to which the income depends upon the efforts, expertise or skills of an individual; the number of employees or contractors engaged to perform work; the nature of the activities being conducted that generate the income; the existence of goodwill or substantial income-producing assets; and the size of the business operation.

93.	Therefore, as the company has income-producing assets and a number of employees who are employed to perform the services, the income is generated from the operations of a business structure. The income of the company is not personal services income of any individual within the meaning of section 84-5 of the ITAA 1997.

Example 7: Income from a business structure

94.	John is a partner in a large accounting partnership which has 20 partners and 200 employees.

95.	As a partner, John's income from the partnership flows from property, namely, his proprietary interest in the partnership. That interest is an interest in, among other things, the profit derived by the partnership as a whole, i.e., in the profits generated by the other partners and employees from custom attracted by the goodwill of the partnership, and use of the partnership assets. When a partner participates in profits generated not merely in law, but as a commercial reality, from the efforts of the entire firm, it is properly attributed to the taxpayer's interest in the business structure or organisation of the partnership (which is his capital).

96.	Accordingly, as a partner in the partnership, John's income is income of a business structure rather than his own personal services income. The partnership has numerous employees and business assets and the income of the partnership is generated by these employees and the partnership assets and goodwill.

Example 8: Income from a business structure

97.	Jim is one of the employees of the accounting partnership and works in an audit area.

98.	As such, Jim is employed to provide services to clients attracted by the goodwill of the partnership. When clients come to the firm seeking audit work by the firm, they are looking for a reputable well-known firm to deal with. They do not know Jim individually and do not care whether Jim is employed by the firm. When Jim is doing the client's audit work, his efforts are part of the team effort of the firm itself.

99.	In the usual case, the income of the partnership is derived from the goodwill of the partnership (in attracting the custom) and the organisation of the partnership's human resources and tangible assets to produce the required services, and it is that which is rewarded rather than the personal efforts or skills of Jim.

100.	None of the firm's ordinary income or statutory income is Jim's personal services income because it is produced mainly by the firm's business structure, and the income of the partnership is not mainly a reward for Jim's personal efforts or skills. When Jim provides his services, he is working on behalf of the partnership rather than for himself.

Example 9: Income that is personal services income

101.	Ralph is in partnership with his spouse to provide accounting services and the partnership only has one client.

102.	Ralph's spouse does not participate in the partnership activities other than to answer the phone and do the banking. The spouse does not do any of the partnership's principal work.

103.	In this situation, Ralph is doing all of the principal work of the partnership and it is Ralph's personal efforts that are generating the partnership income. Accordingly, all of the partnership income would be the personal services income of Ralph. This example has similarities with the facts in Egan v. FC of T (2001) 47 ATR 1180 where Senior Member Pascoe found the facts to be as follows:

"the technical expertise of Mr Egan was the principal or sole reason which enabled TM to derive fees...I am unable to find that any other service of significance was provided...It appears that TM owns some computer and other office type equipment but the accounts of the company do not show any extensive investment in equipment and all indications are that it was no more than a busy computer consultant would have at his home."

104.	This example can be contrasted with Example 8 in that the partnership in which Ralph is a partner does not have significant assets, has no employees, and only has one client.

Example 10: Income that is mainly from the use of an asset

105.	Moov Pty Ltd owns one semi-trailer, and Bob is the only person who drives it. Moov Pty Ltd has a contract with a large supermarket chain to transport goods throughout Australia. The semi-trailer is a substantial asset which is specifically suited to Bob's transport business (and is not generally suitable for private purposes). Based on market rates, the use of the vehicle for the relevant period represents substantially more than 50% of the contract price; whereas, Bob's services as driver of the semi-trailer represent substantially less than 50% of the contract price.

106.	Because the income is not mainly a reward for Bob's efforts or skills, the income is not personal services income and not subject to this measure. The situation would not be any different if the semi-trailer is leased by Moov on an arm's length basis.

Example 11: Income that is personal services income

107.	Dihanne is a welder who operates through a partnership with her spouse. The partnership contracts with SkyWeld Pty Ltd to provide the services of Dihanne on a major project. The contract is for a term of 18 months and the contract specifies that the work is to be done by Dihanne. Under the contract, the partnership is not liable for defects in the work, although Skyweld is able to terminate the contract if her work is unsatisfactory. The partnership is paid on an hourly basis. Dihanne works on the project site, which is about 50 kilometres from where she lives.

108.	Dihanne has a station wagon that amongst other things she uses to transport her welding equipment to and from the site.

109.	In this case, income from the welding work that Dihanne does is her personal services income. This is because the income is mainly a reward for the personal efforts and skills of Dihanne as a welder. The efforts and skills of Dihanne exceeds the value of all other inputs such as the use of plant and equipment. In other words, the income generated under the contract relates mainly to the labour component.

Distinction between personal services income and income from the supply or sale of goods

Example 12: Income that is personal services income

110.	Donna is a computer programmer who writes programs under a contract with Big Computer Co. Under the contract, Donna is required to do the work at the premises of Big Computer using the company's equipment. She has no ownership of the programs that are written. She gets paid on an hourly basis and is not liable for defects in this work, although BC Co. can terminate the contract if the work is unsatisfactory.

111.	In the evenings, at home, Donna also writes and produces computer games that she sells to Internet service providers for on-line computer games players. She usually approaches the Internet service providers and sells the game to the highest bidder.

112.	The ordinary income of Donna that is derived under her contract with Big Computer Co. is mainly a reward for Donna's personal efforts or skills and would be personal services income under subsection 84-5(1). This is because it is mainly her particular skill that is generating the income.

113.	Income under the contracts for sale of the computer games would not be mainly a reward for Donna's personal efforts or skills but would be from the sale of the software. This income would not be personal services income within the meaning of subsection 84-5(1).

Example 13: Income from the supply or sale of goods

114.	Rick is a tax expert who writes a book on the new PAYG measures. He approaches a number of publishing houses to get it printed and finally enters into a contract under which he sells the copyright to the book for $20,000 plus a royalty of 40 cents per book.

115.	Income from the sale of the copyright is not personal services income. Rather, it is a transfer of property and income is consideration for the transfer of the proprietary rights from Rick to the publishing house.

Example 14

116.	Rick is a tax expert who is commissioned by a publisher of taxation books to write a book on the new PAYG measures. The contract specifies that when the book is finished to the standard required by the publisher and the copyright passes from Rick to the publisher, Rick will be paid a sum of $150,000.

117.	It is not considered the contract is for the sale of property or goods, like example 13, because in this case it is Rick's efforts and skills that mainly generate the income. Therefore, Rick's income from the contract is personal services income.

Example 15

118.	Jim is a medical practitioner who operates his practice through a company, Jim Pty Ltd, at business premises in a busy shopping centre. The company employs Jim as a doctor and the practice has many clients. Jim Pty Ltd makes a monthly payment of $20,000 to Jimbo Pty Ltd, trustee of the Jim Family Trust. Jimbo Pty Ltd holds the premises from which the practice is conducted. It also holds all the assets used in the medical practice. Jimbo Pty Ltd also employs the administrative staff (3 in number) whose services are used in the medical practice. The payment by Jim Pty Ltd to Jimbo Pty Ltd as trustee is in line with guidelines established by Phillips v. FC of T 78 ATC 4,361; (1978) 7 ATR 345 for payments to service entities and covers the use of the plant and equipment and the cost of providing a receptionist, filing clerk and an assistant. The premises are leased to Jim Pty Ltd under a separate lease agreement.

119.	Jimbo Pty Ltd pays wages to each of the 3 administrative staff, who work 40 hours a week, at the rate of $15 per hour.

120.	The payment of $20,000 per month is an arm's length amount to cover a number of services, all of which comprise the business being conducted by the trust. The payment is not mainly a reward for an individual's efforts or skills, having regard to the relative worth and market value of the use of the assets compared with the personal services provided. In these circumstances, income of the trust is not personal services income as defined.

121.	As for Jim, the patients' fees are mainly a reward for his efforts and skills, but the alienation measures would not apply where, for example, the practice has more than one unrelated client, or has separate business premises.

DETAILED CONTENTS LIST

122.	Below is a detailed contents list for this Ruling:

What this Ruling is about	1
Class of persons/arrangement	3
The Relevance of Personal Services Income	4
The effect of the alienation measure	8
Background	11
Definitions	15
Personal services entity	15
Service acquirer(s)	16
Diagram showing the operation of the Alienation Measures	16
Related Rulings	18
Ruling	19
Individuals affected are not employees	34
Date of effect	35
Explanations	36
Meaning of Personal Services Income	36
Does the statutory definition widen the common law meaning of personal services income?	38
Does the definition refer to all the income or to specific items or amounts of income?	44
Alternative view	51
Contracts for labour and skills where some materials are used	52
What is not personal services income	57
Income mainly from the supply or sale of goods is not personal services income	63
Income mainly from the supply and use of income-producing assets is not personal services income	65
Income from a business structure is not personal services income	69
Examples	71
What is personal services income?	72
Example 1	72
Example 2	77
Distinction between personal services income and income from a business structure or from the use of assets	79
Example 3	79
Example 1.3: Explanatory Memorandum	79
Example 4	81
Example 5	86
Example 6: Income from a business structure	91
Example 7: Income from a business structure	94
Example 8: Income from a business structure	97
Example 9: Income that is personal services income	101
Example 10: Income that is mainly from the use of an asset	105
Example 11: Income that is personal services income	107
Distinction between personal services income and income from the supply or sale of goods	110
Example 12: Income that is personal services income	110
Example 13: Income from the supply or sale of goods	114
Example 14	116
Example 15	118
Detailed contents list	122

Commissioner of Taxation

31 August 2001


[F1]

After the enactment of the proposed amendments, the ruling will be reviewed and will be modified, if necessary.


[F2]

The note to section 86-10 makes it clear that the general anti-avoidance provisions of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) may still apply to cases of alienation of personal services income that fall outside the alienation measure. This may occur for example where the dominant purpose of an arrangment is income splitting.


[F3]

See section 85-35 which provides that Division 85, which relates to deductions for individuals who are not conducting personal services businesses, does not apply to the extent that an amount, payment or contribution relates to personal service income that is received as an employee.


[F4]

See Treasurer's Press Release No.51 of 9 July 2001.


[F5]

See Treasurer's Press Release No.47 of 29 June 2001. If an agent satisfies the four conditions set out in that Press Release, they will not be subject to the alienation measure. The four conditions are that an agent:

•	Receives personal services income from providing services (on behalf of the principal) to customers, and less than 80 per cent of that income is from services provided to each customer;

•	Receives at least 75 per cent of that income as commission or results-based payments, (as opposed to retainers or salary-like payments);

•	Actively seeks customers for their principal; and

•	Does not provide services from the premises of their principal (or the principal's associate).


[F6]

For example, if an individual or personal services entity would have met, or could reasonably have been expected to meet the unrelated clients test, the employment test or the business premises test but for unusual circumstances: see subsections 87-60(3) and (4) and 87-65(3) and (4).


[F7]

The Commissioner's declaration in relation to this deferral was published on 30 August 2000 in the Commonwealth of Australia Gazette No. GN 34.


[F8]

See also Treasurer's Press Release No. 74 of 11 November 1999, and the Explanatory Memorandum which accompanied the New Business Tax System (Alienation of personal Services Income) Bill 2000, the New Business Tax System (Alienated Personal Services Income) (Tax Imposition) Bill (No.1) 2000, and the New Business Tax System (Alienated Personal Services Income) (Tax Imposition) Bill (No2) 2000, (the Explanatory Memorandum).


[F9]

See Treasurer's Press Release No.47 of 20 June 2001 and Treasurer's Press Release No.51 of 9 July 2001.


[F10]

See Example 3 in s84-5. See also Sun Newspapers Ltd v. FC of T (1938) 61 CLR 337 and Taxation Ruling IT 2639 in relation to profit yielding structures; and Hollis v. Vabu Pty Ltd [2001] HCA 44, 9 August 2001, where the High Court held that bicycle couriers are employees and not independent contractors. In the course of their judgment, the majority of the High Court said: "Viewed as a practical matter, the bicycle couriers were not running their own business or enterprise ... The notion that the couriers somehow were running their own enterprise is intuitively unsound, and denied by the facts disclosed in the record."


[F11]

It is arguable that each item in an itemised contract gives rise to a separate obligation. However, such a construction would produce different results depending on form rather than substance.


[F12]

For the purposes of drawing a distinction between independent contractors and employees, the High Court in Hollis v Vabu Pty Ltd said that there is nothing contrary to a relationship of employment in the fact that employees have to supply their own tools and equipment, particularly where the capital outlay is relatively small and the tools and equipment are not inherently capable of use only for the particular work being done. However, a different conclusion might be appropriate where the investment in capital equipment is more significant.


[F13]

See Hollis v. Vabu Pty Ltd [2001] HCA 44, 9 August 2001, where the High Court said that a bicycle courier is unable to generate any goodwill as a bicycle courier.


[F14]

The Explanatory Memorandum notes that there is no equivalent specific rule in the existing law (paragraph 1.17).


[F15]

The issue in question is Humberstone v. Northern Timber Mills (1949) 79 CLR 389 which involved a truck which bore the applicant's own name with the description "carrier"; and Wright v. Attorney – General for the State of Tasmania and Others (1954) 94 CLR 400 which involved a "four to five ton" truck that could be driven by the owner or drivers supplied by the owner was whether the owner/driver was an employee or independent contractor.


[F16]

Contrast Egan v. FC of T (2001) 47 ATR 1180.


[F17]

See also paragraphs 1.29 and 1.30 of the Explanatory Memorandum.


[F18]

This is consistent with the market value approach taken in the employment test (s87-25) in relation to principal work.


[F19]

See also paragraph 1.34 of the Explanatory Memorandum.


[F20]

For example, goodwill may have been generated if Russell Pty Ltd had previously conducted courier work for other principals (although this is not the case here).


Taxation Ruling TR 2000/2 Deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities
Taxation Ruling TR 2000/2

Income tax: deductibility of interest on moneys drawn down under line of credit facilities and redraw facilities

Contents:

What this Ruling is about

Class of persons/arrangement

Line of credit facilities

Redraw facilities

Ruling

Line of credit facilities

First Exception – Borrowed money recouped and repaid

Second Exception – Refinancing mixed purpose debt

Apportionment calculations

Redraw facilities

Date of effect

Explanations

Further borrowings

First Exception – Borrowed money recouped and repaid

Second Exception – Refinancing mixed purpose debt

Alternative views

Examples

Example one

Example two

Example three

Example four

Example five

Preamble

The number, subject heading, Class of person/arrangement, Date of effect and Ruling parts of this document are a "public ruling" for the purposes of Part IVAAA of the Taxation Administration Act 1953 and are legally binding on the Commissioner. The remainder of the document is administratively binding on the Commissioner. Taxation Rulings TR 92/1 and TR 97/16 together explain when a Ruling is a public ruling and how it is binding on the Commissioner.

WHAT THIS RULING IS ABOUT

Class of person/arrangement

1.	This Ruling considers the deductibility of interest incurred by borrowers on moneys drawn down under line of credit facilities and moneys redrawn under other loans offering redraw facilities. It considers the operation of section 8-1 of the Income Tax Assessment Act 1997 ("ITAA 1997") (formerly subsection 51(1) of the Income Tax Assessment Act 1936 ("ITAA 1936")) where the borrowed money has been applied for both income producing and non-income producing purposes.

2.	The cases cited in this Ruling that consider deductibility under subsection 51(1) of the ITAA 1936 have equal application to section 8-1 of the ITAA 1997. All references to subsection 51(1) should be taken as including a reference to section 8-1, and vice versa.

3.	This Ruling applies only to line of credit facilities as described in paragraphs 4 to 8 below and redraw facilities as described in paragraphs 8 to 11 below. This Ruling does not deal with facilities that permit the capitalisation of interest or the applicability of the "refinancing principle" for funds borrowed by business partnerships as discussed in Taxation Ruling TR 95/25.

Line of credit facilities

4.	A line of credit facility is a credit facility taken out with a financial institution under which a borrower may draw down funds up to an agreed credit limit. There are a number of different facilities available. There may be one or more loan contracts and one or more borrowers. The line of credit may be fully drawn, i.e., the taxpayer borrows up to the credit limit, or partly drawn, i.e., the taxpayer draws only some of the funds leaving credit available to be utilised at a later date. If the facility is fully drawn the taxpayer can only draw further funds if payments in excess of interest, fees and charges are made into the facility. Where the facility is partly drawn the taxpayer can draw down further funds up to the credit limit without making repayments of principal.

5.	The facility may operate with one account that is used for all draw downs. Funds may be drawn down from a single line of credit account up to the full amount of the available credit limit and may be used for either income producing or non-income producing purposes or both.

6.	Alternatively, the facility may be divided into a number of sub-accounts by agreement between the lender and the borrower. Some financial institutions allow the sub-accounts to be held by different borrowers. Some sub-accounts may be used for income producing purposes ("investment sub-account") and others may be used for non-income producing purposes ("private sub-account"). Some sub-accounts may be used for mixed income producing and non-income producing purposes ("mixed purpose sub-account"). Funds may be drawn down from each sub-account up to an allocated portion of the overall credit limit.

7.	While the focus of this ruling is on mixed purpose sub-accounts, the same principles apply to single line of credit accounts used for mixed purposes.

8.	In most cases, the lender requires the borrower to make a minimum monthly payment equal to the interest, fees and charges that have accrued on the facility. A payment into that facility in excess of the interest, fees and charges, is a repayment of principal. Under these facilities, the borrower is able to make payments to reduce the amount owing under the line of credit account or sub-account at any time. Any payments over and above the required minimum payments for interest, fees and charges increase the funds available to the borrower to draw down, subject to the agreed credit limit for that account or sub-account. Where a taxpayer makes a payment over and above the required minimum payment, the taxpayer can direct this payment to be allocated to a particular sub-account.

Redraw facilities

9.	There are a number of loan arrangements under which a borrower may redraw previous repayments of the loan principal. There may be one or more loan contracts and one or more borrowers. The loan may be for income producing purposes, non-income producing purposes or mixed purposes. The lender prescribes a minimum payment that is due on the loan. This minimum payment is at least equal to the amount of interest, fees and charges that accrues on the loan, but more commonly is a principal and interest payment.

10.	The redraw facility allows the borrower to make payments over and above the minimum payments required under the loan agreement, and then permits the borrower to redraw an amount equivalent to those payments in excess of interest, fees and charges at a later time. Those payments in excess of interest, fees and charges reduce the borrower’s outstanding loan debt and money redrawn increases the outstanding loan debt.

11.	A taxpayer may use the money redrawn for income producing purposes, non-income producing purposes or mixed purposes regardless of the use of the original borrowed funds. In some cases the consent of the lender is required to redraw funds and the redraw may be subject to other conditions affecting the amount and frequency of redraws. Redraws may also be subject to the consent of the loan guarantors.

RULING

Line of credit facilities

12.	Where a line of credit facility is divided into sub-accounts and each sub-account is used for a specific purpose, interest is fully deductible where funds drawn down on an investment sub-account continue to be used exclusively for an income producing purpose. Interest is not deductible where funds drawn down on a private sub-account are used for a non-income producing purpose.

13.	Where interest accrues periodically on the outstanding balance of a mixed purpose line of credit sub-account, the deductibility of accrued interest is determined by considering the application of the borrowed funds for income producing and non-income producing purposes. The original application of the borrowed funds will not determine deductibility where funds borrowed under a line of credit facility have been recouped or withdrawn from the original use and are reapplied to a new use, e.g., upon sale of an asset purchased with borrowed funds.

14.	Where borrowed money applied to a particular use is recouped and redirected to another use, it is necessary to examine that new application of those borrowed funds in considering the deductibility of interest. Where there are changes in the use of money borrowed under a line of credit facility, or in the amount of borrowed money used for a particular purpose, the deductibility of the interest accrued on that part of the outstanding debt will be determined by considering the advantages sought from that new application of those funds. Interest will be deductible under section 8-1 to the extent that it is incurred on that part of the outstanding borrowed money used at that time for an income producing purpose.

15.	Where a taxpayer has a mixed purpose sub-account, the interest needs to be apportioned between the income producing and non-income producing purposes. Apportionment must be made on a fair and reasonable basis. One approach that we accept as fair and reasonable in relation to the apportionment of interest that has accrued on a daily basis on a mixed purpose account is set out in the following paragraphs. We accept that this approach to apportionment is not the only approach that is fair and reasonable.

16.	Where interest accrues daily under a mixed purpose sub-account, a taxpayer is entitled to a deduction in respect of that part of the interest that has accrued on the portion of the outstanding daily loan balance attributable to an income producing purpose. In calculating the portion of the outstanding daily loan balance attributable to an income producing purpose, any repayment of principal is applied proportionately against the outstanding balance of amounts applied to income producing and non-income producing purposes respectively, at the time the repayment is made. However, there are two exceptions.

First Exception – Borrowed money recouped and repaid

17.	Where money borrowed and applied to a particular use (the "relevant use") is recouped in whole or in part, in the sense that the amount or some part of it is recovered ( e.g., on the sale of an asset purchased with borrowed funds) that part of the outstanding balance of the mixed purpose line of credit debt which had been applied to the relevant use can no longer be regarded as continuing to be applied to that use. Where borrowed funds recouped are repaid to the mixed purpose sub-account in reduction of the outstanding balance, those funds have ceased to be outstanding funds used for any purpose. The effect of the repayment of the recouped funds to the mixed purpose sub-account is to reduce only that part of the outstanding line of credit debt applied to the previous use of those funds. The use of the balance of borrowed funds still outstanding is unaffected by the recoupment and repayment in these circumstances unless the amount of the sale proceeds paid into the mixed purpose sub-account exceeds the amount drawn down and applied to the relevant use (the "relevant debt portion"). This would occur, for example, where the asset is sold at a profit and part or all of the recouped borrowed funds and profit are paid into the mixed purpose sub-account. To the extent that the payment exceeds the relevant debt portion, such excess amount (i.e., the profit component) will be taken to have reduced prorata the amounts borrowed and applied to uses other than the relevant use.

Second Exception – Refinancing mixed purpose debt

18.	A taxpayer may choose to refinance a debt outstanding on a mixed purpose sub-account by borrowing an equivalent amount under two separate accounts or sub-accounts. If the sums borrowed under those two separate accounts are equivalent to the respective income producing and non-income producing parts of the existing outstanding debt, we accept that interest accrued on the debt incurred in refinancing the income producing portion of the mixed purpose debt will be deductible.

Apportionment calculations

19.	Where interest on borrowed money accrues daily, we accept that it would be unnecessarily onerous to require a manual daily apportionment calculation. We accept that the interest accrued in a month is deductible under section 8-1 where it is calculated using an apportionment approach based on the average outstanding principal used that month for income producing purposes. The deductible portion of interest accruing in each month is calculated as follows:

total interest accrued for the month	X	deductible interest percentage figure
20.	The deductible interest percentage figure is calculated as follows:

(A + B)
	X   100
(C + D)
where

A  =  opening balance (beginning of month) of outstanding principal used for income producing purposes;

B  =  closing balance (end of month) of outstanding principal used for income producing purposes;

C  =  opening balance of total outstanding principal;

D  =  closing balance of total outstanding principal;

NOTE:
The closing balance for one month is the opening balance for the next month.

21.	Where a taxpayer makes repayments over and above the required minimum payment and the line of credit facility comprises one mixed purpose sub-account only, the taxpayer cannot choose to notionally allocate the repayments to a particular portion of the total debt, e.g., the non-income producing portion.

Redraw facilities

22.	The deductibility of interest on a further borrowing of money under a redraw facility depends upon the use to which the redrawn funds are put.

23.	Where the original borrowing is for non-income producing purposes and the taxpayer uses the redrawn funds wholly or partly for income producing purposes, that part of the accrued interest attributable to the redrawn funds used for income producing purposes is deductible.

24.	Similarly, where the original borrowing is for income producing purposes and the taxpayer uses the redrawn funds wholly or partly for non-income producing purposes, that part of the accrued interest attributable to the redrawn funds used for non-income producing purposes is not deductible.

25.	Where a taxpayer uses redrawn funds for a different purpose to the original borrowing in circumstances described in paragraphs 23 or 24, the loan account becomes a mixed purpose account and the same principles discussed above in relation to mixed purpose line of credit sub-accounts will apply to the mixed purpose loan account. There is an ongoing need to apportion interest on a mixed purpose loan account. That apportionment needs to be made on a fair and reasonable basis. Subsequent repayments are apportioned between the outstanding debt used at that time for income producing and non-income producing purposes. However, the two exceptions for borrowed money recouped and repaid and for the refinancing of a mixed purpose debt, discussed above at paragraphs 17 and 18 in relation to mixed purpose line of credit sub-accounts, are equally applicable to mixed purpose loan accounts.

DATE OF EFFECT

26.	This Ruling applies to years commencing both before and after its date of issue. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

EXPLANATIONS

27.	The nature of an interest expense was recently considered by the Full High Court in Steele v. DC of T 99 ATC 4242; 41 ATR 139. The Court said, at 99 ATC 4242 at 4248; (1999) 41 ATR 139 at 148, that:

"… interest is ordinarily a recurrent or periodic payment which secures, not an enduring advantage, but, rather, the use of borrowed money during the term of the loan. According to the criteria noted by Dixon J in Sun Newspapers Ltd and Associated Newspapers Ltd v FC of T it is therefore ordinarily a revenue item."

28.	Although interest is ordinarily a revenue expense, it will only be deductible under subsection 8-1 if the expense can be characterised as an outgoing that is incurred in gaining or producing assessable income or is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income and must not otherwise be excluded from being deductible, e.g. an outgoing of a private or domestic nature.

29.	The character of interest is determined by the purpose of the borrowing. Generally, the purpose of a borrowing can be determined from the use of borrowed funds and outgoings of interest ordinarily draw their character from that use (see Fletcher & Ors v. FC of T 91 ATC 4950; (1991) 22 ATR 613). It is recognised that it may be appropriate to distinguish between the purpose of the taxpayer in borrowing the money and the use to which the borrowed funds are put in an appropriate case (see Steele v. DC of T 99 ATC 4242, at 4251; (1999) 41 ATR 139, at 150).

30.	The term "use" in this context does not necessarily require a strict tracing approach to the application of the borrowed money (see FC of T v. JD Roberts; FC of T v. Smith 92 ATC 4380; (1992) 23 ATR 494). Rather, the characterisation of interest on borrowed money (and the purpose of the borrowing) is ascertained by reference to the advantages sought from the use of the borrowed funds. In Kidston Goldmines Ltd v. FC of T 91 ATC 4538 at 4545-6; (1991) 22 ATR 168 at 176-7, Hill J. stated:

"In most cases, the purpose of the borrowing will be ascertained from the use to which the borrowed funds were put…

To be deductible the outgoing, or in a case of apportionment a part of an indivisible outgoing, must be seen to be incidental and relevant to the activity which is directed to the gaining or production of assessable income. In the normal case, the fact that funds borrowed have been borrowed for the purpose of that activity and can still, in the year of income in which the deduction is claimed, be seen as having that purpose, will lead readily to the conclusion that the interest will be incidental and relevant to the income producing activity. Again, in the usual case the application of funds for an income producing purpose will demonstrate the relevant connection between the outgoing and the income producing activity. Indeed there is much to be said for the view that the tests of purpose and application of funds are but two sides of the one matter."

31.	However, the original purpose of the borrowing and use of the borrowed funds will not always determine the deductibility of interest. Where borrowed money has been used to purchase an income producing asset and that asset subsequently has been sold, the original use of that money will not necessarily determine the character of the interest expense accruing on those borrowed funds. In such a case the question of the deductibility of interest "… must be resolved by determining whether the essential character of the interest outgoings after the sale … was such that it can be said that those outgoings were incurred by the respondent in the course of the gaining or production of assessable income or, having regard to the business then carried on by it, they were necessarily incurred by the respondent in carrying on that business." (F.C. of T. v. Riverside Road Pty. Ltd. (in liq.) 90 ATC 4567 at 4576; 21 ATR 499 at 509).

32.	In some circumstances, for example where the loan contract imposes a continuing obligation to pay interest for a specified period, the sale of income producing assets purchased with those borrowed funds may not necessarily result in the immediate cessation of the relevant connection with the income earning activity. For example, in Riverside Road the Full Federal Court held at 90 ATC 4567 at 4576; (1990) 21 ATR 499 at 509 that:

"It seems to us that it does not follow from De Bavay’s case… that the mere fact that the land and buildings were sold necessarily results in the conclusion that as and from the date of sale the whole of the interest incurred was not deductible. The respondent, pursuant to the contractual arrangements it had entered into, was obliged … to pay interest until 1 May 1979. Had it sought to discharge its obligation to the mortgagee, it could have been required to pay interest to this date."

33.	In the circumstances of that case, the contractual obligation to pay interest for a fixed period meant that the sale of the assets did not alter the essential character of the interest payments incurred until that loan was discharged.

34.	The deductibility of interest under the loan agreement considered by the Court in Riverside Road is distinguishable from the deductibility of interest under a line of credit facility. The observations of the Full Federal Court in FC of T v. Brown 99 ATC 4600 at 4608; (1999) 43 ATR 1 at 10 provide support for this view. The Full Federal Court stated at 99 ATC 4608; 43 ATR 10 that:

"Had the loan agreement in question been a "roll over" business loan facility which entitled the taxpayer conducting the business, on the date of each monthly payment, to elect to repay the principal and thereby avoid incurring liability for interest or to "roll over" the loan and continue to be liable for interest, that may have been a different situation. In that circumstance there may be considerable force in the contention that the occasion of the liability was the election to "roll over" the loan on each monthly payment date, rather than any liability arising under the terms of the original loan agreement establishing the terms of the "roll over" facility. In such a case the cessation of business or sale of the income-producing asset acquired with the borrowed funds might properly be regarded as breaking the nexus in much the same way as certain post cessation interest payments were not allowed in Riverside Road."

35.	While the Full Federal Court did not express a concluded view on this issue, their comments suggest that in determining the deductibility of interest under a "roll over" debt facility, the "occasion" of the liability to pay interest was to be found in the circumstances concurrent with the accrual of the liability to pay interest which arose on each recurring monthly interest date.

36.	We believe the same principle will apply to a line of credit facility where interest accrues daily and the outstanding debt can be repaid at any time. The obligation to pay interest under the terms of, and for the period of, the original borrowing can not be regarded as the "occasion" of the interest liability which accrues in a subsequent period after a taxpayer has made an election not to repay the outstanding principal under a line of credit facility. A line of credit debt has a continuing opportunity for repayment which distinguishes it from the type of loan debt considered in Brown.

37.	Where the funds borrowed under a line of credit remain outstanding, we believe the deductibility of interest is to be determined by considering the ongoing application of those borrowed funds. Interest is considered to be the cost of retaining the use of the outstanding line of credit funds in the period in which that interest accrues. Where borrowed funds are recouped from the sale of an income producing asset purchased with that money, the connection between the interest expense and the income producing use of that asset will be broken when the asset is sold. Interest on those borrowed funds will only be deductible after that time if it can be established that the accrued interest continues to be incurred in the course of deriving assessable income or in carrying on a business. For this to be the case under a line of credit, there would need to be a sufficient connection between the accrual of interest in a period and any new application for income producing purposes of those recouped borrowed funds. Deductibility of interest on those borrowed funds will be determined by a consideration of the advantages sought from that new use to which those funds are redirected.

38.	Taxation Ruling TR 95/25 also outlines some general principles governing deductibility of interest.

Further borrowings

39.	Where a loan facility allows for redraws of extra repayments, we consider those redraws constitute new borrowings of funds that cannot be traced to the extra repayments. In this regard the term "redraw" is a misnomer. It is in effect a new borrowing of funds. Similarly, a draw down on a line of credit that has not been fully drawn is a new borrowing of funds.

40.	In our view, it is not correct to characterise the reduced loan balance as comprising the previous loan balance with a notional offset credit available in respect of extra repayments as if those extra repayments were standing to the credit of the borrower in a separate account in the books of the lender. The extra repayments do not create a debt due by the lender to the borrower. Those funds used to make extra repayments simply cease to exist as an asset of the borrower after being used to discharge part of the loan debt. In our view, the redraw facility does not involve separate loan and deposit accounts of the type discussed in paragraphs 6 to 8 of TR 93/6.

41.	In the case of a repayment of principal on a line of credit, the borrower acquires a contractual right to borrow a further amount equal to the difference between the reduced drawn-down amount and the available credit limit. That right to borrow further funds is a contractual right under the loan agreement permitting the borrower to draw down funds up to the agreed credit limit. The available credit is not an asset of the borrower and the available credit limit can be varied by the lender upon review.

42.	Similarly, under a redraw facility, the loan agreement gives the borrower the right, subject to restrictions in some cases, to borrow a further amount up to the balance of the loan debt that would have been outstanding if the minimum loan repayments required under the loan agreement had been made. The extra repayments do not create a debt payable by the lender to the borrower and are not an asset of the borrower after they have been used to discharge part of the loan debt.

43.	We consider a draw-down from a line of credit account or sub-account, or a redraw from a loan account, is a separate borrowing. Therefore, the deductibility of the interest on that separate borrowing depends on whether the interest is incurred in gaining or producing assessable income or is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. To the extent borrowings are used for income producing purposes, that part of the accrued interest attributable to those borrowings is deductible. Conversely, that part of the accrued interest attributable to borrowings used for non-income producing purposes is not deductible.

44.	The balance outstanding on a mixed purpose line of credit sub-account or a mixed purpose loan account is an undivided single debt owed by the borrower to the lender. When repayments of principal are made, it is not considered possible to direct those payments to only that part of the borrowed funds used for a particular purpose as if it were a separate debt. While it may be possible to trace the uses to which different parts of the borrowed funds are put, it is considered repayments of principal need to be applied proportionately to reduce the balance of the outstanding principal attributable to income producing use and non-income producing use respectively, e.g., if 70% of an outstanding line of credit sub-account debt is used for income producing purposes, 70% of any repayment would be in respect of that part of the outstanding debt. However, there are two exceptions.

First Exception – Borrowed money recouped and repaid

45.	Where money borrowed and applied to a particular use is recouped, e.g., on the sale of an asset purchased with borrowed funds, that part of the outstanding balance of the mixed purpose debt can no longer be regarded as applied to that use. Where the borrowed funds recouped are paid into the mixed purpose account or sub-account, those funds have ceased to be outstanding funds used for any purpose. The effect of the repayment of the recouped funds to the mixed purpose sub-account is to reduce only that part of the outstanding line of credit debt applied to the previous use of those funds. Example four, at paragraph 66 of this ruling, outlines the practical application of these principles.

Second Exception – Refinancing mixed purpose debt

46.	A taxpayer may choose to refinance a mixed purpose debt by borrowing an equivalent amount under two separate accounts or sub-accounts. Where a mixed purpose line of credit sub-account debt is replaced by two new debts and the advantage sought by these borrowings is the refinancing of the respective parts of the previous debt used at that time for income producing and non-income producing purposes, we consider that a strict tracing approach is not appropriate. It is relevant to bear in mind the comments of Dixon CJ. in Hallstroms Pty. Ltd. v. FC of T (1946) 72 CLR 634, cited with approval by Hill J in FC of T v. JD Roberts; FC of T v. Smith 92 ATC 4380, at 4391; (1992) 23 ATR 494, at 507, that the question of characterisation depends on:

"… what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of legal rights…"

47.	The sole purpose of the borrowing used to refinance money used at that time for income producing purposes is to continue to have the use of those funds for income producing purposes. Similarly, the sole purpose of the borrowing used to refinance money used at that time for non-income producing purposes is to continue to have the use of those funds for non-income producing purposes. Therefore, we accept that interest accrued on the debt incurred in refinancing the income related portion of the previous mixed purpose debt will be deductible.

ALTERNATIVE VIEWS

48.	It has been suggested that if funds were originally borrowed for income producing purposes and there is no requirement to repay those funds, the occasion of the interest liability remains the income producing activities of the taxpayer. The decision in FC of T v. Brown 99 ATC 4600; 43 ATR 1 is cited in support of this proposition. However, the comments made in that case in relation to "roll over" loan facilities support our view of the law outlined above.

49.	It has also been suggested that funds withdrawn from a loan account or a line of credit account which can be attributed to the extra repayments made, simply represent a withdrawal of funds temporarily "parked in the loan". This view depends upon a characterisation of the extra repayments as effectively remaining an asset of the borrower, available to the borrower by virtue of the contractual right to redraw them. As discussed above, we believe this view is not correct. The extra repayments have been used to discharge part of the loan or line of credit debt and the subsequent redraw or draw down is funded by a subsequent increasing of the loan or line of credit debt. In our view, the redraw or draw down is a new borrowing of money. The deductibility of the interest payable on those new borrowings depends upon the advantages sought from the use of those funds.

50.	It has been further suggested that the taxpayer can allocate a repayment to that portion of borrowed moneys used for a particular purpose. The decision in FC of T v. Carberry 88 ATC 5005; (1988) 20 ATR 151, is cited in support of this view. In Carberry a husband and wife borrowed money to acquire undivided real estate comprising a private residence and a kindergarten business and premises. The taxpayers applied the proceeds of sale of a previous private residence towards the purchase of the new property. The proceeds from the sale of the previous residence exceeded the cost attributable to the purchase of the new residence. In the circumstances, the Administrative Appeals Tribunal held at first instance that the whole of the funds borrowed to finance the acquisition of the property was used by the partnership to purchase the kindergarten.

51.	The decision in Carberry is relevant to establishing the original use of the borrowed funds. On the facts of that case it was open to the tribunal to conclude that the whole of the borrowed funds were applied to an income producing use. In reaching this conclusion, the Tribunal did not apply a strict tracing approach to the borrowed funds. However, as recognised by Davies J in that case on appeal to the Federal Court, an apportionment of interest would have been required if the Tribunal had found as a matter of fact that the borrowed funds had been applied to both income producing and private purposes.

52.	The decision in Carberry is not inconsistent with the basis of apportionment outlined in this ruling in relation to cases involving borrowed funds applied to both income producing and non-income producing purposes.

EXAMPLES

Example one

53.	Barry has a line of credit with the XYZ Bank. His credit limit is $100,000 and when that facility is established on 1 April he draws down $80,000 to invest in income producing shares. Barry's net salary of $4,000 per month is paid directly into the line of credit account on the last day of the month and interest and charges are debited on the same day. Barry redraws $2,000 per month on the first day of the month for living expenses. On 30 April, Barry makes a lump sum repayment of $20,000 from the proceeds of the sale of a private yacht, in addition to the $4,000 repayment from his salary. On 1 June, Barry draws down a further $20,000 for home renovations, in addition to the $2,000 draw down for living expenses.

Barry's transactions are summarised below:

Date	Borrowings and Interest	Payments	Account Balance	Income Portion (see below)	Non-income Portion (see below)
1 Apr	80,000		80,000	80,000	NIL
30 Apr	400	24,000	56,400	56,400	NIL
1 May	2,000		58,400	56,400	2,000
31 May	292	4,000	54,692	52,819	1,873
1 Jun	22,000		76,692	52,819	23,873
30 Jun	383	4,000	73,075	50,328	22,747
54.	The repayments of $20,000 and $4,000 made on 30 April first pay the accrued interest of $400 and then reduce the outstanding principal used at that time for income producing purposes to $56,400.

55.	The interest of $400 accrued in April is wholly attributable to borrowed funds used for income producing purposes and is therefore fully deductible.

56.	The $4,000 repayment on 31 May first pays the accrued interest of $292 and then proportionately reduces the outstanding principal used at that time for income producing purposes and for non-income producing purposes. The proportionate reduction in the outstanding principal attributable to income producing purposes will be $3,708 x 56,400/58,400 = $3,581, giving a balance of the outstanding principal used for income producing purposes at that time of $52,819. The proportionate reduction of principal attributed to non-income producing purposes will be $3,708 x 2,000/58,400 = $127. The balance of the outstanding principal used for non-income producing purposes at that time, therefore, will be reduced by $127 to $1,873.

57.	The interest of $292 accrued in May is related partly to the outstanding principal used that month for income producing purposes and partly to the outstanding principal used that month for non-income producing purposes. The amount of interest Barry can claim as a deduction for May is calculated as:

292	x	Deductible interest percentage
= 292	x	(56,400 + 52,819)        x        100 (56,400 + 54,692)
= 292	x	98.3%
= 287
Barry can claim a deduction of $287 for interest for the month of May.

58.	The borrowings on 1 June of $20,000 for home renovations and $2,000 for living expenses were for non-income producing purposes. The outstanding principal used for non-income producing purposes at 1 June will, therefore, be $1,873 (see paragraph 33 above) + $22,000 = $23,873.

59.	The $4,000 repayment on 30 June first pays the interest accrued that month of $383 and then proportionately reduces the outstanding principal used at that time for income producing purposes and for non-income producing purposes. The proportionate reduction in the outstanding principal used at that time for income producing purposes will be $3,617 x 52,819/76,692 = $2,491, giving a balance of the outstanding principal used at 30 June for income producing purposes of $50,328. The balance of the outstanding principal used for non-income producing purposes at 30 June will, therefore, be reduced by $1,126 to $22,747.

60.	The interest of $383 accrued in June is related partly to the outstanding principal used that month for income producing purposes and partly to the outstanding principal used that month for non-income producing purposes. The amount of interest Barry can claim as a deduction for June is calculated as:

383	x	Deductible interest percentage
=383	x	(52,819 + 50,328)       x      100 (54,692 + 73,075)
=383	x	80.7%
=309
Barry can claim a deduction of $309 for interest for the month of June.

Example two

61.	Bill is a computer programmer.  He is offered a job in Darwin and decides to relocate his family there. He borrows $200,000 from the bank and purchases a house in Darwin. He makes the minimum monthly payment of $1650. After two years the balance on Bill's home loan is $186,000.

62.	Bill receives a $50,000 windfall and decides to pay this money off his home loan. This reduces the balance to $136,000.

63.	Bill is then offered a job in Perth. He decides to take the job and relocate his family. He decides to rent out the house in Darwin and borrow to purchase a new residential property in Perth. Bill redraws $50,000 from the Darwin loan and uses this as a deposit for the new home in Perth.

64.	Bill can deduct the interest accrued on the outstanding loan principal of $136,000 that is related to the Darwin house from the date that property is available for rental. Those borrowed funds are used at that time for income producing purposes. As the new borrowing of $50,000 is used as a deposit on the residence in Perth, the interest on that borrowing will not be deductible as it is incurred for a non-income producing purpose.

Example three

65.	Rod has a mixed purpose line of credit debt comprising $5,000 used for investments in income producing shares and $5,000 used for holidays. Rod refinances the income producing and non-income producing components of this mixed purpose debt with borrowings under two new line of credit sub-accounts. The interest accrued on the line of credit sub-account used solely to refinance the borrowed money used for investments in income producing shares will be fully deductible. The interest accrued on the line of credit sub-account used solely to refinance the borrowed money used for holidays will not be deductible.

Example four

66.	Bob has a mixed purpose line of credit sub-account debt of $30,000 with $20,000 applied to the purchase of a private vehicle and $10,000 applied to purchase income producing shares in company XYZ. Bob sells half the XYZ shares for $6,000 and pays that amount into the mixed purpose sub-account.

67.	The debt outstanding after the repayment is related to the $20,000 applied to the purchase of the private vehicle and $5,000 of borrowed funds applied to purchase that half of the income producing XYZ shares still held by Bob.

68.	The $5,000 of borrowed funds previously applied to purchase that half of the XYZ shares that were sold is no longer applied to that use after being recouped and repaid on the sale of those shares. The previously outstanding debt related to the XYZ shares is therefore reduced to $5,000 when that portion of the borrowed money recouped is repaid to the mixed purpose sub-account.

69.	When the additional amount of $1,000 obtained from the sale of half the XYZ shares is paid into the mixed purpose sub-account, it is apportioned between the outstanding funds used for income producing and non-income producing purposes. That is, the payment into the mixed purpose sub-account of $1,000, in addition to that portion of the borrowed funds recouped on the sale of half the XYZ shares, reduces the outstanding debt applied to the XYZ shares still held by $200 to $4,800 and reduces the debt applied to the private vehicle by $800 to $19,200.

Example five

70.	All facts are the same as in example four except Bob sells all the XYZ shares for $8,000 and pays that amount into the mixed purpose sub-account.

71.	For a line of credit, the deductibility of interest depends upon the continued use of borrowed funds for income producing purposes. After the sale of the XYZ shares, there are no longer any outstanding funds then used for income producing purposes. Therefore, there would be no deduction allowed for interest accruing on the outstanding line of credit debt after the sale of the XYZ shares.

72.	The $22,000 outstanding after the sale of the shares and repayment of the sale proceeds, comprises $20,000 of borrowed funds that continue to be applied to the purchase of a private vehicle and $2,000 of borrowed funds still outstanding that was lost on the sale of the income producing shares. After the sale of those shares, the outgoing of interest on that $2,000 ceases to be for the purpose of retaining the use of those funds for income producing purposes. The interest incurred after the sale relates to financing the capital loss made on the sale of those shares. The connection with the previous income producing use of the funds invested in the XYZ shares is broken on the sale of those shares. The "occasion" of the incurring of that interest is no longer the obligation to pay interest under the terms and conditions applicable to the previous period of the borrowing arrangement.

73.	No deduction would be allowable under s 8-1 ITAA 1997 in respect of interest on the borrowed funds lost on the sale of the income producing XYZ shares.

Commissioner of Taxation

1 March 2000


Taxation Ruling TR 93/30 Deductions for home office expenses
Taxation Ruling TR 93/30

Income tax: deductions for home office expenses

Income Tax Rulings do not have the force of law. Each decision made by the Australian Taxation Office is made on the merits of each individual case having regard to any relevant Ruling.

This Ruling, to the extent that it is capable of being a "public ruling" in terms of Part IVAAA of the Taxation Administration Act 1953, is a public ruling for the purposes of that Part. Taxation Ruling TR 92/1 explains when a Ruling is a public ruling and how it is binding on the Commissioner.

Contents:

What this Ruling is about

Ruling

Date of effect

Explanations

When is an area of a home a place of business rather than a private study?

Which expenses can be claimed?

Other Considerations

Previous Rulings

WHAT THIS RULING IS ABOUT

1.	This Ruling is about the deductions allowable for "home office" expenses. In particular, it explains:

•	when an area of the home is considered to be a private study;

•	 when an area of the home is considered to be a place of business;

•	what deductions are allowable in each case and how they should be calculated; and

•	 the deductibility of rates and taxes under section 72 of the Income Tax Assessment Act 1936 and repairs under section 53.

It also deals with the capital gains tax implications on the disposal of a private residence for which home office expenses have been allowed.

This Ruling consolidates previous Rulings on home office expenses.

RULING

2.	As a general rule, expenses associated with a taxpayer's home are of a private or domestic nature and do not qualify as deductions for taxation purposes. An exception to this general rule is where part of the home is used for income producing activities and has the character of a "place of business". In such cases some of the expenses incurred in respect of the home such as rent, interest, repairs, house and contents insurance, rates and property taxes may be partly deductible.

3.	Another exception to this general rule is where part of the home is used in connection with the taxpayer's income earning activities but does not constitute a place of business. In this case, a more limited range of deductions may be available.

4.	Whether an area of the home has the character of a place of business is a question of fact which depends on the particular circumstances of each case. This is likely to be the case where a part of a residence is set aside exclusively for the carrying on of a business by a self employed person (e.g., a doctor's surgery). Another example is where part of the home is used as a taxpayer's sole base of operations for income producing activities (e.g., where no other work location is provided to an employee by an employer).

5.	The following factors, none of which is necessarily conclusive on its own, may indicate whether or not an area set aside has the character of a "place of business" :

•	 the area is clearly identifiable as a place of business;

•	 the area is not readily suitable or adaptable for use for private or domestic purposes in association with the home generally;

•	 the area is used exclusively or almost exclusively for carrying on a business; or

•	the area is used regularly for visits of clients or customers.

6.	The deductible expenses in respect of a home office can be divided into two broad categories:

•	 Expenses relating to ownership or use of a home which are not affected by the taxpayer's income earning activities (i.e., occupancy expenses). These include rent, mortgage interest, municipal and water rates and house insurance premiums.

•	 Expenses relating to the use of facilities within the home (i.e., running expenses). These include electricity charges for heating/cooling, lighting, cleaning costs, depreciation, leasing charges and the cost of repairs on items of furniture and furnishings in the office.

7.	If an area of the home has the character of a place of business as outlined in paragraph 5, some part of the expenses from both categories may be claimed as a deduction. In most cases the apportionment of expenses should be made on a floor area and, in addition, where the area of the home is a place of business for part of the year, a time basis. However, where an area of the home is simply used in connection with income producing activities, but does not have the character of a place of business, only expenses in the latter category (the running expenses) are allowable. The amounts allowable as deductions are the additional expenses incurred as a result of income producing activities.

DATE OF EFFECT

8.	This Ruling applies to years commencing both before and after its date of issue. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

EXPLANATIONS

9.	Expenses which relate to the use or ownership of a home (or to facilities in it) normally have a private or domestic character and are not allowable deductions under subsection 51(1); 	[Thomas v FC of T (1972) 3 ATR 165; 72 ATC 4094 and FC of T v Faichney(1972) 129 CLR 38; (1972) 3 ATR 435; 72 ATC 4245 (Faichney's Case)]. However, in certain circumstances, part of these expenses may be allowed as a deduction. The allowable deductions will depend on whether an area of the home has the character of a place of business or is merely a private study.

10.	In deciding cases concerning home office expenses, courts and tribunals have consistently drawn a distinction between cases:

•	 where part of a home can be characterised as a place of business; and

•	 -where a room is used as a study or home office merely as a matter of convenience.

The reason this distinction is important is that if an area of the home has the character of a place of business then expenses associated with that part of the home can be said to take on a business or businesslike character and are allowable deductions [Swinford v FC of T (1984) 15 ATR 1154; 84 ATC 4803 (Swinford's Case)]. In effect, the area used loses its domestic character.

When is an area of a home a place of business rather than a private study?

Place of business:

11.	Paragraph 5 lists some of the factors which may indicate that a part of a home has the character of a place of business. The existence of any of these factors or a combination of them will not necessarily be conclusive in ascertaining the character of an area used as a home office. Rather the decision in each case will depend on whether, on a balanced consideration of:

•	 the essential character of the area;

•	 the nature of the taxpayer's business; and

•	 any other relevant factors,

the area constitutes a "place of business" in the ordinary and common sense meaning of that term.

12.	The absence of an alternative place for conducting income producing activities has also influenced a court or tribunal to accept a part of a taxpayer's residence as a place of business. Examples include:

•	a self employed script writer using one room of a flat for writing purposes and for meetings with television station staff (Swinford's Case);

•	an employee architect conducting a small private practice from home (Case F53, 74 ATC 294;Case 65, 19 CTBR(NS) 452);

•	 a country sales manager for an oil company whose employer did not provide him with a place to work (Case T48, 86 ATC 389; Case 47, 29 CTBR(NS) 355).

In each of these cases the taxpayer was able to show that, as a matter of fact, there was no alternative place of business, it was necessary to work from home, and that the room in question was used exclusively or almost exclusively for income producing purposes.

13.	In circumstances such as those referred to in paragraph 12, a place of business will exist only if:

•	it is a requirement inherent in the nature of the taxpayer's activities that the taxpayer needs a place of business;

•	the taxpayer's circumstances are such that there is no alternative place of business and it was necessary to work from home; and

•	the area of the home is used exclusively or almost exclusively for income producing purposes.

Private Study:

14.	The circumstances where part of a home is considered to have the character of a place of business can be contrasted with the more common case where a taxpayer maintains an office or study at home as a matter of convenience (i.e., so that he or she can carry out work at home which would otherwise be done at his or her regular place of business or employment). Examples of this include:

•	a barrister who reads client briefs at home;

•	 a teacher who prepares lessons or marks assignments at home; and

•	 an insurance agent who maintains client files and occasionally interviews a client in his or her home office.

In these circumstances the area of the home and the expenses incurred (subject to the exceptions listed below) retain their private or domestic character (Handley v FC of T (1981) 11 ATR 644 ; 81 ATC 4165 (Handley's Case) and Forsyth v FC of T (1981) 11 ATR 657; 81 ATC 4157).

Which expenses can be claimed?

15.	The expenses that may be associated with a home office or study can be divided into two broad categories. These are:

•	Occupancy expenses relating to ownership or use of a home. These include rent, mortgage interest, municipal and water rates and house insurance premiums.

•	Running expenses relating to the use of facilities within the home. These include electricity charges for heating/cooling, lighting, cleaning costs, depreciation, leasing charges and the cost of repairs on items of furniture and furnishings in the office.

Occupancy Expenses:

16.	If part of a taxpayer's home qualifies as a place of business, the taxpayer may be able to claim a portion of the occupancy expenses incurred under subsection 51(1) .

17.	The actual amount which can be claimed is dependent on the taxpayer's individual circumstances. In most cases, the apportionment of the total expense incurred on a floor area basis is the most appropriate method.

18.	However, where an area of the home is a place of business for part of the year only, it may be necessary for expenses to be apportioned on a floor area and a time basis. The time apportionment under this method should reflect the period of the year in which the room is used for income producing purposes.

Running Expenses:

19.	Running expenses may take on a different character where taxpayers, who have a home office, establish that they have incurred additional expenditure on the running expenses as a result of their income producing activities (refer Faichney's Case). In appropriate circumstances, taxpayers are entitled to a deduction for the expenditure actually incurred through their income producing activities which is additional to their private expenditure.

20.	While it is not practicable to provide a list of the running expenses which may be allowable as income tax deductions, the following paragraphs illustrate the type of expenses which may be claimed.

Heating/Cooling and Lighting Expenses:

21.	A deduction may be allowable where additional heating/cooling and lighting expenses are incurred as a result of income producing activities. However, the extra expenditure must relate to facilities provided exclusively for the taxpayer's benefit while he or she works. For example, if a taxpayer merely sits in the lounge room with his or her family and at the same time does some work related activity, the expenditure for lighting and heating/cooling retains its private or domestic character (refer Faichney's Case). This would be the case where, for example, a teacher marks school work in a room where other family members are watching television or listening to music.

22.	However, if the taxpayer uses the room at a time when others are not present or uses a separate room, he or she is entitled to a deduction. This is the case even if the room used is not set aside solely as a home office. In this respect the treatment of lighting and heating expenses is different to most other home office expenses. This is because heating/cooling and lighting expenses relate to the use by the occupant rather than to the premises occupied.

23.	The amount that the taxpayer is entitled to claim is the difference between what was actually paid for heating/cooling and lighting and what would have been paid had he or she not worked from home.

24.	Once it has been established that a taxpayer does, in fact, incur additional expense by reason of working at home, an appropriate formula for calculating the additional expense for an appliance is:

Formula

(a)  x  (b)  x  (c)

where -

•	(a)	is the cost per unit of power used;

•	(b)	is the average units used per hour; and

•	(c)	is the total annual hours used for income producing purposes.

•	Generally speaking however, the quantum of any allowable deduction for the additional expense will be small. Accordingly, a bona fide estimate based on a reasonable percentage of the household annual fuel bill will be acceptable.

Depreciation:

25.	Taxpayers are entitled to claim depreciation on items which are used wholly or partly for carrying out income producing activities. This includes a professional library and items of equipment used at home.

26.	Where items used for business purposes are also used for domestic or private purposes the taxpayer will need to apportion the depreciation allowance. To do this a bona fide estimate of the percentage of business use of the item should be made. This is the proportion of the annual depreciation which the taxpayer is entitled to claim.

Other Considerations

Rates and Taxes:

27.	Many taxpayers simply maintain a private study in their homes to enable them, as a matter of convenience, to do work at home rather than at their regular place of work. It has been suggested that such taxpayers may be entitled to claim a proportionate amount of council and water rates. This argument relies on a deduction being allowable under section 72.

28.	Section 72 provides that no deduction is allowable unless the property is used for the purpose of gaining or producing income or carrying on a business for the same purpose.

29.	Taxation Ruling IT 2673 deals with the capital gains tax implications of using a sole or principal residence for income producing purposes. As indicated in that Ruling, conducting income producing activities from a residence is not necessarily the same as using the residence for the purpose of producing assessable income. The view taken in IT 2673 was that for a dwelling (or part of it) to be regarded as being "used for the purpose of gaining or producing income" it must constitute a place of business in the way described in paragraphs 11 to 13 above. Using similar reasoning to that in IT 2673, no deductions are allowable under section 72 for rates and taxes in respect of a residence where the only income producing activities are associated with a private study.

30.	Where the area is used as a place of business a deduction for rates and taxes will be allowable under subsection 51(1) or section 72.

Repairs to a Home Office:

31.	Section 53 allows a deduction for non-capital expenditure on repairs to premises, or part of premises, held, occupied or used by the taxpayer for the purpose of producing assessable income, or in carrying on a business for that purpose.

32.	The principles explained above in relation to rates and taxes should be applied in determining whether the taxpayer is entitled to claim the cost of repairs to that part of the residence used as a home office or study.

33.	In general if part of the home qualifies as a place of business, then the cost of repairs referable to that part of the home is deductible under section 53.

34.	Where the premises, or part of the premises are used partly for income-producing purposes and partly for other purposes, the cost of repairs is deductible only to the extent to which the premises are used for income-producing purposes [refer subsection 53(3)]. For example, the cost of repairing a broken window in a doctor's surgery is wholly deductible, while the cost of repairing a broken window in a home office which is also used for private purposes would have to be apportioned accordingly.

Capital Gains Implications:

35.	Generally, capital gains tax does not apply to a person's sole or principal residence. However, subsection 160ZZQ(21) applies to deem a capital gain (or loss) to have accrued to the extent to which the sole or principal residence disposed of was also used for the purpose of gaining or producing assessable income during the period of ownership. IT 2673 states that as a rule of thumb, it can be expected that where an area of a home is a place of business the capital gains provisions will apply . The calculation of any capital gain or loss is discussed in paragraphs 21 and 22 of IT 2673.

PREVIOUS RULINGS

36.	The relevant principles from Taxation Rulings IT 140, 191, 192, 193, 194, 2061, 2135 and 2338 have been incorporated into this Ruling. Accordingly, those Taxation Rulings are now withdrawn.

Commissioner of Taxation

30 September 1993


Taxation Ruling TR 2001/14 Division 35 non-commercial business losses
Taxation Ruling TR 2001/14

Income tax: Division 35 – non-commercial business losses

There is an Addendum for this document

Contents:

What this Ruling is about

Date of effect

Flowchart: operation of Division 35

Legislative framework

Key terms

Ruling

Explanations

Examples

Detailed contents list

Preamble

The number, subject heading, Class of person/arrangement, Date of effect and Ruling parts of this document are a "public ruling" for the purposes of Part IVAAA of the Taxation Administration Act 1953 and are legally binding on the Commissioner. The remainder of the document is administratively binding on the Commissioner. Taxation Rulings TR 92/1 and TR 97/16 together explain when a Ruling is a public ruling and how it is binding on the Commissioner.

WHAT THIS RULING IS ABOUT

1.	This Ruling considers the operation of Division 35 of the Income Tax Assessment Act 1997 ("ITAA 1997"), specifically:

deferral of deductions from "non-commercial" *business activities under subsection 35-10(2);

NOTE:
In this Ruling the term "non-commercial" *business activity merely refers to an activity to which Division 35 applies or potentially applies. It does not mean that the activity has been pre-judged as being non-commercial in any ordinary sense of that term.
An asterisk before a term in this Ruling denotes that the term is defined in the Income Tax Assessment Act 1997 (ITAA 1997). Terms that are defined in the ITAA 1997, and identified with an asterisk in that Act, are similarly identified in this Ruling.

•	the *primary production and *professional arts businesses Exception in subsection 35-10(4);

•	the four tests in Division 35, satisfaction of any one of which will allow a "loss" from a *business activity to be offset against other income in the year in which it is incurred:

(i)    the Assessable income test in section 35-30;

(ii)   the Profits test in section 35-35;

(iii)   the Real property test in section 35-40;

(iv)   the Other assets test in section 35-45; and

•	the operation of the Commissioner’s discretion in section 35-55.

Class of person/arrangement

2.	This Ruling applies only to individuals (including an individual as a partner) who:

(a)   carry on a "*business activity"; and

(b)   who, for a particular year in relation to that *business activity, have allowable deductions in excess of assessable income.

3.	Thus, this Ruling does not apply to taxpayers who are not individuals, or to activities which are not part of a *business.

DATE OF EFFECT

4.	This Ruling applies to assessments to which Division 35 may apply, i.e., to assessments for the income year ending on 30 June 2001 (or the equivalent substituted accounting period), and subsequent years.

FLOWCHART: OPERATION OF DIVISION 35

5.	In general terms the operation of Division 35 can be represented by the following flowchart, where for an income year:

LEGISLATIVE FRAMEWORK

Introduction to Division 35

6.	Division 35 was introduced into the ITAA 1997 via the New Business Tax System (Integrity Measures) Act 2000. It applies from 1 July 2000 to each and every income year in which an individual taxpayer carries on a relevant *business activity. The main operative provision in the Division is section 35-10. The major rule in section 35-10 is that unless in each year:

(a)   the individual’s *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 Commissioner’s discretion in relation to that *business activity,

(d)   a loss from the *business activity will not be deductible in the income year in which it arose.

7.	However, the loss will be available for deduction in a later year if one of the four tests is met, an Exception is satisfied, or the Commissioner’s discretion is exercised, in relation to that later year. Division 35 does not apply to activities that do not constitute carrying on a *business (subsection 35-5(2)).

8.	The changes to the law contained in Division 35 arose as a result of the Government’s adoption of Recommendation 7.5 of the Ralph Committee’s report, Review of Business Taxation: A Tax System Redesigned. This recommendation focused on significant revenue leakage from individual taxpayers claiming deductions for unprofitable activities which were "often unlikely to ever be profitable" (refer to paragraph 1.8, Explanatory Memorandum, A New Business Tax System (Integrity Measures) Act 2000).

*Primary Production and *Professional Arts businesses Exception

9.	Where an individual has a loss from a *primary production business or a *professional arts business in a year of income, and in that year the total of their assessable income from sources unrelated to that *business activity (excluding any *net capital gain) is less than $40,000, the rule in subsection 35-10(2), that the loss be deferred, will not apply in relation to that *business activity (subsection 35-10(4)).

*Business needs to be carried on

10.	Division 35 applies only to an individual who is carrying on a "*business activity" in an income year, either on their own, or in a general law partnership (section 35-5). Division 35 does not apply to any other entity. The Division operates by identifying a specific "*business activity" for calculating whether a non-commercial loss has been made from that activity, which would, but for Division 35, be able to be offset against other income (in the calculation of the individual’s taxable income). Note, a *business may, for the purposes of Division 35, be made up of more than one *business activity (see paragraphs 36 to 39 of the Ruling section and paragraphs 83 to 85 of the Explanations section below).

Calculating the non-commercial loss

11.	Under subsection 35-10(2), if the amounts attributable to the *business activity for a year of income that otherwise could be deducted, apart from Division 35, exceed the assessable income (if any) from the *business activity, the excess (i.e., the non-commercial loss) is treated for the purposes of the ITAA 1997 as though it:

(a)   were not incurred in that income year; and

(b)   instead, were an amount attributable to the *business activity that is deductible in the next income year in which that *business activity is carried on.

12.	In determining how Division 35 applies to the relevant *business activity it is necessary therefore to identify both the allowable deductions "attributable" to the *business activity and the assessable income "from" that activity. Note that the amounts to be "attributed" to the *business activity in this regard include all the amounts for the activity that otherwise could be deducted; not just those deductible under section 8-1, for example, any deductible under Division 40.

Effect of passing one of the tests, coming within the Exception or an exercise of the Commissioner’s discretion

13.	If the relevant *business activity passes at least one of the tests, comes within the Exception or has a favourable exercise of the Commissioner’s discretion, the loss deferral rule in subsection 35 10(2) will not apply to the individual undertaking that activity for that income year. They will be able to deduct the excess deductions against their other assessable income.

The four tests and their operation

Assessable income test

14.	If the amount of assessable income *derived by the individual from the relevant *business activity for an income year is at least $20,000, the rule in subsection 35-10(2) does not apply to defer any loss incurred by the individual from the activity for that income year (paragraph 35-30(a)). Calculation of the assessable income from the activity can involve making a "reasonable estimate" of a notional annual amount if the activity has not been carried on for the whole year (paragraph 35-30(b)).

Profits test

15.	This test involves determining whether an activity has produced a tax profit (refer to Key Terms in paragraph 34) in 3 out of the past 5 years. The 5-year period includes the current year. If a tax profit has resulted from the relevant *business activity in three out of the last five years, the rule in subsection 35-10(2) does not apply to defer any loss incurred by the individual from the activity for that income year (subsection 35 35(1)).

Real property test

16.	If the individual uses real property, or an interest in real property, on a continuing basis in the relevant *business activity, that has a value of at least $500,000, the rule in subsection 35-10(2) does not apply to defer any loss incurred by the individual from the activity for that income year (subsection 35-40(1)).

17.	For this test, the following assets are not counted:

•	a *dwelling, and any adjacent land used in association with the *dwelling that is used mainly for private purposes (paragraph 35-40(4)(a)); and

•	fixtures owned by an individual as a tenant (paragraph 35-40(4)(b)).

18.	To value real property or interests in real property, the individual can choose the *reduced cost base, or the market value of the property or interest in real property if that value is more than the *reduced cost base (subsection 35-40(2)). The meaning of *reduced cost base is the same as it is for capital gains tax ("CGT") purposes. This meaning is to be found in Subdivision 110-B.

19.	*Dwelling has the same meaning in this test as it does for CGT purposes (refer to the definition in section 118-115).

20.	Where assets that have been taken into account for the Real property test are partly used in the relevant *business activity and partly for some other purpose(s), only that part of their value that is attributable to their use in the *business activity for that year can be taken into account (section 35-50).

Other assets test

21.	If the individual uses certain other assets, on a continuing basis in the relevant *business activity, that have a total value of at least $100,000, the rule in subsection 35-10(2) does not apply to defer any loss incurred by the individual from the activity for that income year (subsection 35-45(1)).

22.	The assets and their values counted for this test are those set out in the following table contained in subsection 35-45(2):

Assets counted for this test and their values

Item	Asset	Value
1	An asset whose decline in value you can deduct under Division 40*	The *written down value of the asset
2	An item of *trading stock	Its value under subsection 70 45(1)
3	An asset that you lease from another entity	The sum of the amounts of the future lease payments for the asset to which you are irrevocably committed, less an appropriate amount to reflect any interest component for those lease payments
4	Trademarks, patents, copyrights and similar rights	Their *reduced cost base
* This wording only applies from 1 July 2001 (see s2 and s222, New Business Tax System (Capital Allowances-Transitional and Consequential) Act 2001). Prior to that the item read "An asset for which you can deduct an amount for depreciation".

23.	The following assets are specifically excluded under subsection 35-45(4) from being counted for this test:

•	real property, or interests in real property, that are taken into account for the Real property test; and

•	*cars (as defined in section 995-1), motorcycles and similar vehicles.

24.	Where assets that may be taken into account for the Other assets test are partly used in the relevant *business activity and partly for some other purpose(s), only that part of their value that is attributable to their use in the *business activity for that year can be taken into account (section 35-50).

When is an asset’s value determined?

25.	The *reduced cost bases, market values or other prescribed values of a relevant asset counted for the Real property test or Other assets test is worked out:

•	as at the end of the income year (paragraphs 35 40(3)(a) and 35-45(3)(a)); or

•	if an individual stops carrying on the *business activity during the year:

(i)	as at the time the individual stops (subparagraphs 35-40(3)(b)(i) and 35 45(3)(b)(i)); or

(ii)	if the individual disposed of the asset before that time in the course of stopping carrying on the activity – as at the time the individual disposed of it (subparagraphs 35-40(3)(b)(ii) and 35 45(3)(b)(ii)).

Leased assets and the two assets tests

26.	The value of some leased assets used on a continuing basis in the relevant *business activity can be taken into account for either of the assets tests (but not for both). The general scheme is that an individual with an interest in real property comprised of fixtures owned by them as a tenant, takes the fixtures into account under the Other assets test, and not under the Real property test (paragraph 35 40(4)(b)).

Depreciating assets and the two assets tests

27.	An owner of real property on which a depreciating asset is fixed is potentially able to take the value of that asset into account under the Real property test and under the Other assets test. This would be where the asset qualifies as part of the real property, but is also an asset in its own right whose decline in value can be deducted under Division 40 (i.e., an asset within Item 1 of the table in subsection 35-45(2)). However, the general scheme in this case is that where such an asset is part of the real property taken into account for the purposes of the Real property test, then it is not also counted for the Other assets test (paragraph 35-45(4)(a)).

The operation of the tests when the *business activity is conducted by individuals in partnership

28.	Where the relevant *business activity is carried on by an individual and one or more individuals or other entities, as partners in a general law partnership, only that part which is attributable to the total of the interests of all the individuals in the partnership may be aggregated for the Assessable income test, Real property test and Other assets test (paragraphs 35-25(a) and (c)). In addition, any assessable income that is *derived and/or assets owned by an individual partner in their own right, or that they may have from the same, or a similar, *business activity, outside of the partnership, can also be taken into account by that partner in considering these tests (paragraphs 35-25(b) and (d)). The interests of companies and trustees are ignored (paragraphs 35-25(a) and (c)).

29.	To apply the Profits test the individual partner takes into account their share of the deductions and assessable income attributable to their interest in the partnership, along with any of their own assessable income and allowable deductions they may have from the same, or a similar, *business activity outside of the partnership (subsection 35-35(2)) see Examples 8 and 9 at paragraphs 141 to 146 below.

Exercise of the Commissioner’s discretion – 2 arms

30.	Under subsection 35-55(1) the Commissioner may decide that the rule in section 35-10 is not to apply to a *business activity for one or more income years if he is satisfied that it would be "unreasonable" for the loss from the *business activity not to be deductible against other income for that income year or years. This discretion is, however, only able to be exercised in two limited situations which make up the two arms of the discretion. These are:

(a)   "special circumstances" (first arm); and

(b)   where the *business activity has started to be carried on but, because of its nature, it is yet to pass one of the four tests, though within a period that is commercially viable for the industry concerned, there is an objective expectation that it will do so, or will produce a tax profit (second arm).

Latest time for exercise of the Commissioner’s discretion

31.	Under subsection 35-55(2) the Commissioner cannot exercise the discretion under paragraph 35-55(1)(b) after the time in which it is reasonable to expect that:

(a)   the *business activity would first produce assessable income greater than the deductions attributable to it in an income year (apart from the operation of subsection 35-10(2) under which losses of previous years are treated as attributable to later years); or

(b)   meet one of the tests set out in section 35-30, 35-35, 35-40 or 35-45.

NOTE:
On 2 October 2001 the Minister for Forestry and Conservation announced that the Government proposed to amend section 35-55 with effect from the commencement of the 2000-2001 income year. The amendments proposed would allow the Commissioner to exercise the discretion in this section in relation to a *business activity that has commenced to be carried on, for the period up until that activity is expected to pass one of the tests in Division 35, or produce a profit, "on a sustained basis". Until such time as these amendments become law, however, it is not possible to make them the subject of a public ruling. On enactment this ruling will be reviewed and amended accordingly.

Application of Division 35 when an individual has *exempt income

32.	Under section 35-15 a non-commercial loss deferred to the current year under paragraph 35-10(2)(b), or a current year non commercial loss to be deferred under paragraph 35-10(2)(b) to a later year, may be reduced where the individual has *derived *exempt income. Such losses will be reduced where any net *exempt income *derived in the current year is not fully offset against any Division 36 losses allowable for that year (see Example 15 at paragraphs 171 to 172 below).

Application of Division 35 if an individual becomes bankrupt

33.	Under section 35-20, a non-commercial loss deferred under subsection 35-10(2) will be treated differently where an individual becomes bankrupt, or is released from a debt by the operation of an Act relating to bankruptcy. A non-commercial loss incurred prior to bankruptcy that was deferred, as a result of the rule, will not be available for deduction in the current or any future year (see Example 16 at paragraph 173 below).

KEY TERMS

34.	In this Ruling the following Key Terms are used:

•	"*business activity" means an activity which may be a complete *business in itself, or part of a larger *business, and may include, applying subsection 35 10(3), "… *business activities of a similar kind" (see paragraphs 36 to 39 following);

•	"individual" means a natural person;

•	"non-commercial loss" means the excess of allowable deductions attributable to a "*business activity", for a particular year, over assessable income (if any) from that activity where the operation of Division 35 has not been excluded by the Exception, the four tests or the Commissioner’s discretion (see subsection 35-10(2));

•	"*professional arts business" has the meaning given in subsection 35-10(5), namely:

… a *business you carry on as:

(c)   the author of a literary, dramatic, musical or artistic work;

(d)   a *performing artist; or

(e)   a *production associate’ ;

The terms, "*performing artist", and "*production associate" have the same meaning as they have in section 405-25.

•	"tax profit" is where the amount of assessable income from the activity for a year is greater than the sum of the deductions attributable to the *business activity for that year (apart from the operation of subsection 35 10(2));

•	"tenant’s fixtures" means fixtures owned according to property law, by you as a tenant, as that expression is used in paragraph 35-40(4)(b).

RULING

*Business needs to be carried on

35.	Carrying on a *business activity requires that a *business be carried on, as that term is ordinarily understood. The criteria as to when a *business of primary production is being carried on, for example, are set out in Taxation Ruling TR 97/11.

Subsection 35-5(1) says the object of Division 35 "is to improve the integrity of the taxation system by preventing losses from non-commercial activities that are carried on as *businesses by individuals (alone or in partnership) being offset against other assessable income". Division 35 is not intended to apply to activities that do not constitute a *business, e.g., a "passive investment" (subsection 35-5(2)). The terms "*business" and "passive investment" are used here in a mutually exclusive sense.

Meaning of "*business activity"

36.	A key concept to understand in applying Division 35 therefore is "*business activity" as the term is used in the Division. The asterisk signifies that the term includes the defined term *business, the meaning of which in section 995-1 is:

"*business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee."

37.	The composite term "*business activity" is otherwise undefined in the ITAA 1997. The inclusion of the extended definition of "*business" in the composite term does not, however, alter the ordinary meaning of the composite term in any significant way. That ordinary meaning is an activity forming part or all of the taxpayer’s activities "engaged in for the purpose of profit on a continuous and repetitive basis" (Hope v. The Council of the City of Bathurst 80 ATC 4386 at 4382; (1980) 12 ATR 231 at 236), or an activity that is one of the activities that makes up the "course of conduct" (FC of T v. Murry 98 ATC 4585 at 4596; (1998) 39 ATR 129 at 145) that is the taxpayer’s *business.

38.	However, while a *business may be subdivided into a number of different *business activities this cannot be carried out to the point where the composite term in Division 35, "*business activity", is deprived of practical meaning. An activity that forms part of a taxpayer’s overall *business will not be a separate "*business activity" for the purposes of Division 35 unless it is capable of standing alone as an autonomous commercial undertaking of some sort (see further paragraphs 40 to 46 on identifying separate and distinct *business activities for the purposes of Division 35).

39.	As described in paragraph 8, the relevant changes in the law are directed at activities that are "unlikely to ever be profitable". *Business activities have been made subject to a series of tests to determine whether they are treated as non-commercial (section 35-1) and the identification and tax treatment of non-commercial business activities is the main purpose of Division 35.

Identifying separate *business activities

40.	In Allied Mills Industries Pty Ltd v. FC of T 88 ATC 4852 at 4864; (1988) 19 ATR 1724 at 1737, Gw J acknowledged that a taxpayer might carry on "several distinct *businesses". Gummow J stated:

"Viewed in the light of the conduct of *business of the taxpayer as a whole, one cannot sensibly say that the taxpayer went out of *business or that the taxpayer parted with a substantial part of its *business undertaking, or that its profit-making apparatus was materially crippled.

It may be that activities of a taxpayer are so disparate in character and so discrete in the manner they are conducted, that one properly asks questions of the type posed by the facts of this case by reference to some but not the whole of those activities; examples of several distinct *businesses conducted by one taxpayer may be provided by the Board of Review decisions Case H100 (1956) 8 T.B.R.D. 457 (retail jeweller and real estate letting agent) and Case N38 (1962) 13 T.B.R.D. 161 (printer and seller of goods on commission). But, in my view, for the reasons I have given, the present is not such a case."

41.	The same may be said for Division 35 about an individual taxpayer carrying on the one *business. In certain situations their *business activities may be so discrete in character and in the manner they are conducted that the question arises whether they are carrying on separate and distinct *business activities for Division 35 purposes. Whether this is so is clearly a question of fact and overall impression, like the question of whether they are carrying on a *business.

42.	Given the purpose and context in which "*business activity" appears in Division 35, as noted already, such situations would also need to be ones where the separate *business activities were each capable in their own right of producing assessable income and having attributed to them amounts that would otherwise be deductible.

43.	Further, and most importantly, to be identified as a separate *business activity for Division 35, within the statutory scheme referred to, the activity (or set of activities) will need to exhibit the following:

•	it produces a loss, in the sense that looked at as a separate activity there is clearly assessable income produced, or intended to be produced, from it, and otherwise allowable deductions attributable to carrying it on in excess of that income (otherwise Division 35 has no relevance);

•	its conduct is not motivated by factors connected with supporting in any commercial way the carrying on of the individual’s other *business activities; and

•	it shows signs in its own right that it is unlikely to ever be profitable.

44.	All these requirements need to be satisfied, though the greatest weight would typically be given to the last two. For example, an activity might exhibit the first, and the last, but not the second requirement, because it assists in a genuinely commercial way, the carrying on of the individual’s other *business activity: see Example 1 (paragraphs 120 to 123) in the Examples part of this Ruling. Such an activity would not be identified as a separate *business activity for Division 35 purposes.

45.	The following table summarises some of the factors that may be relevant to whether a *business is made up of separate and distinct *business activities for Division 35 purposes. The term "activities" is used in the table simply to refer to the various business operations making up the individual’s *business. The table is not meant to be a checklist, or suggest that each factor should be given equal weighting in all cases.

Table 1- relevant factors concerning identifying separate *business activities

Factor	"for" there being separate and distinct *business activities	"against" there being separate and distinct *business activities
Location	Different types of activities carried on at different locations	Different types of activities carried on but all at the same location
Assets used	Different types of assets used in carrying on separate activities, with no, or very little, crossover or commonality of use	Some different assets used in carrying on separate activities but many assets common to all
Goods/ services produced (incl.  market conditions)	Significant differences in the type of goods/services produced from the separate activities and in the conditions affecting their sale	Different types of goods/services produced but significant similarities in the manner produced and/or marketed
Inter- dependency	No, or very little, interdependency between the separate activities	Separate activities carried on but significant level of interdependency between them in terms, for example, of working capital support, customer base, manner in which activities carried out
Commercial links	One set of activities is inherently unprofitable and has no, or only minimal, commercial basis on which it could support the other activities	One set of activities may be inherently unprofitable but it supports the other activities, for example through increasing their sales base
46.	The above list is not meant to be exhaustive. In some cases other factors that may be relevant to determining whether one *business activity is separate and distinct from another might include any difference in methods of funding, any difference in the degree of commercial risk associated with each of them, and any laws or regulations of any industry body that apply.

A common-sense approach

47.	To sum up, identification of what are the individual taxpayer’s relevant *business activities is to be done on a common sense basis without looking to create artificial distinctions between various parts of their overall *business. This will often mean that the relevant *business activity is the individual’s whole *business.

48.	However, where an individual taxpayer carries on several distinct *businesses it follows that they carry on several distinct *business activities for Division 35 purposes.

*Business activities "of a similar kind"

49.	An individual’s *business may, adopting the approach described above, be seen as made up of two or more separate and distinct *business activities. Subsection 35-10(3) nevertheless provides that those *business activities can be grouped together for all purposes in Division 35 if they are "of a similar kind." This would produce, for a particular income year, the same result practically as if those activities had not been identified as separate *business activities in the first place. However, where an individual does identify that their *business is in fact made up of more than one *business activity, they may choose not to group those activities under subsection 35-10(3) if it would not be to their advantage to do so.

50.	Subsection 35-10(3) also plays another role. It will allow the comparison of separate *business activities across different income years in which they are carried on. This will be relevant to the operation of paragraph 35-10(2)(b). This paragraph requires, where a non-commercial loss has been deemed not to be deductible for an income year, identification of the "… next income year in which the activity is carried on". As a result of subsection 35-10(3), this activity need not be the same activity as that from which the non-commercial loss was made. It can be another *business activity "of a similar kind". In other words, it does not have to be "of the same kind".

Determining whether *business activities are "of a similar kind"

51.	What will be a *business activity "of a similar kind" to another *business activity is very much a question of fact and degree. The question will involve a comparison of the relevant characteristics of each, for example:

•	the location(s) where they are carried on;

•	the type(s) of goods and/or services provided;

•	the market(s) conditions in which those goods and/or services are traded;

•	the type(s) of assets employed in each; and

•	any other features affecting the manner in which they are conducted.

52.	Some of these characteristics may be the same for the *business activities being compared, but some differences must always be expected. The presence or absence of similarity in respect of a single characteristic will rarely be determinative (Goodfellow v. FC of T 77 ATC 4086 at 4094; (1977) 7 ATR 265 at 274). An overall comparison of the separate *business activities will be called for, weighing up the extent of the characteristics which are the same or similar against those where there are significant differences. See Example 2 (paragraphs 124 to 130) for an illustration of how the factors referred to in paragraph 51 above apply to determine whether two separate activities are *business activities "of a similar kind".

53.	The broader in nature any separate and distinct *business activities are the more likely it will be that they will have some same or similar characteristics, especially when looked at over a period of time. For example, a mixed farming *business consisting nevertheless of only the one *business activity may involve a particular mix of grazing certain animals and growing certain crops. Changes to this mix may mean that at some stage in the future this *business is no longer the same *business it once was. However, the relevant *business activity may still be "of a similar kind" to the previous one, and Division 35 will apply accordingly.

54.	That is, that the whole enterprise in the above example can continue to be treated as a single *business activity if the individual taxpayer so chooses. This means that if the enterprise is profitable overall there is no need to identify any separate loss making activities and, hence, the loss deferral rule in Division 35 will not apply at all (see paragraphs 86 to 88 of the Explanations below).

Ceasing to carry on a *business activity

55.	In some cases an individual taxpayer’s circumstances may change leaving issues about their ability to deduct the full extent of any loss made. Any amount deferred under subsection 35-10(2) will only be deductible in a subsequent year if the *business activity that gave rise to this amount, or one "of a similar kind", is carried on in that subsequent year. If the activity, or one "of a similar kind", is never carried on again, the entitlement to deduct the amount will be lost (see Example 3 at paragraphs 131 and 132 below).

Application of Division 35 year by year

56.	In determining whether Division 35 applies to the relevant *business activity it is necessary to identify both the allowable deductions "attributable" to the *business activity and the assessable income "from" that activity. The four tests in Division 35 are applied annually to each relevant *business activity.

Calculating the non-commercial loss on a year by year basis

57.	The "amounts attributable to the *business activity" that an individual taxpayer can otherwise deduct are, for the purposes of applying the loss deferral rule in subsection 35-10(2), all those amounts otherwise deductible under any provision of the ITAA 1997, to the extent that they relate to the carrying on of the particular *business activity in the income year in question. The relevant assessable income from the *business activity is that income which is *derived directly from, and has a causal relationship with, the carrying on of that *business activity for the income year in question (see paragraphs 91 and 92 of the Explanations and Example 5 at paragraphs 134 to 136 below).

Deductions allowable after *business carried on

58.	Division 35 will only apply to otherwise allowable deductions that are attributable for a particular year to the carrying on of a *business activity in that year (see subsections 35-5(2) and 35 10(1)). This means that typically they will be outgoings incurred in a particular year in the course of carrying on that *business activity in that year. There may be amounts however, for example, those deductible under paragraph 8-1(1)(b), that are deductible even though they are incurred after the business activity has ceased being carried on. These otherwise allowable deductions are not subject to Division 35.

NOTE:
When losses or outgoings are deductible, even where incurred after the cessation of income earning activities, is discussed in Taxation Ruling TR 2000/17. Note paragraph 14 of that Ruling: interest may be deductible when borrowed funds have been lost, but if those funds are put to other use, the question of the deductibility of that interest is determined by such other use.

*Primary Production and *Professional Arts businesses Exception

59.	This Exception allows eligible individuals who carry on a *primary production business or *professional arts business to offset any loss (including any deferred amount) from their *primary production business or *professional arts business against other income in the current year. This is regardless of the amount of the *business activity’s income, assets, real property or profit, as the four tests are not relevant where the Exception applies if their assessable income (excluding any *net capital gain), from sources not related to the *business, is less than $40,000 for the income year in question (see paragraphs 89 and 90 of the Explanations and Example 4 at paragraph 133 below).

Distinguishing a Division 35 loss from a Division 36 loss

60.	Where Division 35 does not apply and the excess deductions for the *business activity for the income year (whether in combination with other deductions, or alone) are greater than the individual’s other assessable income and any *net exempt income, they will have a "tax loss" under section 36-10. Deductibility of that tax loss in a later year will then be subject to Division 36 and not Division 35.

Assessable income

61.	Assessable income is defined in section 995-1 of the ITAA 1997 to include statutory income as well as ordinary income (see generally, Division 6 of the ITAA 1997). This definition governs what income will be counted towards the Assessable income test in section 35-30, provided that such income is "from" the relevant *business activity. Note that, where relevant, the amount taken into account will not include a Goods and Services Tax ("GST") component: see section 17-5 of the ITAA 1997.

Making a "reasonable estimate" of assessable income for the purposes of the Assessable income test

62.	To make a "reasonable estimate" under paragraph 35-30(b) of assessable income that would have been *derived from the *business activity if it had been carried on throughout the income year in question (i.e., an estimate of a notional annual amount) an individual can consider all relevant factors, including, but not limited to:

(a)   the cyclical nature of the particular *business activity which may result in variations in the pattern of receipts;

(b)   any orders received and/or forward contracts entered into;

(c)  the amount that could have been *derived for a full income year based on a pro rata calculation of the assessable income already *derived for the part of the year.  The amount *derived for the part of the year must be typical of the income *derived in a full year;

(d)   the type of *business activity undertaken, considering the nature and type of income receipts of similar activities typical of the industry; and

(e)   current size and investment in the activity.

Profits test

63.	Initially this test will require the taxpayer to look at years before the commencement of Division 35. However, it is not a requirement that the *business activity be carried on for 5 years. If there is a profit in 3 out of 4 years that will be sufficient to satisfy the requirements of the test (see paragraph 93 of the Explanations and Example 6 at paragraph 137 below).

Whether to value the real property or the interest in real property in applying the Real property test

64.	An issue arises concerning the Real property test in section 35-40. It concerns whether a holder of an interest in real property (e.g., a lessee) uses the *reduced cost base, or the market value (if greater), of that interest or, instead, of the underlying real property, in applying the Real property test. The words of section 35-40 allow an individual taxpayer to choose either of these methods in applying the Real property test to their *business activity i.e., the holder of an interest in real property can choose either the *reduced cost base or market value of:

•	the interest; or

•	the underlying property,

they use in the relevant *business activity, for the purposes of applying the Real property test.

Values to be used in applying the Other assets test

65.	The table in subsection 35-45(2) specifies the values for different classes of assets to be used in applying the Other assets test. For example, the tax value of an asset for which an individual can deduct an amount for its decline in value is its *written down value at the date that that value is to be determined (usually, the end of an income year). If an item of machinery has been depreciated to nil, the value to be taken into account for this test will also be nil. Item 3 of subsection 35-45(2) makes it clear that where the asset is leased, the value of the interest is the future lease payments to which the individual is irrevocably committed, less an interest component, and not the value of the underlying asset.

What is continuing use in the *business activity for the purposes of the Real property test and the Other assets test?

66.	The use of assets required for them to be taken into account under one of the two assets tests must be something more than "transient or insubstantial use" (see FC of T v. Stewart 84 ATC 4146; (1984) 15 ATR 387). This is evident also from the requirement in both sections 35-40 and 35-45 that the use of the assets in question must be on a "continuing basis".  "Continuing" is not defined for Division 35 purposes and therefore takes its ordinary meaning. Whether an asset is used on a continuing basis in the *business activity will depend on the circumstances of each case.

67.	However, "continuing" does not cover the following, or similar, circumstances:

(a)   the asset is used on a short-term basis for a specific task or for a one-off activity; or

(b)   the asset is acquired under an agreement for taking a unit of property on hire where the agreement is of a kind ordinarily entered into by persons taking property on hire intermittently as the occasion requires on an hourly, daily, weekly, monthly or other short-term basis (see, e.g., subsection 42-345(3) and the meaning of short-term hire agreement).

The reference to using an asset on a short-term basis for a specific task does not mean that, for example, an item of machinery, such as a harvester, used in an ongoing *business, but only at harvest time, would be regarded as not being used on a continuing basis. On the other hand, a large item of earthmoving equipment hired on a one-off basis for the construction of a dam would not meet the requirement of being used on a continuing basis.

All tests – determining whether general law partnership exists

68.	Determination of the existence, or otherwise, of a partnership at general law will be determined under case law. Taxation Ruling TR 94/8 outlines the factors to be considered in deciding whether persons are carrying on a *business as partners.

69.	If the arrangement between the parties is not as partners at general law, the interest of the individuals must be taken into account separately and assessed independently against all of the tests.

Operation of section 35-55 – the Commissioner’s discretion

"Special circumstances"

70.	Under paragraph 35-55(1)(a), the first arm of the Commissioner’s discretion may be exercised where there are "special circumstances outside the control of the operators of the *business activity" that have had an effect on the *business activity and its ability to pass any one of the tests in Division 35 (see the "Note" to paragraph 35 55(1)(a)). Examples of such special circumstances could include drought, flood, bushfire and other natural disasters, such as:

•	earthquakes;

•	diseases affecting livestock or crops;

•	pest plagues; or

•	hailstorms.

71.	Special circumstances will not depend on a State or Federal body declaring a natural disaster. What will constitute special circumstances is a question of fact and degree and will depend on each individual’s particular circumstances. It is critical that the individual can establish that but for the special circumstances their *business activity would have passed one of the four tests.

72.	The use of the word "including" in the legislation expands the scope of the test to special circumstances beyond natural disasters that materially affect the business operations. Other "special circumstances" that are likely to attract the exercise of the second arm of the Commissioner’s discretion include material effects on a *business activity caused by events such as, but not limited to:

•	an oil spill;

•	a chemical spray drift;

•	a gas plant explosion;

•	a power plant shutdown;

•	a water authority malfunction;

•	government authority restriction imposed on land use; or

•	other events (for example, illness of the operator or employee(s)) which have significantly affected the ability of the operator to carry on the *business activity.

73.	Generally, ordinary economic or market fluctuations that might reasonably be predicted to affect the *business activity would not be considered to be special circumstances. However, substantial unexpected economic or market fluctuations of a scale not regularly encountered previously may qualify on a case by case basis. This is in keeping with the normal meaning of "special circumstances" as being ones that are out of the ordinary or normal course of business (see Secretary, Department of Employment, Education, Training and Youth Affairs v. Barrett & Anor (1998) 52 ALD 499; (1998) 82 FLR 524).

74.	Where the special circumstances affect the *business activity for a number of years the discretion will be granted for each year it can be shown these circumstances have hampered the *business activity being able to satisfy one of the four tests (see Examples 10 and 11 at paragraphs 147 to 153 and Example 12A at paragraphs 156 and 157 below).

*Business activity has started to be carried on

75.	The second arm of the Commissioner’s discretion may be exercised where:

(a)   the *business activity has started to be carried on;

(b)   "because of its nature", it has not yet met any of the tests; and

(c)   the individual can show that there is a objective expectation, based on evidence from independent sources (if available) that, within a period that is commercially viable for the industry concerned, the activity will meet one of the tests or produce a tax profit (paragraph 35 55(1)(b)).

76.	The first requirement that there be a *business activity being carried on means an individual must have started to carry on that *business activity. This will broadly require that the individual has:

•	made a decision to commence the *business activity;

•	acquired the minimum level of "business assets" to allow that *business activity to be carried on; and

•	actually commenced "business operations".

A mere intention to start carrying on a *business activity will not be sufficient. (See paragraphs 95 to 105 of the Explanations below.) But note that private rulings can be given in relation to proposed arrangements so long as they are being "seriously contemplated". See also paragraph 119.

Meaning of "because of its nature"

77.	The second requirement for a *business activity to be eligible for exercise of the second arm of the discretion is that it is "because of its nature" that it has not yet, for the income year(s) in question, satisfied any one of the four tests. This requirement refers to something innate or inherent in the activity itself that results in a period of time between when the activity commences and when it first produces assessable income (see the "Note" to paragraph 35-55(1)(b) and paragraph 1.51 of the Explanatory Memorandum).

78.	Not all newly commenced *business activities will have such an innate or inherent feature. Where they do not have such a feature they will be ineligible for the exercise of the second arm of the discretion (see paragraphs 106 to 113 of the Explanations and Examples 12 at paragraphs 154 and 155 and 14 at paragraphs 165 to 170 below).

Objective expectation of meeting a test or producing a tax profit within a period that is commercially viable for the industry concerned

79.	The third requirement for the operation of the second arm of the discretion is that there is an objective expectation, based on evidence from independent sources, where available, that the *business activity will, within a period that is commercially viable for the industry concerned, meet one of the four tests in Division 35 or produce a tax profit.

80.	The essence of such an activity is that it is carried on for commercial reasons, and in a commercially viable manner, with the dominant purpose being one of profit. The taxpayer’s primary reason for engaging in the *business activity should not be a recreational one, nor to pursue a particular lifestyle.

81.	To determine whether their *business activity is one in which there is a commercially viable period and, if so, what its duration is, the individual taxpayer will normally need to collect relevant evidence on these points from independent sources. Their own material typically will show whether their activity will pass one of the tests, or produce a tax profit within this period. Their case will, however, be assisted where the relevant facts and figures are consistent with those for the industry in question.

82.	Appropriate independent sources include industry bodies or relevant professional associations, government agencies, or other taxpayers conducting successful comparable *businesses. The evidence to be presented to the Commissioner to show that the second arm of the discretion should be exercised, should also deal with the nature and extent of the investment required to establish a viable and profitable activity. A business plan could provide this information where it has been prepared on the basis of the relevant independent evidence and is accompanied by copies of the relevant material (see Examples 13 and 13A at paragraphs 158 to 164 below).

EXPLANATIONS

Meaning of "*business activity" and identification of separate and distinct *business activities within the one *business

83.	The meaning of the composite phrase, "*business activity", as it appears in Division 35, is explained in paragraphs 36 to 39 of this Ruling. A major point to note is that an individual’s *business will not comprise separate and distinct *business activities for the purposes of Division 35 where all the activities are interlinked, and support each other in a genuine commercial way.

Alternative view

84.	During consultation on this Ruling the view was expressed that the term "*business activity" effectively had the same meaning as *business as defined in section 995-1. In other words, there was no warrant for separating out various parts of an individual’s *business into separate *business activities. Some support for this view can be found in the objects clause to Division 35, section 35-5, specifically in subsection (1). There reference is made to Division 35 being intended to deal with "... losses from non-commercial activities that are carried on as *businesses".

85.	Such a view ignores the question of why the specific term, *business activity, is otherwise used regularly in the same manner throughout Division 35, especially in the key operative provision, section 35-10. If Parliament had intended the term *business activity to mean *business, it would have been easy enough to use the term *business rather than *business activity. However, on the basis of the view taken in this Ruling on the meaning of *business activity, in many cases it will be an individual’s whole *business anyway that will be identified as the relevant *business activity for Division 35. Even under this alternative view there would be a need to perform separate calculations for the purpose of section 35-10 where the same individual taxpayer carries on separate and distinct *businesses.

*Business activities "of a similar kind"

86.	Subsection 35-10(3) allows *business activities to be grouped for Division 35 purposes where they are activities "of a similar kind". A similar activity may be one that has evolved from the first *business activity, or it may simply be another *business activity carried on in the same year, that fits the description of being "similar". *Business activities which are of a similar kind are those which inherently have the same nature or character. The activities must be similar; they do not need to be identical (Goodfellow). The term "similar" involves "a near identity, a close correspondence, a resemblance in many, but not all respects" (Galcif Pty Ltd v. Dudley’s Corner Pty Ltd & Ors (1995) 6 BPR 14,134).

87.	Identification of the relevant *business activity for Division 35 purposes will always need to occur having regard to the possible operation of subsection 35-10(3). In other words, there will be no practical effect achieved in splitting an individual’s *business up into two or more separate *business activities if under subsection 35 10(3) they can be combined back together because they are "of a similar kind". These combined activities will then form the one *business activity for all Division 35 purposes.

88.	However, where an individual does identify that their *business is in fact made up of more than one *business activity, they may choose not to group those activities under subsection 35-10(3) if it would not be to their advantage to do so.

*Primary Production and *Professional Arts businesses Exception

89.	Subsection 35-10(4) contains an Exception for *primary production businesses or *professional arts businesses that are carried on by certain individuals, where they have less than $40,000 of assessable income (excluding any *net capital gain), from sources not related to their *primary production business or *professional arts business.

NOTE:
The indicators as to whether an individual is carrying on a *primary production business are set out in Taxation Ruling TR 97/11. These indicators are no different, in principle, from the indicators as to whether activities in any other area, such as professional arts, constitute the carrying on of a *business (TR 97/11 para 11).

90.	The term *Professional arts business is given a wide meaning in subsection 35-10(5) through use of the same concepts as found in Division 405 concerning the averaging of incomes of authors, *performing artists and *production associates. Paragraph 35-10(5)(a) includes as a *professional arts business a *business that an individual carries on as the author of a literary, dramatic, musical or artistic work. As noted under paragraph 35-10(5)(a), the term "author" is a technical term from copyright law. Apart from the author of a photograph, which is generally the person who took it, the Copyright Act 1968 does not define what an author is. (Subsection 10(1) of the Copyright Act 1968 defines the author of a photograph taken after 1 May 1969 as the person who took the photograph.) Copyright law indicates that the author of a literary, dramatic, musical or artistic work will be the person who has "originated it or brought it into existence and has not copied it from another". (Ricketson, The Law of Intellectual Property, (1984) at 83 as quoted by the High Court in Data Access Corporation v. Powerflex Services Pty Ltd [1999] HCA 49 at paragraph 22.)

Calculating the non-commercial loss

91.	Where none of the four tests is satisfied, the Exception does not apply, and the Commissioner has not exercised the discretion in section 35-55, the rule in subsection 35-10(2) applies. Subsection 35 10(2) contains the loss deferral mechanism of Division 35. Under this provision, for a particular income year where "the amounts attributable to the *business activity for that income year" exceed "the assessable income from the *business activity for that year", then the excess is treated as though it "were not incurred in that income year".

92.	Instead, the excess is treated as an amount attributable to that activity that the individual could deduct for the next income year in which the activity or a similar activity is carried on. The amounts attributable to the *business activity are those that the individual could, apart from Division 35, deduct under the Act for that income year. They do not include a "tax loss" (as that term is used in Division 36) that might be deductible in that year, but has arisen in respect of carrying on operations in a previous year.

Profits test

93.	The Profits test in section 35-55 requires that the *business activity has produced "profits" in 3 out of the past 5 income years (where this five year period includes the current income year), for the activity to satisfy this test. The term "profit" refers to the excess of the tax law assessable income from the activity for the income year in question, over the tax law deductions attributable to carrying on the activity in that year (but does not include any deduction deemed attributable to the activity under subsection 35-10(2) in relation to a non-commercial loss deferred from a previous year).

Exercise of the Commissioner’s discretion – 2 arms

94.	The Commissioner’s discretion in section 35-55 is designed to apply where it is "unreasonable" for the loss not to be deductible against other income for that income year because either there are:

(a)   "special circumstances"; or

(b)   the *business activity "has started to be carried on, and because of its nature it has not yet satisfied one of [the four tests] and there is an objective expectation that it will either pass a test or produce a profit within a reasonable time" (paragraph 1.47 of the Explanatory Memorandum).

Second arm – certain start-up *business activities

95.	The exercise of the second arm of the discretion in paragraph 35-55(1)(b) is intended to assist individuals commencing certain *businesses (such as certain *primary production businesses) which because of their nature have a lead time (see the "Note" to paragraph 35-55(1)(b)).

96.	Under paragraph 35-55(1)(b), the Commissioner’s discretion can be exercised where the *business activity satisfies three requirements. These are:

(a)   the *business activity has started to be carried on; and

(b)   because of its nature, it has not yet satisfied a test in Division 35; and

(c)   there is an objective expectation that within a period that is commercially viable for the industry concerned it will pass one of the tests or make a tax profit.

Whether activity has started to be carried on

97.	The first requirement concerning when a *business activity starts to be carried on is one that usually arises in relation to the deductibility of expenses incurred in the establishment of a *business activity. The actual date of commencement of a *business is a question of fact (see Goodman Fielder Wattie Ltd v. FC of T 91 ATC 4438 at 4446; (1991) 22 ATR 26 at 35).

98.	For a *business activity to have commenced a person must have:

•	made a decision to commence the *business activity;

•	acquired the minimum level of "business assets" to allow that *business activity to be carried on; and

•	actually commenced "business operations".

99.	We believe that when a *business activity commences is like the question of whether a *business is being carried on at all and depends on the "large or general impression gained" (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551).

Decision to commence

100.	1The chain of events leading to the commencement or start up of a *business activity often begins with a mere intention to establish the *business activity. This is developed by researching the proposed *business and, in some instances, by experiment. This process culminates in a final decision on whether to commence *business. Not all *businesses commence in such an orderly fashion of course.

101.	1The intention and purpose of the taxpayer in engaging in the activity is relevant to when a *business commences. However, a mere intention to commence a *business activity is not enough: Goodman Fielder Wattie. The taxpayer must have more than an intention to commence *business. There must be activity. In Esso Australia Resources Ltd v. FC of T 97 ATC 4371 at 4382; (1997) 36 ATR 65 at 77-78 Sundberg J stated:

"While the taxpayer may have had the intention ultimately to engage in production, that is not sufficient in itself to constitute a business activity."

Sundberg J went on to say that "commitment" was missing on the facts of the case. See also Brennan J in Inglis v. FC of T 80 ATC 4001 at 4004-4005; (1979) 10 ATR 493 at 496-497.

102.	1Whitfords Beach Pty Ltd v. FC of T 83 ATC 4277; (1983) 14 ATR 247 is one of the few cases that has examined the issue of the commencement of a *business activity and the factors to consider when determining the commencement of a *business activity. These factors were a consideration of the taxpayer’s purpose and the taxpayer’s activities. Bowen CJ, Morling and Fitzgerald JJ said, at ATC 4282; ATR 253:

"Of course it does not follow that all the activities engaged in by the taxpayer were necessarily in the course of that business or that some of them were not merely preparatory to it. In order to determine when the taxpayer’s relevant business commenced and when its land or the various parts of it were committed to or ventured in that business, it is necessary to have regard both to the taxpayer’s purposes and to its activities." (emphasis added)

Business structure

103.	1Most *business activities have a structure that provides the framework of the *business, or their "profit yielding subject". It is usually a collection of capital assets. What the particular capital assets are will depend on the particular *business activity. In Calkin v. CIR [1984] 1 NZLR 440 Richardson J said at 446-447:

"Clearly it is not sufficient that the taxpayer has made a commitment to engage in business: he must first establish a profit-making structure and begin ordinary business operations." (emphasis added)

104.	For a *business activity to commence, an appropriate business structure should also be in place. As to what this structure will consist of, and its size, this will be a question of fact and degree, and depend on the nature of the *business activity. A suitable structure might even be established by the execution of certain documents, where independent contractors with the necessary capital assets are engaged. Even though the taxpayer may have no physical assets themselves, their rights as against the independent contractor secure use of such assets, and those rights can properly be said to be capital assets in the taxpayer’s hands. However, each case will need to be determined on its own facts and having regard to industry norms.

Business operations

105.	As noted in Inglis, the level of activity is important. The extent of activity will also determine whether a *business activity has commenced and is in its start-up phase. Activity will support the taxpayer’s claims to have commenced a *business activity. Brennan J in Inglis made it clear that there must be activity when he said at ATC 4004; ATR 496:

"The carrying on of a business is not a matter merely of intention. It is a matter of activity. Yet the degree of activity which is requisite to the carrying on of a business varies according to the circumstances in which the supposed business is being conducted. Little activity may suffice for carrying on a business that does not call for much activity, as in Thomas and in Ferguson." (emphasis added)

Brennan J went on to say at ATC 4005; ATR 497:

"At the end of the day, the extent of activity determines whether the business is being carried on. That is a question of fact and degree." (emphasis added)

The level of activity that is required will clearly vary from case to case. Based on the decision in Calkin two different types of activity are relevant:

•	acquisition of the minimum level of "business assets"; and

•	the commencement of "business operations".

Both are necessary to be able to conclude that a *business has commenced.

Meaning of "because of its nature"

106.	The second of three requirements concerning eligibility for exercise of the second arm of the discretion contained in paragraph 35-55(1)(b) is that in subparagraph (i). It requires that the *business activity, "because of its nature", has not yet, for the income year(s) in question, satisfied any one of the four tests in Division 35.

107.	Guidance on what is meant by the phrase, "because of its nature" is given firstly by the "Note" to paragraph 35-55(1)(b) which states:

"NOTE:
This paragraph is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. For example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income."

108.	Secondly, paragraph 1.51 of the Explanatory Memorandum says:

"This arm of the safeguard discretion [i.e., that in paragraph 35 55(1)(b)] will ensure that the loss deferral rule in section 35-10 does not adversely impact on taxpayers who have commenced to carry on activities which by their nature require a number of years to produce assessable income. Examples of activities which could fall into this category are forestry, viticulture and certain horticultural activities." (emphasis added)

109.	Both the Note and the Explanatory Memorandum point to the phrase, "because of its nature", as referring to some innate or inherent feature of the *business activity resulting in it not being able to produce income until some time after it has been commenced, usually not until after a "number of years". This is also consistent with the third requirement, in subparagraph (1)(b)(ii), that there needs to be an objective expectation that notwithstanding the initial failure of the *business activity to satisfy one of the tests because of such an innate or inherent feature, nevertheless within a period that is commercially viable for the industry concerned it will do so (or will produce a tax profit).

110.	In other words, an initial inability to satisfy one of the tests must be due to an innate or inherent feature or features of the industry overall, or well recognised segments in it, rather than just isolated *business activities within that industry.

111.	Not all recently commenced *business activities will have such an innate or inherent feature. If a *business activity does not meet all three requirements then the Commissioner is not able to exercise the second arm of the discretion in paragraph 35-55(1)(b). For example, take the case of a *business activity that is by its nature capable of producing income relatively soon, eg., within a matter of months, after commencing, but is not able to satisfy any of the tests for a number of years because of the small scale on which the individual decided to start it. It would not be possible to say that the second requirement is satisfied in such a case, and hence the *business activity would not be eligible for a favourable exercise of the second arm of the discretion.

Alternative view

112.	During consultation concerning the view outlined above, arguments were submitted that the view was too narrow and did not promote the purpose of the second arm of the discretion in subsection 35-55(1). In particular, it was argued that the hardwood example in the Note to paragraph 35-55(1)(b), and the examples in paragraph 1.51 of the Explanatory Memorandum are merely examples, and hence cannot be determinative of all the circumstances in which the second arm of the discretion should be applied. In rejecting this alternative view it is agreed that activities other than those considered in the examples may be affected by such an innate or inherent feature. Whether this is so will depend on the facts of each case.

113.	It is accepted that the examples in question are not exhaustive of all the cases intended to fall within the provision (see e.g., Brooks & Anor v. FC of T [2000] FCA 721 at 66). However, it is still necessary, as required by the words "because of its nature", to determine whether there is any innate or inherent feature of the *business activity itself which prevents it from being able to satisfy any one of the tests for the year of commencement, or some time after. All the examples provided are consistent with such a feature being present, specifically an innate inability to satisfy the Assessable income test for some years. If a broader category of start-up activities were intended to be covered by the second arm of the discretion it would be expected that the relevant words concerning some inherent or innate feature would not have been used.

Objective expectation of becoming commercially viable

114.	In determining whether to exercise the discretion the Commissioner may consider any information provided by the taxpayer or any other information that is available and relevant to the *business activity in question.

Application of Division 35 when an individual has *exempt income

115.	The application of section 35-10 may be modified if in the current year the individual *derived *exempt income. This modification was inserted to ensure that losses deferred under Division 35 are treated similarly to how losses are treated under Division 36.

116.	A current year non-commercial loss to be deferred under paragraph 35-10(2)(b) may be reduced if the individual *derived *exempt income. The non-commercial loss (apart from any deduction deemed to arise under subsection 35-10(2)) must be reduced by any amount of net *exempt income *derived in the current year that has not already been used to reduce any Division 36 tax losses, before being able to be deferred under paragraph 35-10(2)(b). If the total current year non commercial loss is fully reduced by the individual’s *exempt income, no amount will be deferred.

Application of Division 35 if an individual becomes bankrupt

117.	Section 35-20 modifies the operation of the non-commercial loss deferral rule contained in subsection 35-10(2) in certain circumstances relating to bankruptcy. The non-commercial loss deferral rule is modified in accordance with subsection 35-20(3) where:

•	an individual becomes bankrupt or is released from bankruptcy in the current income year (subsection 35 20(1)); or

•	in that year their bankruptcy is annulled under section 74 of the Bankruptcy Act 1966 by a release from debt under a composition or scheme of arrangement accepted by their creditors (subsection 35-20(2)).

118.	The effect of subsection 35-20(3) is that a non-commercial loss incurred by the individual prior to any one of the above events, and deferred under the loss deferral rule, will not be deemed to be attributable to the *business activity. The deferred loss will not be available to be deducted in that year or any subsequent year.

Applying for a private ruling

119.	An individual taxpayer can apply to the Commissioner for a Private Ruling on whether the discretion in section 35-55 would be exercised in relation to their *business activity. Such an application should be in the required format. A taxpayer can apply for a Private Ruling in relation to an arrangement which has not yet commenced, so long as it is being "seriously contemplated" (paragraph 14ZAN(h), Taxation Administration Act 1953). Details of such an arrangement and the reasons why the Commissioner should exercise his discretion under subsection 35-55(1) may therefore extend over a number of years into the future. Further information on applying for a Private Ruling, particularly one involving subsection 35-55(1), can be found on the Australian Taxation Office website (http://www.ato.gov.au).

EXAMPLES

Example 1 – no separate *business activities

120.	Bill has operated a flower shop *business for several years, in which he sells a range of products other than flowers, such as fine china and various novelty items. Until recently there was nothing about his *business to suggest any part of it was separate or discrete from the rest.

121.	In the last six months he has also operated a delivery service for his flowers, to expand his client base and compete with other sellers. Although a separate fee is charged for this service, looked at on its own, it is not profitable.

122.	However, there is a clear commercial purpose behind offering the delivery service, and it has now become an integral part of Bill’s overall *business.

123.	The delivery activity would not be regarded as a separate and distinct *business activity for the purposes of Division 35, even though it is being carried on at a loss.

Example 2 – separate *business activities not "of a similar kind"

124.	Six years ago Des purchased 5 hectares of land on the outskirts of a capital city, for $455,000, where he has since been living. He planted 1 hectare with grapevines, which have now come into full production. For the current income year his sales of grapes total $2,700. Initially his stock of plant and equipment was small. However, recently he has cut back his time worked as an employee in the city to only 2 days a week, and he has been devoting more and more time to providing various contract services, such as spraying, mowing, weeding, digging trenches etc., for other people in the district.

125.	For some of this work he can use his original equipment, but he has also bought new equipment, so that for the current income year the *written down value of his depreciating assets will have increased to approximately $85,000. Despite earning income of $19,100 from this contract work, he has made an overall loss in relation to the two activities (grape growing and contract work) of $11,000, in part due to the interest he is paying on the loans taken out to purchase the land and the new equipment.

126.	Although insufficient details are given in this example on which to determine this point, a complete examination of his grape growing activity may show that it lacks sufficient of the recognised features of a *business (e.g., those outlined in Taxation Ruling TR 97/11) for it to qualify as a *business activity. Such an examination may also show that on its current size and scale, it cannot reasonably be expected to ever exist as any sort of autonomous commercial undertaking and therefore losses attributable to it are not allowable.

127.	Assuming however, that the grape growing is a *business activity, the question then arises, because of the separate and discrete way in which it is largely carried on, whether or not Des is carrying on just the one *business activity of grape growing and providing contract services, or two separate and distinct *business activities. Applying the factors and reasoning described in paragraphs 40 to 46 of this Ruling leads to the conclusion that the grape growing or vineyard activity is a separate *business activity from that of providing the contract services. This is not a case where the earning of income from doing such things as the spraying etc., is merely ancillary or incidental to the carrying on of a *primary production business.

128.	On the basis that the two activities in this case are separate and distinct *business activities for the purposes of Division 35, the further question then arises, as to whether or not they are "of a similar kind". If they are, then Des can group them together under subsection 35 10(3), and this combined *business activity will then satisfy the Assessable income test. Otherwise, when looked at as two separate *business activities, neither will satisfy any one of the four tests. Would the activities undertaken by Des be *business activities "of a similar kind"? Applying the factors described in paragraph 51 to the facts in Des’ case produces the following comparison:

Factor	Grape growing	Contract services
Location	On Des’ small vineyard	On properties of neighbours
Goods or services provided	Sale of grapes	Provision of contract services such as, spraying, mowing, etc.
Market conditions	Governed by domestic and world market conditions for grapes	Dependent on demand of other farmers for services provided using the equipment; whether services of any other contractors available locally
Assets employed	Des’ land, and vineyard equipment used for grape growing	Various items of machinery
Other characteristics	Nature of income *derived – from sales of produce from land-affected by risk of crop failures etc.	Nature of income *derived -from the provision of services
129.	An overall comparison therefore shows some similarities between the two activities, e.g., use of common assets (the vineyard equipment) in both, and both activities involve, to some degree, the working of land used for growing grapes in a vineyard. However, there are significant differences between the activities as well – the different locations and market conditions, different other assets used, the significantly different way in which income is *derived in each activity, and the different elements of "risk" that apply to each. If the two activities do constitute two separate and distinct *business activities, they would not be regarded as being "of a similar kind" for the purposes of Division 35.

130.	Therefore, under Division 35 Des will have to attribute those otherwise allowable deductions, such as depreciation on the vineyard equipment, between the two *business activities to determine the profit or loss from each *business activity. As separate activities, neither satisfy any of the four tests. The loss deferral rule will therefore apply separately to losses from both activities (assuming that the Exception does not apply, and that there is no exercise of the Commissioner’s discretion).

Example 3 – *business activity ceases

131.	Marie owns land on which she previously carried on a *business activity. Due to losses incurred in a prior income year, there is an amount of $11,000 that she could potentially deduct against assessable income earned from the *business activity, or a similar one, in a later income year under paragraph 35-10(2)(b). In the current year, however, she is not carrying on any *business activity, and it is unlikely that she will ever do so again. One fifth of the land is rented out in this year at a commercial rate to someone else.

132.	Two consequences from these events should be noted:

(a)   Marie will lose her entitlement to a potential deduction unless she carries on the same *business activity (or one "of a similar kind") to which the amount of $11,000 relates in a later income year; and

(b)   Marie’s rental income is unlikely, on well established authority, to be income from the carrying on of a *business activity. Therefore, Division 35 will not apply to any loss made from the rental activity and she will not be required to defer it. However, as only part of the land is now being used for the purpose of producing assessable income, Marie will need to apportion expenses that relate to the land as a whole, e.g., interest, insurance, rates and taxes, etc. These outgoings will only be deductible to the extent to which they are incurred under section 8-1 in producing the rental income.

Example 4 – the *Primary Production business Exception

133.	Jessie is a teacher earning a salary of $34,000 a year and has no other non-primary production assessable income. In addition to teaching, Jessie carries on a *business of alpaca farming and made a loss from this *business activity of $5,000 in the current year. As Jessie’s non-primary production income is less than $40,000, the exception is satisfied and she does not need to satisfy any of the tests in Division 35 in order to offset her primary production loss against her teaching income.

Example 5 – operation of the loss deferral rule

134.	Assume the following figures for Michelle’s pearl farming *business activity where the Exception does not apply to her and the Commissioner’s discretion has not been exercised in her favour:

Year	Assessable Income (1)	Allowable deductions (2)	Deferred deduction from previous year	Net (1) – (2)	Deferred deduction for current year
1	$4,000	$5,000	Nil	($1,000)	$1,000
2	$4,000	$5,500	$1,000	($1,500)	$2,500
3	$6,000	$5,000	$2,500	$1,000	$1,500
135.	In each year none of the tests of Division 35 is passed. Therefore subsection 35-10(2) applies. The excess of allowable deductions over assessable income in relation to the *business activity is deemed not to be deductible in each income year. It is deemed to be a deductible amount attributable to the activity for the next income year in which that activity is carried on and, thus, potentially subject to Division 35 in that year.

136.	Subsection 35-10(2) will continue to operate in this manner until one of the tests of Division 35 is met, or the Commissioner’s discretion is exercised. If any of the tests had been met in Year 3 in the above example, the $1,500 would have been deductible in full in that year.

Example 6 – operation of the Profits test

137.	For the example below, assume the profit or loss in each year is from the same or a similar activity and the activity is regarded as a *business for taxation purposes, but does not satisfy the Assessable income test, the Real property test or the Other assets test. Also, assume that the Exception in subsection 35-10(4) does not apply.

Year	Profit or loss from activity	Other income	Taxable income	Cumulative loss deferred
1	Loss $10,000	$50,000	$50,000 Note 1	$10,000
2	Profit $2,000	$50,000	$50,000 Note 2	$  8,000
3	Profit $5,000	$50,000	$50,000 Note 3	$  3,000
4	Loss $10,000	$50,000	$50,000 Note 4	$13,000
5	Profit $5,000	$50,000	$42,000 Note 5	$0
Notes:

(1)	Year 1 – loss deferral rule applies, loss deferred to next year activity is carried on. Loss from Year 1 to be held over.

(2)	Year 2 – the deferred loss from Year 1 can only be offset against the profit from the activity in Year 2 (paragraph 35-10(2)(b)). Balance of loss deemed to be deduction attributable to activity in the next year it is carried on.

(3)	Year 3 – the deferred loss from Year 2 can only be offset against the profit from the activity in Year 3 (paragraph 35-10(2)(b)). Balance of loss deemed to be deduction attributable to activity in the next year it is carried on.

(4)	Year 4 – loss deferral rule applies.

(5)	Year 5 – The activity has made profits in three out of the past five years, including the current year. It has passed the Profits test. Deferred loss can now be offset against other income in full.

138.	Example 7 – apportioning asset values across different *business activiRon operates as a sole trader. He runs a 4WD driving school on his 40-hectare property. On the same property he also grows dahlias for sale and exhibition. Both are *businesses. The property also contains his residence and surrounding land he uses for private purposes.

139.	The two *business activities are not similar activities. The value of the real property and other assets must be apportioned between each *business activity and the private use of the property. The value of the *dwelling should be excluded before any apportionment exercise is undertaken under section 35-50.

140.	Ron will need to keep adequate records to allow him to make a reasonable apportionment of his assets between his *business activities and his private *dwelling.

Example 8 – operation of the Other assets test where general law partnership involved

141.	Two sisters, Erin and, Katie, and their family trust, the EK Trust, are partners in a chocolate manufacturing *business. The partnership (through the partners) owns a number of "other assets" which have a *written down value of $135,000 and which are used on a continuing basis in the *business. Each partner has an equal share in these partnership assets. Erin also owns a depreciating asset that has a *written down value of $15,000. She allows the partnership to use the asset in its *business activity on a continuing basis. However, at no stage does Erin’s asset become a partnership asset.

142.	In determining whether Erin’s *business activity satisfies the Other assets tests, she can take into account the value of other assets of the partnership which is attributable to only the individuals of the partnership, that is, $90,000 (2/3 of $135,000). However, she can also take into account the value of the asset she owns and allows the partnership to use, that is, $15,000. The total value of other assets that Erin can take into account for the test is therefore $105,000. Erin’s *business activity satisfies the Other assets test threshold of $100,000.

143.	Katie cannot include the value of Erin’s plant for the Other assets test. This is because it is not an asset that is either attributable to her, or to an individual’s interest in the partnership assets. (The item of plant is not a partnership asset, and so cannot be attributable to the interest of the individuals in the partnership.) The value of other assets attributable to Katie is $90,000 (2/3 of $135,000).

144.	Katie (or Erin) cannot count the one-third interest of their family trust for any of the tests. Katie’s *business activity does not satisfy the Other assets test. She will need to consider one of the other tests. If her *business activity does not satisfy one of the other tests, where it would be unreasonable for the loss deferral rule in subsection 35-10(2) to apply, she can ask the Commissioner to exercise the discretion under subsection 35-55(1).

Example 9 – operation of the Profits test where general law partnership involved

145.	Bob and Brendan are partners in a general law partnership which carries on a publishing *business and they each receive a $2,000 distribution from it. Bob has no other attributable expenses and the result for him is a profit from the *business activity for the income year.

146.	Brendan took out a loan to fund his contribution to the partnership on which he pays interest of $5,000 during the year. Brendan’s $5,000 interest expense is attributable to his interest in the partnership net income. Brendan’s deductions that are attributable to the activity ($5,000) exceed the income he has *derived from it ($2,000). Brendan has a loss for the income year from the activity. If this pattern of income and attributable expenses were to continue for a further two years (years 2 and 3), with the partnership distributing losses to Bob and Brendan in years 4 and 5:

•	Bob would pass the Profits test in years 4 and 5, as when testing for each of those years he would have profits from the activity in three out of the past five years (i.e., years 1 to 3); whereas

•	Brendan would not pass the Profits test in any of the five years, as even in the years in which he received a distribution of partnership income, his attributable expenses meant that overall he did not make a tax profit from that activity in any year.

Example 10 – exercise of the first arm of the discretion, special circumstances

147.	Simon’s farming *business activity has previously been profitable, although in the past five years, for the purposes of the Profits test, the activity has only produced "profits" in two of those years. In the current year (Year 1), his property is severely affected by drought, and he faces a large loss from the *business. He obtains employment with the local council to support his family and the *business. However, his employment income exceeds $40,000, and so he does not come within the Exception in subsection 35-10(4) for Year 1.

148.	He has evidence that the drought will stop his *business activity from satisfying any of the four tests in Division 35 for the current year, and the income year after this one (Year 2). He forwards a copy of this to the Commissioner, along with an application for a private ruling on whether the Commissioner will exercise the first arm of the discretion in paragraph 35-55(1)(a), for the current year and the next year, to allow losses made in those years to be offset against Simon’s other income. The Commissioner issues a private ruling advising that this is how the discretion would be exercised for Years 1 and 2.

149.	Some time towards the middle of the next year (Year 2), Simon realises that he has underestimated the effects of the drought, and that it will stop his *business from passing any of the tests for a further year (Year 3). However, he can demonstrate that for the income year after that (Year 4), the Assessable income test will be satisfied. He applies then for another private ruling to cover this additional drought affected year, Year 3, and the Commissioner agrees that the conditions in paragraph 35-55(1)(a) are also satisfied for this income year. The Commissioner issues a further private ruling to this effect in relation to Year 3.

Example 11 – first arm of discretion not exercised

150.	Emma is an architect who has purchased a 20-hectare property where she works in her own *business. Emma loves the farm that she works on in her spare time. However, when the architectural firm is busy she is not able to devote any time to working on the farm. Emma grows wild flowers and in one year she did not cut the wild flowers for sale because she did not have the time. She has claimed a loss from her activity of growing wild flowers for a number of years. Each year she has self assessed that this loss is deferred under Division 35.

151.	In the current year Emma’s wild flowers are affected by disease to the extent that they are unsaleable, and she requests a private binding ruling about whether the first arm of the discretion would be exercised in her favour. Her income from the wild flowers for the current year is nil. She has some expenses from the wild flowers activities. However, she is unable to provide sufficient evidence that her wild flowers activity will ever be conducted on a scale that would make it commercially viable, or in a way that would make it profitable.

152.	There is a threshold question about whether her wild flowers activity constitutes the carrying on of a *business activity. Even if it does:

•	she has made continual losses from the wild flowers activity and it is unlikely the activity will ever be profitable;

•	the disease to the wild flowers is not the major factor contributing to the losses from her activity; and most importantly

•	she is not able to show that her *business activity would have satisfied one of the tests were it not for the disease affecting the wild flowers.

153.	Therefore, the first arm of the discretion would not be exercised to allow the current year loss.

Example 12 – second arm of discretion not exercised

154.	Maria undertakes a profitable *business activity and recently started a new *business activity as a direct seller. This new activity is separate and distinct from her other *business activity and cannot be said to be "similar" in any respect. Maria does not expect to make a tax profit from her direct selling activities for the first three years of operation. On her projections she expects to make a tax profit in year four. Maria asks the Commissioner to exercise the second arm of the discretion for the first three years of operation.

155.	The direct selling activity is able to produce assessable income relatively soon after being commenced. It does not have any innate or inherent feature about it that means that it is "because of its nature" not able in the first three years to satisfy one of the tests. In other words there is no natural time period between starting to carry on the *business activity and it being able to produce assessable income, so as to come within the second requirement of the second arm of the discretion. As Maria’s direct selling *business activity does not meet this second requirement of the second arm of the discretion, the Commissioner is unable to exercise the second arm in her favour.

Example 12A – first arm of discretion not exercised

156.	Maria continues undertaking her direct selling activities and has now been engaged in the activity for approximately 10 years. Maria has sold goods for three different Direct Selling Organisations in those 10 years. In all years Maria’s assessable income has been less than $20,000 from direct selling activities and in most years she has returned a loss from this activity. Maria is injured in her teaching employment and is hospitalised for 4 months of the year. Maria wants the Commissioner to exercise the first arm of the discretion to allow her to offset her Direct Selling loss against her other income for the year.

157.	Since Maria cannot show that if it had not been for her illness, the Assessable income or the Profits test, or any of the assets tests, would have been satisfied, the first arm of the discretion would not be exercised in her favour.

Example 13 – exercise of the second arm of the discretion

158.	Fiona and Dene are employees earning large salaries who wish to retire to the country in the next ten years. However, they wish to purchase land now in order to establish a quolive growing *business that they hope will produce profits to supplement their retirement income. They carry out further research on the viability and profitability of such a venture, and eventually decide to buy a suitable property after a favourable expert opinion was obtained. This property costs them $155,000, and they have to borrow $103,000 to complete the purchase. A variety of evidence from a number of independent sources leads them to conclude that they should plant 500 quolive trees – 350 of a variety that will produce good quality table quolives, and 150 of a variety that will produce good quality quolive oil. This evidence shows that a planting of this scale is within the usual range of start-up quolive growing activities that should prove to be commercially viable.

159.	The independently sourced material also shows that while some income from sales of quolives can often be expected in the fifth year after planting, it is not usually until at least six years that such a planting is commercially viable and self sustaining as an autonomous commercial undertaking. Using this material and other evidence of what income and expenses can reasonably be predicted to arise over the first seven to eight years of operations, Fiona and Dene put together a business plan. From this they calculate that they can reasonably expect, based on this objective evidence, that their activity will produce a tax profit in Year 6 (the time of starting to carry on the activity being in Year 1). These calculations also show a similar expectation about passing the Assessable income test in Year 7.

160.	They lodge all of this material with the Commissioner, along with applications for private rulings for each of them, on whether the Commissioner will exercise the second arm of the discretion in paragraph 35-55(1)(b) for Years 1 through to 5 inclusive. The Commissioner considers the arrangement they have described, including the evidence from independent sources, and concludes that all three of the requirements of paragraph 35-55(1)(b) will be satisfied in relation to the income years in question:

(a)   Fiona and Dene will have started to carry on a *business activity;

(b)   it is "because of its nature", in the sense of an innate or inherent feature of their quolive growing *business activity, that it is not able to satisfy any of the four tests in Division 35 in its initial start-up phase (specifically, that it is in the nature of the activity that it is not able to produce assessable income for a number of years and not because of other factors such as starting off on a very small scale); and

(c)   there is sufficient evidence from which the Commissioner can be satisfied that there is an objective expectation, based on evidence from independent sources, that within a period that is commercially viable for the industry concerned (specifically, the growing of the quolive trees in question), that their *business activity will either meet one of the four tests, or produce a tax profit.

161.	The Commissioner issues a favourable private ruling to each of them in which he advises that under paragraph 35-55(1)(b) his discretion would be exercised for all the income years that Fiona and Dene have applied for. The result is that losses made from the activity, to be shared equally between them, will not need to be deferred under Division 35.

Example 13A – second arm of the discretion not exercised

162.	Assume the facts in this case are largely as for Example 13, except that, for various reasons, Fiona and Dene only plant 100 trees, and this occurs over two income years. Further, they will not be able to have their loan substantially repaid by Year 6. As a result they revise their business plan and their projections and realise that they may not be able to rely on the original private rulings issued to them, as the arrangement they have actually carried on may be considered to be materially different from that described in the rulings. This is particularly so, as it now looks like their activity may, on its present size and scale, not be able to produce a tax profit until around about Year 15 or 16, and then only if the loan has been paid off.

163.	They advise the Commissioner of the change in applications for a second set of private rulings. In these applications they argue that their activity is nevertheless eligible for a favourable exercise of the second arm of the discretion for the first fourteen years of operations. The Commissioner agrees that the arrangement they have actually carried out is materially different from the one described in his original notices of private ruling. Further, in considering the second set of applications, he reaches the conclusion that on its present size and scale the activity appears so marginal he cannot be satisfied that it will ever pass one of the tests, or produce a tax profit. The Commissioner issues further private rulings in relation to this changed arrangement in which he states that the second arm of the discretion will not be exercised at all.

164.	The Commissioner further advises Fiona and Dene that the original private rulings are not legally binding as the arrangement entered into is materially different from the arrangement described in the original rulings. Accordingly, Division 35 will apply to defer the losses made for any income year in which Fiona and Dene do not come within the Exception, and their activity does not meet any one of the four tests. The Commissioner also advises that he/she is considering whether their activity amounts to the carrying on of any *business activity, and that this may mean that no deductions are allowable at all. Whether or not their income tax assessments will need to be amended, as a result, and whether any administrative penalties imposed, also needs to be considered.

Example 14 – second arm of the discretion unlikely to be exercised

165.	Neil is a keen fisherman. He prides himself on his expert knowledge and has a wealth of fishing experience. Neil has recently retired from full time employment and has decided to write his second book about fishing. His first book was a short one from which he barely made any income. Neil spends some time doing research about the manner in which books could be published. He writes to a number of publishers about his proposed project.

166.	Some publishers have told him that unless he is a well-known author, his book will not be published, as the prospects of selling the book are not good. All publishers will not publish unless he pays the publishing costs himself. This will also apply to any reprints. Neil spends about 5 hours a week on his book. He and his wife go on a holiday during the year, a large amount of which Neil spends fishing.

167.	Neil wishes to claim expenses from the early stages of the book development against his pension and investment income. Neil believes the Commissioner should exercise that the second arm of the discretion in paragraph 35-55(1)(b), as his writing activity is still in its start-up phase.

168.	The discretion is unlikely to be exercised in Neil’s favour. There is a threshold question about whether his writing does constitute the carrying on of a *business activity. Note that if Neil were pursuing a hobby instead of a *business activity, no deductions relating to the hobby would be deductible, and nor would any receipts from it be assessable as ordinary income.

169.	Assuming that Neil is carrying on a *business activity he is unlikely to satisfy the Commissioner that the loss deferral rule should not apply. This is partly because Neil has not shown that it is because of the nature of his activity that it has not yet satisfied a test in Division 35. Neil would need to show that there is something innate or inherent about his activity that results in a period of time between when he commences the activity and when it first produces assessable income.

170.	If Neil were carrying on a *professional arts business, however, and his assessable income (excluding any *net capital gain) from sources not related to that activity was less than $40,000 then, under subsection 35-10(4), Division 35 would not apply to any loss from that activity.

Example 15 – deferral of loss affected by *exempt income

171.	Besides her part time office job Heather has a driving school *business. In the current year Heather has a non-commercial loss of $10,000 from her driving school *business activity, and *derived *exempt income of $2,000. Heather has no tax losses under Division 36. The non-commercial loss deferred under paragraph 35-10(2)(b) to Heather’s next year of *business is $8,000 ($10,000 – $2,000).

172.	If in the following year income year Heather earns more than $20,000 from her driving school *business and passes the Assessable income test, she may deduct the deferred loss of $8,000 from her other income. This is so whether or not she has *derived any net *exempt income in that year.

Example 16 – deferral of loss affected by bankruptcy

173.	In Year 1 Rhonda has a $2,000 non-commercial loss from a *business activity. The rule in subsection 35-10(2) defers that loss and deems it to be attributable to that activity in the next year it is carried on. If in Year 2 Rhonda’s *business activity made a profit of $4,000, her Year 1 non-commercial loss would normally be deductible against her Year 2 profit. However, if she is declared bankrupt in Year 2, her loss from Year 1 will no longer be available for deduction in Year 2 or in any subsequent year.

Last Ruling

174.	This is the last Taxation Ruling for the 2001 calendar year. The next Ruling will be Taxation Ruling TR 2002/1.

DETAILED CONTENTS LIST

175.	Below is a detailed contents list for this Ruling:

	Paragraph
What this Ruling is about	1
Class of person/arrangement	2
Date of effect	4
Flowchart: operation of Division 35	5
Legislative framework	6
Introduction to Division 35	6
*Primary Production and *Professional Arts businesses Exception	9
*Business needs to be carried on	10
Calculating the non-commercial loss	11
Effect of passing one of the tests, coming within the Exception or an exercise of the Commissioner’s discretion	13
The four tests and their operation	14
Assessable income test	14
Profits test	15
Real property test	16
Other assets test	21
When is an asset's value determined?	25
Leased assets and the two assets tests	26
Depreciating assets and the two assets tests	27
The operation of the tests when the *business activity is conducted by individuals in partnership	28
Exercise of the Commissioner’s discretion – 2 arms	30
Latest time for exercise of the Commissioner’s discretion	31
Application of Division 35 when an individual has *exempt income	32
Application of Division 35 if an individual becomes bankrupt	33
Key Terms	34
Ruling	35
*Business needs to be carried on	35
Meaning of "*business activity"	36
Identifying separate *business activities	40
Table 1- relevant factors concerning identifying separate *business activities	45
A common-sense approach	47
*Business activities "of a similar kind"	49
Determining whether *business activities are "of a similar kind"	51
Ceasing to carry on a *business activity	55
Application of Division 35 year by year	56
Calculating the non-commercial loss on a year by year basis	57
Deductions allowable after *business carried on	58
*Primary Production and *Professional Arts businesses Exception	59
Distinguishing a Division 35 loss from a Division 36 loss	60
Assessable income	61
Making a "reasonable estimate" of assessable income for the purposes of the Assessable income test	62
Profits test	63
Whether to value the real property or the interest in real property in applying the Real property test	64
Values to be used in applying the Other assets test	65
What is continuing use in the *business activity for the purposes of the Real property test and the Other assets test?	66
All tests – determining whether general law partnership exists	68
Operation of section 35-55 – the Commissioner’s discretion	70
"Special circumstances"	70
*Business activity has started to be carried on	75
Meaning of "because of its nature"	77
Objective expectation of meeting a test or producing a tax profit within a period that is commercially viable for the industry concerned	79
Explanations	83
Meaning of "*business activity" and identification of separate and distinct *business activities within the one *business	83
Alternative view	84
*Business activities "of a similar kind"	86
*Primary Production and *Professional Arts businesses Exception	89
Calculating the non-commercial loss	91
Profits test	93
Exercise of the Commissioner’s discretion – 2 arms	94
Second arm – certain start-up *business activities	95
Whether activity has started to be carried on	97
Decision to commence	100
Business structure	103
Business operations	105
Meaning of "because of its nature"	106
Alternative view	112
Objective expectation of becoming commercially viable	114
Application of Division 35 when an individual has *exempt income	115
Application of Division 35 if an individual becomes bankrupt	117
Applying for a private ruling	119
Examples	120
Example 1 – no separate *business activities	120
Example 2 – separate *business activities not "of a similar kind"	124
Example 3 – *business activity ceases	131
Example 4 – the *Primary Production business Exception	133
Example 5 – operation of the loss deferral rule	134
Example 6 – operation of the Profits test	137
Example 7 – apportioning asset values across different *business activities	138
Example 8 – operation of the Other assets test where general law partnership involved	141
Example 9 – operation of the Profits test where general law partnership involved	145
Example 10 – exercise of the first arm of the discretion, special circumstances	147
Example 11 – first arm of discretion not exercised	150
Example 12 – second arm of discretion not exercised	154
Example 12A – first arm of discretion not exercised	156
Example 13 – exercise of the second arm of the discretion	158
Example 13A – second arm of the discretion not exercised	162
Example 14 – second arm of the discretion unlikely to be exercised	165
Example 15 – deferral of loss affected by *exempt income	171
Example 16 – deferral of loss affected by bankruptcy	173
Last Ruling	174
Detailed contents list	175

Commissioner of Taxation

19 December 2001

ADDENDUM

Footnote 5 (paragraph 31, page 10), of Taxation Ruling TR 2001/14 foreshadowed the Government’s intention to amend section 35-55 of the Income Tax Assessment Act 1997. Section 35-55 has subsequently been amended by Taxation Laws Amendment Act (No. 1) 2002 with effect from the 2000-2001 income year.

This Addendum therefore amends TR 2001/14 as follows:

At paragraph 30, delete the words:

is yet to pass

and replace with:

has not satisfied

Delete paragraph 31 (including footnote 5)

At paragraphs 77, 94, 106 and 169, delete the word:

yet

Replace para 75 with:

The second arm of the Commissioner’s discretion may be exercised where:

(a)	the *business activity has started to be carried on; and

for the income year(s) in question:

(b)	"because of its nature", it has not satisfied, or will not satisfy, any of the tests; and

(c)	the individual can show that there is a objective expectation, based on evidence from independent sources (if available) that, within a period that is commercially viable for the industry concerned, the activity will meet one of the tests or produce a tax profit (paragraph 35-55(1)(b)).

Insert the following heading after paragraph 82:

EFFECT OF MEETING A TEST OR PRODUCING A TAX PROFIT WITHIN A PERIOD THAT IS COMMERCIALLY VIABLE FOR THE INDUSTRY CONCERNED

After the above heading, insert the following new paragraph:

82A.	The second arm of the Commissioner’s discretion can be exercised where all three requirements of paragraph 35-55(1)(b) are satisfied, for all the income year(s) in question, even though the business activity may, on a one-off basis, meet a test or produce a tax profit.

Replace para 96 with:

Under paragraph 35-55(1)(b), the Commissioner’s discretion can be exercised where the *business activity satisfies three requirements. These are:

(a)	the *business activity has started to be carried on; and

for the income year(s) in question:

(b)	because of its nature, it has not satisfied a test in Division 35; and

(c)	there is an objective expectation that within a period that is commercially viable for the industry concerned it will pass one of the tests or make a tax profit.

Insert the following heading after paragraph 113:

EFFECT OF MEETING A TEST OR PRODUCING A TAX PROFIT WITHIN A PERIOD THAT IS COMMERCIALLY VIABLE FOR THE INDUSTRY CONCERNED

After the above heading, insert the following new paragraphs:

113A.	Where all three requirements of paragraph 35-55(1)(b) are satisfied "the Commissioner’s discretion can be appropriately exercised for any income year or years within the period that is commercially viable for the business activity" (paragraph 1.10 of the Explanatory Memorandum, Taxation Laws Amendment Act (No.1) 2002). This is the case even though the business activity may meet a test or produce a tax profit for a year(s) within what is regarded as the commercially viable period for that business activity.

113B.	For example, an individual undertaking a forestry business establishes a plantation with the purpose of harvesting the trees in 21 years, which is consistent with industry standards for that particular variety of trees. However, the individual expects to undertake a thinning of the plantation in year 10, which will result in the business activity meeting the Assessable income test for that year. The business activity of the individual satisfies all three requirements in paragraph 35-55(1)(b). The Commissioner can exercise the second arm of the discretion in favour of the individual, for any relevant income year within the commercially viable period for the activity, which in this case is 20 years, even though the business activity is expected to pass a test in year 10.

At paragraph 72, delete the word:

second

and replace with:

first

Commissioner of Taxation

19 June 2002


Taxation Ruling TR 94/8 Business carried on in partnership

Income tax: Business carried on in partnership (including "husband and wife" partnerships)

Contents:

What this Ruling is about

Ruling

Date of effect

Explanations

General

Intention

Conduct

Examples

WHAT THIS RULING IS ABOUT

1.	This Ruling outlines factors we take into account in deciding whether persons are carrying on business as partners for income tax purposes. It has particular relevance to what are sometimes known as husband and wife partnerships.

2.	This Ruling is not to be applied :

(a)	to situations where persons are in receipt of income jointly unless that income is derived from carrying on business; and

(b)	to limited partnerships.

RULING

3.	There are no statutory rules in the income tax law for deciding whether persons are carrying on business as partners. The question of whether a partnership exists is one of fact. The existence of a partnership is evidenced by the actual conduct of the parties towards one another and towards third parties during the course of carrying on business.

4.	We look at the following factors in deciding whether persons are carrying on business as partners in a given year of income:

Intention

•	the mutual assent and intention of the parties

Conduct

(a)	joint ownership of business assets

(b)	registration of business name

(c)	joint business account and the power to operate it

(d)	extent to which parties are involved in the conduct of the business

(e)	extent of capital contributions

(f)	entitlements to a share of net profits

(g)	business records

(h)	trading in joint names and public recognition of the partnership

5.	The weight to be given to these factors varies with the individual circumstances. The above list of factors is not exhaustive and no single factor is decisive, although the entitlement to a share of net profits is essential.

DATE OF EFFECT

6.	This Ruling applies to years commencing both before and after its date of issue. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

EXPLANATIONS

General

7.	The term "partnership" is defined in subsection 6(1) of the Income Tax Assessment Act 1936 as follows:

" "partnership" means an association of persons carrying on business as partners or in receipt of income jointly, but does not include a company."

•	This definition extends the meaning given to the word "partnership" in State and Territory partnership law. According to the statutory definitions in State and Territory partnership law, partnership is the relationship between parties carrying on a business in common with a view to profit. Income tax law does not distort the general law of partnership, nor does it disregard it (Jolley v. FC of T 89 ATC 4197, (1989) 21 ATR 3253).

•	Whether a partnership exists is a question of fact and it is up to the person alleging a partnership to prove that fact (Morden Rigg & Co. and RB Eskrigge & Co. v. Monks (1923) 8 TC 450 ). To decide whether or not a partnership exists between parties, we closely examine the relationship between them. We apply objective tests to the facts of each situation to assess the nature of the relationship.

8.	The essential element for a partnership to exist is the genuine intention of all the parties to act as partners. This intention must be demonstrated by the conduct of the parties.

9.	We consider the matters outlined below in deciding whether persons are carrying on business as partners.

Intention

10.	Mutual assent and intention to act as partners is the essential element in demonstrating the existence of a partnership between two or more persons. We accept a written or an oral agreement as prima facie evidence of such an intention.

11.	A written agreement signed by all parties, although desirable, is not necessary to demonstrate mutual assent and intention. An agreement to act as partners may also be inferred from a course of conduct agreed to by all parties.

12.	Generally, a lack of intention to be in partnership means that a partnership does not exist at law. Conversely, a stated intention of partnership is not, of itself, sufficient to establish a partnership, as the intention must be manifested by conduct (Re Megevand; Ex Parte Delhasse (1878) 7 Ch. D 511, Montefiore v. Smith (1876) 14 SCR (NSW) 245). The parties must understand what the partnership relationship entails, which requires more than a general understanding between them that they are in business as partners(I. R. Commrs v. Williamson (1928) 14 TC 335).

Conduct

13.	Mutual assent and intention must be demonstrated, but do not stand alone and must be assessed with all relevant circumstances, including the conduct of the parties (Jolley 's Case ).

(a) Joint ownership of business assets

14.	We view the joint ownership of business assets, together with a joint liability to business debt, as indicative of a business partnership. All partners must be liable for the firm's debts not only to the extent of the partnership property, but also to the full extent of their personal resources.

(b) Registration of business name

15.	We consider the registration of a business name by the parties to be a positive factor in determining the existence of a partnership. However, where a partnership trades in the name of the partners, registration of a business name is not normally required under the provisions of State and Territory partnership law. The use of a business name, or the names of the partners trading in joint names, can be an external sign of the existence of a partnership to third parties.

(c) Joint business account and power to operate the account

16.	The existence of a joint bank account, specifically named and used as a business account, is another positive factor in establishing that business is being carried on in partnership. We give this factor greater weight where:

(i)	the bank at which the account is held is aware the parties are acting in partnership; and

(ii)	all parties have the power to operate the account.

17.	In the situation of husband and wife partnerships, we view the opening of a separate business bank account favourably. This is particularly so where an existing joint account may be used for non-business purposes.

(d) Extent to which parties are involved in the conduct of the business

18.	While it is not essential that all partners actively participate in a partnership, such participation supports the existence of a partnership. Exclusive performance of all the work or activities of a business by one party will not, of itself, negate the conclusion that a partnership exists.

19.	Irrespective of the number of parties actively engaged in the partnership, the test of whether a business is being carried on in partnership may be stated as:

"Is the person who carries on that business doing so as agent for all persons who are alleged to be partners?" (Lang v. James Morrison & Co Ltd (1911) 13 CLR 1 at 11).

20.	In husband and wife situations, we examine the conduct of each party to determine whether it is part of their ordinary domestic relationship or part of a business association.

(e) Extent of capital contributions

21.	When we examine relationships between parties to determine whether they are in partnership, we assess the relative capital contributions of the parties to that relationship. Contributions may be made at the start of, or during, a partnership.

22.	The sharing by the parties of contributions to assets and capital weighs in favour of the existence of a partnership.

(f) Entitlement to a share of net profits

23.	Partners share between them the profits and losses of the partnership activity (I. R. Commrs v. Williamson (1928) 14 T.C. 335). We look at the rights of the parties to a share of the net income or loss of the partnership. A situation in which profits are shared in line with clearly stated rights and entitlements in the partnership agreement is prima facie evidence of the existence of a partnership.

(g) Business records

24.	The existence of a partnership is supported when business activities are entered in records that are separate and distinct from those kept for other business and private activities. Business records include:

•	books of account (with accounts for each partner's capital contribution, drawings and share of profit or loss);

•	minutes of partnership meetings; and

•	memoranda of decisions reached, especially regarding shares of income and losses.

25.	The maintenance of business records in the name of the parties or in the name of the partnership, rather than in the name of one party only, is indicative of the existence of a partnership.

(h) Trading in joint names and public recognition of the partnership

26.	The conclusion that a partnership exists is supported if the parties, by trading in joint names, make it clear to persons dealing with them that they are in partnership. Banks, suppliers and customers dealing with a partnership should be aware that they are trading with a partnership, as opposed to dealing with an individual. It is important that creditors of a partnership are aware that they are dealing with a partnership, as partners are obliged, jointly and severally, to meet the partnership debts to the full extent of their own resources.

27.	The existence of the following is relevant :

(i)	invoices, receipts, tenders, business letters and applications for approval in the partnership name;

(ii)	written and oral contracts with the partnership; and

(iii)	advertising in the partnership name.

EXAMPLES

Example 1

Facts:

28.	Mrs Tracklight is an interior decorator. She has decided to enter into "partnership" with her husband, but they have no written partnership agreement. Mrs Tracklight continues to perform all decorating work and all receipts and other business documents are in her name only. Any cheques received are made out to her and she deposits them into a newly opened joint bank account. This account is used for household and business expenses. Mr Tracklight helps the business by answering the telephone. His wife believes that she and her husband are in partnership together and that she acts for the partnership.

Editor's Note: This text includes correction made in erratum TR94/8 issued on the 27th January 1994.

Result:

29.	Mr Tracklight's role is a normal incident flowing from the ordinary domestic relationship of husband and wife. There is no express or implied representation to the public of the existence of a partnership. Mrs Tracklight is performing personal services and has not discharged the burden of proving that the business was operated by a partnership.

Example 2

Facts:

30.	Mr and Mrs Frost carry on business reconditioning refrigerators, allegedly in partnership. There is no written partnership agreement, although Mrs Frost has expressed her willingness to join in partnership with her husband and he has agreed.

Mrs Frost contributes no money to the setting up of the business, although she actively participates in the building up of the business. Only a small amount of capital is involved in the establishment of the business.

Mrs Frost spends about 20 hours a week answering business calls and relaying instructions for the collection and delivery of refrigerators. Business accounts are kept in joint names.

Business income is paid into a joint bank account, although funds are subsequently withdrawn from the joint account and invested in Mr Frost's name only. Mrs Frost has agreed to this.

Some, but not all, receipts are made out in the name of the partnership.

Result:

31.	A partnership exists between Mr and Mrs Frost. The parties have agreed to share the profits of the enterprise equally in return for Mrs Frost providing services to the business. Mr and Mrs Frost have demonstrated the mutual assent and intention to act as partners.

Example 3

Facts:

32.	Mr Floppy is engaged by an employment agency to work as a computer programmer for a software company.

Mr Floppy claims that income arising from the agreement with the agency is not his income, but income of a partnership between himself and his de facto, Miss Megabyte. Miss Megabyte performs no services for the "partnership". No written agreement exists between the couple and a business name is registered only after work begins.

The employment agency makes cheques for work completed payable to the business and a joint bank account is used to bank these cheques. The bank account was in existence prior to the alleged agreement.

Result:

33.	No partnership exists. The income is derived solely by Mr Floppy, who personally entered into the agreement and was employed in his own right.

Example 4

Facts:

34.	Mr and Mrs Volta claim to conduct an electrical business as partners. Mr Volta does all electrical work and Mrs Volta answers the phone, types accounts, does the banking and purchases supplies.

Mr Volta has sole control over the business bank account and Mrs Volta's name does not appear on any of the bank's records of the account.

The books of account are kept in the name of the business and Mrs Volta does not receive any income from the business. There is no evidence that the parties intend to share profits or to receive income jointly.

A partnership return is lodged, splitting the income equally between Mr and Mrs Volta, but Mrs Volta admits that the arrangement has been entered into purely as a means of income splitting.

No partnership agreement is entered into and Mrs Volta does not intend to become a partner.

Result:

35.	No partnership exists. The parties do not intend to operate the business as a partnership and no partnership agreement is in place. The way in which the parties conduct themselves toward third parties does not demonstrate that they are conducting the business in partnership.

Example 5

Facts:

36.	Mr and Mrs Flagfall purport to conduct a taxi cab business in partnership from 1 July. Prior to this, Mr Flagfall carried on a taxi cab business for several years.

On 1 July, Mr and Mrs Flagfall enter into a written agreement which states that they agree to operate the taxi business in partnership. The agreement provides that the proceeds of the business are to be divided equally, although no partnership accounts are prepared.

Mrs Flagfall does not contribute any capital and there is no actual division of profits. Third parties, including drivers employed in the business, are not aware that the business is conducted by both Mr and Mrs Flagfall.

Result:

37.	Mr and Mrs Flagfall, despite their written agreement, do not conduct themselves as partners.

Mr Flagfall fails to discharge the burden of proving that the business is carried on by himself and his wife in partnership. Therefore, the income of the business is derived solely by Mr Flagfall.

Commissioner of Taxation

27 January 1994


Change


Taxation Determination 92/106

Income tax:  who should be assessed to interest earned on a joint bank account?

Preamble

This Determination, to the extent that it is capable of being a 'public ruling' in terms of PartáIVAAA of the Taxation Administration Act 1953, is a public ruling for the purposes of that Part .  Taxation Ruling TR 92/1 explains when a Determination is a public ruling and how it is binding on the Commissioner.  Unless otherwise stated, the Determination applies to transactions entered into both before and after its date of issue.

1.	Interest income on a joint bank account should be assessed to income tax to the persons who are beneficially entitled to the income (see MacFarlane v. FC of T 86 ATC 4477 at 4486-7; (1986) 17 ATR 808 at 819-20).  That entitlement depends on the beneficial ownership of the moneys in the account.  The general presumption is that holders of acounts in joint names have joint beneficial ownership of the moneys in equal shares.  This presumption is rebuttable by evidence to the contrary (see Case Z7 92 ATC 131; AAT Case 7675 (1991) 22 ATR 3591).

2.	In a self assessment environment, interest income on a joint bank account should be returned by taxpayers according to who has the beneficial entitlement to the interest.

3.	In an audit context, if there is no evidence as to the beneficial entitlement to the interest, it is appropriate to assess the interest derived on a joint bank account to the account holders in equal shares.  However, if a taxpayer disputes that assessing treatment and has evidence to support his or her claims as to a different entitlement to the interest, those claims should be accepted unless there is evidence to refute the claims.

4.	The sort of relevant evidence includes information as to who contributed to the account, in what proportions the contributions were made, the nature of the contributions, who drew on the account and who used the money and the accrued interest as their own property.  Evidence also might be provided that joint account holders hold moneys in the account on trust for other persons, e.g. dependants.

EXAMPLE

B and C are each assessed to tax on half of the interest not returned on their joint bank account.  B later establishes that C contributed all of the money to the account and usually treated all of the interest as her money.  B has only once drawn funds from the account.  C should be assessed to all of the interest.

Commissioner of Taxation

1/7/92

FOI INDEX DETAIL:	Reference No.	 I 1212696

Related Rulings:	IT 2486

Subject Ref:	derivation of interest from joint bank account

Legislative Ref:	 ITAA 25(1)

Case Ref:	MacFarlane v. FC of T 86 ATC 4477; (1986) 17 ATR 808; Case Z7 92 ATC 131; AAT Case 7675 (1991) 22 ATR 3591

ATO Ref:	92/3449-7

ISSN  1038 - 3158


Taxation Determination TD 2006/43

Income tax:  what are the reasonable travel and meal allowance expense amounts for 2006-2007?

This publication provides you with the following level of protection:

This publication (excluding appendixes) is a public ruling for the purposes of the Taxation Administration Act 1953. A public ruling is an expression of the Commissioner’s opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. If you rely on this ruling, we must apply the law to you in the way set out in the ruling (or in a way that is more favourable for you if we are satisfied that the ruling is incorrect and disadvantages you, and we are not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you.

1.	This Determination sets out the amounts that the Commissioner considers are reasonable (reasonable amounts) for the 2006-2007 income year in relation to claims made for:

(a)	overtime meal allowance expenses;

(b)	domestic travel allowance expenses;

(c)	travel allowance expenses for employee truck drivers; and

(d)	overseas travel allowance expenses.

TAXATION RULING TR 2004/6

2.	This Determination should be read together with Taxation Ruling TR 2004/6 which explains the substantiation exception and the way in which these expenses are able to be claimed. Key points about claiming travel allowance expenses and meal allowance expenses are:

•	Claim must be allowable – A deduction claim cannot exceed the amount actually incurred for work-related purposes. The payment of an allowance does not of itself allow a deduction to be claimed.

•	Expenses covered – The expenses that the substantiation exception apply to are:

o	domestic travel allowance expenses – accommodation, food and drink, and incidentals that are covered by the allowance (but the accommodation rates do not apply to employee truck drivers);

o	overseas travel allowance expenses – food and drink, and incidentals that are covered by the allowance (the exception does not apply to accommodation); and

o	Meal allowance expenses – for food and drink in connection with overtime worked.

•	For travel allowance expenses – the employee must sleep away from home.

•	Substantiation exception for reasonable amounts – Where the amount claimed is no more than the applicable reasonable amount, substantiation of the claim with written evidence is not required.

•	Allowance must be paid – The substantiation exception only applies if the employee is paid a meal allowance under an industrial instrument or a travel allowance. The allowance must have an identifiable connection with the nature of the expense covered.

•	Claims in excess of reasonable amounts – If the amount claimed is more than the reasonable amount, the whole claim must be substantiated, not just the excess.

•	Verification of reasonable claims – In appropriate cases, where the substantiation exception is relied on, the employee may still be required to show:

o	an entitlement to the substantiation exception;

o	the reasonable rate used;

o	an entitlement to a deduction (for example that work-related travel was undertaken);

o	a bona fide travel allowance was paid; and

o	if accommodation is claimed, that commercial accommodation was used.

The nature and degree of evidence will depend on the circumstances:  for example the circumstances under which the employer pays allowances, the occupation of the employee, and the total amount of allowances received and claimed during the year by the employee.

•	Tax return treatment – Where a travel or overtime meal allowance which does not exceed the reasonable amounts is not shown on the payment summary, and it has been fully spent on deductible expenses, neither the allowances nor the expenses need be shown on the employee’s tax return. If an amount less than the allowance has been spent, the income tax return must include the allowance and the expense claimed. Whenever a claim is made for overtime meal or travel allowance expenses the allowance must also be included in the tax return.

REASONABLE AMOUNT FOR OVERTIME MEAL ALLOWANCE EXPENSES

3.	For overtime meal expenses to be considered under the exception from substantiation, the meal allowance must be a bona fide meal allowance (see paragraph 87 of Taxation Ruling TR 2004/6) paid or payable under a law of the Commonwealth or of a State or Territory, or an award, order, determination or industrial agreement in force under such a law (section 900-60 of the Income Tax Assessment Act 1997).

4.	For the 2006-2007 income year the reasonable amount for overtime meal allowance expenses is $21.90

REASONABLE AMOUNTS FOR DOMESTIC TRAVEL ALLOWANCE EXPENSES

Types of expenses

5.	This Determination shows reasonable amounts for travel allowance expenses. The reasonable amounts are given for:

•	accommodation at daily rates (for domestic travel only);

•	meals (showing breakfast, lunch and dinner); and

•	deductible expenses incidental to travel.

Travel destinations

6.	These amounts are shown for the following travel destination:

•	each Australian State and Territory capital city;

•	certain specified high cost regional and country centres (at individual rates);

•	other specified regional and country centres (at a common rate);

•	all other regional and country centres (at a common rate); and

•	specified overseas locations (selected countries or regions in a country).

Type of accommodation

7.	The accommodation rates shown for domestic travel apply only for stays in commercial establishments like hotels, motels and serviced apartments. If a different type of accommodation is used the rates do not apply.

Meal expenses

8.	The reasonable amount for meals depends on the period and time of travel. That is, the rates only apply to meals (that is breakfast, lunch, dinner) that fall within the time of day from the commencement of travel to the end of travel covered by the allowance.

Incidental expenses

9.	The reasonable amount applies in full to each day of travel covered by the allowance, without the need to apportion for any part-day travel on the first and last day.

Reasonable amount for 2006-2007

10.	The reasonable amounts for daily travel allowance expenses, according to salary levels and destinations, for the 2006-2007 income year are shown in Tables 1-6 as follows.

Table 1:  Employee’s annual salary – $84,250 or below

Place	Accomm. $	Food and drink $ B’fast 19.60 Lunch 21.95 Dinner 37.80	Incidentals $14.95	Total $
Adelaide	136	79.35	14.95	230.30
Brisbane	141	79.35	14.95	235.30
Canberra	114	79.35	14.95	208.30
Darwin	128	79.35	14.95	222.30
Hobart	104	79.35	14.95	198.30
Melbourne	150	79.35	14.95	244.30
Perth	126	79.35	14.95	220.30
Sydney	158	79.35	14.95	252.30
High cost country centres	See Table 4	79.35	14.95	Variable – see Table 4
Tier 2 country centres (see Table 5)	89	B’fast 17.50 Lunch 20.05 Dinner 34.55	14.95	176.05
Other country centres	78	72.10	14.95	165.05

Table 2:  Employee’s annual salary – $84,251 – $149,750

Place	Accomm. $	Food and drink $ B’fast 21.30 Lunch 30.15 Dinner 42.25	Incidentals $	Total $
Adelaide	152	93.70	21.35	267.05
Brisbane	172	93.70	21.35	287.05
Canberra	143	93.70	21.35	258.05
Darwin	140	93.70	21.35	255.05
Hobart	125	93.70	21.35	240.05
Melbourne	169	93.70	21.35	284.05
Perth	152	93.70	21.35	267.05
Sydney	196	93.70	21.35	311.05
High cost country centres	See Table 4	93.70	21.35	Variable – see Table 4
Tier 2 country centres (see Table 5)	107	B’fast 19.60 Lunch 20.05 Dinner 39.00	21.35	207
Other country centres	94	78.65	21.35	194.00

Table 3:  Employee’s annual salary – $149,751 and above

Place	Accomm.	Food and drink $ B’fast $25 Lunch $36 Dinner $55	Incidentals	Total
Adelaide	195	116	21.35	332.35
Brisbane	216	116	21.35	353.35
Canberra	195	116	21.35	332.35
Darwin	195	116	21.35	332.35
Hobart	195	116	21.35	332.35
Melbourne	265	116	21.35	402.35
Perth	195	116	21.35	332.35
Sydney	265	116	21.35	402.35
Country centres	$151, or the relevant amount in Table 4 if higher	116	21.35	Variable – see Table 4 if applicable

Table 4:  High cost country centres – accommodation expenses

Country centre	$

Ballarat (Vic)	100.00

Bendigo (Vic)	95.00

Broome (WA)	134.00

Burnie (Tas)	100.00

Carnarvon (WA)	97.00

Christmas Island (WA)	120.00

Dampier (WA)	105.00

Devonport (Tas)	103.50

Exmouth (WA)	96.00

Gold Coast (QLD)	112.00

Halls Creek (WA)	112.00

Horn Island (QLD)	119.00

Jabiru (NT)	190.00

Kalgoorlie (WA)	102.00

Karratha (WA)	166.00

Kununurra (WA)	113.00

Launceston(TAS)	96.00

Newcastle (NSW)	101.50

Newman (WA)	119.50

Norfolk Island	100.00

Pt Hedland (WA)	124.00

Thursday Island (QLD)	140.00

Warrnambool (Vic)	95.00

Weipa (QLD)	125.00

Wilpena (SA)	106.50

Wollongong (NSW)	104.00

Yulara (NT)	307.00

Table 5:  Tier 2 country centres

Country centre

Alice Springs (NT)

Bordertown (SA)

Bright (VIC)

Bunbury (WA)

Cairns (QLD)

Castlemaine (VIC)

Cocos (Keeling) Island

Derby (WA)

Geelong (VIC)

Katherine (NT)

Maitland (NSW)

Mount Gambier (SA)

Mount Isa (QLD)

Mudgee (NSW)

Northam (WA)

Orange (NSW)

Port Lincoln (SA)

Port Macquarie (NSW)

Portland (VIC)

Queenstown (TAS)

Wagga Wagga (NSW)

Reasonable travel allowance expense claims for employee truck drivers

11.	Amounts claimed up to the food and drink component only of the reasonable domestic daily travel allowance amounts for ‘other country centres’ are considered to be reasonable for meal expenses of employee truck drivers who have received a travel allowance and who are required to sleep away from home. For the 2006-2007 income year, the relevant amounts are:

Table 6:  Employee truck drivers

Salary range	Food and drink
$84,250 and below	B’fast Lunch Dinner $17.50 $20.05 $34.55 $72.10 Per day
$84,251 and above	B’fast Lunch Dinner $19.60 $20.05 $39.00 $78.65 per day
(For further information on truck drivers see paragraphs 72 to 75 of TR 2004/6 and Taxation Ruling TR 95/18.)

Office holders covered by the Remuneration Tribunal

12.	Daily domestic travel allowance expense claims made by office holders covered by the Remuneration Tribunal are considered to be reasonable amounts if they do not exceed the rate of allowances set by the Remuneration Tribunal for that office holder.

Federal Members of Parliament

13.	The travel allowances paid to Federal Members of Parliament and Federal Parliamentary Secretaries, under the arrangements that commenced on 14 April 1998, are considered reasonable amounts for the recipients of those allowances. This includes the Capital City and Canberra travel allowance rates for domestic travel, having regard to the circumstances under which those allowances are paid.

REASONABLE AMOUNTS FOR OVERSEAS TRAVEL ALLOWANCE EXPENSES

14.	The reasonable amounts for overseas travel expenses are shown in Schedule 1 to this Determination. Table 1 of Schedule 1 sets out the cost group to which a country (or part of a country) has been allocated. Table 2 of Schedule 1 sets out the reasonable amount for meal expenses and incidental travel expenses for each cost group for specified employee salary ranges.

15.	If the employee travels to a country that is not shown in Table 1 of Schedule 1 the employee can use the reasonable amount for Cost Group 1 in Table 2 for the relevant salary range.

EXAMPLES – CALCULATION OF REASONABLE DAILY OVERSEAS TRAVEL EXPENSE AMOUNTS

Allowance includes a separate meals and incidentals component

16.	An employee travels to Brazil on business for two weeks and is paid a travel allowance of $300 per day ($100 for meals and incidentals and $200 for accommodation). The employee’s annual salary is $86,000. The reasonable daily overseas travel allowance expense claim is calculated as follows:

•	Schedule 1 Table 1 lists Brazil as Cost Group 2.

•	Using Table 2, at a salary of $86,000 per year, the reasonable overseas travel allowance amount for meals and incidental expenses for Cost Group 2 (which covers Brazil) is $145 ($110 for three meals and $35 for incidentals).

17.	The employee claims a deduction for meals and incidental expenses actually incurred of $120 per day. As the employee is claiming a deduction that is less than the reasonable amount of $145 per day, the employee does not need to keep written evidence to substantiate expenditure on meals and incidental expenses. The employee is required, however, to maintain a travel record and to keep receipts or other documentary evidence to substantiate accommodation expenses.

Allowance without an identified component for meals and incidentals

18.	An employee travels overseas on business for four days and is paid a travel allowance of $300 per day for meals, incidentals and accommodation. The employee’s annual salary is $33,000. The employee travels to a country in Europe that is not listed in Table 1 of Schedule 1. The reasonable daily overseas travel allowance expense claim is calculated as follows:

•	Cost Group 1 is used for the reasonable overseas travel allowance amount for a country not listed in Table 1.

•	Using Table 2, at a salary of $33,000 per annum the reasonable overseas travel allowance amount for Cost Group 1 is $65 for three meals and $25 for incidental expenses.

19.	The travel allowance paid to the employee does not specify an amount for each of the components of the allowance, but it covers meals and incidental expenses. The employee is entitled to claim up to $90 per day for expenses incurred on three meals (that is, food and drink) and incidentals without substantiation provided he has incurred deductible meals and incidental expenses at least equal to $90. Written evidence is required to substantiate any accommodation cost claimed.

DATE OF EFFECT

20.	This Determination applies to the 2006-2007 income year only. However, the Determination will not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Determination.

Commissioner of Taxation

28 June 2006

Appendix 1

SCHEDULE 1

Table 1:  Table of Countries

If a country is not listed in Table 1 use the reasonable amount in Table 2 for Cost Group 1.

For an explanation of Cost Groups see Table 2.

Country	Cost Group

Albania	3

Algeria	3

Angola	6

Antigua and Barbuda	5

Argentina	1

Austria	4

Azerbaijan	3

Bahamas	6

Bahrain	3

Bangladesh	1

Barbados	5

Belgium	4

Bermuda	6

Bolivia	1

Bosnia	2

Brazil	2

Brunei	1

Bulgaria	2

Burkina Faso	3

Cambodia	3

Cameroon	4

Canada	4

Chile	2

China (includes Macau & Hong Kong)	4

Colombia	3

Congo Democratic Republic	5

Cook Islands	3

Costa Rica	1

Cote D’Ivoire	4

Croatia	3

Cuba	4

Cyprus	4

Czech Republic	2

Denmark	6

Dominican Republic	4

East Timor	1

Ecuador	2

Egypt	3

El Salvador	2

Eritrea	1

Estonia	2

Ethiopia	1

Fiji	2

Finland	5

France	5

Gabon	5

Gambia	2

Georgia	1

Germany	4

Ghana	3

Gibraltar	3

Greece	4

Guatemala	3

Guyana	1

Hungary	3

Iceland	6

India	3

Indonesia	2

Iran	1

Irish Republic	5

Israel	4

Italy	4

Jamaica	3

Japan	5

Jerusalem	3

Jordan	3

Kazakhstan	2

Kenya	1

Korea Republic	5

Kuwait	4

Laos	1

Latvia	2

Lebanon	4

Libya	3

Lithuania	2

Luxembourg	4

Macedonia	1

Malawi	1

Malaysia	1

Mali	2

Malta	3

Martinique	5

Mauritius	2

Mexico	2

Monaco	5

Morocco	3

Mozambique	1

Myanmar	3

Namibia	2

Nepal	1

Netherlands	4

New Caledonia	5

New Zealand	3

Nicaragua	1

Nigeria	4

Norway	6

Oman	4

Pakistan	1

Panama	4

Papua New Guinea	3

Paraguay	1

Peru	2

Philippines	1

Poland	3

Portugal	3

Puerto Rico	5

Qatar	3

Romania	2

Russia	5

Rwanda	1

Saint Lucia	4

Saint Vincent	2

Samoa	3

Saudi Arabia	2

Senegal	4

Serbia	2

Sierra Leone	4

Singapore	3

Slovakia	1

Slovenia	1

Solomon Islands	2

South Africa	2

Spain	3

Sri Lanka	1

Sudan	4

Surinam	1

Sweden	4

Switzerland	5

Syria	2

Taiwan	3

Tanzania	1

Thailand	1

Tonga	3

Trinidad and Tobago	4

Tunisia	2

Turkey	4

Uganda	1

Ukraine	5

United Arab Emirates	4

United Kingdom	5

United States of America	5

Uruguay	1

Vanuatu	4

Venezuela	2

Vietnam	1

Zambia	2

Zimbabwe	2

Table 2:  Reasonable amounts by cost groups

Cost Group	Salary $84,250 and below	Salary $84,251 – $149,750	Salary $149,751 and above
	Meals	Incidentals	Total	Meals	Incidentals	Total	Meals	Incidentals	Total
1	$65	$25	$90	$90	$25	$115	$115	$30	$145
2	$80	$30	$110	$110	$35	$145	$140	$40	$180
3	$105	$35	$140	$130	$40	$170	$160	$45	$205
4	$130	$35	$165	$160	$45	$205	$190	$50	$240
5	$170	$40	$210	$210	$50	$260	$250	$60	$310
6	$205	$45	$250	$260	$50	$310	$300	$60	$360
NOTE:
These amounts are determined by the Commissioner solely as the amounts that will be accepted for the exception from the requirement to obtain written evidence for substantiation purposes (see paragraph 33 of TR 2004/6).

REFERENCES

Previous draft:

Not previously issued as a draft

Related Rulings/Determinations:

TR 95/18;  TR 2004/6

Previous Rulings/Determinations:

TD 2004/19;  TD 2005/32

Subject references:

•	accommodation expenses

•	domestic travel expenses

•	meal & food expenses

•	overseas travel expenses

•	travel expenses

Legislative references:

•	TAA 1953

•	ITAA 1997  900-60

ATO references

NO:	2004/7122

ISSN:	1038-8982

ATOlaw topic:	Income Tax ~~ Deductions ~~ accommodation and meal expenses

Income Tax ~~ Deductions ~~ travel expenses


Taxation Ruling TR 96/11 Record keeping
Taxation Ruling TR 96/11

Income tax: record keeping – taxi industry – guidelines for recording taxi takings

NOTE:
This Ruling, to the extent that it is capable of being a 'public ruling' in terms of Part IVAAA of the Taxation Administration Act 1953, is a public ruling for the purposes of that Part.  Taxation Ruling TR 92/1 explains when a Ruling is a public ruling and how it is binding on the Commissioner.

Contents:

What this Ruling is about

Class of person/arrangement

Definitions

Ruling

Date of effect

Explanations

Examples

WHAT THIS RULING IS ABOUT

1.	This Ruling sets out our views on what are sufficient records for the purposes of section 262A of the Income Tax Assessment Act 1936 ('the Act') to record income from taxi takings.

2.	This Ruling should be read in conjunction with Taxation Ruling TR 96/7, 'Income tax: record keeping - section 262A - general principles'.  TR 96/7 explains the general application of section 262A to a person, including a company, carrying on a business.

3.	Paragraph 7 of TR 96/7 envisages that we may issue further Rulings or Determinations on record keeping as we identify needs.  We consider that the taxi industry is an industry which has record keeping issues which need specific explanation.

Class of person/arrangement

4.	This Ruling applies to the operators of taxi licences/plates ('operators').  For the purposes of this Ruling, we consider that an operator is a person who either:

(i)	owns a taxi licence/plate and conducts a business of plying a taxi cab for hire;

(ii)	leases a taxi licence/plate and conducts a business of plying a taxi cab for hire;  or

(iii)	acquires total operational control of a taxi licence/plate and a business of plying a taxi cab for hire, under an agreement whereby the owner of the taxi licence/plate is indemnified against all costs and liabilities in respect of the operation of that business.

5.	We consider that the responsibility for keeping the records set out in this Ruling rests with the operator as defined in paragraph 4 above.

6.	There are also cases where the owner or lessee passes on the management of a business of plying taxi cabs for hire to another person, but that other person does not assume total control of the business.  Often the owner or lessee will maintain some operational control of the business.  In these cases, the other person may keep the records on behalf of the owner or lessee.  However, the responsibility for keeping those records still remains with the owner or lessee.

DEFINITIONS

7.	For the purposes of this Ruling:

'takings' includes passenger hire fees, tips/gratuities and income arising from courier services;

'taxi lessee' is a person who leases a taxi licence/plate from a taxi licence/plate owner and assumes total responsibility for the taxi operation, the maintenance of all or most of the equipment and total risk of the business operation.  The leases would generally be of a long-term nature and be approved/registered by the relevant State or Territory transport licensing authorities;

'taxi owner' is the legally licensed owner and holder of a taxi licence/plate;

'taxi licence/plate' is an authority granted by a State or Territory to ply a taxi cab for hire.

RULING

8.	Section 262A of the Act requires operators to keep records that record and explain all transactions engaged in by them that are relevant for any purpose of the Act.  In paragraphs 9 and 10 of TR 96/7 we take the view that a record will 'explain' transactions engaged in by a person if it contains information which will enable Australian Taxation Office ('ATO') staff with accounting skills to understand the essential features of the transactions.  The content of the information needed in a record will depend on the circumstances of each case.  Our view, generally, is that the minimum information required by ATO staff with accounting skills to understand the essential features of transactions which relate to a person's income is the date, amount and character of the transactions.  We also recognise that, in some circumstances, ATO staff need other information in order to understand the essential features of the transactions.

9.	In respect of the taxi industry, we consider that operators should keep the following records:

(i)	the full identity details of all persons who derive income from driving the operator's taxis ( i.e., name, address, taxi driver licence number);

(ii)	the details of each operational taxi shift (i.e., date, identity of driver, distance travelled, shift hours, total takings for each shift, shift expenses);  and

(iii)	the details of the arrangements between the operator and drivers as to how they will apportion shift takings (i.e., set pay-in, percentage pay-in) and the amounts apportioned to the operator and the drivers for each shift.

10.	In paragraph 11 of TR 96/7 we take the view that it is not necessary for a person to keep a record of each individual transaction where any records of the individual transactions provide no additional information about the essential features of the transactions than does a record of the transactions as a group.  The following paragraph sets out how we believe this principle applies in the taxi industry.

11.	In the taxi industry, generally, drivers record information as to the date, amount and character (i.e., hire charge, tips, etc.) of the takings for their shift on a shift summary such as a pay-in slip, envelope or worksheet.  They also record the other information required in paragraph 9(ii) above on these shift summaries.  We consider that any record made by a driver of each individual hire transaction provides no additional information about the essential features of the operator's takings than does the information provided on the shift summaries.  Where drivers do not fill out shift summaries, operators must make a record of the details that would be on the shift summaries at the end of each shift.

12.	All records must be kept for the statutory period (5 years) as set out in subsection 262A(4) of the Act.

DATE OF EFFECT

13.	This Ruling applies as from its date of issue.

EXPLANATIONS

14.	We have explained the purpose of section 262A and the meaning of 'record and explain all transactions' in paragraphs 27 to 35 of TR 96/7.

15.	In the taxi industry, we consider that a record which contains only information as to the date, amount and character of a transaction is not sufficient to record and explain the transaction.  We consider that it is necessary for us to know the full identity details of all drivers because these details enable us to check whether operators have included takings from all drivers in their income and to verify the details as to how the operators and the drivers split the takings .

16.	We consider that the details relating to the date and total takings for each operational shift enable us to ascertain the date, amount and character of the income.  The details relating to the identity of the driver, distance travelled and shift hours enable us to be assured as to the accuracy of the takings figures for that shift by determining whether the total shift takings are consistent in relation to the distance travelled and shift hours.  The details relating to shift expenses allow us to reconcile the total takings to the net takings.

17.	The details in relation to the apportionment of the takings enable us to determine how the transactions affect the amount of each person's liability under the Act.

18.	We consider that operators can record and explain all transactions relating to takings from taxi fares as a group rather than individually.  This is because the details of each individual passenger and individual fare provide no additional information as to the essential features of the transactions than does a record of these transactions as a group.  We consider that the information contained on the shift summaries is sufficient to enable ATO staff to ascertain the income of the operator.  The retention of these shift summaries also enables ATO staff to verify the details contained in any consolidated takings records that an operator may keep.

EXAMPLES

Example 1

19.	Taxi licence/plate owner (Alan) engages a taxi driver (Brian) to drive taxi shifts for a percentage/proportional share of the shift takings.

20.	Alan is required to keep records as outlined in this Ruling.

Example 2

21.	Taxi licence/plate owner (Alison) leases her taxi licence/plate to a taxi lessee (Barbara) for exclusive use of the taxi licence/plate for one year.  The lease is registered with the relevant State transport authority.

22.	Barbara is required to keep records as outlined in this Ruling.

Example 3

23.	Taxi licence/plate owner (Amir) enters into an arrangement with a taxi driver (Baldev) to use the taxi on specified periodic taxi shifts for which the Amir receives a set amount.  The agreement is not registered with the relevant State transport authority.

24.	Amir is required to keep records as outlined in this Ruling.

Example 4

25.	Taxi licence/plate owner (Adriana) enters into an arrangement with a taxi driver/manager (Bruno) to oversee the business of operating her taxi licence/plate.  Bruno engages a taxi driver (Christina) to drive specific taxi shifts.

26.	Bruno is responsible only where total operational control for all aspects of the business of operating the taxi licence/plate passes from Adriana, and Bruno indemnifies Adriana against all costs and liabilities in respect of the operation of the business.  Where this is so, Bruno is required to keep records as outlined in this Ruling.

27.	2Where total operational control does not pass, Adriana is responsible, and is required to keep records as outlined in this Ruling.

Example 5

28.	Taxi licence/plate owner (Austin) enters into an arrangement with Best Cabs, the local taxi co-operative, to manage the business of operating the taxi licence/plate.  Best Cabs engages various drivers to drive taxi shifts and indemnifies Austin against all costs and liabilities in respect of the operation of the business.

29.	Best Cabs is required to keep records as outlined.

Commissioner of Taxation

24 April 1996


Taxation Ruling TR 2005/9 - Income tax: record keeping - electronic records
Taxation Ruling TR 2005/9

Income tax: record keeping – taxi industry – guidelines for recording taxi takings

Preamble

The number, subject heading, What this Ruling is about (including Class of person/arrangement section), Date of effect, and Ruling parts of this document are a ‘public ruling’ for the purposes of Part IVAAA of the Taxation Administration Act 1953 and are legally binding on the Commissioner. Taxation Rulings TR 92/1 and TR 97/16 together explain when a Ruling is a ‘public ruling’ and how it is binding on the Commissioner.

Contents:

What this Ruling is about

Definitions

Date of effect

Previous Rulings

Ruling

Explanation

Detailed contents list

WHAT THIS RULING IS ABOUT

Class of person/arrangement

1.	This Ruling explains to a person, including a company carrying on business, the principles associated with the retention of electronic records created from business transactions including those carried out through the internet for the purposes of section 262A of Income Tax Assessment Act 1936 (ITAA 1936). It sets out the Tax Office view on what are sufficient electronic records to be retained including those created by internet electronic commerce so as to record and explain all transactions and other acts engaged in by such persons for the purposes of the ITAA 1936.

2.	This Ruling also explains the Tax Office view on access under section 263 of the ITAA 1936 to electronic records including those created from electronic commerce.

Related Rulings

3.	Taxation Ruling TR 96/7 Income tax:  record keeping – section 262A – general principles and Taxation Determination TD 2002/16 Income tax:  what are the obligations under the Income Tax Assessment Act 1936 where a business chooses to keep some of its records as encrypted information? should be read in conjunction with this Ruling.

DEFINITIONS

4.	In this Ruling:

‘documents and records’ means:

all documents and records including those documents and records kept in electronic form on a computer or on other electronic storage media.

‘electronically’ means:

held or processed by means of a computer.

‘electronic commerce’ means:

‘the delivery of information, products, services or payments via telephone lines, computer networks or by any other electronic means’. (Kalakota, R and Whinston, AB 1998, Frontiers of Electronic Commerce: A Manager’s Guide)

‘Electronic Data Interchange (EDI)’:

is the electronic transfer of data and information to both external and internal sources. Many transfers of data and information are made automatically between computers.

‘electronic storage medium’ includes:

hard disc, removable hard disc, diskette, floppy disc, CD-ROM, DVD, optical disc or magnetic tapes.

‘encryption’ means:

scrambling a message so that it is virtually impossible for other people to read unless they have a key. Encryption is used to maintain privacy when sending a message over the internet and to verify the identity of the sender of a message.

‘internet’:

is an international network of computers linked by certain rules and guidelines. The Internet has many components:

•	it has a comprehensive set of protocols  that define how computers communicate;

•	it has a global operational network with no single point of control; and

•	its operation is supported by a large number of commercial and non-profit organisations.

‘key’ means:

a value that is used to encrypt or decrypt a message.

‘websites’ means:

computer programs residing on computers (known as servers) which are connected to the internet.

DATE OF EFFECT

5.	This Ruling applies to years of income commencing both before and after its date of issue. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

PREVIOUS RULINGS

6.	This Ruling replaces Taxation Ruling TR 97/21 Income tax:  record keeping – electronic records, which was withdrawn on 8 December 2004.

RULING

7.	When a person carrying on a business chooses to process and keep records in electronic form, the records must be in a form that the Tax Office can access and understand in order to ascertain the person’s taxation liability. For record keeping purposes, electronic records are subject to the same record keeping requirements under the ITAA 1936 as paper records.

8.	To ensure that the electronic records associated with a computer system are being maintained in accordance with the requirements in subsections 262A(1), (3) and (4) of the ITAA 1936, a person should have an understanding of their computer system. System documents should be retained to explain the basic aspects of the system so the Tax Office can ascertain that the system is doing what it is claimed to do.

9.	Where systems have changed over time, records should be kept to allow the original data to be reconstructed to satisfy section 262A. The records to be kept would include:

•	a chronological record and explanation of all changes or upgrades to the software and hardware employed in the system, including explanations of how the new system can recreate an original record;

•	where applicable, explanations of migrations of data that may have taken place across either software or hardware;

•	a detailed, documented record of the controls which maintain the integrity of the old system and of the records processed and transmitted; and

•	explanations of archival and back-up facilities under that system.

10.	Any data held under an old system should be capable of conversion to a form that is readily readable and retrievable by the Tax Office.

11.	For record keeping purposes, business transactions carried out using either Electronic Data Interchange (EDI) specific systems or the internet are no different from other forms of business transactions. We consider section 262A requires the person to keep records that explain all internet or EDI transactions that are relevant for any purpose of the ITAA 1936 and the Income Tax Assessment Act 1997 (ITAA 1997) (ITAAs). Accordingly, the minimum information that must be recorded is the date, amount and character of the transaction.

Storage of paper records in electronic form

12.	A business using either a manual or a computerised accounting system may want to store and keep paper records in electronic form. Where paper records are produced or received in the course of carrying on business, the Tax Office accepts the imaging of those records onto an electronic storage medium provided that the electronic copies are a true and clear reproduction of the original paper records. This would include documents which have been entered into a Capital Gains Tax asset register under Division 121 of the ITAA 1997 and have been converted to an electronic copy.

13.	Where paper records are imaged and stored electronically the requirements of section 262A are satisfied if they are:

•	not altered or manipulated once stored;

•	retained for the statutory period of five years; and

•	capable of being retrieved and read at all times by Tax Office staff.

Access to electronic records

14.	Under subsection 263(1) of the ITAA 1936, the Commissioner or any duly authorised officer has the right of full and free access to all buildings, places and documents, including electronically stored records required for the purposes of the Act. The provision enables an authorised officer to access and copy records held on an electronic storage medium.

15.	In addition, subsection 263(3) requires the occupier of a building or place to provide an authorised officer with all reasonable facilities and assistance for the effective exercise of powers under the section. In the context of electronically stored records, reasonable facilities and assistance extends, where necessary, to the provision of login codes, keys and passwords. Similarly, it permits access to any printed copies of the records, as well as allowing the authorised officer to read computer and software manuals. Access powers will be exercised in accordance with relevant ATO guidelines and common law principles.

(Safeguards protecting legal professional privilege and administrative concessions in respect of professional papers are detailed in relevant chapters of the ATO Access Manual and other ATO material, available on line at www.ato.gov.au.)

16.	Where it is necessary to download electronic records onto ATO computers, it is the practice of the ATO to invite taxpayers to carry out the copying of these electronic records for and on behalf of the ATO on storage media provided by the ATO. Where this is inconvenient or impractical, the ATO undertakes, with the approval of taxpayers, to carry out that download process.

EXPLANATION

Electronic Transactions Act

17.	The Electronic Transactions Act 1999 (ETA 1999) established the basic rule that a transaction is not invalid because it took place by means of electronic communication. The ETA 1999 contains specific provisions which state that a requirement or permission under a law of the Commonwealth for a person to provide information, in writing, to sign a document or to retain information or a document can be satisfied by an electronic communication, subject to certain minimum criteria being satisfied.

18.	Particular attention should be paid to the following sections of the ETA 1999:

•	section 9 – Writing;

•	section 11 – Production of document; and

•	section 12 – Retention.

All these sections have the requirement that information stored in electronic form be ‘readily accessible so as to be usable for subsequent reference’.

19.	The ITAAs impose obligations on a taxpayer to retain certain records; the ETA 1999 facilitates the acceptance of electronic records. Those electronic records are required by the ETA 1999 to be ‘readily accessible so as to be usable for subsequent reference’. It is expected that electronically stored information should be retrievable on the taxpayer’s computer system for the full retention period required by the ITAAs and that where electronic records are made available in compliance with record keeping requirements that they be ‘readily accessible’ by the Tax Office.

20.	This Ruling provides prudential guidance in relation to the maintenance of electronic records in the face of such obstacles to electronic record keeping as system upgrades and advancement and subsequent obsolescence of storage media. However, it is the record keeper’s responsibility to ensure that electronic records are maintained so as to be ‘usable for subsequent reference’ over the retention period.

21.	It is considered that the ETA 1999 is not intended to alter the stringency or effect of any obligations imposed on a person by Commonwealth law in relation to retaining information or documents, including the period of retention. The ETA 1999 provides a different way of complying with record keeping obligations.

Electronic records

22.	Advances in technology (including the internet) have meant that many taxpayers who carry on a business now process and keep their records electronically rather than through a paper based system. This includes encrypted records. The Tax Office requires that records, whether kept on paper or electronically, must be kept accurately so as to enable that person’s tax liability to be readily ascertained. The records must be in a form which Tax Office staff can access and understand in order to ascertain that person’s taxation liability.

23.	Records made by and stored in a computer are recognised as documents for the purposes of Commonwealth legislation. Section 25 of the Acts Interpretation Act 1901 (AIA 1901) extends the ordinary meaning of the word record to include information stored by means of a computer.

24.	The reference in subsection 262A(1) of the ITAA 1936 to the keeping of records therefore includes information stored or recorded by means of a computer. A person carrying on a business may keep documents and records made by and/or stored in a computer system. By virtue of subsection 262A(3), the person is required to keep these computer records in the English language or in a form readily convertible into English. The Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 5) 1989 that introduced subsection 262A(3) into the ITAA 1936 explained, at Clause 42:

Subsection 262A(3) obliges a person who is required by the section to keep records, to keep those records:

o	by paragraph (a) – in the English language or, if not in written form (e.g., in an electronic medium such as magnetic tape or computer disc), in a form which is readily accessible and convertible into writing in English; and

o	by paragraph (b) – so as to enable the person’s assessable income and allowable deductions, and any credits to which the person is entitled, to be readily ascertainable.

25.	A taxpayer’s computer system may generate records or alternatively, a taxpayer may scan paper records into an electronic form provided that the electronic copies are a true and clear reproduction of the original paper records.

26.	All records must generally be kept for a period of 5 years after the documents were prepared or obtained, or 5 years after the completion of the transaction or acts to which the records relate (whichever is the later):  subsection 262A(4) of ITAA 1936.

27.	The admissibility of computer produced evidence in Federal Courts is now governed by various provisions in the Evidence Act 1995 (the Evidence Act). Broadly speaking, computer documents are admissible evidence in taxation matters subject to relevance and, where necessary, proof as to the competence of the computer device. Even prior to the introduction of the Evidence Act, documents held in electronic form had been accepted as admissible evidence:  DFC of T v. Capron 93 ATC 4144; (1993) 25 ATR 142.

28.	The Commissioner’s powers under sections 263 and 264 of the ITAA 1936 to require access to, or production of, documents extends to documents that are electronically stored by reason of the extended meaning of ‘document’ in section 25 of the AIA 1901. The effect of section 25A of the AIA 1901 is that, in the absence of a direction by the Commissioner to the contrary, a requirement to produce a document or information that is stored electronically obliges the person under whose custody or control it is, to provide it in a hard copy form. In many situations, particularly where the hard copy would be voluminous, it will be far more convenient and efficient for the Tax Office to have the documents or information in electronic form. Accordingly, where the Tax Office specifically requires documents or information in electronic format, a contrary direction under section 25A of the AIA 1901 will be given. This will mean that the information is, or the documents are, to be produced or accessed in electronic form and hard copies will not satisfy the requirement. Except where special circumstances exist that require production of, or access to, the original electronic record (for example, the hard drive of a computer), it is the practice of the Tax Office, however, to accept an electronic copy of the information or documents created specifically for the purpose of satisfying the requirement for production or access. In every case where information or documents are provided in electronic format, it must be possible for the data to be readily accessible by the Tax Office. This means that the format in which the data is stored must be one that the Tax Office systems can read.

29.	Where a requirement under section 264 of the ITAA 1936 is for the production of a hard copy of documents, section 11 of the ETA 1999 allows the requirement to be satisfied by provision of the information or documents in electronic form. For example, if the Tax Office requires production of accounting records from a person, those accounting records may be provided in an electronic form. Again, in this case, the electronic data must be such that is readily accessible by the Tax Office. However, the Commissioner may specify under a notice to produce and in accordance with the exclusory provisions of section 11  of the ETA 1999 that, where a written record exists, it must be supplied.

(The relevant exclusory provisions of section 11 of the ETA 1999 are paragraphs 11 (1) (a), (b) and (c) and paragraphs 11 (2) (a), (b) and (c) which deal with the integrity, usability and accessibility of the electronic records.)

Internet and EDI transactions

30.	Where a taxpayer conducts business transactions through the internet or by EDI the Tax Office position is that the taxpayer is required to keep records explaining all such transfers that are relevant for any purposes of the ITAAs. All other requirements relating to electronic record keeping systems, such as the need for controls, are equally applicable.

31.	If electronic information systems are used to conduct business transactions such as those that may be conducted by websites, but do not function as record keeping systems, there will be no evidence of those transactions. Without this evidence your organisation or business may not be considered to have complied with its record keeping requirements under section 262A of the ITAA 1936. There is an administrative penalty if you do not keep or retain records as required by this section:  see section 288-25 in Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). Taxpayers should remember that the onus of proof is on them in showing that an assessment is excessive should the Tax Office amend their taxable income. The failure to keep sufficient records to explain relevant transactions for tax purposes would be inconsistent with the requirements of these obligations.

32.	The nature of e-commerce with the recording of transactions and information and subsequent record keeping implications will assist taxpayers in the design and implementation of systems to manage full and accurate records arising from e-commerce or EDI for the required periods.

Electronic record keeping systems

33.	There are many similarities between a manual accounting/paper based record keeping system and one operated on a computer. Many businesses use computerised accounting packages to process their financial transactions and to prepare their periodical accounts including those operating in an internet environment. Other businesses need to operate from highly sophisticated and fully integrated real time systems where one single transaction or entry in the system triggers the processing and recording of many other transactions, for example, where a sale transaction will simultaneously update various ledger accounts, adjust stock levels, and so on. Still others use electronic information systems that have special functionality for maintaining the integrity of the digital data as electronic records over time to conduct business transactions. These organisations will have developed software integration between record keeping systems and other corporate systems to ensure that data can be seamlessly and deliberately captured as electronic records.

34.	Different businesses have different needs in terms of the type and level of complexity of the computerised accounting or record keeping system they wish to operate. The Tax Office considers that electronic record keeping systems operate essentially in the same manner as paper based systems and the records kept in them are, in principle, the same as those kept under manual/paper based record keeping systems.

35.	The Tax Office recognises that many taxpayers process and keep their records electronically. There are many advantages associated with such an approach; however the Tax Office requires that the records, whether kept on paper or electronically, must be kept accurately so as to enable that person’s liability to be readily ascertained. There are risks with an electronic record keeping system and a taxpayer should take steps to minimise the risks of:

•	inadvertent destruction or corruption of electronic records;

•	unauthorised tampering with electronic records; and

•	the possibility that electronic records and operating systems will become obsolete, due to constant upgrading or changing of computer systems.

36.	Therefore an electronic record keeping system must have adequate controls to safeguard the security and integrity of the records created, processed and kept in the record keeping system to ensure compliance with section 262A of the ITAA 1936.

What are the essential elements of an electronic record storage system?

37.	There are important guidelines to be followed by any taxpayer in formulating acceptable standards for electronic record keeping and to comply with the record keeping requirements under the tax laws. These include:

(1)	record retention;

(2)	data security and integrity;

(3)	system documentation;

(4)	retaining archival copies; and

(5)	accessibility.

Record retention

38.	A taxpayer should retain electronic records for the same length of time that it retains paper records, or at the very least, for so long as they may be material either for tax purposes or for any on going business transaction. For tax purposes this is generally for a period of 5 years.

39.	If a taxpayer chooses to routinely destroy records then it may be advisable that this occur in accordance with a regular schedule which is part of the documented record retention procedures of the taxpayer. A routine procedure may provide an explanation as to why documents were destroyed.

Data security and integrity

40.	A taxpayer should be able to demonstrate that its electronic records system is secure from both unauthorized access and data alterations.

41.	This usually involves developing and documenting a security program that establishes controls to ensure that only authorized personnel have access to electronic records; provides for backup and recovery of records; ensures that personnel are trained to safeguard sensitive or classified electronic records; and minimizes the risk of unauthorized alteration, addition or erasure.

42.	To ensure the integrity of its electronic records, a taxpayer would be advised to test the storage media prior to its being used for storing electronic records to verify that it is free from errors and defects and should also maintain the storage media in temperature- and humidity-controlled environments. A sample of all storage media may be read periodically to identify any loss of data and any media likely to deteriorate, such as computer tapes, and this can then be copied onto new media before deterioration is likely.

System documentation

43.	The entire electronic records system should be documented, including physical and logical descriptions of the system’s structure and programs, including all inputs and outputs. This is prudent for a taxpayer’s own internal controls and to assist the Tax Office should it request an explanation of the electronic records system.

44.	To ensure that the records are being maintained in accordance with subsections 262A(1), (3) and (4) of the ITAA 1936, a person should have an understanding of their computer system. System documents should be retained to explain the basic aspects of that system so Tax Office officers can ascertain that the system is doing what it is claimed to do. This should also include the changes and upgrades that have occurred in software and hardware and so on.

45.	Generally, it is advisable for a taxpayer’s data files (that is, any related numeric, textual or graphic information that is organized in a strictly prescribed form or format) to be stored with documentation including:

(a)	a narrative description of the system producing, using or storing the data files;

(b)	a description of the physical and technical characteristics of the records; and

(c)	sufficient detail, in the form of a sequential file, to identify underlying source documents.

46.	For text documents such as letters, memoranda and reports, each document should be sufficiently identified and indexed to enable retrieval, protection and disposal of such documents through some form of indexing or text search system. Appropriate identifying information may include:  origin code, file code, retrieval key words, addressee, signatory, author, date of creation, date of authorized disposition, classification, and correlations to other records in other media.

47.	Labelling of the media is also necessary and should identify the name of the area responsible for the data; the system title; and may also include file titles, creation dates, coverage dates, recording density, type of internal labels, volume serial number (if appropriate), character code/software dependency, and media sequence number (if in a set).

48.	Any data held under an old system should be capable of conversion to a form which is readily readable and retrievable by the Tax Office. Thus, the Tax Office would prefer that data be converted to a standard data format, for example, ASCII, DBF or a spreadsheet format.

49.	Systems documents for example manuals should be retained to explain the basic aspects of the electronic system, so that the Tax Office can ascertain if the system is effectively doing what it is claimed to do. In addition it is advisable that the taxpayer should have an understanding of the controls present in the system.

Retaining archival copies

50.	It is generally not necessary to retain a hard copy of the information contained in an electronic record unless a particular law or regulation requires the taxpayer to retain the paper copies. However, taxpayer’s records must be in a form which Tax Office staff can access and understand in order to ascertain that person’s taxation liability.

Accessibility

51.	Electronic records should be readily accessible. To that end, a taxpayer should ensure the conversion of electronic records to a compatible format when upgrading or changing data-processing capabilities.

52.	Under section 263 of the ITAA 1936 the Commissioner or any duly authorised officer has the right of full and free access to all buildings, places and documents, including electronically stored records required for the purposes of the Act. The provision enables an authorised officer to access and copy records held on an electronic storage medium.

53.	In addition, subsection 263(3) of the ITAA 1936 requires the occupier of a building or place to provide an authorised officer with all ‘reasonable facilities and assistance’ for the effective exercise of powers under the section. In the context of electronically stored records, reasonable facilities and assistance extends to the provision of login codes, keys including encryption keys, passwords, and so on, and access to any hard copies of the records as well as allowing the authorised officer to read computer and software manuals.

54.	In relation to section 263 the level of practical assistance required by taxpayers in respect of access to electronic records is that reasonable assistance be provided. For instance, while electronic information should be retrievable on the taxpayer’s system for the full retention period, it may not be reasonable for a taxpayer to write new software to make data compatible with the Tax Office system. However, if the Tax Office system is incompatible with the taxpayer’s system the information will need to be reduced to hard copy form as the electronic information would not be ‘readily accessible’ (as required by the ETA 1999) to the Tax Office in any other form. If information retrieval takes up time and resources on the taxpayer’s system the concept of reasonableness may mean that retrieval takes place before or after ordinary business hours and that the Tax Office may provide its own paper and printer ink, toner or printers and so on if the task was beyond reasonable assistance for the taxpayer to provide the same. What is considered reasonable may vary on a case by case basis. Access powers will be exercised in accordance with relevant ATO guidelines and common law principles.

55.	All records, including those kept for the purposes of the ITAA 1936, should be able to be examined by the Tax Office to determine their authenticity and their integrity. This may also include updating all of the encrypted data to allow for that data to remain accessible in the event of changes to either computer hardware or software and to ensure that the data stored on magnetic or other media does not become ‘corrupted’ over time.

56.	Businesses should adopt prudential practices to reduce the likelihood of loss of decryption keys. These could include keeping a copy written down or on other storage media such as a floppy disk in a safe place or by the use of trusted third party arrangements (refer TD 2002/16).

Storage of paper records in electronic form

57.	The Tax Office considers that where it is intended to convert original paper records onto an electronic storage medium by way of an imaging process that this represents a true and clear reproduction of the original documentation. The Tax Office accepts the imaging of paper records provided the conversion process produces electronic copies that are a complete, true and clear reproduction of the original paper records. For instance, Optical Character Recognition conversion processes that do not produce a 100% accurate reproduction of original documents are not acceptable to the Tax Office.

58.	Scanned copies of paper records must:

•	not be altered or manipulated once stored;

•	be retained for the statutory period of 5 years; and

•	be capable of being retrieved and read by Tax Office staff.

DETAILED CONTENTS LIST

59.	Below is a detailed contents list for this Taxation Ruling:

Paragraph

What this Ruling is about	1

Class of person/arrangement	1

Related Rulings	3

Definitions	4

Date of effect	5

Previous Rulings	6

Ruling	7

Storage of paper records in electronic form	12

Access to electronic records	14

Explanation	17

Electronic Transactions Act	17

Electronic records	22

Internet and EDI transactions	30

Electronic record keeping systems	33

What are the essential elements of an electronic record storage system?	37

Record retention	38

Data security and integrity	40

System documentation	43

Retaining archival copies	50

Accessibility	51

Storage of paper records in electronic form	57

Detailed contents list	59

Commissioner of Taxation

8 June 2005


Protocol
A protocol is a set of rules for communicating entities. A rule might describe the format of a packet or in a client-server communication it might define what commands the client can issue and the format and meaning of the server’s responses.


 Pre-filling

This topic covers:

What is pre-filling?

How does pre-filling work?

What data can be pre-filled?

Participating organisations, data availability and scheduled outages

Why is my data incomplete and why is it excluded from pre-filling?

Repeating the pre-filling process

WHAT IS PRE-FILLING?

Pre-filling is a service provided by the Tax Office to make it easier for you to meet your tax obligations and claim your entitlements. Pre-filling is when your tax return is partially completed for you and all you have to do is review it and add missing details.

NOTE:
Many organisations are required by law to report your income details to the Tax Office. The Tax Office also has other information that can be used to complete your tax return. This information is used by the Tax Office to pre-fill your tax return.

HOW DOES PRE-FILLING WORK?

You can request the pre-filling service at the beginning of your e-tax interview or on particular screens in the e-tax interview.

You must provide information that allows the Tax Office to verify your identity before data is pre-filled into e-tax.

Once you have successfully verified your identity, the pre-filling service downloads data into e-tax and completes or partially completes the relevant items. The data is displayed to you as you work through the e-tax interview. You can:

•	review the pre-filled data

•	amend the pre-filled data, if necessary, and

•	add any missing details.

You can also view or print summaries of the pre-filled data.

NOTE:
If you forget to review an item with pre-filled data, e-tax will remind you before you lodge your tax return.

WHAT DATA CAN BE PRE-FILLED?

e-tax will pre-fill the following information into your tax return if it is available.

•	Centrelink, Department of Education, Science and Training (DEST) and Department of Veterans' Affairs (DVA) payments,

•	Child care benefit details from the Family Assistance Office (FAO),

•	Bank interest,

•	Share dividends ,

•	Distributions from managed funds, and

•	Baby bonus details.

NOTE:
You will not be required to select the data you wish to pre-fill. If you choose to use the pre-filling service, e-tax will automatically download all your available information and pre-fill your tax return.

You can also pre-fill Medicare financial tax statement details at item T10 – Tax Offsets – Medical Expenses over $1500. For more details, see pre-filling your Medicare financial tax statement.

PARTICIPATING ORGANISATIONS, DATA AVAILABILITY AND SCHEDULED OUTAGES

For a list of participating organisations and when data is available, see e-tax pre-filling initiatives.

WHY IS MY DATA INCOMPLETE AND WHY IS IT EXCLUDED FROM PRE-FILLING?

Your data may be incomplete or excluded from pre-filling for the following reasons.

Data type	Reasons
Bank interest Share dividends Managed fund distributions	• You did not quote your tax file number or Australian business number in connection with your investment. • You claimed non-resident status in connection with your investment. • The investment body is not a participating organisation. • The investment body has not supplied your data. • The investment body has provided limited data. • The investment is made under a formal partnership (for example, an account for a husband and wife trading as a business is excluded), trust or interposed entity arrangement. • The Tax Office could not match the data to your Tax Office record. • The data did not pass all Tax Office processing checks.
Centrelink, Department of Education, Science and Training (DEST) and Department of Veterans’ Affairs (DVA) payments	• You did not quote your tax file number to the government agency. • A government agency has not supplied your data. • A government agency has provided limited data. • The Tax Office could not match the data to your Tax Office record. • The data did not pass all Tax Office processing checks.
30% child care tax rebate	• The Tax Office could not match the data to your Tax Office record. • The data did not pass all Tax Office processing checks.
Baby bonus	• Your circumstances have changed. For example, you claimed the baby bonus previously as a transferee and this year, you are claiming as an eligible person.
You must review your pre-filled data and manually enter any missing details to complete your tax return. If you forget to review an item with pre-filled data, e-tax will remind you before you lodge your tax return.

REPEATING THE PRE-FILLING PROCESS

You can repeat the pre-filling process if you experienced problems with your previous attempt or you wish to check for new and updated data.

To repeat the pre-filling process, click ‘Pre-filling’ in the Navigator when it appears on the left hand side of the screen or click the ‘Pre-fill’ button that appears at the following items in the e-tax interview.

•	Item 5 – Income – Australian Government Allowances and Payments

•	Item 6 – Income – Australian Government Pensions and Allowances

•	Item 10- Income – Gross Interest

•	Item 11 – Income – Dividends

•	Managed Funds

•	Item T6 – 30% Child Care Tax Rebate

•	Item T7 – Baby Bonus

NOTE:
The ‘Pre-fill’ button will appear at the bottom of the first screen in each of these items unless that item has been pre-filled and you have not yet reviewed the data. The ‘Pre-fill’ button will be available once you have reviewed the pre-filled data.

If you repeat the pre-filling process and e-tax detects that new and/or updated data is available:

•	e-tax will replace the existing pre-filled data (even if you have changed the details)

•	e-tax will add records for new data, and

•	e-tax will not change any additional records that you have entered.

NOTE:
You will not be required to select the data you wish to update. If you choose to repeat the pre-filling process, e-tax will automatically download all your available new and/or updated information and pre-fill your tax return.

You must review any new and/or updated data to:

•	check that the new and/or updated details are correct,

•	enter any other details to complete your tax return, and

•	delete any duplicated records.

If you forget to review an item with updated data, e-tax will remind you before you lodge your tax return.


e-tax user licence

© Commonwealth of Australia 2007.

WHAT e-tax IS DESIGNED FOR

The e-tax software is designed for use in:

•	Preparing an Australian individual tax return, baby bonus claim of 30% child care tax rebate transfer advice for the 2006-07 tax year, and

•	Lodging that tax return, claim or transfer advice with the Tax Office electronically.

COPYRIGHT INFORMATION

The e-tax software and its related information (e-tax) is protected by copyright.  The commonwealth of Australia represented by the Tax Office gives you a licence to:

•	Use the installed copy of e-tax (in its unaltered form) for the purposes for which it was designed, and

•	Make copies of it for back-up purposes only.

All other rights are reserved In particular; you may not (under this licence):

•	sub-licence, distribute or create derivative works based upon e-tax in whole or in part, or

•	decompile, reverse engineer, disassemble, or otherwise attempt to derive the source code for e-tax.

Requests for other uses can be sent by e-mail to E-teamMailbox@ato.gov.au.

YOUR USE OF e-tax

Before you use e-tax, you should ensure e-tax does not interfere with your computer system and address any security issues inherent in your system. e-tax has not been designed for terminal server environments.

You will need to use e-tax’s cryptographic attributes to fully utilise its electronic features. You are responsible for maintaining the security of your personal identification code (password) and of the environment in which you store and use e-tax.

If you are located outside Australia, you are responsible for complying with local laws. Those laws may impact your eligibility to obtain or use a copy of e-tax.

e-tax PRODUCT AND LICENCE INFORMATION

The Tax Office:

•	Provides e-tax ‘as is’ and without charge,

•	Gives no express or implied warranties (and to the full extent permitted by law excludes all statutory warranties) in relation to e-tax (including as to its performance or fitness for a particular purpose), and

•	Will not be liable in any way for any loss or damage (Including special, indirect or consequential) arising from or in connection with e-tax or its use or performance

However, where you have followed the instructions in e-tax fully and honestly, we will not impose a penalty should incorrect information be lodged with us if the problem occurred because of a defect in the e-tax software.

This licence terminates automatically if you fail to comply with any of these licence provisions. The laws in force in the Australian Capital Territory apply to this licence.


Taxation Determination 2007/2

Income tax:  should a taxpayer who has incurred a tax loss or made a net capital loss for an income year retain records relevant to the ascertainment of that loss only for the record retention period prescribed under income tax law?

This publication provides you with the following level of protection:

This publication (excluding appendixes) is a public ruling for the purposes of the Taxation Administration Act 1953. A public ruling is an expression of the Commissioner’s opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. If you rely on this ruling, we must apply the law to you in the way set out in the ruling (unless we are satisfied that the ruling is incorrect and disadvantages you, in which case we may apply the law in a way that is more favourable for you – provided we are not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you.

RULING

1.	No. A taxpayer who has incurred a tax loss  or made a net capital loss  for an income year should, as a matter of prudence, retain records relevant to the ascertainment of that loss until at least the later of the following times:

a.	the end of the statutory record retention period (for example, under subsection 262A(4) of the Income Tax Assessment Act 1936 (ITAA 1936)); or

b.	the end of the statutory period of review for an assessment for the year of income when the tax loss is fully deducted or the net capital loss is fully applied (section 170 of the ITAA 1936 covers the Commissioner’s power to amend assessments).

Further, where a formal dispute arises in relation to a loss, the taxpayer should retain records relevant to the ascertainment of that loss until any objection or appeal in relation to the loss is finally determined.

2.	Records should be kept beyond the statutory record retention period because, as a practical matter, it may be necessary to demonstrate the basis of the tax loss deducted or net capital loss applied in the event that a dispute arises, or continues on foot, outside that period in respect of the claim (paragraphs 14ZZK(b) and 14ZZO(b) of the Taxation Administration Act 1953 (TAA)).

3.	The Commissioner has the power in particular circumstances to make income tax assessments beyond the time limits referred to in this Determination. In the event of any dispute in relation to an assessment, the Commissioner may require a taxpayer to discharge the onus of proof that the assessment is excessive. Records of the type described above may therefore have usefulness beyond the time limits expressly referred to in this Determination. Accordingly, taxpayers should have regard to their own particular circumstances in making any decision whether or not to retain documents for longer periods.

EXAMPLE 1:  TAX LOSS – PERIOD OF REVIEW FOR ASSESSMENT ENDS AFTER STATUTORY RECORD RETENTION PERIOD ENDS

4.	Anthony makes a tax loss from carrying on a business for the income year ended 30 June 2002.

5.	Anthony does not have sufficient net assessable income to fully deduct the tax loss carried forward until the income year ended 30 June 2006. The Commissioner issues a notice of assessment to Anthony for the year ended 30 June 2006 on 30 October 2006 which is received by him on 1 November 2006. Anthony is an STS taxpayer to whom a two year period of review applies. As such, the period of review in respect of that assessment ends on 1 November 2008.

6.	Under paragraph 262A(4)(a) of the ITAA 1936 all records must generally be kept for a period of 5 years after the documents were prepared or obtained, or 5 years after the completion of the transaction or acts to which the records relate (whichever is the later). Assuming that all records were prepared and transactions were completed by 30 June 2002, Anthony is not required by paragraph 262A(4)(a) to keep any records as from 1 July 2007 relevant to ascertaining the tax loss.

7.	As the period of review in respect of the assessment for the year ended 30 June 2006 ends later than the end of the statutory record retention period, Anthony should keep records relevant to ascertaining the tax loss until at least 1 November 2008.

EXAMPLE 2:  NET CAPITAL LOSS – PERIOD OF REVIEW FOR ASSESSMENT ENDS AFTER STATUTORY RECORD KEEPING PERIOD ENDS

8.	Operating Co makes a net capital loss for the year ended 30 June 2003. During that year there was only one CGT event which resulted in a capital loss on 1 June 2003. It was certain that no further CGT event could happen such that the records could reasonably be expected to be relevant to working out the amount of capital gain or loss in relation to that CGT event.

9.	Operating Co does not have sufficient capital gains to fully apply the net capital loss carried forward until the year ended 30 June 2005. A deemed assessment under section 166A of the ITAA 1936 is made in relation to Operating Co for the income year ended 30 June 2005 upon lodgment of its tax return on 16 January 2006. Operating Co is not an STS taxpayer and the period of review in respect of that assessment ends on 16 January 2010 assuming no extension of this period occurs.

10.	Under subsection 121-25(2) of the ITAA 1997, all records must be kept until the end of 5 years after it becomes certain that no CGT event, or no further CGT event, can happen such that the records could reasonably be expected to be relevant to working out whether there is a capital gain or capital loss from the event. Therefore, Operating Co is required to keep records relevant to working out the capital loss and resulting net capital loss until 1 June 2008.

11.	As the period of review in respect of the assessment for the income year ended 30 June 2005 ends later than the end of the statutory record retention period, Operating Co should  keep records relevant to working out the capital loss and resulting net capital loss until at least 16 January 2010.

DATE OF EFFECT

12.	This Determination applies to income years commencing both before and after its date of issue. However, the Determination will not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10).

Commissioner of Taxation

7 March 2007

Appendix 1 – Explanation

 This Appendix is provided as information to help you understand how the Commissioner’s view has been reached. It does not form part of the binding public ruling.

EXPLANATION

The statutory requirements

13.	Section 262A of the ITAA 1936 provides general rules in respect of the keeping of records. A person carrying on a business is required to keep records of all transactions and acts relevant for the purposes of the tax law.

14.	Generally those records must be kept for a period of 5 years commencing from the time when they were prepared/obtained or when the transactions or acts to which they relate are completed, whichever is the later – refer to paragraph 262A(4)(a) of the ITAA 1936. This period can be extended where the period of review for an assessment is extended under subsection 170(7) of the ITAA 1936 – refer to paragraph 262A(4)(b) of the ITAA 1936.

15.	Part 3-1 of the ITAA 1997 provides special rules in respect of the taxation of capital gains and losses. Subsection 121-25(2) of the ITAA 1997 requires that records in respect of acts, transactions, events or circumstances that can reasonably be expected to be relevant to working out whether a person has made a capital gain or capital loss from a CGT event must be kept under for 5 years:

... after it becomes certain that no *CGT event (or no further *CGT event) can happen such that the records could reasonably be expected to be relevant to working out whether you have made a *capital gain or *capital loss from the event.

16.	This requirement applies despite subsection 262A(4) of the ITAA 1936 which requires records to be retained for a different period. The CGT record retention rules in Part 3-1 of the ITAA 1997 prevail over subsection 262A(4) of the ITAA 1936 because of subsection 121-25(3) of the ITAA 1997.

17.	Section 262A of the ITAA 1936 does not apply to taxpayers who did not carry on a business for an income year. However, specific statutory record retention rules may apply to those taxpayers, such as those contained within Division 900 of the ITAA 1997, in relation to claims for work related expenses.

The burden of proof

18.	Subparagraphs 14ZZK(b)(i) and 14ZZO(b)(i) of the TAA provide that the burden is on the taxpayer to show that an assessment is excessive (upon any review or appeal proceedings). This basic principle operates independently of any record keeping or substantiation requirements, statutory or otherwise.

19.	It will often be the case that a taxpayer who has incurred a tax loss or made a net capital loss does not deduct or apply that loss for a number of years. The period in which the Commissioner can issue an original assessment or an amended assessment (as applicable) in respect of the deduction or application year of income will often extend beyond the statutory record retention period in respect of the tax loss and the constituent capital losses and capital gains (as applicable) that comprise the net capital loss. It follows that the period for which records should be retained in order to establish the basis of the tax loss deducted or net capital loss applied may in practice extend to the end of the relevant period of review for an assessment, subject to a possible separate extension in the event of an objection or appeal in relation to a disputed loss.

20.	Accordingly, a taxpayer who has made a tax loss or net capital loss should retain records relevant to the ascertainment of that loss until at least the later of the following times:

a.	the end of the statutory retention period; or

b.	the end of the period of review for the year of income when the tax loss is fully deducted or net capital loss is fully applied.

Further, where a formal dispute arises in relation to a loss, a taxpayer should retain relevant records until any objection or appeal in relation to a loss has been finally determined.

REFERENCES

Previous draft:

TD 2006/D44

Related Rulings/Determinations:

TR 2006/10

Subject references:

- capital gains tax

- capital loss

- net capital loss

- tax loss

Legislative references:

- TAA 1953

- TAA 1953  14ZZK(b)

- TAA 1953  14ZZK(b)(i)

- TAA 1953  14ZZO(b)

- TAA 1953  14ZZO(b)(i)

- ITAA 1936  166A

- ITAA 1936  170

- ITAA 1936  170(7)

- ITAA 1936  262A

- ITAA 1936  262A(4)

- ITAA 1936  262A(4)(a)

- ITAA 1936  262A(4)(b)

- ITAA 1997  Pt 3-1

- ITAA 1997  121-25(2)

- ITAA 1997  121-25(3)

- ITAA 1997  Div 900

- ITAA 1997  995-1

ATO references

NO:	2006/6882

ISSN:	1038-8982

ATOlaw topic:	Income Tax ~~ Losses ~~ deducting tax losses of earlier income years

Income Tax ~~ Losses ~~ deferred capital losses or deductions


Addendum

Product Ruling

Income tax and fringe benefits tax:  Product Rulings system

This Addendum amends Product Ruling PR 1999/95 to incorporate the recommended changes for public rulings stated in the Report on Aspects of Income Tax Self Assessment (ROSA Report). These changes were enacted under the Tax Laws Amendment (Improvements to Self Assessment) Act (No. 2) 2005. In respect of public rulings, that Act inserted new Divisions 357 (common rules) and 358 (public rulings) into Schedule 1 to the Taxation Administration Act 1953, the provisions of which are referred to in this Ruling.

PR 1999/95 is amended as follows:

1.	Preamble

Omit Preamble and substitute:

This publication is a public ruling for the purposes of the Taxation Administration Act 1953.

A public ruling is an expression of the Commissioner’s opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes.

If you rely on this ruling, we must apply the law to you in the way set out in the ruling (or in a way that is more favourable for you if we are satisfied that the ruling is incorrect and disadvantages you, and we are not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any under-paid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you.

2.	The Ruling

(a)	Omit the words ‘arrangement’ and ‘arrangements’ (wherever occurring); substitute ‘scheme’ and ‘schemes’ respectively.

(b)	Omit the words ‘person’ and ‘persons’ (wherever occurring); substitute ‘entity’ and ‘entities’ respectively.

3.	Paragraph 8

Omit ‘Part IVAAA of’; substitute ‘Division 358 of Schedule 1 to’.

4.	Paragraph 11

Omit the paragraph and substitute:

Class of entity/scheme

11.	Division 358 of Schedule 1 of the TAA contains the public ruling provisions and sets out what is necessary for a published opinion of the Commissioner to be a public ruling. A product ruling sets out the Commissioner’s opinion as to the way in which a ‘relevant provision’ applies to a class of entities in relation to a scheme (subsection 358-5(1) of Schedule 1 to the TAA).

5.	Paragraph 14

Omit the paragraph and substitute:

Relevant provision

14.	Provisions that are relevant to rulings are defined in section 357-55 of Schedule 1 to the TAA. A ‘relevant provision’ is a provision of an Act or regulation administered by the Commissioner that is about any of the following:

•	income tax;

•	Medicare levy;

•	fringe benefits tax;

•	franking tax (that is, franking deficit tax, over-franking tax and venture capital deficit tax);

•	withholding taxes (including non-resident withholding taxes and mining withholding tax);

•	the administration or collection of the above taxes;

•	product grants or benefits mentioned in section 8 of the Product Grants and Benefits Administration Act 2000 (including energy grants, cleaner fuel grants and product stewardship (oil) benefits); and

•	the administration or payment of the above grants and benefits.

6.	Paragraph 15

(a)	Omit ‘tax law’; substitute ‘relevant provision’.

(b)	Omit ‘(section 14ZAAD of the TAA)’.

7.	Detailed contents list

Omit ‘Tax law’; substitute ‘Relevant provision’.

8.	Paragraph 39

Omit the paragraph and substitute:

39.	Product Rulings will generally be withdrawn where no longer needed. For example, a Product Ruling will be withdrawn where the Commissioner is satisfied that the scheme in relation to which the Product Ruling issued, is no longer to be implemented or the scheme has been implemented but in a way materially different from that described in the Ruling. A Product Ruling, although withdrawn, will continue to bind the Commissioner in relation to those to whom the Ruling applies, who entered into the scheme as described in the Ruling during the currency of the Ruling.

39A.	If a Product Ruling is inconsistent with a later public or private ruling, the relevant class of entity/entities may rely on either ruling which applies to them (subsection 357-75(1) item 1 of Schedule 1 to the TAA).

39B.	If a private ruling is inconsistent with a later Product Ruling, the earlier private ruling is taken not to have been made if, when the Product Ruling is made, the following two conditions are met:

•	the income year or other period to which the rulings relate has not begun; and

•	the scheme to which the rulings relate has not begun to be carried out.

If the above two conditions do not apply, the relevant class of entity/entities may rely on either ruling which applies to them (subsection 357-75(1) item 3 of Schedule 1 to the TAA).

This Addendum applies to Product Rulings issued on and from 1 January 2006.

Commissioner of Taxation

5 April 2006

ATO references

NO:	2005/18404
ISSN:	1441-1172
ATOlaw topic:	Income Tax ~~ Administration ~~ public rulings


Addendum

Product Ruling

Income tax and fringe benefits tax:  Product Rulings system

This Addendum amends Product Ruling PR 1999/95 to:

•	reflect that a statement specifying a date of withdrawal is no longer contained in Product Rulings because they otherwise specify the term to which they apply;

•	update the list of relevant provisions that a Product Ruling can cover;

•	update information about where to obtain and submit application forms; and

•	update information about when the Commissioner will not rule.

PR 1999/95 is amended as follows:

1.	Paragraph 5

Omit the paragraph; substitute:

5.	A Product Ruling applies to all entities within the specified class who enter into the specified scheme during the term specified in the Ruling. When that term expires, the Product Ruling continues to apply to those entities for schemes entered into during the specified term. This is subject to there being no change in the scheme or in the entities’ involvement in the scheme.

2.	Paragraph 14

Omit the paragraph (including the heading); substitute:

Relevant provision

14.	Provisions that are relevant to rulings are defined in section 357-55 of Schedule 1 to the TAA. Relevant provisions are provisions of Acts and regulations administered by the Commissioner that are about any of the following:

•	income tax;

•	Medicare levy;

•	fringe benefits tax;

•	franking tax (that is, franking deficit tax, over-franking tax and venture capital deficit tax);

•	withholding taxes (including non-resident withholding taxes and mining withholding tax);

•	petroleum resource rent tax;

•	the administration or collection of the above taxes;

•	product grants or benefits mentioned in section 8 of the Product Grants and Benefits Administration Act 2000 (including energy grants, cleaner fuel grants and product stewardship (oil) benefits) or the administration or payment of the product grants and benefits; and

•	net fuel amount, or the administration, collection or payment of a net fuel amount.

3.	Paragraph 22

Omit the paragraph; substitute:

22.	A short time prior to formally submitting an application for a Product Ruling, applicants may forward to the Australian Taxation Office a completed ‘Intention to Submit a Product Ruling Application’ form. A copy of this form is available on the Tax Office’s Internet site at http://www.ato.gov.au or can be obtained from the Tax Office.

4.	Paragraph 24

Omit the paragraph; substitute:

24.	Alternatively, applicants may submit an application form for a Product Ruling directly to the Tax Office. Details of the information required for a Product Ruling application and where the application should be submitted are available from the Tax Office’s Internet site at http://www.ato.gov.au.

5.	Paragraph 38

Omit:

Without limiting the discretion to refuse to rule in relation to other instances, a Product Ruling will not be issued in the following circumstances:

substitute:

Without limiting the discretion to refuse to rule in relation to other instances, a Product Ruling will ordinarily not be issued in the following circumstances:

6.	Subparagraph 38(d)

Before the first dot point, insert:

•	the Government has announced a change to the law upon which the Commissioner has been asked to rule;

7.	Paragraph 40

Omit:

‘Tax Law’

substitute:

Relevant provision

8.	Legislative references

Add the following legislative references:

-	ITAA 1936  Pt III Div 13

-	TAA 1953  14ZAAA

-	TAA 1953  14ZAAD

-	TAA 1953  14ZAAF

-	TAA 1953  Sch 1 357-55

-	TAA 1953  Sch 1 357-75(1)

-	TAA 1953  Sch 1 Div 358

-	TAA 1953  Sch 1 358-5(1)

-	PGBA Act 2000  8

Commissioner of Taxation

17 January 2007

ATO references

NO:	2006/20258
ISSN:	1441-1172
ATOlaw topic:	Income Tax ~~ Administration ~~ public rulings