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LAWCOMM 403 long notes.docx
LAWCOMM_403_long_notes.docx
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LAWCOMM 403 long notes.docx-CONTENTS Tips ...........
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
LAWCOMM 403 long notes.docx-CONTENT...
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
Page 84
What is the meaning of “incurred”?
“The language in which the warranty had been expressed made liability dependent upon the
manifestaon and noficaon of the defect within the 12-month period. The queson of
whether the taxpayer had been “definively commied” to an expenditure or whether it was
merely “impending, threatened or expected” did not depend upon whether future events
which might determine liability were expressed in the language of conngency or
defeasance. The queson was rather whether, in the light of all the surrounding
circumstances, a legal obligaon to make a payment in the future could be said to have
accrued.”
Mitsubishi Motors were definively commied – so they incurred the expenditure
At the me the purchasers bought the vehicles, Mitsubishi knew that 63% of the
cars would have a problem – there was a known quanfied liability
It wasn’t a “possible” or “likely” expense – it was a quanfied known expense based
on historical factual informaon
Therefore,
there was a definive commitment to make the expenditure
on the
provision, even though it hadn’t yet occurred
“
Although the jurisprudenal approach prevented one from treang an aggregate of
conngent liabilies as a stascal certainty, it did not rule out stascal esmaon of facts
which had happened but were unknown. The relevance of this principle was that esmaon
on the basis of stascal experience could be used to conclude that 63 per cent or
thereabouts of the vehicles sold by the taxpayer in fact had defects which would manifest
themselves within the warranty period. In deciding whether the taxpayer had incurred a
liability at the me when the vehicle was sold, it was legimate to have regard to the
evidence establishing that 63 per cent would in fact have defects.”
Therefore,
if you have an expenditure which hasn’t been paid yet but is able to be quanfied
with some certainty and stascal informaon, it has been “incurred”
PURPOSE OF THE EXPENDITURE
Expenditure is generally deducble if it is incurred in deriving assessable income or incurred in the course of carrying on
a business
o
But is expenditure deducble if:
it never actually produces any income?
Yes, because this is not part of the test in secon DA 1(1) – expenditure only needs to be
incurred in deriving assessable income
it is unnecessary?
Yes, because there is no requirement that expenses must be necessary (e.g. a law firm can
waste a lot of money persuading students that their firm is beer, but it is not necessary)
it is unreasonable?
Yes, because there is no requirement for it to be reasonable (but if it is obviously
unreasonable, then it is unlikely that a court will believe it is genuine expense incurred in
deriving income)
o
It is not for the Commissioner or the courts to tell the taxpayer how to run their business or to queson the
commercial wisdom of their expenditure (
Cecil Brothers
)
Aspro Ltd v Commissioner of Taxes
[1932] AC 683 (PC)
o
Facts
Aspro had a foreign-owned New Zealand subsidiary – it was effecvely managed in Australia
The directors (who were also the shareholders) arranged for it to pay directors’ fees of £10,000,
which was far more than was commercially sensible (because as a proporon of New Zealand sales, it
represented more than the amount paid to the directors of the Australian and UK subsidiaries)
o
Judgment
The directors’ fees were only deducble to the extent that they were incurred in deriving assessable
income
The taxpayers could not evidence that the directors’ fees were a reasonable sum – therefore, the fees
could not be jusfied as being exclusively incurred in the producon of assessable income
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