Deductions and Trading Stock
General and specific deductions
Section 8-1 allows deductions for losses or outgoings to the extent incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business, provided they are not capital, private or domestic, or incurred in gaining exempt income. Specific provisions override or supplement s 8-1, including depreciation, repairs, bad debts, superannuation contributions and interest. Candidates must distinguish the positive limbs from the negative limbs and apply the tests cumulatively.
Nexus and timing
A deduction requires a sufficient nexus to income-producing activity. Losses incurred before income is derived may be deductible if the activity is commenced. Apportionment is required for mixed-purpose expenses, such as interest on a loan used partly for private purposes. Timing generally follows when the liability is incurred, not when paid, subject to specific rules for prepayments.
Trading stock
Trading stock is anything produced, manufactured or acquired for manufacture, sale or exchange. Closing stock is valued at cost, market value or replacement value, at the taxpayer's choice, and the opening value of the next year must match the prior closing value. A change in valuation method must be consistent. Disposals outside ordinary business (gifts, private use) are treated as sales at market value.
Traps
Common errors include claiming capital expenditure as a repair, deducting a private expense because it is incidental to business travel, and forgetting that trading stock on hand at year end must be brought to account. Another trap is claiming a deduction for a fine or penalty, which is generally not deductible.
Worked example
A business buys stock for $50,000, has opening stock of $10,000 and closing stock of $15,000. Purchases plus opening less closing gives cost of sales of $45,000, which is the deductible amount.