Question

Should deductions be capped to what are reasonable expenses rather than actual expenses? Can you think of an example of such a restriction under the ITAA97.

Answer 1

YES DEDUCTION SHOULD BE CAPPED TO WHAT ARE REASONABLE EXPENSES RATHER THAN ACTUAL EXPENSES. BECAUSE THE DEDUCTION CAN NOT BE ALLOWED FULL TO WHAT THE ACTUAL EXPENSES ARE INCURRED. IF FULL DEDUCTION IS ALLOWED THEN THERE MAY BE REDUCTION IN TOO MUCH TAXES. SO CAPPING OF DEDUCTION MUST BE THERE TO THE REASONABLE EXPENSES.

EXAMPLE OF CAPPING

A TAXPAYER COMPANY HAS OPERATIONS WHICH PRODUCE BOTH ASSESSABLE INCOME AND EXEMPT INCOME. THE DIRECTORS OF THE COMPANY ARE PAID A SINGLE ANNUAL FEE FOR THEIR SERVICES. HOWEVER, IN RUNNING THE COMPANY'S OPERATIONS, THE DIRECTORS ARE NECESSARILY REQUIRED TO MANAGE AND SUPERVISE THE ACTIVITIES THAT GO TOWARDS PRODUCING BOTH THE COMPANY'S ASSESSABLE INCOME (FOR WHICH A DEDUCTION WOULD BE ALLOWED) AS WELL AS ITS EXEMPT INCOME (FOR WHICH NO DEDUCTION WOULD BE ALLOWED).

IN THESE CIRCUMSTANCES, THE COMPANY SHOULD APPORTION THE DIRECTORS' FEES BETWEEN THE TWO PURPOSES BASED ON WHAT IS FAIR AND REASONABLE.