Question

Sally is a single parent who is employed as an accountant. In order to attend employment she must put her young child in a day-care centre. Sally considers the expense is necessarily incurred in gaining her income. Would she be entitled to a tax deduction under s8-1?

Required

Advise Sally of her tax consequences

Answer 1

The general deduction provision of Section 8-1 of the ITAA 1997 states that:

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; 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 your non-assessable non exempt income; or

d) a provision of this act prevents you from deducting it.

Analysis: Since, in the given case the expense is incurred for putting her young child in a day-care center. This expense qualifies to be on account of private or domestic nature and thus this deduction is not allowed. in order to consider a expense to be incurred in relation to gaining or producing assessable income, the expense should have some nexus with the income. In this case, the nexus is not created as day care center expenses is not required to earn income.

Conclusion: Sally will not be entitled to a tax deduction under S8-1.