Question

The second positive limb for the general deductions provision in section 8-1(1)(b) ITAA97 imposes a stricter nexus test than for the first positive limb in section 8-1(1)(a). This is because the word ‘necessarily’ limits deductions for business taxpayers to unavoidable expenses.

Answer 1

Necessarily’ idoes inot itake ion iits iliteral imeaning iof iessential, iimperative ior iunavoidable, ibut irather ihas ia imore iliberal imeaning iof i‘clearly iappropriate’.

In iRonpibon iTin iNL iv iFCT i(1949) i78 iCLR i47; i4 iAITR i236; i8 iATD i431 iat i435, ithe iHigh iCourt isaid:

The iword i“necessary” ino idoubt ilimits ithe ioperation iof ithe ialternative, ibut iprobably iit iis iintended ito imean ino imore ithan i“clearly iappropriate ior iadapted ifor”.

In iFCT iv iSnowden i& iWillson iPty iLtd i(1958) i99 iCLR i431; i7 iAITR i308; i11 iATD i463, iFullagar iJ icited ithe ifollowing ifrom iHannan’s iTreatise i(at iAITR i317):47

The imeaning iof i“necessary” iin ithat icontext iis iprobably inot ilimited ito icompulsion iin ia ilegal isense i… iand imay iextend ito ibusiness iexpenditure iarising iout iof ithe iexigencies icreated iby idifficult ior iunusual icircumstances.

His iHonour iadded:

I iwould irespectfully iadopt ithat ipassage, iomitting ithe iword i“probably” iand isubstituting ithe iword i“does” ifor ithe iword i“may” i… i[necessarily] imeans ifor ipractical ipurposes ithat, iwithin ithe ilimits iof ireasonable ihuman iconduct, ithe iman iwho iis icarrying ion ithe ibusiness imust ibe ithe ijudge iof iwhat iis i“necessary”.

In iMagna iAlloys i& iResearch iPty iLtd iv iFCT i(1980) i11 iATR i276; i80 iATC i4542, iDeane iand iFisher iJJ inoted i(at iATC i4557):48

For ipractical ipurposes iand iwithin ithe ilimits iof ireasonable ihuman iconduct, iit iis ifor ithe iman iwho iis icarrying ion ithe ibusiness ito ibe ithe ijudge iof iwhat ioutgoings iare inecessarily iincurred i… iIt iis ino ipart iof ithe ifunction iof ithe iAct ior ithose iwho iadminister iit ito idictate ito itaxpayers iin iwhat ibusiness ithey ishall iengage ior ihow ito irun ithe ibusiness iprofitably ior ieconomically.

Thus iit iwould iseem ithat, ito iqualify ifor ideduction, ian ioutgoing ineed ionly ibe iappropriate ior iadapted ito ithe iends iof ithe ibusiness ibeing icarried ion. iExpenditure icannot ibe idenied ibecause ia icheaper ialternative iis iavailable, ifor iexample. iHowever, iit iis iclear ifrom iMagna iAlloys ithat i‘necessarily’ ipresupposes ian iobjective ipurpose itest iand ithat ioutgoings iincurred ifor ipurposes iother ithan ibusiness ican ibe idisallowed ior iapportioned.

The iword i‘necessarily’ ihas inot ibeen iinterpreted istrictly ibut irather imeans i‘clearly iappropriate ior iadapted ifor’: iRonpibon iTin. iIn iFCT iv iSnowden i& iWillson i(1958) i99 iCLR i431; i7 iAITR i308 iat i312, iDixon iCJ isaid ithat ithe iword imeant i‘dictated iby ithe ibusiness iends ito iwhich iit iis idirected, ithose iends iforming ipart iof ior ibeing itruly iincidental ito ithe ibusiness’. iIn iSpriggs iv iFCT; iRiddell iv iFCT i(2009) i239 iCLR i1; i[2009] iHCA i22, ithe iHigh iCourt iendorsed ian ialternative iway iof iasking ithe iquestion: iis ithe iloss ior ioutgoing i‘reasonably icapable iof ibeing iseen ias idesirable ior iappropriate ifrom ithe ipoint iof iview iof ithe ipursuit iof ithe ibusiness iends iof ithe ibusiness’.12 iIt ishould ibe inoted ithat iwhat iis iappropriate iis ithe itaxpayer’s iprerogative. iIt iis inot ifor ithe icourt ior ithe iCommissioner ito itell ia itaxpayer ihow ito irun ia ibusiness.