Section 14(1) of the Income Tax Act states the general deduction formula: "?there shall be deducted all outgoings and expenses wholly and exclusively incurred during that period?in the production of the income". We shall now discuss the general deduction formula, determine deductibility of expenses, and examine non-deductible expenses that are given special concessions.
"Wholly and exclusively"
The judgment in Bentleys, Stokes and Lowless v Beeson (1952) 2 All ER 82 at 85 clearly highlights that expenditure incurred must be for the sole objective of income production. If the intention behind an expenditure is a purely business benefit but an incidental personal benefit arises, a deduction is allowed. Thus, the taxpayer's intention and motive for incurring the expenditure must be considered.
Often, most expenditure are dual purposes. Although in principle, dual-purpose expenditure would fail the "wholly and exclusively" test, the Comptroller may apply rules of apportionment.
"Incurred"
Using the cases of New Zealand Flax Investments Ltd v FCT (1938) 61 CLR 179 and CIR (Hong Kong) v Lo & Lo (1984) WLR 986, an expense is "incurred" as long as there is a liability to pay and such expense is deductible, taking into account that this does not necessarily mean that the expense has been paid.
"During that period"
Expenses incurred before the commencement of business, or after the termination of the business are not deductible, because they are incurred before or after the production of the income respectively, and not in the production of the income. In other words, one can deduct expenses where the liability to pay arises during the same tax year of the income.
With effect from YA 2004, as a concession, all expenses of a revenue ...