Week 3 Deductions and Residency Concepts – Vocabulary Flashcards

A set of vocabulary flashcards covering key terms, cases, and concepts from Week 3 on deductions, residency principles, and related tax rules. Each card defines a term or concept mentioned in the lecture notes to aid exam preparation.

TR 2023/1

Australian tax ruling referenced for residency and source rules; used to guide assignment approach.

Residency (general concept)

Tax residency determined by ordinary concepts, including domicile, the 183-day test, and the superannuation test.

Domicile test

A test of residency based on where a person’s permanent home and ties are located.

183-day test

Residency criterion based on presence in Australia for 183 days or more; connections and intent matter.

Superannuation test

Residency criterion linked to connections with Australia through superannuation arrangements.

Section 8-1 (Deductibility)

Broad rule allowing deductions for losses or outgoings incurred in producing assessable income, subject to exclusions.

Nexus to income

The expense must relate to earning assessable income; a key test for deductibility.

Matching principle (deductions)

Expenses must be recognized in the same period as the income they help generate.

82KZL Prepayments

Prepayments are deductible over time (straight-line, up to 10 years); wages are generally excluded from prepayable deductions.

Ogilvy incurrence test

Deduction depends on whether an obligation to pay has actually incurred; if payment is due only on completion, it’s not incurred.

Private or domestic deductions

Most personal/private expenses are non-deductible (e.g., Looney, Lodges cases), even if related to lifestyle.

Warranties (deductibility)

Warranties are non-deductible because there is no definite deductible event until claims are made.

RACV - insurance claims

Estimates of losses can be deductible if the event occurred and credible data supports the estimate, even if claims aren’t yet submitted.

Post-income deductions (Jones case)

Deductibility after income may be allowed for a reasonable period following cessation if there’s a close link to income.

Reasonable approximation

A limited post-cessation deduction allowance; not unlimited, must be a reasonable estimate/time window.

Commercial enterprise rule

Deductions must be connected to earning income through a commercial enterprise, not purely financing.

Mutuality / group tax

Intercompany transactions are eliminated for group taxation; no tax impact within the group.

Black hole expenses

Costs to set up a business (e.g., incorporation) are not expensed immediately; deductible at 20% per year (over five years).

Pre-income expenditure (Madelina, Amalgamated Zinc context)

Costs incurred before income arises are typically capitalized and matched to future income rather than deducted immediately.

Cliffs case (per-ton royalty)

A royalty or similar payment tied to actual production can be deductible if the amount is variable and ongoing with production.

Kemp case (contract termination)

Paying to terminate a contract can be treated as a capital cost if it yields an enduring benefit; amortized over the benefit period.

Flight/train/professional development (Wilkinson’s case)

Education or training costs that improve performance for current or future work can be deductible.

Sanchez case (travel for work-related searches)

Travel expenses incurred in the course of seeking or maintaining employment related to income generation may be deductible.

Morris case (sun protection for outdoor work)

Expenses like hats or protection gear can be deductible if there is an industry-wide exposure requirement.

Mansfield case (dry skin/moisturizer)

Deductions allowed for items addressing work-related health conditions when supported by evidence.

Frisch case (work assistant)

Deduction allowed when an assistant is used solely to perform work duties, not for personal use.

Lodges case (childcare)

Childcare costs are generally non-deductible as a private/domestic expense.

Looney case (commute)

Public transport and commuting costs are generally non-deductible as private travel.

Tax planning vs avoidance

Tax planning uses lawful deductions and rules to minimize tax; avoidance involves questionable schemes and gray areas.