DEDUCTIONS Section 19
Total income is calculated as income less expenses. This topic concerns expenses incurred in
earning income, and deductions in calculating total income.
THE GENERAL APPROACH
Section 19 concerns deductions. It commences: 'In determining total income, no deductions
shall be allowed in respect of...' Then follow ten paragraphs of which three are :
(a) any expense not for the purpose of the trade, business, profession, employment or
vocation of the taxpayer;
(b) any loss not connected with or arising out of the trade, profession,business,
employment or vocation of the taxpayer;
(c) any expenditure or loss of capital nature.
This section is expressed in the negative.
THE NEXUS REQUIREMENT
In general expenses or losses incurred in earning income be deducted in calculating net profit.
This idea may be referred to as the nexus requirement. There must be a sufficient nexus or
connection between the expense or loss to be deducted and the income earning activity.
There must be a strict nexus requirement. Not every loss or expenditure appearing in a taxpayer's
commercial accounts may be nexus requirement.
Necessity : There is no requirement that an expenditure is a necessary expense. It is very
difficult to determine whether an expenditure is necessary. It is for the taxpayer to determine
whether a particular expenditure is for a purpose of trade. The role of law is limited to determine
whether the expenditure is for the purpose of the trade.
The Fiji Sugar Corporation Ltd v CIR (Local Example)
Case Study 6 CSR began operations as sugar millers in Fiji in 1882. In 1961
the milling operation of CSR was taken over by FSC (the
taxpayer). CSR recruited labourers (who came to be known as Gurmiteers) from India from 1878.
Many of today's growers and mill workers are descendants of these labourers. In 1978 a committee
was formed among these descendants to celebrate the centenary(100 years) of the arrival of the
first Gurmiteers in Fiji. The committee sought a donation of $250,000 from the taxpayer for the
purposes of the celebration. The tax issue concerned the taxpayer's claim to deduct this sum.
The committee and workers in the sugar industry felt strongly that FSC should contribute to
the celebration. The committee was prepared to exert pressure even up to industrial action to
encourage a substantial donation. FSC gave $100,000 and deducted as expense. CIR argued that
it was not a deductible expense. Finally The Judge (Stuart J) held that the donation of $100 000
was a deductible expense. It was made to foster goodwill with employees of the company and the
growers from whom the company obtained its cane, a large majority of whom were descended
from the Gurmiteers. It ensured continuance of the company's business and it aided the imminent
negotiations for a new sugar agreement. Clearly the payment as donation was not a normal
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company’s expense. The donation payment clearly was for the purpose of the taxpayer's trade.
1. Capital expenditure or losses
The second principal prohibition in s.19 concerns capital expenditure or losses.
S, 19(i) provides:
In determining total income, no deductions shall be allowed in respect of—
(i) any expenditure or loss of capital nature;
The ITA does not define the terms capital or capital expenditure. The terms are used in everyday
sense and courts define and distinguish between expenditure on capital and income account.
2. Personal and living expenses
Section 19(a) prohibits the deduction of 'personal and living expenses'.
Expenses travelling to and from work are different from expenses incurred in travelling between two
places of work. Eg example a lawyer travelling from the office to the courthouse is a deductible
expense. It occurs in the course of the trade. Expenses incurred in studying to obtain a
qualification necessary for employment or professional certification are not deductible. Study itself
is not productive of income. These are expenses incurred in preparing to earn income. Study
expenses incurred by a person already in employment with a view to obtaining a salary increase or
promotion may be deducted. Expenses incurred in maintaining professional expertise (e.g. continuing
education programmes, subscription to professional journals) are deductible expense.
3. Losses and expenses covered by insurance - Section 19(d) provides no deductions shall be
allowed in respect of:
any loss or expense, the deduction of which would otherwise be allowable, to the
extent to which it is recoverable under any contract of insurance, guarantee,
surety or indemnity.
Expenditure actually incurred in repairing a capital asset is deductible as a revenue expense.
However, money received to compensate damage to a capital asset is a capital receipt.
4. Taxes levied on income - Section 19(e) provides no deductions shall be allowed in respect of 'the
taxation levied on incomes. It would be impossible for a taxpayer to deduct the tax on his own
income since such a deduction would itself change the total income figure and thereby the sum
due as tax. In calculating total income it is usual to allow deduction of other taxes and levies such as
land rates, stamp duty and customs levies incurred in the course of earning income.
5. Expenses in earning exempt income
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Fairness dictates that expenses incurred in earning exempt income may not be deducted in
calculating total income.
Section 19(f) provides no deductions shall be allowed in respect of: any expense
incurred in respect of
(i) any amount received, receivable, or accrued which is not included in total
income or, if so included, is exempted under section 16 or 17, or
is not included in chargeable income under any of the provisions of this
Act;
(ii) any investment or property the income arising from which will not be included in
total income or, if so included, will be exempted under section 16 or 17, or will not
be included in chargeable income under any of the provisions of this Act.
6. Reserve fund - Section 19(g) prohibits the deduction of 'income carried to any reserve fund or
capitalized in any way'.
A provision for doubtful debts could not be deducted because of the prohibition on deduction of
doubtful debts in s. 19(h).
7. Bad debts - Section 19(h) provides no deductions shall be allowed in respect of:
any bad debt, except any proved to the satisfaction of the Commissioner to be bad and to
have been written off in the taxpayer's books during the year.
Business who recognize income on accrual basis incur some degree of bad debts. A customer
becomes insolvent or for some other reason becomes unable to pay a sum due to the taxpayer.
No deduction may be made for a doubtful debt.
Deduction is permitted only if
(i) the taxpayer is able to prove to the satisfaction of the Commissioner that a debt is bad and
cannot be collected; and
ii) the taxpayer himself has written off the debt in the taxpayer's Profit and Loss accounts.
Where a deduction has been made for a Bad debt and is recovered in any any portion must be
included in total income.
8.Repairs, alterations and improvements - The deduction of expenditure on repairing, altering or
improving a capital asset is governed by
S 19(j). No deduction is allowed in respect of:
(j) any expenditure on repairs, alterations and improvements, other
than that actually incurred on the repair of property either occupied for
the purposes of any trade, business, or profession.
Section 19(j) permits only expenditure on repairs to be deducted. The deduction is limited to
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expenditure 'actually incurred' and to 'sums expended'.
A repair is to be distinguished from an improvement. Any repair improves the object being repaired in
the sense that it restores it to its original condition. However, work that makes an object better
than it was prior to its falling state beyond repair is an improvement. The improvement of a capital
asset in this second sense involves a capital expenditure. Repairs are deductible and improvements
are not.
• The materials or replacement part used in making a repair need not be identical to the materials
or part in the object in its original condition. However, if the different materials or part have
superior qualities, for example greater durability or efficiency of operation, it will be an
improvement.
9. Excessive expenses - In the context of expenditures it is not open to the Commissioner to
argue. Eg the commissioner can not argue that sales by the taxpayer could have been bought
from another who sells at a lesser prise.
Therefore excessive allowable expenses are allowed.
10. Excessive remuneration expenses
Section 20 of the Fiji Act contains express provisions concerning excessive remuneration
expenses. The judgment required of the Commissioner is whether in his opinion the sum paid is the
remuneration is 'a reasonable deduction to be allowed as a sum incurred exclusively for the
purposes of the trade' or business. Under each provision It: remuneration expenditure to the
extent it exceeds 'a reasonable deduction' is nor deductible expense.
11. Losses - A newly established business may have several loss years before becoming profitable.
A profit-earning scheme may not perform as expected. In short many income-earning activities risk
returning a loss rather than a gain. The tax treatment of losses is dealt with in S.22. The term loss in
this context refers to an overall loss from a income-earning activity
The basic scheme for the treatment of losses is very simple. It rests on two rule s.21(l)(a) & (b).
First, a loss from a discrete economic activity is to be set off against income from other sources
in the same tax year. For example, an individual with salary income of $30,000 and net rental
income of $10,000 owns a business that made a net loss of $15,000. The taxpayer's aggregate
income from his successful activities $40,000 is reduced by the loss from the business, to produce
total income for the year $25,000.
The second rule concerns loss carried forward for no more than six years following the year in
which the loss was incurred.
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