Reasonable Business Expense - The Chartered Institute of Taxation

Reasonable Business Expenses: Discussion paperTHE REASONABLE BUSINESS EXPENSES RULEDISCUSSION PAPER COMMISSIONED BY THE CHARTERED INSTITUTE OFT AXATION’S TAX POLICY SUB-COMMITTEE1. INTRODUCTION1.1. OVERVIEWThis Report critically considers the case against the continuation of the‘all or nothing’, ‘wholly and exclusively’ test applied to expenditure laidout to earn certain categories of taxable income, to determine whether ornot such payments are deductible in arriving at the net incomechargeable to tax. It outlines the statutory and other origins of the ‘whollyand exclusively’ rule to aid in understanding the causes and effects of itsevolution to current forms in the taxation of business and employmentincome. It considers in some depth the perceived advantages anddeficiencies of the practical application of the rule, as illustrated in theapplicable case law. This Report further evaluates the policy implicationsof accounting concepts and economic theories, and notes practicalconstraints on these insights. In identifying the possibility of a ‘but for’reasonable business expenses rule alternative to the ‘wholly andexclusively’ rule, emphasis is placed on the practical application of sucha rule using variants permitting the dissection and apportionment ofmixed purpose expenses. It highlights the use of apportionment in theAustralian tax system to suggest an alternative view of how a moreequitable system of deduction for expenses could be implemented.However, this Report does not seek to provide an exhaustive analysis ofthe application of these alternatives. Rather, its key aim is to highlightthe inequities posed by the ‘wholly and exclusively’ rule and to provokedebate on these issues. As such, while it argues for the replacement ofBode OyetundePage 2 of 63PhD CandidateCentre for Commercial Law StudiesQueen Mary & Westfield College