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Wednesday, 20 May 1936

Senator A J McLACHLAN (SOUTH AUSTRALIA) (Postmaster-General) . - It is true, as Senator Duncan-Hughes has mentioned, that section 23 of the existing legislation provides for "all losses and outgoings ". Section 25 of the act provides that a deduction shall npt, in any case, be made in respect of any of the following matters -

(b)   domestic or private expenses.

(e)   money not wholly or exclusively laid out or expended for the production of assessable income;

(h)   any loss not connected with or arising out of the production of assessable income, or any capital withdrawn from any business producing income, or any sum used or intended to be used as capital in any business, or any capital used in the improvement of premises occupied for the purpose of any business.

That principle is contained in the new provision, although the language employed is not the same. The bill provides that certain losses and outgoings shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or arc incurred in relation to the gaining or production of exempt income.

In view of the fact that five States haveaccepted this wording and that this matter was discussed fully at several conferences I ask the committee to accept the clause as it stands, with the inclusion of the word " necessarily

Senator Collings - Did the royal commission suggest the inclusion of "necessarily"?

Senator A J McLACHLAN (SOUTH AUSTRALIA) - It dealt with a number of English and American decisions, and as a result of its report, the word " necessarily ". was included in the clause. The new clause makes clearer the principle contained in the existing legislation. In the carrying on of a business there are items of expenditure which, although properly deductible from an accountancy point of view in order to ascertain the profits, do not survive the test set up by the act. The object of the clause is to give legislative effect to a principle laid down by the High Court in appeal cases. There will be some reduction of the yieldof tax from some businesses through allowance, in future, of deductions in respect of Arbitration Court expenses and certain legal expenses which have not previously been deductible. On page 100 of its report the Royal Commission on Taxation said -

The problem, therefore, is to draft sections relating both to the allowance and disallowance of deductions which will make it clear that the taxpayer is entitled to claim any expenditure properly incurred by him in the production of his income, whether derived from a trade or otherwise, without at the same time opening the door so wide as to permit the allowance of deductions for which there is no justification. This might, perhaps, be accomplished by means of a section under which the taxpayer would be allowed as deductions all losses and outgoings incurred in gaining or producing the assessable income, or in carrying on a business for the purpose of gaining or producing such income; with a proviso or limiting section excluding the right to deduct any losses or outgoings of capital, or losses or outgoings incurred in relation to the gaining or production of income exempt from tax.

The recommendations of the royal commission, as accepted by the Government, have been embodied in the bill now before the committee and, in the interests of uniformity, I urge the committee to accept the clause.

Senator Duncan-Hughes - There is not complete uniformity, because New South Wales has not included the word " necessarily " in its draft legislation.

Senator A J McLACHLAN (SOUTH AUSTRALIA) - As I have said, the Government is not without hope that New South 'Wales will yet fall into line. Unless there is a considerable degree of uniformity, we shall have judges deciding deductions on different bases. If this Parliament fails to accept a provision which is practically uniform, some of the States will make other changes, and there will be no uniformity at all. Differences of language may give rise to a great deal of litigation.

SenatorLECKIE (Victoria) [5.13].- The Minister's contention that uniformity of legislation is desirable has great weight withme, but we have also to consider the protection of the taxpayer. The inclusion of the word " necessarily " seems to place on the taxpayer an obligation which he should not have to bear. Senator Duncan-Hughes referred to expenditure incurred in advertising. A business man may make a mistake and advertise too extensively; but at the time that the expenditure is incurred he regards it as necessary to his business. Another man may expend considerable sums of money in defending his patent rights, only to lose his case. Would the Minister say that that expenditure was not necessarily incurred in carrying on his business ? So long as the administration is sympathetic the inclusion of the word " necessarily " may be of comparatively little importance, but changes of officers might result in the administration becoming harsh.

Senator A J McLACHLAN (SOUTH AUSTRALIA) - Does not the honorable senator consider that this provision is wider than the old section?

Senator LECKIE - If the Minister will offer to defer consideration of the matter, or will give an undertaking that if it is found necessary a suitable amendment will be made by the House of Representatives, I shall be satisfied.

Senator A J McLACHLAN (SOUTH AUSTRALIA) - Does not the honorable senator consider that the clause opens the door wider than the existing law?

Senator LECKIE - The general opinion of taxation experts is that the concessions intended to be given to taxpayers, are being withheld from them. It does not appear to me that this one word carries such a great amount of weight. To say that unless we insert the word " necessarily ", the aim to achieve uniformity will fail, is, in my opinion, to exaggerate its importance. It is feared that the word will involve the commercial community, if not in further expense, at any rate, in a considerable amount of explanation in order to satisfy the Commissioner of Taxation that the expenditure incurred was absolutely necessary for the earning of the income.

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