Exposure draft: Disallowing deductions against government assistance payments

The government has recently released Exposure Draft legislation and explanatory material for consultation which seek to amend the Income Tax Assessment Act 1997 to disallow deductions against taxable government assistance payments that are eligible for a rebatable benefit from 1 July 2011.

The Exposure Draft follows announcements made by the government in the 2011-12 Budget that it would disallow deductions against government assistance payments following the High Court decision in Commissioner of Taxation v Anstis [2010] HCA 40 (Anstis).

Background

In Anstis, the High Court held that individuals who incurred study expenses in gaining Youth Allowance for students were able to deduct the expenses from their assessable income. Because the entitlement to Youth Allowance requires an individual to satisfy an ongoing statutory activity test, such as undertaking full-time study, the expenses were held to be incurred in gaining or producing assessable income.

Further, the High Court also considered the expenses were not private or domestic in nature as they were incurred in the retention of a statutory right to payment.

In its Decision Impact Statement, the Tax Office indicated that in addition to Youth Allowance, the High Court decision applied to a range of other taxable government assistance payments including ABSTUDY living allowance, Austudy living allowance and Newstart Allowance.

The government considered the High Court decision to be a departure from the principle that study expenses unrelated to employment are not deductible. The decision means that individuals in like circumstances (such as students with the same income) have different tax obligations depending on the type of government assistance payment they receive, or whether they receive any government assistance payments at all.

Due to this, the government intends to disallow deductions against such government assistance payments.

Amendments

Under the amendments, individuals will not be able to deduct a loss or outgoing they incur in gaining or producing a rebatable benefit (as defined in s160AAA of the Income Tax Assessment Act 1936) (eg. a government assistance payment) even if the loss or outgoing is not considered private of domestic in nature.

If an individual uses property in gaining or producing a rebatable benefit, the use of property is taken to not have been for the purpose of producing assessable income, and is not deductible.

Example from the Explanatory Memorandum

Tanuja attends university full-time. She receives a part-rate amount of Youth Allowance (Student). During the income year, Tanuja receives $11,000 from her part-time job as a barista. Youth Allowance 8 (Student) is a taxable government assistance payment and is eligible for the beneficiary tax offset.

During the income year, Tanuja purchases a laptop for $1,200 to assist her to complete her studies. The laptop is expected to have a useful life of three years, is used solely for her studies and is depreciated using the prime cost method, with a decline in value of $400 per year.

Tanuja is unable to claim a deduction for the depreciation cost of her laptop even though the laptop is used solely for her studies. Tanuja is unable to deduct the depreciation cost of the laptop as it is taken to not have been for the purpose of producing assessable income.

The closing date for submissions is Friday, 17 February 2012.

A copy of the Exposure Draft and explanatory materials can be accessed here:

http://www.treasury.gov.au/contentitem.asp?NavId=&ContentID=2296