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Can the taxpayer claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for expenditure on containment sheeting?

Yes, the taxpayer can claim a deduction under section 8-1 of the ITAA 1997.

The taxpayer company erects scaffolding. It incurs expenditure on containment sheeting (a polypropylene material) and uses the sheeting in erecting scaffolding to stop dust and other pollutants, as required by government regulations. The sheeting is only useable for one job. Jobs last for between 1 to 12 months.

Broadly and so far as relevant here, section 8-1 of the ITAA 1997 allows a deduction for expenditure incurred in gaining or producing assessable income or in carrying on a business for that purpose unless the expenditure is of a capital nature.

In deciding whether expenditure is incurred in gaining or producing assessable income it is appropriate to consider, whether the expenditure is 'incidental and relevant to the operations or activities regularly carried on for the production of income' or 'connected with the operations which more directly gain or produce income' ( FC of T v. Smith (1981) 147 CLR 578; 81 ATC 4114; (1981) 11 ATR 538). Erecting scaffolds is for this taxpayer, an activity that is regularly done and directly produces income. The containment sheeting is used in erecting scaffolds and so the required connection exists.

The expenditure is not capital because the containment sheeting is connected to activities regularly carried on and is only useable for 1 to 12 months and so not of a 'lasting quality' ( Sun Newspapers Ltd v. FC of T (1938) 61 CLR 337).