Issue
Is the taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 ('ITAA 1997') for the costs of maintaining a horse?
Decision
No. The taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for the costs of maintaining a horse as the expenses are of a private nature.
Facts
The taxpayer is employed as a steward in the racing industry.
The taxpayer's key responsibilities relate to the administration of various aspects of racing and ensuring the adherence to the rules and regulations governing racing.
The taxpayer owns a horse.
The taxpayer spends over 20 hours a week with their horse to keep the horse presentable for events and to ride the horse in training for competition. The taxpayer incurs expenses in maintaining the horse but does not derive assessable income from those activities.
The taxpayer is not required under the terms of their employment to acquire and maintain a horse.
Owning and maintaining the horse has improved the taxpayer's knowledge of horses, riding equipment and racing strategies, which has assisted them in carrying out some aspects of their employment duties.
Reasons for Decision
Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.
Several significant decisions established that, for a loss or outgoing to be an allowable deduction: • there must be a nexus between the outgoing and the assessable income so that the expenditure is incidental and relevant to the taxpayer's income-producing or business operations ( Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431); and • that the essential character of the expenditure is that of an income-producing or business expense ( Charles Moore & Co (WA) Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344; (1956) 11 ATD 147; (1956) 6 AITR 379).
Where the connection between the expense and the income earning activity is too general or remote, a taxpayer would not be able to establish that the expense is essentially an income producing expense which is incidental and relevant to their income earning activities. This was highlighted in Case U54 87 ATC 354, where the Tribunal disallowed a claim for expenses associated with a study tour of China by a lecturer. The lecturer failed to establish that the essential nature of the expenses was not private and that a sufficient connection existed between the expenses and his income earning activities. Whilst the lecturer had broadened his knowledge of contemporary Third World History through some of the countries he had toured and that knowledge would quite likely make him a better teacher, this general consideration was not sufficient to make the expenses deductible.
Where an outgoing is voluntarily incurred and there are no apparent commercial factors, the taxpayer's subjective purpose in incurring voluntary expenditure may be relevant in characterising the expenditure ( Magna Alloys and Research Pty Ltd v. FC of T 80 ATC 4542; (1980) 11 ATR 276).
The taxpayer is not required by their employer to own or keep a horse. The taxpayer owns and maintains a horse for the purpose of participating in competitions and events. This is a private purpose which characterises the expenditure as private in nature.
Whilst the knowledge the taxpayer has gained from maintaining a horse may have assisted them in carrying out some aspects of their duties as a steward, as with the lecturer in Case U54, the connection between the expenses and their employment duties is too tenuous or remote. It does not change the essentially private character of the expense.
Accordingly, the taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for the costs incurred in maintaining their horse as they were not incurred in gaining or producing assessable income and are private in nature.