Issue
Is the taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the unused portion of the Personal Allowance from the United Kingdom (UK) where the taxpayer is in receipt of assessable foreign income?
Decision
No. The taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for the unused portion of the Personal Allowance from the UK as it is not a loss or outgoing incurred by the taxpayer.
Facts
The taxpayer is a resident individual of Australia for income tax purposes.
The taxpayer derives interest, dividend and rental income from the UK.
The taxpayer is entitled to a Personal Allowance in the UK under the UK income tax legislation. The Personal Allowance is a standard allowance that all resident individual taxpayers in the UK are entitled to in calculating their taxable income regardless of their personal circumstances. This Personal Allowance is similar to the tax-free threshold (sometimes called a 'general exemption') provided under Schedule 7 of the Income Tax Rates Act 1986 , to which all residents of Australia are entitled.
The taxpayer has not used their full Personal Allowance entitlement in the UK.
Reasons for Decision
Section 8-1 of the ITAA 1997 allows a deduction for all losses or 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.
Subsection 8-5(1) of the ITAA 1997 allows a deduction from assessable income an amount that can be deducted (specific deduction) under a provision of the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997.
Subsection 8-5(2) of the ITAA 1997 provides that some provisions of the ITAA 1936 or the ITAA 1997 prevent or limit deduction of an otherwise deductible amount.
Section 12-5 of the ITAA 1997 contains a list of provisions about specific types of deductions. Included in this list is section 79D of the ITAA 1936 which deals with limitation on deductions relating to foreign income.
Section 79D(1) of the ITAA 1936 denies a 'foreign income deduction' in relation to expenditure exceeding income of a class of foreign assessable income. The term 'foreign income deduction' has the same meaning as in section 160AFD of the ITAA 1936 (subsection 79D(2) of the ITAA 1936).
Section 160AFD(9) of the ITAA 1936 defines 'foreign income deduction' in relation to a class of assessable income to mean, subject to certain exclusions, any deduction allowed, or allowable from the assessable income, to the extent that the deduction relates to assessable foreign income of that class.
The phrase 'any deduction ... allowed or allowable' in section 160AFD(9) of the ITAA 1936 refers to any deduction allowable under the ITAA 1936 or the ITAA 1997 - both general (section 8-1 of the ITAA 1997) and specific deductions (section 8-5 of the ITAA 1997).
The Personal Allowance is not an allowable deduction under subsection 8-5(1) of the ITAA 1997 as no specific deduction is available under the ITAA 1936, or the ITAA 1997.
The Personal Allowance is not an allowable deduction under section 8-1 of the ITAA 1997 as it is not a loss or outgoing incurred by the taxpayer.
Therefore, the taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for the unused portion of the Personal Allowance from the UK, where the taxpayer is in receipt of assessable foreign income.