Deductions: telephone expenses and input tax credit

Is a goods and services tax (GST) registered taxpayer required, under section 27-5 of the Income Tax Assessment Act 1997 (ITAA 1997), to reduce their deduction for telephone expenses claimed under section 8-1 of the ITAA 1997 by the amount of input tax credit to which they are entitled that is included in those expenses?

Yes. A GST registered taxpayer is required, under section 27-5 of the ITAA 1997, to reduce their deduction for telephone expenses claimed under section 8-1 of the ITAA 1997 by the amount of input tax credit to which they are entitled that is included in those expenses.

The taxpayer is in business.

The taxpayer uses their home telephone 50% for business purposes and 50% for private purposes.

The taxpayer's telephone bill for the year was $1,100 including $100 of GST.

The taxpayer is registered for GST and is entitled to claim an amount of input tax credit.

Section 27-5 of the ITAA 1997 states that: You cannot deduct under this Act a loss or outgoing you incur, to the extent that the loss or outgoing includes an amount relating to an input tax credit to which you are entitled ...

Accordingly, when calculating their deduction under section 8-1 of the ITAA 1997 a taxpayer must first determine the amount of the deduction to which they are otherwise entitled and then apply section 27-5 of the ITAA 1997 to reduce the deduction by the relevant amount of input tax credit.

In the present case the deduction the taxpayer is entitled to under section 8-1 of the ITAA 1997 before the application of section 27-5 of the ITAA 1997 is $550 ($1,100 x 50%).

This deduction includes an amount of input tax credit to which the taxpayer is entitled of $50 ($100 x 50%).

As such, the taxpayer is required, under section 27-5 of the ITAA 1997, to reduce the deduction for telephone expenses claimed under section 8-1 of the ITAA 1997 from $550 to $500.