Issue
Are the costs incurred in training a guard dog to protect business premises deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The training costs are not deductible under section 8-1 of the ITAA 1997.
Facts
The taxpayer purchased a dog for use solely as a guard dog to protect equipment and supplies at the taxpayer's business premises.
The taxpayer incurred expenses in having the dog complete guard dog training.
Reasons for Decision
A guard dog used to provide security for business premises is considered to be a working beast or plant, as it serves a productive function of the business. Consequently, the guard dog is a capital asset of the business.
Under section 8-1 of the ITAA 1997, expenditure incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of producing assessable income, is deductible if it is not capital or of a capital, private or domestic nature.
The leading authority on the distinction between revenue and capital outgoings is the judgment of Dixon J in Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 23; 1 AITR 403. Dixon J set out three matters to be considered (at CLR 363): (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it, that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.
In applying these factors to the guard dog training expenses, clearly the training is a once-off expense calculated to produce a benefit for the business for the working life of the dog, that is, an enduring benefit. The outgoing is not incurred over the life of the benefit but as a preliminary expense in obtaining the benefit of a guard dog.
Accordingly, the expense is of a capital nature and is not deductible under section 8-1 of the ITAA 1997.