Deductions from assessable income and loan guarantee payments

Abstract

This paper is about the general principles which govern deductions from assessable income. The Income Tax Act 1976 makes provision for the imposition, assessment and collection of income tax. The conceptual basis of the system is that the Act imposes liability for the tax and the Commissioner acts in quantification of the amount due Reckitt & Colman (NZ) Ltd v TBR [1966] NZLR 1032, 1045; although the Commissioner is not "a mere scribe mechanically carrying out an inescapable obligation": Lemmington Holdings Ltd v CIR (No 2)(1983)6 NZTC 61,576.61,582. In considerable detail the Act describes what is to be included within assessable income and what may be deducted from assessable income. The latter is the focus of this paper and it is considered in relation to three aspects. The first concentrates on section 104, That section, and others discussed in this paper, are set out in the Appendix, post the section which authorises deduction of most outgoings which may be deducted from assessable income. There is a review of some of the important principles which have developed in application of the section. The same exercise is carried out in relation to the second aspect, which deals with the concept which most often operates to deny deductibility. This is the prohibition against deducting outgoings of capital. Neither aspect is considered in a vacuum. Following them is an examination of a specific problem. This is the deductibility of payments made in honour of a loan guarantee. The structure of the paper therefore is an exposition of the general principles which often determine deductibility together with examination of a specific problem. The object is to ascertain and examine those principles and then look at the manner of their application in one factual situation.