ATO ID 2001/432: Deductions - credit notes issued for the provision of free services
Date of decision: 21 September 2001
Business line: Private Groups and High Wealth Individuals

Issue
Does the issue of a credit note for the provision of your own labour free of charge constitute a deductible expense under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. The provision of your own labour does not constitute a deductible expense. A tax deduction under the general deduction provisions of section 8-1 of the ITAA 1997 is only allowed where you incur an actual 'loss' or 'outgoing'.

Facts
The taxpayer, an individual, operates a small business which provides services to other businesses and householders. In order to generate new and repeat business, the taxpayer intends to run a promotional or advertising campaign offering customers and potential customers the chance to win $x worth of services if they use any of the taxpayer's services within a selected period. Winners will receive a credit note with a specified dollar value, which may be redeemed at their leisure.

Reasons for decision
Summary: To qualify for a deduction under the general deduction provisions of section 8-1 of the ITAA 1997, a loss or outgoing must have been incurred. For the purposes of the income tax provisions, you incur an outgoing at the time you owe a present money debt that you cannot escape. For a fuller discussion concerning the meaning of 'incur' in this context, see Taxation Ruling TR 97/7. In Federal Commissioner of Taxation v. Ilbery (1981) 12 ATR 563; (1981) 38 ALR 172; (1981) 58 FLR 191; 81 ATC 4661 Toohey J considered the meaning of the word 'outgoings' and emphasised that it should be read in conjunction with the rest of the section with particular reference to the word 'incurred'. A loss or outgoing, to be deductible, must also constitute actual expenditure. Lending weight to this assertion is the Commissioner's published view in Capital Gains Tax CGT Determination Number 60 that the value of a taxpayer's own labour cannot have a value attributed to it for inclusion in the cost base of an asset. In view of the above, it is clear that the provision of one's own labour does not constitute a deductible expense as no money debt has been incurred.

Legislative references: Income Tax Assessment Act 1997 section 8-1
Case references: Federal Commissioner of Taxation v. Ilbery (1981) 12 ATR 563 (1981) 38 ALR 172 (1981) 58 FLR 191 81 ATC 4661
Related public rulings and determinations: TR 97/7 | Capital Gains Tax CGT Determination Number 60
Subject references: Deductions & expenses