Private ruling: Deductions
Published: August 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to a deduction for the cost of your remedial and rehabilitation massages? | A1: No. | Q2: Are you entitled to a deduction for the cost of your food substitutes for dietary purposes and vitamins, minerals, sports supplements and protein shakes? | A2: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You are a professional athlete playing sport at an elite level. You play a game of sport on a regular basis and have a demanding training schedule. You have remedial and rehabilitation massages on a regular basis by a qualified masseur to relieve soreness, and aches and pains which arise from injuries sustained during the sporting activity and training sessions. You undertake the massages predominantly to ensure that you are fit and able to perform your duties and compete at the level required by your employer. You incur expenses for food substitutes for dietary purposes and vitamins, minerals, sports supplements and protein shakes. You consume these foods pre and post-sporting activities.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision: Summary: No deduction is allowable for the cost of massages or for the food substitutes, vitamins, minerals, sports supplements and protein shakes as the expenses: (a) were not incurred in gaining or producing your assessable income; (b) were not necessarily incurred in carrying on a business; and (c) are private in nature. | Detailed Reasoning - Detailed reasoning: Subsection 8-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that you can deduct from your assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income; or (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. Subsection 8-1(2) of the ITAA 1997 provides however, you cannot deduct a loss or outgoing under this section to the extent that: (b) it is a loss or outgoing of a private or domestic nature. Deductions allowed under section 8-1 of the ITAA 1997 are referred to as 'general deductions'. Paragraph 8-1(1)(a) of the ITAA 1997 is referred to as the 'first limb' and requires an expense to be incurred in gaining or producing your assessable income. Deductions under this limb are available to all taxpayers. The term 'second limb' refers to paragraph 8-1(1)(b) of the ITAA 1997 and relates to when an expense is necessarily incurred in carrying on a business for the purposes of gaining or producing your assessable income. By its very wording deductions under the second limb are only available to taxpayers carrying on a business. Subsection 8-1(2) of the ITAA 1997 is referred to as the 'negative limb' and provides categories of outgoings that are not deductible. Paragraph 8-1(2)(b) of the ITAA 1997 does not allow a deduction for outgoings that are of a private or domestic nature. In the year ended 30 June 2014 you were a professional athlete who incurred expenses in relation to remedial and rehabilitation massages, and on food substitutes, vitamins, minerals, sports supplements and protein shakes. The deductibility of the expenses will be examined under both limbs of subsection 8-1(1) of the ITAA 1997 and the negative limb of paragraph 8-1(2)(b) of the ITAA 1997. | Detailed Reasoning - Deductibility under Paragraph 8-1(1)(a) of the ITAA 1997 - Expenses incurred in gaining or producing assessable income: Paragraph 8-1(1)(a) of the ITAA 1997 allows a deduction from your assessable income for any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income. The test for what is 'incurred in gaining or producing your assessable income' was explained in Ronpibon Tin NL and Tongkah Compound NL v FC of T (1949) 8 ATD 431; (1949) 78 CLR 47: "... to come within the initial part of [s 8-1] it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income, or if none be produced, would be expected to produce assessable income." In the current case, the taxpayer's relevant income producing activities are considered to be training for and playing sport. Accordingly, for the expense to be deductible under paragraph 8-1(1)(a) of the ITAA 1997, the occasion of the expense must be found in these activities. In Federal Commissioner of Taxation v. Cooper 29 FCR 177; 91 ATC 4396; (1991) 21 ATR 1616 ( Cooper ), the court examined the deductibility of expenses which are normally characterised as being private or domestic in nature. The legislation referred to in Cooper is subsection 51(1) of the Income Tax Assessment Act 1936 (ITAA 1936) which is the predecessor of section 8-1 of the ITAA 1997. In Cooper , the taxpayer was a professional footballer contracted to a rugby league football club. Under the contract he was required to do everything necessary to keep himself in the best possible condition so as to render the most efficient service to the club. During the football season, the taxpayer lost weight which affected his strength and ability as a forward player. His coach provided him with a letter asking him to eat additional steak, potatoes, and bread and drink at least one dozen cans of beer each week. The taxpayer claimed a deduction for the cost of additional food and drink which was disallowed by the Commissioner. In Cooper Lockhart J at FCR 184; ATC 4402; ATR 1622 stated "the deductibility of … [an expense] … depends upon determining the essential character of the expenditure itself and not upon the fact that, unless it is incurred, the taxpayer will not be able to engage in the activity in which his income was derived". Mr Cooper's income-producing activities were considered to be training for and playing football. The income-producing activities did not include the taking of food, albeit that unless food is eaten, the player would be unable to play. Expenditure on food, even as "additional food" did not form part of the expenditure relating to his income-producing activities of playing football or training. The court in Cooper also looked at the situation where an employer directs an employee to incur certain expenditure as a term of his employment. It was held that this requirement does not convert expenditure that is not incurred in the course of income-producing operations into a deductible outgoing. Mr Cooper's expenditure on additional food and drink was held not to have been incurred in gaining or producing his assessable income and was therefore not deductible from his assessable income during the relevant years of income. It lacked the necessary connection with his income-producing activities. In addition, the expenditure was excluded from deductibility as it was of a private nature. Expenses for food substitutes, vitamins, minerals, sports supplements, protein shakes etc. The principles in Cooper apply directly to the expenses that you incurred for your food substitutes, vitamins, minerals, sports supplements and protein shakes. The expenditure that you incurred does not form part of expenditure relating to your income-producing activities of training for and playing sport. Therefore you are not entitled to claim a deduction under paragraph 8-1(1)(a) of the ITAA 1997 for these expenses. Expenses for remedial/rehabilitation massages An expense incurred for remedial and rehabilitation massages to relieve soreness and aches and pains is generally considered to be a medical expense. Generally, medical expenses have no direct connection to the gaining or producing of assessable income as the purpose of the expense is to return you to health. It is considered that the expenses for remedial and rehabilitation massages can be viewed in the same way as the expenses for food substitutes, vitamins, minerals, sports supplements, protein shakes etc. discussed above, and do not form part of expenditure relating to your income-producing activities. The massages may enable you to return to your income earning activity sooner, but this is to put you in the position to earn your assessable income and does not relate to the way in which it is earned. There is insufficient connection to the gaining or production of assessable income for a deduction to be allowed as the expenditure is too remote. It is therefore considered that the expenses incurred for remedial and rehabilitation massages are not deductible under paragraph 8-1(1)(a) of the ITAA 1997 because they were not incurred in gaining or producing your assessable income. | Detailed Reasoning - Deductibility under paragraph 8-1(1)(b) of the ITAA 1997 - Expenses necessarily incurred in carrying on a business: Paragraph 8-1(1)(b) of the ITAA 1997 allows a deduction from your assessable income for a loss or outgoing to the extent that it is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. Carrying on a business Section 995-1 of the ITAA 1997 defines 'business' as including any profession, trade, employment, vocation or calling, but not occupation as an employee. In Cooper , the court examined the deductibility of expenses that are generally accepted as private in nature and did not look at whether the expenses were incurred in carrying on a business. It was stated by Lockhart J at FCR 181; ATC 4400; ATR 1620 that '[a]s the taxpayer did not carry on a business it is only the first limb of the sub-section that can apply to the deduction'. In Spriggs and Another v. Federal Commissioner of Taxation (2009) 239 CLR 1; [2009] HCA 22; 2009 ATC 20-109; (2009) 72 ATR 148 ( Spriggs and Riddell ), the High Court examined the situation of when professional footballers are considered to be carrying on a business and what sporting related income was classified as 'business' income. In this case, the two appellants were professional footballers playing at a national level. Each footballer was subject to an employment contract between themselves, their club and the appropriate national football body. The employment contracts enabled the taxpayers to obtain product endorsements, sponsorship and to exploit their sporting prowess and associated celebrity. The High Court accepted that the footballers were carrying on a business and that the payment of management fees was deductible. The High Court found that looking at the taxpayers' activities as a whole, the taxpayers were engaged in 'the business of commercially exploiting their sporting prowess and associated celebrity for a limited period': Spriggs and Riddell at paragraph 69. In Decision Impact Statement DIS M92 and M93 of 2008 the Commissioner accepted that the principles set out by the High Court in Spriggs and Riddell have equal application to all players operating in the Australia Football League (AFL) and National Rugby League (NRL) competitions. That is, due to the contractual framework under which the players undertake their football related activities, these activities will be accepted as being carried on as part of a business. Applying the principles considered in Spriggs and Riddell and DIS M92 and M93 to your situation it is accepted that you were carrying on a business of commercially exploiting your sporting prowess and associated celebrity during the 2013-14 financial year. The question to be examined is whether the cost of the massages and food substitutes, etc. was 'necessarily' incurred in carrying on a business for the purpose of gaining or producing your assessable income. Necessarily incurred The classic test for deductibility under the second limb was stated by the Full High Court in Spriggs and Riddell at paragraph 75 as: ... a loss or outgoing will be 'necessarily incurred in carrying on' a business if it is 'clearly appropriate' or 'adapted' for the carrying on of the business. Restating the test another way, the loss or outgoing will be 'necessarily incurred' if it is 'reasonably capable of being seen as desirable or appropriate from the point of view of the pursuit of the business ends of the business'. In Spriggs and Riddell the court considered that management fees in connection with the business of commercially exploiting a person's sporting prowess and associated celebrity were deductible. In that case the taxpayers engaged managers to negotiate contracts and obtain sponsorship and income from other football related activities. The management fees were held to be deductible as the activities undertaken by the managers resulted in, or were undertaken with the aim of obtaining, additional assessable income for the business, and as such were seen to have been necessarily incurred in carrying on the business of commercially exploiting your sporting prowess and associated celebrity. Your situation differs from that in Spriggs and Riddell as the type of expense you are seeking to deduct differs. Whilst the massages and food supplements, etc. maintain general health and fitness, and potentially allow you to return to your income earning activities in a timelier manner, they are not, of themselves, related to the income producing activities of the business of commercially exploiting your sporting prowess and associated celebrity. The relevant expenses incurred put you in a position that is no different to other taxpayers who operate their own business and can only generate income when they are undertaking their business activities. Accordingly, the massages and food supplements, etc. have not been necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income, and are not deductible under paragraph 8-1(1)(b) of the ITAA 1997. | Detailed Reasoning - Are the expenses private in nature?: Where a loss or outgoing is deductible under either limb of section 8-1 of the ITAA 1997 the deduction may still be denied, in whole or in part, under paragraph 8-1(2)(b) of ITAA 1997 if the loss or outgoing is of a private nature. Whilst it has been determined above that the expenses in relation to remedial massages and food supplements etc. do not fall under either of the positive limbs of section 8-1 of the ITAA 1997 and accordingly are not deductible, for completeness, it will also be considered whether the expenses are excluded from deductibility under paragraph 8-2(2)(b) of the ITAA 1997. In order to determine if an expense is private or domestic in nature it is necessary to look at the essential character of the expense and whether the occasion of the outgoing operates to give the expenditure the essential character of a working expense: Federal Commissioner of Taxation v Anstis (2010) 241 CLR 443; [2010] HCA 40; 2010 ATC 20-221; (2010) 76 ATR 735 ( Anstis ) and see Gordon J's comments in Russell v Federal Commissioner of Taxation (2011) 190 FCR 449; [2011] FCAFC 10; 2011 ATC 20-240; (2011) 79 ATR 315 ( Russell ). In considering whether an expense is private or domestic in nature the test to be applied is one of "essential character": Anstis and Russell . The High Court in Anstis at paragraph 38 held that the concept of deeming a particular type of expenditure as always being private in nature cannot be sustained. Thus it is necessary to look at the "essential character" of the expense incurred and the occasion of the outgoing to determine whether it is of a private nature. The High Court in Anstis, at paragraph 36, referred to Hill J's comments in Cooper: The essential character of expenditure on food and drink will ordinarily be private rather than having the character of a working or business expense. However, the occasion of the outgoing may operate to give to expenditure on food and drink the essential character of a working expense in cases such as those illustrated of work-related entertainment or expenditure incurred away from home. The decision in Case U83 87 ATC 481 ( Case U83 ) recognised that medical expenses have the essential character of a private expense and are not generally considered to be a working or business expense. Case U83 considered the deductibility of orthodontic work for a trombone instructor. Senior Member McMahon concluded that it seemed too extreme a view to say that all work done to one's anatomy must necessarily be private or personal and must necessarily fall within the exception contained in subsection 51(1) of the ITAA 1936. Concluding that the orthodontic expenses were not an outgoing incurred in gaining assessable income and also an outgoing of a private nature, he gave examples of other expenses that were no different in their essential nature, such as the: • cost of spectacles for a musician with defective eyesight who has difficulty reading music • expenses of an airline pilot attending fitness classes • expenses of a spinal laminectomy in the case of a labourer for whom a strong back is essential in earning a living In holding that the medical expenses were not deductible Senior Member McMahon concluded at ATC 484: All these types of expenditure may well have a beneficial effect on the taxpayer's income earning capacity. Indeed it is possible to visualise cases where the expenditure is necessary for that purpose. The authorities, nevertheless, compel me to treat the essential nature of those expenses and of the expenses of the present applicant as private. Expenses for remedial/rehabilitation massages It is considered that the principles in Cooper's case, Anstis , and Case U83 are applicable to your circumstances. As noted above, an expense incurred for remedial and rehabilitation massage to relieve soreness and aches and pains would generally be considered to be a medical expense The cost of medical treatment is considered to be a private expense as it relates to the well-being of the recipient and not as a means of earning assessable income. Whilst there can be rare cases where medical expenses may be considered a working or business expense, the essential character of your expense is considered private and accordingly is excluded from deductibility under paragraph 8-1(2)(b) of the ITAA 1997. Expenses for food substitutes, vitamins, minerals, sports supplements, protein shakes etc. Similarly, there is nothing in the occasion of the expenses in relation to food supplements etc. that operates to give the expenditure the essential character of a work expense. The expenses are not incurred in earning your assessable income and are private in nature. Accordingly, these expenses are excluded from deductibility under paragraph 8-1(2)(b) of the ITAA 1997. | Detailed Reasoning - Conclusion: You are not entitled to a deduction for remedial/rehabilitation massage expenses or e xpenses for food substitutes, vitamins, minerals, sports supplements, protein shakes etc.