Dissection and Apportionment of Composite Receipts and Outgoings
7.101. An issue of general application arises when a receipt is composed of a number of elements, some of an income
character and some not. In certain circumstances, not clearly defined in the legal authorities, the composite receipts
may be dissected or apportioned so as to determine what part of the receipt is income. Dissection
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would
appear to require that there has been some acceptance by the taxpayer in the course of the transaction of an amount as
referable to the income item. Apportionment, it is said, is appropriate where the amount referable to the income item
is ascertainable by calculation, but not, it seems, where the calculation involves a distribution of the receipt
between items on the basis of a valuation of each item. The law as it stands might be thought to encourage practices
in the settlement of claims to compensation and, in some cases, in the disposal of assets that will defeat the
Revenue. Section 36 (relating to trading stock) and section 59 (relating to depreciable property) offer some
protection, but more general provisions allowing apportionment on the basis of values would strengthen the law. Even
when the parties have made a dissection of the composite amount, the Revenue may still need protection: it should not
be open to the parties to make a dissection that is contrary to what would be a fair apportionment, so as to bring
about a favourable tax result.
7.102. A similar issue arises when the taxpayer has paid an amount in part for a purpose that would attract deduction as an expense in gaining income and in part for a purpose that would not. The words of the general provision (section 51) purport to allow a dissection or apportionment. An outgoing is allowable ‘to the extent to which’ it is incurred in deriving income. But it is not clear in what circumstances a dissection or apportionment may be made. According to the authorities, it is only when a purpose other than the gaining of income is evident on the face of a transaction that it is proper to deny a deduction for that part of an outgoing incurred for this purpose. Where the transaction is a contract, it must be a part of the contractual arrangement ‘that … some advantage not … related to the production of assessable income was gained’. The words quoted are from the judgment of the Privy Council in a New Zealand appeal,note but would be thought as well to be a correct statement of the Australian law. The Committee would not wish to make the test of deductibility depend on the subjective purpose of the taxpayer. On the other hand, the character of a transaction should not depend exclusively on its form. It should be expressly provided that the character of a payment may be inferred from all the circumstances of the transaction and, where that character is in part a payment for a purpose which is not the gaining of income, an apportioned amount will be denied deduction. Such apportionment should be made ‘as the facts … may seem to make just’. The words quoted are from a High Court judgment:note they might be made the basis of the drafting of the proposed provision.