u003cpu003eDue to considerable differences existing between book and tax accounting, confusion arises to many. Not all expenses under book accounting are deductible for tax purposes. Tax deductible expenses are those that can be deducted from assessable income before it is subject to taxation.u003c/pu003eu003cpu003eTo calculate the taxable income of a trade, business or profession, section 18 of our Income Tax Act, 1995 provides that any expenditure or loss shall be deductible from the gross income in the income year in which it is incurred to the extent to which it is exclusively incurred in the production of the gross income for that income year.u003c/pu003eu003cpu003eThe question that arises regards the meaning of the word u0026lsquo;extentu0026rsquo; in section 18. u0026lsquo;To the extentu0026rsquo; in a sentence is often coupled with a preposition to read u0026lsquo;to the extent ofu0026rsquo; or u0026lsquo;to the extent thatu0026rsquo;. Inclusion of the words u0026lsquo;to the extent to whichu0026rsquo; in section 18 lacks explicitness and there is no tax precedent to rely on to obtain a proper interpretation. In my opinion, they suggest a valuation, an assessment or an amount, uncertain of what the upper limit will be.u003c/pu003eu003cpu003eSection 18 requires a deductible expenditure u0026lsquo;to be incurred to the extent to which it is exclusively incurred in the production of gross incomeu0026rsquo; without the u0026lsquo;wholly and exclusiveu0026rsquo; condition of Singapore and UK. Section 26 of the Income Tax Act on u0026lsquo;Unauthorised deductionsu0026rsquo; provides that no deduction shall be made in respect of any expenditure or loss to the extent to which it is incurred in the production of income which is exempt income. Where gross income consists of both taxable and exempt income, the expenditure incurred, which is not directly attributable to the production of the gross income, is apportioned in accordance with a prescribed formula to disallow the proportion of expenditure attributable to exempt income in the calculation of taxable income. The words u0026lsquo;to the extent to whichu0026rsquo; inserted in the wording of section 26 lead to indicate that apportionment of expenditure is acceptable.u003c/pu003eu003cpu003eBased on the above circumstance, I would tend to apply an apportionment to any expenditure whereu0026nbsp;u0026nbsp; necessary to determine the extent of expenditure incurred in the production of income as tax deductible expenditure. It is a common practice of the MRA generally to reasonably apportion expenditure between business and non-business to allow the business amount as a deductible expenditure. The same principle is adopted for private and business expenditure. As example, private expenditure like food, pocket money for personal use, etc. incurred during a business trip abroad to produce income is disallowed from the amount deductible as overseas travelling.u0026nbsp;u0026nbsp; However, the principle of apportionment excludes expenses of a dual purpose on the ground that business expenditure with a dual purpose cannot set a definite part or proportion laid out in the production of income.u003c/pu003eu003cpu003eAs example of an expenditure for a dual purpose is the case of Sargent v Eayrs [1972] 48 TC 573 where the expenses incurred by a Gloucestershire farmer visiting Australia with a view to emigrating and buying a farm there were not allowed as a deduction from the profits of a trade. The Commissioners found that the visit had little of value to offer as far as farming in the UK was concerned, and the main purpose of the visit was to ascertain whether conditions and prices in Australia were such that emigration would be attractive.u003c/pu003eu003cpu003eIn the UK, the rule prohibiting a deduction for expenditure not incurred wholly and exclusively for the purposes of the trade does not prohibit a deduction for any identifiable part or proportion of the expense which is incurred wholly and exclusively for trade purposes. Examples of expenses part of which may be regarded as allowable are the running costs of a car used partly for business and partly for private purposes and the cost of rates, lighting and heating of premises used partly as business and partly as private accommodation.u0026nbsp;u003c/pu003eu003cpu003eThe words u0026lsquo;to the extent tou0026rsquo; in section 18 is, to my good understanding pruned for apportionmentu0026nbsp; if an analysis is done to (1) section 17 on deduction in connection with employment where the expenditure must be wholly, exclusively and necessarily incurred to be deductible from gross employment earnings, and (2) section 19 on expenditure incurred on interest in the production of income where the interest deduction must be in respect of capital employed exclusively in the production of gross income which includes income from business, income derived from property and investment income. The wholly/exclusively criteria, as per the Income Tax Act, is applicable to employment earnings only.u003c/pu003eu003cpu003eI am therefore of opinion that the words u0026lsquo;to the extent to which an expenditure is exclusively incurred in the production of gross incomeu0026rsquo; do not mean that the expenditure must be exclusively incurred in the production of income but rather, it must be incurred to the limit it is in the production of gross income.u003c/pu003e
Tax deductible expenditure
