The Acting Assistant Secretary to the Department of the Treasury has forwarded for advice the following memorandum:

In the attached copy of a memorandum the Commissioner of Taxation has asked that there be promulgated an addition to regulation 34 under the War-time Profits Tax Assessment Act in order to meet certain cases of hardship for which the Act and Regulations as they now stand provide no relief.

1. It appears that a partnership was trading in cattle and that a condition under which one of the partners received half the profits was that he undertook to pay the whole of the expenses of droving the cattle. Had the partnership paid those expenses they could have been deducted from the profits liable to tax, but as one partner paid them privately they are not considered an allowable deduction from the profits of the partnership.
2. Section 10 (2) of the War-time Profits Tax Assessment Act provides that the tax shall be paid by the partnership, but that the tax shall be deemed to have been paid by each partner in proportion to his interests in the profits.
3. The partner who paid the droving expenses is assessable on his share of the partnership profits, but that share is not wholly profit to him. His real profit is the share less the expenses of droving. It does not seem equitable, therefore, that he should be called upon to pay tax on the whole of the profit received by him from the partnership.
4. In reply to a suggestion from the Treasury that the expense of the droving is really an expense of the partnership and that deduction of the amount from what is nominally a half share is only another way of giving an actual share of less than half, the Commissioner of Taxation states that this position has already received consideration, and the facts of the case are such that it is impossible for him to allow the deduction in the absence of the regulation recommended by him.
5. As, however, the matter is an extremely small one, I am directed to ask that you will please advise whether the Commissioner cannot give the necessary relief without a special regulation.

Sub-section (2) of section 15 of the War-time Profits Tax Assessment Act 1917-19T8 provides as follows:

(2) Deductions for wear and tear or for any expenditure of a capital nature for renewals, or for the development of the business or otherwise in respect of the business, shall not be allowed except such as may be allowed for the purposes of the Commonwealth Income Tax:

Provided that where in the opinion of the Commissioner any deduction claimed for advertising in the accounting period is excessive, having regard to the expenditure on advertising for the business during the last three pre-war trade years, he may reduce the deduction to such sum as he thinks reasonable and just.

By section 18 of the Income Tax Assessment Act 1915-1921 deductions are allowed of, inter alia, expenses actually incurred in Australia in gaining or producing the assessable income.

There is, I think, no doubt that any such expenses to be allowed as deductions, must, unless otherwise provided, be incurred by the taxpayer.

In the present case the partnership is the taxpayer but the expenses were not incurred by the partnership and cannot, therefore, in the absence of the regulation suggested, be allowed as deductions.

I would, however, point out that the new paragraph proposed to be added to regulation 34 of the War-time Profits Tax Regulations should appear as paragraph (d), a paragraph (c) having been added in 1920 by Statutory Rules 1920, No. 76.

[Vol. 18,p. 296]