Income Tax (Trading and Other Income) Act 2005 section 274

Relationship between rules prohibiting and allowing deductions

Section 274 establishes how to resolve conflicts between rules that allow deductions and rules that prohibit deductions when calculating the profits of a property business.

• Rules that permit a deduction in calculating property business profits generally take priority over rules that prohibit or restrict a deduction, but certain specific restrictions — covering unpaid remuneration, employee benefit contributions, car hire, crime-related payments, residential property finance costs, and cash basis loan costs — always override the permissive rules.
• If a deduction arises directly or indirectly from tax avoidance arrangements, the permissive rule loses its priority and becomes subject to any prohibitive rule as well as the specific restrictions listed above.
• Tax avoidance arrangements are broadly defined as any agreement, understanding, scheme, transaction, or series of transactions — whether legally enforceable or not — to which the property business owner is a party and whose main purpose (or one of the main purposes) is to obtain a tax advantage.
• The priority rule applies not only to provisions within the property income part of the Act itself but also to the large number of trading income rules that are imported into property income calculations through sections 272 and 272ZA.