Taxation Rules and Principles
To determine the taxable income for Racing Parts Pty Ltd certain assumptions are provided below regarding the exclusion and inclusion of income and expenses for tax purpose.
- Referring to “section 6-20 of the ITAA 1997”the exempted income of $100,000 has been considered as tax offset against the previous year loss figure of $120,000 incurred under “Division 36”. While the sum of $50,000 obtained as Non Assessable Non Exempted income is included for assessment because previous year tax loss incurred under Division 36 is deducted against the income.
- Referring to Division 40 the depreciation sum of $30,000 has been considered for deduction for taxation purpose.
- The bad debt of $20,000 has been written off for deduction under “section 25-35” while provision for doubtful debt amounting to $40,000 is not allowed for deductions.
- The amount of $35,000 relating to the provision of long service leave and annual leave is excluded from the deduction since it is an accounting liabilities and non-deductible for income tax purpose.
- The cash dividend received by Racing Parts Pty Ltd has been considered for assessment while the franking credits attached to the dividends is considered as tax offset under “section 67-25” which is equal to the amount of franking credits.
- With reference to “section 8-1 of the ITAA 1997” the borrowing expense of $5000 is treated as tax deductible expenditure because the expenses were occurred by Racing Parts Pty Ltd in derivation of assessable income.
- According to the judgement in “Arnold v FCT (2017)”value of gifts and contributions exceeding the amount of $2 given to the gift deductible recipient are treated as permissible deduction under “Division 30”. The donation and gift expenses incurred by Racing Parts Pty Ltd will be treated as tax deductible expenses under “Division 30”.
- The expenditure occurred for the service of Managing Director husband as the computer analyst is treated as tax deductible expenditure under the general provision of “section 8-1(1) of the ITAA 1997”. The outgoings were occurred in deriving the assessable income of the Racing Parts Pty Ltd.
- Closing has been considered based on LIFO method and the same is included in cost of goods for tax deductible in order to provide Racing Parts Pty Ltd with higher tax deductions.
- With respect to “Division 36”the tax loss of $120,000 reported by Racing Parts Pty Ltd during the income year is considered for offset against the NANE and Exempted Income.
- Expenses on repair incurred on plant constitutes deductible expenses under “section 25-10 of the ITAA 1997”because it was occurred in restoring the efficiency of the plant without changing its nature.
The current issue is associated with the determination of the income tax consequences from the transactions incurred by the taxpayer in the relevant income year. The issue here would take into the account the capital gains tax consequences that arises from the sale of residential property and antique desk.
According to the explanation given under the “Taxation Ruling of TR 93/30” where the home office is simply is used by the taxpayer for deriving assessable income but does not comprises the character of business place only the appropriate part of the running outgoings will be allowed for deductions. To support the argument the decision made by court in “Swinford v FC of T (1984)” held that the self-employed script writer was allowed deduction under the positive limbs of “section 8-1 of the ITAA 1997” relating to the portion of rent that was paid for house where a separate room was dedicated by the taxpayer for the purpose of study.
According to the “section 26-5 of the ITAA 1997” a taxpayer is not allowed to claim deduction for the expenses that are incurred in the form of fines or penalties for breaching the Australian law.
According to “Taxation Ruling of TR 97/23” outgoings occurred in replacing the exhaust fans and locks of a permanent fixtures installed in property that are employed for deriving assessable income are held as repairs of deductible nature under “section 25-10”. An exception to this rule is that repairs or replacement of damaged unit by a new unit would not be treated as repairs instead it constitute an improvement of capital nature. The explanation made in “Western Suburbs Cinemas v FC of T (1952)” stated that the replacing the old ceiling with an improved and new ceiling was treated as the improvement carrying capital nature and was held as non-allowable expenditure under “section 25-10”.
As defined under “section 40-25 (1) of the ITAA 1997” a taxpayer is allowed to deduction relating to the depreciating asset that is equivalent to the sum of decline in value during the income year.
Correspondingly, travel from and to the place of work is not allowed for deductions since it is treated as the private expenditure of domestic nature. However, travel in the course of employment will be held as permissible deductions. Evidently the decision made in the case of “Weiner v FCT (1978)” held that the teacher was permitted deductions for the travelling expenditure because the travel from one place of employment to another place was travel during the course of work.
Deductions Allowed for Specific Expenses and Assets
As per the ATO when a taxpayer uses their own car for carrying out business activities then the expenses incurred for the business purpose would be treated as the allowable deduction. The expenses are viewed as car expenditure. By using the log book method, the business proportion of the car expenses used by the taxpayer during business will be allowed for deductions.
The main residence of an individual taxpayer is generally held exempted from the provision of capital gains tax. Nevertheless, the taxpayer can obtain the partial main residence exemption if any part of the property is used by the taxpayer for deriving assessable income. As per the ATO a taxpayer under the interest deductibility test can claim an allowable deduction relating to the amount of money borrowed for purchasing the residential property and interest occurred from such borrowed funds.
“Section 108-10 (1)” explains that the taxpayer must separate any amount of capital loss and under “section 108-10 (4) of the ITAA 1997” the net amount of capital loss can be carried forward in the relevant income year.
The case study provides that John is a self-employed architect and purchased a residential property in the outskirts of Melbourne. John used a portion of house for his architect business where his clients could visit him. An expenses in the form of interest on loan was occurred by John during the income year. Referring to the “Swinford v FC of T (1984)” a deduction is allowed to John for loan interest of house. John can claim deduction under “section 8-1 of the ITAA 1997” up to the part of house that is exclusively used from where he carried is business activities. Later John reports a payment of fine for installing door without obtaining permission. The fines imposed will be non-deductible under section 26-5 since it is a breach of Australian law.
John reports expenses on his house where the old carpet in his room was replaced by the new carpet of improved quality and incurred a cost of $6000. Referring to “Western Suburbs Cinemas v FC of T (1952)” replacing the old carpet with new on is a capital improvement and not allowed for deduction under “section 25-10 of the ITAA 1997”.
An antique desk was bought by John for the purpose of work. Citing “section 40-25 (1) of the ITAA 1997” a deduction is allowable to John for an equivalent amount that is related to the decline in the value of antique desk. John later reports traveling to visit clients regarding the building designs and simultaneously travelled to the building sites. Referring to “Weiner v FCT (1978)” the travel by John is the travel during the course of work and any expenses arising thereof is deductible. John later reports car expenses that was used for business purpose. With the help of log book only the business proportion will be permitted for deduction while the private part of car expenses is non-deductible.
The house bought by John during July 2018 was eventually sold. Since John used the house for generating income he can claim partial main residence exemption. The interest expenses on borrowed funds meets the interest deductibility test and hence will be allowed for deduction. Furthermore, the sale of antique desk resulted loss and hence under “section 108-10 (4) of the ITAA 1997” the net amount of capital loss can be carried forward by John in the relevant income year.
Conclusion:
On a conclusive note, a deduction will be allowed to John incurred for home office purpose but john cannot claim any deduction for capital expenses. Similarly a partial main residence exemption can be claimed by John as the property was partially used for generating income.
References:
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Kabinga, M. “Established principles of taxation.” Tax justice & poverty (2015).
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