Tax Deductions For Veterinary Expenses And Car Expenses

Tax Deductions for Veterinary Expenses

1.To

John Smith

The main aim of this letter is to address the issues related to deduction of outgoings based on the relevant statute and case laws. The laws related to deductions are covered under Division 8 of the Income tax Assessment Act 1997. The section 8-1 of the Act provides that a taxpayer is allowed to deduct outgoings from the assessable income if it is incurred for gaining assessable income.  It is has been clearly identified that the issue regarding the tax treatment of the expenses include various kinds of expenditure. Some of the expenditure is installation of new toilet at $30000, $10000 on replacing the carpets, $1000 on repairing the broken glass of a window, game machine for $1500(including the repair cost) and a computer worth $2000. The purpose of this letter is to provide advice to John Smith whether the outgoings incurred are allowable deductions.

In the case of Ronpibon Tin NL & Tong Kah Compound NL v FC of T (1949) 78 CLR 47 the expenses that are relevant or incidental for producing the assessable income are deductible. It is not a very easy task to determine whether a particular legal expenses can be deductible as various issues should be considered in determining the deductibility of legal expenses. In the case Magna Alloys & Research v FC of T [1980] FCA 150 it was held that the legal expenses have been incurred in defending the business method is an allowable business expenses (Woellner et al., 2016). In this case the legal expenses have been successfully incurred in defending the negligence case filed by one of the patients. Therefore the legal expenses of $50000 that have been incurred for defending the case is an allowable business expenses.  However, for availing the stated expenses as deduction, the taxpayer must ensure that three are certain records that he is need to maintain (Barkoczy 2016). 

The expenses that are of capital nature are not immediately deductible. In the case of Sun Newspaper Ltd v FC of T (1938) 61 CLR 337 there is a broad distinction between the revenue and capital expenses that are provided. The three main factors that needs to be considered for determination are the means that have been adopted, the manner in which it is used or the nature of the advantage. In the current case expenses have been for installing a new indoor toilet for making attractive for customers. On analysis it can be seen that the advantage and the nature of the expenses is of the long term so the expenses is of capital nature.

Tax Deductions for Car Expenses

The section 25-10(1) of the Income Tax Assessment Act 1997 provides that  deduction is allowed for repair of depreciable assets or premises that have been held for producing the assessable income. It should be noted that the repair that are of capital nature cannot be claimed as deduction under this section.  The Taxation Ruling 97/23 provides that a repairing expenditure is considered as capital expenses if the nature of the assets is changed. In the current case the expenses that have been incurred for replacing glass and carpet does not fundamentally changes the nature of the assets. Therefore this expenses are not regarded as the capital expenses and are allowed as deduction. The expenses that are of capital nature are not allowed as immediate deduction. In this case the expenses that have been incurred for purchasing computer is of capital nature and hence not allowed as deduction.

As per the provisions the assessee is entitled to claim deduction in respect of home expenses including a computer, phone or other electronic devices, which are to be used for the purpose of rendering of the services or production of goods in the daily course of operations, do the company.

It is clearly stated that in case the service is being rendered from a premise owned by the assessee then, that person as deduction can claim the cost required for running it.

The costs include the following

1. In respect of equipment’s such as computers, printers and telephones, the cost incurred in case the value of the asset is less than $300.  If the value of the asset or equipment is more than $300 then the cost will not be deducted but the reduction in the value will be allowed as deduction.
2. The calls that have been made for the purpose of work. This includes mobile phone calls. In addition to this phone rental is also allowed as deduction if it is possible to show that the business has to be conducted on call or the usage of the phone is regular in case of absence from the workplace (Tan et al., 2016).
3. Expenses in respect of heating, cooling and lighting.
4. The costs that have to be incurred in respect of repairing the office furniture and fittings.
5. The cost incurred for the cleaning purposes.

In order to avail deduction in respect of all these expenses the following records have to be kept.

1. Receipts or any sort of written evidence representing the depreciable asset purchased
2. Maintenance of diary is compulsory for the small and petty expenses of the offices like the expenditure amounting to less than $10, which do not have the corresponding receipt. The total of such items cannot be more than $200.  Diary has to be maintained for all such other expenses whose records or receipts are not available for e.g. stationery items (Ali et al., 2017).

Hence, all the expenses will be deductible subject to the keeping go proper records. However, in case of the equipment is purchased of amount more than $300 only there reduction in the corresponding value is eligible for deduction (Braithwaite, 2017). It is expected that all the queries is resolved if there is any further issue related to deductibility of expenses please feel free to contact. 

2.1.The Division 28 of the Income Tax Assessment Act 1997 deals with the rules relating to the deduction of car expenses that is owned or leased. The section 28-10 states that this Division is only applicable in case of individual or partnership. The loss or outgoing that is related to the operation of the car or decline in the value of car is referred to as car expenses as per section 28-13 of ITAA 97. The law allows the taxpayer to claim deduction for expenses incurred in performing employment related activity. In case the taxpayer uses the car for both private and work purpose then expenses proportional to the work can be claimed as deduction (Davis, 2015).

There are two method for calculating the deductible car expenses. These methods are cents per kilometre method provided under section 28-25 of the ITAA 97 and the log book method provided under section 28-90 of the ITAA 97. In the current case 69% of the time the car is used for work related purpose. Therefore 69% of the expenses relating to car is allowable expenses.

The law provides that if a taxpayer receives insurance pay-out for the destruction of the depreciable assets in that there is a need to calculate the balancing adjustments. The balancing adjustment is calculated after deducting the adjusted value of assets from the insurance pay out received at the time destruction. In case the log book method is used then the amount related to balancing adjustment needs to be adjusted for personal use. In the current case as the insurance pay-out is less than the adjusted value of car so it is not deductible.

2.The Division 40 of the ITAA 97 provides that a taxpayer is allowed to claim deduction for decline in value of depreciable assets. The decline in the value is generally measured with respect to the useful life of the assets. The section 40-30 of the ITAA 97 states that a depreciating asset is that which has limited useful life. It is provided in section 40-25 that the taxpayer can claim the decline in value of assets that was held by the taxpayer during the year (Davidson, 2016). In addition to this the assets should be used for producing assessable income or business activity. In this case a photo copier was purchased for official use therefore depreciation can be claimed.  However, in order claim additional deduction the section 328-175 allows small business entity to claim entire value of the assets as deduction from the assessable income.  

3.The expenses that are of capital nature cannot be claimed for immediate deduction. In case of capital expenses the taxpayer is allowed to depreciation as deduction. In the current case expenses have been incurred for carryout the extension of the warehouse. This is a capital expenditure so expenses will not be allowed as deduction. The section 43-20(1) allows to claim depreciation of warehouse using the prime cost method. The depreciation rate applicable is 4% and the period is of 25 years.

4.The section 8-1 clearly provides that the expenses that are necessary for producing assessable income and carrying out business activity are allowed as deduction. The expenses that are of personal nature are not allowable expenses. In case an expenses is combination of personal and business purpose then the portion of expenses that relates to the business is allowed as deduction (Symes, 2016). The section 25-25 of the Income Tax Assessment Act 1997 provides that expenses related to borrowing for producing an assessable income is deductible expenses. The deduction is spread over the period of loan.  In the current case 35% of the funds were used for personal purpose so remaining 65% is used for business purpose. This proportion will be used for allocating application fees. The interest expenses will be allowed for overall business purpose. Therefore the allowable expenses is given below:

5.The section 26-35 of the Income Tax Assessment Act 1997 states that in case of payment made to related entity only that much of the amount can be claimed that is considered to be reasonable by the commissioner. The tax legislation provides that the tax is payable on the taxable income. The taxable income is calculated after deducting assessable income from allowable deduction. If the taxpayer deducts unreasonable amount then the tax payable will be hence (Braithwaite, 2017). Hence, only the reasonable amount that is paid can only be claimed as deduction. In the current case the company will be allowed to claim deduction of $40000. 

6.The Taxation Ruling IT/2670 in Para 3 provides the meaning of trading stock in hand. It states that for section 28 of the act it is not necessary that the goods should be physically delivered to the tax payer (Berg & Davidson, 2015). In the case of Frozen Foods Pty Ltd v. F.C. of T. (1990) it was held that the goods that are in transit from the overseas supplier should be regarded as the stock in hand.  Therefore, it can be said though the stock has not been delivered but it should be included on the stock in trade of the business.

7.The loss incurred in the previous year can be bought forward and adjusted against the gain in the current year. The income on which tax is not paid is treated as exempt income. However, the exempt income can be taken into consideration when adjusting the tax losses of the previous year. The section 36-17 of the Income Tax Assessment Act 1997 provides that if the company has net exempt income. Then the tax loss is first deducted against net exempt income then against the assessable income. 

References

Ali, M., Sales, A. B. I. C. L., Barwick, J., Digirolamo, L., Australia, C. R., Officer, D. R., … & Khalid, A. (2017). School of Business.

Barkoczy, S. (2016). Foundations of taxation law 2016. OUP Catalogue.

Berg, C., & Davidson, S. (2015). Submission to Treasury Consultation Into Exposure Draft of Tax Laws Amendment (Tax Integrity Multinational Anti-Avoidance Law) Bill 2015. Institute of Public Affairs (Melbourne). Institute of Public Affairs.

Braithwaite, V. (2017). Closing the gap between regulation and the community. REGULATORY THEORY, 25.

Braithwaite, V. (Ed.). (2017). Taxing democracy: Understanding tax avoidance and evasion. Routledge.

Davidson, S. R. (2016). Submission to Parliamentary Joint Committee on Law Enforcement Inquiry into Illicit Tobacco’.

Davis, A. K., Guenther, D. A., Krull, L. K., & Williams, B. M. (2015). Do socially responsible firms pay more taxes?. The accounting review, 91(1), 47-68.

Symes, C. F. (2016). Statutory priorities in corporate insolvency law: an analysis of preferred creditor status. Routledge.

Tan, L. M., Braithwaite, V., & Reinhart, M. (2016). Why do small business taxpayers stay with their practitioners? Trust, competence and aggressive advice. International Small Business Journal, 34(3), 329-344.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2016). Australian Taxation Law 2016. OUP Catalogue.

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