Issues:
Discuss about the Understanding The Consequences Of Tax For Icon Pty Ltd.
The current issue is based on the understanding the consequences of tax for Icon Pty Ltd. The issue here highlights whether Icon Pty Ltd would be able to claim an allowable deduction under “section 8-1 of the ITAA 1997” on transactions that are occurred during relevant income year.
- “section 8-1 of the ITAA 1997”
- “Softwood Pulp & Paper v FCT 1976”
- “W. Nevill & Co v FCT (1937)”
- “Esso Petroleum Co Ltd v Harper’s Garage (Support) Ltd (1968)”
- “TR 94/D33”
- “Buckley v Young Ltd v Commissioner of Inland Revenue (1978)”
- “The Herald and Weekly Times Ltd v FCT (1932)”
- “Magna Alloys and Research Pty Ltd v FCT (1980)”
- “Hallstorms Pty Ltd v FCT (1946)”
- “Sun Newspaper Ltd v FCT (1959)”
As per the “section 8-1 of the ITAA 1997” a person is allowed to an entitlement of an allowable general deduction from their assessable proceeds relating to any loss or expenses till the degree that the outlays are experienced in creating or generating the chargeable earnings. Additionally, the positive limbs of “section 8-1 of the ITAA 1997” states that a taxpayer is permitted to claim deductions for expenditures that are incurred necessarily in execution of the commercial activities with the objective of attaining or generating the chargeable earnings (Woellner et al., 2016). The evidences obtained from the case study of Icon Pty Ltd states that the company in the recent years has suffered the substantial amount of business losses and indulged in the service of On The Ball Pty Ltd to perform the efficiency study that is aimed at restructuring or reorganizing the business activities. The expenses were primarily incurred in raising the productivity of business and lowering its business costs. The efficiency study conducted by the company resulted in incurring the expense of $50,000.
According to the nexus test for an expense to qualify for deductions there should be a sufficient association among the expenses or loss and either of the positive limbs. According to the general provision of the “section 8-1 of the ITAA 1997” losses or outgoings that are preliminary to the beginning of the business or the income generating activities are not considered for deductions that are not incurred in the course of producing business income (Barkoczy, 2016). As held in the case of “Softwood Pulp & Paper v FCT 1976” the company incurred cost on the feasibility study and other relevant costs to determine whether to establish a new production paper mill (Basu, 2016). The commissioner of taxation in its view stated that the costs that were incurred cannot be allowed as deductions since everything that was done was held as preliminary to the beginning of the income generating activity or business.
Similarly, in case of the Icon Pty Ltd the company has incurred an expense of $50,000 for efficiency study which is not incurred in the course of gaining business income and cannot be considered as the permissible deductions under the general provision of “section 8-1 of the ITAA 1997”. The cost was preliminary to the beginning of the income producing activities.
Laws:
The later instances of the case study of Icon Pty Ltd states that the company upon the recommendations of the On The Ball Pty Ltd certain number of employees of the Icon Pty Ltd were cut back and also included the general manager of the company as well. The company paid a lump sum of $80,000 as the agreement for the termination of the service from the four-year employment contract that was due to expire in six months. As per to the “section 8-1 of the ITAA 1997” to qualify for the deductions the losses or outgoings should have been incurred (Cao et al., 2015). As the general rule an individual incurs the outgoing when they owe the present money debt which they cannot escape. Consequently, for a loss or outgoings that might be incurred under the “section 8-1 of the ITAA 1997” is entirely subjected to the loss or outgoings. The taxpayer might have the present current liability in spite of the liability might be considered defensible by the others (Morse & Deutsch, 2016). The taxpayer might have the current existing liability in spite of the amount of the liability could not be entirely determined given that it is capable of reasonable estimations.
For the expenses to be permitted as deductions under the “section 8-1 of the ITAA 1997” it is at times enough that the loss or the outgoings has been incurred (Saad, 2014). The outgoings should be properly referable during the year of income in which the taxpayers seek deductions. As held by the court in the case of “W Nevill & Co v FCT (1937)” the court of law allowed the taxpayer a deduction associated to the sum that was paid to one of its managing director as the consideration for agreeing the managing director to resign (Graetz & Warren, 2016). The payment by the taxpayer was with the objective of improving the efficiency of the company.
As evident in the case of Icon Pty Ltd the company paid a lump sum of $80,000 as the retrenchment payment to the general manager for agreeing him to resign from his four-year employment. The sum that was paid to its general director as the consideration for agreeing the managing director to resign. The payment by the taxpayer was with the objective of improving the efficiency of the company (Robin & Barkoczy et al., 2018). Hence, Icon Pty Ltd would be allowed to allowed to claim deductions for the expenses relating to the retrenchment payment made to the employee.
Applications:
Restrictive covenants might be under the general law amounts to the covenants in restraint of the trade. The court of law in “Esso Petroleum Co Ltd v Harper’s Garage (Support) Ltd (1968)” stated that the restraint of trade refers that an individual has agreed to give up some of the freedom that would have otherwise (Robin, 2017). The taxation ruling of the “TR 94/D33” states that the trade restraint is valid at the common law that is not held to be the unreasonable restraints by the courts needs that the convene is entitled to protect an interest (Blakelock & King, 2017). The examples of the trade ties and the exclusive agreements comprises of the agreement not to compete. This includes the restrictions on the competition where the full payment made under the covenants constitute the non-competition financial value with no such amount is attributable to the goodwill of the company.
As held in the case of “Buckley v Young Ltd v Commissioner of Inland Revenue (1978)” the payment made for the restrictive covenants cannot be allowed as deductions since expenditure incurred was in return for the company’s undertaking not to compete or prejudice to the interest of the taxpayer (Roe, 2017). The expenses were not deductible under the provision of “section 8-1” of the Act. Similarly, in the case of Icon Pty Ltd the payment made to the general director for not competing directly with the business and refraining from engaging in any employment would not be allowed as it was capital in nature to preserve the goodwill of the company. The expenses were non-allowable deductions under “section 8-1 of the ITAA 1997”.
“Section 8-1 of the ITAA 1997” allows the taxpayer to obtain the allowable deductions associated to all the losses and outgoings up to the extent to which they are occurred in gaining the producing the taxable income (Fry, 2017). However, there is an exception that outgoings should not be of capital, private or domestic nature or it is associated to the earnings of the exempted income. The court of law in “Hallstorms Pty Ltd v FCT (1946)” stated that in ascertaining whether the deductions for the legal expenses is considered as permitted deductions under “section 8-1 of the ITAA 1997” the nature of the expenditure should be considered (Kirchler & Hoelzl, 2017). The nature of the legal expenditure carries the advantage that is pursued to be gained by occurring the expenditure. Given the advantage is to be gained is capital in nature then the expenditure that is occurred is for attaining the advantage would also be classified as capital in nature.
The legal expenditure might carry the nature of revenue and hence considered as allowable deductions if they originate from the daily business activities of the taxpayer or revenue generating activities (Fleurbaey & Maniquet, 2017). The taxation commissioner in “Sun Newspaper Ltd v Federal Commissioner (1959)” stated that expenditure that is dedicated towards the structural instead of operational purpose then the expenditure forms capital in nature and the expenses is not allowed as deductions (Oats et al., 2017).
Citing the reference of the above stated instances the legal expenditure incurred by the Icon Pty Ltd in opposing the extension for patent cannot be allowed as deductions since it was capital in nature. The advantage that was sought by the Icon Pty Ltd to pursue the legal action was to preserve the current patent of manufacturing the perfume and selling the same to the retailers. The legal expenditure that was occurred by the Icon Pty Ltd is accordingly having capital in nature (Schenk, 2017). Since the legal expenses that is incurred by the Icon Pty Ltd are having the capital and the same would not be allowed as the allowable deductions under the “section 8-1 of the ITAA 1997”.
The instances obtained from the present case study provides that Icon Pty Ltd directors and agents were charged with the illegal secret commissions to its employees of the retail purchasers as the means of increasing the sales of the company products. “Section 8-1 of the ITAA 1997” allows the taxpayers to claim deductions for the entire amount of losses and outgoings up to the extent for which they incurred in producing the taxable income except where the expenditure is capital or domestic in nature (Pope et al., 2017). The court of law in the case of “The Herald and Weekly Times Ltd v FCT (1932)” states that the legal expenditure are allowed as deductions given the legal expenditure is incurred in day to day income generating activities of the taxpayer (Samansky & Smith, 2017).
The court of law in “Magna Alloys and Research Pty Ltd v FCT (1980)” allowed the company to claim deductions relating to the legal expenditure that is occurred in defending its directors and agents against the charges that they received the secret commissions (Bankman et al., 2017). The commissioner of taxation stated that the necessarily occurred does not represents unavoidable or fundamentally compulsory. An important thing is that the expenditure that is appropriate and adapted for the ends of the business that is carried on with the objective of deriving taxable income. The taxpayers interest was inextricably engaged with those of its directors and agents and was simply in the own interest of the taxpayers that the directors and the agents were represented properly. The decision concluded by the court of law stated that the expenditure incurred were allowed as the deductible since the taxpayer was inextricably engaged in the business events and its interest were tied with the directors.
As evident in the current case study of Icon Pty Ltd the legal expenses that were occurred by the Icon Pty Ltd for the secret commissions to the employees would be considered as the allowable deductions. The expenses were suitable and adapted for the ends of the business that was carried on by the Icon Pty Ltd with the purpose of deriving taxable income. The interest of Icon Pty Ltd was inextricably engaged with those of its directors and agents and was simply in the own interest of the taxpayers that the directors and the agents were represented properly. Citing the reference of the above stated case it can be stated that the legal fees and fines would be permitted as deductions under “section 8-1 of the ITAA 1997” (McDaniel, 2017). For Icon Pty Ltd the outgoings should be reasonably considered as the desirable or the appropriate to pursue the business ends.
The evidences gained from the case study provides that Icon Pty Ltd bought a building for the purpose of showroom products use. The company had un-deducted cost of construction that stood $160,000. According to the “Taxation Ruling of 97/25” that are relevant in determination of the relevant deductions under “division 43 of the ITAA 1997” relating to the expenses on construction of the taxable income producing buildings and other capital works (Bankman et al., 2017). An individual taxpayer is allowed to claim deductions relating to the capital works under the division 43 relating to the amount of the construction expenditure that includes the capital expenditure that is occurred in relation to the construction of those capital works. Furthermore, “section 40-25 (1) of the ITAA 1997” provides that an organization can subtract the sum that is equivalent to the decline in value of the depreciating assets that is held by the taxpayer during the income year (Schenk, 2017). The “Taxation Ruling of 97/25” is applicable to the taxpayers that holds the income generating building or the other capital works during the year of income.
The “Taxation Ruling of 97/25” provides that a deduction is available to the taxpayer under division 43 is reliant on the other things such as capital expenditure that are incurred in relation to the construction of the capital works (Fry, 2017). The ruling provides that deductions is determined with reference to the sum of such expenditure that is occurred by the owner, lessee or quasi-owner of the capital works when such works are undertaken. It is worth mentioning that the value of the owner’s contributions does not forms the part of the construction expenditure.
Citing the above stated reference it can be stated that the taxation ruling of “Taxation Ruling of 97/25” is applicable on Icon Pty Ltd since the taxpayer held the income producing during the year of income. Icon Pty Ltd would be able to claim deductions for the capital works under the division 43 for the un-deducted cost of construction (Roe, 2017). The sum of $160,000 would be held as the capital expenditure by the operation of the “sub-section 43-85 (2)” since the expenditure has been incurred by the Icon Pty Ltd in respect of the construction of the capital works. Icon Pty Ltd would be able to claim deductions under division 43 relating to the capital expenditure that was incurred in respect of the construction of the capital works. Conclusively, with reference to the “Division 43 of the Taxation Ruling of 97/25” Icon Pty Ltd would be able to claim an allowable deduction under the “sub-section 43-85 (2)” for the un-deducted cost of $160,000 since it was occurred in the relevant year when the asset was held by the company.
Conclusion:
On a conclusive note it can be stated that the Icon Pty Ltd would not be able claim deductions for the sum of $50,000 under the general provision of “section 8-1 of the ITAA 1997”. Additionally, the company would not be able to claim deductions for the sum of $80,000 and $100,000 as it was capital in nature.
Reference List:
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