Allowable Deductions under Section 8-1 of ITAA 1997
The present case situation is based on analysis of given four expenses to determine whether they are allowed for deductibility under section 8(1) of ITAA 1997.
According to the provisions of ITAA97 s 8-1, a “general” deduction is kind of loss or expenditure incurred that has a connection with activities related to income generation like personal exertion, investment or business activities and also is not of private, domestic or capital nature. Under ITAA97 s 8(5), a “specific” deduction is a deduction or an amount that a provision other than the general deduction provision. Provisions of deduction are also cover denial provisions that prevent deductions for some amounts.
According to the Income Tax Assessment Act 1997 Section 8-1 General deductions
- Any loss or outgoing can be deducted from the assessable income to the extent
- In gaining and producing assessable income it has been incurred or
- In carrying on business for the purpose gaining and producing assessable income it has been incurred (Newnham, 2012).
According to the Income Tax Assessment Act 1997 Section 8-1(2) following loss or expenses cannot be deducted:
- It is a loss of capital nature or outgoing of capital or
- It is a loss of private or domestic nature or outgoing of a private or
- In gaining or producing exempt income or non-assessable non-exempt income it has been incurred or
- The acts provision prevents from deducting it.
|
Scenario |
Allowable as deduction |
Reason |
|
Cost of moving machinery to a new site |
No |
No as it is a capital expense. |
|
Cost of revaluing assets |
Yes |
Due to lack of information it is assumed that advantage is recurring in nature and incurred for business purpose. |
|
Legal expenses for wind up |
No |
In this case, occurred legal expenditure will help the business in its wind up so it is in capital nature. |
|
Legal expenses incurred on services of a solicitor. |
Yes |
Yes because incurred expense mentioned is of revenue nature and incurred for business purpose. |
Conclusion:
According to application of cited provisions only cost of revaluing assets to effect insurance cover and Legal expenses incurred on services of a solicitor is deductible.
The present case situation is based on analysis whether Big Bank is entitled to take allowance of input tax credit of advertisement expenditure.
Input tax credit is not provided for the expenses which are related to input-taxed sales. According to Australian Taxation provisions there is no GST in the price of financial supplies as same is considered as input-taxed sales (Coleman and et.al. 2017). Financial supply considered following activities:
- Lending or borrowing money.
- Customer is granted credit.
- Buying or selling shares or other securities
- Under, a superannuation fund creating, transferring, assigning or receiving an interest.
- Under a hire purchase agreement, providing and receiving credit into before 1 July 2012 (CCH Australia Staff, 2012).
Still GST credit may be claimed for a purchase that is to make a financial supply if any of the following provision applies:
- The financial acquisitions threshold should not exceed.
- The amount borrowed is related to the purchase and is used to make a supply of non-input- tax (McCouat, 2012).
- Entitlement of reduced input tax credit is there if purchase qualifies as a reduced credit acquisition.
If or if not the Big Bank meet the terms with eligibility to claim input tax credit, is enumerated as below:
- Registration: Business is entitled for GST.
- Commercial Transaction –advertising expenses are held with regard to the management and have an open communication with the business. The price of purchases are inclusive of GST and the transaction is more than $82.50
- Tax invoices –bank had sufficient invoice as a proof for the expense incurred and payment of tax is available.
Conclusion:
By considering the legal provisions regarding GST input credit and the application of this on the cited case, it can be stated that the Big Bank is entitled to do claims for its input credit for the expenditure on advertisement on home and content insurance division. On the other hand, Big Bank is not allowed to make claim input credit for the remaining amount of 1,100,000, it is because banking principle does not fall under the purview of this deduction, but insurance do allows. Thus, any of the expense based on insurance associated goods or services are also allowed to make claim on input credit.
The present case situation is based on foreign off set for Angelo as he is earning income from home country as well as from foreign countries.
Maximum limit of foreign off set is difference of tax payable on total income and tax payable on home country income (Australian Government, 2017).
=Tax payable on total income – tax payable on home country income
=$12867.00 -$4731.00
=$8136.00
Working note 1: Tax payable on total income
|
Particulars |
Amount |
|
Gross income |
$62000.00 |
|
Taxable income |
$11697.00 |
|
Medicare levy |
$1240.00 |
|
Less: Low Income Tax Offset |
$70.00 |
|
Total amount of tax |
$12867.00 |
|
Calculation of Gross income |
|
Amount |
|
Employment income earned |
Australia |
$44,000 |
|
Employment income earned |
US |
$12,000 |
|
Employment income earned |
UK |
$8,000 |
|
Total rental income from property rented |
UK |
$2,000 |
|
Dividend income earned |
UK |
$1,200 |
|
Interest income earned |
UK |
$800 |
|
Total Gross income |
|
$68000 |
|
Expenses |
||
|
Amount paid for deriving employment income |
Australia |
$4,000 |
|
Amount paid for deriving employment income |
US |
$900 |
|
Amount paid for deriving employment income |
UK |
$500 |
|
Gift to a deductible gift recipient |
$400 |
|
|
Interest expense for earning dividend income |
$140 |
|
|
Expense for earning interest income |
$60 |
|
|
Total allowable deductions |
|
$6000 |
|
Taxable income |
|
$62000 |
Working note 2: tax payable on home country income
|
Particulars |
Amount |
|
Gross income |
$39400.00 |
|
Taxable income |
$4352.00 |
|
Medicare levy |
$788.00 |
|
Less: Low Income Tax Offset |
-$409.00 |
|
Total amount of tax |
$4731.00 |
|
Calculation of Gross income |
Amount |
|
Employment income earned |
$44,000 |
|
Expenses |
|
|
Amount paid for deriving employment income |
$4,000 |
|
Gift to a deductible gift recipient |
$400 |
|
Interest expense for earning dividend income |
$140 |
|
Expense for earning interest income |
$60 |
|
Total allowable deductions |
$4600 |
|
Taxable income |
$39400 |
The present case situation is based on computation of taxable amount by considering partnership business transactions of Johnny and Leon.
For computation of taxable income of partnership business transactions of Johnny and Leon provisions of ITAA 1997 will be applicable
Table 1: Taxable income for partnership business
|
Particulars |
|
Amount |
|
Assessable income |
||
|
Sales |
Sec 6-5 |
$40,000 |
|
Interest by bank |
Sec 6-5 |
$10,000 |
|
Dividend |
Sec 44 |
$21,000 |
|
imputation gross-up |
Sec 207-20 |
$5,400 |
|
recovery of bad debts |
Sec 20-30 |
$10,000 |
|
Exempt income (not assessable) |
Sec 6-20 |
|
|
Gain on capital |
Sec 106-5 |
– |
|
Total income |
|
$86,400 |
|
Deductions |
||
|
Sales proceeds stolen by employee |
Sec 25-45 |
$3,000 |
|
Capital loss of $15000 |
Sec 8-1 |
|
|
Salary to Johny and Leon |
N 1 |
|
|
Fringe benefit tax |
N 2 |
$16,000 |
|
Interest on loan |
N 3 |
$4,000 |
|
Interest on capital |
N 4 |
|
|
Johnny’s travelling expenses |
$3,000 |
|
|
Legal fees for the renewal of lease |
$2,000 |
|
|
Legal expenses for partnership agreement |
$1,200 |
|
|
Legal expenses for lease of business premises |
$700 |
|
|
Debt collection expenses |
$500 |
|
|
Council rates on business premises |
$500 |
|
|
Staff salaries |
N 5 |
$20,000 |
|
Purchase of sporting goods supplies |
$30,000 |
|
|
Rent on retail shop |
$20,000 |
|
|
Provision for doubtful debts |
N 6 |
|
|
Business lunches |
N 7 |
$10,000 |
|
Total deductible expenses |
$110,900 |
|
|
Taxable Loss |
|
24,500 |
Notes
|
1 |
The salaries of partners is disallowed as it form of distribution of profit. |
|
2 |
Expense related to Fringe Benefits Tax is allowed to employers as business expense |
|
3 |
Loan is taken for partnership business so it is deductible. |
|
4 |
Loan is taken for partnership business so it is deductible. |
|
5 |
The interest paid by partners is for loan used for personal purpose, so same will be disallowed. |
|
6 |
Provisions is not an actual loss of business so it is not deductible. |
|
7 |
It is deductible business expense so cost will does not affect its allowance. |
|
8 |
Previous year losses can’t be set off. |
References:
Australian Government, 2017. Guide to foreign income tax offset rules 2016 [Online]. Available through < https://www.ato.gov.au/individuals/tax-return/2016/in-detail/publications/guide-to-foreign-income-tax-offset-rules-2016/ > [Accessed on 20th September 2017]
CCH Australia Staff. 2012. Australian GST Legislation with Overview 2012. CCH Australia.
Coleman C., Hart G., Jogarajan S., Krever R. McLaren J., & Sadiq K., (2017) Principles of Taxation Law. Thompson Reuters, Sydney.
McCouat, P., 2012. Australian Master GST Guide. CCH Australia.
Newnham, M., 2012. Tax for Small Business: A Survival Guide. John Wiley & Sonsec
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