Issues on Allowable Deductions under s 8-1 of ITAA97
The issue is to determine whether the following cited expense are allowable as general deductions under section 8.1 ITAA 1997.
|
Expense 1 |
The cost of moving machinery to a new site |
|
Expense 2 |
The cost of revaluing assets to effect insurance cover |
|
Expense 3 |
Legal Expenses incurred by a company opposing a petition for winding up |
|
Expense 4 |
Legal Expenses incurred for services of a solicitor in respect of a number of matters |
Calculation of income tax is done according to the taxable income of taxpayer. Further the taxable income is computed by subtracting general and specific deductions from the total assessable income of taxpayer (Somers and Eynaud, 2015).
In accordance with ITAA97 s 8-1, a general deduction is loss/expense that contains an applicable relation with the income generating activities, such as personal efforts, investment or operating activities, but it is not of capital and neither of domestic nature.
One can make deduction from their assessable income if any loss/outgoing satisfies one of the following two provisions:
- If the loss/outgoing is incurred while producing or gaining assessable income
- It is automatically incurred in carrying a business with the intention of producing or gaining assessable income (SECTION 8-1 General deductions, 2017).
Under s 8-1(2), one the other hand one cannot make deductions from their assessable income if any loss/expense if following cited aspect is satisfied as Act does not allow to make deduction:
- If it is held as a loss/expense of a capital nature
- If it is held as a loss/ expense of private nature
- If it is incurred regarding the producing or gaining of non-assessable income or exempt income
|
Expense |
Allowance or disallowance |
|
Expense 1 |
No, as it is capital expenditure and thus it is not entitled in terms of deduction as per 8-1 of ITAA 1997. Although, this expense can raise product’s cost as transaction following depreciation will be considered. |
|
Expense 2 |
Yes, in order to determine expense deduction regarding fixed assets, the company is required to check that if the incurred expense is increased or make increment in earning capacity, or the expense is held for the intention of perseverance or protection. In this situation, it is supposed advantage occurred will be provisional and continuing, thus is entitled deductible as per the section. |
|
Expense 3 |
No, the major transactional issue raised in this present case is that the considered expense has a connection with the capacity of revenue yielding or has a connection with work activities. In the event, it is assumed that all the legal expensed will assist business during its wind-up and consequently this will appear as an expense of capital nature. |
|
Expense 4 |
Yes, to make a decision if an expense is deductible or not, the necessity of information is there, like nature, distribution or any other related factor. However, the expenses been described in this cited seems to be of revenue nature, and therefore the estimates meet the term with s 8-1. |
The issue is to analyse whether Bank is entitled to take credit on an expense incurred of $1,650,000 Out of this, $550,000 was assigned to a TV ad campaign that was focused solely on the home and contents insurance policy. The remaining amount was assigned to a general advertisement campaign for the entire company and included different modes of marketing.
Financial supplies are sales of input-tax, in which supplier cannot claim for GST in their process.
One can form a financial supply if has performed any of the mentioned aspects:
- Engaged in lending or borrowing funds
- Allowed credit to a consumer
- Involved in buying and selling of shares
- Produced, transferred, consigned or obtained interest in, or had provided rights under superannuation fund (Dunne, Mason and Patto, 2014)
In certain circumstances, one is allowed to charge GST for purchases that will be used to form a financial supply, if any of the mentioned aspects are applied:
- One has not surpassed the financial acquisitions threshold
- Their purchases are not related to the borrowed amount and are used to make a non-input-taxed supply
- Their purchase meets the criteria of a reduced credit acquisition then the taxpayer is allowed to make the reduction of input tax credit.
In the cited case; it can be noticed that $1,100,000 is for advertisement of general services which are related to lending funds and same is covered in input-tax on which tax credit cannot be claimed. However, on insurance services, GST is to be paid so the expense of advertisement specifically related to this service will be eligible for input tax credit.
Conclusion
Credit can only be availed for the amount of $550,000, as it was to be paid to a campaign of television advertising for the promotion of Big Bank home and contents insurance policies.
The issue is to determine the amount of foreign tax offset limit for Angelo by considering his income from foreign and national sources:
The Foreign tax off-set limit is computed to provide relief to assess from double as Australian residents are required to pay tax in Australian on their all worldwide income, so income tax paid by them in foreign countries need adjustment so relief is provided to them (Barkoczy, 2016).
Foreign tax off-set limit is computed by reducing the taxable amount by considering all income sources from the taxable amount by considering income only from home country. Calculation for Angelo is as follows:
Table 1: Statement showing Taxable income of Angelo by considering income from all sources
|
Income from various sources |
Amount |
||
|
Employment revenue |
|||
|
Earned in the Australia |
$44,000.00 |
||
|
Earned in the United States |
$12,000.00 |
||
|
Earned in the United Kingdom |
$8,000.00 |
$64000 |
|
|
Rental revenue from property |
$2,000.00 |
||
|
Earned in the United Kingdom |
|||
|
Dividend revenue |
|||
|
Earned in the United Kingdom |
$1,200.00 |
||
|
Interest revenue |
|||
|
Earned in the United Kingdom |
$800.00 |
||
|
Total gross income |
$68000.00 |
||
|
Allowable deductions |
|||
|
Expenses incurred for earning employment income |
|||
|
From the Australia |
$4,000.00 |
||
|
From the United States |
$900.00 |
$4900 |
|
|
Expenses incurred for earning rental income |
|||
|
From the United Kingdom |
$500.00 |
||
|
Gift to a deductible gift recipient |
$400.00 |
||
|
Interest paid to obtain dividend income |
$140.00 |
||
|
Expenses incurred to earn interest income |
$60.00 |
||
|
Total allowable deductions |
$6000.00 |
||
|
Taxable income |
$62000.00 |
||
|
Total tax payable** |
$12937.00* |
Low-income off tax is not considered
(Tax on income + Medicare levy)
Table 2: Statement showing Taxable amount for Angelo by considering income of Australia
|
Income from various sources |
Amount |
|
Employment income |
$44,000.00 |
|
Allowable deductions |
|
|
Expenses incurred for earning employment income |
$4,000.00 |
|
Gift to a deductible gift recipient |
$400.00 |
|
Interest paid to obtain dividend income |
$140.00 |
|
Expenses incurred to earn interest income |
$60.00 |
|
Total allowable deductions |
$4600.00 |
|
Taxable income |
$39400.00 |
|
Total tax payable (Tax on income + Medicare levy) |
$5140.00* |
Low-income off tax is not considered
(Tax on income + Medicare levy)
Table 3: Statement showing offset limit
|
Taxable income of Angelo by considering income from all sources |
$12937.00 |
|
Taxable amount for Angelo by considering income of Australia |
$5140.00 |
|
Offset limit |
$7797.00 |
The issue is the computation of taxable income for partnership business of Johnny and Leon.
|
Particulars |
Amount |
|
|
Assessable income |
||
|
Sales as per s.6-5 of ITAA97 |
$40,000.00 |
|
|
interest received as per s.6-5 of ITAA97 |
$10,000.00 |
|
|
Dividend income as per s.44 of ITAA97 |
$21,000.00 |
|
|
Gross-up imputation as per s.207-20 of ITAA97 |
$5,400.00 |
|
|
Bad debts recovery s.20-30 of ITAA97 |
$10,000.00 |
|
|
Exempt income as per s.6-20 of ITAA97 |
||
|
Capital gain as per s.106-5 of ITAA97 |
– |
|
|
Total income |
$86,400.00 |
|
|
Deductions |
||
|
Sales proceeds stolen as per S.25-45 of ITAA97 |
$3,000.00 |
|
|
Capital loss of $15000 as per S. 8-1 S. 8-1 of ITAA97 |
||
|
Salary to partners* |
||
|
Fringe benefit tax** |
$16,000.00 |
|
|
Interest on loan |
$4,000.00 |
|
|
Interest on capital |
||
|
Travelling expenses of Johnny from home to work and return |
$3,000.00 |
|
|
Legal fees for the renewal of lease of the office building |
$2,000.00 |
|
|
Legal expenses regarding formation of a partnership agreement |
$1,200.00 |
|
|
Legal expenses for regarding formation new lease of business premises |
$700.00 |
|
|
Debt collection expenses paid to a solicitor |
$500.00 |
|
|
Council rates on business premises |
$500 |
|
|
Staff salaries as per QC33728 of ITAA97 |
$20,000.00 |
|
|
Purchase of sporting goods supplies |
$30,000.00 |
|
|
Rent on retail shop |
$20,000.00 |
|
|
Provision for doubtful debts as per s. 63 of ITAA97 |
||
|
Business lunches |
$10,000.00 |
|
|
Total deductible expenses |
$110,900.00 |
|
|
Taxable Loss (Total income – Total deductible expenses) |
($24,500) |
Salary of partners is not allowed
Expenses of fringe benefits tax paid are an allowable expense for the employer
References
Barkoczy, S., (2016). Foundations of Taxation Law 2016. OUP Catalogue.
Dunne, J., Mason, J. and Patto, J., (2014). 2013 cases show high ATO success rate. Taxation in Australia, 48(8), p.429.
Somers, R. and Eynaud, A., (2015). A matter of trusts: The ATO’s proposed treatment of present unpaid entitlements: Part 1. Taxation in Australia, 50(2), p.90.
Section 8-1 General deductions. (2017). Income Tax Assessment ACT 1997. Retrieved from < https://www.ato.gov.au/law/view/document?docid=PAC/19970038/8-1>.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
