Analysis Of Allowable Deductions And Foreign Income Tax Offset Calculation For ITAA 1997

Answer 1

The observation of applicability of deductions on the specific expenditures could be reviewed with references to s 8-1 of ITAA 1997. The observation of ITAA97 as a benchmark for determining assessable income and allowable deductions is characterized by the definition of allowable deductions. The division 8of ITAA 1997 is particularly directed towards estimation of allowable deductions. The following expenditures would be considered for review in order to determine allowable deductions.

The expenses incurred for relocating machinery to a new site could be classified as the moving of tangible fixed assets from one location to another thereby implying capital expenditure. The expenditure on relocation could therefore be excluded from any deduction according to the Section 8-1 of ITAA97 (Barkoczy, 2016). Another significant element that could be observed in context of this expenditure is observed in the form of the capability of the expense to improve the overall cost of items through provision of opportunities for calculating deduction.

The profound highlights that can be inferred in context of this expenditure with respect to a fixed asset refer to the opportunities for improving the capability for earning revenues or provide competences for safeguarding the prospects for income earning. The expense incurred for the measure for revaluation of assets could be perceived as revenue expenditure in order to address the organization’s operations (Blakelock & King, 2017). However, it is also imperative to observe that the Section 8-1 of ITAA97 considers expenditures in context of fixed assets as a reasonable indicator for ensuring deductions. The notable ambiguity that is perceived in context of this expenditure can be apprehended in the challenge for determining where the expenses were incurred in context of the operations of the organization or its existing structure and its competences for generating revenue. The present context dictates that the outcomes of the case could be detrimentally impactful on the abilities of the organization to generate acquire profits (Borrego, 2016). Therefore the expenditure for legal proceedings could be regarded as capital expenditure and can be otherwise classified as revenue expenditure in instances of higher inclination of the case towards the operational procedures of the business.

Legal expenses for solicitor services such as discharge of mortgage, conveyancing and legal advice related to client’s business operations: It is essential to observe that the solicitor account does not allocate different costs for the various matters. Therefore the contextual environment of the case could present profound implications for evaluating the nature of the expenses alongside the allocation implemented with respect to the expenses. The different expenses incurred by an organization in the solicitor’s services could not be identified distinctly thereby leading to ambiguities in implementing deductions on the expenditures (Chaisse, et al., 2015). Hence determining the nature of expenses in different solicitor services would be a major insight into the applicability of deductions for the expenses according to the Section 8-1 of ITAA97 (Christie, 2015). The common precedent suggesting expenditure on fixed assets as capital expenditure is reflective of the factor that such expenses would not be subject to any sort of deduction. On the other hand, expenditures which are incurred in context of the business operations are classified as revenue expenditures which could be subject to deductions.

Allowable deductions based on Division 8 of ITAA 1997

 The issue which has been identified profoundly in this case refers to estimation of the liability of Big Bank for claiming input tax credit on the expenditures incurred by the bank for advertisements. The advertisement expenditure can be classified as revenue expenditure. The organization could claim an amount of $100,000 as Input Tax credit which has been identified as the amount of expenses on print media (Krever, 2014). The other expenses on advertisement could not be encompassed under Input Tax Credit thereby implying that they are not liable for any taxation. Hence it can be concluded that the expenditures of Big Bank on print media could be invariably claimed as input tax credit which have been estimated at $100,000 (Lyons, 2014).

Calculation of foreign income tax offset can be applicable in scenarios where Australian resident taxpayer is associated with investments in a financially transparent entity in a foreign jurisdiction. The calculation is governed by the precedents established in division 770 of the Income Tax Assessment Act 1997 (Motro, 2016). The estimation of foreign income tax offset limits in the case of Angelo can be illustrated as follows:

The taxable income in this context was identified to be $62000. The total tax payable on the taxable income after the inclusion of a 2% Medicare levy could be calculated as $12,937. The Medicare levy is applicable according to the Medicare Levy Act 1986 implying calculation at a base rate of 2% and addition to the net tax payable (Peattie, 2013). The addition of the Medicare levy could be observed in the Section 6 of the Medicare Levy Act 1986. It is also imperative to observe that the taxable income also comprises of the medical expenses owing to their exemption from deductions (Rametse, 2015).

It can be observed that the assesse does not have any indication of money in their assessable income that can be associated with payments with respect to foreign income tax (ROBIN, 2017). The calculation of foreign income tax paid on income set off against other income source observed primarily in non-Australian origins could be presented as follows:

The assessment of the employment income of Angelo generated by him from United Kingdom provides a critical insight into the fact that Angelo has defaulted in the payment of $8000 which was due as foreign income tax (Snape & De Souza, 2016). Therefore, the deduction of an amount of $8000 from the assessable income of Angelo could be validated in this context. The primary reason for deduction of the foreign income tax amount from the assessable income of Angelo could be identified in the factor that the origins of income of $8000 were non-Australian.

Expenditures for relocating machinery, revaluation of assets, and legal expenses for solicitor services

The expenditure and costs involving money that is utilized as payment for foreign income tax and its involvement in the assessable income have been validated (STEPHEN & BARKOCZY, 2017). The major underlying factor in this case refers to the consideration of tax with respect to the offsetting of foreign income and income from non-Australian sources that can be included in the assessable income. It is also imperative to note that the consideration of tax would not consider the deductions that are imposed for debts or loans.

The noticeable highlight to be observed in this case refers to the deduction implemented in context of a debt or loan amounting to $200. The particular observation of the dividend income and interest income acquired from United Kingdom have also been assumed as major highlight in this case owing to the factor that Angelo does not have ownership of any permanent establishment in overseas jurisdictions (Taylor & McNamara, 2014). Furthermore, the above reasons also raise questions on the deduction of $400 with respect to the gift and its connection to the omitted assessable income. However, the deduction of $400 could be validated since it is addressed as the deductible gift recipient.

The computation of tax on assessable income could be presented as follows:

An imperative factor to be noted in this context implies that calculation of tax would be implied on the taxable income of $39,400. The tax that has been calculated on the assessable income also involves medicare levy of 2% and is estimated to be $5140 (Woellner, et al., 2016).

The foreign income tax offset limit that can be apprehended in case of Angelo is estimated to be $7,797. The amount is derived by subtracting the tax calculated on assessable income i.e. $5140 from the net tax payable on the taxable income i.e. $12,937. Angelo has already paid an amount of $4,400 as foreign income tax as observed in this case. Therefore, Angelo could be considered eligible for the privileges to offset the total amount of paid foreign tax from the outstanding tax liability against him (Woellner, et al., 2016). This factor could be validated on the grounds of the paid foreign tax amount being lesser than the offset limit. 

Therefore it can be clearly inferred that the variance noted between the foreign income tax paid by Angelo and the foreign income tax offset limit could not be allowed to be forwarded to another income year in the future.

Classification of expenses as capital or revenue

The concerns for computing the net income derived from the partnership, allowable deductions and the assessable income could be monitored by the precedents established in the provisions of ITAA97 (Taylor & McNamara, 2014). The provisions of ITAA97 suggest that all the expenses could be subject to deductions. Another important consideration that can be observed in context of determining the applicability of deductions according to the provisions of ITAA97 for this case refer to the implications for nature of the expenses incurred and the effect of the expenses on the business or the partner. 

The review of the expenses from the perspective of their nature could be broadly categorized into the perspectives of capital expenditure and revenue expenditure. Capital expenditures are observed in cases where the business implements the investments and is not liable to obtain any improvement in its capabilities for earning revenue. On the contrary, expenses of a business can be classified as revenue expenditures if they are aligned with the operational aspects of the business (Chaisse, et al., 2015). The criteria for allowing deduction could be observed in the determination of whether the expenses are capital expenditure or revenue expenditure. It is also imperative to consider that the recognition of assessable income facilitates the opportunity to reflect on the nature of income or profits according to the provisions established according to ITAA97 (Blakelock & King, 2017). The calculation of the net income from partnership could be realized by referring to the terms stated in the provisions of ITAA97 related to the aspects of assessable income and the precedents for deductions on taxable income. 

References

Barkoczy, S., 2016. Foundations of Taxation Law 2016. OUP Catalogue.

Blakelock, S. and King, P., 2017. Taxation law: The advance of ATO data matching. Proctor, The, 37(6), p.18.

Borrego, L.M.P., 2016. State Aid Law and Taxation. Bocconi Legal Papers, 7, p.97.

Chaisse, J., Lang, M., Günther, O.C., Kollmann, J. and Li, N. eds., 2015. International Taxation: Law and Practice in Hong Kong and China. Wolters Kluwer Hong Kong Limited.

Christie, M., 2015. Principles of Taxation Law 2015.

Krever, R.E., 2014. Australian Taxation Law Cases 2014: A Guide to the Leading Cases for Commerce and Law Students. Thomson Reuters.

Lyons, T., 2014. The modernisation of EU state aid law and taxation. British Tax Review, (2), pp.113-119.

Motro, S., 2016. The Income Tax Map: A Bird’s-eye View of Federal Income Taxation for Law Students.

Peattie, L., 2013. Understanding taxation law 2013 [Book Review]. Ethos: Official Publication of the Law Society of the Australian Capital Territory, (229), p.37.

Rametse, N.T.H.A.T.I., 2015. Measuring the costs of implementing the former carbon tax for Australian liable entities. New Zealand Journal of Taxation Law and Policy, 21(2), pp.190-213.

Robin, H., 2017. Australian Taxation Law 2017. Oxford University Press.

Snape, J. And De Souza, J., 2016. Environmental Taxation Law: Policy, Contexts And Practice. Routledge.

Stephen. Barkoczy, 2017. Foundations Of Taxation Law 2017. Oxford University Press.

Taylor, D. and McNamara, N., 2014. The Australian consumer law after the first three years-is it a success?. Curtin Law and Taxation Review, 1(1), pp.96-132.

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

Woellner, R.H., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law Select: Legislation and Commentary 2016. Oxford University Press. 

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