Legal And Tax Analysis Of Deductions Under Section 8-1 Of ITAA 1997 And Input Tax Credits For Advertising Expenses

Issue 1

Whether the following are allowable as deductions under s 8-1 of ITAA 1997?

Under section 8-1 of ITAA 1997, the expenses that are deductible are those which are either incurred in earning the assessable income or are incurred while carrying on the business through which the said assessable income shall be earned. Deduction of those expenses is not allowed as a deduction which is either capital in nature or private/ domestic in nature or the expenses which are in relation to earning of exempt income (Kobestky, 2005).

The cost of moving machinery to a new site – in case, this expense pertains to brand new machinery which is being moved from the place of purchase to the new site, then the expense shall be included in the capital cost of purchase of machinery and shall be deemed to be of capital nature. Hence such expense will not be allowable under section 8-1 of ITAA 1997, as the same is of capital nature and expenses of capital nature are disallowed under s 8-1. The expense shall be added up or allowed as expenses shall solely depend upon the nature of asset whether it is a new asset or old asset. In case it is brand new machinery, all the expenses incurred up to its use date shall be added up to its cost and it shall be part of the cost of the asset (Fullerton et. al, 2017). For example Transportation expenses, Installation, and commissioning expenses.

In case this expense is for moving the old machinery from existing site to a new site, then it shall be deemed to be a transportation cost and hence would be allowable as deduction.

1. The cost of revaluing assets to effect insurance cover

The expenses incurred in the revaluing of assets for the purpose of claiming exemption are allowable if the same are incurred for the recovery of loss of incomes directly or indirectly attributable to the assessable income. There can be two circumstances in case of an insurance claim (Fullerton et. al, 2017). In the case where the asset for which insurance claim is being received is of capital nature, it means that the capital asset was destroyed and the insurance cover is for recovery of loss from destruction of a capital asset. In this case, the expenses that will be incurred for recovery of insurance claim shall be deducted from the insurance claim amount received and will not be considered as a business expense in the income statement.

Rule

On the other hand, where the insurance claim is for claiming loss of assets which are held as stock in trade, it means that the assets are not capital assets and are directly related to the assessable income which is shown in the income statement. In such a case, the expenses incurred for claiming recovery of loss of stock are allowable as a business expense. It is done for the business benefit so it shall be allowed as business expenses. Such expenses shall be charged to profit and loss account and treated as expenses incurred for recovery of losses of stock (Hopewell, 2017).

Hence, in the given case if the revaluing of assets held as the stock is being done, then the expenses on revaluing shall be allowable under s 8-1 of the ITAA 1997.

Under section 8-1 of ITAA 1997, the expenses that are deductible are those which are either incurred in earning the assessable income or are incurred while carrying on the business through which the said assessable income shall be earned. Deduction of those expenses is not allowed as a deduction which is either capital in nature or private/ domestic in nature or the expenses which are in relation to earning of exempt income.

Hence, if we interpret the given situation with reference to s8-1, the legal expenses incurred by the company opposing a petition for winding up does not fall under s 8-1 because it is not being incurred for earning assessable income and also it is not the expenses to be incurred necessarily to carry on the business to earn the assessable income (Renton, 2005). The expenses paid is also to be checked in light of its total amount as well because larger the amount spent by the company, it can’t be treated as business expenses.

But, as it is a legal expense which has been incurred for the continuance of the business by opposing to its winding up, it is an expense specifically allowable under section 25-5.

Under section 8-1 of ITAA 1997, the expenses that are deductible are those which are either incurred in earning the assessable income or are incurred while carrying on the business through which the said assessable income shall be earned. Deduction of those expenses is not allowed as a deduction which is either capital in nature or private/ domestic in nature or the expenses which are in relation to earning of exempt income (Sadiq et. al, 2017).

Application

In the given case, the solicitor account does not separate the costs for various matters and hence the various legal expenses cannot be bifurcated into capital or revenue nature. The legal expenses for all the matters mentioned have been assumed here as incurred for business purposes only. Further, all these expenses have been incurred for recovery of the income which shall further become a part of the assessable income.

Conclusion

So in the above solution, answers have been provided with its proper reasoning as to why the expenses shall be allowed or not allowed in the business. If we separate the given purposes mentioned above, the legal expense for the discharge of mortgage can be treated as a capital nature purpose and hence shall not be allowed under s 8-1. Other expenses shall be allowable as deduction

Can Big Bank’s claim input tax credits in regard to its advertising expenditure of $1,650,000?

In the given case, the Big Bank Limited is a bank that operates on a national basis and is registered under GST. Similar instance was held in the case of Hua-Aus Pty Ltd v Commissioner of Taxation [2010] FCA 341 that the taxpayers should endure the responsibility of proving that an evaluation is excessive, the taxpayer provided responsibility of proving that there is no adverse presence of credit and that the taxpayer provided a proper explanation of moneys then there is no rejection of procedural fairness.

It has more than 50 branches and has a huge 10-storey office and numerous call centers for calling up its customers. Since past many years, the Big Bank Ltd. has been providing facilities of loans and deposits to customers in Australia. It provided facilities to its customers. It has also recently launched a new product which is home and contents insurance policies and it is considered as one of the major steps in company’s business but the bank needs to change its computerized accounting system because GST has to be charged on the premium policies which shall be collected by the company from its customers. The company also needs to promote and advertise its new product in a big way. The company has also made a big budget to advertise its product and is ready to go with full force in the insurance business. The company has planned to advertise its product through various advertising platforms like television, radio and print media.

Conclusion

For the purpose of promotion of its facilities and new product launched, the Big Bank Ltd. had to spend on advertising campaign an amount of $16,50,000 which included about $5,50,000 for promoting the new product launched and the balance for its existing facilities. The advertising consultant had issued a tax invoice of $16,50,000. The input tax credit of GST shall be available to Big Bank Ltd. as the Bank is registered under GST provisions and can claim GST credits.

The business shall be allowed the tax credit of gst paid on advertising bill because it is a business expense and also it is incurred exclusively for business only. It shall not be capitalized because of it, not one-time expenses, this is a recurring expense whose life is short and hence it shall not be added up or treated as an asset of the company (Pratt & Kulsrud, 2013). When a business enterprise pays for an expense for its business purposes and such expense includes GST, then such business enterprise can claim the credit for GST paid on it. This is called GST Credit or input tax credit (Nethercott et. al, 2013).

GST can be claimed if the following conditions are fulfilled:

1. The expenses incurred for the purchase of goods and supplies are for the purpose of business and not for personal use.
2. The purchase price of the goods or supplies is inclusive of GST.
3. A consideration is to be paid for the purchase of goods or supplies.
4. The supplier of goods or supplies has issued a tax invoice for the particular goods or supplies and it includes GST.

Conclusion

The business expense incurred by the company is of the big amount but it shall be allowed as advertising expenditure because it is wholly incurred for promoting its insurance business. Also, the company shall be able to claim entire input tax credit against its existing GST tax liabilities. The payment made by the company to its advertising consultants constitutes $ 5,50,000 allocated to television, advertisement and $ 11,00,000 for other advertisement media. The above expense will allow the company to almost increase its business and it shall be approximately 2% of entire bank’s business (Khadem, 2017). So, 98% of business shall accrue to traditional banks income sources which are loan distributions and deposit facilities to its customers for which they charge interest and commission respectively (Kenny et. al, 2016). All these conditions are fulfilled in the case of Big Bank Ltd., hence it is eligible to claim the input credit of GST on the advertising expenditure bill issued to Big Bank Ltd.

If a person has income from the country where he is a resident as well as from other countries also, then he shall be eligible for foreign tax offset (Barcokzy, 2010). The person has income from more than one country also he has incurred expenses against this income which have been treated in the calculation. Such offset is allowable only when:

1. The said person has actually paid foreign income tax from the income derived from the foreign country meaning that the income has already been paid and
2. The said person has included the foreign income in the total assessable income for calculation of income tax payable.

Issue 2

Computation of tax on $62,000

The initial step that needs to be taken into consideration will be evaluating the tax payable on the income that is under the ambit of tax. The tax will be on $62,000 taking into consideration that every medical expense is not deductible in nature.  The payable tax amount will be $12,627 and this contains the medical levy.

The tax payable if the income excludes any amount in tune to the foreign income tax till the time such tax is directed towards the foreign income tax and other applicable non source amount.

Employment income in US $12,000

Less: deduction that is allowable ($4400 + $200) = $4600

Going by the assumptions the taxable income stands at $39400

Tax on $39,400 = 4943

Now deducting 4943 from 12627 = 7684

In this scenario, it needs to be noted that Angelo has paid a foreign tax income amounting to $4400 and therefore eligible for a full tax offset.

The question deals with the allowability of income and expenses in the business done by Johny and Leon. Due treatment of various adjustments and events have been incorporated within the business transactions as they have happened during the reporting period. Figures have been regrouped and added up wherever required for calculation purposes. No tax rates have been assumed in the question.

The equation that is followed in the above case is:

Net income of business partnership = Assessable income in total minus the overall deductions

References

Barcokzy, S 2010, Australian Tax Casebook, CCH Australia Ltd

Fullerton,I.G,  Deutsch, R, Friezer, M.L, Hanley,P &  Snape, T 2017, The Australian Tax Handbook Tax Return Edition 2017, Thomson Reuters: Australia

Gilders, Taylor, Walpole, Burton & Ciro, Understanding Taxation Law 2016

Hopewell, L 2012, Australia tax inquiry opens submissions, viewed 9 September 2017, www.zdnet.com.au.

Kenny, P, Blissenden, M, & Villios, S 2016, Australian Tax 2017, Thomson Reuters: Australia

Kobestky, M 2005, Income Tax: Text, Materials and Essential Cases, Sydney: The Federation Press

Khadem, S 2017, News Australia loses appeal in Federal Court on $15m tax bill, viewed 10 September 2017 https://www.smh.com.au/business/the-economy/news-australia-loses-appeal-in-federal-court-on-15m-tax-bill-20170609-gwnz0b.html

Nethercott, L,  Richardson, G.,& Devos,K. 2013, Australian Taxation Study Manual, Sydney.

Pratt, J. W &  Kulsrud, W N 2013, Federal Taxation, Oxford university press.

Renton N.E 2005, Income Tax and Investment, 2nd edition, Sydney

Sadiq, K, Coleman, C , Hanegbi, R,  Jogarajan,S,  Krever, R, Obst, R, Teoh, J & Ting, A 2017,  Principles of Taxation Law 2017, Law book Australia

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