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1. Discuss whether the following are allowable as deductions under s 8-1 of ITAA 1997.

  1. The cost of moving machinery to a new site
  2. The cost of revaluing assets to effect insurance cover
  3. Legal Expenses incurred by a company opposing a petition for winding up
  4. Legal Expenses incurred for services of a solicitor in respect of a number of matters, including conveyancing, discharge of a mortgage, and general legal advice relating to a client’s business operations. (The Solicitor account does not separate the costs for various matters.)

2. Big Bank Ltd operates nationally with more than 50 branches, a 10-storey head office and numerous call centres. It is registered for GST purposes. Big Bank has for many years provided loans and deposit facilities to customers in Australia. Last year it launched a new product, Big Bank home and contents insurance policies. It was a significant step for Big Bank and required it to change some of its computerised accounting systems due to the fact that GST needed to be charged on the new product.

Big Bank budgeted to spend $1,650,000 (including GST) on advertising campaigns last year. Of that sum, $550,000 was allocated to a television advertising campaign specifically promoting Big Bank home and contents insurance policies. The other $1,100,000 was allocated to a general advertising campaign, including television, radio and print media advertisements promoting Big Bank to the public as the bank that is “Here for You”.

When Big Bank Ltd launched Big Bank home and contents insurance policies, it forecast that its home and contents insurance business would constitute 2% of its entire enterprise. Big Bank has been proved correct in its forecasts. The other 98% of its enterprise is made up of its traditional loans and deposit facilities businesses.

Last month, the advertising consultants issued their tax invoice for $1,650,000.

Discuss Big Bank's ability to claim input tax credits with respect to its advertising expenditure of $1,650,000.

3.The following are the current year details of Angelo’s income, expenses and the foreign tax he paid. All of Angelo’s foreign income amounts have been converted to Australian dollars.

Gross income

$

Employment income from Australia

44,000

Employment income from United States

12,000

Employment income from United Kingdom

8,000

Rental income from property in United Kingdom

2,000

Dividend income from United Kingdom

1,200

Interest income from United Kingdom

800

Total gross income

68,000

Expenses

$

Medical expenses

5,000

Expenses incurred in deriving employment income from Australia

4,000

Expenses incurred in deriving employment income from United States

900

Expenses incurred in deriving rental income from United Kingdom

500

Gift to a deductible gift recipient

400

Interest (debt deductions) incurred in deriving dividend income

140

Expenses (debt deductions) incurred in deriving interest income

60

Total expenses

11,000

Foreign tax paid

$

Employment income from United States

3,600

Dividend income from United Kingdom

120

Interest income from United Kingdom

80

Rental income from United Kingdom

600

Total foreign tax paid

4,400

Determine Angelo’s foreign tax offset.

4 Johnny and Leon are adult partners in a business selling sporting goods.

The partnership records, excluding GST, for the current income year disclose the following:

Receipts ($):

400,000

Sales of sporting goods (see Note 3)

10,000

Interest on bank deposits

21,000

Dividend franked to 60% received from an Australian resident company

10,000

Bad debts recovered

50,000

Exempt income

30,000

Capital gain from the disposal of shares acquired in 2009 and sold in June this income year (see Note 4)

Payments ($):

10,000

Salary to Johnny

15,000

Salary to Leon

16,000

Fringe benefits tax

2,000

Interest on capital provided by Johnny

4,000

Interest on loan made by Johnny to the partnership

3,000

Johnny's travelling expenses from home to work and return (see Note 5)

2,000

Legal fees for the renewal of lease of the office building

1,200

Legal expenses for preparation of a partnership agreement

700

Legal expenses for preparation of new lease of business premises

500

Debt collection expenses paid to a solicitor

500

Council rates on business premises

25,000

Staff salaries (see Note 6)

30,000

Purchase of sporting goods supplies

20,000

Rent on retail shop

30,000

Provision for doubtful debts (see Note 10)

10,000

Business lunches (see Note 11)

Notes

1.

Partnership profits and losses are shared between Johnny and Leon on an equal basis.

2.

The partnership is registered as a Small Business Entity (SBE).

3.

On 1 January this income year the partners discovered that an employee had stolen $3,000 cash in respect of money received from sales to customers.

4.

Johnny and Leon made a capital loss of $15,000 from the disposal of shares acquired in 2006 and sold in 2011.

5.

Johnny often takes work home as he finds it convenient to plan the next day's work in his home study.

6.

Staff salaries include $10,000 paid to Johnny's son Johnny Jr for washing the partners' cars. The Commissioner considers $5,000 to be a reasonable commercial rate for washing the cars.

7.

Stock at beginning of the year was: $20,000.

8.

Stock at end of the year was: Cost $16,000

(a)

Market selling value $18,000

(b)

Replacement $17,000

9.

Johnny and Leon did not make an election under s 328-285 of ITAA97.

10.

Johnny and Leon are owed $30,000 by a debtor who is bankrupt. They believe it is very unlikely that they will recover any money from the debtor, and do not take any action to recover the money.

11.

Johnny and Leon spent $10,000 on business lunches with overseas buyers at expensive restaurants.

12.

In the last income year, Johnny and Leon made a net partnership loss of $40,000.

13.

Johnny and Leon wish to minimise their tax liabilities for the income year.

Issue of Allowable Deductions for Advertising Expenses and Foreign Tax Offset

The issue is related to ascertaining the deductions that would be allowed under “section 8-1 of the ITAA 1997” with respect to the cost happened in the shifting of machine.

  1. “Section 8-1 of the ITAA 1997”
  2. “British Insulated &Helsby Cables”

The charge that has taken place for shifting the machine to new location signifies capital expenditure and admissible deductions permitted under the “Section 8-1 of the Income Tax Assessment Act 1997”. In case of depreciation, the shifting of machinery to new site has raised the overall asset cost. The charge that has occurred for shifting the machine to the new location signifies a charge followed from minor changes and means to be allowable in the form of admissible deductions, as per the “section 8-1 of the ITAA 1997”. The sole reason for considering the expenses for allowable deductions is that the cost is considered as portion of the business expenditures arising from the daily business operations (Blakelock and King 2017).

With special reference to the result obtained in the case of “British Insulated &Helsby Cables”, the charge arising out of the carriage features a continuous benefit on the trade-associated locations through location of the depreciable assets (Becker, Reimer and Rust 2015). According to the “taxation rule of TD 93/126” in relation to the machinery installation and initiation of the business operations, the occurrence of cost to shift the machine in overall operation would be treated as revenue. It has been laid out under the current incidence of state of charge in situating the machine to the new site features a nature of the capital cost and this would be treated in the form of deductions, which are not allowed.

Conclusion:

From the above analysis, it has been found out that the relocation of machine to the fresh destination is not permissible to deduct due to capital cost and it is restricted from being taken into account as deductions in accordance with “section 8-1 of the ITAA 1997”.

The existing state is familiar with whether or not the asset revaluation to influence the insurance cover would be viewed in the form of permitted deductions, as per the “section 8-1 ITAA 1997” (Hill and Mancino 2014).

  • “Section 8 (1) of ITAA 1997”

As identified from the current scenario, the expense having relation with the non-current asset to ascertain the deductions is crucial to ascertain whether such expenditures have taken place in revaluation acquires in enhancing the revenue generation capacity. In case of the second proposal consequences as profit of transitory nature, then it would be taken as acceptable deductions according to “Section 8 (1) of ITAA 1997”. Evidence obtained from the current state incidence of charge in asset revaluation as the insurance cover consequence would be acceptable in the form of admissible tax deductions in accordance with section 8(1) at the time the outflow occurred are primarily repeating cost.

Conclusion:

Based on the analysis in relation to the revaluing cost, it could be ascertained that the insurance cover cost is identified as admissible deductions related to income tax. Subsequently, it could be adjudged as periodic cost and it needs to be regarded as acceptable deductions of income tax, as per the “8-1 of the ITAA 1997”.

Deductibility of Machinery Relocation and Asset Revaluation for Insurance Purposes

The statement initiates the circumstances, which carries with the question of whether the legal expenditures that the taxpayer has incurred for opposing the requisition to wind up would be observed for deductions of income tax allowable under the supervision of “section 8-1 of the ITAA 1997”.  

  1. “Section 8-1 of ITAA”
  2. “FC of T v Snowden and Wilson Pty Ltd (1958)”

In relation to the above issue and under the supervision of “section 8-1 of the ITAA 1997”, the charge occurred in winding up the business and they are not observed in the form of acceptable deductions of income tax. According to the “taxation ruling of ID 2004/367”, the legal cost would be taken into account for deductions; in case, the cost is for conduction of the business operation through which a person develops the taxable proceeds (Kingston 2015).

As observed from “FC of T v Snowden and Wilson Pty Ltd (1958)”, the unusual expenses and the taxpayer in no previous occasion are crucial to start the lawful actions, as it could not prevent the expense for qualifying as deductible expense (Lang 2014).

Conclusion:

With reference to the above analysis concerning the cost occurring in opposition to the business wind up, it would be considered as non-permissible deductions of income tax, as per the “section 8-1 of the ITAA 1997”.

The statement conducts the issue of ascertaining whether or not the legal disbursement to obtain the solicitor services for discharging different commercial processes of the taxpayer would be considered as admissible deductions of income tax in accordance with the “section 8-1 of the ITAA 1997”.

  1. “section 8-1 of ITAA 1997”

Based on the primary statement developed within the context of “section 8-1 of the Income Tax Assessment Act 1997”, when the taxpayer incurs legal expenditure with the intention of obtaining various business functions for yielding profit, such type of outlay would be considered in the form of income tax deductions. However, there are certain types of exception to the norms of “section 8-1 of the ITAA”, in which the legal outlay occurrence taken place denotes the capital character, private and domestic expense or the incurring of expenditure to yield the exempted and non-chargeable non-exempt proceeds.

Conclusion:

In accordance with the above discussion, the occurrence of legal expense in relation to the business operations for developing the taxable income needs to treated as allowable deductions with reference to “section 8-1 of the ITAA 1997”.

If a business organisation makes any purchase, the input credit of GST is permitted only, in case; pertinent documents are stored properly in association with such transactions. According to “GST Act 1999”, any organisation intending to make business income possesses the right to obtain credit of input for payments related to GST involving material or asset purchase (Peattie 2013). It has been identified from the provided case that Big Bank Limited has incurred advertisement expenditure of $1,650,000 that includes GST as well. In the current scenario, the bank intends to assure that the overall expenditures related to advertisement would be permitted as credit of input or not, as the expenditures include GST.

As identified from the “Chapter 2 of the Goods and Services Act 1999”, input tax credit including GST would be permitted to an organisation on the incurred expenditures at the time of general course of the business. However, it is to be noted that such expenses include the amount of GST.

Big Bank Limited is a financial organisation that provides services to the individuals having more than 50 branches throughout the province of Australia. It has a 10-storied apartment, in which its head office is situated. Along with, there has been the introduction of home content and insurance policy in Australian market coupled with loan and deposit provisions of the customers over the years. In order to carry out advertising work, the bank has kept apart a budget amounting to $1,650,000 from which $550,000 is invested for house advertisement and insurance products. With the help of such investment, the organisation has managed to generate 2% of its overall revenues. The leftover amount of $1,100,000 is for promoting the other services of the organisation and it takes into consideration the GST as well (Saad 2014).

Therefore, it has been evaluated that $1,100,000 had been incurred for the promotion of services for generation of maximum revenue, while the amount of $550,000 is to be considered as capital expense. This is because the newly launched product would contribute towards the income generation of the organisation (Wigmore 2016).

Conclusion:

From the above discussion, it is inherent that the sum of $1,100,000 that the organisation has spent on advertising its current products and services would be allowed to obtain credit input. On the contrary, the overall amount of $550,000 would not be restricted to obtain credit of input, since 2% of such expense contributes towards the generation of income of Big Bank Limited.

Calculation of Input Tax credit

Particulars

 Amount ($)

 Amount ($)

Total spending on advertisement and promotional activities

1,650,000.00

GST input credit 100% eligible for:   

1,100,000.00

Portion of advertisement expenditures ineligible for input credit in respect of GST

550,000.00

100%  GST input credit

100,000.00

 Add: For 2% contribution in revenue

3,000.00

 Amount of input credit allowed to the bank

103,000.00

3:

                 

4:

                                   

References:

Becker, J., Reimer, E. and Rust, A., 2015. Klaus Vogel on Double Taxation Conventions. Kluwer Law International.

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

Hill, F.R. and Mancino, D.M., 2014. Taxation of Exempt Organizations.

Kingston, S., 2015. Territoriality in EU (Taxation) Law: A Sacred Principle, or Dépassé?.

Lang, M., 2014. Introduction to the law of double taxation conventions. Linde Verlag GmbH.

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

Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075.

Wigmore, J.H., 2016. Wigmore on evidence. Wolters Kluwer.

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