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Allowable Expenses for Income Tax Calculation

Questions:

1. The calculation of income tax is done by reducing the allowable expenses from the assessable income as per section 4-15 of the Income tax Assessment Act 199.  According to 8-1(1) of the ITAA 199,deduction can be claimed bytax payers for the expenses that have been incurred on following:

  • Conducting any activities relating to business purpose
  • For assessable income gain or production

2. The input credit of GST is permissible in event of purchase done by business organization, when proper documentation of such transactions is maintained. A business has the right to acquire input tax credit that has purchased any assets according to GST Act 1999.

3. Rules in relation to offset of income tax is discussed in subdivision 717A and the below table provides with calculation.


4. The calculation is shown in the table:

The calculation of income tax is done by reducing the allowable expenses from the assessable income as per section 4-15 of the Income tax Assessment Act 199.  According to 8-1(1) of the ITAA 199, deduction can be claimed by tax payers for the expenses that have been incurred on following:

  • Conducting any activities relating to business purpose
  • For assessable income gain or production

Therefore,

  1. If the machinery is used for earning an income that can be taxed, then only the expenses related to movement if machinery will be considered for deduction as per Section 8-1. Since the expense related to machinery relocation in case of Granite Supply Association Ltd vKitton(1905) and Smith v Westinghouse Brake Company (1888) was of capital nature, they would not be allowed for deduction (Barkoczy 2016).
  2. Cost uncured in assets revaluation cannot be regarded as deductible expenses under section -1 of ITAA 1997.
  3. Expenditure incurred in opposing the wingding up of company and is related to lawful procedures will be regarded as expenditure that are deductible according to section 8-1.
  4. If solicitor expenditure is while carrying out business and earning income, then there will be allowable deduction of such expenditure under section 8-1.
  1. The input credit of GST is permissible in event of purchase done by business organization, when proper documentation of such transactions is maintained. A business has the right to acquire input tax credit that has purchased any assets according to GST Act 1999.

$1,650,000 amount have been spent by Big Bank and this amount is inclusive of expenses relating to advertisement. It is now assured by bank that expenses incurred does not include value of GST and therefore, it will not be allowed as input credit.

An input tax credit on GST relating to such expenses can be taken by organization if they are incurred in business normal course according to chapter 2 of the Goods and Service Act 1999, provided if such expenses include GST (Lang et al. 2015).

Big bank is involved in serving fifty branches all over country and provide financial assistance to people. They are registered for purpose of GST. A new product such as Big bank home was launched recently by bank and has introduced insurance policy and is actively engaged in providing deposits and loan to people. An amount $1,650,000 was kept separately by bank for advertisement purpose out of which advertisement and insurance product advertisement involves $ 550,000. Remaining balance of $ 1,100,000 is inclusive of GST amount that is required for promoting the products and services of bank.

Therefore, it can be said that majority of revenue of Big bank is generated from services and products promotion that incur $ 110000 costs. Since the income generation of company is yet to account for newly launched product, capital expenditure of bank would be $ 550000.

Conclusion:

It can be concluded that amount of expenditure that is involved in carrying out advertisement of existing services and products of Big bank is permissible to take input credit and the amount is $ $1,100,000. Since, 2% of expenditure relating to such advertisement helps in generating revenue for company, there will not be any prohibition on amount $ 550000 to take input credit.

Calculation of Input Tax credit

Particulars

 Amount ($)

 Amount ($)

Total spending on advertisement and promotional activities

16,50,000.00

GST input credit 100% eligible for:  

11,00,000.00

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

5,50,000.00

100%  GST input credit

1,00,000.00

 Add: For 2% contribution in revenue

3,000.00

 Amount of input credit allowed to the bank

1,03,000.00

 Table 1: Input tax credit

(Source: Created by Author)

Rules in relation to offset of income tax is discussed in subdivision 717A and the below table provides with calculation.

Assessable income of Angelo inclusive of foreign incomes

Particulars

Amount

Amount

Gross total income without any deductions  

 $   68,000.00

 Available deductions:

 Medical expenditures  

 $              5,000.00

 Expenses for deriving employment expenses disallowed for deduction

  - 

Expenses incurred in UK for generating Rental income

 $                 500.00

 Interests expenditures for generation of dividend income

 $                 140.00

 Expenses for generation of interest income 

 $                   60.00

Total amount of deductions

 $     5,700.00

Net income after deductions

 $   62,300.00

 Income tax payable 

 $   11,794.18

Table 2: Income Tax Payable

(Source: created by Author)

Assessable income of Angelo inclusive of foreign incomes

Details

 ($)

 ($)

Gross total income without any deductions  

  52,000.00

 Available deductions:

 Medical expenditures  

 5,000.00

 Expenses for deriving employment expenses disallowed for deduction

 -

Expenses incurred in UK for generating Rental income

 -

 Interests expenditures for generation of dividend income

 -

 Expenses for generation of interest income 

 -

Total amount of deductions

   5,000.00

Net income after deductions

  47,000.00

 Income tax payable 

   6,821.68

Table 3: Income Tax Payable

(Source: Created by Author)

Assessable income of Angelo inclusive of foreign incomes

Details

 ($)

 ($)

Gross total income without any deductions  

52,000.00

 Available deductions:

 Medical expenditures  

5,000.00

 Expenses for deriving employment expenses disallowed for deduction

 -

Expenses incurred in UK for generating Rental income

 -

 Interests expenditures for generation of dividend income

 -

 Expenses for generation of interest income 

 -

Total amount of deductions

5,000.00

Net income after deductions

47,000.00

 Income tax payable 

6,821.68

Table 4: Income Tax Payable

(Source: Created by Author)

Calculation of foreign tax offset under first option is done by reducing the amount of income tax that is paid and in second option; they are calculated by deducing the income tax payable (Scholes 2015).

Hence, the value of limit is = $4972.50 (11794.18-6821.68)

The amount of foreign tax paid is less or lower than foreign tax offset amount and therefore, the value of limit of foreign tax offset is $ 4400.

The calculation is shown in the following table:

Statement showing Calculation of Income from Partnership

Particulars

Amount

Amount

Revenue from sporting goods sales

 $           4,00,000.00

Interests incomes on bank deposits

 $              10,000.00

Un-franked portion of dividend 

 $                8,400.00

 Amount of Bad debts recovered

 $              10,000.00

Incomes exempt

 -

 Income from capital gain 

 $              30,000.00

 The amount of gross total income

 $      4,58,400.00

 Expenses eligible as deduction:

 Partners’ salaries 

 $              25,000.00

 Fringe benefit tax

 $              16,000.00

 Interests on capital 

 $                2,000.00

 Interests expenses on loan 

 $                4,000.00

Johnny’s travelling expenses  

 $                3,000.00

Office building renewal fees 

 $                2,000.00

Documentation related expenses 

 $                  700.00

Expenses on debt collection 

 $                  500.00

 Council rates 

 $                  500.00

 Salaries of employees

 $              20,000.00

 Cost of goods sold {(Opening stock + purchases) – Closing stock}

 $              34,000.00

Retail shop rent 

 $              20,000.00

 Bad debt  losses

 $              30,000.00

Expenses related to business lunches 

 -

 Pilferage 

 $                3,000.00

 $      1,60,700.00

 Income of the partnership firm for the income year before setoff of loss

 $      2,97,700.00

 Less: Setting off loss incurred in the previous year 

 $            40,000.00

 Net income of the partnership in the income year 

 $      2,57,700.00

 Table 5: Net Income from partnership

(Source: created by Author)

References:

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

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

Lang, M., Pistone, P., Schuch, J. and Staringer, C. eds., 2015. Introduction to European tax law on direct taxation. Linde Verlag GmbH.

Scholes, M.S., 2015. Taxes and business strategy. Prentice Hall.

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