Issue
The key concern is to determine if the expenses or loss incurred in the various situations presented would be tax deductible or not in accordance with section 8-1 ITAA 1997.
Relevant Law
Section 8(1) ITAA 1997 deals with the general deductions related to the business. This allows deduction of any loss or expenses that are incurred in the production of assessable income. These outflows are typically incurred in order to carry on the business so as to ensure that there is generation of assessable income (Barkoczy, 2015). However, it is noteworthy that loss or outgoings of capital nature are not deductible. Also, any loss or expenses incurred in generation of exempt income would also be non-deductible for tax purposes (Gilders et. al., 2016). Besides, the expenses or loss which are private or of domestic nature are non-deductible (Sadiq et. al., 2016).
Application
Even though s. 8(1) allows deduction of expenses related to minor alternations made in the site, but the cost of moving the machine to the new site would not be deductible under s 8(1) due to the capital nature of the outgoings. This is because this site involves movement of asset and does not cater to changes in the site. Thus, the cost would be reflected in the value of asset (i.e. machine) and would lead to higher depreciation expense subsequently.
The cost of revaluation tends to pertain to the fixed assets. However, for determining whether the expenses incurred therein would be deductible or not, it needs to be determined if the incurred expense would lead to higher income generation capacity or is aimed at preserving or protecting the asset (CCH, 2013). The asset revaluation for insurance cover clearly seems to deal with the latter and also the expense would not be carried out on a frequent basis which implies that the expense would not be termed as deductible under s. 8(1).
With regards to the legal expenses incurred, the critical question deals with the nature of the case. It needs to be ascertained whether the case in question would impact the operations of the company or the income generation capacity as has been highlighted in the Snowden & Wilson Pty Ltd (1958) 7 AITR 308 case (Woellner, 2014). In the given case, it is apparent that the issue is regards to income generation capacity as the case relates with winding up of the company and hence the expense incurred would be considered capital in nature. Thus, no deduction can be claimed as per s 8(1) for the legal expenses of such a case.
In the given case, it is apparent that the legal expenses which are incurred tend to deal with general legal advice in relation to the business operations besides conveyancing and mortgage. Since the solicitor does not distinguish these expenses, hence it would be appropriate to consider the legal expense as revenue expenses as these relate to enhancement of the overall earning capacity of the business. Hence, deduction of the legal expense is allowed under s. 8(1).
Based on the discussion above, it is apparent that the cost of moving machinery to the new site is capital in nature and hence non-deductible. Further, the revaluation of asset cost is related to insurance and hence aimed at asset protection rather than income generation and hence would be non-deductible under s.8(1). Further, the legal expense related to winding up proceedings would be non-deductible while that relating to general business operations advice would be deductible.
Issue
The central issue is to determine if Big Bank can claim the input tax credits on account of GST paid on the advertising expenditure.
Relevant Law
With regards to making financial supplies, the ability to claim the input tax credits in based on whether the FAT or Financial Acquisition Threshold is exceeded by the firm or not. In accordance with s. 189(5) and s. 189(10), GST Act, the FAT is exceeded by the given entity when financial acquisitions are made by the concerned entity and the input credit tax related to these would tend to be greater than the lower of the following two values (Nethercott, Richardson and Devos, 2016).
If an entity manages to satisfy the FAT test by not crossing the threshold limit, then claim on full GST credits is possible. However, if the entity fails to pass this test, then full credit claim cannot be entertained (Barkoczy, 2015).
Application
It is noteworthy that acquisition involving input taxed supplies related to deposit facilities along with loans will not be treated as creditable acquisition. Also, acquisitions in relation to taxable supplies making (for instance contents insurance along with home) are considered as creditable acquisitions. As a result, the advertising spending in relation to the home and contents insurance is creditable which implies the availability of input tax credits to the extent of $ 50,000. Also, it is apparent that the entity i.e. Big Bank would most certainly fail to satisfy the FAT limitation. With regards to general advertisement, a fair method of apportionment is required. For instance, a 2% expenditure could be classified as taxable supplies while the left over 98% can be classified as input tax credit in line with the given expectations. Thus, the input tax credit of $ 2,000 would be available.
Based on the above discussion, it is apparent that the Big Bank would be entitled to input tax credit of $ 2,000 with regards to general advertising.
Issue
The key issue is to determine the foreign tax offset of Angelo considering the information that has been presented.
Relevant Law
In case an individual taxpayer has foreign income on which tax is paid to foreign tax authorities, then the ATO allows the taxpayer to claim foreign tax offset on account of avoidance of double taxation. This implies that the income generated must be taxed only once and hence the same income shall not be taxed abroad as well as in Australia (Gilders et. al., 2016). In order to claim the foreign tax offset, the following two conditions need to be fulfilled (Deutsch et. al., 2016).
If the above conditions are satisfied, the taxpayer can claim foreign tax offset in order to claim the extent to which the tax liability in Australia would be reduced on account of the tax paid to foreign authorities (Sadiq et. al., 2016).
Application
With regards to Angelo and given information, it is apparent that foreign tax offset would arise for him as he has foreign income on which tax has been paid to the foreign income tax authorities. Taking into consideration the given information, the foreign tax offset can be computed in the manner indicated below.
Step 1: Compute the tax payable in Australia taking into consideration the total taxable income based on the information provided.
Considering that the medical expenses are not deductible, the taxable income = $ 62,000
Tax to be paid = 3572 + 0.325*(62000-37000) = $ 11,697
Medicare levy = 2% of 62000 = $ 1,240
Hence, total tax payable= 11697 + 1240 = $ 12,937
Step 2: In this case, the tax payable needs to be computed assuming that foreign income on which income tax has been paid abroad or income derived from outside Australia is deducted. Hence, the amounts to be deducted are highlighted below.
Hence, taxable income after deducting the above = $ 68,000 – $ 24,000 = $ 44,000
Further, allowable deductions for deriving the foreign income also need to be corresponding deducted so as to arrive at the tax liability on the Australian income. Only the following expenses would be deductible for foreign income.
It is noteworthy that $ 200 worth of debt deduction in the UK is not considered as Angelo did not have permanent establishment abroad. Also, the gift of $ 400 has not been considered as a deduction as it cannot be sufficiently linked to assessable income.
Hence, assessable income (Excluding foreign income) = $ 44,000
Less: Deductions allowed (after adjusting for the foreign income deductions) = (6000-1400) = $ 4,600
Therefore, taxable income (considering only Australian income and deductions) = 44000 – 4600 = $ 39,400
Tax to be paid = 3572 + 0.325*(39400-37000) = $ 4,352
Medicare levy = 2% of 39400 = $788
Hence, total tax payable= 4352+788 = $ 5,140
Step 3: Foreign tax offset limit = 12937-5140 = $7,797
Clearly, in the given case, the foreign income tax paid is $ 4,400 which is lesser than the offset limit determined above. Hence, the foreign tax offset for Angelo would be $ 4,400.
The foreign tax offset for Angelo would be equal to amount of foreign tax paid i.e. $4,400 since this amount is lower than the foreign tax offset limit.
Issue
The core objective is to determine the net income for the partnership firm.
Relevant Rule and Application
In order to compute the net income for the partnership firm, the various assessable income needs to be identified coupled with the various deductible expenses for tax purposes taking into consideration the information provided.
The assessable income for the firm along with the relevant rule is as highlighted below (Barkozcy, 2015).
Sales (Applicable Section: s.6(5), ITAA 1997) = $ 400,000
Interest from bank (Applicable Section: s.6(5), ITAA 1997) = $ 10,000
Dividends received (Applicable Section: s.44, ITAA 1936) = $ 21,000
Imputation credits on account of dividends (Applicable Section: s. 207-20 ITAA 1997)= 21000*(30/70)*60% = $ 5,400
Recovery of bad loans (Applicable Section: s. 20(30) ITAA 1997) = 10,000
Hence, total income for the partnership firm = $446,400
It is noteworthy that the exempt income would not be considered and the capital gains would be shared by the partners on an individual basis.
The tax deductions for the firm along with the relevant rule is as highlighted below (CCH, 2013).
Sale proceeds that employee has stolen (Applicable Section: s. 25(45) ITAA 1997) = $ 3,000
Fringe benefits tax (Applicable Section: s. 8(1) ITAA 1997) = $ 16,000
Partner’s loan interest (Applicable Section: s. 8(1) ITAA 1997) = $ 4,000
Office lease renewal legal fees (Applicable Section: s. 8(1) ITAA 1997) = $ 2,000
New office lease legal fees (Applicable Section: s. 8(1) ITAA 1997) = $ 700
Expenses in debt collection (Applicable Section: s. 8(1) ITAA 1997) = $ 500
Council rates (Applicable Section: s. 8(1) ITAA 1997) = $ 500
Salary given to staff (Applicable Section: s. 8(1) ITAA 1997) = 25000 -5000 = $ 20,000
Trading stock purchase (Applicable Section: s. 8(1) ITAA 1997) = $ 30,000
Shop rent (Applicable Section: s. 8(1) ITAA 1997) = $ 20,000
Excess of opening stock in comparison to the closing stock (Applicable Section: s. 70(35) ITAA 1997) 20000 – 15000 = $ 5,000
Thus, total deductions for tax that the firm can claim = $ 100,700
The following points are noticeable with regards to deductions (Gilders et. al., 2017).
Based on the above, income of the partnership firm = 446,400 – 100,700 = $ 345,700
Based on the above discussion, it is apparent that the income of the partnership firm for the given year would be $ 345, 700 based on the provided information.
References
Barkoczy, S. (2015), Foundation of Taxation Law 2015, 7thed., North Ryde: CCH Publications
CCH (2013), Australian Master Tax Guide 2013, 51st ed., Sydney: Wolters Kluwer
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2016), Australian tax handbook 8th ed., Pymont: Thomson Reuters,
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016), Understanding taxation law 2016, 9th ed., Sydney: LexisNexis/Butterworths.
Nethercott, L., Richardson, G. and Devos, K. (2016), Australian Taxation Study Manual 2016, 4th ed., Sydney: Oxford University Press
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A (2016) , Principles of Taxation Law 2016, 8th ed., Pymont:Thomson Reuters
Woellner, R (2014), Australian taxation law 2014, 7th ed., North Ryde: CCH Australia.
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