Allowable Deductions Under ITAA 1997

Moving Machinery and Revaluing Assets

The prevailing problem introduces that whether an individual incurring the cost on moving the machine to the new site will be able to claim deductions specified under the “section 8-1 of the ITAA 1997”. 

• The rules are section 8-1 of the ITAA
• The rules for this study is “British Insulated and Helsby Cables v Atherton (1926)”

From the above-defined prevailing issue of cost incurred on the movement of the machine to a new place a person will be disallowed from making allowable deductions in tax return. One should note that “Section 8-1 of the ITAA 1997” accordingly specifies that a person is disallowed from claiming expense that is not related in the production of assessable income or business proceeds having private or domestic character (Kiprotich 2016). The problem statement provides that the cost of moving the machine is capital outlay and such expenses are disallowed from being considered as deductions.

An evidence of such cost is put forward under the “Taxation ruling of IT 2197”  where the cost of moving the machine is observed as capital expenditure and deductions for income tax is disallowed for such outlay or expense (Chan 2013). The important case laws of “British Insulated and Helsby Cables Ltd v. Atherton (1926)” expenditure taking place at the time of moving the depreciable asset is portrayed as unceasing benefit to the asset (Miller and Oats 2016).

Conclusion: 

The argument can be concluded that capital cost are disallowed from being considered as deductible expense and cost of moving the machine to the new site is prevent from allowable income tax deductions.

The problem that has been prevalent in this context is making of claim of admissible income tax related deductions defined in context of “section 8-1 of the ITAA 1997” about the revaluating of asset.

• The applicable rule in this context is the“Section 8-1 of the ITAA 1997”

The problem that has been stated in the context of the situation is the asset revaluation and claiming the deductions that has been allowed in accordance with the “section 8-1 of the ITAA 1997”. As evident the cost that is incurred by the individual taxpayer in order to revalue the asset to the effect of insurance cover is primarily occurred from the execution of trade activities. The cost of revaluation is solely incurred in the deriving the business revenue and therefore such cost can be considered as allowable deductions for the reason that they are not carrying the nature of domestic, private or capital under the purview of first limb (Preez 2016). It is assumed that cost of revaluing the asset to effect insurance cover is cyclical business cost and such is incurred in generating the business revenue. Furthermore, an assertion can be bought forward that the cost incurred possess significant association with the taxpayers business functions and does not constitute capital or private expense.

Conclusion: 

Arguably, the cost of revaluing asset in order to effect insurance cover is a recurring business cost. Therefore, such cost forms the part of the income tax deductions.

c. The prevailing circumstances is associated with determining the deductibility of the legal cost a person incurs for opposing the petition of winding up.

• The applicable rule in this context is the “Section 8-1 of the ITAA 1997”
• The applicable case laws legislation in this issue is the “Sun Newspapers Ltd v F C of T (1938)”

The above stated problems statement is concerned with the deductibility of the legal cost that a person incurs for opposing the winding up petition. In order to obtain an income tax deductions for legal expenses or outgoings, in important considerations is to paid in understanding the nature of such cost under “Section 8-1 of the ITAA 1997” (Atkinson and Stiglitz 2016). The character or the feature of the legal expense carries a benefit that is sought by the taxpayers for the expenses incurred. An important consideration of the “Section 8-1 of the ITAA 1997” is that when individual taxpayers in the process of gaining or deriving business revenue occur a legal expenditure then such legal expense is regarded as admissible income tax deductible expense.

Legal Expenses and Advertising Expenditures

Reciting the situation “Sun Newspapers Ltd v F C of T (1938)” when a legal expense is primarily dedicated for deriving the operational trade functions then such expense are considered for income tax purpose (Shome 2015). Whereas, when the expense are structural in nature then such legal expense are disallowed from being considered as admissible income tax deductions. The legal expense of opposing the petition of winding up represents structural business cost rather than an operative cost therefore, such expense are disallowed from allowable deductions.

Conclusion: 

The above stated explanation provides conclusive evidence that the legal expenditure are incurred are structural business cost rather a operative business cost. In compliance with “Section 8-1 of the ITAA 1997”, these expenses are disallowed from being considered as deductible expense.

The prevalent issue is focussed on determining the deductibility of the legal expense incurred by an individual taxpayer in discharge of the business functions for taking the service of the solicitor.

• The applicable rule in this problem statement is the “Section 8-1 of the ITAA 1997”
• The appropriate case laws that is applicable here is “Herald and Weekly Times v. F.C. of T (1932)”

Denoting the prevalent of determining the deductibility of legal expense that is incurred by the taxpayer for discharge of varied business functions with the help of solicitor should be considered as admissible income tax deductible expense (Lang 2014). A significant considerations of “Section 8-1 of the ITAA 1997” is that legal expense incurred by the taxpayers carrying the nature of the operative business functions are regarded for income tax deductions except for capital, domestic or private expense (Kaldor 2014). Referring the instance of “Herald & Weekly Times v F C of T (1932)” expenses incurred in the discharge of regular business functions are treated for deductions since they form the part of the revenue deriving actions. Moreover, if the legal expense has more than outlying connection with the business actions then such expense qualifies for income tax deductions (Bankman et al. 2017). As noted in the prevailing case that legal expense was incurred for taking the service of solicitor in order to discharge numerous business functions and those functions formed the operative part of the business. Therefore, the taxpayer in this scenario can claim for income tax allowable deductions.

Conclusion: 

Under the reference of “Section 8-1 of the ITAA 1997” legal expense that originated in the present scenario formed the part of the business functions and the taxpayer for such expense can claim an allowable income tax deduction.

The following case study of Big Bank Ltd deals with the determination of the input tax credit that can be claimed by the company for the financial supplies made by them under the purview of the “GST Act 1999”.

1. The applicable rule in this present context is the “GST Act 1999”       
2. Another applicable rulings that is has been concerned is the “Goods and Service Taxation Ruling of GSTR 2006/3”
3. The appropriate case laws legislation is the “Ronpibon Tin NL v FC of T”

The problem statement brings forward the scenario of Big Bank Ltd providing financial supplies to its customers and the advertisement expenditure incurred by the company. The bank provided service in more than 50 branches across the state of Australia and had large number of customers to access the service of the home content and insurance products. Apart from this, Big Bank also provided the services of loans and deposits to its customers. As evident from the “Taxation ruling of GSTR 2006/3” it provides process of computing and determining the amount of input tax credit that can be availed by the commercial entities making financial supplies (Schmalbeck, Zelenak and Lawsky 2015). An important considerations has been laid down under the second chapter of the “GST Act 1999” that effectively puts forward that an commercial entities making financial supplies would be entitled for claiming input tax credit concerning the expenditure occurred by the business in their ordinary course.

Calculation of Net Income for a Partnership

More significantly, to claim an input tax credit an organization must be the price of the financial supplies must include the amount of the GST (Beard and Lucas 2017). The “taxation ruling of GSTR 2006/3” is generally applicable to the commercial entities making financial supplies that goes past the financial acquisition threshold limit. The prevalent study of Big Bank has evidently puts forward that the bank has made the spending on advertisement that was inclusive of the sum of GST (Scholes 2015). The applicable rulings in the case study of Big Bank that can be applied is the GSTR of 2006/3. Arguably, Big Bank has surpassed the threshold limit of the financial acquisition threshold limit and the bank meets the eligibility criteria of claiming input tax credit.

According to the principles that has been laid down under the “GSTR 2006/3” an entity making a commercial supplies is fundamentally required to acquire registration under the “GST Act 1999” (McDaniel 2015). Furthermore, the act provides that an organization can claim the input tax credit for the commercial made by it together with the sum of GST. On the other hand, if the organization goes past the prescribed limit of the threshold acquisition the commercial unit will not be able to claim input tax credit however, a part of such input tax credit shall be allowable for recovery. According to the judgement that has been stated under the case of “Ronpibon Tin NL v FC of T”, the provision of extent and the degree of extent is applicable in determining the amount of GST (Seto 2015). The “GSTR 2006/3” evidently states that determination of GST must be made in a fair and equitable manner. “Para 11-5 and 15-5” of the “GST Act 1999” defines that when a commercial unit successfully meets the criteria of claiming input tax credit then it is necessary that the financial acquisition that is made must be wholly or partially for the creditable purpose.

There are some necessary obligations defined under the “para 11-5 and 15-5” of “GST Act 1999” which evidently puts forward that an acquisition to be considered for creditable purpose it must be entirely creditable (Heathcote and Tsujiyama 2015). On the contrary to the situation on noting the acquisition to be partially meeting the criteria of creditable purpose then it is vital to determine the extent of the creditable purpose.

From the applicable rulings of GSTR 2006/3, important explanations has been provided in section 11-5 and 15-10 that is concerned with the issue of creditable acquisition. An individual firm can make claim of the input tax credit if the monetary supplies is including the amount of the GST (Snape and De Souza 2016).  In context of the present scenario of Big Bank, the commercial supplies of financial nature made by the bank has an association with creditable supplies. From the given case study of Big Bank it has been observed that it has already crossed the threshold limit that was stated in GSTR 2006/3 for the financial acquisition so, it can claim partly for input tax credit supplies that it has made.  

Conclusion: 

The explanation to the case study is providing a conclusive evidence that it can claim the input tax credit that Big Bank has incurred for its advertisement expense under the framework of GSTR 2006/3.

Assessable Income	Amount ($)	Amount ($)
Gross Income
Employment income from Australia	44000
Employment income from United States	12000
Employment income from United Kingdom	8000
Rental income from property in United Kingdom	2000
Dividend income from United Kingdom	1200
Interest income from United Kingdom	800
Total Taxable Income		68000
Tax on Taxable Income		13647
Medicare Levy		1360
Less: Tax Offset for Medical Expenses		750
(5000-1250)
Total Tax Payable		14257
Average rate of tax payable on Angelo Taxable Income (%)		21
(14257/68000)*100
Net Foreign Income From Each Class
Foreign Rental Income	2000
Less: Expenses incurred in Deriving	500	1500
Gross foreign dividend income		1200
Gross Interest income from United Kingdom		800
Net passive foreign income		3500
Other Foreign Income
Gross Employment income from United States	12000
Less: Expenses incurred in deriving employment income from United States	900	11100
Gross Employment income from United Kingdom	8000
Less: Expenses incurred in deriving employment income from United Kingdom	500	7500
Net Other Foreign Income		18600
ANFI for each Class
ANFI For Passive Foreign Income		3479
(3500*68000(68000+400)
ANFI other Foreign Income		18491
(18600*(68000/68000+400)
Amount of Australian Tax Payable on Passive Foreign Income (3749*21%)		787.29
Amount of Australian Tax Payable on Other Foreign Income (18491*21%)		3883.11
Tax payable on his passive foreign income
Tax on Dividend income from United Kingdom	120
Tax on Interest income from United Kingdom	80
Tax On Rental income from United Kingdom	600
Total passive foreign Income tax paid	800
Amount of Australian Tax Payable on Passive Foreign Income	787.29
Tax Credit on Passive Forign Income		12.71
Foreign Tax Paid on Employment income from United States	3600
Total Other foreign Income tax paid	3883.11	283.11
Tax Credit Angelo can claim
On Passive Income		787.29
On Other Foreign Income		3883.11
Total foreign tax offset he can claim		4670.4

Particulars	($)	($)
Revenue from sporting goods sales	400,000.00
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		458,400.00
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
Expenses on debt collection	500
Council rates	500
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
		160,700.00
Net income of the partnership firm for the income year	297,700.00

Statement showing Calcuation of Income from Partnership
Particulars	Amount	Amount
Revenue from sporting goods sales	$400,000.00
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		$458,400.00
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
		$160,700.00
Income of the partnership firm for the income year before setoff of loss	$297,700.00
Less: Setting off loss incurred in the previous year	$40,000.00
Net income of the partnership in the income year	$257,700.00

Reference List:

Atkinson, A.B. and Stiglitz, J.E., 2016. The design of tax structure: direct versus indirect taxation. Journal of public Economics, 6(1-2), pp.55-75.

Bankman, J., Shaviro, D.N., Stark, K.J. and Kleinbard, E.D., 2017. Federal Income Taxation. Wolters Kluwer Law & Business.

Beard, R. and Lucas, G.S., 2017. Federal Income Taxation. Mercer L. Rev., 68, pp.1041-1161.

Chan, L.K., 2013. AAT.: Principles of Taxation. Paper 5. Pearson Education Asia Limited.

Du Preez, H., 2016. A construction of the fundamental principles of taxation (Doctoral dissertation, University of Pretoria).

Heathcote, J. and Tsujiyama, H., 2015. Optimal income taxation: Mirrlees meets Ramsey.

Kaldor, N., 2014. Expenditure tax. Routledge.

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

McDaniel, P.R., 2017. FEDERAL INCOME TAXATION. Foundation Press.

Miller, A. and Oats, L., 2016. Principles of international taxation. Bloomsbury Publishing.

Schmalbeck, R., Zelenak, L. and Lawsky, S.B., 2015. Federal Income Taxation. Wolters Kluwer Law & Business.

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

Seto, T., 2015. Federal Income Taxation: Cases, Problems, and Materials. West Academic Publishing.

Shome, P. ed., 2015. Tax policy handbook. International Monetary Fund.

Snape, J. and De Souza, J., 2016. Environmental taxation law: policy, contexts and practice. Routledge.