Allowable Deductions, Input Tax Credits, Foreign Tax Offset, And Net Income Of Partnership – ITAA 1997

Allowable Deductions Under s 8-1 of ITAA 1997 for Big Bank Ltd

Under Section 8-1 of Income Tax Assessment Act 1997:

1. The cost of moving machinery to a new site will be allowed as deduction because it has been incurred while producing or gaining the assessable income.
2. The cost of revaluing assets to effect insurance cover will not be allowed as a deduction because it has been incurred while producing or gaining the exempt income or non-assessable income (Tran-Nam & Evans, 2012).
3. Legal Expenses incurred by a company opposing a petition for winding up will not be allowed as a deduction because it is considered as an outgoing of a domestic or private nature.
4. Legal Expenses incurred for services of a solicitor in respect of a number of matters, including conveyance, discharge of a mortgage, and general legal advice relating to a client’s business operations will be allowed as a deduction as the cost has been incurred while producing or gaining assessable income.

In question 2 it can be observed that Big Bank had a budget of expending $1650000, out of which $550,000 was given to media advertising campaign especially for promotion of contents insurance policies and Big Bank home. The remaining $1,100,000 was spent on a general campaign, including radio, television and print media promoting Big Bank.

Now to calculate the input tax credit, the fact that acquisitions in relation to input taxed supplies that is the traditional borrowing as well as deposit facilities business will not be considered (James, 2015). Accession in relation to taxed supplies will be taken into consideration. Therefore as in the case of Question 2 the advertisement expenditure incurred for the promotion of Big Bank home and contents insurance policies will be considered while calculating input tax credit but the expenditure incurred for general advertisement campaign will only be considered for that part about which the Big Bank home and contents insurance business is concerned that is 2 percent off $1100000.

Particulars	Amount Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper
Expenditure on advertisements for Big Bank home and content insurance policies (+) Expenditure on general advertisements [ 2%*1100000]                                                                                TOTAL                                                                                                                     Bank’s ability to claim input tax credits is                                                    ($572000*10%)/100+10%	$550000  $22000  $572000
$571.43

At first the total expenditures are added that is the advertisement expenditure subjected to insurance policies and Big Bank home is added with that part of the general advertisement expenditure that is included in taxed supplies (Kumar, 2016).

Then the input tax credit is calculated with the above mentioned formula. The Rate is assumed to be 10% as the standard Australian rate is 10%.

In question 3 as it can be observed that the foreign tax offset is required to be calculated for an individual named Angelo. Before proceeding further, the term foreign tax offset must be understood.

From 1^st July 2008, the tax credits subjected to foreign income have been replaced with a foreign income tax offset (Fleming, Peroni & Shay, 2016). The excess foreign tax credits from the period of 1^st July 2003 to 30^th June 2008 should be converted to an amount known as pre-commencement excess foreign income tax before they are made any use of. Unlike the traditional system of foreign tax credits (applying till 30^th June 2008), in calculating the amount of the offset, no longer the foreign income has to be divided into different classes (West & Varma, 2012). As stated in the question all of Angelo’s foreign income amounts have been converted to Australian dollars.

Now in order to calculate the tax offset limit, the total income tax payable is calculated as follows:

Input Tax Credits for Big Bank’s Advertising Expenditure

Particulars	Amount($)
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 ASSESSABLE INCOME (A)	68000
Column1	Column2
Expenses incurred in deriving employment income from Australia	4000
Expenses incurred in deriving employment income from United States	900
Expenses incurred in deriving rental income from United Kingdom	500
Interest (debt deductions) incurred in deriving dividend income	140
Expenses (debt deductions) incurred in deriving interest income	60
Gift to a deductible gift recipient	400
TOTAL ALLOWABLE DEDUCTIONS (B)	6000
Taxable income of angelo (a – b)	62000
Column1	Column2
Foreign Income Tax paid:
Employment income from United States	3600
Dividend income from United Kingdom	120
Interest income from United Kingdom	80
Rental income from United Kingdom	600
TOTAL FOREIGN TAX PAID	4400

Angelo will calculate his overseas boundary or limit of the income tax offset as follows:

Step 1: The tax payable on taxable income is $13289.5 (including Medicare levy)

[According to the resident tax rates – $3572 + {($62000 + $4900) – $37000}*32.5c]

Step 2: The income tax that would require payment if the assessable income is excluded of the following foreign income:

PARTICULARS	AMOUNT($)
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(A)	24000

Certain expenses are not taken into account. These are expenditures that can be linked with financial values included in his assessable income upon which the payment of foreign income tax has been done (Cockfield, 2013).

EXPENSES	AMOUNT($)
Expenses incurred in deriving employment income from United States	900
Expenses incurred in deriving rental income from United Kingdom	500
TOTAL EXPENSES(B)	1400

The debt deductions worth $100 related to the United Kingdom dividend and interest income are not taken into account, as nothing is mentioned in the question about Angelo having a foreign permanent address or establishment. Nor is the $70 deduction for gift is regarded, as it does not have any reasonable relation to the excluded assessable income amounts.

Particulars	Amount($)
Total assessable income	24000
(-) allowable deduction (total expenses)	1400
Taxable income under step 2 (a – b)	22600

Therefore tax on $22600 is $836

[According to resident tax rates – ($22600 – 18200)*19]

Now the TAX OFFSET LIMIT = 289.5 – $836 = $12453.5

This amount is Angelo’s foreign income tax offset limit. Although he did pay foreign income tax of $4,400, his foreign income tax offset is limited to $12453.5.

In question 4 it can be observed that the net income of the partnership for a particular financial year is required (Gale & Brown, 2013).

For this the net profit of the firm whose partners are Johnny and Leon is calculated as below. Net operating profit can be calculated by subtracting all the payments or expenses incurred by the firm as a whole from all the payments (Steingold, 2015).

RECEIPTS	AMOUNT($)	AMOUNT($)
Sale of sporting goods	400000
(-) goods stolen as mentioned in Note 3	-3000
		37000
Interest on bank deposits		10000
Dividend received		21000
Bad debt recovered		10000
Exempt income		50000
Capital gain from disposal of shares	30000
(-) loss acquired as mentioned in Note 4	-15000
		15000
TOTAL RECEIPTS		143000
EXPENSES	AMOUNT($)	AMOUNT($)
Salary to Johnny		10000
Salary to Leon		15000
Fringe benefits tax		16000
Interest on capital provided by Johnny		2000
Interest on loan made by Johnny to the partnership		4000
Legal fees for the renewal of lease of the office building		2000
Legal expenses for preparation of a partnership agreement		1200
Legal expenses for preparation of new lease of business premises		700
Debt collection expenses paid to a solicitor		500
Council rates on business premises		500
Staff salaries	25000
(-) Personal expense as mentioned in Note 6	-10000
		15000
Stock at the beginning of the year	20000
Purchase of sporting goods supplies	30000
(-) Sale of stock {(20000 + 30000) – 16000}	-34000
		16000
Loss on sale of stock {(18000/20000)*34000} = 30600    (34000 – 30600) = 3400		3400
Rent on retail shop		20000
Provision for doubtful debts	30000
(-) Debt beyond recovery as mentioned in Note 10	-30000
		NIL
Johnny and Leon made a net partnership loss of $40,000 last year		40000
Business lunches with expensive buyers as mentioned in Note 11 (50%*10000)		5000
TOTAL EXPENSES		151300

NOTES:

In Note 5 it is said that Johnny takes work home, but this is not considered as a business expense hence no entry is made for this.

In Note 6 staff salaries include $10000 for washing the partner’s car which is again a personal expense hence not considered.

In Note 7 the opening stock is shown as $20000 and at the end of the year it is $16000. Therefore the opening stock is added with the purchase at first and then the stock worth $ 34000 is subtracted from it in order to keep the closing stock as $16000.

Now the stock worth $34000 is sold at $30600 thus incurring a loss of $3400

In Note 10 the provision for doubtful debt is made nil as there is no action for recovery.

In Note 11 Johnny and Leon spends $10000 on business lunch with overseas buyers, for which only fifty percent of the expenditure is taken into account as per rule.

In Note 12 the net partnership loss of $40000 is taken into account they have made an election under Section 328-285 of ITAA97 as mentioned in Note 9.

Therefore Net Profit = (143000 – 151300) = -8300

The net profit cannot be a negative figure, therefore it is net loss, $8300 and has to be borne by both the partners in 1:1 ratio that is equally.

References

Cockfield, A. J. (2013). The Limits of the International Tax Regime as a Commitment Projector. Va. Tax Rev., 33, 59.

Fleming, J. C., Peroni, R. J., & Shay, S. E. (2016). Two Cheers for the Foreign Tax Credit, Even in the BEPS Era.

Gale, W. G., & Brown, S. (2013). Small business, innovation, and tax policy: A review.

James, K. (2015). The rise of the value-added tax. Cambridge University Press.

Kumar, R. (2016). Comparison between Goods and Services Tax and Current Taxation System A Brief Study. International Journal of Allied practice, Research and Review, 3(4), 09-16.

Steingold, F. S. (2015). Legal guide for starting & running a small business. Nolo.

Tran-Nam, B., & Evans, C. (2012). Tax policy simplification: An evaluation of the proposal for a standard deduction for work related expenses.

West, P. R., & Varma, A. P. (2012). The Past and Future of the Foreign Tax Credit. Int’l Tax J., 38, 47