Allowable Business Expenses Under ITAA 1997: Deductible Expenses And Capital In Nature

Types of Deductible Expenses Under ITAA 1997

Question:

Discuss About The Association To The Earning Of The Not Liable Income?

According to section 8-1 of ITAA 1997, deductible expenses are of two kinds; firstly, the one which is incurred while earning the measurable income, and secondly, incurred on continuing the business from which the measurable capital is earned. Expelling of the expenses are only done for the ones which are not private/domestic, capital in nature also including the ones which are in association to the earning of the not liable income (Pratt & Kulsrud, 2013).

It is to be noted that the expense required to purchase a new machine and to shift it from the purchasing site to the required destination is capital in nature. This is because the shifting charge is also included in the buying cost and termed as the capital cost of machinery purchasing. This type of capital coat is never taken into consideration as per the 8-1 section of ITAA and is not treated as deductible expenses. The expenses spent on the machinery shall always be summed up with the capital cost on the basis that it is old machinery or new machinery (Gilders & Walpole, 2016). For instance, if the machinery is new then the total costs spent on it till date shall be added to the capital cost and termed as the capital of the asset. Other expenses include transportation expenses and commissioning expenses. But considering the cost of transportation of the old machinery to a new destination, then the particular expense can be defined as a deductible expense. It was held in the case of W Neville & Co v FCT (1937) that expenses those connected with a business purpose must be allowed as deduction.

The amount spends in the revaluing the property of the company so as to claim release is only accepted if the received amount is used for regenerating the loss of income which is wholly or partially related to the assessable income of the company. Insurances can be claimed by the company only upon the rise of two cases. Firstly, if the insurance has been claimed for some machinery that has been capital in nature, and now has been destroyed by some risen situations. In this, the claim has been made to recover the machinery loss (Fullerton et. al, 2017). It shall be very obvious in this case that the insurance money provided can only be used in the recovery of the loss and in no case can be shown in the income statements of the company’s business.   

Capital Costs and Deductibility of Expenses

According to the second way, if the claims are made for the asset loss which has been shown as stocks in trade then, these assets are directly taken into account as for the business and related to the assessable income because they are not capital in nature. All this is obviously done to provide profits to the business and so are termed as business expenses. But all these expenses should be recorded in the profit and loss accounts of the company and used for the recovery of the lost assets (Fullerton et. 2017).

Thus, if the revaluing of the assets is done then the expenses claimed are allowable as per the section 8-1 of the ITAA 1997.  It was held in the case of Charles Moore & Co (WA) P/L v FC of T (1956) that financial transactions that form a part of the business activities must be deductible. 

According to section 8-1 of ITAA 1997, deductible expenses are of two kinds; firstly, the one which is incurred while earning the measurable income, and secondly, incurred on continuing the business from which the measurable capital is earned. Expelling of the expenses are only done for the ones which are not private/domestic, capital in nature also including the ones which are in association to the earning of the not liable income (Gilders & Walpole, 2016).

So according to the given case, if it is taken into account with the s 8-1 then, the costs claimed by the company with an unfavorable decision for the winding up is not in association with the s 8-1. This situation arises because the claims put up are neither for earning assessable income and neither to continue the business for earning the assessable income. The total cost paid by the company should be checked regularly so as to not let it turn into big numbers because it will not be treated as the money spent on the company’s business.  It was held by the Federal court in the case of FC of T v Cooper (1991) that the expenses incurred by the tax payer to carry on the operations and in the normal course of business must be considered as a deduction.

But the expense shown in the case is a legal cost which has been claimed for the continuance of the business so as to earn the assessable income and thus this type of cost is perfectly allowed to be claimed as per the section 25-5.

Insurance Claims and Allowable Business Expenses

According to section 8-1 of ITAA 1997, deductible expenses are of two kinds; firstly, the one which is incurred while earning the measurable income, and secondly, incurred on continuing the business from which the measurable capital is earned. Expelling of the expenses are only done for the ones which are not private/domestic, capital in nature also including the ones which are in association to the earning of the nonliable income (Kobestky, 2005).

In the explained matter it is very clear that all the expenses claimed in the case are not at all subjected to any category wise division. There is no expense separately tagged as private or revenue or any other. All the claimed costs are just defined as for business purposes only. Also, the claimed expenses have been shown as an effort to recover the capital which is a portion of the assessable income. It was held in the case of W Neville & Co v FCT (1937) that expenses related to business activity would appear in the deductible expenses.  It is also seen that if the expenses are categorized than the legal costs for the mortgaging purpose would obviously appear to be out of the section 8-1 because of its capital nature and would not be part of the deductible expenses while the other ones would surely be included. 

From the above discussion, it is clear that for expenses to be considered as an allowable expense it must have a direct bearing on the business activity and must be done in the business course. There are various expenses that are incurred while conducting the business and the above situation clearly stresses that there must be an establishment with the business activities.  The ones that do not fall under the ambit of the business activity is altogether ignored.

The Big Bank Ltd is a national level insurance company which is GST registered and has over 50 branches, a 10-storey office, and various call centers to communicate with its customers. For a long time, the company has been facilitating its customers with its services in Australia. The launch of the home and contents policies by the company is a crucial step in expanding its business but the company is willing to install a new accounting system as the company is now GST registered and from now on the amounts collected by premium policies will be GST charged (Kenny et. al, 2017). So for undertaking this idea promotion has to be done.   A similar instance was observed in the case of Rio Tinto Services Ltd v Commissioner of Taxation [2015] FCA 94 where the federal court came to a conclusion that the taxpayer would not be able to input tax credits on acquisitions that are in tune to the input tax supplies a GST supplies. If a direct link has been established then the acquisition is defined as partly creditable.

Input Tax Credits and Advertising Expenses

A thorough decision on the part of the company has been taken to expand its business through the medium of advertising so as to begin its era into the insurance field with a bang. Printing media, television, radio are some of the base methods adopted by the company to advertise its business (Khadem, 2017).

The Big Bank Ltd was ready and spent a huge amount of $16,50,000 for the advertising purposes only. This massive amount spent includes $5,50,000 for only promoting the newly launched product of the company. The remaining amount left was spent in advertising for the facilities that the company already had from before. The promotional advisor proposed a tax invoice of $16,50,000 to the company. As the company is GST registered so the Big Bank Ltd is allowed to enjoy the profits earned as per the GST credits provided if it is claimed (Nethercott et. al, 2013).

The Big Bank Ltd is able to enjoy the GST credits on the advertising tax credit because the amount spent by them is taken into consideration as business expenses and can be used only for business purposes. This expense made by the company cannot be treated as capital in nature because it is not long-lasting and has to be proposed time to time and so it is wise to summon them up together and depict them as a positive feature of the company. Whenever the company makes any transaction in association with the expense for the principles of the company, and if this made transaction includes GST then in such cases the company has the full power to exercise control on the credits of the GST as the company paid for it (Barcokzy, 2010). This type of credits enjoyed is termed as GST credits or input tax credits.

• The expenses incurred for the purchase of goods and supplies are for the purpose of business and not for personal use.
• The price at which the items or supplies are purchased includes GST.
• A consideration is to be paid for the purchasing of items or supplies.
• The items or supplies provider has proposed a tax invoice for the meticulous possessions or supplies and that includes GST.

Conclusion

No matter the amount spent is massive but it all finally comes under the portion of advertising for which the company has paid GST. The tax invoice of $16,50,000 comprised of the television advertisement worth of $5.50.000 and the left over the amount for other promotional mediums. All this will help in expanding the business while it is only 2% of the company’s capital and the remaining 98% is fulfilled through the loans given and the deposits made by the company’s costumes for which commission and interest rates are charged. All this makes the company fully eligible to claim the GST credits as per the received advertising bill

Foreign tax offset can be obtained when the person has income from one country where he is a resident of the domestic and the visiting country. In this scenario, the person contained income from more than a country and even expenses are done in this regard.  As per Hopewell  (2012),  the offset is provided in the following cases

• The person in question has paid foreign income tax from the income generated in the foreign country that means income is already paid
• The person in question has included foreign income in the overall assessed income for the computation of income tax.

• Expenses pertains a totality of domestic and foreign income
• Tax that is paid in foreign country is set off in regard to total tax liability
• Regrouping of figures are done

References

Barcokzy, S 2010, Australian Tax Casebook, CCH Australia Ltd

Fullerton,I.G,  Deutsch, R, Friezer, M.L, Hanley,P &  Snape, T 2017, The Australian Tax Handbook Tax Return Edition 2017, Thomson Reuters: Australia

Fullerton,I.G,  Deutsch, R, Friezer, M.L, Hanley,P &  Snape, T 2017, The Australian Tax

Gilders, T & Walpole, B.C 2016, Understanding Taxation Law 2016, LexisNexis

Hopewell, L 2012, Australia tax inquiry opens submissions, viewed 12 September 2017, www.zdnet.com.au.

Kenny, P, Blissenden, M, & Villios, S 2017, Australian Tax 2017, Thomson Reuters: Australia

Khadem, S 2017, News Australia loses appeal in Federal Court on $15m tax bill, viewed 12 September 2017 https://www.smh.com.au/business/the-economy/news-australia-loses-appeal-in-federal-court-on-15m-tax-bill-20170609-gwnz0b.html

Kobestky, M 2005, Income Tax: Text, Materials and Essential Cases, Sydney: The Federation Press

Nethercott, L,  Richardson, G & Devos,K. 2013, Australian Taxation Study Manual, Sydney.

Pratt, J. W &  Kulsrud, W N 2013, Federal Taxation, Oxford university press.

Sadiq, K, Coleman, C , Hanegbi, R,  Jogarajan,S,  Krever, R, Obst, R, Teoh, J & Ting, A 2017,  Principles of Taxation Law 2017, Law book Australia