Allowable Deductions Under ITAA 1997 And Foreign Tax Offset Limit Calculations

Big Bank Ltd’s Advertising Expenditure – Input Tax Credit Calculations

Business expense deduction is allowed as per s. 8(1) ITAA 1997 but only if the underlying conditions are fulfilled by the taxpayer. For the situations that are highlighted, it needs to be opined if deductions under this section are permissible or not.

Any outgoing expense or loss can be tax deductible provided that the underlying requirements are complied with. These noteworthy aspects are mentioned as follows  (CCH, 2013).

• Only expenses of revenue nature qualify for a deduction under this statute and any expense which is of capital nature would not be covered as these are not directly related to improvement in assessable income.
• Only expenses that are related with business qualify for a deduction under this statute and any expense which is of private nature would not be covered
• Only expenses that are related with assessable income generation qualify for a deduction under this statute and any expense which is related to non-assessable income would be excluded from the ambit of this statute.
• It is noteworthy that the underlying expense related to the movement of machine from one place to another would essentially be an expense of capital nature and would not be revenue expense. In line with the discussion in above section, capital expenses do not lead to availability of any tax deduction (Gilders et. al., 2016).
• To understand the underlying nature of expense, it is imperative to consider the precise reason for which this cost is incurred. In the given situation, the expense is for asset revaluation and the same is required for the purpose of insurance which essentially falls in the domain of asset preservation and does not contribute towards income increase. As a result, it would be appropriate to classify the given expense as capital and hence no deduction would be availed for this case.
• The underlying legal expense can be revenue or capital depending of the end use of the same. For the situation at hand, the legal expense is being incurred in relation to the firm’s winding up and thus seems to be related to the asset and not with the earning capacity. Thus, it seems logical to classify this expense as capital expense and hence no deduction for the same may be claimed under s. 8(1).
• Again, the underlying reason would be considered. In line with the information given, a key reason for the solicitor services hiring is business operations which other reasons such as mortgage. But with regards to the fee, it is not possible to possibly separate the various uses and hence the whole amount would be assumed to have a revenue nature and hence would qualify for deduction under s. 8(1) (Sadiq et. al., 2016).

In line with the above discussion, it becomes apparent that barring the last case where solicitor expenses were meant for operations, in other cases the expense would not be deductible for the purposes of s. 8(1).

It is known considering the given facts that a significant amount on advertising has been spent by Big Bank. GST has also been levied on the same and in wake of this, it is to be determined that input tax credit to what extent can be availed.

Input tax credit tends to be generated when GST is paid by any entity on the purchase of the financial supplies. However, it is essential that the entity must be registered for GST. Also, the underlying claim making ability would also be influenced depending on the Financial Acquisition Threshold (FAT) and whether the reporting entity breaches it or not (FAT). In case of breach of FAT, the refund of input tax credit would be partial only as per GST Act 1999 (Nethercott, Richardson and Devos, 2016). The FAT tends to be the value lesser in magnitude from 150,000 and (1/10) times the cumulative right of input tax credits for the given entity  (Barkoczy, 2017).

For the given case and the bank, the creditable acquisition would essentially comprise of any expense related to the promotion of the insurance business. The direct advertising expense on the same has been given to be $ 550,000.

Since GST @10% is applicable on various payment, hence GST on account of the above expenses = (550000/11) or $ 50,000

As a result, there would be a resulting tax credit available amounting to $ 50,000.

Further, it is also known that an amount of $ 1.1 million have been spent on the general advertisement related to the bank as a whole. For input credit generation, only the proportion of this expense that could be linked to the insurance operations could be used. Since no other credible or useful information is available, hence it seems worthwhile to assume that the contribution can be carried out assuming the same ratio as the current share in business which is pegged at 2%.

Foreign Tax Offset Limit Calculation for Angelo

Hence, general advertisement expense attributed to insurance business = (2/100)* $1.1 million = $ 22,000

Since GST @10% is applicable on various payment, hence GST on account of the above expenses = (22000/11) or $ 2,000

The above computations clearly reflect that total input credits that are available for the bank on account of the advertisement spend amounts to $ 52,000. But, the actual claim that could be made here would be considerably lesser as there would be a FAT breach by the bank.

Based on the given situation, it is apparent that Angelo has earned some foreign income and has therefore already paid some tax to the respective tax agencies located in these countries. Since, Angelo is a Australian tax resident that these income would also be taxable by ATO which in absence of any foreign tax offset would lead to violation of double taxation avoidance principle. Hence, the central objective is to outline the foreign tax offset limit for Angelo based on the information provided (Woellner, 2014). This has been demonstrated in the various tables that are shown as follows.

On account of the above, a critical observation that may be highlighted is that the foreign tax offset limit exceeds the actual tax which Angelo has paid abroad. In wake of the same, Angelo would be able to claim 100% of the foreign tax paid as offset in Australia. Hence the total amount comes out as $4,400.

For the given case, the objective is taxable income determination in relation to the partnership firm. In order to compute the same, a step by step procedure is to be followed. In this process, first the assessable income would be outlined post which the deductible expenses would be accounted for and finally the taxable income would be computed.

Table for Assessable Income

The above computations reflect the assessable income at $ 446,400 while the corresponding deductible expenses are coming out as $ 345, 700. Hence, the subtraction of the deductible expenses from the assessable income highlights the taxable income of the partnership a $ 345,700. 

References

Barkoczy, S. (2017), Foundation of Taxation Law 2017, 9^thed., North Ryde: CCH Publications

CCH (2013), Australian Master Tax Guide 2013, 51^st 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, 9^th ed., Sydney: LexisNexis/Butterworths.

Nethercott, L., Richardson, G. and Devos, K. (2016), Australian Taxation Study Manual 2016, 4^th 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, 8^th ed., Pymont:Thomson Reuters

Woellner, R (2014), Australian taxation law 2014, 7^th ed., North Ryde: CCH Australia.