In this case, Bob is engaged in the business of promoting motor race. There was a damage caused in the track due to flood and it required reconstruction of the long straight that costs $58000. The company constructed the bypass and reduced the length of the track by 300 meters. The bypass was constructed using the original material. The issue here is to determine whether cost of the bypass is allowed as deduction under section 25-10 of the Income Tax Assessment Act 1997.
The Income Tax Assessment Act 1997 under section 4-1 provides that every individual, company or entity is required to pay tax on the taxable income. The section 4-15 of the Income tax Assessment Act 1997 provides that the taxable income is calculated by deduction allowable deductions from the assessable income (Saad et al. 2014). The taxpayers are allowed general deduction under section 8-1 of ITAA 1997 and certain particular kind of deduction under section 25 of the Act. The Division 25 of the Income Tax Assessment Act 1997 deals with the rules relating to deduction of certain particular kind of item. The section 25-10 of the Income Tax Assessment Act 1997 provides that taxpayer can deduct expenditure that has been incurred for the repair of the premises or the depreciating assets that are used for producing the assessable income. This section further provides that the capital expenditure will not be allowed as deduction. Therefore it is necessary to determine whether the repair is an expense or of capital nature (James et al. 2015).
The Para 13 of the Taxation Ruling 97/23 provides the meaning of the of the term repair. The term repair means remedying the defects or damages to the property. The purpose of the repair should be the restoration of the efficiency of the income earning property as per Para 17 of the ruling (Tran-Nam et al. 2014). The Para 18 of the ruling provides that it is important to exercise judgment for deducting the repair expenditure under section 25-10 of the ITAA 1997. The Para 31 states that the expenditure of repair that are of capital nature are not allowed as deduction under section 25-10 of the ITAA 1997. The Para 32 of the Ruling provide instances of repair expenditure that are of capital nature and hence not allowed as deduction under section 25-10 of the ITAA 1997. In the Para 32 it is stated that the guide line for distinguishing expenditure between the revenue and capital nature is provided in the case Sun Newspapers Ltd v. FC of T (1938) and Hallstroms Pty Ltd v. FC of T (1946). The expenditure incurred for the renewal, improvement or reconstruction of the property is not a repair. These expenditures are not allowed as deduction under section 25-10 of the Income Tax Act 1997.
In this case, a separate bypass was constructed using the original material. Therefore, it is important to determine whether the construction should be regarded as reconstruction or repair. The para 36 of the TR 97/23 provides that the process of restoration of the property entirely is regarded as reconstruction. The bypass was created using the original material and it is a separate identifiable property (Eccleston and Warren 2015). Therefore based on the analysis it can be concluded that the amount incurred for the construction of the bypass should be regarded as reconstruction. The amount incurred is treated as reconstruction so it is not allowed as deduction in the nature of repair under section 25-10 of Income Tax Assessment Act 1997. If the material used for the construction of the bypass was more long lasting then it is an improvement. The improvements is distinguished from repair and is not allowed as deduction under section 25-10 of the income tax assessment actor 1997. Therefore, it can be said that if high quality material was used then it is not a repair and should not be allowed as deduction.
1.
The section 8-1 of the Income Tax Assessment Act 1997 provides that the taxpayer can deduct any loss or outgoing from the assessable income if the amount is used for gaining or producing assessable income. The amount of expenditure is allowed as deduction if it is necessarily incurred for carrying out the business in order to produce or gain assessable income. In this case, the company has borrowed a sum of $502000 (Kucukvar et al. 2014). However, 35% of the loan amount will be used for personal purposes and 65% will be used for the business purposes. Based on Section 8-1 of the Income Tax Assessment Act 1997 it can be concluded that 65% of the interest expenses and the application fee will be allowed as deduction. The deduction is allowed for this portion because this portion of the loan amount is utilized for producing the assessable income.
|
Allowable deduction |
|||
|
Particulars |
Business Purpose |
Loan purpose |
Total |
|
Proportion |
65% |
35% |
100% |
|
Loan Application |
$ 3,263.00 |
$ 1,757.00 |
$ 5,020.00 |
|
Interest amount |
$ 17,875.00 |
$ 9,625.00 |
27500 |
|
Allowable business deduction |
$ 21,138.00 |
Table 1: Allowable deduction
(Source: created by Author)
Based on the above calculation it can be said that the allowable deduction is $21138.00 in the initial year. In the remaining 9 years, the business is allowed to deduct the interest amount of $17875.
2.
In this case, the business sold Toyota Corolla car for $3000. The company purchase a second hand commodore car by providing an additional amount of $ 27800. It is assumed that this car was used for the purpose of business. The section 40-25 of the income tax assessment Act 1997 states that the taxpayer can deduct an amount that is equal to the decline in the value of the assets that is held during the current income year. This section 40-30 of the income tax assessment Act 1997 states that an assets that has a limited useful life and is expected that there would be decline in the value of the assets is regarded as a depreciating asset (Richardson et al. 2013). The land, inventory items and intangible assets are not depreciable assets as per the section 40-30(1) of the income tax assessment Act 1997. Therefore, it can be said that the car used for the purpose of business is a depreciable asset. In this case, the depreciation amount of the car should be allowed as deduction from the accessible income.
|
Depreciation using Reducing balance method |
|
|
Particulars |
Amount |
|
Cost of Car |
$ 30,800.00 |
|
Useful life (years) |
8 |
|
Days held |
150 |
|
Depreciation Amount |
$ 3,164.38 |
Table 2: Depreciation
(Source: Created by Author)
The calculation above shows that the depreciation amount of $3164.38 will be allowed as deduction.
3.
The written down value of the car sold was $1964. The profit or loss made from the sale of the car should be included in the assessable income as the ordinary income as per section 6-5 of the Income tax Assessment Act 1997.
|
Profit or loss on sale of assets |
|
|
Particulars |
Amount |
|
Sales |
$ 3,000.00 |
|
Less: |
|
|
Written down value |
$ 1,964.00 |
|
Profit |
$ 1,036.00 |
Table 3: Profit or loss on sale of assets
(Source: Created by Author)
The profit of $1036 on the sale of car should be included in the assessable income.
The salary paid is allowable deduction under section 8-1 of income tax assessment Act 1997. The excess amount of salary paid to a related party is not allowed as deduction. Therefore, the deductible portion of the salary will be only the reasonable salary that is $40000.
5.
The section 26-22 of the Income Tax assessment Act 1997 provides that the business taxpayer is not allowed to claim deduction for contribution or gift made to political parties. In this case, the taxpayer has contributed an amount of $1000 for federal election to the liberal party. This amount will not be allowed as deduction as per the section mentioned earlier (Forsyth et al. 2014).
6.
The net income from business is included in the assessable income. In order to ascertain the current tax liability it is necessary to determine the correct amount of business profit. In this case, the closing stock did not include the amount stock in transit. This has resulted in undervaluation of profit and as a result, the tax payable will be less. Therefore, in order to avoid wrong calculation of the assessable income the closing stock should include the amount of stock in transit (Carney 2014).
7.
The section 36 -10 of the income tax Assessment 1997 states that the tax loss for an income year is calculated by adding up all the allowable deduction and subtracting from it the total assessable income and exempt income. The section 36-20 of the income tax assessment act 1997 state that the net exempt income is calculated by adding the exempted income from all the sources and deducting the amount of loss and outgoing that are incurred in deriving the exempt income. The section 36-17 (3) of the income tax assessment Act 1997 provide that the entity should deduct the tax loss from the net exempt income. The excess undetected portion of the loss should be carried forward . In this case, the carry forward loss of $75000 should be adjusted against the net exempt income and the balance should be carried forward.
References
Carney, T., 2014. Where Now Australia’s Welfare State?.
Eccleston, R. and Warren, N., 2015. The devil is in the detail: the distributional consequences of personal income tax sharing in the Australian federation.
Forsyth, P., Dwyer, L., Spurr, R. and Pham, T., 2014. The impacts of Australia’s departure tax: Tourism versus the economy?. Tourism Management, 40, pp.126-136.
James, S., Sawyer, A. and Wallschutzky, I., 2015. Tax simplification: A review of initiatives in Australia, New Zealand and the United Kingdom. eJournal of Tax Research, 13(1), p.280.
Kucukvar, M., Egilmez, G. and Tatari, O., 2014. Sustainability assessment of US final consumption and investments: triple-bottom-line input–output analysis. Journal of Cleaner Production, 81, pp.234-243.
Richardson, G., Taylor, G. and Lanis, R., 2013. The impact of board of director oversight characteristics on corporate tax aggressiveness: An empirical analysis. Journal of Accounting and Public Policy, 32(3), pp.68-88.
Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075.
Tran-Nam, B., Evans, C. and Lignier, P., 2014. Personal taxpayer compliance costs: Recent evidence from Australia. Austl. Tax F., 29, p.137.
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