Are the legal expenses on advertisement and the redundancy expense incurred by the taxpayer for challenging the government statement will be an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).
The problem statement that has been defined under this case is relating to the advertisement expenses that has been occurred by the taxpayer relating to the expense of the advertisement for launching an attack against the government in media. The following case study of Aussie Ltd provides information that the company functions as the subsidiary to the Meranti Ltd that produces high quality furniture at a very low cost. The furniture produced by Meranti Ltd is exported to the Aussie Ltd that enjoys high success from economies of scale. However, the decision of the federal government to impose high amount of duty on annual sales of importing furniture that is imported by Aussie Ltd. consequently, the decision of the government created an adverse impact on the Aussie Ltd and this ultimately hampered the revenue of the company. Later, Aussie Ltd undertook the decision of launching the attack for repealing the decision of the government against the imposition of the heavy duty. The led the company to incur a spending of $2 million for revoking the decision of the government.
According to section 8-1 of the ITAA 1997, an individual can deduct from your assessable income any loss or outgoing to the extent that, it is incurred in gaining or producing your assessable income (Anderson et al., 2016). On other hand the expense is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income. However, there is an exception to this rule where an individual cannot deduct a loss or outgoing under this section to the extent that it is a loss or outgoing of capital, or of a capital nature; or it is incurred in relation to gaining or producing your *exempt income or your *non-assessable non-exempt income. The provision of this Act prevents an individual taxpayer from deducting it.
As held in Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) Also, in determining whether a deduction for legal expenses is allowable under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered (Barkoczy 2016). The nature or character of the legal expenses follows the advantage that is sought to be gained by incurring the expenses. On the other hand, it has been decided in the case of Herald and Weekly Times Ltd v. Federal Commissioner of Taxation (1932) that Legal expenses are generally deductible if they arise out of the day to day activities of the taxpayer’s business (Cao et al., 2015). Additionally, in the case of Magna Alloys and Research Pty Ltd v. FC of T (1980) the legal action has more than a peripheral connection to the taxpayer’s income producing activities.
As evident in the present case study of Aussie Ltd the sum of advertisement expenses that has been occurred by the Aussie Ltd it can be considered as the as deductions. The primary reason is that Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent that they are incurred in gaining or producing assessable income except where the outgoings of a capital, private or domestic nature, or relate to the earning of exempt income (Coleman & Sadiq, 2013). As held in the case of Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) For legal expenses to constitute an allowable deduction, it must be shown that they were incidental or relevant to the production of the taxpayer’s assessable income.
The legal expense that has been incurred here by the Aussie Ltd in the current scenario is allowable as deductions because they constitute a deductible expenditure since they were relevant to the production of the assessable income of Aussie Ltd. he legal expenses are not incurred by the taxpayer for any purpose other than defending its business method. The decision to challenge the government decision of imposing higher duty represents that Aussie Ltd had incurred the expenditure related to an integral part of the taxpayer’s business.
The expenditure is necessarily incurred by Aussie ltd in carrying on the business for the purpose of gaining assessable income. Furthermore, the negative limbs of subsection 51(1) of the Income Tax Assessment Act 1936 have no application: the legal expenses are not capital in nature (Kenny, 2013). The expenditure incurred by the taxpayer produces no benefit of an enduring nature nor does it relate to the preservation of a capital asset
As held in the case of FC of T v Snowden and Wilson Pty Ltd (1958) the fact that the expenses are unusual and the taxpayer has not on previous occasion needed to take such legal action does not prevent the advertisement expenses being deductible (James, 2016). In the present context of Aussie Ltd it does not have to incur such kind of advertisement expense and as a result of this such expenses is considered for deductions under section 8-1 of the ITAA 1997.
As held in “Magna Alloys and Research Pty Ltd v. FC of T (1980)” it was observed that the legal outlay that was experienced by the taxpayer with the objective of preventing the statements of libel that was being made by the co-worker was observed as the permissible deductions under “section 8-1 of the ITAA 1997” (Miller, & Oats, 2016). The motive for such conclusion as accessible in “section 8-1 of the ITAA 1997” where a deductions are acceptable if the spending is ascending out the fixed income generating activities or having more than an outlying association to the business of the taxpayers (Pyrmont, 2014).
Debatably, it can be bought forward that when the main reason of experiencing advertisement expenditure is for the determination of defending the activities of the taxpayers in performing the service duties with the help of which they gain or produce taxable income such outlay is characterised in the method of income in nature and are observed as permissible deductions.
As it has been defined that under Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature (Grange et al., 2014). Legal expenses are deductible provided the legal action taken by Aussie Ltd is arose out of, or concerns the day to day income producing activities of the taxpayer and have more than a peripheral connection to the taxpayer’s business. According to the Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent that they are incurred by Aussie Ltd in gaining or producing assessable income except where the outgoings of a capital, private or domestic nature, or relate to the earning of exempt income (James, 2015).
For Aussie ltd, the legal expenses that has been occurred constitute an allowable deduction and it must be shown that they were incidental or relevant to the production of the taxpayer’s assessable income (Jover, 2014). The legal action has more than a peripheral connection to the taxpayer’s income producing activities. The expense has arisen out of, or concerns the day to day income producing activities of the taxpayer. Aussie Ltd does not occur the legal expenditure in the contemporary background for any another purpose other than protecting its process of trade and commerce of distributing high quality furniture in Australia (Krever, 2013). Therefore, it can be proclaimed that choice to challenge the verdict of government against the obligation of higher duty is hereafter associated to the essential part of the taxpayer’s trade.
From the following case study, it can be determined that advertisement cost that has arisen in the case of Aussie Ltd will be considered as the allowable deductions. The reason for considering the cost the allowable deductions is because the expense incurred by the Aussie Ltd is not capital in nature. Therefore, the expense is incurred for the purpose of producing income that possess the character of income producing capacity and they does not account as in the nature of private or domestic. Hence, in compliance with FC of T v Snowden and Wilson Pty Ltd (1958) it can be defined that the advertisement expenses that has occurred by the Aussie Ltd is for challenging the decision of the government with the objective of defending the business method. Furthermore, the decision to undertaken by Aussie Ltd to challenge the decision of the government through the imposition of duties is associated with the essential business part of the taxpayer.
Conclusion:
The case study of Aussie Ltd can be concluded by defining that the legal expense that has taken place in Aussie Ltd is related to the production and generation of income that are assessable. As a result of this Aussie Ltd will be able to claim permissible deductions under the section 8-1 of the ITAA 1997 since the amount is eight timers higher and will ultimately effect the deductibility. The primary reason for undertaking the decision of spending on launching the attack on media is generally for protecting the revenue making structure of the business and therefore would not be considered for taxation. On the other hand, the redundancy payment that was made by Aussie Ltd can be claimed as the deductible amount.
The following issue provides that the taxpayer has incurred an expenditure that is related to the purchase of rental property and incurring expenditure that is occurred by the taxpayer before the purchase of the rental premises. The amount of $20,000 would not be considered as expense and they are capital which is not deductible expense.
As defined under the Taxation Ruling of 97/23 this Ruling explains the circumstances in which expenditure incurred by a taxpayer for repairs is an allowable deduction under section 25-10 of the Income Tax Assessment Act 1997 (Barkoczy et al., 2016). Section 8-1 of the ITAA 1997 there is a provision relating to the permission for considering the deductions as the allowable deductions (Woellner, 2013). Under section 8-1(2) of the ITAA 1997 an individual cannot deduct a loss or outgoing under this section to the extent that loss or outgoing of capital, or of a capital nature.
The present case study of James puts forward an evidence that James in this context has purchase the property of five blocks of flats. He purchased the property so that he can rent out the property to the tenants. As it has been found from the current case study that James prior to making any kind of decision of purchasing the property, he was further advised by the inspector that he would have to should some pre-purchase cost that is related to plumbing, roofing and painting. Sooner the work of the plumbing, roofing and painting was finished, James decided to let out the property to the tenants. As defined under the Australian taxation office any form of capital works that is incurred by the individual on the structural improvement of the rental property are normally write off over the period of long term. This kind of expenses are usually considered as the deductible expenditure.
The capital work is generally considered as the expenditure that has the nature of the capital and they can be generally put for depreciation over the period of time and may be regarded as the cost base of the property for the purpose of the capital gains tax purpose (Morgan et al., 2013). As defined in the case of Fct v western subarbs cinemas ltd it is worth mentioning that the repairs and maintenance expense are treated as the most highly sought after question. Expenses that a person makes on repairs and preservation of the property may be treated as the allowable expense. But there is an exception to the rule which states that the repairs must be related directly to the wear and tear of the property and the damage that has arisen from the property was to preserve the property (Lang, 2014). Arguably it can be bought forward that the initial repairs that is executed to the new purchase property are not regarded as the expense and they are regarded as the capital work expenditure.
As it has been evidently put forward under the Law shipping co ltd v inland revenue commissioners there is a provision relating to the permission for considering the deductions as the allowable deductions (Woellner, 2013). The section provides that deductions of all the losses and outgoings to the certain degree to which such expenditure are incurred in gaining or deriving the assessable income of the taxpayers. Under section 8-1(2) of the ITAA 1997 an individual cannot deduct a loss or outgoing under this section to the extent that loss or outgoing of capital, or of a capital nature (Robin, 2017). The costs associated with the purchase of a rental property are generally not deductible as they form part of establishing the profit making asset. On the other hand, costs incurred in deriving rental income (ie agent commissions to collect rents) are deductible revenue outgoings because they are incurred in deriving income from that asset.
As it has been found in the present scenario that cost that has been incurred for roofing, plumbing and painting cannot be viewed as an expense since they are treated as the capital works expenditure (Woellner, 2013). As it has been found in the present context of James he incurred the expense to make the property suitable for rental purpose and these expense did not arise from the James use of the property to generate rental income. Conversely, in terms of the “Section 8-1 of the ITAA 1997” under the case of W Thomas & co pty ltd v fc of T it can be stated that the expenses having the nature of the capita would not be considered as the allowable deductions (Russell, 2016). James in the present situation would not be allowed of claiming allowable deductions of the work related cost.
Additionally, it has also been found that James also occurred an expense of $50,000 and the expense was related to the collapse of a segment of upstairs floor because of the infestations of termites. Furthermore, James has additionally incurred a spending of $2,000 towards the pest control company in order to assure that the remaining portions of the buildings are not infected by the infestation of termites.
The appearance of the term maintenances is defined under “Subsection 25-10 (1)” describes repairs where the repairs are in the nature of capital or spending that is happened to remedy defects, harm or worsening in presence at the date of purchase of the property. Capital works used to produce income, including buildings and structural improvements, are written off over a longer period than other depreciating assets (Harris et al., 2015). Capital works deductions are income tax deductions that can be claimed for the expenses such as building construction costs the cost of altering a building and the cost of capital improvements to the surrounding property (Snape & De Souza, 2016). The spending that is experienced by James on substituting the ceiling from the infiltration of termites can be observed as the capital works deductions.
As it has been noted in the case of James that he purchased the property after the time period of 17 July 1985, as a result of this James will be able to claim allowable deductions that is related to the replacing of roof of the property that he has purchased. As it has been defined under the “Para 15 of the Taxation ruling of TR 97/23” repairs for large part is considered as the occasional and partial cost (Krever, 2013). Such kind of cost are generally regarded as the cost of restoration of the property without changing the character of the property and may comprise of the restoration of the former appearance, state or conditions.
An important considerations laid down under Lindsay v. FC of T(1960) relating to the property is that work done to prevent or anticipate defects, damage or deterioration (in a mechanical or physical sense) in property is not in itself a ‘repair’ unless it is done in conjunction with remedying or making good defects in, damage to, or deterioration of, the property (Morgan et al., 2013). Repair for the most part is occasional and partial. It involves restoration of the efficiency of function of the property being repaired without changing its character and may include restoration to its former appearance, form, state or condition. Furthermore, the replacement of infested roof by termites contemplates that James wanted to prevent the property from further deterioration with the objective of contemplating the continued existence of the property.
Considering the ruling of “Taxation Ruling of TR 97/25” a deduction for capital works under Division 43 is based on the amount of construction expenditure, that is, capital expenditure where taxpayers incurred in respect of the construction of those capital works (Nethercott et al., 2016). A deduction for capital works under Division 43 can be claimed for buildings or extensions, alterations or improvements to buildings or structural improvements or extensions, alterations or improvements to structural improvements. From the earlier explanations it has been found that James occurred an expense that formed the part of the initial repairs carried out to the new property could not be regarded as the allowable expense and as a result of this it will be considered as the capital works (Sadiq, 2016). Nevertheless, in the later parts the expenses that has occurred were meeting the criteria of being considered as the eligible deductions because they consist in the nature of extension or improvement to the rental property. According to the Australian taxation office, an individual can claim expenses relating to your rental property but only for the period your property was rented or available for rent. Additionally the pest control expense of $2,000 incurred by James can be claimed as deductions since the expense incurred at the time when the property was available for rent.
Conclusion:
On arriving at the assumption from the above stated study, it can be stated that the spending that is acquired preceding the attainment of the property could not be observed as the acceptable deductions. The expenditures were experienced by James to make the premises appropriate for rental and it did not originate from the use of rental property to producing assessable rental income. From the present study it has been defined that James repairs done on roofing of the building represents structural improvement of the rental property and would be regarded as capital works deductions.
Reference List:
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