Australian Tax Office Regulations For Deductible Business Expenses

Legal Expenses for Business-Related Litigation

Discuss about the Accounting For Allowable And Non-Allowable Expenses For Tax Purposes In Australia.

Australian Tax Office recognizes and allow expenses and cost that relate directly to activities relating to revenue generation to be the only items eligible for tax deduction deductible. John Smith by virtue of being a veterinarian officer generates his revenue from the services he offers at his own consulting rooms in the Northern suburbs of Melbourne. Therefore, any expenses relating to this revenue have to be accounted for but of course within the stipulated perimeter of ATO on repairs, maintenance, replacement and litigation expenses involved.

According to ATO ID 2001/27, all legal expenses incurred for suit relating to any activity generating revenue is allowed for tax purposes. However, the existing condition that has to be fulfilled so as to claim for this deduction. Part of the conditions allowed include provision of reasons as to why the litigation or suit was filed, provision of court documents as well as illustration document showing how the litigation was affecting you in your revenue generation, documents proofing payments of the court fees done as well as declaration of any insurance cover existing and damage payment if any.

John Smith legal expense of $50000 relates to a case filed against him for negligence that ruined his reputation to the extent of sending away patients thus affecting his revenue in masses. Smith is eligible to claim this as a deductible expense because he has a proof showing that there was reduce in revenue when the case was in the course and an increase in revenue after he won the case. The 50000 dollars spent by Smith should form part of his deductible expense in his income set for tax purpose but only if he provides the court documents as well as he fulfills the terms and condition mentioned above Pandya (2017.Pg 19). Smith is allowed to claim this litigation expense because it has a direct impact on his revenue as proofed above.

an ATO on repairs, maintenance, and replacement charge likewise outline what to be deducted for tax purposes especially when it relates to equipment or rather assets. John’s expenditure incurred fall as either deductible or non-depending on the activity done. This first cost incurred of $30000 relating to installation of new toilet door indeed does not form part of deductible expense mainly because according to ATO this any substantial added value of an item does not form part of repair means it is reconstruction hence not allowed for tax purposes.

Repair and Maintenance Costs on Assets

Smith’s $10000 cost of replacing the carpet may fall to either deductible or non-deductible depending on what is done to it. For instance, if the carpet is mended or some correction is done to it worth the 10000 dollars hence the amount is eligible for deduction purpose this is according to Australian Tax Office. But if it is replacing with a new one wholesome hence the allowable expense is not claimable because at the point of acquisition the item condition had been based on.

John is allowed to claim for the $1000 spends to replace the broken window glass because this is a repair cost only on that glass broken and not the whole window. This glass repair involves fixing the broken defect in it and not reconstruction as many may think, thus allowing Smith to pretty claim the deductible allowance of this from the income generated for tax purposes in that disclosure period of reporting as per ATO rules and regulation.

The $1000 purchased cost spent in acquiring the children hand game machine ideally does not qualify for deductible allowance mainly because it forms part of capital expenditure hence only qualify for depreciation or tear and wear. It is likewise stated by ATO that “any repair or maintenance to any equipment after acquisition does not form qualify for deductible allowance mainly because it is presumed that the purchase cost reflects the initial state of the item hence hindering Mr. Smith from claiming the $500 spent to repair the game machine before its actual usage.

Finally, ATO on home office appliances depicts the items that worth claim for tax purposes. By stating that if a computer is used for work purposes hence it is claimed as an allowable deduction. Smith spent $2000 to purchase a computer that the receptionist uses to serve the clients hence forms part of generating revenue, therefore, he should claim the amount to be deducted for tax purposes Lignier(2012.Pg 5).

Australian Tax Office outlines to what extent one claim car allowance can expense as well as when not. Australian tax regulation stipulates that by use of logbook method one can claim expenditure incurred proportion to percentage business or work-related usage. Victor is only allowed to claim 69% of any expenditure incurred but not on the cost this is because the law does not recognize this acquisition cost as part of the expenditure since they form part of the capital cost.

Computer Usage for Work Purposes

However, Victor as an owner of the Porsche he is eligible to claim a deduction for the decline of the value of the Porsche but only to that portion utilized for business purpose James (2016.Pg 350). The below is the calculation showing the portion of the depreciation that is claimable.

Purchase Cost=$135000

The useful life of the Car=6yrs

Expected Depreciation Per Year=$135000/6

=135000/6=$22500

This car was acquired on 10th Oct 2017 thus meaning by the end of claiming the deduction at the financial year period ending 30th June 2018 thus can claim the decline in value for 1year since useful life since it was acquired is less than 1year.Therefore we only need to capture the portion of days that the car was utilized.

From 10th Oct to31st Oct=21days, then Nov 30days, Dec 31days, Jan 2018 31days, Feb 28days,31 days March,30 days April,31 days May and finally 27 of days June up to when it was written off, therefore the total number of days is; =21+30+31+31+28+31+30+31+27=260days is the number of days the vehicle existed for decline in value hence the portion claimable is;

=260/365*69/100*$22500=$11058.904,

=Hence Victor is eligible to claim $11186.51 as a result of the decline in Porsche value.

The Net Book Value of the car at the date of write off is =135000-(260/365*$22500) =

NBV=$135000-$16027.39=$118972.61

According to ATO, we need to calculate balance adjustment by comparing $99000 insurance compensation and the NBV of $118972.61,

=99000-=$118972.61=-$19972.61 this is a capital loss Chung (2018, Pg. 34) hence Victor is eligible to claim only =69% of 19972.61=$13781.10 as deductible capital allowance Weller (2012, Pg. 18).

This case of canon photocopier is considered to be that one whose purchase cost is more than $300 hence not the claimable full amount but only the decline in value is only what is to be accounted for as allowable deduction. This is done by assuming that the fail in doing 1200000 copies as expected versus what it does i.e. 150000 is what is presumed to be the decline in value thus; =150000/1200000=0.125, hence 0.125*$8750*119/366=$355.62 is what which is claimable.

The extension made of the warehouse where the vegetables are stored for sales forms part of capital works that sees into it improvements on the warehouse according to ATO thus forms part for allowable deduction but the only portion of the months that fall in that financial year 2017/2018 hence =79/366*85800=$18519.6721 is only what he can claim.

Claiming Car Expenses for Work Purposes

Australian Tax Office only allows interest on credit facility but only to that extent that relates to business activities. Therefore, we need to consider all expenses but must apportion as per the percentage usage. From this we are told the interest paid for 10yrs is $27500 hence therefore though we are not told whether it was spread let us assume it was paid on spread basis hence there was a flat rate of =27500/10yrs, hence every year they were eligible to pay $2750, therefore for interest on loan the portion that is claimable is 65% of $2750*76/366=$371.17.The same applies to loan application fee of $5020 whereby the same portion basis analysis applies to;$5020*0.65*76/366=$677.562, therefore, he can claim $371.17 for interest Prince(2016, Pg. 12) and $677.562 for loan application fee but this is only as for the period ending June 2018 30th hence the balance will be apportioned for the next financial year.

As long as the wage is recognized as $55000 in the payroll and the relevant return is filed as well as payment of individual tax is done there is no mistake with that, however, there is need to provide all the wife details in Victors tax return for reporting requirement and concessions.

According to TD 93/138 if the motor parts in transit were paid for and thus just awaits delivery hence he can claim for that deductibility of $25,735 and this upon producing shipping, pro-forma invoice, invoice and contract document speculating terms and condition. However, if there is no payment made and the liability still lies with the supplier hence no allowance is claimable as in ruling TR 97/15.

According to ATO exempt income calculates and set-off tax losses of previous income years. In this case, we are informed that there is an exempt income of $55000 but on the other hand, we have recurring loss arrears of $75000 hence going with ATO regulation we should net off this income from this loss by Cobham (2014.Pg 31);

=$55000-$75000=$20000, thus reducing the loss to $20000.

Victor is therefore advised to follow all the above outlines ways to claim deduction plus many other existing ways embraces in the Australian Tax Office Saad (2014, Pg. 1070) rule and regulations and above all he should ensure that keeps all record Bond (2017.Pg 8) deemed usable for claim as well as filling Cooper (2017, Pg. 43) and paying taxes in time to avoid penalties.

References;

Bond, D. and Wright, A., 2017. A Snapshot of the Australian Taxpayer.

Chung, E., 2018. Can I really deduct that? Understand investment deductibles, Mar 2018), p.34.

Cobham, A. and Lorentz, S., 2014. International distribution of the corporate tax base: Implications of different apportionment factors under unitary taxation.

Cooper, R., 2017. A brief guide to tax filing. TAXtalk, 2017(65), pp.42-45.

James, K., 2016. The Australian Taxation Office perspective on work-related travel expense deductions for academics,8(5-6), pp.345-362.

Lignier, P. and Evans, C., 2012. The rise and rise of tax compliance costs for the small business sector in Australia.

Pandya, S. and Utz, S., 2017. Designing the Tax Treatment of Litigation-Related Costs.

Prince, J.B., 2016. Tax for Australians for Dummies. John Wiley & Sons.

Saad, N., 2014. Tax knowledge, tax complexity, and tax compliance: Taxpayers’ view. Procedia- 109, pp.1069-1075.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2012. Australian taxation law. CCH Australia.