Calculation Of Input Tax Credit And Income Tax Payable

Answer to Question 1

“Section 4-15 of the Income Tax Assessment Act 1997” states that in order to calculate taxable income, the allowable expenses are deducted from assessable income. In addition, a taxpayer is allowed in claiming deduction under “Section 8-1(1) of the ITAA 1997” for expenditures incurred on gaining or developing assessable income along with conducting the activities associated with the businesses. Hence, the following points are discussed briefly as follows:

• According to “Section 8-1”, the amount spent on moving a machinery would be taken into account for deduction only, if the machinery is utilised in earning an income, which is taxable. In case of “Granite Supply Association Ltd v Kitton(1905) and Smith v Westinghouse Brake Company (1888)”, the sum of money incurred for relocating expenses and plant would not be allowed as deduction due to the capital nature of the expenditures.
• “Section 8-1 of ITAA 1997” denotes that the cost of revaluation related to an asset is not considered as deductible expense.
• “Section 8-1 of ITAA 1997” represents that any expenditure related to lawful suits is suffered in contrast to the closure of the company and this would be taken into account in the form of deductible expenditure.
• As laid out in “Section 8-1 of ITAA 1997”, in order to assure business income, with prior experience of solicitor expense, it would be considered in the form of permissible deduction.

If a business organisation makes any purchase, the input credit of GST is permitted only, in case; pertinent documents are stored properly in association with such transactions. According to “GST Act 1999”, any organisation intending to make business income possesses the right to obtain credit of input for payments related to GST involving material or asset purchase.

It has been identified from the provided case that Big Bank Limited has incurred advertisement expenditure of $1,650,000 that includes GST as well. In the current scenario, the bank intends to assure that the overall expenditures related to advertisement would be permitted as credit of input or not, as the expenditures include GST.

As identified from the “Chapter 2 of the Goods and Services Act 1999”, input tax credit including GST would be permitted to an organisation on the incurred expenditures at the time of general course of the business. However, it is to be noted that such expenses include the amount of GST.

Big Bank Limited is a financial organisation that provides services to the individuals having more than 50 branches throughout the province of Australia. It has a 10-storied apartment, in which its head office is situated. Along with, there has been the introduction of home content and insurance policy in Australian market coupled with loan and deposit provisions of the customers over the years. In order to carry out advertising work, the bank has kept apart a budget amounting to $1,650,000 from which $550,000 is invested for house advertisement and insurance products. With the help of such investment, the organisation has managed to generate 2% of its overall revenues. The leftover amount of $1,100,000 is for promoting the other services of the organisation and it takes into consideration the GST as well.

Therefore, it has been evaluated that $1,100,000 had been incurred for the promotion of services for generation of maximum revenue, while the amount of $550,000 is to be considered as capital expense. This is because the newly launched product would contribute towards the income generation of the organisation.

Conclusion:

From the above discussion, it is inherent that the sum of $1,100,000 that the organisation has spent on advertising its current products and services would be allowed to obtain credit input. On the contrary, the overall amount of $550,000 would not be restricted to obtain credit of input, since 2% of such expense contributes towards the generation of income of Big Bank Limited.

Calculation of Input Tax credit
Particulars	Amount ($)	Amount ($)
Total spending on advertisement and promotional activities	1,650,000.00
GST input credit 100% eligible for:	1,100,000.00
Portion of advertisement expenditures ineligible for input credit in respect of GST	550,000.00
100%  GST input credit		100,000.00
Add: For 2% contribution in revenue		3,000.00
Amount of input credit allowed to the bank		103,000.00

 Table 1: Computation of input tax credit allowed to Big Bank Limited

(Source: As created by author)

The subdivision 717A concentrates on rules pertaining to the offset of income tax. The computation is provided as follows:

Assessable income of Angelo inclusive of foreign incomes
Particulars	Amount	Amount
Gross total income without any deductions		$ 68,000.00
Available deductions:
Medical expenditures	$   5,000.00
Expenses for deriving employment expenses disallowed for deduction	–
Expenses incurred in UK for generating Rental income	$      500.00
Interests expenditures for generation of dividend income	$      140.00
Expenses for generation of interest income	$        60.00
Total amount of deductions		$   5,700.00
Net income after deductions		$ 62,300.00
Income tax payable		$ 11,794.18

 Table 2: Computation of income tax payable

(Source: As created by author)

Along with the above-depicted table, the following computation is presented as follows:

Assessable income of Angelo inclusive of foreign incomes
Details	($)	($)
Gross total income without any deductions		52,000.00
Available deductions:
Medical expenditures	5,000.00
Expenses for deriving employment expenses disallowed for deduction	–
Expenses incurred in UK for generating Rental income	–
Interests expenditures for generation of dividend income	–
Expenses for generation of interest income	–
Total amount of deductions		5,000.00
Net income after deductions		47,000.00
Income tax payable		6,821.68

 Table 3: Computation of income tax payable

(Source: As created by author)

Assessable income of Angelo inclusive of foreign incomes
Details	($)	($)
Gross total income without any deductions		52,000.00
Available deductions:
Medical expenditures	5,000.00
Expenses for deriving employment expenses disallowed for deduction	–
Expenses incurred in UK for generating Rental income	–
Interests expenditures for generation of dividend income	–
Expenses for generation of interest income	–
Total amount of deductions		5,000.00
Net income after deductions		47,000.00
Income tax payable		6,821.68

 Table 3: Computation of income tax payable

(Source: As created by author)

The offset of foreign tax is computed by subtracting the amount of income tax payable under the first alternative from income tax payable from the second alternative. Henceforth, the limit is computed as $4,972.50 ($11,794.18 – $6,821.68). It could be observed that the sum of offset of foreign tax is greater in contrast to the payment of foreign tax. Hence, the offset limit of foreign tax is $4,400.

Statement showing Calculation of Income from Partnership
Particulars	Amount	Amount
Revenue from sporting goods sales	$            400,000.00
Interests incomes on bank deposits	$              10,000.00
Un-franked portion of dividend	$                8,400.00
Amount of Bad debts recovered	$              10,000.00
Incomes exempt	–
Income from capital gain	$              30,000.00
The amount of gross total income		$ 458,400.00
Expenses eligible as deduction:
Partners’ salaries	$              25,000.00
Fringe benefit tax	$              16,000.00
Interests on capital	$                2,000.00
Interests expenses on loan	$                4,000.00
Johnny’s travelling expenses	$                3,000.00
Office building renewal fees	$                2,000.00
Documentation related expenses	$                  700.00
Expenses on debt collection	$                  500.00
Council rates	$                  500.00
Salaries of employees	$              20,000.00
Cost of goods sold {(Opening stock + purchases) – Closing stock}	$              34,000.00
Retail shop rent	$              20,000.00
Bad debt  losses	$              30,000.00
Expenses related to business lunches	–
Pilferage	$                3,000.00
		$ 160,700.00
Income of the partnership firm for the income year before setoff of loss	$ 297,700.00
Less: Setting off loss incurred in the previous year	$     40,000.00
Net income of the partnership in the income year	$ 257,700.00

 Table 5: Computation of net profit from partnership

(Source: As created by author)

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