Answer to A:
According to the “section 25-10 of the ITAA 1997” an individual is allowed to claim deductions relating to the expenditure that is incurred for repair on the premises or the depreciating assets that is entirely held for generating income (Barkoczy, 2014). However, an individual is not allowed to claim deductions relating to expenses that are capital in nature. As evident in the situation of Bhavraj who bought a property on 30 June and undertook the decision of repainting the entire building so that an Indian theme is reflected.
Any kind of repair that is carried out following the acquisition of property is referred as initial repair. This reflects that the property is not in better order when it was purchased and not suitable for producing income as the way planned. In the leading case of “W Thomas and Co Pty Ltd v FCT (1965)” the cost incurred by the taxpayer on repairing the roof and painting the building during the year in which it was acquired is regarded as capital expenditure and not deductible (Brokelind, 2014). Similarly for Bhavraj the cost of repainting the building is an initial repair of capital in nature and no deductions is allowable.
According to the “division 40-25(1)” an entity can claim deductions for an amount that is equivalent to the decline in value for the income year of the depreciating asset that is held throughout the year (Coleman & Sadiq, 2013). As evident in the situation of Bhavraj a new oven was installed with a cost price of $10,000 and incurs $1000 for transportation with another $1000 for installation purpose. According to the simpler depreciation for small entity an individual is allowed to immediately write off the or deduct the full cost of the asset in the year when it is purchased given the cost of depreciating assets is less than $20,000. Additionally the cost of assets also includes the cost that is incurred in transporting and installing the assets. Similarly for Bhavraj the cost of new oven can be immediately written off since it is less than $20,000 and the additional cost on transportation and installation can be allowed as deductions.
|
Particulars |
Amount ($) |
|
Cost Price of Oven |
10000 |
|
Transportation Costs |
1000 |
|
Installation Costs |
1000 |
|
Floor strengthening costs |
2000 |
|
Total Costs |
14000 |
Diminishing Value Method = Assets costs x Days held / 365 x 100% / Effective Life
|
14000 |
365 |
x 200% |
|
365 |
5 |
= (14000)*365/335 = 15253.7
= 15,253.7 x 200 / 5 = 6101.49
Hence, Bhavraj under the diminishing value method can claim maximum depreciation of $6,101.49.
According to the Australian taxation office where the asset that has been written off previously either under the instant write off method or under the low value pool and the proceeds that are derived from the sale of the assets should be included in the assessable income up to the level that the assets has been used and depreciated for the assessment purpose. Bhavraj with reference to the “section 40-25 (1) of the ITAA 1997” can claim deductions for the amount that is equal in the decline in the value for the income year of the refrigerator which was held throughout the year.
According to “section 8-1 of the ITAA 1997” an individual is allowed to claim deductions relating to the cost that is incurred in producing the taxable income (Grange et al., 2014). An individual taxpayer is allowed to claim deductions when the expenses are necessarily incurred in producing or gaining the taxable income. Similarly in the case of Bhavraj the cost that is incurred in resealing of customer car park cannot be allowed as deductions since the cost of $5000 is not associated to the income deriving activities of the taxpayer. The cost of resealing the car park is neither relevant nor incidental in derivation of the taxable income.
According to Australian taxation office a car is defined as motor vehicle that is designed to carry load for less than one tonne (James, 2015). An individual at the time of working out their deductions can use the cents per kilometre or the log book methods to claim deductions. Evidently in case of Bhavraj the purchase of car was entirely for the business purpose and he can claim deductions relating to the running expenditure of the car that are incurred in process of business.
Answer to A:
According to ATO ID 2004/489 an employer is entitled to claim deductions under “section 8-1 of the ITAA 1997” relating to the long service leave contributions to the worker entitlement fund (Kenny, 2013). Similarly in the case of Raj the payment of $10,000 for the long service leave for his employees will be allowed as deductions under “section 8-1 of the ITAA 1997”. The expenses are incurred in producing the assessable income of the taxpayer.
According to Section 26-5 of the ITAA 1997” an individual taxpayers is not allowed to claim deductions relating to the penalties or fines that is imposed as the breach of the Australian law (Krever, 2013). This includes parking fines that is incurred in the work related travel. The parking fines of $5000 which is incurred by staff at the time of delivery of food constitutes business fines. Under Section 26-5 of the ITAA 1997”, the parking fines will not be allowed as deductions.
For an expenditure to be considered as the allowable deductions for an outgoing it must be incurred in gaining or producing the taxable income and should be incidental and relevant to the end. As held in “W Neville & Co v FCT” the taxpayer was allowed to claim deductions for the sum paid to the managing director for agreeing to resign since the payment was to increase the efficiency of the company (Morgan et al., 2013). Referring to above instance the payment of $10,000 made by Raj to obtain the resignation of restaurant manager would be an allowable deductions under “section 8-1 of the ITAA 1997”.
According to the Australian taxation office an individual is allowed to claim tax deductions for the super payment that is made for the employees during the financial (Murphy & Higgins, 2016). Evidently in the situation of Raj the superannuation contribution that is made to the complying superannuation fund will be allowed as deductions. Therefore, the sum of $45,000 can be claimed by Raj as an allowable deductions.
Any form of losses or outgoing that are preliminary in the commencement of the income generating business activities are usually not incurred in the course of business and not allowed for deductions under the general provision of “section 8-1 of the ITAA 1997”. As held in “Softwood Pulp & Paper v Federal Commissioner of Taxation (1976)” the company occurred a feasibility study and other costs in order to ascertain whether to establish a new production mill for paper (Pope et al., 2017). The taxation commissioner held that the cost would not be allowed as deductions as it was preliminary to the commencement of the income generating activities. Similarly, in case of Raj, the cost of $6,000 on feasibility study for opening a new restaurant is a pre-commencement cost and no deductions is allowable as it is preliminary to the commencement of the income generating activities.
According to “section 108-10 (2) of the ITAA 1997” collectible refers to any artwork, antique or a jewellery that is used or kept for the personal use or enjoyment (Woellner, 2013). According to “section 118-10(1)” any form of capital gains and capital loss is disregarded under the first element of the collectible’s cost base if it is less acquired for less than $500. As evident an antique desk was acquired for a cost of $4000 but was sold for a loss at $3500.
According to subsection 108-10 (1) of the ITAA 1997 provides that at the time of working out the net capital gains for the income year capital losses from the collectables can be only used to reduce the capital gains from the collectables (Woellner et al., 2014). An individual is required to disregard the capital losses made from the collectables. The loss from the sale of Antique desk cannot be used to offset any capital gains since no gains was reported from the sale of collectible. With reference to “subsection 108-10 of the ITAA 1997” Raj should disregard the loss from the sale of antique desk.
A person used use asset under “subdivision 108-C” refers to the non-collectable assets that are largely kept for personal use and enjoyment. This includes Yacht, furniture, electrical goods and household items (Barkoczy, 2014). Under “section 118-10 (3)” any form of capital gains made is disregarded from the personal use asset when the asset is acquired for $10,000 or less. Referring to “section 118-10 (3)” Raj reported capital gains of $11,000 from sale of Yacht but the cost base was less than $10,000 (i.e. $6000). Therefore, Raj should disregard the capital gains from sale of Yacht.
“Section 108-5 of the ITAA 1997” is concerned with CGT assets which includes, shares in company land and buildings, goodwill etc. The shares in the company or units are treated in the similar manner as any other assets for the purpose of capital gains tax (Brokelind, 2014). The sale of shares by Raj and profits derived from such sale of shares would be subjected to capital gains tax.
|
The 12-month ownership rule: |
Yes |
|
Sold price: |
$8,500 |
|
Purchase price: |
$5,000 |
|
Capital gain |
$3,500 |
|
CGT Discount @ 50% |
|
|
Taxable capital gain |
$1,750 |
According to “section 108-5 (1) of the ITAA 1997” CGT asset also includes personal use assets that costs more than $10,000 (Coleman & Sadiq, 2013). The sale or Mercedes car by Raj constitutes personal use assets as the value of the car was greater than the threshold limit of $10,000. The capital gains made from the sale of Mercedes car would be liable for capital gains tax.
|
The 12-month ownership rule: |
Yes |
|
Sold price: |
$175,000 |
|
Purchase price: |
$150,000 |
|
Capital gain |
$25,000 |
|
CGT Discount @ 50% |
|
|
Taxable capital gain |
$12,500 |
According to the Australian taxation ruling an individual main residence is usually exempted from capital gains tax. In order to obtain exemption the property should have a dwelling on it and an individual tax payer must have lived in it. In the current case of Raj it is assumed that the main residence was used for dwelling purpose (Grange et al., 2014). The capital gains that is made from the sale of main residence would be subjected to main residence exemption for Raj.
Small business accounts a sizeable portion of the Australian economy. The small business contributes more than $1.5 trillion as revenue to the Australian economy. In spite of their large contributions the small business are unable to attain a large scale benefits than the larger counterparts (James, 2015). Because of the growing importance of the small business a simplified tax system was introduced with the attempt of providing small business with the options of tax measures in order to simply their tax measures and simultaneously reducing their cost of tax compliance. For several small business owners the major source of retirement funding constitute the sale of their business or the assets that are owned by them (Kenny, 2013). The small business CGT concessions helps the taxpayers to reduce or eliminate their capital gains based on sale of certain assets.
There are usually four types of small business concessions that are available;
To be eligible for small business concessions there are following eligibility criteria that is required to be fulfilled;
The objective of the small business concessions was to provide eligible small business with the new platform of dealing with their tax. The objective of implementing the simplified tax measures was to reduce the compliance of income tax by 95% of the business. The initial small business concession packaged enabled the small business with the options of collectively adopting the four tax treatment packages (Krever, 2013). This included the simplified rules for depreciation, cash accounting for income tax purpose, simplified trading stock accounting rules and the capability of claiming an immediate tax deductions relating to the prepaid expenditure. The four concessions that are provided in the small business concessions is to increase the simplicity to qualify as the small business.
The history of tax measures shows that the additional concessions were made available to the business that included the CGT relief and the GST relief for accounting on the cash basis (Morgan et al., 2013). The provision of the small business was applied on the business that had turnover of less than $1 million each year, although the test of eligibility differed in relation to other associated provisions. The old system required ignoring the debtors and creditors with work-in-progress only taxed when it is realised.
The current regime is introduced through new business tax system relief that are designed to attain the simplifications and greater degree of equity for the business. This includes introducing the choice of accounting for GST based on the cash basis. Other notable changes that were introduced are stated below;
The findings from the study suggest that introducing the new policies for the small business concessions has helped in reducing the compliance cost of tax that was faced by the business (Woellner, 2013). This has enabled the small business with the choice in adopting simplified tax rules and has ultimate resulted in reduced burden of compliance costs.
It is disputed that the ability of the taxpayers to satisfy the $6 million maximum test may be difficult to meet. It is recommended that the $6 million maximum net asset value test should be replaced with some alternative eligibility test. This can be done through revised aggregated turnover that would lead the concession being reduced gradually above the threshold limit.
Conclusion:
The results obtained suggest that small business entity concession is being widely adopted. The most popular small business concession were the CGT reliefs for small business with the adoption of cash basis accounting for GST purpose. The simplified depreciations rules and the immediate deductions for prepaid expenses could be viewed as an attempt in reducing the cost compliance for the business.
References
Barkoczy, S. (2014) Foundations of taxation law.
Brokelind, C. (2014). Principles of law: function, status and impact in EU tax law. Amsterdam: IBFD.
Coleman, C., & Sadiq, K. (2013) Principles of taxation law.
Grange, J., Jover-Ledesma, G., & Maydew, G. (2014) principles of business taxation.
James, M. (2015) Taxation of small businesses.
Kenny, P. (2013). Australian tax 2013. Chatswood, N.S.W.: LexisNexis Butterworths.
Krever, R. (2013). Australian taxation law cases 2013. Pyrmont, N.S.W.: Thomson Reuters.
Morgan, A., Mortimer, C., & Pinto, D. (2013). A practical introduction to Australian taxation law. North Ryde [N.S.W.]: CCH Australia.
Murphy, K. E., & Higgins, M. (2016). Concepts in Federal Taxation 2017. Cengage Learning.
Pope, T. R., Rupert, T. J., & Anderson, K. E. (2017). Pearson’s Federal Taxation 2018 Corporations, Partnerships, Estates & Trusts. Pearson.
Woellner, R. (2013). Australian taxation law select 2013. North Ryde, N.S.W.: CCH Australia.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2014) Australian taxation law.
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