Deductions And Taxation: Allowable Claims Under S 8-1 Of ITAA 1997

Deductibility of certain expenses under s 8-1 of ITAA 1997

A deduction for business general may be made as outlined in s. 8(1) provided certain conditions are satisfied. In wake of this background, the objective is to assess whether the given expenses qualify for deduction or not under the above section.

As mentioned above, for any loss or outgoing expense to qualify for deduction under the provided section 8-1, certain requirements would need to be met. These are outlined below (CCH, 2013).

• Deduction is permissible only for revenue expenses (mainly for increasing assessable income) and not capital expenses (mainly for preservation of asset).
• Deduction is permissible only for business expenses and not for expenses that are classified as private or domestic.
• Deduction is not permissible for those expenses which contribute to non-assessable income production.

• For the cost involved in machine movement to a designated site, the expense incurred would not be categorised as a revenue expense. Instead, such an expense is essentially capital and thus would not lead to any deduction under the given section (Gilders et. al., 2016).
• In order to determine whether the given cost can be deducted or not, focus needs to be paid on the underlying reason. The revaluation is cleared being carried out for insurance which can be linked with preservation of asset value. Thus, the expense would assume a capital nature and thus would not lead to any deduction under the given section
• To decipher the nature of legal expense, the essential cause needs to be ascertained. For instance, the legal expense as per the given details deals with proceedings of winding up and hence the reason is apparently preservation of company or the asset in this case. Thus, the expense would assume a capital nature and thus would not lead to any deduction under the given section.
• As has been highlighted above, the intention behind legal spending is critical. One of the reasons stated for hiring the services of the solicitor pertains to general business operations. Further, the fees paid cannot be differentiated and hence the whole fees or expense would assume a revenue nature and deduction in tax would be available (Sadiq et. al., 2016).

Conclusion

Applying the conditions for availing s. 8(1), it becomes apparent that for the first three cases, owing to the expense being of capital nature, deduction would not be available. However, for the fourth case, deduction is available under s.8(1) as the expense is of revenue nature.

As per the question, Big Bank has incurred expenditure in relation to business promotion and otherwise. On account of the GST paid, the key concern is to outline the input tax credit that would be available for the company.

Any GST which is paid related to the financial supplies would lead to input tax credit generation for the reporting entity as per GST Act. However, the ability of the entity to claim this completely would depend on the threshold defined in the form of Financial Acquisition Threshold (FAT) (Deutsch et. al., 2016). If FAT is not violated, then complete refund is permissible (Nethercott, Richardson and Devos, 2016). The definition of FAT is the lesser value of either $ 150,000 or “10% of the total entitlement to the total input tax credits” that is available for the company (Barkoczy, 2017).

It needs to be understood that taxable supplies would result from creditable acquisition which for Big Bank would be the promotion expense on insurance business. This expense including GST payments has been highlighted as $ 550,000.

Considering a GST rate of 10%, GST payment = (550000/11) or $ 50,000

The above GST paid leads to availability of tax credits to the extent of $ 50,000.

The bank also spends $ 1.1 million on general advertising but the portion of expense which is attributed to the insurance business can lead to generation of input tax credit. A reasonable assumption would be to assume that expense for insurance would be equal to the business contribution from insurance i.e. 2% currently.

Thus, component of general advertisement linked to home and content insurance = 2% of 1.1 million = $ 0.022 million

Considering a GST rate of 10%, GST payment = (0.22 million/11)  or $ 2,000

Conclusion

Thus, the bank has $ 52,000 worth of input credit available for claim. However, on account of the FAT being breached for the bank, the actual claims would be lesser.

It is known that Angelo has paid tax to foreign tax authorities, and consistent with the principle of avoidance of double taxation, the foreign tax offset needs to be calculated.  A key condition for making a claim for foreign tax offset is that actual tax payment abroad should have been done (Woellner, 2014). The relevant computations are highlighted below.

Since the tax paid abroad ($ 4,400) is lesser than the offset limit ($ 7,797), hence $ 4,400 would be the foreign tax offset that Angelo would avail while filing tax returns in Australia.The key aim is to perform computation of the net taxable income for the given partnership firm. This would be essentially performed in steps whereby first the assessable income would be determined followed by the deductible expenses and outgoings so as to arrive at the taxable income.

                                                            Determination of assessable income

The above represents the deduction in tax on account of deductible expenses and outflows. Determination of taxable income (For Partnership Firm).Taxable income = Assessable income ($ 446, 400) – Deductions in tax on account of expenses and outgoings ($100,700) = $ 345,700 

References

Barkoczy, S. (2017), Foundation of Taxation Law 2017, 9^thed., North Ryde: CCH Publications

CCH (2013), Australian Master Tax Guide 2013, 51^st ed., Sydney: Wolters Kluwer

Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2016), Australian tax handbook 8th ed., Pymont: Thomson Reuters,

Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016), Understanding taxation law 2016, 9^th ed., Sydney: LexisNexis/Butterworths.

Nethercott, L., Richardson, G. and Devos, K. (2016), Australian Taxation Study Manual 2016, 4^th ed., Sydney: Oxford University Press

Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A (2016) , Principles of Taxation Law 2016, 8^th ed., Pymont:Thomson Reuters

Woellner, R (2014), Australian taxation law 2014, 7^th ed., North Ryde: CCH Australia.