Taxation Law Assignment On Casinos And Travelling Expenses

Q 1: Difference Between Capital And Revenue Expenditure

Facts of the case

In Melbourne city John wants to operate a casino and for the same application for license has been done and it was approved. The license granted to John to operate a casino was for 10-year  from Victorian Government. John also received an approval for Casino’s building for a total period of time of 90 years.

It was instructed to John by the concerned Government agency of Australia for the payment of $180 million as casino license fees and also payment of $ 80 million as prepaid rent which will cover total 10 years of casino rental.After the over of 10 years of lease contract ,john has negotiated with the government agency for payment of $4,00,000 rental per year for eighty years.

Let’s help John understand the implication of the transactions above under the income tax laws by answering the following questions to enable him to better understand the implication of taxes for each transaction he has undertaken. With reference to relevant legislation and case laws we would be discussing whether the rent paid in advance is considered to be revenue  or capital in nature.

Section 8-I of the Income tax assessment act, 1997

Before we get into the classification of this transaction, let’s see what Section 8-I of the Income tax assessment act, 1997 says, it states that any loss arising can be deducted from our assessable income to the extent that: (austlii.edu.au, 2020)

1. the loss is incurred in producing such assessable income; or
2. the loss is incurred in carrying on any business for the purpose to gain income.(austlii.edu.au, 2020)

It also contains a proviso to the main section above which states that, However, loss cannot be deducted under this section to the extent:

1. such losses are in the nature of capital outflow;
2. such expenses are in the nature of personal expenditure; or
3. such expenses have been incurred for generating income which is exempt or non –assessable like Capital Gain on certain assets; or
4. such expenses have been prohibited to be deducted under certain provision of ITAA 1997.(austlii.edu.au, 2020)

Section 51-1 of ITAA 1936, further affirms Section 8-1 of ITAA 1997.

Section 40.880 of Income Tax Assessment Act, 1997

Further for any capital expenses, Section 40.880 of Income Tax Assessment Act, 1997 states that:

One can claim and deduct capital expenses incurred over a period of five years in equal amount starting from the year in which it is incurred. One can claim following types of capital expenses:

1. If the same is incurred for the purpose of business; or
2. If the same is incurred for the purpose of carrying on business. or
3. If the same is incurred for the proposed business to be carried on or
4. If the capital expenses is incurred with respect to liquidation or demerger case in which one is a member ,if the same is incurred in case of winding up a partnership in which one is a partner or for winding up a trust of which one is beneficiary that carried on a business. (austlii.edu, 2020)

However, the following expenses can be deducted as capital expenditure in the income year in which it is incurred:

1. If the expense is in relation for proposed business to be carried on, and
2. the expenses are incurred:
3. for the purpose of providing advice or services which relates to proposed structure of the business or for the proposed operation of the business.in obtaining advice or services relating to the proposed structure, or proposed operation of the business; or
4. with respect to amount paid to an Australian government agency of fees, taxes or charges which relates to establishing the business or its operating structure; and
5. if one is a small business entity for the income year, or both of the following condition apply:
6. the business is not carried on that particular income year.;
7. if one is not connected or affiliated with any other entity that carries on the business in that particular income year and is also not a small entity for the particular income year. (austlii.edu, 2020)

Let us also review the guidelines deduction of prepaid expenses 2018 for understanding how prepaid expenses are allowed as deduction in the return of tax payers. Individuals can use this as a guideline to work out the eligibility of the prepaid expenses as deduction in the return of income.

What is Prepaid Expenses? – A prepaid expense is expenditure you incur under an agreement for something to be done (in whole or in part) in a later income year. (Australian Taxation Office, 2018).

Identification of material facts (issues) regarding John’s prepaid rent.

After having gone through the definition let’s see what the prepaid rules are, the prepayment rules alters the timing of deduction of the expenses incurred in a particular year that would ordinarily be deductible in the year in which it has been incurred. (Australian Taxation Office, 2018)

Generally, a prepaid expense is deductible over “eligible service period” which cannot exceed 10 years from the year it is being incurred. However, a prepaid expense may be immediately deductible and not follow the eligible service period in case of below: (Australian Taxation Office, 2018)

1. it is specifically excluded,
2. “the 12 month rule” applies to the same wherein if you are a small business entity and incurs expenses which are within 12 months service period(Australian Taxation Office, 2018)

We can also refer to the case of Star City Pty Limited Vs FC of T, Federal Court of Australia, 09 November 2007. Details and judgments of the case can be summarized as follows:

• New South Wales Casino Control Authority (NSWCCA) has granted a license to the Start City with certain terms on 14^thNovember, 1994
• NSWCCA further enters into a lease agreement with Sydney Harbour Casino Properties Pty Limited (SHCP) for 99 years with following terms:

1. First 12 year rental of $ 15 Million per annum and
2. Thereafter rental of 0.25 Million $(CCH Australia Limited., 2020)

• It was further stated that rental shall involve a prepayment of $ 120 Million

The above facts are similar to the John’s dilemma and the questions that arose were whether the prepayment is capital expenditure or revenue expenditure.

The Hon’ble Federal court adjudged the same as revenue expenditure relying on the earlier judgments of Citylink (High Court) at [147] and GP International Pipe coaters Pty Ltd v Federal Commissioner of Taxation 90 ATC 4413; (1990) 170 CLR 124 at 137 and passed the following judgment:

For deciding as to the nature of expenditure the court relied on the judgment of Dixon J in Sun Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 at 363 wherein three matters have been considered for deciding an expenditure to be revenue or capital (CCH Australia Limited., 2020)

• Extent of advantage to be sought and its durability lasting shall play a significant role;
• Manner of usage of such expenditure and whether the said expenditure is recurring;
• Means employed for obtaining the same;(CCH Australia Limited., 2020)

Conclusion

Based on the above case laws and various sections of the act, it is hereby clarified that the payments by John of 10 year license and 10 year rent can be classified as revenue expenses and prepaid rules can be applied to it for being claimed as deduction equally over a period of 10 years.

Facts of the case

In Melbourne city Alex Kingsford is working as a mechanical engineer for company ABC Engineering . The family of Alex  are residing at a  property which is in Dandenong, Victorian. Alex also run a home based business providing catering and food services to local people of Melbourne and also run school canteens. The business of Catering  is very well-structured. In an month Alex runs his business 15 days and also  earns a huge income from the catering relates service business. Alex uses car or uber service to travel from ABC Engineering workshop to his home . At the time of filing tax return in year 2019,Alex claimed travelling expenses done from ABC Engineering workshop to his home based business .

Identification and analysis of legal issues / legal question and relevant taxation law in regards to casino’s rental (e.g. ITAA 1936 and ITAA 1997).

As per the fact stated above Alex needs advice with reference to all the related tax laws,rules and legislation whether Alex’s can claim the travelling expenses incurred .

Section 8-I of the Income tax assessment act, 1997

Before we get into the classification of this transaction, let’s see what Section 8-I of the Income tax assessment act, 1997 says, it states that any loss arising can be deducted from our assessable income to the extent that: (austlii.edu.au, 2020)

1. the loss is incurred in producing such assessable income; or
2. the loss is incurred in carrying on any business for the purpose to gain income.(austlii.edu.au, 2020)

However, one cannot deduct a loss or outgoing under this section to the extent that:

1. such losses are in the nature of capital outflow;
2. such expenses are in the nature of personal expenditure; or
3. such expenses have been incurred for generating income which is exempt or non –assessable like Capital Gain on certain assets; or
4. such expenses have been prohibited to be deducted under certain provision of ITAA 1997.(austlii.edu.au, 2020)

There is guideline prescribed by Australian Taxation Office on Vehicle and travel expenses. The vehicle and travel related expenses can be claimed can be claimed one incur at the time of performing work duties. These expenses cannot be claimed if it is incurred with respect to travelling expenses from work to home and viceversa. Record for the same is required to be maintained. (Commonwealth Of Australia, 2020)

There are few exceptions to the rule for travelling expenses incur between home and work. In few cases these expenses can be claimed as deduction for travelling made between home and work and vice versa.

What you can claim

You can claim the traveling cost: (Australian taxation Officer, 2020)

1. directly between two separate workplaces – for example, in case one has a second job (travelling between workplace is not your home)
2. When one travel from a normal workplace to the client office, which is not permanent workplace, back to the office or home from the client workplace.
3. If home has been the base for employment -One start their work at home and continue the same at the workplace of same employer.
4. If any tools or equipment is required to be used at office premises that is carried from home to workplace and vice versa. The same equipment cannot be left at the workplace. Example, an extension ladder or a cello.(Australian taxation Officer, 2020)

You can’t claim the cost of driving your car between work and home if:

1. home is the place from where the business is running and one travel to a place of work where one work for somebody else.
2. the work is carried out at home (Australian taxation Officer, 2020)

If you do itinerant work (or have shifting places of work) one can claim the travelling expenses incur while travelling between workplace and home. (Australian taxation Officer, 2020)

The following factors may indicate you do itinerant work:

• Travel is a principal part of work aspect, as the very nature of your work, not just because it is convenient to you or your employer
• The basis of operation is home – if a work cannot be completed at home until the same work is attended at your work place.
• The location of worksite is uncertain
• The employer provides an allowance to employee in recognition of need of travel required between different places of work and the same allowance is used for payment purpose. (Australian taxation Officer, 2020)

The travel allowance provided by the employer of company needs to form part of employment income. The travelling expenses done is merely a part of convenience than it will be considered as part of private expenses incurred and the same is not allowed as deduction.  (Australian taxation Officer, 2020)

Conclusion

Based on above guidelines and reading of Section 8-I of the ITAA, 1997, Alex can take guidelines of Itinerant work wherein his home is the base of operation and he needs to travel to site as part of his work but he cannot claim any deduction of motor vehicle expenses since his home is the basis of operation from where he ran his own business and directly he travel to a place of work where he work for some other employer

The requirement which need to be satisfied for travel purpose was not fundamentally related to his employment income. The expense related to travel was basically a matter of convenience for him and the same will form part of private expenses and is not allowed as deduction.

References

austlii.edu.au, 2019. classic.austlii.edu.au. [Online] Available at: https://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s51aaa.html[Accessed 12 May 2020].

austlii.edu.au, 2019. INCOME TAX ASSESSMENT ACT 1997 – SECT 40.880. [Online] Available at: https://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s40.880.html[Accessed 12 MAy 2020].

austlii.edu.au, 2020. INCOME TAX ASSESSMENT ACT 1997 – SECT 8.1. [Online] Available at: https://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s8.1.html[Accessed 18 May 2020].

austlii.edu, 2020. INCOME TAX ASSESSMENT ACT 1997 – SECT 40.880. [Online] Available at: https://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s40.880.html[Accessed 18 May 2020].

Australian Taxation Office, 2018. General information about prepaid expenses. [Online] Available at: https://www.ato.gov.au/Individuals/Tax-return/2018/In-detail/Publications/Deductions-for-prepaid-expenses-2018/?page=2#General_information_about_prepaid_expenses
[Accessed 18 May 2020].

Australian taxation Officer, 2020. Travel between home and work and between workplaces. [Online] Available at: https://www.ato.gov.au/individuals/income-and-deductions/deductions-you-can-claim/vehicle-and-travel-expenses/travel-between-home-and-work-and-between-workplaces/#itinerant
[Accessed 18 May 2020].

CCH Australia Limited., 2020. STAR CITY PTY LTD v FC of T, Federal Court of Australia, 09 November 2007. [Online] Available at: https://iknow.cch.com.au/document/atagUio1234589sl171166175/star-city-pty-ltd-v-fc-of-t
[Accessed 12 May 2020].

Commonwealth Of Australia, 2019. Travel between home and work and between workplaces. [Online] Available at: https://www.ato.gov.au/individuals/income-and-deductions/deductions-you-can-claim/vehicle-and-travel-expenses/travel-between-home-and-work-and-between-workplaces/
[Accessed 12 MAy 2020].

Commonwealth Of Australia, 2020. Vehicle and travel expenses. [Online] Available at: https://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-can-claim/Vehicle-and-travel-expenses/
[Accessed 12 May 2019].

Wolters kluwer, 2020. STAR CITY PTY LTD v FC of T, Federal Court of Australia, 09 November 2007. [Online] Available at: https://iknow.cch.com.au/document/atagUio1234589sl171166175/star-city-pty-ltd-v-fc-of-t[Accessed 12 May 2020].