Taxation Law: Deductions, Input Tax Credits And Tax Liability Calculation

Question 1

Issue

The issue is to determine whether the given expenses would be considered for tax deductions as per the provisions of section 8-1, ITAA 1997.

Rule

In accordance of section 8-1, ITAA 1997 the following expenses or losses resulted from business activities would be considered for tax deduction on the part of the taxpayer for the given scenario (CCH, 2013).

• Business losses or outgoings which are capital in nature would not be deductible.
• The loss or expense derived from business in order to generate exempt income would not be considered for tax deduction.
• The loss or expense of domestic nature would not be considered for tax deduction.

Application

The cost incurred in movement of machine to a new site is an outgoing of capital nature as there are no changes to the site but rather asset movement. As a result, this cost would add to the machine cost and would result in increase in expense on account of depreciation (Gilders et. al., 2016). However, the cost of moving machine would be termed as non-deductible as per s. 8(1).

The asset revaluation cost could be termed as deductible only when the revaluation exercise leads to higher assessable income being generated. However, the asset revaluation here is being carried out for insurance which is essentially related to asset preservation and hence this cannot be termed as deductible as per s. 8(1).

The incurred legal expenses would be deductible under s.8(1) only if there is an impact on the company operations or the ability to produce assessable income in line with the verdict in Snowden & Wilson Pty Ltd (1958) 7 AITR 308 case (Woellner, 2014). The current issue at hand is related to company being winded up and hence relates to asset preservation and hence the expense would be termed capital and non-deductible for tax.

Based on the given information the expense on legal advice relates to general operations besides concerns like mortgage and conveyancing. Considering the inability of the solicitor to distinguish amongst these expenses, the expenses are of revenue nature (since concerned with general operations) and thus would be held as deductible for tax purposes (Sadiq et. al., 2016).

Conclusion

The first three cases i.e. moving the machine to a different location, revaluation for insurance, legal advice in winding up proceedings lead to outflow which would be capital and hence non-deductible. On the other hand, legal advice for operations would be revenue expense for which s. 8(1) provides deduction.

Issue

It needs to be determined in relation to the given GST on advertising expenditure as to the claim that would arise for Big Bank in terms of input tax credits.

Relevant Law

Question 2

The critical aspect in relation to claiming input tax credit on GST paid on the financial supplies is the Financial Acquisition Threshold (FAT) and to derive if the underlying firm has crossed the same or not (Deutsch et. al., 2016). GST Act namely, s. 189(5) along with s. 189(10) provide the definition of FAT which then could be used to determine the input tax credit claim of a given entity. FAT tends to be breached when the input credit tax in relation to financial acquisition is higher than the lesser of the two values i.e. 150,000 and 10% of the total entitlement to the total input tax credits (Barkoczy, 2017). Full GST credit claim can be made in the event that the concerned organisation does not breach the FAT. But if FAT breach does happen, the full claim on input tax credit would not be complied with (Nethercott, Richardson and Devos, 2016).

Application

It is essential that creditable acquisitions are those which are related to making taxable supplies and in this case would apply to the home and content insurance.

Advertising expense for promotion of home and content insurance = $550,000 (including GST)

Hence, GST paid = (1/11)*550,000 = $ 50,000

As a result, input tax credits worth $ 50,000 is available

Besides, Big Bank based on the given information and reasonable assumptions would have breached the FAT limit. Also for the general advertising expense, based on the estimate provided by the company, a fair apportionment needs to be done.

Total general purpose advertising expense = $ 1,100,000

However, since 2% of the business constitutes home and content insurance, hence, general insurance which can be apportioned to the taxable supplies and input tax credit may be avoided on the GST paid on same.

Hence, expense from general advertisement allocated to the insurance business = (2/100)*1,100,000 = $ 22,000

GST paid on the same = (1/11)*22000 = $ 2,000

Therefore an input tax credit to the tune of $2,000 can be availed. Also, no reduction would be available in the input tax credit that could be availed for advertisement.

Conclusion

The above discussion hints at availability of $ 52,000 as input tax credit. Also, input tax credit available in the context of advertisement cannot be reduced.

Issue

The issue is to compute the net income for the firm being run by partners Johnny and Leon for FY2016/17.

Rule

The income derived from various sources would be taken into consideration to find the net income of partnership fir. Further, the net income can be determined with the help of total assessable income and tax deductions for the given tax year in accordance with relevant tax statutes in particular ITAA 1997 (Barkoczy, 2017).

Application

Computation of assessable income

Computation of tax deduction for Johnny and Leon

It is noteworthy that there are certain outgoings or expenses which are not included in the above table on account of their non-deduction for tax purposes in accordance with relevant provisions of ITAA 1997 and ITAA 1936 (Gilders et. al., 2016).

Net income of Johnny and Leon (partnership firm)

Net assessable income for the partnership firm  for the FY2017
Net tax deductible outgoings for the partnership firm
Net income =

Conclusion

Based on the above calculation, it can be said that the net income of Johnny and Leon (partnership firm) is $ 345,700 for FY2017.  This has been derived by first computing the assessable income and then computing the various deductions that can be claimed by the firm.

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