HI3042 Taxation Law T2 2017 Assignment


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Question 1 Issue The central issue in the present case is to comment on the nature of the given losses or expensesand to decide whether these would be allowable as deductions under s 8 – 1 of Income TaxAssessment Act 1997. Rule Section 8 – 1 ITAA 1997, describes various factors that would be taken into consideration in theprocess of deciding whether the loss or expenses occurring in the given business operationsresults in tax deduction for the business or not (Barkoczy, 2017). When the loss is of “capitalnature”, then it would not be considered for tax deductions. Losses or expenses which occur toderive exempt income would also not be considered for tax deductions. Also, loss or expensethat is of private nature or for domestic purposes would not be tax deductible (Gilders, et. al.,2016). Application 1.“Cost of moving machinery for a new site” It is apparent that cost occurs for moving machinery from one site to another side is an outgoingcapital expense. Therefore, it is not tax deductible. 2.“Cost of revaluing the assets to effect the insurance cover” Cost involved in revaluing the asset would be mainly incurred for the two reasons. One reason isto increase the total assessable income. In this case, the cost would lead tax deductions as per s 81

(1) ITAA 1997. On the other hand, if revaluing of the asset is created by the concerned party inorder to protect the assets and not to make more money, then in such cases, the cost involved inrevaluing would not be liable for tax deductions. In present case, it can be seen that revaluing ofasset is not continuous and also not to make profit. Therefore, this cost is not tax deductible. 3.“Legal expense incurred by the company opposing a petition for winding up”According to the highlights of Snowden & Wilson Pty Ltd (1958) 7 AITR 308 case, when legalexpense occurs to improve the business of company and to make more income, then in such casethe expense would lead not lead tax deduction because they become capital nature outgoings. Inpresent case, legal expenses would not be deductible allowance. 4.“Legal expenses incurred for the service of a solicitor” When company paid fee to solicitor for their services which involves legal advice on generaloperations besides other purposes would be considered as revenue expenses. Further, revenueexpenses would be considered for tax deduction. Hence, it can be said that legal expense is taxdeductible under this section. Conclusion From the above discussion, it can be concluded that costs incurred in moving machinery andrevaluing or asset and expense incurred on legal expense for petition of winding would not leadto tax deduction. However, the expense incurred as a fee offered to solicitor would amount to taxdeduction as per section 8 (1), ITAA 1997. 2

Question 2 IssueThe input tax credit that can be claimed by Big Bank based on the advertising expenditurerelated GST payment needs to be determined.Relevant LawAn essential consideration relevant to ascertain the claim making ability of input tax credits forfinancial supply is the Financial Acquisition Threshold (FAT). If the firm exceeds the firm, thenfull credits cannot be claimed or else full credits can be claimed. For determination of FAT, GSTAct (s. 189(5), s. 189(10)) is quit helpful. It defines the FAT as the lower of the two values i.e.10% of the total entitlement of the total input tax credits or $ 150,000 (Nethercott, Richardsonand Devos, 2016). Acquisitions that tend to involve input taxed supplies in the context or loansor deposit facilities fail to be recognized as creditable acquisition. On the other hand, acquisitionsthat tend to lead to taxable supplies i.e. involving home and content insurance are recognized inthe form of creditable acquisition (Barkoczy, 2015).ApplicationIn line with the relevant rule highlighted above, the insurance (home and content) relatedspending on advertisement would be creditable and hence lead to input tax credits of $ 50,000being available. Further, the FAT threshold would be crossed by the bank and thus for generaladvertisement, it is recommended that apportionment needs to be carried out in a fair manner.One manner to do that same is to rely on the estimate of 2% dedicated to insurance and hencethis would generate taxable supplied unlike the remaining 98% of the expenditure.3

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