Tax Deductions and Income Calculation

The assignment focuses on calculating a business's taxable income by identifying allowable deductions against total income. It presents a detailed financial record with various income sources and expenses, including legal fees, interest payments, and business lunches. The student is tasked with determining the tax implications of specific deductions based on relevant sections of the Australian Income Tax Assessment Act 1997.

HI3042 Taxation Law
T2 2017 Individual Assignment

TABLE OF CONTENTS
Solution 1.................................................................................................................... 3
Issue........................................................................................................................ 3
Legal provisions.......................................................................................................3
Application on cited transactions.............................................................................4
Solution 2.................................................................................................................... 5
Issue........................................................................................................................ 5
Legal provisions.......................................................................................................5
Application on cited transactions.............................................................................5
Conclusion...............................................................................................................6
Solution 3.................................................................................................................... 6
Issue........................................................................................................................ 6
Legal provisions.......................................................................................................6
Calculations.............................................................................................................6
Solution 4.................................................................................................................... 8
Issue........................................................................................................................ 8
Legal provisions and Calculations...........................................................................8
References................................................................................................................10

SOLUTION 1
Issue
The issue is to determine whether the following cited expense are allowable as
general deductions under section 8.1 ITAA 1997.
Expense 1 The cost of moving machinery to a new site
Expense 2 The cost of revaluing assets to effect insurance cover
Expense 3 Legal Expenses incurred by a company opposing a petition for
winding up
Expense 4 Legal Expenses incurred for services of a solicitor in respect of a
number of matters
Legal provisions
Calculation of income tax is done according to the taxable income of taxpayer.
Further the taxable income is computed by subtracting general and specific
deductions from the total assessable income of taxpayer (Somers and Eynaud,
2015).
In accordance with ITAA97 s 8-1, a general deduction is loss/expense that contains
an applicable relation with the income generating activities, such as personal efforts,
investment or operating activities, but it is not of capital and neither of domestic
nature.
SECTION 8-1 (General deductions)
One can make deduction from their assessable income if any loss/outgoing satisfies
one of the following two provisions:
 If the loss/outgoing is incurred while producing or gaining assessable income
 It is automatically incurred in carrying a business with the intention of
producing or gaining assessable income (SECTION 8-1 General deductions,
2017).
Under s 8-1(2), one the other hand one cannot make deductions from their
assessable income if any loss/expense if following cited aspect is satisfied as Act
does not allow to make deduction:

 If it is held as a loss/expense of a capital nature
 If it is held as a loss/ expense of private nature
 If it is incurred regarding the producing or gaining of non-assessable income
or exempt income
Application on cited transactions
Expense Allowance or disallowance
Expense 1 No, as it is capital expenditure and thus it is not entitled
in terms of deduction as per 8-1 of ITAA 1997.
Although, this expense can raise product’s cost as
transaction following depreciation will be considered.
Expense 2 Yes, in order to determine expense deduction regarding
fixed assets, the company is required to check that if the
incurred expense is increased or make increment in
earning capacity, or the expense is held for the intention
of perseverance or protection. In this situation, it is
supposed advantage occurred will be provisional and
continuing, thus is entitled deductible as per the section.
Expense 3 No, the major transactional issue raised in this present
case is that the considered expense has a connection
with the capacity of revenue yielding or has a
connection with work activities. In the event, it is
assumed that all the legal expensed will assist business
during its wind-up and consequently this will appear as
an expense of capital nature.
Expense 4 Yes, to make a decision if an expense is deductible or
not, the necessity of information is there, like nature,
distribution or any other related factor. However, the
expenses been described in this cited seems to be of
revenue nature, and therefore the estimates meet the
term with s 8-1.

SOLUTION 2
Issue
The issue is to analyse whether Bank is entitled to take credit on an expense
incurred of $1,650,000 Out of this, $550,000 was assigned to a TV ad campaign that
was focused solely on the home and contents insurance policy. The remaining
amount was assigned to a general advertisement campaign for the entire company
and included different modes of marketing.
Legal provisions
Financial supplies are sales of input-tax, in which supplier cannot claim for GST in
their process.
One can form a financial supply if has performed any of the mentioned aspects:
 Engaged in lending or borrowing funds
 Allowed credit to a consumer
 Involved in buying and selling of shares
 Produced, transferred, consigned or obtained interest in, or had provided
rights under superannuation fund (Dunne, Mason and Patto, 2014)
In certain circumstances, one is allowed to charge GST for purchases that will be
used to form a financial supply, if any of the mentioned aspects are applied:
 One has not surpassed the financial acquisitions threshold
 Their purchases are not related to the borrowed amount and are used to
make a non-input-taxed supply
 Their purchase meets the criteria of a reduced credit acquisition then the
taxpayer is allowed to make the reduction of input tax credit.
Application on cited transactions
In the cited case; it can be noticed that $1,100,000 is for advertisement of general
services which are related to lending funds and same is covered in input-tax on
which tax credit cannot be claimed. However, on insurance services, GST is to be
paid so the expense of advertisement specifically related to this service will be
eligible for input tax credit.

Conclusion
Credit can only be availed for the amount of $550,000, as it was to be paid to a
campaign of television advertising for the promotion of Big Bank home and contents
insurance policies.
SOLUTION 3
Issue
The issue is to determine the amount of foreign tax offset limit for Angelo by
considering his income from foreign and national sources:
Legal provisions
The Foreign tax off-set limit is computed to provide relief to assess from double as
Australian residents are required to pay tax in Australian on their all worldwide
income, so income tax paid by them in foreign countries need adjustment so relief is
provided to them (Barkoczy, 2016).
Calculations
Foreign tax off-set limit is computed by reducing the taxable amount by considering
all income sources from the taxable amount by considering income only from home
country. Calculation for Angelo is as follows:
Table 1: Statement showing Taxable income of Angelo by considering income from
all sources
Income from various sources Amount
Employment revenue
Earned in the Australia $44,000.00
Earned in the United States $12,000.00
Earned in the United Kingdom $8,000.00 $64000
Rental revenue from property $2,000.00
Earned in the United Kingdom
Dividend revenue
Earned in the United Kingdom $1,200.00
Interest revenue

Earned in the United Kingdom $800.00
Total gross income $68000.00
Allowable deductions
Expenses incurred for earning employment
income
From the Australia $4,000.00
From the United States $900.00 $4900
Expenses incurred for earning rental income
From the United Kingdom $500.00
Gift to a deductible gift recipient $400.00
Interest paid to obtain dividend income $140.00
Expenses incurred to earn interest income $60.00
Total allowable deductions $6000.00
Taxable income $62000.00
Total tax payable** $12937.00*
*Low-income off tax is not considered
** (Tax on income + Medicare levy)
Table 2: Statement showing Taxable amount for Angelo by considering income of
Australia
Income from various sources Amount
Employment income $44,000.00
Allowable deductions
Expenses incurred for earning employment income $4,000.00
Gift to a deductible gift recipient $400.00
Interest paid to obtain dividend income $140.00
Expenses incurred to earn interest income $60.00
Total allowable deductions $4600.00
Taxable income $39400.00

Total tax payable (Tax on income + Medicare levy) $5140.00*
*Low-income off tax is not considered
** (Tax on income + Medicare levy)
Table 3: Statement showing offset limit
Taxable income of Angelo by considering income from all sources $12937.00
Taxable amount for Angelo by considering income of Australia $5140.00
Offset limit $7797.00
SOLUTION 4
Issue
The issue is the computation of taxable income for partnership business of Johnny
and Leon.
Legal provisions and Calculations
Particulars Amount
Assessable income
Sales as per s.6-5 of ITAA97 $40,000.00
interest received as per s.6-5 of ITAA97 $10,000.00
Dividend income as per s.44 of ITAA97 $21,000.00
Gross-up imputation as per s.207-20 of ITAA97 $5,400.00
Bad debts recovery s.20-30 of ITAA97 $10,000.00
Exempt income as per s.6-20 of ITAA97
Capital gain as per s.106-5 of ITAA97 -
Total income $86,400.00
Deductions
Sales proceeds stolen as per S.25-45 of ITAA97 $3,000.00
Capital loss of $15000 as per S. 8-1 S. 8-1 of
ITAA97
Salary to partners*
Fringe benefit tax**
$16,000.00
Interest on loan $4,000.00
Interest on capital
Travelling expenses of Johnny from home to work
and return $3,000.00
Legal fees for the renewal of lease of the office
building $2,000.00

Legal expenses regarding formation of a partnership
agreement $1,200.00
Legal expenses for regarding formation new lease
of business premises $700.00
Debt collection expenses paid to a solicitor $500.00
Council rates on business premises $500
Staff salaries as per QC33728 of ITAA97 $20,000.00
Purchase of sporting goods supplies $30,000.00
Rent on retail shop $20,000.00
Provision for doubtful debts as per s. 63 of ITAA97
Business lunches $10,000.00
Total deductible expenses
$110,900.0
0
Taxable Loss (Total income - Total deductible
expenses) ($24,500)
*Salary of partners is not allowed
** Expenses of fringe benefits tax paid are an allowable expense for the employer

REFERENCES
Barkoczy, S., (2016). Foundations of Taxation Law 2016. OUP Catalogue.
Dunne, J., Mason, J. and Patto, J., (2014). 2013 cases show high ATO success
rate. Taxation in Australia, 48(8), p.429.
Somers, R. and Eynaud, A., (2015). A matter of trusts: The ATO's proposed
treatment of present unpaid entitlements: Part 1. Taxation in Australia, 50(2),
p.90.
SECTION 8-1 General deductions. (2017). INCOME TAX ASSESSMENT ACT
1997. Retrieved from < https://www.ato.gov.au/law/view/document?
docid=PAC/19970038/8-1>.