HI3042 - Taxation Law - Assignment

TAXATION

Taxation
Answer to 1
According to section 8-1 of the ITAA 1997, deductible expenses are the one that is incurred
either while earning the assessable income or while functioning a business that can assist in the
attainment of such assessable income. Further, deduction of these expenses is not allowable as a
deduction that is private or capital in nature, or the expenses that are in association with the
attainment of exempted income.
i. In the case of cost of moving machinery to a new place, the same is related to brand
new machinery that is deported from the area of purchase to the site. Moreover, the
expense incurred here must be incorporated in the Machinery's capital cost and
therefore, it is deemed to be of capital nature. Therefore, such expenses must not be
allowable under the above-mentioned section 8-1 because they are of capital origin
and the given section does not allow such expenses. Further, adding up to such
expenses or allowability of expenses rely upon an asset’s nature whether it is an old
one or brand-new (Fullerton et. al, 2017). If the asset is brand new in nature, every
expense that is incurred up to the date of its utilization must be summed up to its cost
and it must become a part of the asset’s cost. For instance, commissioning,
installation, and transportation cost, etc. Besides, in the case wherein the expense is
incurred for deporting the old machine from the present location to a new location, it
must be deemed to be regarded as transportation cost and therefore, allowable as
deduction.
ii. In the case of revaluation of assets to effect insurance cover, it can be seen that the
expenses incurred for the assets’ evaluation in order to claim exemption are allowable
only if they are incurred for recovery of loss of gain, whether directly or indirectly
related to the assessable income. Besides, in relation to an insurance claim, two
scenarios can arise. Firstly, in relation to an asset for which insurance claim is
attained is of capital nature, this implies that the capital asset is wrecked and the claim
is mainly for the recovery of losses. Nevertheless, in such a scenario, the incurred
expenses for the recovery of insurance coverage must be subtracted from the original
insurance claim amount and the same must not be regarded as business expenditure.
Secondly, when the insurance claim is for attaining loss on assets that are directly
2

Taxation
held as stock in trade, such assets cannot be regarded as capital assets and is therefore
directly associated with the assessable income being depicted in the financials.
Further, any incurred expenses for such purpose are allowable only as business
expenditures so that businesses can attain benefit from the same. Nevertheless, these
expenses must be shown in the profit and loss account and considered as expenses for
recovering the losses on the stock. On a whole, the expenses incurred for revaluation
of assets held as stock in trade can be allowed under 8-1 of the ITAA, 1997.
iii. As mentioned previously, under section 8-1 of the ITAA, 1997, it has been stated that
deductible expenses are either incurred while earning the assessable income or while
operating a particular business that plays the main role in generating such assessable
income. Furthermore, the deduction is not allowable of these expenses if they are of
domestic nature, capital nature, or nature in association with the attainment of
exempted income. A similar instance was held in the case of Newspapers Ltd v
FCT(1938) 61 CLR 337) where all losses and payments that include commission,
expenses of traveling, expenses and not in the nature of losses and capital outgoing
provided in gaining the income that is assessable. Therefore, in computing the
taxpayer taxable income, the overall income generated by the taxpayer shall be
considered.
Therefore, in the given situation, if such ideology is implemented, it can be stated that
the legal expenses that the company has incurred for tackling a petition for winding
up cannot fall under the purview of the said section. This is because it is not incurred
for earning an assessable income and it is not the expenses that are incurred
compulsorily to operate the business so that assessable income can be attained.
Furthermore, the paid expenses must also be verified in the light of the net amount
because bigger the figure, the more impossible it will be to treat such as business
expenses. However, since it is a legal expenditure that has been incurred for the
purpose of carrying on the business operation, it can be regarded as an expense that is
allowable under section 25-5.
iv. It can be observed in the given case that the solicitor account does not segregate the
expenses in relation to several matters and therefore, many legal expenses fail to be
divided into revenue or capital nature. Further, it has been assumed that the legal
3

Taxation
expenses for each affair mentioned in the situation are incurred for the purpose of the
business itself. In addition, such expenses have been incurred for the purpose of
income recovery that must further become a relevant part of the assessable income
(Kobestky, 2005). Therefore, if the purposes are segregated, it can be stated that the
legal expenses that have been incurred for the discharge of mortgage can be regarded
as an expense of capital nature and hence, the same cannot be allowed under section
8-1 of the ITAA 1997. Besides, all other incurred expenses can be easily allowable as
deduction.
Hence, it can be concluded why the previously mentioned expenses are either allowable or
disallowable in the businesses.
4