Tax Deductions and Business Losses

This assignment examines the concept of tax deductions and business losses in an Australian context. It delves into a detailed analysis of various deductible expenses incurred by a hypothetical business owned by Johnny, including interest on capital, travel costs, legal fees, and staff salaries. The assignment calculates the total deductible expenses and ultimately determines a net loss for the business. It also highlights the limitations on claiming future tax benefits from this loss according to Australian tax laws.

TAXATION LAW

TABLE OF CONTENTS
QUESTION 1..................................................................................................................................1
Introduction..................................................................................................................................1
Legal Provisions...........................................................................................................................1
Application...................................................................................................................................1
Conclusion...................................................................................................................................3
QUESTION 2..................................................................................................................................3
Introduction..................................................................................................................................3
Legal Provisions...........................................................................................................................3
Application...................................................................................................................................4
Conclusion...................................................................................................................................4
Question 3........................................................................................................................................5
Issue.............................................................................................................................................5
Legal provisions...........................................................................................................................5
Application of legal provisions....................................................................................................5
Calculation...................................................................................................................................5
Question 4........................................................................................................................................5
Issue.............................................................................................................................................5
Legal provisions...........................................................................................................................5
Application of legal provisions....................................................................................................5
Calculation...................................................................................................................................5
REFERENCES................................................................................................................................6

QUESTION 1
Introduction
This segment explains whether the discussed scenarios are allowable as deductions under
s 8-1 of the ITAA 1997 or not.
Legal Provisions
Income tax is computed based on the assessable income of an individual. This assessable
income is computed by subtracting “specific” and “general” deductions from the gross income of
the taxpayer for that year. A general deduction as per ITAA 1997 s 8-1 refers to a loss or
outgoing which is related to some income generating operations (e.g. investment or business
activity), and is not of domestic, capital or private nature. On the contrary, a specific deduction is
a sum which a provision except the general deduction provision permits as a deduction
(Woellner et al., 2011).
There are several deduction rejection provisions as well which prohibit deductions for
certain amounts.
General Deductions under s 8-1 ITAA 1997:
8-1(1) The tax payer can deduct from his/her taxable income any outgoing or loss to the limit
that:
a) It is incurred in producing or gaining the taxable income; or
b) It is incurred essentially to carry on a business to gain or produce the taxable income
(D'Ascenzo and England, 2005).
8-1(2) Nonetheless, the taxpayer cannot subtract any outgoing or loss under this Act to the limit
that:
a) It is capital or of similar nature; or
b) It is of domestic or private nature; or
c) It is incurred to produce or gain the non-taxable non-exempt income or the exempt
income; or
d) Any subsection of this section prohibits it from being deducted (Mete, Dick and
Moerman, 2010).
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Application
Scenario Allowable as
deduction
Reason
Cost of moving
machinery to a new
site
No This is a capital expense and hence is not eligible for
deduction under s 8-1 of ITAA 1997. However, this
is an expense which is likely to escalate the cost of
the product as transaction pertaining to depreciation
will be taken into account (Bugeja and da Silva Rosa,
2008)
Cost of revaluing
assets to effect
insurance cover
Yes For determining deductibility of expenses pertaining
to fixed assets, one needs to find out if the expense
incurred increases or improves the income earning
capability or the expense is incurred only in relation
to perseverance and/or protection. It is presumed in
this situation that the advantage is going to be
provisional and recurrent in nature and hence is
deductible under this section (Braithwaite, 2007)
Legal expenses made
by a company
opposing a petition to
wind up
No The main transaction issue in this case is that the
concerned expense has relation with the revenue
yielding capacity or is connected with an operational
activity. In this case, it is alleged that the legal
expenses will help the business in its wind up and
resultantly this becomes an outgoing which is of
capital nature (Woellner et al., 2011)
Legal expenses
incurred on services of
a solicitor in respect of
a number of matters
including discharge of
mortgage,
conveyancing and
Yes To decide whether an outgoing is deductible or not,
information is needed on aspects such as: the nature,
allocation and many other related facets.
Nonetheless, the expenses mentioned in the present
case appear to be of revenue nature and hence the
assumption that they meet the terms of s 8-1.
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general legal advice
relating to business
operations
Conclusion
As per the different provisions under s 8-1 which determine the deductibility of an
expense, it can be concluded that first and third expenses are not allowable for deduction because
they are capital in nature, while the second and fourth are deductible because they are revenue in
nature.
QUESTION 2
Introduction
As per the facts given in this case, Big Bank is huge bank with operations across
Australia and over 50 branches all over the country. The Bank holds a GST registration. It
recently introduced a new division i.e. home and contents insurance policies. The organization
spent $1,650,000 worth on promotions and advertising in the previous year. The present case
involves discussion over whether the entire advertising expense of $1,650,000 can be claimed for
input tax credit or not.
Legal Provisions
Financial supplies are considered to be input-taxed sales and do not include GST in their
selling price. An individual or party normally makes a financial supply if it does any of the
below mentioned:
 Borrow or lend money
 Give credit to a client
 Trade shares or stock or bonds (Rainey, 2013)
 Receive, allocate, transfer or create a right under, or an interest in, superannuation fund.
 Receive or provide credit via a hire purchase agreement before 1st July 2012, if the credit
is given for a different charge which is revealed to the customer. For hire purchase
agreements made post 30th June 2012, credit is assessable.
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In some exceptional circumstances, the taxpayer could be eligible to claim input credit for a
purchase that is used to make a financial supply, provided any of the below mentioned is
applicable:
 The financial acquisition threshold is not exceeded (Schwenzer, Hachem and Kee, 2012)
 The purchase is related to a sum that was borrowed and utilized to make a non-input
taxed supply
 The purchase is eligible as “reduced credit acquisition” – the taxpayer would be qualified
to a decreased input tax credit (Braithwaite, 2007).
Application
Whether or not the Big Bank satisfies the main terms to be eligible to claim input tax
credit, is determined below:
 Registration – The organization has GST registration as per the facts of the case.
 Commercial Transaction – The expenses of advertisements are incurred with respect to
the business and have a direct relation with the company. The purchase price includes
GST and the transaction amount is greater than $82.50 (Blacklow, Nicholas and Ray,
2010).
 Tax invoices – The Big Bank Ltd. has enough invoice to show as evidence for the
incurrence of expense and payment of tax on the same.
Conclusion
From the understanding of the legal provision related to GST input credit and the
applicability on the concerned case, it can be concluded that Big Bank is eligible to make a claim
for input credits for the advertisement expense on home and content insurance division, however,
it cannot claim credit for the remaining amount of 1,100,000. This is because general banking
does not fall under the purview of this deduction, however, insurance does and hence any
expense on insurance related products or services are also entitled to claim input credit.
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QUESTION 3
Issue
According to the described case scenario, Angelo has income sources from both domestic and
foreign sources and current part of study deals with computation of taxable amount by applying
provisions of foreign tax offset.
Legal provisions
According to the Australian Taxation office, provisions of foreign tax offset is introduced to
remove the burden of double taxation from Australian residents (King, 2016). For the
computation of foreign tax offset for individual following steps are required to be followed: Step 1: Calculation of tax by assuming income from foreign sources as ordinary income Step 2: Calculation of tax by excluding income from foreign sources Step 3: Step 2 – Step 1
Tax has been computed by applying following table as Angelo is an Australian Resident
Tax Rates for 2017-2018
TAXABLE INCOME TAXABILITY ON INCOME
$0.00 – $18,200.00 Nil
$18,201.00 – $37,000.00 19c for each $1 more than $18,200
$37,001.00 – $87,000.00 $3,572.00 + 32.5c for each $1 more than $37,000.00
$87,001.00 – $180,000.00 $19,822.00 + 37c for each $1 more than $87,000.00
More than $180,000 $54,232.00 + 45c for each $1 more than $180,000.00
Compulsory superannuation rate: 9.50%
Medicare Levy of 2% applies and same will not be applicable for earners having low income).
Application of legal provisions
By applying above described provisions computation is as follows:
Step 1
Description of income from various sources Country of origin Amount in $
Employment revenue Australia 44 000
Employment revenue United States 12 000
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Employment revenue United Kingdom 8 000
Rental revenue United Kingdom 2 000
Dividend income United Kingdom 1 200
Interest revenue United Kingdom 800
Total income 68 000
Allowable expenses
Expenses incurred to obtain employment income Australia 4 000
Expenses incurred to obtain employment income United States 900
Expenses incurred to obtain rental income United Kingdom 500
Gift to a deductible gift recipient 400
Interest paid for earning dividend income United Kingdom 140
Expenses incurred for earning interest income United Kingdom 60
Total allowable expenses 6 000
Taxable income (Total income- Allowable
Expenses)
62 000
Tax on income 11697
Medicare levy 1240
Low Income Tax Offset: -70
Total tax payable (Tax on income + Medicare levy-
Low Income Tax Offset)
12 867
Step 2
Description of income from various sources Amount in $
Employment income 44 000
Allowable expenses
Expenses incurred to obtain employment income 4 000
Gift to a deductible gift recipient 400
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Interest paid for earning dividend income 140
Expenses incurred for earning interest income 60
Total allowable deductions 4 600.00
Taxable income (Total income- Allowable Expenses) 39 400
Tax on income 4 352
Medicare levy 788
Low Income Tax Offset: -409
Total tax payable (Tax on income + Medicare levy- Low Income Tax
Offset)
4 731
Step 3
=$12,867.00-$4,731.00
=$8,136.00
Conclusion
On the basis of computation; it can be said that tax paid by Angelo outside the Australia is within
the available limit so he is entitled to offset entire tax paid from the liability of tax payable in
Australia.
QUESTION 4
Issue
Partnership businesses operating in Australia are required to report their taxable income to
authorities by applying viable provisions. This part of the study is based on computation of net
income for the partnership for the income year by considering business transactions of Johnny
and Leon engaged in selling sporting goods.
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Legal provisions
Despite the fact that, a business partnership does not make payment of tax on their
income earned, it should place a partnership tax return stating all the generated income and all
the expenses which are deductible. It represents how the net profit and loss was distributed
among partners.
Business can claim
 Requirement of costs in order to generate business income
 Business assets depreciation (Dunne, Mason and Patto, 2014)
 Superannuation funds for HR
Business cannot claim:
 Losses of preceding year
 Losses incurred from any other business
 Certain costs on capital
 Superannuation meant for separate traders and partners of business
Application of legal provisions
Particulars Amount in $
Assessable income
Sales to be included 1 40 000
interest received from the bank 2 10 000
Dividend income 3 21 000
Gross-up imputation 4 5 400
Bad debts recovery 5 10 000
Exempt income 6
Capital gain 7 -
Total income 86 400
Deductions
Sales proceeds stolen by employee 8 3 000
Capital loss of $15000 9
1 according to sec 6(5)
2 according to sec 6(5)
3 according to sec 44
4 according to sec 207(20)
5 according to sec 20(30)
6 according to sec 6 (20)
7 according to sec 106(5)
8 according to sec 25(45)
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Salary to Johny and Leon
Fringe benefit tax 10 16 000
Interest on loan given by Johnny to the business 11 4 000
Interest on capital provided by Johnny 12
Travelling expenses of Johnny from home to work and return 3 000
Legal fees for the renewal of lease of the office building 2 000
Legal expenses regarding formation of a partnership agreement 1 200
Legal expenses for regarding formation new lease of business premises 700
Debt collection expenses paid to a solicitor 500
Council rates on business premises 500
Staff salaries 13 20 000
Purchase of sporting goods supplies 30 000
Rent on retail shop 20 000
Provision for doubtful debts 14
Business lunches 100 000
Total deductible expenses 110 900
Taxable Loss (Total income - Total deductible expenses) $25,500
Conclusion
By considering above computation it can be noticed that there is net loss to business however
same cannot be claimed by business in future as per described provisions.
9 according to sec 8(1)
10 note 1 Salary of partners is disallowed as it is the mere distribution of profit.
11 note 2 as per provisions of fringe benefits tax expenses of tax paid is allowable to partners
12 note 3 Loan is use for commercial purpose thus interest will be allowed
13 according to QC33728
14 according to sec (63)
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REFERENCES
Blacklow, P., Nicholas, A. and Ray, R., 2010. Demographic demand systems with application to
equivalence scales estimation and inequality analysis: The Australian evidence. Australian
Economic Papers, 49(3), pp.161-179.
Braithwaite, V., 2007. Responsive regulation and taxation: Introduction. Law & Policy, 29(1),
pp.3-10.
Bugeja, M. and da Silva Rosa, R., 2008. Taxation of shareholder capital gains and the choice of
payment method in takeovers. Accounting and Business Research, 38(4), pp.331-350.
D'Ascenzo, M. and England, A., 2005. The Tax and Accounting Interface. J. Australasian Tax
Tchrs. Ass'n, 1, p.24.
Dunne, J., Mason, J. and Patto, J., 2014. 2013 cases show high ATO success rate. Taxation in
Australia, 48(8), p.429.
King, A., 2016. Mid market focus: The new attribution tax regime for MITs: Part 2. Taxation in
Australia, 51(1), p.12.
Mete, P., Dick, C. and Moerman, L., 2010. Creating institutional meaning: Accounting and
taxation law perspectives of carbon permits. Critical Perspectives on Accounting, 21(7), pp.619-
630.
Rainey, S., 2013. The Law of Tug and Tow and Offshore Contracts. CRC Press.
Schwenzer, I., Hachem, P. and Kee, C., 2012. Global sales and contract law. Oxford University
Press.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2011. Australian Taxation Law
Select: legislation and commentary. CCH Australia.
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