Deductibility/ Non deductibility of Taxable income

This article discusses the deductibility and non-deductibility of taxable income, focusing on the provisions and guidelines for claiming deductions for capital expenditures. It explains how repairs and renovations are treated for tax purposes and provides insights into the tax liability of Tom for the year 2019-20. The article also covers the computation of income tax and the applicable rates, along with an overview of the taxation provisions and guidelines provided by the Australian Taxation Office.

TAXATION

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
QUESTION 1..................................................................................................................................1
Deductibility/ Non deductibility of Taxable income...................................................................1
QUESTION 2..................................................................................................................................3
Tax liability of Tom for the year 2019-20...................................................................................3
REFERENCES................................................................................................................................7

QUESTION 1
Deductibility/ Non deductibility of Taxable income
In this question Francis is experienced working businessman in hospitality industry for
number of years. Commercial kitchen in restaurant were in poor condition. He is planning to
replace whole commercial kitchen which will be costing $23000. Cost of the repairing and
kitchen appliances will be $4900, however some parts are not available in market anymore as
appliances are obsolete and old. Francis decides of replacing commercial kitchen with new
modern appliances as there are new appliance in market having better features and the durability.
Since Francis is running restaurant business and kitchen in the restaurant is considered as
part of the commercial properties that is used for producing assessable income. There are
provisions regarding the amount and nature of expenses that could be claimed under the
deductions (Aquilina, 2019). For claiming the deduction it is essential to identify the nature of
transaction that whether it is a deductible regular expense of capital expenditure. Replacing
whole commercial kitchen will be classified as capital work expenditure.
Tax payer can claim deduction for the capital expenditures incurred for producing assessable
income such as building and structural improvements are written off as capital expenditures. Any
individual could claim deduction for building, extensions or the improvements, alteration to
building including leasehold improvements and such other. if it is not possible to reliably
determine the cost of construction, estimate from independent qualified person. Australian
taxation office allows the publicans and hoteliers & publicans for claiming capital allowances for
wear and tear over the time of building and depreciation of plant and equipments over time.
There are many publican that lose significant amount of money and many dollars for the tax
deductions as not effectively accounting for removal and disposal of the building & assets when
the properties are upgraded
People are claiming deductions over the renovation of properties and commercial premises.
In the hospitality industry kitchen is considered as the part of income producing unit. The assets
used in kitchen are capital assets therefore the tax deductions are available to the businessman in
the form of depreciation (McGregor-Lowndes and Hannah, 2017). Australian taxation office
provides for owners of the income producing properties for claiming deductions of natural wear
and tear which occurs to the building or commercial premises. Depreciation on structure of
building through capital work deductions.
1

Capital work deduction on structural assets like kitchen equipments, walls, roof tiles are not
affected by legislative changes and could be claimed by owners of income producing properties.
The deductions make around 85%-90 % of depreciation claim. When the structural assets are
removed there could be depreciation deduction available. Process called scrapping is often
applied that allows the investors in claiming deduction in year when items are actually removed.
As per the taxation office item for which immediate claims could be made are repairs to
investment properties for making good or identifying damages, defects or deterioration of
property. Management & maintenance cost like corporate fees, advertising, cleaning, land tax,
council rates etc.
Any major renovation in the commercial building such as restaurants, hotels etc of
bathroom, kitchen are classified under capital improvements by ATO and such expenditures are
claimed under capital work deductions. The expenditure could not be claimed in year in which
they are incurred. Deductions expenses incurred in renovating/ buildings and depreciation are
deducted over number of years.
Expenditures that are made on the property are allowed for deduction. Repairs carried out by
the taxpayers should directly relate to wear& tear or the damages occurred due to use of property
for producing assessable income. Repairs usually involve renewals or replacement of the broken
or worn out part. The repairs are considered of capital nature and no deduction is allowed when
the entire structure of the property is being replaced like building kitchen, cupboard, refrigerators
and such other things. Renovations, extensions, improvements and the alterations. Initial repairs
expenses for remedying the defects, deterioration or damage which existed at date of acquiring
the property (Capital Works deduction, 2019). Capital work deduction is available for such
expenditures and repairs. Capital nature expenses will be forming part of cost base of property
while measuring capital gains tax. Examples of repairs include replacement of broken windows,
repairing of electrical appliances, maintaining plumbing etc. Deduction is available if it is related
for producing assessable income.
In this case replacing the kitchen is considered part of the income producing property which
is restaurant. Replacing the kitchen is counted as capital works deductions under division 43 of
Income Tax Assessment Act, 1997. Expenditures incurred for capital works are not allowed for
deduction under one income year. However repairs on kitchen appliances during the income year
2

are not considered as capital expenses as they are carried out due to normal wear and tear of the
appliances.
Replacing the whole kitchen will considered under capital improvements for producing
assessable income as per the guidelines provided by the ATO. Therefore as per the Section 43 of
ITAA replacing whole kitchen will be counted as capital works and deduction will be available
in the form of deduction over useful life. However the repairs expenses of $4900 could be
claimed as deduction in the year in which they are incurred. The repairs are deductible as per the
provisions of Section 25 of ITAA, 1997 as it is made to the kitchen appliance that is mainly used
for producing the assessed for that period. Taxation Ruling 2007/9 provides for capital
expenditures over hotels and restaurants (ITAA, 1997. 2019). On the other if only repairs were
made in the whole kitchen in place of renovation or replacement whole expenditure would have
been considered as repairs and deduction would have been claimed under section 25 of the act.
QUESTION 2
Tom owns a business named Tom’s Band in Sydney selling musical instruments. He also
gives guitar teaching classes on casual basis at Guitar school in Sydney that is local musical
college. Tom has incurred transactions for the income year and based on these taxable receipts of
Tom are to be calculated for the financial year 2019-20.
Tax liability of Tom for the year 2019-20
Computation of Income Tax
Sales $2,20,000
Less : Sales of last year $2,500
Add : sales made $3,200 $2,20,700
Business Income $2,20,700
Salary from Guitar School $53,000
Long leave payment $4,200 $48,800
Withdrawal of term deposit $22,050
Less : Deposit $20,000
Interest income $2,050
3

less : paid last year $1,000 $1,050
Fully Franked dividends $12,000
Franking Credits $5,143
Dividend income $17,143
Unfranked dividend $4,000
Taxable Income $2,91,693
Tax Payable @ 45% $1,04,358
Medicare Levy @2% $5,834
Income tax liability $1,10,191
Less : Franking Credits $5,143
Net Tax Payable $1,05,048
Income Tax Liability
0 – $18,200 0
$18,201 – $37,000 3571.81
$37,001 – $90,000 17224.675
$90,001 – $180,000 33299.63
$180,001 and over 50261.4
Total Tax liability 104357.515
Income Tax in Australia is charged at progressive rates that mean higher the income
higher the tax for maintaining equality in the taxation system. Taxation provisions are governed
under Income Tax Assessment Act, 1997. It provides for all the sections for charging of tax over
different transaction and the related deductions available for that transaction (ITAA, 1997. 2019).
Tax provisions are further clarified by Australian Taxation Office that has the responsibility of
collecting tax from the individuals.
1. Income from sales
Income from sales in small business is taxable under the division 328 of Income Tax
Assessment Act, 1997. Business income is the assessable income from carrying out the business
4

during the year. it also includes the capital gain, income from personal services and deduction
are also there for the work related expenses for the business carried out by the tax payer. Sales
include $2500 that would have been recorded in the year it has been earned and therefore the tax
would have already been paid (Hockridge, 2018). Due to this it is deducting from sales of current
year. Similarly sales made in current year are included in the year they are earned and not the
year in which payments are received. Therefore the sales of $3200 in included in sales for
current year.
2. Long service leave
Long service leave is allowed to employees who have been working for long period of
time in Australia. This entitlement differs in every state of Australia. the leave pay rate should be
as per the normal routine working hours worked out by the employee. Employers are required to
withhold tax for long leave under section 83 of ITAA,1997. Therefore the tax will be paid in
year the leave is taken that is following year.
3. Tom has withdrawn capital deposits
ITAA, 1997 do not provides for tax on the withdrawal of capital deposits from the banks.
however as per the guidelines given by the ATO it could be identified clearly that indivisual is
required to pay tax over the interest income earned from any deposit. The interest earned by Tom
is reinvested in deposits on which also interest is received this year. As per ITAA, 1997 Tom is
liable to pay tax over interest that is earned in present year as tax over $1000 is already paid in
last year.
4. Fully Franked Dividends
Dividends in Australia are taxed by assessing that shareholder is resident of Australia.
Division 220 of ITAA provides for dividends. Tax payer is allowed for franking tax offset for
tax that has already been paid by the company on their income. Franking tax offset covert partly
or whole tax payable on dividends. On fully franked dividends individual is allowed to claim
offset for the credits that have been already paid by the company on dividends (Hoppe, 2020).
Franking credits of $5143 are allowed for offset from the total dividends that are received by
Tom in the current year.
5. Unfranked dividends
Unfranked dividends do not have credits attached to it. When unfranked dividends are
received individual is require to pay tax return over it. Section 802 of ITAA, 1997 provides for
5

unfranked dividend distribution. Tom is required to pay tax over the unfranked dividends
received.
6. Tax liability
Tax liability is calculated at the marginal rates that are applicable over the taxable income of
Tom. Tom is required to pay marginal tax rate of 45% on taxable income and Medicare levy of
2% on the taxable income. Net tax payable by Tom for the financial year 2019-20 is $105048.
6

REFERENCES
Books and Journals
Aquilina, J., 2019, November. Reforming and realigning Division 855 of the Income Tax
Assessment Act 1997 to give better effect to its policy objectives. In Australian Tax
Forum (Vol. 34, No. 1).
McGregor-Lowndes, M. and Hannah, F.M., 2017. ACPNS Legal Case Notes Series: 2017-5
Glasby & Ors as Trustees Of The BCS Foundation v Attorney General of New South
Wales.
Loiacono, R. and Mortimer, C., 2017. Retrospective Tax Law: Has Pandora's Box Opened Never
to Be Shut Again. Ejtr. 15. p.105.
Hockridge, P., 2018. Alienation of income and. Tax Specialist. 22(1). p.30.
Hoppe, T., 2020. Tax Complexity in Australia–A Survey-Based Comparison to the OECD
Average.
Online
ITAA, 1997. 2019. [Online]. Available through :
<http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/ >.
Capital Works deduction. 2019. [Online]. Available through :
<https://www.ato.gov.au/business/depreciation-and-capital-expenses-and-allowances/capital-
work >.
7