Tax Law: Deductible Expenses and Car Expenses for Employees

Tax Law
30 June 2019
Seminar Number 5
[The focus of this seminar is Chapter 6 of the Study Guide]
Question 1
Jayson Jones, a self-employed plumber, purchased a house in Brisbane as an investment for
$430,000 on 1 September 2018. He rented out the house from that date to the existing tenant
for $410 per week.
Jayson seeks your advice as to whether he might be able to claim any tax deductions
for the following expenses:
 Jayson took out a loan of $350,000 on 1 September 2018 for 20 years to purchase
the house. Interest paid on the loan for the tax year ended 30 June 2019 was $23,630.
The legal fees, loan charges and stamp duty paid in relation to the loan were $5,460.
 On 10 March 2019 Jayson paid $1,400 to replace the entire bathroom vanity unit,
which was badly damaged by a burst water pipe. The new vanity was made of similar
material to the original. He was able to re-use the original tapware [Hint: research the
tax treatment of this expenditure].
 In regards to the burst water pipe above, Jayson fixed it himself. He estimates that if
he performed that work for a paying customer he would have charged $450 for his
labour. Jayson spent $35 on rubber seals to fix the water pipe.
Jayson would also like some tax advice on the following transaction:
 Jayson sold a chemical blower on 15 June 2019 for $24,000 that he had been using
solely for work purposes, but no longer needed. He bought the chemical blower on 1
October 2017 for $30,000 and has been using it since that date. He has been using
the diminishing value method to claim the decline in value of the equipment (and using
the Commissioner’s estimate of effective life). Assume that Jayson is NOT a small
business entity and please ignore the effect of GST.
[Hint: you need to find the appropriate tax ruling that contains the Commissioner’s
estimate of effective life for depreciating assets – note that date of acquisition is
relevant].
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Tax Law
30 June 2019
Loan – interest
The rental property was used for business purposes at all times (since the purchase) in the 1st
September 2018 income year, so the $$23,630 interest expense incurred by Jayson to
purchase the property is deductible under section 8-1 ITAA97: Ronpibon Tin NL v FCT (1949)
(relevant case).
The payment of interest is an allowable deduction that has been incurred in gaining or
producing assessable rental income, and it doesn’t fail any of the positive limbs.
Loan – legal fees, loan charges and stamp duty expenses
The legal fees, loan charges and stamp duty paid in relation to the loan are regarded as
capital expenses. These are generally non-deductible charges involved in establishing or
getting a loan.
Since the borrowing expenses are capital in nature Sun Newspaper Ltd v FC of T (1938)
(relevant case), a deduction is or is not allowed for them under section 8-1 ITAA97
A loan charges deduction is under section 8-1 ITAA97 for borrowing expenses incurred in
relation to a loan which is used for income producing purposes.
If the borrowing expenses are greater than $100, they are deductible over the term of loan or
five years, whichever is the shorter period, beginning with the year in which they are incurred.
Here the loan period is 20 years, so the borrowing costs will be deducted over the term of
loan.
Calculate possible deduction
Calculations of Total Possible Deductions
Particulars
Amount
($)
Amount
($)
Interest expenses (23630 / 20 years) 1181.5
Total Allowable Deductions 1181.5
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Tax Law
30 June 2019
Bathroom vanity
Is the replacement of the damaged bathroom vanity going to be treated as a deductible
repairs? Note the legislation requirements for a deductible repairs in section 25-10, ITAA 1997:
1. That there be a property;
2. That the item be used for the purpose of income producing purpose; and
3. That the expenditure is not capital in nature.
The cases where non-deductible capital expenditure was found to be not repairs
fall into three categories:
(i) replacement of an entire structure or unit of property
(ii) improvements, renovations, extensions or alterations
(iii) initial repairs
Requirement 1 – is the work a repair?
As repair is or is not defined in the legislation, the ordinary meaning is to apply. The
Oxford English Dictionary provides that repair is 'restoration of certain materials things
or structure in the form of renewal of decayed or worn out parts, by refixing that thing
that has turned loose or detached'.
Relevant Tax Ruling? TR97/23 states that ’repairs' ordinarily means the remedying or
making any defects goods that are caused by damage or deterioration of property to be
repaired and contemplating the continuous existence of the property.
The courts (case law) have defined three essential attributes of a repair:
1. A repair involves a restoration of a thing to a condition it formerly had been. It
restores it to its previous conditions, rather than an exact reconstruction of form
and substance
As evident the entire replacement of the bathroom vanity unit is deductible capital repairs
under section 25-10, ITAA 1997.
2. An item of expenditure is allowed deductible when it is worn out, damaged or
deteriorated before it can be repaired
As evident in the current case the item of repairs done on the bathroom is a revenue
expenses because it involves restoration of the asset with the subsidiary parts without
changing its character. Therefore, the repairs are allowable for deduction under section
25-10 ITAA 1997.
3. A repair involves making the defect good through wear and tear or replacement of
subsidiary part, rather than the entire item.
The work done to fix the burst water pipe by Jayson involves repairs done for work
purpose. The aim was to make the deterioration good that are caused through the wear
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Tax Law
30 June 2019
and tear. The work done by Jayson involved the replacement of subsidiary part of a whole
but does not involves the reconstruction of the entirety. Therefore, it is an allowable
deduction under section 25-10.
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