Tax Law: General Deductions, Capital Expenditure, House Office, Foreign Exchange Losses and Interest Expense

TAX LAW
DEDUCTIONS
STUDENT ID
[Pick the date]

TAX LAW
Question 1
a) General deductions are allowable under s.8(1) ITAA 1997 provided the expense satisfies a
minimum of the one of the following two positive limbs (CCH, 2013).
 Expense has been incurred for gaining assessable income
 Expense is an inevitable occurrence in the business process which is associated with
assessable income production
Also, it is essential that the expense must not be incurred in production or non-assessable
income. Further, it is imperative that the expense should not be of personal nature to be
eligible for deduction under s. 8(1) (Barkoczy, 2015).
Based on the amount of effort in terms of practice and travel put in by the lawyer, clearly this
seems to be more than hobby and it does seem that the intention is to gain income. Deduction
under s. 8(1) may not be possible in the given case considering the verdict in “FCT v Payne
(2001) 46 ATR 228 case” where it is made clear that when there are two income generation
activities, then general deductions cannot be made for both. However, despite the above case,
deduction under s. 25-100 still remains at option considering there is travel between
workplaces and none of them happens to be the taxpayers’ residence (Gilders et. al., 2016).
But for s. 25-100 to be applicable, it is imperative that the lawyer must derive some income
from the visits to the club. If no income derived, then the travel to the club cannot be
considered as travel to workplace (Deutsch et al., 2015).
b) It needs to be determined based on the given facts whether the computer and related travel
expenses need to be categorized as capital expenditure or for available for immediate
deduction.
If the expenses are of capital nature, then immediate deduction is not permissible and thus
under DIV 40, ITAA 1997 capital allowance is allowed to be deducted till the time there is
complete amortization of the expense. This deduction as per s. 40-25 would amount to the
decline in value experienced for the computer on an annual basis (Barkoczy, 2015). In
order to compute the decline in value, s. 40-65 provides choice between prime cost
method and diminishing value method.