Taxation Law: Assessable Income and Allowable Deductions

This article discusses the rules and regulations related to assessable income and allowable deductions in taxation law. It includes a detailed computation of taxable income and allowable deductions for Racing Parts Pty Ltd. The article also addresses the tax consequences of claiming deductions for expenses incurred during the year and the capital gains tax originating from the sale of antique desk and residential property. The application of relevant rules and regulations is explained with the help of a case study.

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Authors Note
Course ID

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Table of Contents
Answer to question 1:............................................................................................................. 2
Answer to question 2:............................................................................................................. 5
References:............................................................................................................................ 8

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Answer to question 1:
For an ordinary income to be considered as the taxable income during a particular year
under “section 6-5 of the ITAA 1997” must be derived by the taxpayer during the relevant
year. Below listed are assumptions for inclusion and exclusion of transaction in determining
the assessable income of Racing Parts Pty Ltd for the year ended June 2018;
a. With regard definition stated under “section 6-20 of the ITAA 1997” the exempted
income of $100,000 is not included for assessment however the same has been
offset against the previous year loss of $120,000 reported under “Division 36”1. The
Non Assessable Non Exempted income of $50,000 has been considered for
assessment purpose because a tax loss for the previous year under Division 36 has
been deducted against such income.
b. The depreciation deduction for tax purpose stood $30,000 and the same has been
included for deduction under “Division 40”.
c. With reference to “section 25-35” the bad debt sum of $20,000 will be considered
for deductions because the debt was written off. However, the provision for doubtful
debts amounting to $40,000 is non-deductible.
d. The provision for annual leave and long service leave are considered as accounting
liabilities and hence such expenses are not treated as deductions for income tax
purpose during the year they accrue. The sum of $35,000 is excluded for deduction
for income tax purpose.
e. Shareholders receiving franked dividend should gross up the divided for the franking
amount that is attached and receive the same as the tax offset equivalent to the sum
of franking amount2. Similarly the franking credits attached to cash dividend has been
claimed as tax offset. With respect to “section 67-25” a tax offset for franked
dividends has been claimed as refundable offset for Racing Parts Pty Ltd.
f. The borrowing cost of $5,000 has been included as tax deductions under the general
provision of “section 8-1 of the ITAA 1997”3. The expenses has been considered
1 Miller, Angharad, and Lynne Oats. Principles of international taxation. Bloomsbury
Publishing, 2016.
2 Woellner, Robin, Stephen Barkoczy and Shirley Murphy, Australian Taxation Law 2018
Ebook
28E (OUPANZ, 2018)
3 Woellner, R. H et al, Australian Taxation Law 2018

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for deductions because the borrowing costs were incurred in purchase of new items
of plant which is used in the generation of assessable income by Racing Parts Pty
Ltd.
g. The court in “Arnold v FCT (2017)” explained that gifts or contribution that is more
than $2 made to the deductible gift recipient is considered as allowable deduction
under “Division 30”4. The gifts and donations of painting amounting to $1000 and
$5000 is included for deduction under “Division 30”.
h. With respect to the “section 8-1(1) of the ITAA 1997”, expenses incurred on the
service of managing director’s husband as computer analyst has been considered for
tax deduction purpose5. The expenses were incurred in gaining or generating the
assessable income and satisfies the positive limbs criteria.
i. The value of closing stock has been considered based on the LIFO method as
Racing Parts Pty Ltd would be able to gain greater tax deduction for its cost of goods
sold.
j. The tax loss of $120,000 from the previous year arising under “Division 36” has
been offset against the exempted income and non-assessable non exempted
income6.
k. The repairs of $5,000 was included for deduction with respect to the “section 25-10
of the ITAA 1997” repairs was done to restore the efficiency function of the plant.
The repairs is context of use of plant for generating income.
4 Taylor, C. J et al, Understanding Taxation Law 2018
5 Sadiq, Kerrie et al, Principles Of Taxation Law 2018
6 Sadiq, Kerrie, Australian Taxation Law Cases 2018 (Thomson Reuters, 2018)

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Particulars Amount ($) Amount ($)
Assessasble Income
Net Accounting Profit 700000
Non Assessable Non-Exempted Income 50000
Australian sourced dividend income
Fully Franked (net) 25000
Franking Credits 25000 50000
Capital gains on sale of shares 30000
Less: Capital loss 10000
Net Capital gains 20000
50% CGT Discount 10000 10000
Total Assessable Income 810000
Allowable Deductions
Depreciation Expenses 30000
Bad Debt written off 20000
Borrowing Costs 5000
Donations
Painting 5000
Gifts to soccer club 1000
Expenses on MD Services 30000
Cost of Goods Sold 30000
Cost of Repairs on Machinery 5000
Total Allowable Deductions 126000
Total Taxable Income 684000
Tax on Taxable Income @27.5% 188100
Tax loss from previous year 120000
Less: Offset against Exempted Income 100000 20000
Less: Franking credits 25000
Total tax payable 143100
Computation of Taxable Income
In the books of Racing Parts Pty
For the year ended 2018

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Answer to question 2:
Issue:
The issue outlines the tax consequences for claiming deductions relating to
expenses incurred during the year. The issue would also address the consequences of
capital gains tax originating from the sale of antique desk and residential property.
Rule:
As stated by the “Taxation Ruling of TR 93/30” where the home office is merely
used in relation to the taxpayer revenue generating activities however does not hold the
nature of place of business only the relevant portion of the running expenses will be treated
for deductions. The court in “Swinford v FC of T (1984)” allowed the self-employed
scriptwriter to claim deductions under “section 8-1 of the ITAA 1997” for the part of rent
paid for the flat where the taxpayer dedicated a separate room for the study purpose7. The
taxpayer wrote the script in the room and did not had any separate business premises.
“Section 26-5 of the ITAA 1997” is related to penalties or fines that is imposed on
the taxpayer as the result of the breach of the Australian law is non-deductible. As per the
“taxation ruling of TR 97/23” expenses incurred in replacing the locks and exhaust fans
that are permanent fixtures installed in the premises used for generating income is treated
as deductible repair under “section 25-10” given that it is replacement of damaged unit by a
new unit of identical designs that merely restores the efficiency and not an improvement8.
Similarly, in “Western Suburbs Cinemas v FC of T (1952)” concluded that the replacing
the ceiling with the new one constituted improvement of capital nature and was held non-
deductible.
As per “section 40-25 (1) of the ITAA 1997” an entity can claim deduction for the
amount that is equal to the decline in the value for the income year of the depreciating asset
that is held during the year9.
7 Barkoczy, Stephen, Foundations Of Taxation Law 2014
8 Douglas, Heather et al, Australian Taxation Judgments
9 Kenny, Paul, Michael Blissenden and Sylvia Villios, Australian Tax 2018

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Travel on work or during the course of work will be treated as the allowable
deductions. Similarly, in “Weiner v FCT (1978)” the teacher was allowed deduction for
travel expenses because it was incurred in the course of work10.
The Australian taxation office explains that a person can claim deductions for using
their own car for performing business activities. These expense are treated as car expenses.
Under the log book method, the taxpayer is allowed to claim for the business use percentage
of expenses that is occurred for car.
A taxpayer’s main residence is usually exempted from the capital gains tax.
However, the taxpayer would not get the full main residence exemption if they use any
portion of the dwelling for generating income11. The interest deductibility test is applicable
irrespective of whether a person actually borrows the money to purchase the dwelling. If a
person runs the business or professional practice in a part of home, the person would be
entitled to claim deduction for that part of the interest on the money that is borrowed to
purchase the dwelling. Additionally, the capital losses should be separated under “section
108-10(1)” and the net capital loss must be carry forwarded under “section 108-10 (4)”.
Application:
As evident in the current case John was the self-employed architect and bought a
house in outer suburbs of Melbourne. A portion of house was used for architect business.
John reports an expenses on interest on loan on the house. Citing “Swinford v FC of T
(1984)” John can claim deductions for interest on loan under “section 8-1 of the ITAA
1997” for the portion of the house that was dedicated for the business purpose12. John
however was required to pay fine of $1000 for building a door installer without permission.
Therefore, under “Section 26-5 of the ITAA 1997” the sum of $1000 as fines will not be
allowed for deduction.
John later replaced the old carpet in the room with better quality carpets that costed
$6000. Citing “Western Suburbs Cinemas v FC of T (1952)” replacing the carpets with the
10 Kenny, Paul, Australian Tax 2014
11 McCouat, Philip, Australian Master GST Guide 2018
12 Morgan, Annette, Colleen Mortimer and Dale Pinto, A Practical Introduction To
Australian
Taxation Law

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new one constituted improvement of capital nature and will held non-deductible under
“section 25-10 of the ITAA 1997”.
John incurred expenses on antique desk that he used for work purpose. Referring to
“section 40-25 (1) of the ITAA 1997” John can claim deduction for the amount that is equal
to the decline in the value of antique desk during the income year held during the year.
John also travelled to building sites and visited clients for discussing regarding
designs and drawings. Citing “Weiner v FCT (1978)” the John travel constituted travel in the
course of work13. Later he also used his own car for work purpose. Based on log book
method John can claim deductions for expenses of car incurred for business purpose. While
the private portion of the expenses will not be allowed for deductions.
John reports the sale of house that he bought in July 2017. As the house was partly
used for producing income, John can claim partial main residence exemption. While the
interest expenses satisfy the interest deductibility test therefore, the interest on bank loan will
be allowed for deductions. The antique desk was purchased by John for 7,250 but was
eventually sold for $3,850 and therefore yielded loss. Under “section 108-10 (1)” John must
quarantined the loss obtained from antique desk.
Conclusion:
Conclusively, John can claim deduction for interest incurred for home office purpose
while no deduction will be allowed for replacing carpet and fines imposed.
13 Sadiq, Kerrie et al, Principles Of Taxation Law 2018

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References:
Barkoczy, Stephen, Foundations Of Taxation Law 2014
Douglas, Heather et al, Australian Taxation Judgments
Kenny, Paul, Australian Tax 2014
Kenny, Paul, Michael Blissenden and Sylvia Villios, Australian Tax 2018
McCouat, Philip, Australian Master GST Guide 2018
Morgan, Annette, Colleen Mortimer and Dale Pinto, A Practical Introduction To Australian
Taxation Law
Sadiq, Kerrie, Australian Taxation Law Cases 2018 (Thomson Reuters, 2018)
Sadiq, Kerrie et al, Principles Of Taxation Law 2018
Taylor, C. J et al, Understanding Taxation Law 2018
Woellner, R. H et al, Australian Taxation Law 2018
Woellner, Robin, Stephen Barkoczy and Shirley Murphy, Australian Taxation Law 2018
Ebook 28E (OUPANZ, 2018)
Miller, Angharad, and Lynne Oats. Principles of international taxation. Bloomsbury
Publishing, 2016.