Taxation Law: Deductions and Small Business Concession

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Authors Note
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1TAXATION LAW
Table of Contents
Answer to Part A:.......................................................................................................................2
Issue:..........................................................................................................................................2
Rule:...........................................................................................................................................2
Application:................................................................................................................................3
Conclusion:................................................................................................................................5
Part B: Small Business Concession............................................................................................6
Introduction:...............................................................................................................................6
The small business CGT concession:.........................................................................................7
Overall policy objective under present system of taxation:.......................................................9
Critical evaluation of SBE concession:....................................................................................11
Reformations and further amendments of CGT Concessions:.................................................13
Conclusion:..............................................................................................................................15
References:...............................................................................................................................16

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Answer to Part A:
Issue:
The issue involved in the current case of Anna is based on determining the income tax
consequences for the financial year ended 2018. The issue surrounding the case is whether
the taxpayer qualifies for claiming an allowable deduction under “section 8-1 of the ITAA
1997”?
Rule:
The main provision of the “section 8-1” a taxpayer can claim deductions relating to
the expenditure which is under the provision of general deduction. An expense or loss might
be considered as deductible under “section 8-1” and under the specific provision (Barkoczy
2014). A taxpayer is allowed to claim deductions from their taxable earnings only to the
extent that the expenses are incurred in producing the taxable income. An individual is not
allowed to claim deductions under the negative limbs of “section 8-1 (2) of the ITAA 1997”.
Expenses of capital, private or domestic in nature is not allowed for permissible deductions.
If a person takes loan for the purchase of the equipment and stock is allowed for
deductions under the positive limbs of “section 8-1 of the ITAA 1997” (Grange, Jover-
Ledesma and Maydew 2014). This is because the expenses are incurred in producing the
assessable income or in carrying on of the business with the objective of producing taxable
income.
The taxation commissioner in “Lunney v FCT” held that necessary character of
outgoings that are prerequisite in deriving taxable income should be considered (Jover-
Ledesma 2014). A taxpayer is not allowed to claim deductions under the general provision of
“section 8-1 of the ITAA 1997” relating to the pre-commencement of income generating

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activity. As held in “Softwood Pulp and Paper v FCT” the commissioner denied deductions
to the taxpayer for cost incurred in establishing the business since it was not incurred in the
course of income producing activity. If a taxpayer purchases any tools, equipment or any
other assets that assist them in deriving income then a deduction can be claimed in this regard
for the entire or part of the cost depending upon the business and private use of the asset.
An individual can claim for the deductions when they incur while travelling for the
business or paying for the employee travel expenses. As explained under “section 25-100 of
the ITAA 1997” expenses relating to travel can be claimed by the taxpayer if the travel is
directly associated between two places where the income generating activities are covered
(Kenny 2013). Generally, a taxpayer can claim deductions for travel that forms the part of
performing the work duties away from the home.
An individual taxpayer is allowed to claim deduction for majority of the expenses that
is incurred in carrying or running the business. The expenses incurred for purchase of
jewellery represents the trading stock expense and same is allowed as deductions (Krever
2013). On the other hand, an individual taxpayer is allowed to claim for the salaries and
wages that is paid to the employee or workers. If an individual operates as the sole trader, or
the business owner and not as the employee of the business and therefore the owner of the
business cannot pay salary to themselves. However, on making any form of nominal payment
in the form of salary or wages is generally held as the profit distribution which does not
forms the part of deductions.
Application:
The present situation of Anna provides that she carries on the business of selling
jewellery. Anna incurred the bank interest of $6,000 for the purchase of equipment and stock.
Anna can claim deductions for the purchase of the equipment and stock under the positive

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limbs of “section 8-1 of the ITAA 1997” (Morgan, Mortimer and Pinto 2013). Anna incurred
the expenses in producing the assessable income and in the course of carrying on of the
business with the objective of producing taxable income.
Anna reported an expense of $2,000 for paying monthly rent of the leased small shop.
Citing the case of “Ronpibon Tin NL v FCT (1949)” the monthly rent expenses is allowable
for deductions since it is relevant and incidental in production of assessable income.
The legal fees of $4,400 that is occurred by Anna for obtaining the advice for
establishing the business is a preliminary to the beginning of income generating activity. By
referring to “Softwood Pulp & Paper v FCT” non-deductible under general provision of
“section 8-1” (Sadiq 2014). Anna reports an expenses of $2200 for the purchase of laptop.
She used laptop 10% of the time for personal purpose. Anna can only claim 90% of the
laptop cost for deductions as 10% of the laptop used comprised of personal use.
The expenses of $2,500 incurred for opening party of shop with local celebrities can
be categorized as private or domestic expenditure and non-deductible since the expenses fails
to meet the positive limbs and non-deductible under second negative limb of “section 8-1 (2)
(b)”. A sole trader is allowed to claim deductions relating to the purchase of trading stock
since these expenses forms the part of carrying on of the business in producing the assessable
income (Woellner 2013). Similarly, the cost incurred in surveillance of shop is also
deductible under the positive limbs of “section 8-1” since the costs is necessarily incurred
and relevant in the taxpayer’s income producing activity.
The travelling expenses for travelling with business class that is incurred by Anna for
attending the New York fashion can be classified as the private in nature. Anna will be
denied to claim deductions under “section 8-1” (Hart et al. 2015). Additionally, she incurred
expenses on accommodation and food that was in relation for the business purpose.

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Therefore, a deduction is allowable. Citing the instances of “Lunney v FCT” the cost
incurred by Anna to catch up with her friends is private in nature and non-deductible under
positive limbs of “section 8-1”.
Anna can claim deductions for salary and wages paid to employees however the
salary paid to herself is non-deductible since it constitutes nominal payment of salary and it
would be treated as profit distribution.
Computations of total allowable deductions
For the year ended 2018
Particulars Provisions
Deductions
Type
Amount
($)
Amount
($)
Allowable Deductions
Section 8-1 of the ITAA
1997
General
Deductions
Bank Interest
Section 8-1 of the ITAA
1997
General
Deductions 6000
Payment of Monthly
Lease Expenses
Section 8-1 of the ITAA
1997
General
Deductions 2000
Purchase of Lockable
glass display
Section 8-1 of the ITAA
1997
General
Deductions 28000
Laptop of laptop (90%
business use)
Section 8-1 of the ITAA
1997
General
Deductions 1980
Purchase of Jewellery
Section 8-1 of the ITAA
1997
General
Deductions 480000
Security surveillance cost
Section 8-1 of the ITAA
1997
General
Deductions 24000
Accommodation and
Food Expenses
Section 8-1 of the ITAA
1997
General
Deductions 2000
Salary and wages paid to
employee
Section 8-1 of the ITAA
1997
General
Deductions 65000
Total Allowable
deductions 608980
Conclusion:
Conclusively the total amount of allowable deductions that can be claimed stands
$608,980. However, Anna would not be allowed to claim deductions for the expenses that are
incurred under the negative limbs or non-deductible under the positive limbs of “section 8-1
of the ITAA 1997”.