BAC318 Taxation Law: Depreciation, Deductions, and Provisions

This article discusses the methods of depreciation, deductions, and provisions under BAC318 Taxation Law. It explains the Australian Income Tax Assessment Act, 1997 and its provisions with examples and solutions. The article covers topics such as depreciation of assets, general deductions, legal fees, provisions for future liabilities, and donations.

BAC318 TAXATION LAW
Question 2
Part 1
Purchased a Mercedes Benz motor vehicle for a cost of $128,000 on 10 October 2017. The car is used
by the managing director 72% of the time for work purposes. The effective life of the car is 6 years.
On 16 May 2018 the car was crushed by a forklift. The insurance company wrote off the car and paid
the company $87,000.
Solution
In terms of Australian Income Tax Assessment Act, 1997 there are generally two methods of
depreciation that can be used by a company for the purpose of Income tax reporting generally:
(a) Prime Cost Method
(b) Declining Balance Method
In terms of Section 40-25 of the Australian Income Tax Assessment Act, 1997 depreciation is charged
on the asset from the date the asset is put to use by the company or when the asset is ready for use.
(Commonwealth Consolidated Acts, n.d.) Further, in terms of Prime cost method depreciation
(Section 40-75 of Income Tax Assessment Act, 1997) is charged by using the following formula
Cost of Asset * Days Owned /365* 100%/ Effective Life of Asset
However, under the diminishing value of method (Section 40-72 of Income Tax Assessment Act,
1997) computation of depreciation takes place in the following manner:
Pre-10th May, 2006
Opening Un-deducted Cost of Asset * Days Owned /365* 150%/ Effective Life of Asset
Post-10th May, 2006
Opening Un-deducted Cost of Asset * Days Owned /365* 200%/ Effective Life of Asset
(Commonwealth Of Australia, n.d.)
Further, in terms of Section 40-65 of the Australian Income Tax Assessment Act, 1997, an entity can
choose any method of depreciation depending on the decision of the management. Thus, any of the
above stated two methods of depreciation can be used for computation of deduction of depreciation
amount. (Commonwealth Consolidated Acts, n.d.)
In addition to above, the law allows deduction uptill the amount for which the asset has been used for
the official purpose. Accordingly, the percentage of asset used for the purpose of private consumption
shall be disallowed in terms of Section 40-25(2) of the Income Tax Assessment Act, 1997.
(Commonwealth Consolidated Acts, n.d.)
the basis of above deliberations, the computation has been carried out using both method of
depreciation here-in-below:

Prime Cost Method
Sl No Particular Amount
1 Cost of Asset 128000
2 No of Days for which asset has been held 220
3 Effective life in years of the asset 6 years
4 Decline in value (1280000*220/(365*6)*100% 12858.45
5 Proportion used for private use 28%
6 Private use value 3600.365
7 Consumption for official use (4-6) 9258.082
Diminishing Value Method
Sl No Particular Amount
1 Cost of Asset 128000
2 No of Days for which asset has been held 220
3 Effective life in years of the asset 6 years
4 Decline in value (1280000*220/(365*6)*200% 25716.89
5 Proportion used for private use 28%
6 Private use value 7200.731
7 Consumption for official use (4-6) 18516.16
On the basis of the above, it can be inferred that maximum depreciation w.r.t the car Mercedes Benz
(falling within the category of motor vehicle) which has been used both for official and private
purpose stands at AUD 18,516. Further, using diminishing balance method shall be useful for the
company as it helps to minimise the tax liability of the company.
Further, it has been considered that block concept of the asset is followed by the company and not
single one to one mapping and other asset exists in the block so the disposal of asset shall not give rise
to capital gain or loss. However, if there has been no asset other than car than the same shall be
accounted for capital loss in the books of the company and accordingly deduction for the asset shall
be available.
Part 2
$78,562 was spent on hiring additional fire equipment to fight a fire at the mine site.
Solution
In terms of Section 8-1 of the Australian Income Tax Assessment Act, 1997 general deduction is
allowed for expenses which are not capital in nature and has a nexus with the taxable income derived
from business. In layman terms, the law states that only those expenditures shall be allowed as
deduction which has been incurred for the purpose of earning taxable income unless specifically
excluded under the Act. Further, the law states that the expenditure which has been incurred for
deriving the taxable shall also be allowed as deduction even though income is not derived from such
expenditure later on. (Anon., n.d.)

The said proposition has been established under various judicial pronouncements like in the case of
“W Nevill & Co Ltd v FC of T (1937)” where in similar view has been held stating expensed which
have incurred for the purpose of earning taxable or assessable income and is pertinent to business
operations shall be allowed as deduction for the purpose of computation of taxable revenue under
the Act. (CCH Australia Limited., 2018)
In the present case the expenditure proposed for the additional fire-fighting equipment at the mining
site form a revenue expenditure and is incurred under the normal course of business and it is pertinent
to business, the same shall be allowed as deduction under the positive limb of Section 8-1 of the
Income Tax Assessment Act, 1997. Further, it shall be worthwhile to note that the said expenditure
has been incurred for the purpose of earning assessable income or taxable income, the same shall be
allowed as general deduction.
In case the company wants to treat the same as capital asset and depreciate it for the purpose of
taxation as it has shelf life greater than 1 year (assumer). However, as Viktor wants to reduce tax
liability, the same shall be allowed as revenue expenditure.
Part 3
$583,412 was spent on legal fees and advertising to represent the company and its directors at a
Government enquiry into coal mining activities.
Solution
In terms of Section 8-1 of the Australian Income Tax Assessment Act, 1997 general deduction is
allowed for expenses which are not capital in nature and has a nexus with the taxable income derived
from business. In layman terms, the law states that only those expenditures shall be allowed as
deduction which has been incurred for the purpose of earning taxable income unless specifically
excluded under the Act. Further, the law states that the expenditure which has been incurred for
deriving the taxable shall also be allowed as deduction even though income is not derived from such
expenditure later on.
Further Similar view have been held in various judgements like in the case of Hallstorms Pty Ltd v FC
of T (1946)” wherein similar view have been held stating the expenditure incurred for legal purpose
shall be treated as expenditure incurred for the purpose of earning taxable income and shall be
allowed as deduction accordingly. Further, it was held that the same may be treated as revenue and
capital based on the nature of expenditure.
Reference may also be had to the judgement of in “Snowden & Wilson Pty Ltd v FC of T (1958)”
wherein the expenditure incurred by the company for the purpose of defending the investigation
and placing advertisement on newspaper to defend oneself was allowed as deduction. Similar views
have also been held in the case of “Magna Alloys & Research Pty Ltd v FC of T (1980)”
Thus on the basis of above, it shall be concluded that the above stated expenditure shall be allowed
as deduction by the law.
Part 4
The company also made a provision in the company accounts for $568,438 for future liabilities from
claims by the townspeople against illnesses that may arise from the effects of the coal mine fire.
Solution

In terms of Section 8-1 Positive Limb of Income Tax Assessment Act 1997, only those expenditure is
allowed as deduction which are incurred for producing or generating taxable income. Thus, only
those loss or outgoing can be deducted which has bearing on the income of the company. Further,
the same does not mean only those expenditures which has actually been expended shall be allowed
as deduction. The law states the expenditure shall be allowed as deduction if the taxpayer has been
subject to such loss or outgoing and is not contingent in nature. Thus, for the purpose of deduction
the following condition shall be satisfied:
(a) Expenditure shall be incurred to generate taxable revenue;
(b) Shall have a loss or outgoing;
(c) The outgoing shall not be contingent in nature;
(d) There shall be a current existing liability.
Thus, for claiming the deduction the tax payer has to subject himself to such liability even if no
outflow of resources has taken place during the year. Similar view has been held in case of of “Coles
Myer Finance Pty Ltd v FC of T (1993)” wherein it has been held that the accounting system followed
by the taxpayer is an indicative factor rather than decisive factor for the purpose of determining the
period to which the expenditure relates.
In the present case as the company has subjected itself to the liability of claim on illness and has
made appropriate provisions in the book even though no outflow of resources has taken place, the
same shall be allowed as deduction. (Anon., n.d.)
Part 5
It also donated $55,000 to the local community SES Fire services
Solution
In terms of Australian law and Australian Tax Office, only those donations are allowed as deduction if
the same satisfies the following conditions stated here-in-below:
(a) Gift has been made to an Deductible Gift Recipient;
(b) It must truly be a gift and must involuntary transfer;
(c) No benefit shall accrue to the person or the company who makes the gift or a quid pro quo;
(d) Gift must money, property including shares;
(e) It must comply with any relevant gift conditions (Commonwealth Of Australia, n.d.)
Thus, if the aforesaid conditions are satisfied the same shall be eligible for deduction under the law.
In the present case, if the SES Fire Services are Deductible Gift Recipient, the same shall be allowed
as deduction as the other conditions are satisfied. Assuming that SES Fire Services are Deductible
Gift Recipient, the same shall be allowed as tax deduction.
References:

Anon., n.d. General Deductions (s 8 1 ITAA 1997). [Online]
Available at: https://s3.studentvip.com.au/notes/20987-sample.pdf
[Accessed 25 October 2018].
CCH Australia Limited., 2018. W. NEVILL & CO. LTD. v. FEDERAL COMMISSIONER OF TAXATION, High
Court of Australia, 03 March 1937. [Online]
Available at: https://iknow.cch.com.au/document/atagUio2649767sl683581894/w-nevill-co-ltd-v-
federal-commissioner-of-taxation-high-court-of-australia-03-march-1937
[Accessed 25 October 2018].
Commonwealth Consolidated Acts, n.d. INCOME TAX ASSESSMENT ACT 1997 - SECT 40.25. [Online]
Available at: http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s40.25.html
[Accessed 25 October 2018].
Commonwealth Consolidated Acts, n.d. INCOME TAX ASSESSMENT ACT 1997 - SECT 40.25. [Online]
Available at: http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s40.25.html
[Accessed 25 October 2018].
Commonwealth Consolidated Acts, n.d. INCOME TAX ASSESSMENT ACT 1997 - SECT 40.65. [Online]
Available at: http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s40.65.html
[Accessed 25 October 2018].
Commonwealth Of Australia, n.d. Gifts and donations. [Online]
Available at: https://www.ato.gov.au/Individuals/Income-and-deductions/Deductions-you-can-
claim/Gifts-and-donations/
[Accessed 25 October 2018].
Commonwealth Of Australia, n.d. Prime cost (straight line) and diminishing value methods. [Online]
Available at: https://www.ato.gov.au/business/depreciation-and-capital-expenses-and-allowances/
general-depreciation-rules---capital-allowances/prime-cost-(straight-line)-and-diminishing-value-
methods/
[Accessed 25 October 2018].