Taxation Law Rule- ITAA 1997

Added on -2020-02-24

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TAXATION LAW
TaxationAnswer-1IssueWhether the following are allowable as deductions under s 8-1 of ITAA 1997?RuleUnder section 8-1 of ITAA 1997, the expenses that are deductible are those which are either incurred in earning the assessable income or are incurred while carrying on the business through which the said assessable income shall be earned. Deduction of those expenses is not allowed as a deduction which is either capital in nature or private/ domestic in nature or the expenses which are in relation to earning of exempt income (Kobestky, 2005).Applicationa.The cost of moving machinery to a new site – in case, this expense pertains to brand new machinery which is being moved from the place of purchase to the new site, then the expense shall be included in the capital cost of purchase of machinery and shall be deemed to be of capital nature. Hence such expense will not be allowable under section 8-1 of ITAA 1997, as the same is of capital nature and expenses of capital nature are disallowed under s 8-1. The expense shall be added up or allowed as expenses shall solely depend upon the nature of asset whether it is a new asset or old asset. In case it is brand new machinery, all the expenses incurred up to its use date shall be added up to its cost and it shall be part of the cost of the asset (Fullerton et. al, 2017). For example Transportation expenses, Installation, and commissioning expenses. In case this expense is for moving the old machinery from existing site to a new site, thenit shall be deemed to be a transportation cost and hence would be allowable as deduction.b.The cost of revaluing assets to effect insurance coverThe expenses incurred in the revaluing of assets for the purpose of claiming exemption are allowable if the same are incurred for the recovery of loss of incomes directly or indirectly attributable to the assessable income. There can be two circumstances in case of an insurance claim (Fullerton et. al, 2017). In the case where the asset for which 2
Taxationinsurance claim is being received is of capital nature, it means that the capital asset was destroyed and the insurance cover is for recovery of loss from destruction of a capital asset. In this case, the expenses that will be incurred for recovery of insurance claim shallbe deducted from the insurance claim amount received and will not be considered as a business expense in the income statement. On the other hand, where the insurance claim is for claiming loss of assets which are held as stock in trade, it means that the assets are not capital assets and are directly related to the assessable income which is shown in the income statement. In such a case, the expenses incurred for claiming recovery of loss of stock are allowable as a business expense. It is done for the business benefit so it shall be allowed as business expenses. Such expenses shall be charged to profit and loss account and treated as expenses incurred for recovery of losses of stock (Hopewell, 2017). Hence, in the given case if the revaluing of assets held as the stock is being done, then the expenses on revaluing shall be allowable under s 8-1 of the ITAA 1997.c.Under section 8-1 of ITAA 1997, the expenses that are deductible are those which are either incurred in earning the assessable income or are incurred while carrying on the business through which the said assessable income shall be earned. Deduction of those expenses is not allowed as a deduction which is either capital in nature or private/ domestic in nature or the expenses which are in relation to earning of exempt income.Hence, if we interpret the given situation with reference to s8-1, the legal expenses incurred by the company opposing a petition for winding up does not fall under s 8-1 because it is not being incurred for earning assessable income and also it is not the expenses to be incurred necessarily to carry on the business to earn the assessable income(Renton, 2005). The expenses paid is also to be checked in light of its total amount as well because larger the amount spent by the company, it can’t be treated as business expenses.But, as it is a legal expense which has been incurred for the continuance of the business by opposing to its winding up, it is an expense specifically allowable under section 25-5.3
Taxationd.Under section 8-1 of ITAA 1997, the expenses that are deductible are those which are either incurred in earning the assessable income or are incurred while carrying on the business through which the said assessable income shall be earned. Deduction of those expenses is not allowed as a deduction which is either capital in nature or private/ domestic in nature or the expenses which are in relation to earning of exempt income (Sadiq et. al, 2017).In the given case, the solicitor account does not separate the costs for various matters and hence the various legal expenses cannot be bifurcated into capital or revenue nature. The legal expenses for all the matters mentioned have been assumed here as incurred for business purposes only. Further, all these expenses have been incurred for recovery of theincome which shall further become a part of the assessable income..ConclusionSo in the above solution, answers have been provided with its proper reasoning as to why the expenses shall be allowed or not allowed in the business. If we separate the given purposes mentioned above, the legal expense for the discharge of mortgage can be treated as a capital nature purpose and hence shall not be allowed under s 8-1. Other expenses shall be allowable as deduction4

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