Taxation Law Assignment: Deductions, Credits, and Assessable Income

This taxation law assignment solution addresses several key issues in Australian tax law. Answer 1 examines whether various expenses, such as moving machinery costs, asset revaluation expenses, and legal costs related to business wind-up, are deductible under section 8-1 of the ITAA 1997, referencing relevant case law. Answer 2 focuses on whether Big Bank can claim input tax credits for advertising expenses, considering GST implications and relevant legislation. Answer 3 involves the computation of assessable income, including employment, rental, dividend, and interest income from both Australian and international sources, along with the deduction of various expenses. The solution provides detailed analysis and application of relevant tax laws and regulations.

TAXATION LAW

Taxation law
Answer 1
Issue
Whether the following elements are allowed as deductions under section 8-1 of ITAA 1997?
According to section 8-1 of ITAA 1997, deductible expenses are of two kinds; firstly, the one which is incurred
while earning the measurable income, and secondly, incurred on continuing the business from which the
measurable capital is earned. Expelling of the expenses are only done for the ones which are not private/domestic,
capital in nature also including the ones which are in association to the earning of the not liable income (Pratt &
Kulsrud, 2013).
Application
 The cost of moving machinery to a new site
It is to be noted that the expense required to purchase a new machine and to shift it from the purchasing site
to the required destination is capital in nature. This is because the shifting charge is also included in the
buying cost and termed as the capital cost of machinery purchasing. This type of capital coat is never taken
into consideration as per the 8-1 section of ITAA and is not treated as deductible expenses. The expenses
spent on the machinery shall always be summed up with the capital cost on the basis that it is old
machinery or new machinery (Gilders & Walpole, 2016). For instance, if the machinery is new then the
total costs spent on it till date shall be added to the capital cost and termed as the capital of the asset. Other
expenses include transportation expenses and commissioning expenses. But considering the cost of
transportation of the old machinery to a new destination, then the particular expense can be defined as a
deductible expense. It was held in the case of W Neville & Co v FCT (1937) that expenses those connected
with a business purpose must be allowed as deduction.
 The cost of revaluing assets to effect insurance cover
The amount spends in the revaluing the property of the company so as to claim release is only
accepted if the received amount is used for regenerating the loss of income which is wholly or
partially related to the assessable income of the company. Insurances can be claimed by the
company only upon the rise of two cases. Firstly, if the insurance has been claimed for some
machinery that has been capital in nature, and now has been destroyed by some risen situations. In
this, the claim has been made to recover the machinery loss (Fullerton et. al, 2017). It shall be
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Taxation law
very obvious in this case that the insurance money provided can only be used in the recovery of
the loss and in no case can be shown in the income statements of the company’s business.
According to the second way, if the claims are made for the asset loss which has been shown as
stocks in trade then, these assets are directly taken into account as for the business and related to
the assessable income because they are not capital in nature. All this is obviously done to provide
profits to the business and so are termed as business expenses. But all these expenses should be
recorded in the profit and loss accounts of the company and used for the recovery of the lost assets
(Fullerton et. 2017).
Thus, if the revaluing of the assets is done then the expenses claimed are allowable as per the
section 8-1 of the ITAA 1997. It was held in the case of Charles Moore & Co (WA) P/L v FC of
T (1956) that financial transactions that form a part of the business activities must be deductible.
 According to section 8-1 of ITAA 1997, deductible expenses are of two kinds; firstly, the one which is
incurred while earning the measurable income, and secondly, incurred on continuing the business from
which the measurable capital is earned. Expelling of the expenses are only done for the ones which are not
private/domestic, capital in nature also including the ones which are in association to the earning of the not
liable income (Gilders & Walpole, 2016).
So according to the given case, if it is taken into account with the s 8-1 then, the costs claimed by the
company with an unfavorable decision for the winding up is not in association with the s 8-1. This situation
arises because the claims put up are neither for earning assessable income and neither to continue the
business for earning the assessable income. The total cost paid by the company should be checked
regularly so as to not let it turn into big numbers because it will not be treated as the money spent on the
company’s business. It was held by the Federal court in the case of FC of T v Cooper (1991) that the
expenses incurred by the tax payer to carry on the operations and in the normal course of business must be
considered as a deduction.
But the expense shown in the case is a legal cost which has been claimed for the continuance of the
business so as to earn the assessable income and thus this type of cost is perfectly allowed to be claimed as
per the section 25-5.
 According to section 8-1 of ITAA 1997, deductible expenses are of two kinds; firstly, the one which is
incurred while earning the measurable income, and secondly, incurred on continuing the business from
which the measurable capital is earned. Expelling of the expenses are only done for the ones which are not
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Taxation law
private/domestic, capital in nature also including the ones which are in association to the earning of the
nonliable income (Kobestky, 2005).
In the explained matter it is very clear that all the expenses claimed in the case are not at all subjected to
any category wise division. There is no expense separately tagged as private or revenue or any other. All
the claimed costs are just defined as for business purposes only. Also, the claimed expenses have been
shown as an effort to recover the capital which is a portion of the assessable income. It was held in the case
of W Neville & Co v FCT (1937) that expenses related to business activity would appear in the deductible
expenses. It is also seen that if the expenses are categorized than the legal costs for the mortgaging purpose
would obviously appear to be out of the section 8-1 because of its capital nature and would not be part of
the deductible expenses while the other ones would surely be included.
Conclusion
From the above discussion, it is clear that for expenses to be considered as an allowable expense it must
have a direct bearing on the business activity and must be done in the business course. There are various
expenses that are incurred while conducting the business and the above situation clearly stresses that there
must be an establishment with the business activities. The ones that do not fall under the ambit of the
business activity is altogether ignored.
.
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Taxation law
Answer-2
Issue
Will Big Bank be able to claim the input tax credits in tune to the advertisement expenses that are incurred amount
to $1,650,000?
Rule
The Big Bank Ltd is a national level insurance company which is GST registered and has over 50 branches, a 10-
storey office, and various call centers to communicate with its customers. For a long time, the company has been
facilitating its customers with its services in Australia. The launch of the home and contents policies by the
company is a crucial step in expanding its business but the company is willing to install a new accounting system
as the company is now GST registered and from now on the amounts collected by premium policies will be GST
charged (Kenny et. al, 2017). So for undertaking this idea promotion has to be done. A similar instance was
observed in the case of Rio Tinto Services Ltd v Commissioner of Taxation [2015] FCA 94 where the federal court
came to a conclusion that the taxpayer would not be able to input tax credits on acquisitions that are in tune to the
input tax supplies a GST supplies. If a direct link has been established then the acquisition is defined as partly
creditable.
A thorough decision on the part of the company has been taken to expand its business through the medium of
advertising so as to begin its era into the insurance field with a bang. Printing media, television, radio are some of
the base methods adopted by the company to advertise its business (Khadem, 2017).
The Big Bank Ltd was ready and spent a huge amount of $16,50,000 for the advertising purposes only. This
massive amount spent includes $5,50,000 for only promoting the newly launched product of the company. The
remaining amount left was spent in advertising for the facilities that the company already had from before. The
promotional advisor proposed a tax invoice of $16,50,000 to the company. As the company is GST registered so
the Big Bank Ltd is allowed to enjoy the profits earned as per the GST credits provided if it is claimed (Nethercott
et. al, 2013).
Application
The Big Bank Ltd is able to enjoy the GST credits on the advertising tax credit because the amount spent by them
is taken into consideration as business expenses and can be used only for business purposes. This expense made by
the company cannot be treated as capital in nature because it is not long-lasting and has to be proposed time to time
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Taxation law
and so it is wise to summon them up together and depict them as a positive feature of the company. Whenever the
company makes any transaction in association with the expense for the principles of the company, and if this made
transaction includes GST then in such cases the company has the full power to exercise control on the credits of
the GST as the company paid for it (Barcokzy, 2010). This type of credits enjoyed is termed as GST credits or
input tax credits.
As stated by Sadiq et. al (2017) GST can be claimed as per the following conditions:
 The expenses incurred for the purchase of goods and supplies are for the purpose of business and not for
personal use.
 The price at which the items or supplies are purchased includes GST.
 A consideration is to be paid for the purchasing of items or supplies.
 The items or supplies provider has proposed a tax invoice for the meticulous possessions or supplies and
that includes GST.
Conclusion
No matter the amount spent is massive but it all finally comes under the portion of advertising for which the
company has paid GST. The tax invoice of $16,50,000 comprised of the television advertisement worth of
$5.50.000 and the left over the amount for other promotional mediums. All this will help in expanding the business
while it is only 2% of the company’s capital and the remaining 98% is fulfilled through the loans given and the
deposits made by the company’s costumes for which commission and interest rates are charged. All this makes the
company fully eligible to claim the GST credits as per the received advertising bill.
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Taxation law
Answer – 3
Computation of Income that is assessable
Particulars Amount in AUD$
Employment Income from Australia 23AG of Income Tax Assessment
Act 1997
Employment Income from United States 23AG of Income Tax
Assessment Act 1997
Employment Income from United Kingdom23AG of Income Tax
Assessment Act 1997
Rental income from property in United Kingdom 380-35 of Income
Tax Assessment Act 1997
Dividend Income from United Kingdom (assumed as grossed up) –
47A(1) of Income Tax Assessment Act 1997
Interest Income from United Kingdom 26-25 of ITAA 1997
Total Gross Income
Less: Expenses :
Medical Expenses 159P of ITAA 1997
Expenses incurred in deriving employment income from Australia
Expenses incurred in deriving employment income from the US
Expenses incurred in deriving employment income from the UK
Gift to a deductible gift recipient 30-15 of ITAA 1997
Interest on debt for deriving dividend income 82L to 82T ITAA 1997
44,000
12,000
8,000
2,000
1,200
800
68,000
5,000
4,000
900
500
400
140
60
57,000
10,072
1,140
11,212
4,400
6,812
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Taxation law
Expenses on debt for driving interest income 32-50 ITAA 1997
Total Taxable Income
Tax on Total Taxable Income
Add: Medicare Levy 82A ITAA 1997
Total Taxes Payable
Less: Foreign Taxes Offset Division 770
Net Taxes Payable
Foreign tax offset can be obtained when the person has income from one country where he is a resident of
the domestic and the visiting country. In this scenario, the person contained income from more than a
country and even expenses are done in this regard. As per Hopewell (2012), the offset is provided in the
following cases
 The person in question has paid foreign income tax from the income generated in the foreign
country that means income is already paid
 The person in question has included foreign income in the overall assessed income for the
computation of income tax.
Note:
 Expenses pertains a totality of domestic and foreign income
 Tax that is paid in foreign country is set off in regard to total tax liability
 Regrouping of figures are done
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Taxation law
Answer – 4
Johnny & Leon (A Partnership)
Net profit for the year ending
Income $
Sales of sporting Goods 400000
Interest on Bank deposits 26-
25 ITAA 1997 10000
Dividend franked-60% 21000/60%) 35000
Bad debts recovered 25-35
ITAA 1997 10000
Capital Gain (30000-15000) 15000
Closing Stock at cost 16000
Total 486000
Expenses
Opening Stock 20000
Salary Johny 10000
Leon 15000
Interest on Capital- Johny
(82L to 82T) 2000
Interest on Loan by Johny
(82L to 82T) 4000
Travel Expenses Johny (51AF
ITAA 1997) 3000
Legal Fees for renewal of Lease 2000
Legal Expenses 1900
Debt Collection Expenses 500
Council Expenses 500
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Taxation law
Staff Salary (25000- 5000) 20000
Purchase of Sports Item 30000
Rent 20000
Loss on doubtful Debt 30000
Business Lunch expenses
(Division 32) 10000
Loss due to theft of cash (25-
45 ITAA 1997) 3000
Total 171900
Gain from Partnership (32-90
ITAA 1997) 314100
Less: Last year
Loss 40000
Balance Income 274100
Johny 50% 137050
Leon50% 137050
Notes:
1. distribution of profit is equally
2. It is an SBE
3. when a loss is due to the employee it is discussed as a loss.
4. the adjustment of capital loss has been done against the capital gain on share disposal.
5. the expenses of Johny from House to office and returns for traveling is allowable as business
expenses.
6. loss due to the doubtful debt of 30000$ is treated as a doubtful one.
7. Business lunches are allowable since they have a direct link with the business.
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Taxation law
References
Barcokzy, S 2010, Australian Tax Casebook, CCH Australia Ltd
Fullerton,I.G, Deutsch, R, Friezer, M.L, Hanley,P & Snape, T 2017, The Australian Tax
Handbook Tax Return Edition 2017, Thomson Reuters: Australia
Fullerton,I.G, Deutsch, R, Friezer, M.L, Hanley,P & Snape, T 2017, The Australian Tax
Gilders, T & Walpole, B.C 2016, Understanding Taxation Law 2016, LexisNexis
Hopewell, L 2012, Australia tax inquiry opens submissions, viewed 12 September 2017,
www.zdnet.com.au.
Kenny, P, Blissenden, M, & Villios, S 2017, Australian Tax 2017, Thomson Reuters: Australia
Khadem, S 2017, News Australia loses appeal in Federal Court on $15m tax bill, viewed 12
September 2017 http://www.smh.com.au/business/the-economy/news-australia-loses-appeal-in-
federal-court-on-15m-tax-bill-20170609-gwnz0b.html
Kobestky, M 2005, Income Tax: Text, Materials and Essential Cases, Sydney: The Federation
Press
Nethercott, L, Richardson, G & Devos,K. 2013, Australian Taxation Study Manual, Sydney.
Pratt, J. W & Kulsrud, W N 2013, Federal Taxation, Oxford university press.
Sadiq, K, Coleman, C , Hanegbi, R, Jogarajan,S, Krever, R, Obst, R, Teoh, J & Ting, A 2017,
Principles of Taxation Law 2017, Law book Australia
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