Tax Law Assignment: Analysis of Specific Deductions for Tax Law

This assignment provides a comprehensive analysis of specific tax deductions, focusing on the case of Derek Duffield, a self-employed electrician. The assignment addresses the tax implications of various expenses related to an investment property, including loan interest, legal fees, stamp duty, and repair costs (such as the replacement of an oven and electrical wiring). It delves into the taxability of depreciating assets like an electric generator, considering depreciation calculations and disposal consequences. Furthermore, the assignment examines car expenses, comparing the cent per kilometer method and the logbook method for calculating deductions. The analysis references relevant sections of the Income Tax Assessment Act 1997 and provides conclusions on the deductibility of each expense, offering a practical application of tax law principles.

Running head: SPECIFIC DEDUCTION
Specific deduction
Name of the Student:
Name of the University:
Author note:

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Table of Contents
Answer to question 1.......................................................................................................................3
Taxability of interest on loan.......................................................................................................3
Taxability on expenses................................................................................................................4
Taxability on oven.......................................................................................................................5
Derek’s labour.............................................................................................................................6
Electrical cable.............................................................................................................................6
Electric generator.........................................................................................................................6
Disposal of electric generator......................................................................................................7
Answer to question 2.......................................................................................................................8
Reference list.................................................................................................................................11

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Answer to question 1
Taxability of interest on loan
(1) Issue: Derek took a loan of $480000 to purchase a house and paid interest on loan of
$35000. He also rented the house to a tenant for $610 per week.
Law: According to the income tax rule if someone takes a loan to purchase a property
and paid interest on such loan can claim deduction if such property has been rented in
the year of income for which deduction has been claimed.
Conclusion: Yes, interest on loan is deductible in the hand of Derek as he took loan to
purchase a house and given it for rental purpose. But Derek cannot claim deduction if he
use the property for private purpose (Budak, James & Sawyer,2016).
(2) Issue: Derek paid legal fees, interest on loan and stamp duty charges of $6800 related to
the expense for procuring the asset.
Law: Under section 8-1 is a deduction section which covers deduction for expenses
incurred for income producing. In its positive limb it explains that anyone can deduct loss
from the assessable income up to an extent it incurred in producing the assessable income
in carrying a business for the purpose of producing assessable income. In its negative
limb one cannot take deduction of loss up to the extent when it is a capital loss in nature
or it is a loss of domestic nature, it is incurred while producing exempt income or any
provision prohibit for allowing deduction (Bundgaard, 2014).
Conclusion: So according to the section 8-1 Derek is allowed for deduction for his
expenses of $6800 on legal charges, interest charges and stamp duty chargess as these
expenses is incurred for producing income and is of revenue nature.

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(3) If interest expenses do not satisfy section 8-1 then deduction is not available as the
expense is of capital in nature. So all those expenses which Derek incurred are not
deductible under section 8-1(Chardon, 2014).
Taxability on expenses
1. Borrowing cost are those expenses that are directly incurred for taking loan of a property
which includes legal charges, loan charges, stamp duty expenses and many other costs
that lender requires to incur. Borrowing cost does not include expenses like interest
expenses and insurance premiums.
2. Expenditure incurred in borrowing money or discharge of mortgage is non-deductible
capital expenditure. The borrowing costs such as banks regular charges, fees for
establishment, valuation fees, stamp duty charges, and other fees required for taking loan
which are of capital in nature and not deductible under section 8-1(Chardon, Freudenberg
& Brimble, 2016).
3. According to the question if section 8-1 does not apply then to claim deduction under
section 8-5 following rules can be followed –
 One can take deduction from his assessable income of an amount that is allowed
to deduct.
 Under this section some act prevent the taxpayer to deduct the amount that could
be deductible or can limit the amount of deduction.
 Some deduction is deductible under this provision which is known as specific
deduction (Devos & Zackrisson,2015).
4. There are some condition applicable for deduction are as followed:

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 Ceased from deduction on interest expenses incurred prior to the commencement
of interest incurred after the income earned.
 Deduction of interest expenses where assessable income comprised of net profit
instead of an ordinary income.
5. Calculation of deduction under section 8-1 (25year x 365days ) + 1days = 9126 days
273days /9126 days x $6800 = $203.42
So Derek can claim for $203.42 as deduction in the current year.
Under section 8-5 Derek can take $272 as deduction in the current year which is $6800
deductible throughout the loan period or deduct $6800 for 5 year (whichever will be less
will be provided as deduction (Lanis & Richardson,2013).
Taxability on oven
1. Expenditure related to repair and maintenance make on the property is deductible
however repair must be related directly to wear and tear occurred for renting out the
property. As per the income tax rule replacement of the bathroom vanity will be
treated as repair as it is an expenditure of revenue nature caused due to wear and tear
while letting out the property.
2. Section 25-10 is the ruling provision section for repair. The three requirements
consist under this section are –
 One can deduct expenditure incurred for repair on the property or any part of the
property or any depreciable asset which was solely used or held for producing
income.
 Anyone holding or using the property for partly use of producing income can be
deductible up to the expenditure which is reasonable.

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 No capital expenditure is allowed as deduction under this section.
Derek’s labour
1. The work carried out by Derek for repairing electrical wiring is considered as repair
under section 25-10. Repairing of a rental property is always deductible as the
property continues to be rented or the property remains on rental for a short period or
unoccupied for a certain period.
2. According to the income tax act expenditure for repair made by the owner on the
property while the property is held for income producing. Even if the property is no
longer on rent then also the cost of repair is deductible. So Derek is entitled for
deduction of his own work (James, Sawyer, & Wallschutzky,2015).
Electrical cable
Derek’s oven repair is consider as repair as it is a of revenue nature and cost of electrical cable
of $300 is also deductible as it is a expenses for repair made by the owner in his rented
property.
Electric generator
1. Electrical generator is a capital asset and of capital nature on which taxpayer can
claim depreciation. One can take deduction for the amount equal to the value
declined for depreciation in a year for a depreciable asset.
2. In section 40-25 of the income tax act the steps required to satisfy the law relating to
the specific deduction are as follows –
 One can deduct the amount equal to the declined value of a depreciable asset for
an particular income year.

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 Taxpayer can reduce the deduction value by any part of the asset declined by the
value that is particularly used for that asset for the purpose of taxability.
 Taxpayer can make further reduction from the depreciable asset which was used
or installed to use for the taxable purpose.
 Taxpayer can reduce that part of leisure facility value that is used or installed to
use at the time when it does not constitute a fringe benefit or the taxpayer had no
use of the asset in the course of the business.
 Above three rules does not apply for depreciating asset of a low value pool.
3. Assets cost x days held /365 days x 100% / asset effective life
4. For 2017-18 = 32000*365/365*100% /4 = $8000
For 2018-19 = 24000*305/365*100% /4 = $5013
Disposal of electric generator
1. Cost price $32000, sold for $28000
Depreciation for 2017-18 is $8000 and for 2018-19 is $5013. So sales value should be
$ 18987(32000-8000-5013)
2. Under section 40-175 the cost of depreciation on plant consist of 2 elements which
are the initial cost of acquisition and the improvement cost. Cost of the plant includes
price of purchase, custom duty, installment cost and other cost involved in putting it
ready for use. Then the consequence of taxpayer if the sale value is greater than the
WDV then the taxpayer will earn capital gain while if the sale value is lower than the
WDV then the taxpayer will bear the capital loss (Joseph, 2014).
3. According to the income tax act when a capital gain or capital loss arises from the
selling or disposal of a depreciating asset arise only when the asset is been used for

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any non-taxable purpose. While calculating capital gain or capital loss for a
depreciating asset of a non-taxable asset using the concept of termination and cost
value under capital gain tax rule. Sometime a balancing adjustment event occurs on
depreciable assets.
Answer to question 2
(a) 400km travelling between home and Woolworth for buying groceries are personal
purpose they does not form the part of any deduction. While traveling between home and
office of 1400 km forms the part of deduction. Ben traveled total of 5300 km for both
official and personal. So total official km of Ben is 2800 km + 1700 km = 4500km. Ben
used 4500 km for official purpose for which he will get deduction on the direct cost as a
traveling expense for work purpose (Mackenzie & McKerchar,2014).
i) Section 28-12 is the relevant section that relates to the car expenses under income tax
act by following two rules that are–
 If the taxpayer owned or leased a car can deduct the car expenses for an amount
worked out using two methods.
 Taxpayer has to use one of the two methods unless an expectation applies if no
other method can be used to deduct anything for the car expenses.
ii) The two method that ben can used for calculating the deduction is –
 Cent per kilometer method: Under this method the taxpayer can claim 68% per
km from 1st July 2018 with a maximum of 5000 business km per car. Taxpayer
also needs to provide a written evidence to show how he calculated the official
kilometers. When the car is used for producing two separate income purpose then

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each can claim a maximum of 5000 official kilometers (James, Sawyer &
Wallschutzky, 2015).
 Logbook method: Under logbook method taxpayer claim are based on the
percentage of using car for official purpose and it include expenses like running
cost and depreciation cost but not the capital cost like purchase price or any
improvement cost. Taxpayer has to maintain a logbook and an odometer to
calculate the business kilometer percentage and has to maintain a written evidence
of all other expenses. Logbooks are mainly made for a minimum period of 12
weeks. Based on odometer record taxpayer can claim fuel cost also (Ting &
Ge,2014).
iii) Cent per kilometer method
Ben can claim 4500 km for official purpose under this method at the rate of 68 % per
kilometer. So his claim will be 4500 km *0.68 = $3060
Logbook method
As per logbook method a logbook has to be maintained for 12 weeks. So total cost is
$10000 and logbook showed 85 % of official use $10000*85% = $8500
iv) From the above two method it can be said that Ben can use logbook method which is
more benefited for him. While as the car allowance of $5000 per year will be include
in the assessable income of the Ben’s total income (van Gelder & Niels, 2013).
(b) Ben can claim deduction for using car that are owned, leased, or hired under this method
as described above. But taxpayers cannot claim any expenses relating to the car owned or
leased by someone else which includes the employer also. Considering the owner of the
car are eligible for claim if the car is owned by the Ben’s employer and the employer

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allowed ben to use the car for both work and private purpose then also Ben can claim for
deduction on the all the expenses that he made on the car for official purposes (Warren,
2014, January).

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Reference list
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from around the world. In The Complexity of Tax Simplification (pp. 1-10). Palgrave
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416-426.
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think they know)?. JASSA, (1), 42.
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Lanis, R., & Richardson, G. (2013). Corporate social responsibility and tax aggressiveness: a test
of legitimacy theory. Accounting, Auditing & Accountability Journal.

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Mackenzie, G., & McKerchar, M. (2014). Tax-aware investment management by public offer
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van Gelder, G., & Niels, B. (2013). Tax treatment of hybrid finance instruments. Derivatives &
financial instruments, July/August, 140-148.
Warren, N. (2014). A politically viable strategy for limiting personal income tax deductions: The
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