Tax Law Deductions: Income, Expenses, Allowances and Implications

This assignment provides a detailed analysis of tax law deductions under the ITAA 1997, covering general deductions, capital expenditures, home office expenses, and foreign exchange implications. It examines the deductibility of expenses incurred for gaining assessable income, differentiating between capital and revenue expenditures. The analysis includes a discussion on travel expenses, computer costs, and seminar attendance, with reference to relevant sections of the ITAA 1997 and case law. Furthermore, it explores the conditions under which home office expenses can be deducted, distinguishing between genuine work offices and those established for convenience. The assignment also addresses the treatment of foreign exchange gains and losses, along with the deductibility of interest expenses, based on the usage of borrowed funds for generating assessable income. Desklib offers a platform to explore more solved assignments and past papers.

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DEDUCTIONS
STUDENT ID
[Pick the date]

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Question 1
a) General deductions are allowable under s.8(1) ITAA 1997 provided the expense satisfies a
minimum of the one of the following two positive limbs (CCH, 2013).
 Expense has been incurred for gaining assessable income
 Expense is an inevitable occurrence in the business process which is associated with
assessable income production
Also, it is essential that the expense must not be incurred in production or non-assessable
income. Further, it is imperative that the expense should not be of personal nature to be
eligible for deduction under s. 8(1) (Barkoczy, 2015).
Based on the amount of effort in terms of practice and travel put in by the lawyer, clearly this
seems to be more than hobby and it does seem that the intention is to gain income. Deduction
under s. 8(1) may not be possible in the given case considering the verdict in “FCT v Payne
(2001) 46 ATR 228 case” where it is made clear that when there are two income generation
activities, then general deductions cannot be made for both. However, despite the above case,
deduction under s. 25-100 still remains at option considering there is travel between
workplaces and none of them happens to be the taxpayers’ residence (Gilders et. al., 2016).
But for s. 25-100 to be applicable, it is imperative that the lawyer must derive some income
from the visits to the club. If no income derived, then the travel to the club cannot be
considered as travel to workplace (Deutsch et al., 2015).
b) It needs to be determined based on the given facts whether the computer and related travel
expenses need to be categorized as capital expenditure or for available for immediate
deduction.
If the expenses are of capital nature, then immediate deduction is not permissible and thus
under DIV 40, ITAA 1997 capital allowance is allowed to be deducted till the time there is
complete amortization of the expense. This deduction as per s. 40-25 would amount to the
decline in value experienced for the computer on an annual basis (Barkoczy, 2015). In
order to compute the decline in value, s. 40-65 provides choice between prime cost
method and diminishing value method.

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If there is a business cost, then subdiv 40(1), ITAA 1997 allows it to be categorized as
capital works in case the link with a depreciating asset can be proved. For the given case,
it is evident that the travel to US has been undertaken with the prime objective of buying
the computer and hence direct relation between the computer cost and travel cost is
established. Hence, the travel cost would also form part of the computer cost and hence
annual deductions would be available as there is decline in value (Nethercott, Richardson
and Devos, 2017).
If there is attendance of manager for the seminar, then the associated travel expense has a
relation with capital as well as income. In this case, only the money that is incurred on
seminar only would be deductible as per s.8-1. The residual expense for the trip to US would
form part of the computer related capital costs and provide annual deductions till value
becomes zero (CCH, 2013).
c) In case the taxpayer uses a house office for producing assessable income, then s. 8-1
allows deduction for occupancy expenses (rent, council rates, interest etc.) and running
expenses (utility costs, work related phone and internet cost etc.) provided the office
produces assessable income. (Nethercott, Richardson and Devos, 2017).
The house office may be established for only convenience or it may be a genuine work office.
The deductions available would be contingent on this classification. As per TR 93/30, the
following factors are significant for a given home office to be recognised as genuine (Gilders
et. al., 2016).
 A house portion clearly marked as place of business
 Non-usage of this place of business for private use
 Exclusive usage of house portion for business only
 Using the house portion for client meetings
In case of Adrian, all the parameters listed above are clearly not satisfied, hence it would be
appropriate to term the given house office as convenience related only. Thus, running
expenses are deductible to the extent that they are used for the work in the form conference
paper writing, assignment and exam paper marking. However, no deduction for occupancy

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expenses can be availed since it does not constitute a genuine work office for Adrian
(Deutsch et. al., 2015).
d) The foreign exchange related gains and losses are considered for assessable income
computation (s. 6(5), ITAA 1997) and also serve as allowable deduction (s. 8(1), ITAA
1997) provided the above transactions have a revenue nature. The key aspect to be
considered in the given case is to determine if the arising foreign exchange losses are
related to work or private in nature.
The general deduction under s.8(1), ITAA 1997 hold only when the expense or loss can be
related to an activity which could lead to gaining of assessable income (CCH, 2013). Thus,
for the situation at hand, if a relationship between the foreign exchange loss and
production of assessable income may be highlighted, then it would be possible for the
taxpayer to claim deduction for $ 75,000 loss. However, any private transactions related
losses cannot be claimed in line with Division 775-30 (Barkoczy, 2015).
With regards to interest expense related deduction, it would be dependent on the borrowed
funds usage by Daniel. If Daniel can establish that the borrowed funds were utilised in
generation of assessable income, then s. 8(1) deduction would be applicable for interest
amount of $ 20,000. The fact that loss has been incurred does not impact interest deduction as
expense as per the tax ruling TR 2004/4. However, in the event of the underlying transaction
being labelled as private, then interest cost is non-deductible for the purposes of tax (Gilders
et. al., 2016).

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References
Barkoczy, S. (2015), Foundation of Taxation Law 2015, 7th ed., North Ryde: CCH
Publications
CCH (2013), Australian Master Tax Guide 2013, 51st ed., Sydney: Wolters Kluwer
Deutsch, R., Freizer, M., Fullerton, I., Hanley, P., and Snape, T. (2015), Australian tax
handbook 8th ed., Pymont: Thomson Reuters,
Gilders, F., Taylor, J., Walpole, M., Burton, M. and Ciro, T. (2016), Understanding taxation
law 2016, 9th ed., Sydney: LexisNexis/Butterworths.
Nethercott, L., Richardson, G. and Devos, K. (2016), Australian Taxation Study Manual
2016, 4th ed., Sydney: Oxford University Press