Tax Law HI3042 Assignment: Tax Deduction, Input Tax Credit, Offset

This document is a comprehensive solution to a taxation law assignment, addressing key issues in Australian tax law. The assignment begins by analyzing allowable tax deductions under ITAA 1997, evaluating whether various expenses, such as the cost of moving machinery, asset revaluation, legal expenses, and solicitor fees, are deductible. The solution then explores the Big Bank's ability to claim input tax credits for advertising expenditure, considering the Financial Acquisition Threshold (FAT) and relevant GST regulations. Furthermore, the assignment calculates Angelo's foreign tax offset, considering taxable income and tax paid to foreign authorities. Finally, the document determines the net income for a partnership business, considering assessable income, deductible expenses, and relevant legal provisions. The solution provides detailed explanations, references to relevant legislation and case law, and calculations to support its conclusions.

Taxation Law
HI3042
[Pick the date]
Student id

Question 1
Issue
The issue is to comment whether the given losses or expenses are allowable as tax deduction
under the provisions of s 8-1 of ITAA 1997.
Rule
The provisions of section 8(1), ITAA 1997 would be taken into account in regards to find the tax
deduction on the losses or expenses incurred in business process to generate assessable income.
The main factors are as listed below (Barkoczy, 2017).
 Losses would not be tax deductible if the “outgoing is of capital nature”
 Expenses or loss incurred in the process of deriving exempt income would not be tax
deductible (CCH, 2013).
 Expenses or loss incurred would not be tax deductible if the nature is domestic or personal
nature (Gilders et. al., 2016).
Application
1. “Cost of moving machinery for a new site”
Nature - outgoing is of capital nature and hence, would not tax deductible as per section 8(1),
ITAA 1997.
2. “Cost of revaluing the assets to effect the insurance cover”
Tax deduction in such cases would depend on the fact that whether the revaluing is being
conducted to enhance the income or not. This expense would lead to tax deduction only if the
revaluing of assets takes place to derive more income. On the other hand, when the revaluing of
asset is not frequent and conducted with the intention to preserve or protect the respective asset
then the expense would not be tax deductible.

Nature: Neither frequent not having intention to make more income and thus, it would not tax
deductible in accordance to section 8(1).
3. “Legal expense incurred by the company opposing a petition for winding up”
According to the judgment made in Snowden & Wilson Pty Ltd (1958) 7 AITR 308 case, when
the legal expenses directly affects the business operation of the company and would lead to
increase in the income, then in such cases the expense would be in capital nature and no tax
deduction is applicable under section 8(1).
Nature: Legal expense for opposing a petition for winding would be of capital in nature and
hence, tax deduction would not be valid.
4. “Legal expenses incurred for the service of a solicitor”
Expenses incurred on the legal advices especially for the improvement of business process would
be termed as revenue expenses.
Nature: It is apparent that legal expenses takes place due to the service of the solicitor with
respect to the number of matters, conveyancing and legal advice, mortgage would be of revenue
expense in nature. Therefore, this expense would be tax deduction as per section 8(1).
Conclusion
The final conclusion can be drawn based on the above analysis that expense in the first three
cases (cost of moving machinery, cost of revaluing the assets, and legal expense for opposing a
petition for winding) would not result in any tax deduction under section 8 (1), ITAA 1997.
Further, in last case, where the legal expenses are incurred for paying to a solicitor for his legal
advice, that would result inn tax deduction as per section 8 (1).

Question 2
Issue
The issue is to determine the Big Bank’s ability to claim for the input tax credits for its
advertising expenditure ($1,650,000).
Rule
One of the key considerations when claiming the input tax credit in relation to financial supplies
is to determine if there has been an exceeding of the FAT (Financial Acquisition Threshold) by
the concerned entity (Woellner, 2014). For determining the same, GST Act and in particular s.
189-5 and s. 189-10 are relevant. There is exceeding of the FAT if the input credit tax in relation
to the financial acquisition tends to be higher than either $ 150,000 or 10% of the total
entitlement of the input tax credits whichever is lower (Nethercott, Richardson and Devos,
2016).
If an entity manages to satisfy the FAT test by not crossing the threshold limit, then claim on full
GST credits is possible. However, if the entity fails to pass this test, then full credit claim cannot
be entertained (Deutsch et. al., 2016).
Application
It is noteworthy that acquisition involving input taxed supplies related to deposit facilities along
with loans will not be treated as creditable acquisition. Also, acquisitions in relation to taxable
supplies making (for instance contents insurance along with home) are considered as creditable
acquisitions. As a result, the advertising spending in relation to the home and contents insurance
is creditable which implies the availability of input tax credits to the extent of $ 50,000. Also, it
is apparent that the entity i.e. Big Bank would most certainly fail to satisfy the FAT limitation.
With regards to general advertisement, a fair method of apportionment is required. For instance,
a 2% expenditure could be classified as taxable supplies while the left over 98% can be classified
as input tax credit in line with the given expectations. Thus, the input tax credit of $ 2,000 would
be available.
Conclusion
Based on the above discussion, it is apparent that the Big Bank would be entitled to input tax
credit of $ 2,000 with regards to general advertising.
Question 3

Issue
The issue is the computation of the taxpayer Angelo’s foreign tax offset based on the give
information.
Rule
Australian tax authority has provided the levy to the taxpayer to claim for the foreign tax offset
in Australia, when the taxpayer has generated the foreign income and has paid the relevant tax
amount to the tax authorities located abroad (CCH, 2013). This provision is used to avoid the
burden of double tax on the taxpayer and to ensure that the taxpayer is liable to pay the tax on his
foreign income only once (Woellner, 2014).
The two main conditions that must be satisfied to claim foreign tax offset are highlighted below
(Sadiq et. al., 2016):
 It is essential that the taxpayer should already have paid the tax on the foreign income to
foreign tax authorities.
 It is imperative that the nature of the foreign income on which the taxpayer has paid the tax
in foreign land would be assessable in Australia.
When these two conditions have been satisfied by the taxpayer, then the taxpayer has the rights
to claim for the foreign tax offset in Australia. It is also imperative that the taxpayer is only liable
to claim for the foreign tax offset based on the “foreign tax offer limit (Barkoczy, 2017).”
Application
Computation of foreign tax offset for taxpayer Angelo based on the given information is
highlighted below:
 Taxable amount in Australia

 Amount deducted from total income in Australia
 Taxable income after respective deduction
 Total expense that would be deductible from taxpayer’s foreign income

*Gift is not considered an assessable income in Australia.
** Taxpayer Angelo does not have permanent place of abode in foreign land and hence, debt
deduction in UK would not be considered.

It can be seen that Angelo has made the tax payment of $4,400 to foreign tax authority. Further,
the foreign tax offset limit is $7,797, it means the paid tax to foreign tax authority is lower than
the tax offset limit and therefore, taxpayer Angelo is liable to claim for the foreign tax offset of
$4,400 in Australia.
Conclusion
Based on the above computation, it can be concluded that taxpayer Angelo’s foreign tax offset is
$4,400.

Question 4
Issue
The issue is to determine the net income for the partnership business of Johnny and Leon for the
given financial year.
Rule
In regards to determining the net income for the partnership business, it is essential to find the
nature of the income. Assessable income and respective deductible expenses need to be
determined under the provision of various laws (Barkoczy, 2017).
Application

Amount of exempt income cannot be taken into account here. Further, the derived capital gains
would be distributed between the partners of the firm.
There are some imperative point needs to be taken into account are as given below:
 No deduction in the current financial year because the incurred loss of the partnership firm
gets balanced in the last year through individual partner’s accounts.
 As per section s. 25(35), ITAA 1997, the bad debt would not be deductible.
 Meal expenses would not be tax deductible only if it is not considered as meal fringe benefits
tax.
 As per section 8 (1), the legal expenses in the enactment of contracts would be of capital
nature and therefore, would not be tax deductible.
 Interest amount on the capital of the respective partner and the paid salary amount would not
be tax deductible.

Net income of the partnership firm would be given below:
Net income=Total income−Total deductions
¿ $ 446,400−$ 100,700
¿ $ 345,700
Conclusion
The net income of the partnership firm would be $ 345,700 for the given financial year.

Reference
Barkoczy, S. (2017), Foundation of Taxation Law 2017, 9thed., 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. (2016), 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
Sadiq, K, Coleman, C, Hanegbi, R, Jogarajan, S, Krever, R, Obst, W, and Ting, A
(2016) , Principles of Taxation Law 2016, 8th ed., Pymont:Thomson Reuters
Woellner, R (2014), Australian taxation law 2014, 7th ed., North Ryde: CCH Australia