Taxation Assignment: Deductible Expenses, GST, and Offset Calculations

This assignment provides a detailed analysis of taxation principles, focusing on deductible expenses under section 8-1 of the ITAA 1997, GST implications for businesses like Big Bank Ltd, and foreign tax offsets. The first part examines the allowability of various expenses, such as the cost of moving machinery, asset revaluation, and legal expenses, providing insights into their treatment for tax purposes. The second part delves into GST, specifically addressing the eligibility of Big Bank Ltd to claim input tax credit on advertising expenditures and the relevant conditions. The final part covers foreign tax offsets, illustrating the computation of assessable income and the application of foreign tax credits with examples. The assignment covers topics like employment, rental, dividend, and interest income from multiple countries.

TAXATION

Taxation
Answer to 1
According to section 8-1 of the ITAA 1997, deductible expenses are the one that is incurred
either while earning the assessable income or while functioning a business that can assist in the
attainment of such assessable income. Further, deduction of these expenses is not allowable as a
deduction that is private or capital in nature, or the expenses that are in association with the
attainment of exempted income.
i. In the case of cost of moving machinery to a new place, the same is related to brand
new machinery that is deported from the area of purchase to the site. Moreover, the
expense incurred here must be incorporated in the Machinery's capital cost and
therefore, it is deemed to be of capital nature. Therefore, such expenses must not be
allowable under the above-mentioned section 8-1 because they are of capital origin
and the given section does not allow such expenses. Further, adding up to such
expenses or allowability of expenses rely upon an asset’s nature whether it is an old
one or brand-new (Fullerton et. al, 2017). If the asset is brand new in nature, every
expense that is incurred up to the date of its utilization must be summed up to its cost
and it must become a part of the asset’s cost. For instance, commissioning,
installation, and transportation cost, etc. Besides, in the case wherein the expense is
incurred for deporting the old machine from the present location to a new location, it
must be deemed to be regarded as transportation cost and therefore, allowable as
deduction.
ii. In the case of revaluation of assets to effect insurance cover, it can be seen that the
expenses incurred for the assets’ evaluation in order to claim exemption are allowable
only if they are incurred for recovery of loss of gain, whether directly or indirectly
related to the assessable income. Besides, in relation to an insurance claim, two
scenarios can arise. Firstly, in relation to an asset for which insurance claim is
attained is of capital nature, this implies that the capital asset is wrecked and the claim
is mainly for the recovery of losses. Nevertheless, in such a scenario, the incurred
expenses for the recovery of insurance coverage must be subtracted from the original
insurance claim amount and the same must not be regarded as business expenditure.
Secondly, when the insurance claim is for attaining loss on assets that are directly
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Taxation
held as stock in trade, such assets cannot be regarded as capital assets and is therefore
directly associated with the assessable income being depicted in the financials.
Further, any incurred expenses for such purpose are allowable only as business
expenditures so that businesses can attain benefit from the same. Nevertheless, these
expenses must be shown in the profit and loss account and considered as expenses for
recovering the losses on the stock. On a whole, the expenses incurred for revaluation
of assets held as stock in trade can be allowed under 8-1 of the ITAA, 1997.
iii. As mentioned previously, under section 8-1 of the ITAA, 1997, it has been stated that
deductible expenses are either incurred while earning the assessable income or while
operating a particular business that plays the main role in generating such assessable
income. Furthermore, the deduction is not allowable of these expenses if they are of
domestic nature, capital nature, or nature in association with the attainment of
exempted income. A similar instance was held in the case of Newspapers Ltd v
FCT(1938) 61 CLR 337) where all losses and payments that include commission,
expenses of traveling, expenses and not in the nature of losses and capital outgoing
provided in gaining the income that is assessable. Therefore, in computing the
taxpayer taxable income, the overall income generated by the taxpayer shall be
considered.
Therefore, in the given situation, if such ideology is implemented, it can be stated that
the legal expenses that the company has incurred for tackling a petition for winding
up cannot fall under the purview of the said section. This is because it is not incurred
for earning an assessable income and it is not the expenses that are incurred
compulsorily to operate the business so that assessable income can be attained.
Furthermore, the paid expenses must also be verified in the light of the net amount
because bigger the figure, the more impossible it will be to treat such as business
expenses. However, since it is a legal expenditure that has been incurred for the
purpose of carrying on the business operation, it can be regarded as an expense that is
allowable under section 25-5.
iv. It can be observed in the given case that the solicitor account does not segregate the
expenses in relation to several matters and therefore, many legal expenses fail to be
divided into revenue or capital nature. Further, it has been assumed that the legal
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Taxation
expenses for each affair mentioned in the situation are incurred for the purpose of the
business itself. In addition, such expenses have been incurred for the purpose of
income recovery that must further become a relevant part of the assessable income
(Kobestky, 2005). Therefore, if the purposes are segregated, it can be stated that the
legal expenses that have been incurred for the discharge of mortgage can be regarded
as an expense of capital nature and hence, the same cannot be allowed under section
8-1 of the ITAA 1997. Besides, all other incurred expenses can be easily allowable as
deduction.
Hence, it can be concluded why the previously mentioned expenses are either allowable or
disallowable in the businesses.
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Taxation
Answer to 2
It can be witnessed from the given scenario that Big Bank Ltd is a bank that is registered under
the GST scheme and functions on a national basis. This can be supported by the fact that it
possesses more than fifty branches and pursues a massive ten-story office and other innumerable
call centers for addressing its customers. Nevertheless, Big Bank has been offering various
facilities to its customers that include safety deposit and offering of loans. Besides, the bank has
also launched its product that is associated with contents and home insurance policies and it is
considered as one of the significant initiatives in its business. However, the bank must take
adequate steps to alter its computerized accounting system because of the prevalence of GST
scheme that must be charged on every premium policy offered by it to its customers (Kenny et.
al, 2016). Moreover, the bank is also under an obligation to advertise and promote such new
initiative because it has already made every effort to proceed with enhanced force in the
insurance industry. Such effort also includes preparation of appropriate budgeting strategies and
promotion through platforms like print media, television, etc that can enable in paving out ways
for an effective future. Big Bank has expended an amount of $16,50,000 for the advertising
campaign of such new initiative wherein $550,000 has been expended for promoting the newly
launched product and the remaining amount for other requirements. Moreover, the advertisement
consultant has also offered an invoice amounting to $16,50,000 for its services. The similar
instance has been observed in the case of House of Lords in C & E Commrs v Redrow Group plc
where the issue consisted in claiming of the input tax on the commissions charged to it by the
agent services.
In relation to this, the input tax credit of the same must be available to the Bank because it is a
registered user under the scheme of GST. The business of Big Bank must be allowed the tax
credit of the amount paid on the invoice (advertising bill) because it is usual business
expenditure and it is incurred especially for the purpose of business only (Martin, 2001).
Besides, such expense cannot be capitalized because it is not a one-time expense and it will recur
in future. Further, the life of such expense is short in nature and therefore, it must not be summed
up or regarded as the company’s asset (Pratt & Kulsrud, 2013).
Nevertheless, whenever any business entity expends for an expense that has been incurred for the
purpose of its business and such expense also accommodates GST scheme, then such entity has
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Taxation
the complete right to claim the credit for the amount of GST paid on the bill. This claiming of
credit on GST is also commonly known as GST or input tax credit.
As per Sadiq et. al (2017) claiming of GST can be allowed if the given below conditions comply:
a. The expenses that are incurred for any purchase of items are exclusively for the intention
of business and not for personal utilization.
b. GST must be incorporated in the purchase price of the item.
c. There must be a valid consideration for the payment of item purchased.
d. The seller or supplier of such item must issue a tax invoice for such item and it must be
inclusive of GST.
The expenses that are incurred by the Big Bank is an enormous figure but still, it must be
allowed as an advertising expenditure, as it is significantly or exclusively incurred for the
purpose of promoting the business operations of the bank. Further, the company also has
complete authority to claim the entire input tax credit so that it can be utilized for addressing its
additional tax liabilities of GST. A similar observation was noted in the case of Polysar
Investments Netherlands BV v Inspecteur der Invoerrechten en Accijnzen, Arnhem (Case C-
60/90). The question that was put before the court of justice was that whether Polysar can be
considered as a taxable entity for the purpose of VAT and whether input tax credit charged on
costs will be claimable. The court of justice came with a judgment that a holding company
having a primary purpose of holding shares in the subsidiary company and exercising rights with
the same will not be a taxable entity for the purpose of VAT and the status did not alter because
it is under the ambit of the economic grouping (Martin, 2001). Hence, it came to the conclusion
that input tax will not be available.
Moreover, the payment made by the bank to the advertisement consultants comprise of $550000
that is apportioned to the advertisement, television, and $11,00,000 for other advertising media.
Hence, such expense will assist the bank to enhance its business affairs and it must be
approximately two percent of its entire business affairs. Thus, the remaining 98% of the business
affairs of the bank must accrue to the traditional bank's sources of income that are deposit
facilities and distribution of loan to various customers, and for which commission and interest
are charged respectively (Renton, 2005). Therefore, since all these scenarios comply in the case
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Taxation
of Big Bank Ltd, it is surely eligible to claim input tax credit on the invoice issued by the
advertising consultants (Hopewell, 2012).
Answer to 3
Whenever an individual attains income from a country wherein he is a usual resident and from
countries as well, then he has a right to go for the foreign offset of tax. Moreover, if such
individual has income from more than one country and he has incurred expenses for attaining
such income, he can offset such expenses only if the following conditions are satisfied:
a. Such individual has paid the foreign income tax from income generated from such
foreign country, which means that tax on such income has already been paid.
b. Such person has incorporated the foreign income in the net assessable income for
computing the total tax payable on income (Hopewell, 2012).
Computation of Assessable Income and Foreign Tax Offset:
Particulars Amount in AUD$
Employment Income from Australia
Employment Income from United States
Employment Income from United Kingdom
Rental income from property in the United Kingdom
Dividend Income from United Kingdom (assumed as grossed up)
Interest Income from the United Kingdom
Total Gross Income
Less: Expenses :
Medical Expenses
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
Interest on debt for deriving dividend income
44,000
12,000
8,000
2,000
1,200
800
68,000
5,000
4,000
900
500
400
140
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Taxation
Expenses on debt for deriving interest income
Total Taxable Income
Tax on Total Taxable Income
Add: Medicare Levy
Total Taxes Payable
Less: Foreign Taxes Offset
Net Taxes Payable
60
57,000
10,072
1,140
11,212
4,400
6,812
Notes:
 the income and expenses of domestic and foreign has been totaled
 where taxes are paid in a foreign country it has been allowed as a set off against overall
tax liability
 the figures are regrouped and totaled when done for the purpose of computation
 all amount are in Australian dollar
Answer – 4
The question pertains to the income and expenses allowability done by Johny and Leon. There
have been various alterations and events that have been done during the course of business. For
the purpose of computation, the figures are regrouped and tax rates are not assumed.
Partnership of Johny & Leon
Net income for the year ending
Income $
Sales of sporting Goods 400000
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Taxation
Bank deposits interest 10000
Dividend franked-60% (21000/60%) 35000
Recovery of bad debts 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 2000
Interest on Loan by Johny 4000
Travel Expenses Johny 3000
Legal Fees for renewal of Lease 2000
Legal Expenses 1900
Collection Expenses of debt 500
Council Expenses 500
Staff Salary (25000- 5000) 20000
Purchase of Sports Item 30000
Rent 20000
Loss on doubtful Debt 30000
Business Lunch expenses 10000
Loss due to theft of cash 3000
Total 171900
Gain from Partnership 314100
Less: Last year
Loss 40000
Balance Income 274100
Johny 50% 137050
Leon50% 137050
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Taxation
Notes:
1. profits are distributed in equality
2. Assumption is done at a Small Business entity (SBE).
3. Theft loss must be considered as a loss.
4. Adjustment of capital loss is done Capital Gain on shares disposal
5. Johny travel from House to office and returns have been allowed as business expenses.
6. Johnny’s son salary has been lessened by 5000$ as it exceeded the commercial rate allowable by
commissioner.
7. Closing Stock considered at lower of cost or realizable value.
8. doubtful debt of 30000$ (Loss on account) considered as loss of doubtful debt.
9. lunches expenses of business have been allowed as business expenses because it was for buyers
of business
10. previous year loss of 40000$ have been reduced from current year profits. It is assumed that
they have been carried forward this year.
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Taxation
References
Martin, D 2001 Input Tax Credits - The Core Mechanism of GST, viewed 11 September 2017
http://www.tved.net.au/index.cfm?SimpleDisplay=PaperDisplay.cfm&PaperDisplay=http://
www.tved.net.au/PublicPapers/
June_2001,_Sound_Education_in_GST,_Input_Tax_Credits___The_Core_Mechanism_of_GST.
html
Hopewell, L 2012, Australia tax inquiry opens submissions, viewed 12 September 2017,
www.zdnet.com.au.
Fullerton,I.G, Deutsch, R, Friezer, M.L, Hanley,P & Snape, T 2017, The Australian Tax
Handbook Tax Return Edition 2017, Thomson Reuters
Kenny, P, Blissenden, M, & Villios, S 2016, Australian Tax 2017, Thomson Reuters: Australia
Kobestky, M 2005, Income Tax: Text, Materials and Essential Cases, Sydney: The Federation
Press
Pratt, J. W & Kulsrud, W N 2013, Federal Taxation, Oxford university press.
Renton N.E 2005, Income Tax and Investment, 2nd edition, Sydney
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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