Taxation Assignment: Income, Deductions, and Tax Offsets Analysis

This taxation assignment analyzes several key areas of Australian tax law. Question 1 examines the deductibility of various expenses under s. 8(1) of the ITAA 1997, differentiating between capital and revenue expenses, and the impact of the underlying purpose of the expense. Question 2 focuses on GST input tax credits, particularly in the context of advertising expenditure and financial supplies, considering the Financial Acquisition Threshold (FAT). Question 3 addresses foreign tax offsets, calculating Angelo's taxable income, foreign income, and the application of foreign tax offset limits to prevent double taxation. Finally, Question 4 determines the net income of a partnership firm, identifying assessable income, non-deductible items such as bad debts and partner salaries, and the overall net income calculation.

TAXATION
ASSIGNMENT
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Question 1
Issue
The core objective of the question is to determine whether the outgoings or expense in either of
the given circumstance would be considered as leading to tax deduction on the basis of “s. 8(1),
ITAA 1997.”
Relevant Law
In relation to claiming general deductions for business, “s. 8(1) ITAA 1997” is found relevant. In
accordance with this, for outgoings in the form loss of expense deduction are available provided
the expense is related to assessable income production (Barkoczy, 2017). Further, another key
condition is that the outgoings or expenses should be of revenue nature and not capture or else
they would not lead to any deductions under s. 8(1). Besides, any outgoings or expense related to
exempt income production will not lead to tax deduction (Gilders et. al., 2016). Also, if the
expense relate to private reason i.e. not related to business, then such an expense or outgoing will
not give rise to tax deduction (Sadiq et. al., 2016).
Application
1) The expense incurred for site changing of the machine would be capital outgoing which
would not lead to tax deduction as it would lead to incremental machine cost and higher
depreciation expense in the future.
2) The revaluation cost tax deduction would be governed by the underlying reason. In the given
situation, this is for insurance and hence asset preservation seems to be the purpose which
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provides this expense a capital nature and hence makes it non-deductible under “s.8(1), ITAA
1997.”
3) Just as in revaluation, for legal expense also, the underlying purpose is critical. For the given
situation, the legal advice is in relation of winding up proceeding and hence deals with
preserving the company or asset. Hence, this expense is not revenue nature and hence makes
it non-deductible under “s. 8(1), ITAA 1997.”
4) Here the reason for underlying legal expenses relates to business operations which cannot be
segregated from other purposes and as a result, the underlying solicitor fee would be treated
as an expense of revenue nature which would be deductible under the aegis of “s. 8(1) ITAA
1997.”
Conclusion
Except in the case, where solicitor fee expense is for business operations, for all other situations
the expense is capital due to which no tax deduction can be availed under the aegis of “s. 8(1)
ITAA 1997.”
Question 2
Issue
Taking into consideration the advertising expenditure of the Big Bank, it needs to be ascertained
as to how much input tax credits may be claimed in relation to the GST paid.
Relevant Law
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In the context of financial supplies, the underlying claim in relation to the input tax credits is
essentially linked to the FAT (Financial Acquisition Threshold) and whether it is breached or not
by the concerned entity. The definition of FAT is provided by relevant provision “(s. 189(5)) of
the GST Act, 1999” as per which FAT would be the lower value out of 150,000 or the 10%
“total input tax credits” (CCH, 2013). The FAT is breached when the input credit tax tends to be
greater for the entity under consideration. Full GST credits claim is permissible only when the
threshold is not breached by the reporting entity or else the only partial GST credits claim may
be entertained (Woellener, 2014).
Application
It is critical to understand the meaning of creditable acquisitions in the context of the given
situation as only taxable supplies such as spending related to “home and content insurance”
would be considered. Hence, in the given scenario, the spending for advertisement which relates
to the insurance (home and contents) would be considered as creditable. This leads to $ 50,000
worth of input tax credit being available which in turn would lead to breaching of the FAT
threshold value for the Big Bank. The breakup of general advertisement needs to be made
keeping in consideration the split of revenue. Hence, taxable supplies would make up only 2% of
the expenditure that relate to the spending related to “home and content insurance”. Hence, the
respective input tax credit ($ 2,000) will be taken into consideration. Further, the present input
tax credits on the account of advertising will not be decreased.
Conclusion
Hence, it will be appropriate to conclude that on account of advertising the availability of input
tax credit would not be reduced and also $ 2,000 worth of input tax credit is available.
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Question 3
In the present case, the main focus is to find “foreign tax offset for the respective taxpayer
Angelo.
According to the Australia tax law, the taxpayer who is receiving foreign income i.e. income
arising from foreign sources would be in the position to claim the foreign tax offset in Australia
on the amount of the tax which he/she has already paid on their international income to foreign
tax authority (Sadiq et. al., 2016). This ruling is used in order to prevent the double taxation
burden on the taxpayer. It means the taxpayer is accountable to pay the tax on earned
international income only once (Deutsch et. al., 2016).
The taxpayer can claim for foreign tax offset in Australia only when the given two conditions are
satisfied (Nethercott Richardson and Devos, 2016).
 Taxpayer has already paid the requisite tax on the amount of earned foreign income to
“foreign tax authority.”
 The amount of income on which the taxpayer has paid the tax to foreign tax authority must
be classified as assessable income for tax purposes in Australia.
It is essential to note that the total amount of foreign tax offset would be determined by taking
the effect of foreign tax offset limit (Sadiq et. al., 2016).
Computation of total taxable income of Angelo in Australia
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Taxable income of Angelo = $62,000
It is apparent that medical expenses are not tax deductible and therefore,
Medical levy can be determined as given below.
Medical levy = 2% of Total gross income of Angelo = 2% * 62000 = $1,240
Income tax that needs to be paid by Angelo in Australia =3572 + (62000-37000)* 0.325 = $
11,697
The amount of tax payable on the part of Angelo in Australia = 1240 + 11697 =$ 12,937
The total amount that would be deductible from the total income of Angelo in Australia
Income from employment during work in United State = $12000
Income from employment during work in United Kingdom = $8000
Income from the rent in United Kingdom =$2000
Income from dividend from United Kingdom = $1200
Total interest amount from United Kingdom = $800
Total amount that would be deductible = (12000+8000+2000+1200+800) =$24,000
The amount of taxable income after considering tax deduction
Total gross income of Angelo =$68,000
Total amount that would be deductible = $24,000
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Taxable income = Total gross income of Angelo - Total amount that would be deductible =
68000-24000 = $44,000
The amount of total expense that needs to be deductible from Angelo’s international income
Total expense resulted from the employment in United States = $900
Total expense resulted from the rental income in United Kingdom = $500
Gift as a deductible gift recipient = $400 (This amount cannot be considered under total expense
of Angelo)
Interest resulted in the process of deriving the dividend income of Angelo =$140 (This amount
cannot be considered under total expense of Angelo)
Expenses resulted in the process of deriving the interest income = $60 (This amount cannot be
considered under total expense of Angelo)
Total amount of total expense of Angelo = $900+$500 = $1,400
Computation of foreign tax offset for taxpayer Angelo
The amount of assessable income of Angelo after excluding the international income = $44,000
The respective allowable deductions = $6000 - $1400 = $4,600
The amount of taxable income of Angelo after considering the income from Australia and also
the deductions = $44000 - $4600 = $39,400
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Amount of tax which needs to be paid by Angelo = $3570 + (39400-37000)* 0.325 = $4,352
Amount of Medicare levy = 2% of the amount of taxable income of Angelo = 2%* 39400 = $788
Total taxable income needs to be payable by Angelo = Amount of tax which needs to be paid by
Angelo+ Amount of tax which needs to be paid by Angelo = $4352 +78 = $5,140
Total foreign tax offset limit = The amount of tax payable on the part of Angelo in Australia -
total taxable income needs to be payable by Angelo = $12937 - $5140 = $7,797
Foreign tax paid by Angelo = $4,400
It is apparent that Angelo has paid $4,400 tax on her international income to foreign tax
department. However, the foreign tax offset limit for Angelo has come out to be $7,797.
Therefore, the final conclusion can be made that the computed value of “foreign tax offset limit”
is more than the tax payment made by taxpayer to the overseas land. Hence, Angela can demand
for the foreign tax offset ($4,400) in Australia (Gilders et. al., 2016).
Question 4
In this task, the objective is to find the net income of partnership firm run by partners Johnny and
Leon.
Computation of assessable income and tax deductible for partnership firm
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The exempt income would not contribute into the assessable income of the firm. Also, the
received capital gains will be equally shared between Johnny and Leon (Barkoczy, 2017).
The major aspects related to the tax deductions are highlighted below:
Under “section 25 (35), ITAA 1997” the value of bad debt is not the part of deduction. Further, it
has been assumed that the “meal is not termed as meal fringe benefit” and will not be part of
deduction. Under “section 8(1), ITAA 1997” the legal expense or legal fee paid would not be
considered for tax deduction (Woellner, 2014). Also, any last year loss would not be liable for
tax deduction because they already offset against the capital gains of the individual partners in
last income year. Further, the salary paid to the partners will also not be the part of tax deduction
(Sadiq et. al., 2016).
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The value of net income is “$ 345,700.”
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References
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
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