HI3042 Taxation Law T2 2017 Assignment: Deductions & Credits

This document provides a comprehensive solution to a taxation law assignment (HI3042) from T2 2017, covering key aspects of Australian taxation. The solution addresses four key questions. Question 1 examines the deductibility of various business expenses under s 8-1 of the Income Tax Assessment Act 1997, including costs of moving machinery, asset revaluation, and legal expenses. Question 2 determines the input tax credit claimable by a bank based on advertising expenditure and GST. Question 3 calculates the foreign tax offset for a taxpayer, Angelo, considering foreign tax paid and offset limits. Finally, Question 4 calculates the net income of a partnership firm, Johnny and Leon, considering assessable income and allowable deductions. The solution provides detailed explanations, calculations, and references to relevant tax laws and case precedents.

HI3042 Taxation Law
T2 2017 Assignment
STUDENT ID
[Pick the date]

Question 1
Issue
The central issue in the present case is to comment on the nature of the given losses or expenses
and to decide whether these would be allowable as deductions under s 8 – 1 of Income Tax
Assessment Act 1997.
Rule
Section 8 – 1 ITAA 1997, describes various factors that would be taken into consideration in the
process of deciding whether the loss or expenses occurring in the given business operations
results in tax deduction for the business or not (Barkoczy, 2017). When the loss is of “capital
nature”, then it would not be considered for tax deductions. Losses or expenses which occur to
derive exempt income would also not be considered for tax deductions. Also, loss or expense
that is of private nature or for domestic purposes would not be tax deductible (Gilders, et. al.,
2016).
Application
1. “Cost of moving machinery for a new site”
It is apparent that cost occurs for moving machinery from one site to another side is an outgoing
capital expense. Therefore, it is not tax deductible.
2. “Cost of revaluing the assets to effect the insurance cover”
Cost involved in revaluing the asset would be mainly incurred for the two reasons. One reason is
to increase the total assessable income. In this case, the cost would lead tax deductions as per s 8
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(1) ITAA 1997. On the other hand, if revaluing of the asset is created by the concerned party in
order to protect the assets and not to make more money, then in such cases, the cost involved in
revaluing would not be liable for tax deductions. In present case, it can be seen that revaluing of
asset is not continuous and also not to make profit. Therefore, this cost is not tax deductible.
3. “Legal expense incurred by the company opposing a petition for winding up”
According to the highlights of Snowden & Wilson Pty Ltd (1958) 7 AITR 308 case, when legal
expense occurs to improve the business of company and to make more income, then in such case
the expense would lead not lead tax deduction because they become capital nature outgoings. In
present case, legal expenses would not be deductible allowance.
4. “Legal expenses incurred for the service of a solicitor”
When company paid fee to solicitor for their services which involves legal advice on general
operations besides other purposes would be considered as revenue expenses. Further, revenue
expenses would be considered for tax deduction. Hence, it can be said that legal expense is tax
deductible under this section.
Conclusion
From the above discussion, it can be concluded that costs incurred in moving machinery and
revaluing or asset and expense incurred on legal expense for petition of winding would not lead
to tax deduction. However, the expense incurred as a fee offered to solicitor would amount to tax
deduction as per section 8 (1), ITAA 1997.
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Question 2
Issue
The input tax credit that can be claimed by Big Bank based on the advertising expenditure
related GST payment needs to be determined.
Relevant Law
An essential consideration relevant to ascertain the claim making ability of input tax credits for
financial supply is the Financial Acquisition Threshold (FAT). If the firm exceeds the firm, then
full credits cannot be claimed or else full credits can be claimed. For determination of FAT, GST
Act (s. 189(5), s. 189(10)) is quit helpful. It defines the FAT as the lower of the two values i.e.
10% of the total entitlement of the total input tax credits or $ 150,000 (Nethercott, Richardson
and Devos, 2016). Acquisitions that tend to involve input taxed supplies in the context or loans
or deposit facilities fail to be recognized as creditable acquisition. On the other hand, acquisitions
that tend to lead to taxable supplies i.e. involving home and content insurance are recognized in
the form of creditable acquisition (Barkoczy, 2015).
Application
In line with the relevant rule highlighted above, the insurance (home and content) related
spending on advertisement would be creditable and hence lead to input tax credits of $ 50,000
being available. Further, the FAT threshold would be crossed by the bank and thus for general
advertisement, it is recommended that apportionment needs to be carried out in a fair manner.
One manner to do that same is to rely on the estimate of 2% dedicated to insurance and hence
this would generate taxable supplied unlike the remaining 98% of the expenditure.
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Total advertisement expenditure (excluding GST) = $ 1,000,000
Spend on insurance = 2% of 1,000,000 = $ 20,000
Conclusion
Hence, $ 2,000 worth of input tax credit is left available. However, the reduced input tax credit
related to advertising would be zero.
Question 3
Issue
The objective is to determine the foreign tax offset for the taxpayer Angelo.
Rule
According to Australian tax law, the taxpayer is liable to pay the tax on his/her foreign
(international) income only once. It means if the concerned taxpayer has paid the tax on
international income to the government of foreign country, then it is not essential that he/she
needs to pay the tax on international income in Australia (Barkoczy, 2017) . This process is used
to avoid or prevent the double taxation. In such cases, when the taxpayer is filling the tax, form
would be offered to claim for the foreign tax offset against the tax which the taxpayer has
already paid in foreign land (Deutsch, et. al., 2016).
Taxpayer can claim for foreign tax offset only if the two given aspects are satiated by taxpayer
(Barkoczy, 2017).
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 It is pre-requisite in foreign tax offset claim that taxpayer has already made the payment
of tax on foreign income to foreign authorities.
 The income on which the taxpayer has made the tax payment must be tax assessable in
Australia under tax law.
Further, the determination of actual foreign tax offset would be determined as per the foreign tax
offset limit. This is the threshold limit of claiming the foreign tax offset. The taxpayer cannot
claim the foreign tax offset higher than this limit (CCH , 2013).
Application
Calculation of foreign tax offset for Angelo for current year
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From the above analysis and computation, it can be seen that foreign tax paid by Angelo is
$4400 and the foreign tax offset limit is $7,797. The amount paid by Angelo is lesser than
foreign tax limit. Therefore, she has $4400 foreign tax offset that can be claimed by her in
Australia.
Conclusion
The foreign tax offset of Angelo is $4400 for the current tax year.
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Question 4
Issue
The objective in this case is to calculate the net income of Johnny and Leon’s partnership firm.
Rule
The net income would be the difference between the total assessable income and total deductible
expense. Therefore, the major step is to find the assessable income and deductible expenses for
the firm based on the applicable sections (Sadiq, et al., 2016).
Application
Assessable income
Exempt income would not be the part of assessable income because if the firm generates capital
gains then this gain would equally be distributed between the partners.
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Factors essential to considered before the determination of tax deductions are as illustrated below
(Woellner, 2014):
 Incurred loss had already been cancelled in last financial year from each partner’s
account.
 Interest amount and salary paid would not liable for tax deduction.
 Bad debt would not amount to tax deduction under s. 25(35), ITAA 1997.
 Legal expenses would be outgoing of capital nature and therefore, no deduction is valid
as per s 8 (1), ITAA 1997 (Gilders, et. al., 2016).
Tax deductions
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Therefore,
Net income would be the difference between total assessable income and total tax deductions.
Net income ¿ $ 446,400−$ 100 , 700=$ 345 , 700
Conclusion
Based on the above computation, it can be concluded that the net income for the Johnny and
Leon’s partnership firm 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.
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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