University of Canberra Taxation Law 2 Assignment Solution

This document presents a comprehensive solution to a Taxation Law assignment, specifically addressing Part B and C of the problem. It begins by identifying and discussing relevant legal issues, such as allowable general deductions under section 8-1 ITAA 1997, and the application of negative limbs regarding capital, private, or domestic expenses. The solution delves into the rules governing tax deductions, including those for trading stock, penalties, apportioned expenses, repairs, and travel costs. Furthermore, it examines the application of depreciation rules for depreciating assets and the deductibility of preliminary business expenses and self-education expenses. The document then applies these rules to a case study involving Rick, analyzing the deductibility of various expenses, including car parts, speeding fines, mortgage interest, window repairs, travel costs, welding machines, feasibility studies, and self-education costs. Finally, it concludes with a computation of Rick's total allowable deductions, taxable income, and tax payable for the year ended 2019/20, providing a detailed breakdown of the calculations. The document includes references to relevant legislation and case law, such as ITAA 1997, Ure v FCT (1981), and FCT v Softwood Pulp & Paper (1976).

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Authors Note
Course ID

1TAXATION LAW
Table of Contents
Answer to Part B:.......................................................................................................................2
Issues:.....................................................................................................................................2
Rule:.......................................................................................................................................2
Application:............................................................................................................................4
Conclusion:............................................................................................................................6
Part C:.........................................................................................................................................6
References:.................................................................................................................................8

2TAXATION LAW
Answer to Part B:
Issues:
Whether or not the taxpayer will be allowed to claim an allowable general deduction
under the legislation of “section 8-1 ITAA 1997”?
Rule:
As given in the positive limbs of “sec 8-1 (1)”, a person is permitted to get tax
deduction from their assessable income for any type of loss or outgoing till the extent that it
is occurred in producing the taxable earnings. Deduction for outgoing is allowed to taxpayer
when it is necessary occurred in conducting the business with the objective of generating the
chargeable earnings (Murphy 2019). On the other hand, under the negative limbs of “section
8-1 (2) ITAA 1997” an individual taxpayer is denied deduction when the outgoing or loss is
capital in nature or the expenses are private or domestic in type.
Accordingly, expenditure that are related with the purchase of trading stock are
permitted for deduction for the business under “sec 8-1 ITAA 1997”. Whereas under the “sec
26-5 ITAA 1997” a person is not permitted to claim tax deduction for the amount that is
payable by means of penalty within the Australian law or foreign law or an amount that is
ordered by law court to be paid for an offence against the Australian law (Woellner et al.,
2016).
There might be situation where the expenses are apportioned. Expenses are
apportioned that carries dual purpose (Barkoczy 2016). As noted in “Ure v FCT (1981)”
deduction for expenses are allowed till the extent that indicates in certain situations of loss or
outgoing which requires to be apportioned, in such a situation the loss or outgoing will be
considered partially deductible.

3TAXATION LAW
As per “sec 25-10 ITAA 1997” deduction is permitted for expenses that are occurred
on repairs to the premises or depreciating assets which is used for generating income. A
deduction for repair is allowed when there is a genuine need for restoring the asset
(Braithwaite 2017). While under “sec 25-10 (3)” is not permitted when the expenses are
capital in nature or the replacement of the entirety. An improvement which surpasses repair
especially changes in the character of original item are viewed as capital in type. As noted in
“FCT v Western Suburbs Cinemas Ltd (1952)” the law court denied deduction for repair of
a ceiling with the new material was not held as repair, even though the old materials was not
available.
Outgoing that are occurred for travel between home and regular place of work is not
allowed for deduction. As noted in “Lunney v FCT (1958)” deductions was denied by
commissioner to taxpayer for travel expenses because the outgoings were neither occurred in
producing the chargeable earnings nor it is occurred necessarily in conducting any business
for generating taxable earnings (Arnold, Ault and Cooper 2019). The travel expenses were
private in nature.
As per the “sec 40-25 (1)” a taxpayer is permitted to get deduction equivalent to the
sum of “decline in value” for the income year of depreciating asset which is held during the
year. As noted in “sec 8-1 ITAA 1997” loss or outgoing which is considered preliminary in
the start of business activity are not occurred during the course of income generating activity
are not allowed for deduction (Sadiq 2019). In “FCT v Softwood Pulp & Paper (1976)” a
feasibility study expenditure and other costs to ascertain whether or not to set up a new
production mill. The taxation commissioner denied deduction for costs by stating that the
expenses were not allowed for deduction because it was preliminary to the income producing
activity.

4TAXATION LAW
As per the “taxation ruling of TR 98/9”, a taxpayer is permitted to get deduction for
self-education where the outgoing is occurred in maintaining or increasing the skill of the
taxpayer in the occupation in which he or she is presently engaged (Morgan, Mortimer and
Pinto 2018). Deduction is particularly allowed when the expenses are occurred in improving
prospect of earning high income or promotion. In “FCT v Studdert (1991)” a deduction was
allowed to taxpayer to the flight engineer for the cost occurred in undertaking flying lessons
which would enhance the performance of taxpayer in the present job and improve his
prospect for promotion.
Application:
The case study of Rick provides that he paid $20,000 for car parts to use the same in
making sculptures. The sum of $20,000 has been classified as purchase of trading stock that
are permitted for deduction for Eric under “sec 8-1 ITAA 1997”. Whereas under the “sec 26-
5 ITAA 1997” Rick is not permitted to claim tax deduction for the amount that he has paid
for speeding fines by means of penalty within the Australian law (Robin and Barkoczy 2020).
The amount paid by Rick is ordered by law court to be paid for an offence against the
Australian law.
Rick paid a sum of $50,000 as interest on his home mortgage which takes up 10% of
the floor space in house for his studio. Referring to “Ure v FCT (1981)” Rick can claim a
partial deduction for mortgage expenses up to 10% of the total floor space which is used for
his studio purpose.
A sum of $800 was occurred by Eric to repair the broken window which he replaced
with a non-reflective anti-glass. A deduction for repair of window glass is allowed to Eric
since it is not a genuine need for restoring the asset. Referring to “FCT v Western Suburbs
Cinemas Ltd (1952)” the replacement of broken glass is an improvement since it changes in

5TAXATION LAW
the character of original item (Taylor et al., 2017). Therefore, under “sec 25-10 (3)” Rick is
not permitted deduction because the expenses are capital in nature and involves the
replacement of the entirety.
Rick also occurs a travel cost of $1,500 between his home and office. Referring to
“Lunney v FCT (1958)” the travel expenses of Eric is private in nature. Rick will be denied
deduction under “sec 8-1 ITAA 1997” because the outgoings were neither occurred in
producing the chargeable earnings nor it is occurred necessarily in conducting any business
for generating taxable earnings.
Rick also purchases an industrial quality welding machine for his work purpose that
costs $20,000 with a life span of 20 years. With respect to “sec 40-25 (1)” Eric is permitted
to get deduction equivalent to the sum of “decline in value” for the income year of welding
machine which is held during the year. To maximize the tax deduction prime cost method
should be followed by Rick.
Rick reports expenses on investigating the feasibility of starting a new business of
buying and selling old car parts that costs him $4,000. With respect to “sec 8-1 ITAA 1997”
the feasibility study expenses of $4,000 is considered preliminary in the start of business
activity which is not occurred during the course of income generating activity and hence it is
not allowed for deduction (Main 2019). Referring to “FCT v Softwood Pulp & Paper
(1976)” the feasibility study expenses is not allowed for deduction to Rick because it was
preliminary to the income producing activity.
Rick incurs expenses on self-education purpose for improving his business and
management skills. Referring to “FCT v Studdert (1991)” Rick will be allowed to claim
deduction for self-education expenses under “sec 8-1 ITAA 1997” because the expenses were
occurred by Rick in improving prospect of earning high income.

6TAXATION LAW
Rick is also found to be taking loan from Big Bank at 8% to help his sister in
purchasing home as she cannot home loan from bank. Her sister only paid 3% interest to
Rick. The interest on loan occurred by Rick is not allowed for deduction under the negative
limbs of “sec 8-1 (2) ITAA 1997” because the outgoing is private or domestic in nature. The
expenses has no relation with the income producing activities of the taxpayer.
Conclusion:
On a conclusive note, it can be stated that Rick’s total deduction stands $27,582 while
he is only permitted to claim deduction for purchase of sculptures, partial interest on his
home mortgage, and decline in value of machine and self-education expenses under the
positive limbs of “sec 8-1 ITAA 1997”.
Computation of Total Allowable Deduction
For the Year ended 2019/20
In the Books of Rick
Particulars Amount ($) Amount ($)
Purchase of Car parts 20000
Interest on Mortgage (10% of $50,000) 5000
Decline in value of Machine (1 month) 82.19
Self-Education Expenses 2500
Total Allowable Deductions 27582.19
Part C:
Computation of Taxable Income and Tax Payable
In the books of Rick
For the year ended 2019/20
Particulars Amount ($) Amount ($)
Assessable Income
Salary Income 1200000
Annual performance bonus 400000
Joining bonus 500000
Receipts from Sale of Sculptures 300000
Receipt of Award 50000
Australian sourced dividend income
Fully Franked (net) 70000

7TAXATION LAW
Gross up for franking credits 30000 100000
Interest from Sister on Loan 15000
Net capital gain on disposal of property
Proceeds 4700000
Cost Base
Add: Acquisition Cost 600000
Capital expenditure (Construction) 1200000
Total cost base 1800000
Gross capital gains (proceeds less cost base) 2900000
50% CGT Discount 1450000 1450000
Total Assessable Income 4015000
Allowable Deductions
Purchase of Car parts 20000
Interest on Mortgage (10% of $50,000) 5000
Decline in value of Machine (1 month) 82.19
Self-Education Expenses 2500
Total Allowable Deductions 27582.19
Total Taxable Income 3987417.8
Tax on Taxable Income 1767343.7
Add: Medicare Levy 79748.36
Less: Franking credits 30000
Net Tax Payable 1817092.01

8TAXATION LAW
References:
Arnold, B.J., Ault, H.J. and Cooper, G. eds., 2019. Comparative income taxation: a
structural analysis. Kluwer Law International BV.
Barkoczy, S., 2016. Foundations of Taxation Law 2016. OUP Catalogue.
Braithwaite, V. ed., 2017. Taxing democracy: Understanding tax avoidance and evasion.
Routledge.
Main, J., 2019. Taxation: Buying or selling: beware the sting of GST. LSJ: Law Society of
NSW Journal, (55), p.73.
Morgan, A., Mortimer, C. and Pinto, D., 2018. A practical introduction to Australian
taxation law 2018. Oxford University Press.
Murphy, K., 2019. Procedural justice and the Australian Taxation Office: A study of scheme
investors. Centre for Tax System Integrity (CTSI), Research School of Social Sciences, The
Australian National University.
Robin and Barkoczy Woellner (Stephen & Murphy, Shirley Et Al.), 2020. Australian
Taxation Law 2020. Oxford University Press.
Sadiq, K., 2019. Australian Taxation Law Cases 2019. Thomson Reuters.
Taylor, J., Walpole, M., Burton, M., Ciro, T. and Murray, I., 2017. Understanding Taxation
Law 2018. LexisNexis Butterworths.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation
Law 2016. OUP Catalogue.

9TAXATION LAW