Q1.

A discussion whether the following are allowable deductions under the s 8-1 of ITAA97

(Income Tax Assessment Act of 1997).

Section 8-1 of ITAA 97 deals with general deductions from any entitys assessable

income as seen in the work of Smith and Richardson (1999). It states that one can deduct from

their assessable income any loss (or outgoing) to the limit that it is incurred in the process of

producing or gaining the assessable income or if its incurred necessarily in the course of

conducting a business for the sake of gaining a given assessable income. Its important to note

that division 35 of the same Act prevents entities from preventing losses from their non-

commercial activities that may lead to a loss getting offset against their assessable income.

In the same breadth, s 8-1(2) of ITAA97 advises against deducting loss or any form of

outgoing under this act to the extent that such as loss is;

i. Of capital nature

ii. Of domestic or private nature

iii. Incurred in the course of producing an exempt income, non-assessable non-exempt

income, or

iv. It touches on a provision of ITAA97 such as division 35 that prevents an entity from

deducting it.

According to subsection 20-A, if an individual receives any amount of indemnity, insurance

or other loss or outgoing recoupment that is deductible under this section, then such an

amount must be appropriately included in the assessable income.

a) The cost of moving machinery to a new site

The cost incurred when moving machinery from a given site to the other is classified as a

capital expense and should therefore not be classified as a deduction under s 8-1 of ITAA97.

Instead, the expense could increase the general cost of the machinery for the sake of calculating

depreciation

b) The cost of revaluing assets to effect insurance cover

The cost of asset revaluation for the sake of insurance cover is an expense related to fixed

assets in this case. The determination of the costs deductibility is appropriate in this case if the

expense is deemed to be a recurring one. Therefore, under s 8-1, this should be a deductable

item.

c) Legal expenses incurred by a company opposing a petition for winding up

In this scenario, deductibility would depend on whether the given expenditure is related

to the structure as well as income-generation capacity of the given organization or if such

expenditure relates merely to its operations. If the eventual outcome of the petition is the erosion

of the companys ability to generate income, then such an expense is considered a capital

expense. On the contrary, if the cases relate more to the clarification on the business operating

processes then it is regarded as revenue affecting one and is therefore covered by the s 8-1 of

ITAA97 deductibles.

d) Legal expenses incurred for the services of a solicitor in respect of a number of matters,

including conveyancing, discharge of a mortgage, and general legal advice relating to a

clients business operations. (The solicitors account doesnt separate the costs of the

various matters)
 Even though there s a general need for additional information on the nature of business

expenses, the fact that there activities being paid for are related to the business operation and are

recurrent means that they are not capital expenses. They are therefore deductable under s 8-1 of

ITAA97.

Q2.

In this scenario, Big Bank has certainly exceeded its Financial Acquisition Threshold

(FAT). All acquisitions that relate to financial supplies of both loan and deposit facilities

(otherwise known as input taxed supplies) would not in this case be regarded as acquisitions that

are creditable. On the other hand, all acquisitions relating to the making of taxable supplies such

as content and home insurance would be regarded as creditable acquisitions. This question

however concentrates on the treatment of the advertisement spend. The TV adverts for both

home and content insurance would be treated as creditable items. The input tax credit pegged at

$50,000 would be deemed available. When it comes to general advertising, it would be use a

reasonably fair methodology. One of the techniques would be the attribution of 2% of total

expenditure to cover the taxable supplies and the remaining 98% to cover input taxed supplies

thereby reflecting both the actual and forecasted business line split. This would end up leaving a

total input tax credit of about $2000. The scenario would leave no reduced input tax credit that

would be available for the sake of advertising.

Q3.

Angelo would calculate the foreign income tax offset limit as sown below;

Step 1: Tax on the A$62,000

 The first step would involve Angelo evaluating the amount of tax payable on his taxable

income. The tax on the A$62,000 (considering that all medical expenses are not tax deductible):

This would bring the tax payable on his taxable income to $12,627 (this amount includes the

Medicare levy).

Step 2: calculating the tax payable by Angelo if :

a) His assessable income excludes any amount in respect of the specific foreign income tax

paid as long as such a tax counts towards his foreign income tax offset as well as any other

applicable non-Australian source amounts are considered as shown in the table below;

Type of income Amount

Employment income gained in the US (A$)12,000

Employment income gained the UK (A$)8,000

Rental income gained from the UK (A$)2,000

Dividend income gained from the UK (A$)1,200

Interest income gained from the UK (A$)800

Total (A$)24,000
 Even though Angelo ahs clearly not paid any form of foreign income tax on his

employment income of A$8,000 gained from the UK, it is appropriately deducted

from his assessable income in this stage because it is deemed to be of a non-

Australian source.

b) Amy expenses relating to amounts that are included in his assessable income on which his

foreign income tax has been paid, as long as that tax adds up towards his foreign income tax

offset in this scenario, or to other amounts deemed to be of non-Australian origin and are all

considered to be all part of his assessable income with an express exclusion of his debt

deductions.
 Nature of expense Amount

Expenses that are incurred in the derivation of employment A$900

income from USA

Expenses incurred in the derivation of rental income from the A$500

UK

Total amount of expenses A$1400

Its important to note that the amount of debt collections of A$200 relating to the

UK dividend as well as interest income are never disregarded since Angela does not

have a permanent oversees address. This also applies to the A$400 thats for the gift

thats made to a deductible gift recipient which does not in any way relate to the

amount of excluded assessable income declared earlier.

Foreign tax paid Amount

Employment income gained from The US A$3,600

Dividend income gained from the UK A$120

Interest income gained from the UK A$80

Rental income gained from the UK A$600

Total foreign tax paid A$4,400

Calculations

Taxable income (while disregarding the amounts in A$44,000

 step 2a)

Less allowable deduction (while disregarding the A$4,600

amounts in step 2a) (Total Foreign Tax Paid+

Foreign debt paid-$4400+200=4,600)

Taxable income under with the necessary A$39,400

assumptions

Tax on A$39,400 comes to A$4,943

Next step: subtracting the two amounts in step 1 and 2 above

A$12,627 A$4,943 = A$7,684

This therefore, is Angelos foreign tax offset limit. Since he has paid a foreign tax

income of $4,400, Angelo is entitled to a full tax offset of the same amount.

Q4.

The solution to this question is illustrated in the table below;

The Equation used is as follows;

Net income of the presented business partnership= Total Assessable income-Deductions

Entry Amount

Assessable income calculation:

- sales: according to s.6-5 of ITAA97 A$400,000

- bank interest: A$10,000

- dividend: According to s.44 of ITAA36 A$21,000

- imputation gross up (A$21,000 * 30/70 * 0.6): According to A$5,400

s.207-20 of the ITAA97

- bad debt recovered: According to s.20-30 of ITAA97 A$10,000

- exempt income: not assessable: According to s.6-20 of -

ITAA97

- capital gain: This is treated as though it was as made by the -

partners individually according to s.106-5 of the ITAA97

Total Assessable income A$446400

Deductions calculation:

- sales proceeds that are stolen by their employee: According A$3,000

to s.25-45 of ITAA97

- partners salaries: that are not deductible: For Scott -

- FBT: Calculated according to s.8-1 of ITAA97 A$16,000

- interest on partners capital: are not deductible -

- interest on partners loan: are deductible and Calculated A$4,000

according to s.8-1 of ITAA97

- travel expenses of one partner (Johnny) between home and -

office: classified as a personal expenses and therefore not

deductible

- legal fees for office lease renewal: This is Calculated A$2,000

according to s.8-1 of ITAA97

- legal expenses for the preparation of partnership -

agreement: classified as capital expenses: ditto

- legal fees for new office lease: ditto A$700

- debt collection expenses: ditto A$500

- council rates: ditto A$500

- staff salaries (calculated as follows $25,000 5,000): A$20,000

Calculated according to ss.8-1 & 26-35 of ITAA97

- purchase of trading stock: Calculated according to s.8-1 of A$30,000

ITAA97

- rent on shop: ditto A$20,000

- provision for bad debts: this is not deductible until its -

written off: Calculated according to s.25-35 of ITAA97

- business lunches: This is not deductible if we assume that -

the expenses are not in any way subjected to FBT: Calculated

according to ss.32-5 & 32-20 of ITAA97

- excess of opening stock over the companys closing stock A$4,000

(calculated as $20,000 16,000): Calculated according to

s.70-35 of ITAA97

- net partnership loss last income year: This amount is not -

deductible, since the amount was attributed to the

partnership s last income year

Total Net Income (A$100700)

Net income of the presented business partnership(Total A$345,700

Assessable income-Deductions= A$446400- A$100700)

Net income of the presented business partnership (Total Assessable income-Deductions=

A$446400- A$100700) = A$345,700

Explanation for the various applicable ITAA97 provisions to the various

Various provisions of ITAA97 were used in answering this question.

s. 8-1 of ITAA 97

Section 8-1 of ITAA 97 that deals with general deductions from any entitys assessable

income was the most significant provision. As noted earlier, it states that one can deduct from

their assessable income any loss (or outgoing) to the limit that it is incurred in the process of

producing or gaining the assessable income or if its incurred necessarily in the course of

conducting a business for the sake of gaining a given assessable income. These provisions were

considered for various scenarios in the partnership its important to note that division 35 of the

same Act prevents entities from preventing losses from their non-commercial activities that may

lead to a loss getting offset against their assessable income. These were indicated as non-

deductable in the analysis.

In order to accurately preset the scenario, the following elements were excluded and were

considered as non-deductible under various sections of ITAA97;

i. Partners salaries-Scotts salary-$

ii. - interest on partners capital: are not deductible

iii. - travel expenses of one partner (Johnny) between home and office: classified as a

personal expenses and therefore not deductible

 iv. - legal expenses for the preparation of partnership agreement: classified as capital

expenses:

v. - business lunches: This is not deductible if we assume that the expenses are not in any

way subjected to FBT: Calculated according to ss.32-5 & 32-20 of ITAA97

vi. - net partnership loss last income year: This amount is not deductible, since the amount

was attributed to the partnership s last income year

They were deemed non-deductibles according to s 8-1(2) of ITAA97 that advises against

deducting loss or any form of outgoing under this act to the extent that such as loss is; Of capital

nature, ff domestic or private nature, incurred in the course of producing an exempt income, non-

assessable non-exempt income, or if It touches on a provision of ITAA97 such as division 35

that prevents an entity from deducting it (Woellner et al, 2011). As noted earlier, subsection 20-

A prescribes that if an individual receives any amount of indemnity, insurance or other loss or

outgoing recoupment that is deductible under this section, then such an amount must be

appropriately included in the assessable income.

The other sections of the Australian tax law that were applicable in this scenario were as

follows;

s. 20-300 of ITAA97

This section of the Australian Tax Code provides a table of all deductions for which

various recoupment are treated as assessable. In this scenario, all bad debts were treated as

assessable according to guidelines prescribed in s. 20-300 of ITAA97.

s.106-5 of the ITAA97

 This section provides an in-depth prescription of income tax assessment for partnerships.

It was used appropriately in the determination of the amount of assessable income that the

partnership had.

ss.32-5 & 32-20 of ITAA97

These two sections provide a prescription for the determination of amounts under the

concepts of Fringe Benefits Tax (FBT) and Income tax.

 References

Smith, D., & Richardson, G. (1999). The readability of Australia's taxation laws and

Supplementary materials: an empirical investigation. Fiscal Studies, 20(3), 321-349.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2011). Australian Taxation Law

Select: legislation and commentary. CCH Australia.