ACCT90016: Taxation for Business Decision Making Week 9

[¶13.13] Study questions – General Deductions

16. Tony Brown is a bank clerk and is married to Betty Brown, a history lecturer at a
university who specialises in ancient Egyptian history. In July 2007, Tony resigned from his
job and started a new delicatessen business. He borrowed $700,000 from a bank at an
interest rate of 10% pa. The loan was repayable in 10 years. He used $600,000 of the
borrowings to purchase the goodwill and equipment of his new business. Tony loaned the
remaining $100,000 to his wife at an interest rate of 2% pa. Betty used $70,000 to renovate
her holiday home and the balance $30,000 to undertake a comprehensive field study of the
pyramids at Giza and a two-week intensive refresher course on Egyptian Pharaohs at the
Cairo Museum. She plans to use the information she gains from her overseas trip to write a
textbook on the pyramids, which she hopes will be published commercially and prescribed
as a textbook at various universities. If this is the case, it is highly likely she will be
promoted. Betty has kept all receipts relating to her expenditure. As things turned out,
Tony’s delicatessen business was unsuccessful. After much deliberation, he decided to sell
the business in January 2018 at a substantial loss. The sale proceeds were not sufficient to
discharge his loan. As a result, he continues to pay interest on the borrowings. Advise Tony
and Betty of what deductions they may be entitled to claim.

Tony borrowed $700,00 from a bank at an interest rate of 10% pa.

600,000 Tony purchase the

goodwill and
equipment of his new
business

100,000 Tony loaned to his 70,000 Betty renovate her holiday

wife at an interest rate home
of 2% pa

30,000 Betty undertake a

comprehensive field study
of the pyramids at Giza and
a two-week intensive
refresher course on
Egyptian Pharaohs at the
Cairo Museum.

(1) Deduction of the business revenue:

Positive limbs:
a. Losses and outgoing: 600,000 purchase the goodwill and equipment of his business
– intentional
b. Incurred: (time) 2007,

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 ACCT90016: Taxation for Business Decision Making Week 9
c. To the extent: total
d. In: pre-business expenses, it is related to running the business
Negative limbs:
a. It is a loss or outgoing of capital.
It brings into existence an asset – pass enduring benefits test
Pass once for all test and pass profit making structure test

Non-deductible

(2) Interest expense:

Positive limbs:
a. Losses and outgoing: The sale proceeds were not sufficient to discharge his loan.
As a result, he continues to pay interest on the borrowings
b. Incurred: 2018
c. To the extent: 6/7
d. In: post-business expenses, Brown’s case & Placer Pacific’s case – deductible
Negative limbs:
a. Not private or domestic nature.

6/7 of the interest is deductible. Interest paid on borrowed funds is deductible if the
money was borrowed for the purpose of gaining assessable income. Although the funds
were used to acquire a capital asset, interest is not deemed of a capital nature

(3) Tony loaned to Betty:

70,000: non-deductible, private or domestic nature
30,000: self-education expenses, non-deductible, Betty plan to use the information she
gains from her overseas trip to write a textbook on the pyramids, which she hopes will
be published commercially and prescribed as a textbook at various universities. Write a
textbook is a new field of income producing activity (not normal activity as a history
lecturer).

(4) Interest expense: 3/10 is deductible. The money was borrowed for the purpose of
gaining assessable income.

Tony borrow 700k loan 600k for business, 100k for Betty

1. Loan interest expense 10%, (1) 1. (1) s.8-1, Munro case, de

interest in business (2) interest (2) s.8-1 Brown case, continually link
after business with assessable income- de
2. 100k loan to Betty @ 2% 2. s.8-1 to the extend (Ronpibon Tin NL)
“ure”- de

3. $600k to purchase: (1) Capital asset, 1st element of CGT cost

(1) Goodwill of the business base
(2) Business equipment
(2) Depreciating assert div.40 capital
allowance

Sale of Deli business at a loss Capital loss, either offset against carrying

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 ACCT90016: Taxation for Business Decision Making Week 9

year capital gain or future capital gain –

more facts

Negative limb s.8-1 private use – not

Interest expense 2% on 70k loan used to deductible
renovate holiday home

Interest expense 2% on 30k loan to fund trip
to Egypt
Expenses (funded by 30k loan from Tony,)
incurred in relation to field study of the
pyramids at Giza and a two-week intensive
refresher course
70k renovate expense
[¶14.13] Study questions – Specific Deductions
Self-education expenses s.8-1, related in
current job? – deductible
First 250 denied? s. 82A ITAA36. – no, get
full deduction
s.8-1 relevant to her own job? Education
expense
1st element of CGT, cost base, not principle
home.

3. Trevor recently purchased an investment property that was in poor condition.

Before leasing the property to tenants, he renovated the kitchen and replaced the
front picket fence with a new brick fence. Can Trevor claim any deductions for
repairs in relation to these expenses?

No, under s. 25-10, the initial repair (it is in poor condition and the repair
occurs before leasing to tenants)  capital expenditure, cannot be deductible
(Law Shipping).
In real-life, he will just say that he spent some money to repair. So, ask him to
break down the renovation cost. It is necessary to find out if it’s replacement of
an item (depreciating asset, under div 40, deductible) or a structure
improvement (a new floor or ceiling, div 43, capital works). Cost base of CGT
asset, cost base of the rental property. If it is repairing the picket fence with
brick fence, then is structure improvement.

4. John recently borrowed $500,000 from a bank to purchase shares in BHP. The
loan is for a period of 20 years. To establish the loan, John was required to pay a
$2,000 fee to his bank. Advise John as to whether he can deduct the fee. Would
your answer be different if he used some of the borrowed funds to go on a holiday?

Borrowing expenses ($2000 fee) are not interest, negatively apply of s. 8-1.
BHP shares are deductible under s. 25-25, but not immediately, spread over
five years. Private expense not income producing, so using the money for a trip
is not deductible.

6. Swift Co is a large freight company. In the previous financial year, it billed one of
its customers $1,100 (inclusive of GST) for services that it had provided. Swift Co

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 ACCT90016: Taxation for Business Decision Making Week 9
has recently discovered that the client is experiencing financial distress and will not
be able to pay its bill. What action should Swift Co take from a tax perspective?

- Prove it is the bad debt: discovered customer is in financial difficulty, tried to

recover the debt.
- Write off the debt in the accounts: in the coming year
- Swift Co has included amount as accessible income in previous financial year
because it is an accrued tax payer, the income will be on accrued basis. Then
will need to perform COT or BCT (same or similar business test).

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