Taxation Law
Question 1
Issue
During the running the business, it can be seen that business have to face loss or expenses. In this, expenses are happened by the business owner at the time of making assessable income. The main issue, in this case, is to find out what losses or expenses are allowed by section 8-1 of the ITAA 1997 for the deduction.
Rule
The ITAA 1997 contain some general deductions in section 8.1. In regard to this, ITAA contains the core rules for deductibility of losses and outgoings. The general deductions are different from the specific deductions. In the other words, the term general deduction shows that loss in the business operation and these are deductible under the general principle of deductible. It is required to the loss or outgoing business provides and it also concerns the assessable income.
In addition, there are some general deductions that are needed to be considered for assessable income and loss under section 8-1 of ITAA 1997. On the basis of 8-1 of the ITAA 1997, it can be found which are allowable as deductions or not. The rule of the general deduction says that the deduction is possible when the loss or outgoing is incurred in gaining or producing the accessible income or with the purpose of generating assessable income (Chen, et al., 2010). But on the other hand, it is found that accessible income is not deductible in different situations like when there is a loss of capital nature, private and domestic nature and also due to the purpose of exemption in income. At the same time, it is also found that under division 35 of the same act, helps or prevents the organization from any losses which incur due to any non-commercial activities and this may lead to a loss that is getting offset against the assessable income.
Analysis / Application
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Cost to move machinery at the new site:
It is not tax-deductible as moving any fixed asset (machinery) from one to another is a capital expense for the company under section 8-1 of ITAA 1997. However, this expense may result in an increase in the cost of machinery in relation to the compute the depreciation of assets.
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Revaluing assets cost for affecting the insurance cover:
Under section 8-1 of ITAA 1997, the cost of the revaluing asset to effect the insurance cover is classified as tax deductable because the expenses are related to the fixed assets i.e., revaluing asset cost. In this, the cost is determined to be appropriately deductible from the assessable income in the situation where expenses are recurring one at a time.
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Legal Expenses incurred for opposing a winding-up petition:
In this situation, the tax is deductible and dependent on the given expenses that are related to the structure and operations of the organization as well as on the income-generating capacity of the organization. These legal expenses are incurred as the eventual outcome of the petition that relates to the erosion of the company’s ability to generate the income and these types of legal expenses are classified as capital expenses (Rutenberg, et al., 2010). But in contrast to it, if winding up a petition case is more related to the clarification of business operational processes then it is considered as revenue is affecting one. The legal expense for opposing the winding up of a petition is defined as an expense that is capital in nature. Therefore, it can also be stated easily that under section 8-1 of ITAA 1997, the legal expenses are deductible.
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Legal Expenses incurred for solicitor services:
It is tax-deductible under section 8-1 of ITAA 1997 as this expense is generating from assessable income. In addition, there are some general needs for additional information related to expenses of a business nature. In context to it, there is a fact that the activities which are being paid are related to the operation of the business and are recurrent in nature and this means that these solicitor services are not any capital expenses.
Conclusion
It can be concluded that 8-1 of the ITAA 1997 is applicable to different nature of expenses. This question helps in developing an understanding of different aspects under section 8-1 of ITAA 1997 and also helps in identifying which costs or expenses are deductible or not deductible from assessable income. In addition to this, different aspects are analysed in-depth and identified that except the cost of moving machine expenses would not be deductible in comparison to other expenses involved like legal expenses and revaluing assets cost.
Question 2
Issue: Big Bank has started a new product namely home and contents insurance policies and is also registered for GST purposes. The budget decided to spend on the promotion of the new products is $1,650,000 inclusive GST. This promotion budget consisted of television advertising campaigns and general advertising campaigns. On the other hand, it claims against the advertising expenses of $ 1,650,000 for the input tax credit. In addition, this scenario also states that Big Bank certainly exceeds their Financial Acquisition Threshold (FAT). In addition, all business acquisitions are related to financial supplies to its customers in terms of loan and deposits facilities but in this case, would not be regarded as acquisitions that are creditable. In other words, all financial supplies i.e., loans and deposits are considered as input taxed supplies. In oppose to it, it is also found that there are some financial acquisition supplies like home insurance and content insurance which are treated as creditable acquisition.
Rule: Input tax credit (ITC) is one of the elements of the GST framework that is considered as the credit of the GST into the buyer’s account (Murray & Wright, 2015). It is equal to the amount charged by the supplier from the buyer in form of the tax and paid to the government. This tax paid by the seller enables the buyer to claim ITC of an equal amount. Under GST, all the manufacturers and traders of goods and service providers can get credit. It can be advertising or a marketing service (Kaldor, 2014). If the firm is a service provider, it can also get credit for all the procured goods. In addition, the provisions of service tax law hold that expenses incurred in advertising and promotion of the brand can be eligible for ITC because such services are qualified as input services. Rule 2 of the CENVAT rules include the advertisement or sales promotion as input service (Sackman, et al., 2016).
Application: Mostly, the big banks may claim input tax credits (ITC) with respect to advertising expenses. It is entitled to get input credits of service tax paid on advertising expenses. ITC allows for recovering the GST paid out on expenses regarding commercial activities including marketing and advertising expenses. These ITC provisions under GST allow the firm to get a tax credit on all the input services (Rutenberg, McIntire & Bronner, 2010). While studying this case, it is found that television advertising campaign is related to home and content insurance and also treated as creditable. The tax credit (input) pegged is available at about $50000. However, when it comes to general advertising, it would use the reasonable fair methodology and this technique will be computed of 2% of total expenses that are covered under the taxable supplies whereas the remaining 98% are covered under input taxed supplies which reflects both actual and forecasted business spilt line. Therefore this would end up by leaving an input tax credit of $2000. But in this case, the input tax credit would not be reduced as this would be available for the sake of advertisement.
Conclusion: According to rules of application, it can be interpreted easily that big banks have authority to claim for an input tax credit against advertising expenses i.e., $1,650,000. Moreover, this analysis also helped in understanding that how income tax credit can be claimed or deducted from the taxable income. From this study, it is identified that advertisement spending on television are considered under two categories in big banks like taxation supplies includes home insurance and content insurance is one category and another category includes deposits and loans that are not creditable.
Question 3: Offset Angelo’s foreign tax
According to Grubert & Altshuler (2016), foreign income tax offset helps in reducing or avoiding the impact of double taxation by making available credit on foreign tax which is paid. In case, is foreign tax is actually paid is not more than $1000 then the taxpayer can claim the amount paid as foreign income tax offset (Nunns, et al., 2014). In other words, the foreign income tax offset is claimed when it is paid in another country on employment income or capital gains from assessable income.
For calculating the foreign income tax offset limit, the following steps are followed:
Step 1: Tax payable on income that is taxable
Under this step, Angelo would evaluate the tax amount which he is payable on taxable income.
Taxable income = Gross income – expenses
= $68000-$11000
= $57000
Taxable income = $57000
According to Resident Tax Rates (2014 – 2015):
$37,001-$80,000
$3,572 + 32.5c for each $1 over $37,000
= $3572+ 32.5c *(57000-37000)
= $3572+$6500
= $10072
Medicare lavy @1.5% = $10072*1.5% = 151.08
Tax payable will be: $10072+$151.08 = $10223.08
Step 2: Tax payable if:
Under this step, Angelo would exclude any amount from his assessable income in respect to a specific amount of the foreign income tax paid as long as the tax is counted towards his foreign income tax offset.
(a) Below amount of foreign income is not included in assessable income:
| Employment income from the United States | 12,000 |
| Employment income from the United Kingdom | 8,000 |
| Rental income from property in the United Kingdom | 2,000 |
| Dividend income from the United Kingdom | 1,200 |
| Interest income from the United Kingdom | 800 |
| Total | 24,000 |
(b) Expenses related to other non-Australian income
| Expenses incurred in deriving employment income from the United States | 900 |
Calculation
| Taxable income (disregarding step 2(a) amount): | 44,000 |
| Less allowable deduction (disregarding step 2(b) amount): | 10100 |
| Taxable income under step 2 assumptions: | 33,900 |
Tax on taxable income of 33,900
| $18,201– $37,000 | 19c for each $1 over $18,200 |
= 19c * (33900-18200)
=15700* 19c
= $2983
Step 3: Subtracting the result of step 2 from step 1
Step 2 –Step 1
=$10223.08– $2983
= $7240.08
From this computation, it is identified that the limit of Angelo’s foreign income tax offset is $7240.08. Even though she has paid $4,400 as foreign income tax, but on the other hand, her limit to pay the foreign income tax offset is $7240.08.
Moreover, the difference between the limit of foreign income tax that Angelo has paid and the offset cannot be refunded or carried forward incoming the next income year.
Question 4
Net income for the partnership
| Assessable income | ||
| Sales of sporting goods | 4,00,000 | |
| Interest on bank deposits | 10,000 | |
| Dividend franked to 60% received from an Australian resident company | 21,000 | |
| Imputation gross up [(21,000 × 30 / 70) × 60%] (s207-20 ITAA970) | 5,400 | |
| Bad debts recovered | 10,000 | |
| Exempt income – not assessable: (s6-20 ITAA97) | 0 | |
| Capital gain: regarded as made by the partners individually: (s106-6 ITAA97) | 0 | |
| 446,400 | ||
| Expenses | ||
| Sales proceeds were stolen by employee: (s25-45 of ITAA97) | 3000 | |
| Partner’s salaries: not deductible Scott | 0 | |
| FBT: (s8-1 ITAA97) | 16000 | |
| Interest on partner’s capital contribution: not deductible | 0 | |
| Interest on partner’s loan to the partnership: deductible under (s8-1 ITAA97) | 4000 | |
| Travel expenses of J between home and office: personal expenses: not deductible | 0 | |
| Legal fees for office lease renewal: (s8-1 ITAA97) | 2000 | |
| Legal expenses for the preparation of partnership agreement: capital expense: ditto | 0 | |
| Legal fees for new office lease: ditto | 700 | |
| Debt collection expense | 500 | |
| Council rate | 500 | |
| Staff salaries (25,000-5,000): (ss8-1 & 26-35 ITAA97) | 20000 | |
| Purchase of trading stock: (s8-1 ITAA97) | 30000 | |
| Rent on shop | 20000 | |
| Provision for bad debts: not deductible until written off 25-35 (ITAA97) | 0 | |
| Business lunches: not deductible assuming the expenses are not subject to FBT: (ss32-5 & 3(2-20 ITAA97) | 0 | |
| Excess of opening stock over closing stock (20,000 – 16,000): (s70-35 ITAA97) | 4000 | |
| Net partnership loss last income year: not deductible, as the amount was attributed to partners last income year | 0 | |
| 100,700 | ||
| Net income of the partnership | 345,700 |
References
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Grubert, H., & Altshuler, R. (2016). Shifting the Burden of taxation from the Corporate to the perSonal level and getting the Corporate tax rate down to 15 per perCent.
Kaldor, N. (2014). Expenditure tax. Routledge.
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Murray, I., & Wright, S. (2015). The taxation of native title payments for indigenous groups and resource proponents: Convergence, divergence and reform. UW Austl. L. Rev., 39, 99.
Nunns, J., Eng, A., Austin, L., & Center, U. B. T. P. (2014). Description and Analysis of the Camp Tax Reform Plan. Urban-Brookings Tax Policy Center Research Report.
Pinto-Sanchez, M. I., Verdu, E. F., Gordillo, M. C., Bai, J. C., Birch, S., Moayyedi, P., & Bercik, P. (2015). Tax-deductible provisions for a gluten-free diet in Canada compared with systems for gluten-free diet coverage available in various countries. Canadian Journal of Gastroenterology and Hepatology, 29(2), 104-110.
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