Taxation Law
Answer 1: Deduction under section 8-1 of ITAA 97
Issue
In the running business, it is usually observe that business has to face various risk and losses or expenses. In concern to this, expenses which business bearer is owned by the business owner from their assessable income (Garg, 2014).
Similarly, in this case also, the main issue is that to identify that under section 8-1 of ITAA 97 which loss or expenses are deductable or not deductable (included or excluded loss or expenses) from assessable income.
Rule
The section 8-1 of (Income Tax Assessment Act) ITAA 97 generally includes those deductions which have any entity of assessable income. In concern to it, Mulkay & Mairesse (2013) stated that one person can deduct the specific amount from their assessable income to the limit which is incurred by gaining or producing the assessable income.
However, it is also seen that general deductions are easily differentiated from specific deductions. Usually, general deductions involve business operation losses and those losses are easily deductable from assessable income.
Under section 8-1 of ITAA 97, there is a need to consider a general deductions significantly for identifying the assessable income and losses.
In respect to this, there is subsection 20-A under section 8-1 of ITAA 97 in which if any person receives a specific amount of loss or insurance or indemnity is deductable from their assessable income (Mete, et al., 2010).
Similarly, section 8-1 (2) of ITAA 97 provides advice in against of deduction losses or any form of outgoing under the act to a large extent like there are losses which are related to capital nature, domestic or private nature and so on. These all stated nature is incurred in different situations and are not incurred on assessable income.
Analysis
• Cost of moving machinery from one site to another:
The cost incurred while moving machinery from one sit to other site place is not deductable from the assessable income. Under section 8-1 (2), this expense is considered as a capital in nature because this expense provides outcome that cost of machinery can be increased by computing the depreciation of moving asset.
• Cost of revaluing an asset to affect insurance cover:
The cost of revaluing asset for sake of covering the insurance is a form of expense which is deductable from the assessable income as per the section 8-1 of ITAA 97. In this case, the revaluing cost expense is related to the fixed asset and is deemed to be recurring again & again.
• Legal expenses incurred in oppose for winding up petition:
In this scenario, it is observed that this legal expense is deductable from assessable income because it is an expenditure which is related to organization structure and operations as well as income generation capacity.
The main reason behind to do the legal expanses is the final outcomes of the petition. It is directly related to the lacking in the firm performance for generating the income. So, all these legal expenses can be determined as capital in nature (Grubert & Altshuler, 2016).
At the same time, this legal case of winding up petition is more involved with the business clarification of operational processes in which revenue is considered factor which is affecting business operation.
• Legal expenses incurred for solicitor services:
This legal expense is deductable from assessable income under section 8-1 of ITAA 97.
This expense is incurred on solicitor services as it is a expense which states business nature. In addition, business operations are always recurring in nature and for that expenses are incurred but in this scenario, solicitor services are not capital expenses.
Conclusion
From the above study, it can be easily concluded that section 81 of ITAA 97, have different nature of expenses or losses. In this question, it becomes easier to understand and identify which case of expense or loss is deductable or not deductable from assessable income.
In concern to this, different case are analyzed in which it is identified that there is only one expense or lose which is not deductable from assessable income i.e., cost of moving machine to other site.
On the other hand, there are some deductable expenses or losses such as legal expenses incurred for opposing winding up petition & for solicitor services and for cost of revaluing the assets.
Answer 2: Big bank ability to claim input tax credit (ITC)
Issue
Big Bank is a bank registered for GST services and has started business with new product named as home and content insurance policies. For this, Big bank decided budget for promoting a new product i.e., $1,650,000 from GST.
This promotional budget is set by considering all promotional activities which are to be conducted like campaign advertising, television advertising and other general advertising.
But at the same time, it is found that $1,650,000 is claimed as input tax credit against the advertising expenses. Moreover, this scenario depicts that Big bank has exceeded its limit in form of Financial Acquisition Threshold (FAT).
Rule
In concern to this case, input tax credit (ITC) is considered significant element as per the GST framework. In simple words, this Input Tax Credit (ITC) is considered as a credit over buyer’s account under GST.
According to Brink (2015), Input Tax Credit (ITC) is stated as an amount which is charged equally from the buyer and supplier in tax which is paid to government.
In this case, the buyer can claim for input tax credit for an equal amount which supplier paid in form of tax. In the research study of Cheng, et al., (2012), it is clearly stated that under GST, manufacturer & trader can get credit as well as marketing service provider also gets credit for all procured goods and services.
Moreover, business acquisition involves two different types of acquisition i.e., financial acquisition (home and content insurance) and financial supplies (loans and deposit).
In addition to it, advertising and promotional activities for brands are eligible for the Input Tax Credit (ITC) under the provisions of service tax law which is incurred as an expense as these services are considered as qualified inputs.
Analysis
While analyzing this case, it is clearly seen that big bank is claiming input tax credit (ITC) over advertising expenses because it is eligible to get the input credit service by paying tax for advertising expenses. This input tax credit allows the buyers to recover the expenses which incur under the commercial activities through GST.
Under GST, the provision of ITC is used widely by the firms for their input services in order to get the input tax credit (Minnick & Noga, 2010).
From further study, it is also determined that doing television advertising campaign under the home and content insurance is creditable in nature. However, the firm can pegged for input tax credit for about $50000.
But at the same time, when it comes to general advertising, it is seen that reasonable fair methodology is computed 2% of total expenses which are covered under taxable supplies and remaining under the input tax supplied.
Conclusion
As per above stated rule of application, it can be easily concluded that big banks have an authority or opportunity to claim for input tax credit over advertising expense of $1,650,000.
The above analysis also helped to develop understanding that how business can claim for input tax credit or deductable expenses from their taxable income. Additionally, it is also observed that spending on advertising expenses are considered under two different categories i.e., taxation supplies and non- creditable deposits & loans.
Answer 3: Offset Angelo’s foreign tax
The foreign income tax offset is a process through which impact of double taxation income can be reduced by providing the tax payer with a credit on paid foreign tax. In the research study of Sackman, et al., (2016),
it is studied that there is a situation where actual foreign tax is paid is not more than $1000 and in this case, taxpayer can easily claim for the amount paid as foreign income tax offset.
In simple words, the foreign income tax offset can be claimed in a situation when tax is paid on employment income or capital profit in another country from the assessable income.
In addition, the following steps are required to be followed for calculating the foreign income tax offset limit:
Step 1: Tax payable on taxable income
Under this step, tax amount will be evaluated by Angelo, which she is required to pay on its taxable income.
Taxable income = Gross income – expenses
= $68000-$11000
= $57000
So, taxable income is $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
In concern to it, Tax payable will be evaluated for year 2014-2015 is:
= $10072+$151.08
= $10223.08
Step 2: Tax payable (If):
In this next step, Angelo would reduce a specific amount from his assessable income from the specific amount which he paid as the foreign income tax and that tax is counted as his foreign income tax offset (Mirrlees, 2010).
(a) In assessable income, the below stated amount is not included except employment income from Australia:
Employment income from United States 12,000
Employment income from United Kingdom 8,000
Dividend income from United Kingdom 1,200
Rental income from property in United Kingdom 2,000
Interest income from United Kingdom 800
Total 24,000
(b) Expenses (other non-Australian income):
Expenses incurred in deriving employment income from United States 900
Calculation
Taxable income (disregarding amount in step 2(a)): 44,000
Less: Allowable deduction (disregarding amount in step 2(b)): 10100
Step 2 assumption for taxable income 33,900
Tax paid on taxable income is $33,900
=$18201-$37000
(19c for each $1 over $18200)
= 19c * ($33900-$18200)
=$15700* 19c
= $2,983
Step 3: Subtracting (step2 result from step 1 result)
=Step 2 –Step 1
=$10223.08– $2983
= $7240.08
From above computation, it is evaluated that Angelo’s foreign income tax offset limit is $7240.08. But on the other hand, she has already paid an amount i.e., $4,400 as foreign income tax, even though there is limit which she has to pay as foreign income tax offset is $7240.08.
In addition to it, there is a difference between limit of foreign income tax offset is that she (Angelo) has paid income tax but if that amount is offset then it cannot be carried forward or refunded to her in next income year.
Answer 4: Net income for the partnership in income year
Assessable income Amount Amount
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 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 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 (Assessable Income – Expenses) 345,700
References
Brink, S. (2015). An evaluation of the income tax treatment of client loyalty programme transactions by South African suppliers. Journal of Economic and Financial Sciences, 8(1), 145-164.
Cheng, C. A., Huang, H. H., Li, Y., & Stanfield, J. (2012). The effect of hedge fund activism on corporate tax avoidance. The Accounting Review, 87(5), 1493-1526.
Garg, G. (2014). Basic Concepts and Features of Good and Service Tax in India. International Journal of scientific research and management (IJSRM), 2(2), 542-549.
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 perCent.
Mete, P., Dick, C., & Moerman, L. (2010). Creating institutional meaning: Accounting and taxation law perspectives of carbon permits. Critical Perspectives on Accounting, 21(7), 619-630.
Minnick, K., & Noga, T. (2010). Do corporate governance characteristics influence tax management?. Journal of corporate finance, 16(5), 703-718.
Mirrlees, J. A. (2010). Dimensions of tax design: the Mirrlees review. Oxford University Press.
Mulkay, B., & Mairesse, J. (2013). The R&D tax credit in France: assessment and ex ante evaluation of the 2008 reform. Oxford Economic Papers, 65(3), 746-766.
input tax credit
Sackman, J., Van Brunt, R., Rohan, P. J., & Reskin, M. (2016). Tax Issues in Condemnation Cases (Vol. 7). Nichols on Eminent Domain.
