Allowable Deductions Under ITAA 1997: Machinery Transportation Cost, Revaluing Assets Cost, Legal Expenses, And Input Tax Credit On Advertising Expenses

Issue – Whether transportation cost of machinery is allowable as a deduction under s 8-1 of ITAA 1997

Issue- Whether or not the Cost of moving machinery to a new site allowable as a deduction under s 8-1 while computing the assessable income.

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Rule- According to the s 8-1 of the ITAA 1997, those expenses which are incurred directly or indirectly in running the business are treated as allowable expenses. Further, those expenses which are of capital nature or are incurred in relation to purchasing, transportation, and installation of a capital asset purchased or are for domestic or private use are not allowed as a deduction under s 8-1 (Barcokzy, 2010).

Application-  It was held in the case of W Neville & Co v FCT (1937) that the expenses done for the purpose of the business must be provided as a deduction (Barcokzy, 2010). In the given question, it is not clear that whether the machinery being moved to the new site is a brand new machine which is being transported from the seller place to buyer’s site the or it is an old machine which is being transported from one site to another. In the former case that is where the new machinery purchased is being transported to the buyer’s site then the expenses that will be incurred in such transportation shall be treated as included in the cost of machinery purchased and shall not be allowed as a deduction from the assessable income. In the latter case, if the old machinery is being transported from one site to another, for example in case of road construction the road rollers are shifted from one site to another once the work gets completed at the first site. In such case, the transportation cost shall be treated as a business expenditure and shall be allowed as a deduction under s 8-1of ITAA 1997 (Sadiq et. al, 2017).

Conclusion- If the machinery is old and is being transported from one site to another for completion of business purpose, and then the cost shall be considered as transportation cost and shall be allowable as a deduction under s 8-1 (Kobestky, 2005).

 2) Issue- Whether or not the cost of revaluing assets to effect insurance cover allowable as a deduction under s 8-1 while computing the assessable income. 

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Rule- According to the s 8-1 of the ITAA 1997, those expenses which are incurred directly or indirectly in running the regular business activity and earning of assessable income are treated as allowable expenses. If the expenses of revaluation of assets are related to the fixed assets, then such expenses shall not be treated as allowable expenses under s 8-1. If the expenses are related to assets such as stock which directly affect the calculation of assessable income, then such expenses shall be treated as allowable expenses under s 8-1.

Issue – Whether the cost of revaluing assets to effect insurance cover allowable as a deduction under s 8-1 of ITAA 1997

Application and Conclusion- in the given question, it is not clear that whether the evaluation is being done for fixed assets or inventories. For determining the allowable expenses, it is important to know whether such expenses being incurred are affecting the income making capacity or are affecting the fixed assets. In case the expense is recurring in nature and are being incurred for evaluation of inventories for the insurance cover for recovery of loss from destruction of inventories, then the same shall be allowable expenses for deduction under s 8-1 as the inventories are directly related to the calculation of assessable income.

3) Issue – whether the legal expenses incurred by a company opposing a petition for winding up allowable as a deduction under section 8-1 of ITAA 1997 or not.

Rule- the expenses that are deductible under s 8-1 of ITAA 1997 are those which are either incurred in earning the taxable income or are incurred while carrying on the regular business activities through which the said assessable income shall be earned. Deduction of those expenses is not allowed which are either capital in nature or expenses which are private or domestic in nature or the expenses which are in relation to earning of exempt income. The expenses which are incurred for keeping the company in running position shall be allowed as business expenses.

Application and Conclusion- there may be two outcomes of the given situation. One is that the company may lose the petition case and the company gets winded up and the second case that the company shall win the case and company shall continue with its operations normally. But in both the cases the expenses incurred will not result in earning of the assessable income directly (Pratt & Kulsrud, 2013). The said expense is just necessary to save the business from winding up. Hence the same shall not be treated as business expenses under s 8-1.

4) Issue – whether the Legal Expenses incurred for services of a solicitor in respect of a number of matters, including conveyance, discharge of a mortgage, and general legal advice relating to a client’s business operations. (The Solicitor account does not separate the costs for various matters.)

Rule- the expenses that are deductible under s 8-1 of ITAA 1997 are those which are either incurred in earning the taxable income or are incurred while carrying on the regular business activities through which the said assessable income shall be earned. Deduction of those expenses is not allowed which are either capital in nature or expenses which are private or domestic in nature or the expenses which are in relation to earning of exempt income (Nethercott et. al, 2013). The expenses which are incurred for keeping the company in running position shall be allowed as business expenses.

Issue – Whether legal expenses incurred by a company opposing a petition for winding up allowable as a deduction under s 8-1 of ITAA 1997 or not

Application and Conclusion- in the given case the solicitor has given varied services which include general business expenses and other charges which may be categorized into capital nature expense such as the discharge of a mortgage. The solicitor does not separate the costs for different matters. Hence it shall be assumed in the given case that all the costs have been directly and indirectly incurred for the discharge of mortgage (Cartwright, 2013). In such assumption, the costs shall not be allowed as a deduction under s 8-1, but shall be deductible under another section of ITAA 1997.

Issue

Will Big Bank Limited will be able to claim input tax credits with respect to its advertising expenditure or not?

Rule

The GST paid on a particular expense is allowed to be taken as input tax credit by the business entities when a few conditions are fulfilled. Firstly, the entity that is claiming the input tax credit needs to be GST registered. Hence, the registration is important when it comes to claiming of GST. The expense on which GST is being claimed is a recurring business expense in nature. This means it should happen on a continuous basis and not a one-time act. Moreover, the proper invoice has been issued and GST has been separately mentioned in the invoice. The segregation must be clearly indicated that enables to have a better grasp of the matter (Goldberg, 2017).

Application

Big Bank Limited is a massive bank with more than 50 branches, 10 storied office, and various call centers. Now with a view of expansion Big Bank has started Home and Content Insurance Services. It has to change its accounting system as well as advertises for the new business. Big Bank has budgeted $ 16,50,000 for the advertisement campaign including television media and another mode of televisions like radio and print. The advertising company has issued a bill of $ 16,50,000 for advertisement campaign including GST. Now the Bank is required to claim the GST charged on the advertisement bill as input claimed. Our view in this regard is that input credit on advertising bill shall be allowed to Big Bank Ltd. because expenditure is in the nature of revenue expenses and also has been incurred as business expenses other than capital expense (Kenny, 2016). In case the expense was of capital nature, GST would have been added to the cost of the asset. The input available shall be allowed as a set off against Bank’s GST liability. The reasons for allowance of GST as input credit is that the Bank is registered under GST provisions, and the GST has been mentioned in the Tax Invoice and also that the expense on which GST has been claimed is a business expense. Moreover, it is a recurring expenditure as business promotion is an important part of the growth of a business (Adams, 2011).

Conclusion

The Big Bank Limited shall claim the input tax credit of GST as all the requisite conditions are fulfilled. It is irrelevant regarding the sum involved in advertising and in which the GST has been paid (Cane & Conaghan, 2009). The tax invoice amounting to $16,50000 includes the television advertisement comprising of $5,50000 and the amount left aside is for the promotions. This will enable the business to expand. This consists of 2% of the capital of the company and the remaining 98% is catered with the help of loans and the deposits by the customers over which commission and interest rates are applicable. Hence, the company is totally eligible for GST

Answer -3

Assessable Incomes:

(The Ordinary Incomes are classified under s 6-5 of ITAA 1997)

Employment Income from Australia: s 6-5 ITAA 1997

Employment Income from the United States: s 6-5 ITAA 1997

Employment Income from the United Kingdom: s 6-5 ITAA 1997

Rental income from property in the United Kingdom: s 6-5 ITAA 1997

Dividend Income from United Kingdom (assumed as grossed up) : s 6-5 ITAA 1997

Interest Income from United Kingdom: s 6-5 ITAA 1997

Deductions:

Medical Expenses : s 8-1 ITAA 1997

Expenses incurred in deriving employment income from Australia : s 8-1 ITAA 1997

Expenses incurred in deriving employment income from US: s 8-1 ITAA 1997

Expenses incurred in deriving employment income from UK: s 8-1 ITAA 1997

Gift to a deductible gift recipient (DGR): s 8-1 ITAA 1997

Interest on debt for earning dividend income: s 8-1 ITAA 1997

Expenses on debt: s 8-1 ITAA 1997

Total Taxable Income

Foreign Offset Calculation: s 770-75 ITAA 1997

Tax on Total Taxable Income

Add: Medicare Levy

Total Taxes Payable

Less: Foreign Taxes Offset

Net Taxes Payable

44,000

12,000

  8,000

  2,000

  1,200

     800

5,000

4,000

   900

   500

   400

   140

     60

57,000

10,072

 1,140

11,212

  4,400

  6,812

Notes:

The expenses incurred by an individual for the purpose of earning of his taxable income are allowed as deductions from the assessable income. Hence in the given question the deductions have been taken accordingly.

 (1) Net income of the partnership of Johnny and Leon : 

$

Assessable income:

– sales of sporting goods (Net of loss of cash sales due to theft $ 3,000 ): s 6-5 ITAA 1997

– bank deposits interest: s 6-5 ITAA 1997

– Dividend Income: s 6-5 ITAA 1997

– Bad Debts Recovered: s 10-5 ITAA 1997

– Capital Gain Income (Net of the capital losses on sale of shares $ 15,000): s 10-5 ITAA 1997

397,000

10,000

35,000

10,000

15,000

– excess of closing trading stock over opening stock: s 70-35 ITAA97 (20,000-16000)

4,000

Deductions:

Under s 8-1 of ITAA 1997

– Purchase of sporting goods

– Legal Fees for renewal of lease of office building

– Legal fees – partnership agreement

– Legal fees- new lease agreement

– Expenses incurred for collection of debts

– Rates

– Salaries paid to staff (Net of excess salary paid to Partner’s son $ 5,000)

– Rental Charges

– Loss on Doubtful Debts (as it is expected to be non-recoverable)

– Business Lunches (business purpose expense)

– Partners’ salaries: not deductible: Scott

– Travelling Expense reimbursed to Partner (for business use)

30,000

2,000

1,200

700

500

500

20,000

20,000

30,000

10,000

3,000

Under other sections of ITAA 1997

– Interest on capital and loan of Johnny (Partner)

6,000

Net income of partnership

3,47,100

 Notes-

  1. The amount that will be available for distribution out of $ 3,47,100 shall be after payment of salaries to the partners $ 25,000.
  2. The fringe benefits tax is a nonallowable expense hence not considered in calculating the assessable income.
  3. Partners’ salaries are not allowable under s 8-1 ITAA 1997 but are deductible from the net income before the distribution of profits

References

Adams, J 2011, What is The Difference Between Tax Avoidance and Tax Evasion?, viewed 19 September 2017 https://www.taxinsider.co.uk/680-What_is_The_Difference_Between_Tax_Avoidance_and_Tax_Evasion.html

Barcokzy, S 2010, Australian Tax Casebook, CCH Australia Ltd

Cane, P & Conaghan, J 2009, The new oxford companion to law, Oxford university Press.

Cartwright, M 2013, Death to the Australia Tax?, viewed 18 September 2017, https://www.ato.gov.au/Individuals/Deceased-estates/Being-an-executor/Tax-responsibilities

Goldberg, S.G 2017, The Death of the Income Tax: A Progressive Consumption Tax and the Path to Fiscal Reform, Oxford Press.

Kenny, B. V  2016, Australian Tax 2016, Thomson Reuters (Professional) Australia Limited

Kobestky, M 2005, Income Tax: Text, Materials and Essential Cases, Sydney: The Federation Press

Nethercott, L,  Richardson, G & Devos,K. 2013, Australian Taxation Study Manual, Sydney.

Pratt, J. W &  Kulsrud, W N 2013, Federal Taxation, Oxford university press.

Sadiq, K, Coleman, C , Hanegbi, R,  Jogarajan,S,  Krever, R, Obst, R, Teoh, J & Ting, A 2017,  Principles of Taxation Law 2017, Law book Australia