Bacc318 Taxation Law- Big Bank Assessment Answers

1. Discuss whether the following are allowable as deductions under s 8-1 of ITAA 1997.

i. The cost of moving machinery to a new site

ii. The cost of revaluing assets to effect insurance cover

iii. Legal Expenses incurred by a company opposing a petition for winding up

iv. Legal Expenses incurred for services of a solicitor in respect of a number of matters, including conveyancing, 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.)

2. Big Bank Ltd operates nationally with more than 50 branches, a 10-storey head office and numerous call centres. It is registered for GST purposes. Big Bank has for many years provided loans and deposit facilities to customers in Australia. Last year it launched a new product, Big Bank home and contents insurance policies. It was a significant step for Big Bank and required it to change some of its computerised accounting systems due to the fact that GST needed to be charged on the new product.

Big Bank budgeted to spend $1,650,000 (including GST) on advertising campaigns last year. Of that sum, $550,000 was allocated to a television advertising campaign specifically promoting Big Bank home and contents insurance policies. The other $1,100,000 was allocated to a general advertising campaign, including television, radio and print media advertisements promoting Big Bank to the public as the bank that is “Here for You”.

When Big Bank Ltd launched Big Bank home and contents insurance policies, it forecast that its home and contents insurance business would constitute 2% of its entire enterprise. Big Bank has been proved correct in its forecasts. The other 98% of its enterprise is made up of its traditional loans and deposit facilities businesses.

Last month, the advertising consultants issued their tax invoice for $1,650,000.

Discuss Big Bank's ability to claim input tax credits with respect to its advertising expenditure of $1,650,000.

3. The following are the current year details of Angelo’s income, expenses and the foreign tax he paid. All of Angelo’s foreign income amounts have been converted to Australian dollars.

Gross income	$
Employment income from Australia	44,000
Employment income from United States	12,000
Employment income from United Kingdom	8,000
Rental income from property in United Kingdom	2,000
Dividend income from United Kingdom	1,200
Interest income from United Kingdom	800
Total gross income	68,000

Expenses	$
Medical expenses	5,000
Expenses incurred in deriving employment income from Australia	4,000
Expenses incurred in deriving employment income from United States	900
Expenses incurred in deriving rental income from United Kingdom	500
Gift to a deductible gift recipient	400
Interest (debt deductions) incurred in deriving dividend income	140
Expenses (debt deductions) incurred in deriving interest income	60
Total expenses	11,000

Foreign tax paid	$
Employment income from United States	3,600
Dividend income from United Kingdom	120
Interest income from United Kingdom	80
Rental income from United Kingdom	600
Total foreign tax paid	4,400

Determine Angelo’s foreign tax offset.

4. Johnny and Leon are adult partners in a business selling sporting goods.

The partnership records, excluding GST, for the current income year disclose the following:

Receipts ($):
400,000	Sales of sporting goods (see Note 3)
10,000	Interest on bank deposits
21,000	Dividend franked to 60% received from an Australian resident company
10,000	Bad debts recovered
50,000	Exempt income
30,000	Capital gain from the disposal of shares acquired in 2009 and sold in June this income year (see Note 4)
Payments ($):
10,000	Salary to Johnny
15,000	Salary to Leon
16,000	Fringe benefits tax
2,000	Interest on capital provided by Johnny
4,000	Interest on loan made by Johnny to the partnership
3,000	Johnny's travelling expenses from home to work and return (see Note 5)
2,000	Legal fees for the renewal of lease of the office building
1,200	Legal expenses for preparation of a partnership agreement
700	Legal expenses for preparation of new lease of business premises
500	Debt collection expenses paid to a solicitor
500	Council rates on business premises
25,000	Staff salaries (see Note 6)
30,000	Purchase of sporting goods supplies
20,000	Rent on retail shop
30,000	Provision for doubtful debts (see Note 10)
10,000	Business lunches (see Note 11)

Notes
1.	Partnership profits and losses are shared between Johnny and Leon on an equal basis.
2.	The partnership is registered as a Small Business Entity (SBE).
3.	On 1 January this income year the partners discovered that an employee had stolen $3,000 cash in respect of money received from sales to customers.
4.	Johnny and Leon made a capital loss of $15,000 from the disposal of shares acquired in 2006 and sold in 2011.
5.	Johnny often takes work home as he finds it convenient to plan the next day's work in his home study.
6.	Staff salaries include $10,000 paid to Johnny's son Johnny Jr for washing the partners' cars. The Commissioner considers $5,000 to be a reasonable commercial rate for washing the cars.
7.	Stock at beginning of the year was: $20,000.
8.	Stock at end of the year was: Cost $16,000
	(a)	Market selling value $18,000
	(b)	Replacement $17,000
9.	Johnny and Leon did not make an election under s 328-285 of ITAA97.
10.	Johnny and Leon are owed $30,000 by a debtor who is bankrupt. They believe it is very unlikely that they will recover any money from the debtor, and do not take any action to recover the money.
11.	Johnny and Leon spent $10,000 on business lunches with overseas buyers at expensive restaurants.
12.	In the last income year, Johnny and Leon made a net partnership loss of $40,000.
13.	Johnny and Leon wish to minimise their tax liabilities for the income year.

Calculate the net income for the partnership for the income year.

Answers

1. Issue

With the help of the sustainability of the expenses under the 8-1 ITAA 1997, there are few issues that are important to understand. In the first question, these issues have been identified and explained below:

i. The new system allows deduction in the cost of the machinery for the new site.

ii. It also allows deduction in the cost of assets along with the insurance coverage.

iii. It has the ability to deduct the legal expenses that are used for the petition when the company winds up (Becker, 2015).

iv. deducts the cost in case of the legal expenses for the mortgage, conveyance as well as for providing the legal guidance to the clients (Franklin, 2016).

Rule

The general deduction rule under the act sec 8-1 of ITAA needs to follow the abilities and other deduction methods according to the Somers & Eynaud (2015). Another part that is the division 8, which contains the basic rules that shows the deduction of assert of loss and outgoings. In order to understand the expenses of the deduction, some general tips are needed to follow under the section 8-1 ITAA (Jianwen, 2014).

Application:

i. The initial observation was the deduction of the cost of the machinery. In this observation, the cost of the fixed assets is related to the cost of the capital. So, the machinery needs to be transferred to a new site where it is considered as a capital expense. Therefore, according to the section 8-1 of the ITAA act 1997, there is no deduction provided. Hence, there were chances that the due to the cost of the machinery, the price of the machinery may increase due to the depreciation cost that is charged with the machinery. So the calculation of depreciation of the machinery may rise to certain expenses. When the cost of the machinery is same as that of the capital nature, then according to the 8-1 of ITAA 1997, there will be no reduction in the upcoming days (Kingston, 2015).

ii. In the second condition, the deduction of assert that is revalued for the insurance cover was observed. The evaluations of these assets are based on the fixed asset, but in some cases, while deciding for the deductibility in the increase and decrease of assert, the evaluation is done minutely (Laird, 2014). When the enlargement in the income or the decision is further done, then the expenses need to be incurred or the protection of assert is important. When it was observed that the evaluation was done on basis of enhancing the earning capacity, then according to the section 8-1 of the ITAA act 1997 (cpdlive.com, 2016), the deduction will be provided. The further deductions are provided on the temporary basis in respect to the evaluation of assert. the observation was done based on recurring process, whether the expenses have been recurred or nor properly. Then under the section 8-1 ITAA act 1997, it was observed that the expenses are recurring in nature (Lang, 2014).

iii. In the third case, the expenses will be wind up for the petition that is related to the capacity of earning. The observation was done minutely in order to understand the options for the expenditure that has been incurred as a mere operation or else it is related to the structure. The further analysis has shown the reports that the expenses are capital in nature and under the section 8-1 ITAA act 1997 (cpdlive.com, 2016), the profit capacity that has been yielded will have no deduction (Lang, et al., 2015). Furthermore, the expenses that operate in the business section will be considered as the revenue option. In such cases, the deductions are allowed that are revenue in nature.

iv. In the fourth case, the information that is related to the nature and apportionment of the expenses, needs to be evaluated. After a thorough analysis, the conveyance charges show the relative transfer with respect to the legal property. Under the section 8-1 ITAA act 1997, the expenses are considered as the revenues. When the expenses are related to the property, then they are considered as the capital expenditure under the section 8-1 ITAA act 1997 (Qureshi, 2015)Under the section 8-1 ITAA act 1997, the deduction is allowed for the mortgage and general advice for assert that are related to the expenditure of the revenue. The deduction decision couldn't be taken properly as the apportionment and the nature of expenses are not mentioned.

Conclusion:

After the detailed analysis in the first case, it was observed that the costs of the machinery are considered as the capital expenditure. Therefore deduction is not provided under the act 8-1 ITAA act 1997. In case of the second, if the revalued assert recur and the benefits that are approached on the temporary basis, then the deduction is provided under the act of section 8-1 ITAA act 1997. In the third case, when the expenses are incurred for the business operation, then according to the act section 8-1 ITAA act 1997, the deduction is provided. In the fourth case, when the expenses apportionment and nature are not provided, so the nature of the expenses are considered as the revenue under the act section 8-1 ITAA act 1997, and the deduction is also provided.

2. Issue:

Under this section, the big bank's claims for the input tax credit for the advertising expenses of $1650000 that re incurred by the company. The section discusses the suitability of the input tax claims that are needed to be done under the act section 11-15(1) of GST act 1999 (Seligson, 2017)The final expenditure that was claimed for the input tax credit is shown below in the form of a table.

Figure 1: campaign of the advertising company

(Source: learner)

Rule

Under the act section 11-15(1) of GST act 1999, the law that was explained is used for the analysis of the input tax credit. The values that are added to the system are considered as a new system for the taxation in the Australia that allows only those people who have registered in it. The input tax credit helps to relieve the burden of the GST and the other valid justification of the input tax credit according to the active section 11-15(1) of GST act 1999 (Ventry Jr, 2015).

Application:

Under the act of the GST registration, the people are only able to claim the input tax credit only after the acquisition is made. The creditability of the acquisition refers to the amounts that are equal to the GST and are payable in nature on supply. In case of the advertisement, the expenses of the acquisition, as well as the GST inclusions, are credible that shows the claims of the input tax credit that could be easily done by the big bank Ltd. Furthermore, the Big Bank provides the services for the advertisement that are done by them, so in such cases, the claim can be done (Ventry Jr, 2015). Under the act section GST ACT, the manufactures of the services and goods those who have claimed the input tax credit on their goods, as per the law, the claim can be done by the supplier of the service (Martin, 2000). So, the big bank has incurred the service for their reputation as well as for the retention of the customer. The most important is the big bank has put the limitation of the services up to $1650000 with respect to the input tax claim. The total amount can be claimed by the big bank that is 4165000 under the act section 11-15(1) of GST act 1999.

According to the report analysis of the House of Lords in C&E common VS Redrow Group PLC, it was observed that the Redrow has claimed the input tax credit with respect to the commission that is paid by the agents under the section (jausttax.com, 2000). But the English court has denied the appeal done by them according to the act GST ACT 1999, as the agents were already done for the taxable pays that are under the act of section 11-15(1) of GST act 1999 (Ventry Jr, 2015). The claim is in the relation to the input tax credit are only possible when the expenses are directly linked to the tax, hence the input tax credit is quite justified. In case of the further analysis, the input tax credit has been conceptualized into broader concepts that are in terms of the economy (Woellner, et al., 2014). The claims can be done with respect to the tax credit on certain expenses like the advertising as well as the marketing where the claims can be done on the basis of the input tax credit done by the big bank.

Conclusion:

According to the case study, the big banks are limited to the claims for the input tax credit with respect to the advertising as the advertising has been developed from the company itself. Furthermore, according to the new GST ACT section 1999, the credit can only be claimed when they are directly linked to the tax collections (Yin, 2017). The more analysis reports show that the claims that are linked to the marketing expenses will be allowed as per the new act. So the detailed analysis shows the input tax credit can easily be done by the big bank. The total amount claimed by the input tax credit is the $1650000 by the big bank under the act section 11-15(1) of GST act 1999.

3. Issue:

In the third case, the understanding of the allow abilities of the income tax foreign tax offset is necessary as per the evaluation of the offsets of foreign tax collection. The taxes that are related to the foreign incomes, needs to be calculated in order to deduct the expenses and the other addition of the new expenses to make the process easy to analyze, according to (Becker, 2015). The section 770-D is used to analyze the losses and gains for the offset of the foreign tax.

Rule

According to the segment 770-D of the income tax, it deals with the foreign tax offsets issues and other losses that are important to consider for the further analysis. The foreign tax offset has been claimed on the return that was created due to the income tax (ato.gov.au, 2016). For the calculation of the foreign tax, initially, the income payable calculations are done by the clients. Some certain gains and incomes need to be excluded from the calculations. The incomes and the expenses are calculated separately and finally, the foreign tax is evaluated (Kingston, 2015).

Application:

In case of the medical expenses, these are not included in the foreign tax offset calculation. The foreign tax offset was determined that comes approximately 9.36% in the Australia. The calculation of the foreign tax and other expenses are needed to be included for further calculation of the offset amount. There are three steps that are to be followed for the calculation of the foreign tax offset (Lang, et al., 2015). The tax on the income $5821.8 needs to be included for further calculation of the offset amount. The gifts are excluded from the deduction of the tax (Kingston, 2015).

So it is important to calculate the deduction of the tax from the calculated amount or from the previous amount that is $5821.8 and the net amount is the $ 3849.9. The determined tax value is the $ (5821.8 -3849.9) = $1971.9 (Kingston, 2015).

Conclusion:

Calculating the foreign tax offset is the initial step for the clients. Certain things are important to keep in the mind that is the income and the capital gain. The expenses and the income are separately calculated, then the final foreign tax is calculated (Butler, 2016). The further tax offset shows the calculated amount from the previous value ($5821.8) and the net amount $ 3849.9. The final value is the $ (5821.8 -3849.9) = $1971.9.

4. Issue:

The last case deals with the factors that are necessary to understand the sustainability by calculating the net income. The case helps to clear the idea about the expenses that are excluded from the partnership income (Kingston, 2015). Further using some calculating techniques, the expenses can be calculated according to the act ITAA 1997.

Law:

According to the law ACT of ITAA 1997, the net payment and the deduction of the tax can now be easily calculated (Yin & Burke, 2016). It helps to understand more about the net income from the partnership and determination can easily be done.

Rule

As per the sec 6-5 ITAA 1997, the sales are amenable. The interests of the banks are accountable. According to the S44 ITAA36, the dividend is liable. The gross can be calculated based on a certain percentage (21000*3/70*60%).

Application:

While evaluating the deduction lease amount, $2000 is included for the deduction cause. $16000 in included as FBT in the deduction calculation. Further legal expenses are also calculated (Franklin, 2016). The salaries of the staffs are included in the deduction purpose 26-35 of the ITAA act 1997. Opening stocks are included in the calculation of the partner's income sec 70-35 (Franklin, 2016).

Conclusion:

From the above report, it was concluded that the incomes are included in certain cases and also deducted in case of the net partnership income. In some cases like the business lunches and other operating expenses, the expenses are excluded from the calculation. So the net partnership income is then derived to be $ 345700.

References

Becker, J., 2015. The Relation of Article 9 Paragraph 1 German Double Taxation Treaties to Domestic Tax Law and the Consequences for Current Value Depreciation under Section 1 Paragraph 1: Foreign Tax Act. Intertax, 43(10), pp.589-594.

Franklin, J.S., 2016. Mehrotra Ajay K., Making the Modern American Fiscal State: Law, Politics, and the Rise of Progressive Taxation, 1877–1929 (Cambridge: Cambridge University Press, 2014), pp. 429, $34.99 (paperback). ISBN 978-1-107-61973-9. Journal of the History of Economic Thought, 38(3), pp.399-400.

Jianwen, L., 2014. Research on the Fiscal and Taxation Law Footstone for the State's Modernization of Governing [J]. Social Sciences in Chinese Higher Education Institutions, 3.

Kingston, S., 2015. Territoriality in EU (Taxation) Law: A Sacred Principle, or Dépassé?.

Laird, G., 2014. Hong Kong Taxation: Law and Practice. Chinese University Press.

Lang, M., 2014. Introduction to the law of double taxation conventions. Linde Verlag GmbH.

Lang, M., Pistone, P., Schuch, J. and Staringer, C. eds., 2015. Introduction to European tax law on direct taxation. Linde Verlag GmbH.

Qureshi, A.H., 2015. Coherence in the public International Law of Taxation: Developments in International Taxation and Trade and Investment Related Taxation. Asian J. WTO & Int'l Health L & Pol'y, 10, p.193.

Seligson, M., 2017. The retrospective operation of statutory amendments to taxation laws: interpreting the amendments to section 8EA of the TLAA, 2016. Business Tax and Company Law Quarterly, 8(1), pp.21-29.

Ventry Jr, D.J., 2015. Making the Modern American Fiscal State: Law, Politics, and the Rise of Progressive Taxation, 1877–1929. By Ajay K. Mehrotra (New York, Cambridge University Press, 2013) 429 pp. $90.00 cloth $34.99 paper.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2014. Taxation of financial transactions. In Australian Taxation Law 2014 (pp. 1-81). CCH.

Yin, G.K., 2017. Codification of the Tax Law and the Emergence of the Staff of the Joint Committee on Taxation.

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