HA3042 Taxation Law and Australian Taxation law
Questions:
Question 1
Discuss whether the following are allowable as deductions under s 8-1 of ITAA 1997.
- The cost of moving machinery to a new site
- The cost of revaluing assets to effect insurance cover
- Legal Expenses incurred by a company opposing a petition for winding up
- 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.)
Question 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.
Question 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.
Question 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:
Question 1
Under Section 8-1 of Income Tax Assessment Act 1997:
- The cost of moving machinery to a new site will be allowed as deduction because it has been incurred while producing or gaining the assessable income.
- The cost of revaluing assets to effect insurance cover will not be allowed as a deduction because it has been incurred while producing or gaining the exempt income or non-assessable income (Tran-Nam & Evans, 2012).
- Legal Expenses incurred by a company opposing a petition for winding up will not be allowed as a deduction because it is considered as an outgoing of a domestic or private nature.
- 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 will be allowed as a deduction as the cost has been incurred while producing or gaining assessable income.
Question 2
In question 2 it can be observed that Big Bank had a budget of expending $1650000, out of which
$550,000 was given to media advertising campaign especially for promotion of contents insurance policies and Big Bank home. The remaining $1,100,000 was spent on a general campaign, including radio, television and print media promoting Big Bank.
Now to calculate the input tax credit, the fact that acquisitions in relation to input taxed supplies that is the traditional borrowing as well as deposit facilities business will not be considered (James, 2015). Accession in relation to taxed supplies will be taken into consideration. Therefore as in the case of Question 2 the advertisement expenditure incurred for the promotion of Big Bank home and contents insurance policies will be considered while calculating input tax credit but the expenditure incurred for general advertisement campaign will only be considered for that part about which the Big Bank home and contents insurance business is concerned that is 2 percent off $1100000.
|
Particulars |
Amount |
|
Expenditure on advertisements for Big Bank home and content insurance policies (+) Expenditure on general advertisements [ 2%*1100000] TOTAL Bank's ability to claim input tax credits is ($572000*10%)/100+10% |
$550000
$22000 $572000 |
|
$571.43 |
Formula for calculating input tax credit
At first the total expenditures are added that is the advertisement expenditure subjected to insurance policies and Big Bank home is added with that part of the general advertisement expenditure that is included in taxed supplies (Kumar, 2016).
Then the input tax credit is calculated with the above mentioned formula. The Rate is assumed to be 10% as the standard Australian rate is 10%.
Question 3
In question 3 as it can be observed that the foreign tax offset is required to be calculated for an individual named Angelo. Before proceeding further, the term foreign tax offset must be understood.
From 1st July 2008, the tax credits subjected to foreign income have been replaced with a foreign income tax offset (Fleming, Peroni & Shay, 2016). The excess foreign tax credits from the period of 1st July 2003 to 30th June 2008 should be converted to an amount known as pre-commencement excess foreign income tax before they are made any use of. Unlike the traditional system of foreign tax credits (applying till 30th June 2008), in calculating the amount of the offset, no longer the foreign income has to be divided into different classes (West & Varma, 2012). As stated in the question all of Angelo’s foreign income amounts have been converted to Australian dollars.
Now in order to calculate the tax offset limit, the total income tax payable is calculated as follows:
|
Particulars |
Amount($) |
|
Employment income from Australia |
44000 |
|
Employment income from United States |
12000 |
|
Employment income from United Kingdom |
8000 |
|
Rental income from property in United Kingdom |
2000 |
|
Dividend income from United Kingdom |
1200 |
|
Interest income from United Kingdom |
800 |
|
TOTAL ASSESSABLE INCOME (A) |
68000 |
|
Column1 |
Column2 |
|
Expenses incurred in deriving employment income from Australia |
4000 |
|
Expenses incurred in deriving employment income from United States |
900 |
|
Expenses incurred in deriving rental income from United Kingdom |
500 |
|
Interest (debt deductions) incurred in deriving dividend income |
140 |
|
Expenses (debt deductions) incurred in deriving interest income |
60 |
|
Gift to a deductible gift recipient |
400 |
|
TOTAL ALLOWABLE DEDUCTIONS (B) |
6000 |
|
Taxable income of angelo (a - b) |
62000 |
|
Column1 |
Column2 |
|
Foreign Income Tax paid: | |
|
Employment income from United States |
3600 |
|
Dividend income from United Kingdom |
120 |
|
Interest income from United Kingdom |
80 |
|
Rental income from United Kingdom |
600 |
|
TOTAL FOREIGN TAX PAID |
4400 |
Angelo will calculate his overseas boundary or limit of the income tax offset as follows:
Step 1: The tax payable on taxable income is $13289.5 (including Medicare levy)
[According to the resident tax rates - $3572 + {($62000 + $4900) - $37000}*32.5c]
Step 2: The income tax that would require payment if the assessable income is excluded of the following foreign income:
|
PARTICULARS |
AMOUNT($) |
|
Employment income from United States |
12000 |
|
Employment income from United Kingdom |
8000 |
|
Rental income from property in United Kingdom |
2000 |
|
Dividend income from United Kingdom |
1200 |
|
Interest income from United Kingdom |
800 |
|
TOTAL(A) |
24000 |
Certain expenses are not taken into account. These are expenditures that can be linked with financial values included in his assessable income upon which the payment of foreign income tax has been done (Cockfield, 2013).
|
EXPENSES |
AMOUNT($) |
|
Expenses incurred in deriving employment income from United States |
900 |
|
Expenses incurred in deriving rental income from United Kingdom |
500 |
|
TOTAL EXPENSES(B) |
1400 |
The debt deductions worth $100 related to the United Kingdom dividend and interest income are not taken into account, as nothing is mentioned in the question about Angelo having a foreign permanent address or establishment. Nor is the $70 deduction for gift is regarded, as it does not have any reasonable relation to the excluded assessable income amounts.
|
Particulars |
Amount($) |
|
Total assessable income |
24000 |
|
(-) allowable deduction (total expenses) |
1400 |
|
Taxable income under step 2 (a - b) |
22600 |
Therefore tax on $22600 is $836
[According to resident tax rates - ($22600 – 18200)*19]
Now the TAX OFFSET LIMIT = $13289.5 - $836 = $12453.5
This amount is Angelo’s foreign income tax offset limit. Although he did pay foreign income tax of $4,400, his foreign income tax offset is limited to $12453.5.
Question 4
In question 4 it can be observed that the net income of the partnership for a particular financial year is required (Gale & Brown, 2013).
For this the net profit of the firm whose partners are Johnny and Leon is calculated as below. Net operating profit can be calculated by subtracting all the payments or expenses incurred by the firm as a whole from all the payments (Steingold, 2015).
Calculation of all receipts and expenses:
|
RECEIPTS |
AMOUNT($) |
AMOUNT($) |
|
Sale of sporting goods |
400000 | |
|
(-) goods stolen as mentioned in Note 3 |
-3000 | |
|
37000 | ||
|
Interest on bank deposits |
10000 | |
|
Dividend received |
21000 | |
|
Bad debt recovered |
10000 | |
|
Exempt income |
50000 | |
|
Capital gain from disposal of shares |
30000 | |
|
(-) loss acquired as mentioned in Note 4 |
-15000 | |
|
15000 | ||
|
TOTAL RECEIPTS |
|
143000 |
|
EXPENSES |
AMOUNT($) |
AMOUNT($) |
|
Salary to Johnny |
10000 | |
|
Salary to Leon |
15000 | |
|
Fringe benefits tax |
16000 | |
|
Interest on capital provided by Johnny |
2000 | |
|
Interest on loan made by Johnny to the partnership |
4000 | |
|
Legal fees for the renewal of lease of the office building |
2000 | |
|
Legal expenses for preparation of a partnership agreement |
1200 | |
|
Legal expenses for preparation of new lease of business premises |
700 | |
|
Debt collection expenses paid to a solicitor |
500 | |
|
Council rates on business premises |
500 | |
|
Staff salaries |
25000 | |
|
(-) Personal expense as mentioned in Note 6 |
-10000 | |
|
15000 | ||
|
Stock at the beginning of the year |
20000 | |
|
Purchase of sporting goods supplies |
30000 | |
|
(-) Sale of stock {(20000 + 30000) - 16000} |
-34000 | |
|
16000 | ||
|
Loss on sale of stock {(18000/20000)*34000} = 30600 (34000 - 30600) = 3400 |
3400 | |
|
Rent on retail shop |
20000 | |
|
Provision for doubtful debts |
30000 | |
|
(-) Debt beyond recovery as mentioned in Note 10 |
-30000 | |
|
NIL | ||
|
Johnny and Leon made a net partnership loss of $40,000 last year |
40000 | |
|
Business lunches with expensive buyers as mentioned in Note 11 (50%*10000) |
5000 | |
|
TOTAL EXPENSES |
151300 |
NOTES:
In Note 5 it is said that Johnny takes work home, but this is not considered as a business expense hence no entry is made for this.
In Note 6 staff salaries include $10000 for washing the partner’s car which is again a personal expense hence not considered.
In Note 7 the opening stock is shown as $20000 and at the end of the year it is $16000. Therefore the opening stock is added with the purchase at first and then the stock worth $ 34000 is subtracted from it in order to keep the closing stock as $16000.
Now the stock worth $34000 is sold at $30600 thus incurring a loss of $3400
In Note 10 the provision for doubtful debt is made nil as there is no action for recovery.
In Note 11 Johnny and Leon spends $10000 on business lunch with overseas buyers, for which only fifty percent of the expenditure is taken into account as per rule.
In Note 12 the net partnership loss of $40000 is taken into account they have made an election under Section 328-285 of ITAA97 as mentioned in Note 9.
Therefore Net Profit = (143000 – 151300) = -8300
The net profit cannot be a negative figure, therefore it is net loss, $8300 and has to be borne by both the partners in 1:1 ratio that is equally.
References
Cockfield, A. J. (2013). The Limits of the International Tax Regime as a Commitment Projector. Va. Tax Rev., 33, 59.
Fleming, J. C., Peroni, R. J., & Shay, S. E. (2016). Two Cheers for the Foreign Tax Credit, Even in the BEPS Era.
Gale, W. G., & Brown, S. (2013). Small business, innovation, and tax policy: A review.
James, K. (2015). The rise of the value-added tax. Cambridge University Press.
Kumar, R. (2016). Comparison between Goods and Services Tax and Current Taxation System A Brief Study. International Journal of Allied practice, Research and Review, 3(4), 09-16.
Steingold, F. S. (2015). Legal guide for starting & running a small business. Nolo.
Tran-Nam, B., & Evans, C. (2012). Tax policy simplification: An evaluation of the proposal for a standard deduction for work related expenses.
West, P. R., & Varma, A. P. (2012). The Past and Future of the Foreign Tax Credit. Int'l Tax J., 38, 47
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