HI3042 Cross Cultural Management and Communication Australian Trade
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:
Answer to question 1:
Answer to Scenario I:
Issue
As per the given question which is based on determination of shifting a machinery from one site to another and whether to consider the same under allowable deductions as per compliance with “Section 8-1 of the ITAA 1997”.
Laws:
- “Section 8-1 of the ITAA 1997”
- “British Insulated & Helsby Cables”
Applications:
As per the inference made from the case, it has been discerned that there has been a cost incurred from shifting machinery. It is to be duly understood that no allowable deductions can be charged under the application of “section 8-1 of the ITAA 1997”. The shift in the site for the machinery has been carried out with an objective of depreciation which has led to an increased cost of the asset. As per the statement made in “Section 8-1 of the ITAA”, it can be to be stated that the cost for moving the machinery is very minimal in nature. In normal course the allowable deductions are taken as to constitute some portion of the business expenditure incurred from the day-to-day business activities (Australian Trade Commission 2015).
As per the findings in the case of “British Insulated & Helsby Cables”, it has been seen that the main transgression has been seen with business has been benefiting from
the depreciable asset shifting. As per the rulings under “TD 93/126”, the cost incurred in shifting of machinery, beginning of commercial operations and setting up charges is considered to form a part of revenue. It needs to be further mentioned that the cost of locating of a new machine in a different site is to be treated as cost of capital and will constitute of various types of non-allowable deductions (Cao, Chappie and Sadiq 2014).
Conclusion:
It can be further stated that the cutting of new machinery in a new site will be considered as relocation of an asset which forms a part as capital expenditure. As per the given conditions it can be inferred that no sort of allowable deductions can be permitted.
Answer to Scenario II:
As per the given context it needs to be determined the question of revaluation of the asset with effect of insurance coverage. The main issue is related to find out whether these types of cost need to be considered for allowable deductions under “8-1 of the ITAA 1997”.
Laws:
- “Section 8-1 of ITAA 1997”
Applications:
As per the given scenario, the main question needs to be determined whether evaluating the assets are having any effect on insurance cover which includes all the permissible deductions which are clearly stated under “section 8-1” as the expenses which are incurred as recurring in nature. Based on the given case it can be duly noted that the expenses are having a direct connection with fixed assets. Thus the total amount of time taken for determining deductibility aspect of the expenses has been seen to be important to ascertain whether these expenses have increased the revenue generating their ability or they are just considered for safeguarding their set. In case the latter is seen to be leading to temporary benefit then such characteristics of recurring cost shall be considered for the allowable deductions as per “Section 8-1 of the ITAA 1997” (Bevacqua 2015).
Conclusion:
Based on the given considerations it can be derived at a cost from the insurance cover constitutes as permissible deduction due to its repetitive nature and as per the rulings of “Section 8-1 of the ITAA 1977”, this sort of expenditure needs to be allowed for permissible deductions.
Answer to Issue III:
Issue:
The important issue has been depicted with whether the legal expenses taken place with the opposing of petition in terms of winding up needs to be considered for the permissible deductions as per “Section 8-1 of the ITAA 1997”.
Laws:
- “FC of T v Snowden and Wilson Pty Ltd (1958)”
- “Section 8-1 of the ITAA 1997”
Applications:
The important assumption of the scenario has been able to state about the cost which has incurred during the winding up of business which is a general part and parcel of business operations and henceforth not treated under allowable deductions directly with reference to “Section 8-1 of the ITAA 1997”. It has been further seen as per the “Taxation Ruling of ID 2004/367” the legal cost associated to the business operations forms a part of the allowable deduction. This is mainly due to the fact that these types of expenses are incurred by the individual taxpayer and needs to be considered for getting out of the business operation through with the taxpayer is able to procure an assessable income (Mann 2013).
As per the verdict of “FC of T v Snowden and Wilson Pty Ltd (1958)”, the different types of expenses which are more general and the taxpayer has not shown any activity to prohibit any such expenses then these are to be considered for the allowable deductions (Fallis 2013).
In addition to this, the various types of legal expenses based on the current situation for winding up of petition may adhere to the criteria under positive limbs are not allowed to be met as they debate the characteristics of capital which very much goes into the business structure. The occurrence of such legal expenditure at the time of business finding of need not considered as the allowable deductions shows different types of features of capital in nature (Besley and Persson 2013).
Conclusion:
As per “Section 8-1 of the ITAA 1997” the aforementioned discussion shows that the outcome of cost for opposing the petition for winding up should be considered under non-allowable deductions.
Answer to Issue IV:
Issue:
The main issue has been able to discuss on whether the legal expenses borne by the taxpayer by the service of the Solicitor constitute the deductions as per the rulings of “section 8-1 of the ITAA 1997”.
Laws:
- “Section 8-1 of the ITAA 1997”
Applications:
The application of the aforementioned legislation has been able to put forward the question whether the taxpayer has incurred the legal cost in terms of business operation which needs to be accountable for permissible deductions as per “section 8-1 of the ITAA 1997”. However, there are certain exceptions associated legal expenditure through which the taxpayer takes a service from the Solicitor. In case the expenses are depicted with capital characteristics, Private or domestic then these cannot be considered as allowable deductions (Australian Government 2015).
As per the given explanation, the legal expenditure of the taxpayer has not been able to form a part of the business income as it is not associated to process of carrying the business activities and henceforth it cannot be considered under allowable deductions. It can be further discerned that the legal expenditure of the taxpayer in the present situation needs to be considered for the allowable deductions. The main consideration of allowing that deduction is due to the fact that expenditure resembles characteristics of business operations which need to be applied for allowable deductions under “Section 8-1 of the ITAA 1997” (Hosking 2016).
Conclusion:
The depiction of legal expenditure arising out of the business function for the purpose of taxable income generation must be considered for allowable deduction as per “Section 8-1 of the ITAA 1997”.
Answer to question 2:
Issue:
The main question has been used to depict whether input tax credit needs to be considered under “GSTR Act 1999” as a result of advertising expenditure.
Laws:
- “GST Act 1999”
- “Subsection 15-25”
- “Goods and Service Taxation Ruling of GSTR 2006/3”
- “Ronpibon Tin NL v FC of T”
Application:
With the application of “Goods and Service Taxation Ruling of GSTR 2006/3”, the main guideline concerning the procedure as stated on the input tax credit and the changes in administration put forward by financial supplies as a new taxation regime under “GST Act 1999”. It has been further seen to be worthwhile to mention that the level of creditable intention and unique implementation of ruling is based on under “division 11-15 and 129 of the GST Act 1999”. The applicability of the GST ruling is evident with the assessable and it is which are registered to acquire the financial supplies in excess of prescribed limit and directly falls under the input tax credit or minimised input tax credit (Qureshi 2015).
The case study of Big Bank has been able to bring forward the expenses which have been incurred with an amount of $1,650,000 including the GST for advertisement. Based on the goods and service taxation ruling of “GSTR 2006/3”, the present expenditure is eligible for input tax credit or the minimised amount of input tax credits. As per the agreement of taxation ruling it has been discerned that in case a company is needed to obtain registration, the GST shall be payable in relation to the assessment of global supplies made (Australian Taxation Office 2015). The main system of GST shows that a taxable entity or an individual may be able to claim for the input tax credit which are inclusive of the GST amount and obtained as a process by importation of the entity. In case the entity has been able to make financial supplies and crosses the threshold limit of financial acquisition then these cannot be allowed for recoverable amount of GST which has been charged as a portion of the same (D’Ascenzo 2015).
Based on the verdict of the case “Ronpibon Tin NL v FC of T” the important consideration of “extent” and “to the extent” has been applied to analyse the conditions under GST. This is in further able to consist of the various types of obligations through which the methodology of allocation needs to be adopted as per the fair and reasonable factors on specific enterprise. As per the findings of “para 11-5 and 15-5” for making the acquisition eligible as a creditable one, it needs to be treated either partially or wholly.
In addition to this it has been further inferred that the different types of requirements as per “para 11-5 and 15-5”, needs to be made for the eligible creditable import and they should be wholly considered for the creditable purpose. In case it has been found that their position is partly considered as creditable then it is mandatory to establish the benchmark of creditable function. As per the definition is under “Section 11-15 or 15-10” in case acquisition is held under the creditable eligibility then the taxable entity’s claims for the input tax should be based on financial supplies made by it. It needs to be further acknowledged that the case of such expenditure by Big Bank Ltd was mainly made for the acquisition is related to creditable purpose. In addition to this, the various types of “GSTR ruling of 2006/3” for Big Bank Ltd has been directly related to the present context of the financial acquisition limit for the allowable threshold and the total invoice it has been issued to Big Bank Ltd. This needs to be further considered under the eligibility criteria for input tax credit claim and the GST supplies made by the same (ATO 2015).
Conclusion:
Based on the aforementioned findings it can be clearly stated that Big Bank Ltd needs to consider the eligibility of claimable input tax credit as per the rulings under “GSTR 2006/13” for the total sum incurred by the organisation with the purpose of advertisement expenditure held under creditable acquisition.
Answer to question 3:
Computation of Taxable Income of Angelo
Answer to question 4:
Computation of Net Income from the Partnership
References
ATO (2015) Simplified depreciation rules | Australian Taxation Office, ATO. Available at: https://www.ato.gov.au/Business/Small-business-entity-concessions/In-detail/Income-tax/Simplified-depreciation-rules/.
Australian Government (2015) ‘Australian Taxation Office’, Registerting for GST. Available at: https://www.ato.gov.au/Business/GST/Registering-for-GST/.
Australian Taxation Office (2015) Yearly reports and returns | Australian Taxation Office, Yearly reports and returns. Available at: https://www.ato.gov.au/Business/Yearly-reports-and-returns/.
Australian Trade Commission (2015) Australian Business Taxes, Company Tax. Available at: https://www.austrade.gov.au/International/Invest/Guide-to-investing/Running-a-business/Understanding-Australian-taxes/Australian-business-taxes.
BesleyT. and PerssonT. (2013) ‘Taxation and Development’, Handbook of Public Economics, 5, pp. 51–110. doi: 10.1016/B978-0-444-53759-1.00002-9.
BevacquaJ. (2015) ‘ATO accountability and taxpayer fairness: An assessment of the proposal to split the Australian taxation office’, University of New South Wales Law Journal, The, 38(3), pp. 995–1014. Available at: https://uq.summon.serialssolutions.com/2.0.
CaoR., ChappieL. and SadiqK. (2014) ‘Taxation determinations as de facto regulation: Private equity exits in Australia.’, Australian Tax Review, 43(2), pp. 118–141. Available at: https://proxy.library.upenn.edu/login?url=https://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=96266883&site=ehost-live.
D’AscenzoM. (2015) ‘Modernising the Australian Taxation Office: Vision, people, systems and values’, eJournal of Tax Research, 13(1), pp. 361–377.
FallisA. . (2013) The New Fiscal Sociology: taxation in comparative and historical perspective, Cambridge University Press. doi: 10.1017/CBO9781107415324.004.
HoskingA. (2016) ‘Australian Taxation Office adds voice authentication to its app’, Biometric Technology Today. doi: 10.1016/S0969-4765(16)30038-8.
MannT. (2013) Australian Law Dictionary, Australian Law Dictionary (2 ed.). doi: Online Version: 2012 eISBN: 9780191726842.
QureshiA. H. (2015) ‘Coherence in the Public International Law of Taxation: Developments in International Taxation and Trade and Investment Related Taxation’, Asian Journal of WTO & International Health and Law Policy, 10, p. 193.
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