Hi3042 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

The issue is to determine whether the following cited expense are allowable as general deductions under section 8.1 ITAA 1997.

Expense 1	The cost of moving machinery to a new site
Expense 2	The cost of revaluing assets to effect insurance cover
Expense 3	Legal Expenses incurred by a company opposing a petition for winding up
Expense 4	Legal Expenses incurred for services of a solicitor in respect of a number of matters

Legal provisions

Calculation of income tax is done according to the taxable income of taxpayer. Further the taxable income is computed by subtracting general and specific deductions from the total assessable income of taxpayer (Somers and Eynaud, 2015).

In accordance with ITAA97 s 8-1, a general deduction is loss/expense that contains an applicable relation with the income generating activities, such as personal efforts, investment or operating activities, but it is not of capital and neither of domestic nature.

Section 8-1 (General deductions)

One can make deduction from their assessable income if any loss/outgoing satisfies one of the following two provisions:

If the loss/outgoing is incurred while producing or gaining assessable income
It is automatically incurred in carrying a business with the intention of producing or gaining assessable income (SECTION 8-1 General deductions, 2017).

Under s 8-1(2), one the other hand one cannot make deductions from their assessable income if any loss/expense if following cited aspect is satisfied as Act does not allow to make deduction:

If it is held as a loss/expense of a capital nature
If it is held as a loss/ expense of private nature
If it is incurred regarding the producing or gaining of non-assessable income or exempt income

Application on cited transactions

Expense	Allowance or disallowance
Expense 1	No, as it is capital expenditure and thus it is not entitled in terms of deduction as per 8-1 of ITAA 1997. Although, this expense can raise product’s cost as transaction following depreciation will be considered.
Expense 2	Yes, in order to determine expense deduction regarding fixed assets, the company is required to check that if the incurred expense is increased or make increment in earning capacity, or the expense is held for the intention of perseverance or protection. In this situation, it is supposed advantage occurred will be provisional and continuing, thus is entitled deductible as per the section.
Expense 3	No, the major transactional issue raised in this present case is that the considered expense has a connection with the capacity of revenue yielding or has a connection with work activities. In the event, it is assumed that all the legal expensed will assist business during its wind-up and consequently this will appear as an expense of capital nature.
Expense 4	Yes, to make a decision if an expense is deductible or not, the necessity of information is there, like nature, distribution or any other related factor. However, the expenses been described in this cited seems to be of revenue nature, and therefore the estimates meet the term with s 8-1.

2. Issue

The issue is to analyse whether Bank is entitled to take credit on an expense incurred of $1,650,000 Out of this, $550,000 was assigned to a TV ad campaign that was focused solely on the home and contents insurance policy. The remaining amount was assigned to a general advertisement campaign for the entire company and included different modes of marketing.

Legal provisions

Financial supplies are sales of input-tax, in which supplier cannot claim for GST in their process.

One can form a financial supply if has performed any of the mentioned aspects:

Engaged in lending or borrowing funds
Allowed credit to a consumer
Involved in buying and selling of shares
Produced, transferred, consigned or obtained interest in, or had provided rights under superannuation fund (Dunne, Mason and Patto, 2014)

In certain circumstances, one is allowed to charge GST for purchases that will be used to form a financial supply, if any of the mentioned aspects are applied:

One has not surpassed the financial acquisitions threshold
Their purchases are not related to the borrowed amount and are used to make a non-input-taxed supply
Their purchase meets the criteria of a reduced credit acquisition then the taxpayer is allowed to make the reduction of input tax credit.

Application on cited transactions

In the cited case; it can be noticed that $1,100,000 is for advertisement of general services which are related to lending funds and same is covered in input-tax on which tax credit cannot be claimed. However, on insurance services, GST is to be paid so the expense of advertisement specifically related to this service will be eligible for input tax credit.

Conclusion

Credit can only be availed for the amount of $550,000, as it was to be paid to a campaign of television advertising for the promotion of Big Bank home and contents insurance policies.

3. Issue

The issue is to determine the amount of foreign tax offset limit for Angelo by considering his income from foreign and national sources:

Legal provisions

The Foreign tax off-set limit is computed to provide relief to assess from double as Australian residents are required to pay tax in Australian on their all worldwide income, so income tax paid by them in foreign countries need adjustment so relief is provided to them (Barkoczy, 2016).

Calculations

Foreign tax off-set limit is computed by reducing the taxable amount by considering all income sources from the taxable amount by considering income only from home country. Calculation for Angelo is as follows:

Table 1: Statement showing Taxable income of Angelo by considering income from all sources

Income from various sources		Amount
Employment revenue
Earned in the Australia	$44,000.00
Earned in the United States	$12,000.00
Earned in the United Kingdom	$8,000.00	$64000
Rental revenue from property		$2,000.00
Earned in the United Kingdom
Dividend revenue
Earned in the United Kingdom		$1,200.00
Interest revenue
Earned in the United Kingdom		$800.00
Total gross income			$68000.00
Allowable deductions
Expenses incurred for earning employment income
From the Australia	$4,000.00
From the United States	$900.00	$4900
Expenses incurred for earning rental income
From the United Kingdom		$500.00
Gift to a deductible gift recipient		$400.00
Interest paid to obtain dividend income		$140.00
Expenses incurred to earn interest income		$60.00
Total allowable deductions			$6000.00
Taxable income			$62000.00
Total tax payable**			$12937.00*

Low-income off tax is not considered

(Tax on income + Medicare levy)

Table 2: Statement showing Taxable amount for Angelo by considering income of Australia

Income from various sources	Amount
Employment income	$44,000.00
Allowable deductions
Expenses incurred for earning employment income	$4,000.00
Gift to a deductible gift recipient	$400.00
Interest paid to obtain dividend income	$140.00
Expenses incurred to earn interest income	$60.00
Total allowable deductions	$4600.00
Taxable income	$39400.00
Total tax payable (Tax on income + Medicare levy)	$5140.00*

Low-income off tax is not considered

(Tax on income + Medicare levy)

Table 3: Statement showing offset limit

Taxable income of Angelo by considering income from all sources	$12937.00
Taxable amount for Angelo by considering income of Australia	$5140.00
Offset limit	$7797.00

4. Issue

The issue is the computation of taxable income for partnership business of Johnny and Leon.

Legal provisions and Calculations

Particulars		Amount
Assessable income
Sales as per s.6-5 of ITAA97	$40,000.00
interest received as per s.6-5 of ITAA97	$10,000.00
Dividend income as per s.44 of ITAA97	$21,000.00
Gross-up imputation as per s.207-20 of ITAA97	$5,400.00
Bad debts recovery s.20-30 of ITAA97	$10,000.00
Exempt income as per s.6-20 of ITAA97
Capital gain as per s.106-5 of ITAA97	-
Total income		$86,400.00
Deductions
Sales proceeds stolen as per S.25-45 of ITAA97	$3,000.00
Capital loss of $15000 as per S. 8-1 S. 8-1 of ITAA97
Salary to partners*
Fringe benefit tax**	$16,000.00
Interest on loan	$4,000.00
Interest on capital
Travelling expenses of Johnny from home to work and return	$3,000.00
Legal fees for the renewal of lease of the office building	$2,000.00
Legal expenses regarding formation of a partnership agreement	$1,200.00
Legal expenses for regarding formation new lease of business premises	$700.00
Debt collection expenses paid to a solicitor	$500.00
Council rates on business premises	$500
Staff salaries as per QC33728 of ITAA97	$20,000.00
Purchase of sporting goods supplies	$30,000.00
Rent on retail shop	$20,000.00
Provision for doubtful debts as per s. 63 of ITAA97
Business lunches	$10,000.00
Total deductible expenses		$110,900.00
Taxable Loss (Total income - Total deductible expenses)		($24,500)

Salary of partners is not allowed

Expenses of fringe benefits tax paid are an allowable expense for the employer

References

Barkoczy, S., (2016). Foundations of Taxation Law 2016. OUP Catalogue.

Dunne, J., Mason, J. and Patto, J., (2014). 2013 cases show high ATO success rate. Taxation in Australia, 48(8), p.429.

Somers, R. and Eynaud, A., (2015). A matter of trusts: The ATO's proposed treatment of present unpaid entitlements: Part 1. Taxation in Australia, 50(2), p.90.

Section 8-1 General deductions. (2017). Income Tax Assessment ACT 1997. Retrieved from < https://www.ato.gov.au/law/view/document?docid=PAC/19970038/8-1>.

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