HI3042 Taxation Law of Advertising Campaign
Questions
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.)
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 |
|
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. | |
Answers
1: Discussing the deductions under sec 8-1 ITAA 1997
Issue
There are four issues that need to be discussed, which helps in understanding suitability of expenses for deduction under sec 8-1 ITAA 1997. In first question four issues are identified, which can be deduced as follows:
- Allow ability of deduction for the cost of machinery for a new site.
- Allowability of deduction for the cost of assets revaluation with the effect of insurance cover.
- Allow ability of deduction for the legal expenses incurred for petition opposition in case of winding up of the company.
- Allow ability of deduction in respect of legal expenses for conveyance, mortgage and for providing legal advice to client.
Law:
According to Somers & Eynaud (2015), general deductions under sec 8-1 of ITAA act needs to be followed for understanding the allow ability of the deductions. Division 8 contains core rules that are to be followed for showing deductions of outgoings and losses. For understanding the deductibility of expenses, ITAA act under section 8-1 related to general deductions needs to be followed.
Application:
- In first case deductibility of machinery cost for new site are observed. Cost of fixed assets is related to as capital asset. Therefore, cost of machinery is to be transferred to new site it is considered as a capital expense. Therefore no deduction is to be provided under section 8-1 of the ITAA act 1997. However, the cost of machinery might enhance the price of machinery as depreciation needs to be charged for the machinery. For calculation of depreciation the cost of machinery might give rise to certain expenses. As the cost of machinery is of capital nature therefore, the deduction us 8-1 of ITAA 1997 are denied for further deduction (cpdlive.com
, 2016). - In second case deductibility of revaluation of assets for insurance cover needs to be observed. The revaluation of assets are related to fixed assets but while deciding the deductibility the increase or decrease of assets needs to be evaluated. Further enlargement of capacity of income or decision must be taken where the expenses has been incurred for preservation or protection of assets. If it is seen that revaluation has been done for enhancing the earning capacity of company then deduction could be provided under section 8-1 of the ITAA act 1997 (cpdlive.com, 2016). Further deduction can be made available if temporary benefits are provided in respect of revaluation of assets. Observation needs to be done in understanding whether the expenses has been recurring or not. When it is seen that the expenses are recurring in nature then deduction under sec 8-1 ITAA act 1997.
- In third case legal expenses for winding up petition relates to the capacity of earning income. The observation needs to be done in understanding whether the expenditure has been incurred as mere operation or it relates to structure. Analysis further shows that if the expense is capital in nature and has resulted in extinction of profit capacity yield then no deduction are to be allowed under sec 8-1 ITAA act 1997 (cpdlive.com, 2016). However, if the expenses have been incurred for business operation then the expenses becomes revenue in nature. In that case deduction is allowed as expenses are revenue in nature.
- In fourth case, information regarding expenses nature and apportionment determination needs to be done. After detailed analysis of conveyance charges shows that it relates to transfer of title in respect of legal property. It the expenses are considered as revenue expenditure then deduction under sec 8-1 ITAA act 1997. Further as it relates to property then it may be considered as capital expenditure then deduction are not available under sec 8-1 ITAA act 1997 (cpdlive.com, 2016). Mortgage of assets and general advice relates to mainly revenue expenditure therefore, deduction under sec 8-1 ITAA act 1997 is to be allowed (Barrett & Elsayed, 2014). In the case as the expenses nature and apportionment of expenses are not mentioned therefore, deductibility decision could not be taken clearly in this case.
Conclusion
After in depth analysis of first case, it has been seen that the cost of machinery is itself a capital expenditure therefore, deduction under sec 8-1 ITAA act 1997 are not to be provided. In the second case, if the revalued assets are recurring and the benefit are to be approached for temporary basis then deduction under sec 8-1 ITAA act 1997 could be allowed (Abbey & Richards, 2017).
In third case, legal expenses if incurred for operation in the business then deduction under sec 8-1 ITAA act 1997 are to be provided. In fourth case as the expense nature and apportionment of expenses are not provided therefore, if the nature of expenses are revenue in nature then deduction under sec 8-1 ITAA act 1997 are to be provided.
2: Discussing the claims of input tax credit in respect of advertising expenses
Issue:
In this section Big bank claims for input tax credit in respect of advertising of $ 1650000, which has been incurred by the organisation. Discussion regarding the suitability of input tax claim needs to be done under section 11-15(1) of GST act 1999 (ato.gov.au 2016). Total expenditure of $1650000 is to be claimed for input tax credit.
Figure 1: Advertising campaign
(Source: learner)
Law:
Law relating to input tax credit for GST under section 11-15(1) of GST act 1999 are to be used for analysis. The value added system is introduced as a new system of taxation in Australia, which allows the person who is registered to claim the tax credit. Input tax credit relieves the burden of GST and justification of input tax claim needs be done under section 11-15(1) of GST act 1999 (tved.net.au, 2016).
Application:
Under the GST act registered person can claim for input tax credit only when creditable acquisition has been done. Creditable acquisition refers to the amount of expenses where amount that are equal to GST are to be payable on supply. In this case advertising expenses are creditable acquisition and GST inclusion shows that claim of input tax credit could be done easily by Big Bank Ltd. further as big bank Limited has been providing the service of advertising themselves therefore, claim can be done. As manufacturers of services get the claim for input tax credit on their goods then as per the new law under GST ACT claim in respect of input tax credit can be done by supplier of services (Martin, 2000). Therefore, as big bank has incurred this service for enhancing reputation and customer retention. Most importantly the expense has been done by Big bank limited themselves therefore tax invoice of $1650000 in respect of input tax claim can be done. Full amount of $1650000 can be claimed as input tax credit by Big Bank Limited under section 11-15(1) of GST act 1999.
As per the case analysis of House of Lords in C&E commrs VS Redrow Group PLC it has been seen that Redrow claimed input tax credit in respect of commission that are to be paid to the agents (jausttax.com, 2000). The English court of appeal denied the claim under Section 15 of GST ACT 1999 as the commission to agents has been done for taxable purposes, which could not be included in the 11-15(1) of GST act 1999 (jausttax.com, 2000). Claim in relation to input tax credit can be done only when expenses has direct link with tax and as the advertising expenses has direct link with the tax therefore, claim for input tax credit is justified. In this case further analysis for input credit claim has been conceptualized as a broader concept in terms of economy. Claim can be done in respect of input tax credit on certain expenses like advertising and marketing has been allowed therefore, claim can be done in respect of Input tax credit by Big Bank limited.
Conclusion
Case analysis further shows that Big Bank limited can claim for input tax credit in respect of advertising because advertising has been incurred by the company itself. Further as per the new act of GST section 15 of 1999 case study analysis shows that credit can be claimed when the expenses has direct link with the tax calculation. Analysis further shows that Claim can be done in respect of input tax credit on certain expenses like advertising and marketing has been allowed as per the new act. Therefore, detailed analysis shows that claim in respect of input tax credit can be done easily by Big bank limited. Full amount of $1650000 can be claimed as input tax credit by Big Bank Limited under section 11-15(1) of GST act 1999.
3: Issue: In the third question, offset of foreign tax evaluation needs to be done for understanding the allow ability of income for foreign tax offset. According to Tang (2016), the tax of foreign incomes is calculated so that deductions of the expenses and addition of the income becomes easier for analysis. The income tax act of section 770 - D is used for evaluating the losses and gains related to foreign tax offset.
Law: In this segment sec 770-D of income tax act dealing with foreign tax offset and losses are to be considered for analysis. Foreign tax offset is to be claimed on the return that has been generated from income tax (ato.gov.au, 2016). For calculation of foreign tax offset at first the calculation of income payable to the client are to be calculated. Certain incomes and capital gains are to be excluded in the income calculation. In the second step income tax that are to be paid are calculated. Expenses and incomes are separately calculated. Finally foreign tax offset is determined.
Applications: In this case medical expenses are not included in the calculation of foreign tax offset. The foreign tax offset are determined as 9.39% approx in Australia. In this case the calculation of foreign tax and other expenses are to be included for calculating the offset amount of foreign tax (ato.gov.au, 2016). In this case the medical expenses are to be excluded from the calculation of income tax. Three step procedures are to be followed for determining the offset of foreign tax. As first income tax payable are to be calculated so that taxable income could be determined easily. Then deductions are to be calculated so that taxable income by deducting the income from the expenses could be done. Then calculation of the foreign taxable income are to be calculated, after detecting all the expenses and income that are to be included tax payable amount are to be calculated. Tax on the income $ 5821.8 are to be included for further calculating the amount of offset. Then calculation of certain expenses as well as income is tax payable are assessed so that new tax rate calculation becomes easier. Gift are excluded from the tax deduction (Chardon, Freudenberg & Brimble, 2016).
Finally the taxable income is to be calculated and allowable deduction is to be included by deducting the amount of tax from the above calculated amount. This further shows that the tax offset from the previous amount ($5821.8) are deducted from the net amount of tax $ 3849.9. This shows that tax offset are determined to be of $ (5821.8 -3849.9) = $1971.9.
Conclusion
In the conclusion it can be said for calculating foreign tax offset at first the calculation of income payable to the client are to be calculated. Certain incomes and capital gains are to be excluded in the income calculation. In the second step income tax that are to be paid are calculated. Expenses and incomes are separately calculated. Finally foreign tax offset is determined (Butler, 2016). This shows that offer of income tax are to be done by deducting the previous amount of tax from the new amount of tax that has been calculated. This helps in understanding the tax for further calculating the amount what amount are to be included for calculation so that offset amount could be detected easily. This further shows that the tax offset from the previous amount ( $5821.8) are deducted from the net amount of tax $ 3849.9. This shows that tax offset are determined to be of $ (5821.8 -3849.9) = $1971.9.
4: Issue: In the fourth case the issue is to understand the suitability of income by calculating the net partnership income. This helps in understanding the incomes that are to be included and expenses that are to be excluded from the net partnership income are to be assessed (Peiros & Smyth, 2017). Further use of certain rules is to be used for calculating the expenses related to act of ITAA 1997 could be evaluated. This further helps in understanding which income are to be included in the calculation and which expenses are to be excluded from the deductions for income tax calculation.
Law: ACT of ITAA 1997 are to be included in this segment so that net payment for tax and deduction limit could be evaluated easily (Yin & Burke, 2016) . This helps in understanding the net amount of income that has been generated from the partnership income so that total amount of income determination could be done.
Applications:
In this case sales are liable for income tax under sec 6-5 ITAA 1997 for tax. Interest on bank deposits of 10000 $ are also liable for income tax. Dividend is liable for S44 ITAA36 is to be liable for tax. Imputation gross up are to be calculated on the basis of certain percentage (21000*3/70*60%). Bad debt recovered is to be included into partnership calculation. Further analysis shows that exempt income and capital gain are to be excluded from the net partnership income.
While calculating the deductions lease renewal of $ 2000 is to be included for deduction purpose. FBT for $ 16000 are to be included in the deduction calculation. Interest and other expenses are to be included in the calculation purpose. Further it has been seen that legal expenses are to be included us 8-1 (Bankman et al. 2017). Council rates are to be included in us 8-1 are to be included in calculation. Staff salaries are to be included in deduction u sec 26-35 of the ITAA act 1997. Rent from the shop is to be included under sec 8-1. Business lunches are excluded u sec s32-5 and 32-20. Employees who have stolen cash are included usec s25 -45. Further excess over opening stock from closing stock are to be included in the calculation of partnership income u sec 70-35 (Yin & Burke, 2016). This shows that after considering all the above items the net partnership income derived to be $ 345700.
Conclusion
In the concluding lines, it can be said that certain income are to be included and certain expenses are to be deducted so that proper and accurate net partnership income derivation could be done. Exempt income and capital gain has been excluded from the income calculation. In expenses calculation it has been seen that business lunches, operating expenses and certain other expenses are excluded from the calculation of net partnership income. Therefore, it can be said that total net partnership income derived to be $ 345700.
References
Somers, R., & Eynaud, A. (2015). A matter of trusts: The ATO's proposed treatment of unpaid present entitlements: Part 1. Taxation in Australia, 50(2), 90.
Barrett, J., & Elsayed, A. (2014). Deductibility of employer contributions to employee remuneration trusts-where are we at?. Governance Directions, 66(5), 307.
cpdlive.com (2016) Allowable Deductions Retrived on 16 sept 2017 from https://www.cpdlive.com/charteredaccountants/seminarNotes/TaxForYoungProfessionals-AllowableDeductions-Essentials-TechnicalPaper.pdf
Abbey, R., & Richards, M. (2017). A practical approach to conveyancing. Oxford University Press: US
ato.gov.au (2016) GST Retrived on 16 Sept 2017 from https://www.ato.gov.au/Business/GST/Claiming-GST-credits/When-you-can-claim-a-GST-credit/
tved.net.au (2016) GST Retrived on 16 Sept 2017 from https://www.tved.net.au/index.cfm?SimpleDisplay=PaperDisplay.cfm&PaperDisplay=https://www.tved.net.au/PublicPapers/June_2001,_Sound_Education_in_GST,_Input_Tax_Credits___The_Core_Mechanism_of_GST.html
Martin, D. (2000). The Identification and Characterisation of Taxable Supplies for GST Purposes. J. Austl. Tax'n, 3, 261.
jausttax.com (2000) house of lords in C&E commrs VS Redrow Group PLC case Retrived on 16 Sept 2017 from https://jausttax.com.au/Articles_Free/JAT%20Volume%2003,%20Issue%204%20-%20Martin.pdf
Tang, C. (2016). Australian GST update—2015. World Journal of VAT/GST Law, 5(1), 32-41.
ato.gov.au/ (2016) foreign income tax Retrived on 18 Sept 2017 from https://www.ato.gov.au/Individuals/Tax-return/2016/In-detail/Publications/Guide-to-foreign-income-tax-offset-rules-2016/
ato.gov.au/ (2016) foreign income tax Retrived on 18 Sept 2017 from https://www.ato.gov.au/Individuals/Tax-return/2017/In-detail/Publications/Guide-to-foreign-income-tax-offset-rules-2017/?page=3
Chardon, T., Freudenberg, B., & Brimble, M. (2016). Tax literacy in Australia: not knowing your deduction from your offset 6(1), 40-51.
Butler, D. (2016). Superannuation: Transferring foreign super fund amounts to an Australian resident. Taxation in Australia, 50(8), 481.
Peiros, K., & Smyth, C. (2017). Successful succession: Tax treatment of executor's commission. Taxation in Australia, 51(7), 394.
Yin, G. K., & Burke, K. C. (2016). Partnership Taxation. Wolters Kluwer Law & Business: US
Bankman, J., Shaviro, D. N., Stark, K. J., & Kleinbard, E. D. (2017). Federal Income Taxation. Wolters Kluwer Law & Business:US
Yin, G. K., & Burke, K. C. (2016). Partnership Taxation. Wolters Kluwer Law & Business: US
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