Legl300 Taxation Law Answers Assessment Answers

8. The accounting net profit included a capital gain of $30,000 made on shares sold on 30 June 2018 that had been purchased 13 months earlier. The company also made a capital loss of $10,000 from the sale of another parcel of shares it sold on 30 May 2018. The company also sold an antique vase for a capital loss of $10,000. The company had owned the shares and antique for 5 years. Neither the capital gain nor the capital losses, were included in the net accounting profit.

9. The accounting net profit included a deduction for the services of the Managing Director’s husband, Sebastian, who received $30,000 from the company for services rendered as a computer analyst over a 2 week period. Independent consultants had quoted $8,000 for the same task. 

Answer:

Answer to question 1: 

For an ordinary income to be considered as the taxable income during a particular year under “section 6-5 of the ITAA 1997” must be derived by the taxpayer during the relevant year. Below listed are assumptions for inclusion and exclusion of transaction in determining the assessable income of Racing Parts Pty Ltd for the year ended June 2018;

1. With regard definition stated under “section 6-20 of the ITAA 1997”the exempted income of $100,000 is not included for assessment however the same has been offset against the previous year loss of $120,000 reported under “Division 36”. The Non Assessable Non Exempted income of $50,000 has been considered for assessment purpose because a tax loss for the previous year under Division 36 has been deducted against such income.
2. The depreciation deduction for tax purpose stood $30,000 and the same has been included for deduction under “Division 40”.
3. With reference to “section 25-35” the bad debt sum of $20,000 will be considered for deductions because the debt was written off. However, the provision for doubtful debts amounting to $40,000 is non-deductible.
4. The provision for annual leave and long service leave are considered as accounting liabilities and hence such expenses are not treated as deductions for income tax purpose during the year they accrue. The sum of $35,000 is excluded for deduction for income tax purpose.
5. Shareholders receiving franked dividend should gross up the divided for the franking amount that is attached and receive the same as the tax offset equivalent to the sum of franking amount. Similarly the franking credits attached to cash dividend has been claimed as tax offset. With respect to “section 67-25” a tax offset for franked dividends has been claimed as refundable offset for Racing Parts Pty Ltd.
6. The borrowing cost of $5,000 has been included as tax deductions under the general provision of “section 8-1 of the ITAA 1997”. The expenses has been considered for deductions because the borrowing costs were incurred in purchase of new items of plant which is used in the generation of assessable income by Racing Parts Pty Ltd.
7. The court in “Arnold v FCT (2017)”explained that gifts or contribution that is more than $2 made to the deductible gift recipient is considered as allowable deduction under “Division 30”. The gifts and donations of painting amounting to $1000 and $5000 is included for deduction under “Division 30”.
8. With respect to the “section 8-1(1) of the ITAA 1997”, expenses incurred on the service of managing director’s husband as computer analyst has been considered for tax deduction purpose. The expenses were incurred in gaining or generating the assessable income and satisfies the positive limbs criteria.
9. The value of closing stock has been considered based on the LIFO method as Racing Parts Pty Ltd would be able to gain greater tax deduction for its cost of goods sold.
10. The tax loss of $120,000 from the previous year arising under “Division 36”has been offset against the exempted income and non-assessable non exempted income.   
11. The repairs of $5,000 was included for deduction with respect to the “section 25-10 of the ITAA 1997”repairs was done to restore the efficiency function of the plant. The repairs is context of use of plant for generating income.      

Answer to question 2: 

Issue:

The issue outlines the tax consequences for claiming deductions relating to expenses incurred during the year. The issue would also address the consequences of capital gains tax originating from the sale of antique desk and residential property.  

Rule:

As stated by the “Taxation Ruling of TR 93/30” where the home office is merely used in relation to the taxpayer revenue generating activities however does not hold the nature of place of business only the relevant portion of the running expenses will be treated for deductions. The court in “Swinford v FC of T (1984)” allowed the self-employed scriptwriter to claim deductions under “section 8-1 of the ITAA 1997” for the part of rent paid for the flat where the taxpayer dedicated a separate room for the study purpose. The taxpayer wrote the script in the room and did not had any separate business premises.

“Section 26-5 of the ITAA 1997” is related to penalties or fines that is imposed on the taxpayer as the result of the breach of the Australian law is non-deductible. As per the “taxation ruling of TR 97/23” expenses incurred in replacing the locks and exhaust fans that are permanent fixtures installed in the premises used for generating income is treated as deductible repair under “section 25-10” given that it is replacement of damaged unit by a new unit of identical designs that merely restores the efficiency and not an improvement. Similarly, in “Western Suburbs Cinemas v FC of T (1952)” concluded that the replacing the ceiling with the new one constituted improvement of capital nature and was held non-deductible.

As per “section 40-25 (1) of the ITAA 1997” an entity can claim deduction for the amount that is equal to the decline in the value for the income year of the depreciating asset that is held during the year.

Travel on work or during the course of work will be treated as the allowable deductions. Similarly, in “Weiner v FCT (1978)” the teacher was allowed deduction for travel expenses because it was incurred in the course of work.

The Australian taxation office explains that a person can claim deductions for using their own car for performing business activities. These expense are treated as car expenses. Under the log book method, the taxpayer is allowed to claim for the business use percentage of expenses that is occurred for car.

A taxpayer’s main residence is usually exempted from the capital gains tax. However, the taxpayer would not get the full main residence exemption if they use any portion of the dwelling for generating income. The interest deductibility test is applicable irrespective of whether a person actually borrows the money to purchase the dwelling. If a person runs the business or professional practice in a part of home, the person would be entitled to claim deduction for that part of the interest on the money that is borrowed to purchase the dwelling. Additionally, the capital losses should be separated under “section 108-10(1)” and the net capital loss must be carry forwarded under “section 108-10 (4)”.  

Application:

As evident in the current case John was the self-employed architect and bought a house in outer suburbs of Melbourne. A portion of house was used for architect business. John reports an expenses on interest on loan on the house. Citing “Swinford v FC of T (1984)” John can claim deductions for interest on loan under “section 8-1 of the ITAA 1997” for the portion of the house that was dedicated for the business purpose. John however was required to pay fine of $1000 for building a door installer without permission. Therefore, under “Section 26-5 of the ITAA 1997” the sum of $1000 as fines will not be allowed for deduction.

John later replaced the old carpet in the room with better quality carpets that costed $6000. Citing “Western Suburbs Cinemas v FC of T (1952)” replacing the carpets with the new one constituted improvement of capital nature and will held non-deductible under “section 25-10 of the ITAA 1997”.

John incurred expenses on antique desk that he used for work purpose. Referring to “section 40-25 (1) of the ITAA 1997” John can claim deduction for the amount that is equal to the decline in the value of antique desk during the income year held during the year.

John also travelled to building sites and visited clients for discussing regarding designs and drawings. Citing “Weiner v FCT (1978)” the John travel constituted travel in the course of work. Later he also used his own car for work purpose. Based on log book method John can claim deductions for expenses of car incurred for business purpose. While the private portion of the expenses will not be allowed for deductions.

John reports the sale of house that he bought in July 2017. As the house was partly used for producing income, John can claim partial main residence exemption. While the interest expenses satisfy the interest deductibility test therefore, the interest on bank loan will be allowed for deductions. The antique desk was purchased by John for 7,250 but was eventually sold for $3,850 and therefore yielded loss. Under “section 108-10 (1)” John must quarantined the loss obtained from antique desk.

Conclusion:

Conclusively, John can claim deduction for interest incurred for home office purpose while no deduction will be allowed for replacing carpet and fines imposed.

References:

Barkoczy, Stephen, Foundations Of Taxation Law 2014

Douglas, Heather et al, Australian Taxation Judgments

Kenny, Paul, Australian Tax 2014

Kenny, Paul, Michael Blissenden and Sylvia Villios, Australian Tax 2018

McCouat, Philip, Australian Master GST Guide 2018

Morgan, Annette, Colleen Mortimer and Dale Pinto, A Practical Introduction To Australian

Sadiq, Kerrie, Australian Taxation Law Cases 2018 (Thomson Reuters, 2018)

Sadiq, Kerrie et al, Principles Of Taxation Law 2018

Taylor, C. J et al, Understanding Taxation Law 2018

Woellner, R. H et al, Australian Taxation Law 2018

Woellner, Robin, Stephen Barkoczy and Shirley Murphy, Australian Taxation Law 2018 Ebook 28E (OUPANZ, 2018)

Miller, Angharad, and Lynne Oats. Principles of international taxation. Bloomsbury Publishing, 2016.