Specific Deductions - great note helpul PDF

Preview

Summary

great note helpul...

Description

SPECIFIC DEDUCTIONS – CAPITAL ALLOWANCES SPECIFIC DEDUCTIONS  ITAA 97 s12-5 provides comprehensive list of all specific deductions  Most specific deductions are contained in ITAA 97 Div 25 NEGATIVE LIMB OF ITAA 97 s 8-1  ITAA 97 Div 26 = list of specific items that are not deductible expenses TAX RELATED EXPENSES  ITAA 97 s 25-5 = provides taxpayers with deduction of any expenditure incurred in managing their ‘tax affairs’ that is fulfilling their tax obligations  Same provision provides a deduction for interest paid on underpayment or late payment of tax REPAIRS: CAPITAL  Repair that constitutes a capital expense is not deductible: s 25-10(3) ITAA 97  3 broad categories of expenditure on repairs that may be classified as capital o Initial repairs o Improvements o Replacements  s 25-10 o 1. You can deduct expenditure you incur for repairs to premises (or part of premises), or a depreciating asset that you held or used solely for the purpose of producing assessable income o 2. If you held the property partly for that purpose, you can deduct so much of the expenditure as is reasonable in the circumstances o 3. You cannot deduct capital expenditure under this section  Initial repairs o Law Shipping Co Ltd v IRC (1923) = repairs undertaken to remedy defects which exist at the time property is acquired are not deductible because they are capital expenses o Taxpayer would have received a deduction in purchase price of asset and so it is appropriate to treat the expenditure as part of cost of acquisition  Improvements o FCT v Western Suburbs Cinema Ltd (1952)  Damages ceiling repaired with newer better materials because existing materials were no longer available  Not deductible  Using new material was an improvement which changed the character of the asset  Test is whether the actual expenditure incurred by taxpayer constituted a repair  Replacements o Where repair to property involves a replacement, it is necessary to distinguish between  Replacement of part of an asset  treated as a repair and deductible

Replacement of whole of an asset  treated as a replacement and not deductible as capital o Lindsay v FCT  Taxpayer replaced wooden slipway with longer concrete one  Capital expense  new slipway replaced existing asset and was not part of asset o Samuel Jones & Co (Devondale) Ltd v IRC (1951)  Court held replacement of a chimney in need of repair with new one was a repair as chimney was an inseparable part of entire asset being the factory Notional repairs o Not deductible  FCT v Western Suburbs Cinemas Ltd 



BAD DEBTS  To claim deduction under s 25-35 important that in income year deduction is claimed o There is an existing debt o The debt is bad o The debt was actually written off, creating provision is not sufficient  Point v FCT (1970) o Taxpayer entered into agreement to release debtor from obligations to taxpayer in one income year and debt was written off the debt in following income year o Taxpayer was not entitled to deduction  In year debt was forgiven because it had not been written off  In following year as there was no existing debt PAYMENTS TO ASSOCIATIONS  ITAA 97 s25-55 allows deduction to maximum of $42 for payments made for membership of a trade, business or professional association  If there is nexus between payment and earning of income, then deduction can be claimed under s 8-1 which is not limited to $42 TRAVEL BETWEEN WORKPLACES  ITAA 97 s25-100 deduction is allowed for travel directly between 2 workplaces where taxpayer is engaged in income earning activities at each workplace  Expenses aren’t deductible if one workplace is also taxpayer’s residence: s 25-100(3) GIFTS  ITAA 97 Div 30 provides taxpayers with deduction for gifts to deductible gift recipients  Gifts can be of money or property  T/R 2005/13 to be deductible gift must be o Voluntary o Transfer beneficial interest in property to recipient o Made without expectation of material advantage in return 

FCT v McPhail (1968)

o Taxpayer made a contribution to a building fund to son’s school in return for lower fees o Taxpayer was denied a deduction for contribution to building fund on basis that it was not a true gift because taxpayer received material advantage in return PRIOR YEAR LOSSES  ITAA 97 Div 36 deals with tax losses, “which you may be able to deduct in a later income year”  s 36-10 = how to calculate tax loss for particular year TAX LOSS – ITAA 97 s 36-10  Tax loss = allowable deductions – assessable income – net exempt income  Net exempt income = exempt income – losses or outgoings incurred in producing exempt income – any foreign tax paid LIMITATIONS ON LOSSES  Prior year losses can be carried forward indefinitely  Entitlement to use losses may be restricted by o Companies  continuity of ownership and the same business test rules ITAA 97 Div 165 o Individuals  non-commercial loss rules ITAA 97 Div 35

CAPITAL ALLOWANCES

INTRODUCTION  General deduction provision prohibits deduction for capital item: s 8-1(2)(a)  Specific provisions may allow a deduction over period of time expense is expected to derive benefit  Types of deductible capital expenditure o Depreciation deductions o Capital works deduction o ‘Black hole’ expenses DIV 40 ITAA 97 – CAPITAL ALLOWANCES  This division allows you to claim as a deduction “an amount equal to the decline in value of a depreciating asset” over the term of its effective life where that asset is held, used, or installed ready for use by the taxpayer for a taxable purpose DEPRECIATING ASSET  s 40-30(1) = assets that have a limited effective life and can be reasonably expected to decline in value over the time it used  Assets excluded from definition o ITAA97 s40-30  Land  Trading stock  Intangible assets unless listed in s40-30(2)  Buildings unless considered capital works under Div 43 (s40-45(2))  Claiming a deduction o s 40-25(1)  “You can deduct an amount equal to the decline in value for an income year … of a depreciating asset that you held for any time during the year”  Jointly held assets o s40-25(1) Note 3  “Generally, only one taxpayer can deduct amounts of a depreciating asset. However, if you and another taxpayer jointly hold the asset, each of you deduct amounts for it: s40-35  Reduction of deduction o s 40-25(2)  “You must reduce your deduction by the part of the asset’s decline in value that is attributable to your use of the asset, or you having it installed ready for use, for a purpose other than a taxable purpose”  Immediate deduction o Assets costing less than $300 used predominantly in earning assessable income, that is not from business, is immediately deductible under s40-80(2)  Choice of method o A taxpayer has a choice of two methods to work out the decline in value of a depreciating asset  s40-70 = diminishing value method  s40-75 = prime cost method...