Topic 6 Gen dedns trading stock solutions-1 PDF

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ACC30005 Taxation Swinburne Business School Topic Six: Allowable deductions – General, denied deductions and trading stock Tutorial Questions - Solutions Question one i)

The payment would be a capital expense and therefore not deductible under ITAA96 s8-1. Sun Newspapers It would be considered a part of the cost of acquiring the new machine. Not deductible under the negative limb of ITAA97 s81. It would be added to the cost of the asset and then depreciated. We look at this in following topic.

ii)

The expenditure was not incurred in carrying out activities which produce assessable income. It is putting the taxpayer in a position where they can earn income. It is also expenditure of a private nature Lodge v FCT. It is therefore not an allowable deduction under ITAA97 s 8-1

iii) The cost of travelling to the sports activity from the school would be deductible. Travelling from the sports ground to home would also be deductible if this the sports ground was not his usual place of work. If however she went to the sports ground regularly so that it became one of his usual places of work then the journey home would not be deductable. Lunney’s case applies when travelling from home to your usual place of work. If she was carrying sports equipment, then Woite’s case would apply and the travel expense would be an allowable deduction under s8-1 iv) Fines are not generally incurred in respect of activities as a trader and thus fail to meet the positive tests in ITAA97 s8-1(1) They are a deterrent for a breach of the law not an incident of income earning activities Fines for a breach of the law are specifically non deductible ITAA97 s26-5 v) This is an allowable deduction ITAA97 s8-1 It is an incident associated with this type of business and the Herald and Weekly Times case would support the deductibility of the $10,000. vi) The expense is of a capital nature as it is protecting the entire profit making structure of the taxpayer. With de registration the possible the person can’t work as a medical practitioner so the out lay fits the three tests laid down in the Sun Newspaper case. The advantage sought was long lasting being able to work. The manner in which ort was to be relied on a long term benefit and the means adopted to obtain the benefit a once only payment vii) Preparation of partnership agreement for the purpose of establishing a business is normally a capital expense and not deductible. ITAA97 sec 8-1(2) (a) It has long lasting benefits and the decision of the Sun Newspapers would apply However can claim under ITAA97 sec 40-880 and write off over 5 years.

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viii) The business depends on the existence of the agreement and the exclusive rights that it grants. The legal costs are therefore incurred to protect the agreement and would be capital. The agreement is part of the profit making structure of the business. This is supported by Broken Hill theatres where the payment to try and attempt to prevent a competitor open in the vicinity was held to be capital. However the payment could be deducted over a five year period in accord with ITAA97 s40-880 ix) The payment was for refreshments to invited guests only. Therefore it is entertainment and is not deductible in accordance with ITAA97 s32-5 x) The loan was being used to finance new equipment to be used in the business. Therefore the interest would be an allowable deduction and S8-1 applies. The security offered for the loan is irrelevant.

Question two To be deductible the expenses must be incurred in gaining or producing assessable income ITAA97 s8-1. As Joan undertook the trip prior to commencing her employment then the cost would not be allowable as a deduction What if Joan undertook the trip after commencing work with the TV company? Answer As she is earning income as a journalist we have to ascertain if the outgoing is capital or private. Finns case indicates that travelling for the purpose of keeping abreast of her field in journalism the expenditure is not capital. Assuming that she spent all the time while travelling on her purpose of keeping abreast in her field then the trip would not be private. She would need to be able to substantiate all her expenses and keep a diary. Therefore with this assumption the travelling costs would be an allowable deduction under ITAA97 s8-1

Question three Where the home office is a principle place of business occupancy expenses, (rent, home loan interest, insurance) depreciation of office furniture and equipment and running costs (heating & lighting, cleaning costs) may be deductible on a proportional basis. (CGT consequences need to be considered) TR 93/30 – will allow deduction for heating/cooling, depreciation and lighting expenses where the study is used exclusively for income producing activities e.g. use of a separate room (whether or not set aside solely as a home office) a deduction is allowable. or ATO practice statement – power, heating and depreciation of office furniture can be claimed as a deduction at a specific rate per hour. A diary must be kept.

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Cases Swinford v FC of T FC of T v Faichney Handley v .FC of T. FC of T v Forsyth Handley’s case: Barrister city chambers plus home office. No deduction allowed for occupancy expenses (interest, rates & insurance) used study almost exclusively for professional purposes. Here no physical separation, of the study as was next to living room. Please note only the occupancy expenses were excluded. Forsyth’s case: barrister denied rent as deduction for rent paid to family trust which owned the house; study used more for “convenience’ as also had city chambers. Private study Study maintained at home as a matter of convenience, to carry out work that would otherwise be done at place of employment – generally only running expenses deductible. Place of business Factors indicating place of business. Area clearly defined as a place of business Not readily suitable or adaptable for use for private or domestic purposes Used exclusively or almost exclusively for carrying on a business Area used regularly for visits of clients or customers. Both running and occupancy expenses are deductible in this case Running expenses are; decline in value of and repairs of home office furniture and fittings, heating and cooling and lighting costs. Or claim a fixed rate per hour as per the Commissioners determination. Occupancy expenses; rent, mortgage interest, rates and insurance apportioned on a floor area basis. Or based on the amount of time spent in the home office of incomeearning activities

Question four i) Cashier robbed on the way to the bank The loss is an allowable deduction within ITAA97 s8-1. It was part of the routine activities of the business. Refer Charles Moore & Co v FCT. Any insurance recovery would be assessable income. ii) Travel costs of new staff The amount is deductible under ITAA97s8-1 as the expenditure was incurred in the carrying on of the business for the purpose of gaining assessable income iii) Legal costs This is a normal business risk when selling goods. As such it would be an allowable deduction under ITAA97 s8-1. Herald and Weekly times case supports this conclusion.

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iv) Bonus paid This would be an allowable deduction under ITAA97 s8-1 to the business. It is not capital nor a private expense Question five Patersons Assessable income Trading income $120,000 ITAA97 s6-5 Increase in trading stock Closing stock $10,000 (lowest value) less opening stock $8,000 = $2,000 ITAA97 s70-35 Total assessable income $122,000 Less allowable deductions Purchases of stock $80,000 ITAA97 s8-1 Other deductions $30,000 various Total allowable deductions $110,000 Taxable income $12,000 ITAA97 s4-15

Question six Megan i) You stop holding the item as trading stock but still own it. Taxpayer is deemed to have sold it at cost, the assessable income is $900 ITAA97 s70-110 ii) Dispose of the trading stock outside the ordinary course of business. Taxpayer is deemed to have sold it at market value, assessable income is $1,200 ITAA97 s70-90 iii) Cost of trading stock is deductible under s8-1 but the deduction is not allowed until the year the stock is on hand (i.e. when Megan has power of disposition). The advanced payment is deductible in the year ended 30 June 2017 because the stock is held by her shipping agent and title and risk have transferred to her. See All States Frozen Foods Pty Ltd v FCT.

Question seven Normally, if a company wishes to reduce its taxable income it will minimise the value of closing stock. A taxpayer has discretion to select one of three valuation methods under s.70-45, being cost, replacement value and market selling value. i) ‘Replacement value ’ $60 ii) Selling price $15 iii) Cost price $10

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iv) Materials, cottons etc used for spares in making repairs and alterations on hand at year end are NOT trading stock according to s.70-10. They appear to be consumables and may be expensed in the year purchased. There is no requirement to value in closing stock. They are not purchased for manufacture, sale or exchange in the ordinary course of a business.

Text book questions Question 12.1  Salary expenses → Deductible under s 8-1 of ITAA97 as they are necessarily incurred in carrying on a business to gain or produce assessable income and do not fall within any of the negative limbs of s 8-1: see [12.20]. 

Daughter’s salary → Satisfies the positive limbs of s 8-1 of ITAA97 as it is necessarily incurred in carrying on a business to gain or produce assessable income. However, it also falls within the last negative limb of s 8-1 regarding denied deductions. In this case, the payment is to his daughter who is a “related entity” per s 26-35(2). As such, the amount of the deduction is limited to the amount of the expense that the Commissioner considers reasonable: s 26-35 of ITAA97. $5,000 salary for one week of work to a university student is unlikely to be reasonable and therefore any excess will be a non-deductible expense and is effectively treated as a gift as it is non-assessable nonexempt income for his daughter: s 26-35(4). See [12.240].

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Travel expenses between home and work → As the expenses are incurred on travel between home and work, these expenses are not deductible as they are incurred to put him in a position to gain or produce assessable income rather being incurred in gaining or producing assessable income (Lunney). Further, they would be considered a private expense. None of the exceptions to the general rule appear to apply here: see [12.390].

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Travel expenses to client’s premises → These expenses would constitute travel between an alternative workplace and home and are considered to be incurred in gaining or producing assessable income rather than putting the taxpayer in a position to gain or produce assessable income. As such, they would satisfy the requirements of s 8-1 of ITAA97: see [12.430]. Expenses on new suit → This expense would not be deductible under s 8-1 as it is not incurred in gaining or producing assessable income (rather it is incurred to put the taxpayer in a position to gain or produce assessable income). Further, it would constitute a private or domestic expense and fall within the negative limbs of s 8-1 of ITAA97: see [12.750].

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Membership fees → The membership fees would constitute a “recreational club expense” which is a denied deduction under s 26-45 of ITAA97. As such, it is not deductible under s 8-1 of ITAA97 due to s 8-1(2)(d): see [12.240].

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Meal expenses → The meal expenses would constitute “entertainment”, which is a denied deduction under s 32-5 of ITAA97: see [12.250].

Question 12.3

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The issue here is whether the legal expenses are capital in nature. This is an issue to be argued using the relevant case law and it is open to students to argue either way: see.

Question 16.2 (a) The only amount that can be claimed as a deduction is $12,000 on the basis of FCT v James Flood Pty Ltd (1953) 88 CLR 492; and s 26-10 of ITAA 1997, which holds that provisions are not deductible, only the actual amount paid in any financial year. (b) The payment of insurance premiums for a period of 12 months are deductible, s 8-1. and annual fees are exempt from the prepayment rules s82KZL(1) (c) These expenses are deductible under s 8-1 in the current financial year on the basis that the expense has been “incurred”, although not actually paid. Expenses can be claimed on an ‘accruals’ basis and yet income and be recognised on a ‘cash’ basis. Under tax law, Nevilles case, there is no need to match expenses with income. (d) This expense is not deductible as it extends over two financial years. However, They will only be able to claim 1/12 of the payment, namely $1,000 in the current financial year and $11,000 in the following financial year. (e) This expense is deductible even though the amount paid refers to the next financial year as it will reduce future expenses. The authority for this statement is Neville and Co v FCT (1937) 56 CLR 290. (f) The interest expense is still deductible under s 8-1 of ITAA 1997, even though the income-producing business has ceased to operate. The authority for this statement is based on the decision in FCT v Jones (2002) 49 ATR 188.

Question 16.4 Computer Consultants Pty Ltd: 1.

Provision for long service leave is not deductible, only the amount actually paid: s 26-10 of ITAA 1997. 2. Maintenance fee over a 12-month period; expense over 12 months, so s 82KZL of ITAA 1936 applies and $10,000 deductible in the current year. 3. Provision for bad debts is not deductible, only the amount written off after action has been taken to recover the amount through debt collectors or legal action: s 25-35 of ITAA 1997.

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