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TUTORIAL 9 Prepared by Ian Henry

GENERAL DEDUCTIONS 1

Why was the expense allowed in FCT v Finn (1961) 106 CLR 60 but not fully in FCT v Hatchett 71 ATC 4148? How does this approach demonstrate the operation of section 8-1? Education related expenses. In FCT v Finn, all expenses incurred for taxpayer to study architecture overseas are allowed as it had been proven that all expenses are incurred directly because of the studies which related in full to the taxpayer’s income producing activities. In FCT v Hatchett, only education expenses relating to the taxpayer’s income producing activities. This demonstrates the concept of apportionment, giving the effect to the phrase “to the extent” in section 8-1

2

Joseph worked for a large IT company developing software. At the end of a financial year he was called in by his employer and told he was being made redundant. He was however advised to set up a company and his services would be utilized through the company as and when required. He thus set up JIT Pty Ltd, as a consulting IT business. Much of his work is for his previous employer. The business is run from his residential premises in a room set up especially for the conduct of the business. The company pays government rates and insurances on the premises, and contributes toward the heating and lighting costs of the premises from which it operates. In the first year of operation the company claims these expenses as a tax deduction. As well, Joseph claims his travel from the company’s premises to consulting jobs and back as a deduction. Explain the correctness of the company and Joseph in deducting these expenses. By ruling TR 93/30, it can be established that the room set aside especially for the business is considered a “genuine home office”. However, Joseph can only claim a portion of the running and occupancy expenses, and not the entirety of it as only part of those costs can be attributed to income-producing activities. That is to say, if the company claims the whole amount of expenses, their deduction claim will be amended. If the “room” is proven to be a genuine home office, travelling between the premise to jobs and back can also be considered travelling for work purposes and thus can be allowed as a deduction.

3

What is the effect of the following transactions on the tax position of ABC Pty Ltd. You can assume all transactions occurred in the current financial year. Transaction Purchased new motor vehicle on 1 July - capital Purchased trading stock – deductible (30,000x30%= 9,000)

$ Amount involved 62,000 30,000

Revalued land and offices on site from which business run - capital Acquired land to expand factory - capital Sold case of wine in November, purchased for $24,000 as an investment in February 1990. – CGT tax on $32,000 32,000x30%=9,600 Made allowance for annual leave to be paid to staff for Christmas leave – deductible 12,000x30%=4,000 Provided new motor vehicle to Managing Director, estimated to travel 20,000 kilometres per year – FBT tax for car expenses 0.2x62,000x2.0802x47%=$12,123 Gave to each staff member one piece of furniture valued at no more than $200 – an exempt FB Received fully franked dividend Assessable income 60,000/0.7=85,714.29 Tax credit $25,714.29

70,000 120,000 56,000

12,000

Same vehicle mentioned above.

9,400 60,000

Specific Deductions 1

For the tax year ended 30 June 2013 Paul Berger, who is a self-employed physiotherapist, incurred the following expenses on his professional rooms, which he had acquired in July 2003: Date

Item

$

1.8.12

Repair to leaking roof

1,400

10.9.12

Painting outside of surgery and consulting rooms

2,800

1.3.13

Replacement of vinyl flooring in reception room

2,500

10.4.13

Resealing patient car park

7,100

15.6.13

Gardening: removal of dead tree

500

Advise Paul Berger what deductions (if any) could be claimed in respect of the above expenditure for the tax year ended 30 June 2016. First of all, it is important to prove that the property is for income-producing activities and as Paul works from his professional rooms as a self-employed, this condition is satisfied. Furthermore, only repairs items that must be in need of restoration can be allowed deductions (Case J47 (1958) 9 TBRD 244). Thus, the nature of the expenditure has to be replacement to a defect, not an initial repairs (that is for pre-existing defects at the time of purchase), improvement or replacement of the whole asset which is capital in nature. For this reason, it looks like only the repair to leaking roof and removal of dead tree are deductible. Painting the rooms is more of an improvement whereas replacing

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flooring and resealing car park are replacement of the whole asset which appears to be more capital in nature. The accounts clerk of Fin Co provides you with an analysis of the funds receivable for the tax year ended 30 June 2013 as follows: Item

$

Accounts receivable

990,000

Estimated bad debts

20,000

Estimated doubtful debts

70,000

Debts written off during year

5,000

Assuming that Fin Co satisfies the “continuity of ownership test”, what amount(s) (if any) could be claimed as a deduction by the taxpayer for the 2015/2016 tax year? In order for a taxpayer to claim a deduction for bad debt under s 25-35  There has to be an existing debt  The debt has to be bad  The debt was actually written off Thus the only amount that can be claimed as a deduction is the written off debt $5000 3 At one point in time previous year business losses could only be carried forward for seven years. Nowadays there are no restrictions on the use of previous year losses. Discuss It is important to note that when tax payer has exempt income, prior year losses have to be applied against the exempt income first and any remaining amount then applied to the taxpayer’s assessable income per s36-15 (non-corporate entities) and s36-17 (corporates). Furthermore, where taxpayer has losses from more than one year, the losses are deducted in the order in which they are incurred. In addition to above, the rule of indefinite prior losses offset is restricted by continuity of ownership and same business loss recoupment test for companies or non-commercial losses rules for individuals. 4 Martha was a primary school teacher. Martha was also keen on astrology. To encourage others Martha would run “observatory nights” to teach anyone who wanted to know a little about the stars. Martha charged people $10 to attend one of these sessions. Martha had an expensive telescope she used for her own star gazing, but also used it for her “observatory nights”. She housed the telescope in a converted garage, which was heated and far more comfortable for star gazing. Martha made a loss on her “observatory nights” business of about $7,000 per year, and has claimed this loss against her teacher’s salary. Can Martha claim the Observatory nights losses against her other income?

Division 35 of ITAA97 would prevent Martha from claiming for this deduction. This division deems the losses incurred for the observatory night as noncommercial business activities unless Martha can satisfy one of the below  Assessable income from the business for the income year is at least $20k  The business made profit for income tax purposes in at least 3 of past 5 income years  Total value of real property for business is at least $500,000  Total value of other assets used in business is at least $100,000 It does not look like Martha can satisfy any of the above and thus she cannot claim the deduction as it is prohibited by the Act. 5

During the 2015/2016 tax year, Tasman Ltd incurred the following expenditure: 1 November 2015: entertainment expenditure associated with the launch of a new product — $12,000 – deductible  12 December 2015: expenditure on a staff training seminar on “motivation and sales psychology” — $2,500 – deductible  4 January 2016: expenditure on a gymnasium attached to work premises — $120,000 – capital  During the whole tax year, expenditure on meals provided to staff in the executive dining room — $7,000 – deductible 

Advise Tasman Ltd what deductions (if any) it could claim regarding the above expenditure for the tax year ended 30 June 2016. 6 The first negative limb of section 8-1 means capital expenditure is not deductible. Why then do business continue to buy new capital equipment on a regular basis if there is no tax advantage? Capital equipment is an essential part in running a business so even without tax advantage, it is still required to maintain the business or to produce a competitive advantage over competitors in the market. More importantly, even though they can’t claim immediate tax, they can capitalise the equipment and depreciate over its useful life which reduces their profits and thus effectively reduce their tax liability. 7 How would the purchase of the following items effect the taxable income of the business that makes computers? (i)

Bought $20,000 worth of components to make the computers – deductible so a reduction of 20,000x30% in tax (ii) Paid $15,000 rent on fork lift trucks that were hired for use in the business deductible (iii) Paid 10,000 for the hire of “function room” for a dinner for all those clients who had bought over $15,000 worth of computers off the business during the year – deductible (iv) Bought a new delivery truck for $95,000 - capital, no deduction 8 A bad debt is generally considered provisional for tax purposes until certain criteria are satisfied. What is the consequence of this? What are the criteria referred to that mean a bad debt is no longer provisional?

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Are the following expenses allowable as tax deductions? Give brief reasons and/or references to applicable sections of the income tax legislation, where necessary to support your answer. (Note: assume that all of the expenses were incurred during the 2015/2016 tax year.) Subscription to a club which a self-employed taxpayer used to entertain

business acquaintances. Parking fines paid by a courier company. Discount allowed by a merchant on selling his book debts to a finance

company on the winding-up of his business. Bonus due to an employee, but paid directly to a charitable institution at the request of the employee. Bank interest paid in respect of an overdraft secured on a taxpayer's private home and used in her business to purchase additional manufacturing plant. An amount paid by a company in bringing a new employee from overseas to take-up a position with the company in Australia. Legal costs incurred by a wholesale merchant in discharging a mortgage over storage buildings, which had been used as security for a loan for the purpose of financing his business activities....