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ACC30005 Taxation Week 7: General deductions denied deductions and trading stock Solutions From the text book Question 12.3 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.

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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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