Sadiq, K. et al., 2019. Principles of taxation law 2019, Thomson Reuters (Professional) Australia Ltd.Answers to QuestionsCHAPTER 12 – GENERAL DEDUCTIONSQuestion 12.1Answer Salary expenses → Deductible under s 8‐1 of ITAA97 as they are necessarily incurredin carrying on a business to gain or produce assessable income and do not fall withinany 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 necessarilyincurred in carrying on a business to gain or produce assessable income. However, italso falls within the last negative limb of s 8‐1 regarding denied deductions. In thiscase, 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 theCommissioner considers reasonable: s 26‐35 of ITAA97. $5,000 salary for one weekof work to a university student is unlikely to be reasonable and therefore any excesswill be a non‐deductible expense and is effectively treated as a gift as it is non‐assessable non‐exempt income for his daughter: s 26‐35(4). See [12.240]. Travel expenses between home and work → As the expenses are incurred on travelbetween home and work, these expenses are not deductible as they are incurred toput him in a position to gain or produce assessable income rather being incurred ingaining or producing assessable income (Lunney). Further, they would be considereda private expense. None of the exceptions to the general rule appear to apply here:see [12.390]. Travel expenses to client’s premises → These expenses would constitute travelbetween an alternative workplace and home and are considered to be incurred ingaining or producing assessable income rather than putting the taxpayer in aposition to gain or produce assessable income. As such, they would satisfy therequirements 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 isnot incurred in gaining or producing assessable income (rather it is incurred to putthe taxpayer in a position to gain or produce assessable income). Further, it wouldconstitute a private or domestic expense and fall within the negative limbs of s 8‐1of ITAA97: see [12.750]. Membership fees → The membership fees would constitute a “recreational clubexpense” which is a denied deduction under s 26‐45 of ITAA97. As such, it is notdeductible under s 8‐1 of ITAA97 due to s 8‐1(2)(d): see [12.240]. Meal expenses → The meal expenses would constitute “entertainment”, which is adenied deduction under s 32‐5 of ITAA97: see [12.250].2Question 12.2Answer Plane ticket:o The cost of the airfare to attend the accounting conference wouldgenerally be deductible under s 8‐1 of ITAA97 as a self‐educationexpense as the conference is related to her income‐earning activities.o However, there is a question as to whether the whole amount would bedeductible as Sulin also visited her family while she was in Hong Kong.As such, some or all of the expense may constitute a private or domesticexpense.o In Taxation Ruling 98/9, the Commissioner makes the followingcomments in relation to expenses incurred in attending a conferencewhere there is also an incidental private purpose:(e) The intention or purpose in incurring the expense may be an element indetermining whether the expense is allowable.63. An expense is deductible under section 8‐1 when the essential character isthat of an income producing expense. The essential character is to bedetermined by an objective analysis of all the surrounding circumstances (seeFletcher v FCT (1991) 173 CLR 1 at 17; 91 ATC 4950 at 4957 and 4958; (1991) 22ATR 613 at 622).64. If the purpose of a study tour or attendance at a work‐related conference orseminar is the gaining or producing of income, the existence of an incidentalprivate purpose does not affect the characterisation of the related expenses aswholly incurred in gaining assessable income.65. Both Ronpibon Tin NL (78 CLR at 59; 8 ATD at 437) and Fletcher v FCT (1991)173 CLR at 16; 91 ATC at 4957; 22 ATR at 621 recognise there are at least twokinds of expenditure that require apportionment under s 8‐1. The first isexpenditure in respect of a matter where distinct and severable parts aredevoted to gaining income and other parts are devoted to some other end. If astudy tour or work‐related conference or seminar was mainly devoted to aprivate purpose, such as having a holiday, and the gaining or producing ofincome was merely incidental to the private purpose, only those expensesdirectly attributable to the income‐earning purpose would be allowable.66. The second kind of apportionable expenditure is a single outlay that servesboth an income‐earning purpose and some other purpose indifferently. Whilethe High Court recognised that there can be no precise arithmetical division insuch cases, it said there must be some fair and reasonable division on the factsof each case. For example, if a study tour or work‐related conference or seminaris undertaken equally for income‐earning purposes and private purposes, itwould be appropriate to apportion the expenses equally between the purposes.o The amount of Sulin’s deduction in relation to the air fare depends onher purpose in undertaking the travel. As the conference ran for twodays and she stayed on for four days, it is possible that she had twoequal purposes in attending the conference and, as such, only half of the3airfare is deductible: see [12.620] and [12.690]. However, if Sulin is ableto demonstrate that her sole purpose in incurring the airfare was toattend the conference and the holiday was merely incidental to herdominant purpose of attending the conference, it is possible that shecan deduct the whole airfare. The proportion of time spent on eachpursuit is only one indicator in determining whether apportionment isrequired. Hotel costs → These expenses should be fully deductible under s 8‐1 as they arepart of her self‐education expenses in attending the conference: see [12.620].Question 12.3AnswerThe issue here is whether the legal expenses are capital in nature. This is an issue tobe argued using the relevant case law and it is open to students to argue either way:see [12.170]–[12.210] and [12.840]–[12.850].Question 12.4Answer“Cents per kilometre” method Number of business kilometres travelled = 12,000 but limited to 5,000 under thismethod Car expense = 5,000 x $0.68 = $3,400See [12.460] – [12.480]“Log book” method Expenses = $2,000 (registration and insurance) + $1,000 (repairs and maintenance)+ $1,500 (oil and fuel) + $6,732 (interest = $60,000 x 15% x (273/365)) + $2,300(depreciation) = $13,532 Car expense = $13,532 x (12,000/15,000) = $10,826o (12,000/15,000) represents the business use percentage. NB: The expenses are deductible under s 8‐1 as they have been incurred in gainingor producing assessable income. Rumpole must be able to substantiate his expensesto claim a deduction under this method.See [12.550] – [12.570].Question 12.5AnswerThe deductibility of the $110 fine will depend on whether Sarah can establish a sufficientnexus between the payment and her income‐producing activities: see [12.40]–[12.110].4 Note that the denial of deductions for penalties under s 26‐5 will not apply as this isa private penalty and not prescribed by law.Question 12.6Answer Interest is deductible where the borrowed funds were used in gaining or producingassessable income. If we conclude that the library fine is deductible, then it wouldfollow that insofar as the interest relates to that, it should be deductible. Insofar asinterest relates to the speeding fine – not deductible because the speeding fine itselfis not deductible (a getting to work expense, a private expense and a penalty).Apportionment of the interest is necessary: see [12.220]; [12.240]; [12.270]–[12.280]; [12.390]; [12.810].Question 12.7Answer Sarah cannot claim a deduction for the expenses if she is reimbursed for them:see [12.260].Question 12.8Answer It is necessary to consider whether the legal expenses may constitute a capitalexpense: see [12.170]–[12.210] and [12.840]–[12.850]. The issue is whether the legal expenses relate to Martha’s income producing structure (in which case they arecapital) or her income producing process (in which case they are deductible).Question 12.9Answer Despite the fact that Martha does not have an alternative proper office, this wouldstill not be a genuine home office because it is in her lounge room. It may perhapsqualify as a home office if she put up partitions. If it is not a “genuine home office”Martha cannot claim any portion of her mortgage payments as a deduction. She willbe able to claim a portion of her electricity expenses as a deduction and Martha willhave to determine a reasonable basis for apportionment. The lease payments areprima facie deductible but the amount of the deduction will depend on the extent ofthe use of the laptop for income‐producing purposes: see [12.700]–[12.730].5Question 12.10Answer The issue here is whether this is a capital or revenue expense: see [12.170]–[12.210]. Arguably it is a capital expense as it relates to her income‐producingstructure as is likely to provide Martha with a lasting benefit. However, Marthamay also be able to argue that the DVD production costs are akin to marketingcosts and simply relate to her everyday income producing activities (incomeproducing process) and should therefore be deductible.Question 12.11Answer The issue here is whether there is a sufficient temporal nexus or connection withthe positive limbs of s 8‐1. Property broker’s feeAt the time Jake incurred the property broker’s fee, the purpose was to assistwith finding a suitable investment property (for Jake, this would be a capitalasset). It seems that there would be an insufficient nexus with the positive limbsof s 8‐1 as it could be viewed that the expense was incurred to put Jake into aposition to gain or produce assessable income, rather than the production ofassessable income itself.Notwithstanding, the property broker’s fee could also be a non‐deductiblepreliminary cost. See [8.110]–[8.120]. Bank interest chargesThe bank interest charges accruing on the line of credit facility would bedeductible, provided Jake uses the funds to pay for the cost of the land. Eventhough the land and development would not produce assessable income until alater income year, it seems that Jake had no other purpose in incurring theinterest expense other than for the production of assessable income: Steele vDCT (1999) 41 ATR 139.Question 12.12Answer It is likely that the interest charges would continue to be deductible on the basisthat the occasion of the outgoing arises out of Jake’s past business activitieswhich were for the purpose of producing assessable income: FCT v Jones (2002)49 ATR 188.6Question 12.13Answer The interest charges would still be deductible, provided Jake used the funds topurchase the land. Deductibility of interest charges depends on the use of theborrowed funds: FCT v Munro (1926) 38 CLR 153. It does not matter that Jake’sresidential home is used as security for the loan.Question 12.14Answer A taxpayer’s subjective intention is not usually relevant in determiningdeductibility. However, Jake would make a loss as the loan provided by the bankis at an interest rate of 8.5% per annum and the funds are on‐lent at 3% perannum to his sister, being a related party. Consequently, Jake’s subjectivepurpose may be looked at and the deduction of interest may be limited to theamount of income produced: Ure v FCT (1981) 11 ATR 484.Answers to QuestionsCHAPTER 13 – SPECIFIC DEDUCTIONSQuestion 13.1Answera) Cheryl can claim a deduction for $300 under Div 30 of ITAA97 as the building fund of thelocal public primary school is likely to be a “deductible gift recipient”: see [13.130]. TheCommissioner has published TR 2013/2 which discusses when gifts to school or collegebuilding funds will be deductible under Div 30.b) The $50 is not deductible as it is not a “true” gift. Cheryl has received a materialadvantage in return for her $50 as she does not need to pay the membership fees of$20: McPhail (Case study 13.4); see [13.130].c) Cheryl can claim a deduction for $42 under s 25‐55 of ITAA97 as the $700 is a paymentfor membership of a business association. The remaining $658 is unlikely to bedeductible as it would not satisfy the positive limbs of s 8‐1 because it has not beenincurred in gaining or producing assessable income (Cheryl has not been working as areal estate agent for the last two years): see [13.100], [12.40] and [12.70].7Question 13.2Answerb) The expenses are likely to constitute repairs as the wall is in need of repair and is beingrestored to its previous condition (assuming the same materials are used) and would bedeductible under s 25‐10 of ITAA97: see [13.30]–[13.70].c) Assuming that Digby used the same type of carpet again, the expense is likely to bedeductible under s 25‐10 of ITAA97 (if a different, better carpet is used, then it may beviewed as an improvement rather than a mere repair: see [13.30]–[13.70]). However, anissue here may be whether Digby is replacing the whole of an asset which is a capitalexpense and not deductible under s 25‐10: see [13.30]–[13.70]. This would seemunlikely because the carpet would be difficult to separate from the rest of the bookstoreas a separately identifiable asset with an independent use.d) The installation of the new payment counter with signs will not be a repair but areplacement of a whole asset (payment counter) and also possibly an improvement(because of the new display signs) and therefore a capital expense. Digby may beentitled to depreciation deductions under Div 40 of ITAA97: see Chapter 14; see also[13.30]–[13.70].e) Repainting with a new type of paint may be a repair and deductible under s 25‐10 ofITAA97 but is more likely to constitute an improvement and therefore be treated as acapital expense: Western Suburbs (Case study 13.1); see also [13.30]–[13.70]. The costof the repainting could be added to the cost base of the building: see Chapter 11.Question 13.3Answer Accountant’s fees are deductible under s 25-5 of the ITAA97 as a tax-relatedexpense: see [13.20]. It does not matter that the advice relates to a capitaltransaction.Question 13.4Answer Year 1:o $600,000 assessable income; $1,000,000 deductions therefore tax loss =$400,000. Year 2:o carry‐forward loss must first be deducted against net exempt income. $300,000(net exempt income) minus $400,000 (carry forward loss) = (‐)$100,000 carryforward loss remaining.o $200,000 assessable income and $500,000 deductions = $300,000 current yeartax loss.o therefore, Beta has $400,000 losses to be carried forward.8 Year 3:o carry‐forward loss must first be deducted against net exempt income (in theorder in which they were incurred).o $200,000 (net exempt income) minus $100,000 (Yr 1 loss remaining) = $100,000,then minus $300,000 (yr 2 tax loss) leaves (‐)$200,000 carried‐forward loss.o assessable income of $500,000 minus deductions of $200,000 = $300,000.o Beta can choose how much of its carried forward loss of $200,000 it wants todeduct against its assessable income. However, it must satisfy the lossrecoupment tests to do so.See [13.180].Question 13.5Answer $2,000 not deductible because there is only a provision for bad debts, not a write‐off. $1,000 write‐off should be deductible as a bad debt expense as the amount haspreviously been included in Big Shoes’ assessable income.See [13.80].Question 13.6Answer The train fare from the hospital to the university will be deductible under s 25‐100 as itrelates to travel directly between two income‐producing workplaces and neither is hishome. See [13.110]. The train fare from the university to his home will not be deductible as it is a private ordomestic expense: Lunney. See Chapter 12.
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