Determining Allowable Deductions And Foreign Tax Offset: An Analysis

Discuss whether the following are allowable as deductions under s 8-1 of ITAA 1997.

1. The cost of moving machinery to a new site
2. The cost of revaluing assets to effect insurance cover
3. Legal Expenses incurred by a company opposing a petition for winding up
4. Legal Expenses incurred for services of a solicitor in respect of a number of matters, including conveyancing, discharge of a mortgage, and general legal advice relating to a client’s business operations. (The Solicitor account does not separate the costs for various matters.)

Big Bank Ltd operates nationally with more than 50 branches, a 10-storey head office and numerous call centres. It is registered for GST purposes. Big Bank has for many years provided loans and deposit facilities to customers in Australia. Last year it launched a new product, Big Bank home and contents insurance policies. It was a significant step for Big Bank and required it to change some of its computerised accounting systems due to the fact that GST needed to be charged on the new product.

Big Bank budgeted to spend $1,650,000 (including GST) on advertising campaigns last year. Of that sum, $550,000 was allocated to a television advertising campaign specifically promoting Big Bank home and contents insurance policies. The other $1,100,000 was allocated to a general advertising campaign, including television, radio and print media advertisements promoting Big Bank to the public as the bank that is “Here for You”.

When Big Bank Ltd launched Big Bank home and contents insurance policies, it forecast that its home and contents insurance business would constitute 2% of its entire enterprise. Big Bank has been proved correct in its forecasts. The other 98% of its enterprise is made up of its traditional loans and deposit facilities businesses.

Last month, the advertising consultants issued their tax invoice for $1,650,000.

Discuss Big Bank's ability to claim input tax credits with respect to its advertising expenditure of $1,650,000.

The following are the current year details of Angelo’s income, expenses and the foreign tax he paid. All of Angelo’s foreign income amounts have been converted to Australian dollars.

Gross income	$
Employment income from Australia	44,000
Employment income from United States	12,000
Employment income from United Kingdom	8,000
Rental income from property in United Kingdom	2,000
Dividend income from United Kingdom	1,200
Interest income from United Kingdom	800
Total gross income	68,000

Expenses	$
Medical expenses	5,000
Expenses incurred in deriving employment income from Australia	4,000
Expenses incurred in deriving employment income from United States	900
Expenses incurred in deriving rental income from United Kingdom	500
Gift to a deductible gift recipient	400
Interest (debt deductions) incurred in deriving dividend income	140
Expenses (debt deductions) incurred in deriving interest income	60
Total expenses	11,000

Foreign tax paid	$
Employment income from United States	3,600
Dividend income from United Kingdom	120
Interest income from United Kingdom	80
Rental income from United Kingdom	600
Total foreign tax paid	4,400

Determine Angelo’s foreign tax offset.Johnny and Leon are adult partners in a business selling sporting goods.

The partnership records, excluding GST, for the current income year disclose the following:

Receipts ($):
400,000	Sales of sporting goods (see Note 3)
10,000	Interest on bank deposits
21,000	Dividend franked to 60% received from an Australian resident company
10,000	Bad debts recovered
50,000	Exempt income
30,000	Capital gain from the disposal of shares acquired in 2009 and sold in June this income year (see Note 4)
10,000	Salary to Johnny
15,000	Salary to Leon
16,000	Fringe benefits tax
2,000	Interest on capital provided by Johnny
4,000	Interest on loan made by Johnny to the partnership
3,000	Johnny's travelling expenses from home to work and return (see Note 5)
2,000	Legal fees for the renewal of lease of the office building
1,200	Legal expenses for preparation of a partnership agreement
700	Legal expenses for preparation of new lease of business premises
500	Debt collection expenses paid to a solicitor
500	Council rates on business premises
25,000	Staff salaries (see Note 6)
30,000	Purchase of sporting goods supplies
20,000	Rent on retail shop
30,000	Provision for doubtful debts (see Note 10)
10,000	Business lunches (see Note 11)

Notes
1.	Partnership profits and losses are shared between Johnny and Leon on an equal basis.
2.	The partnership is registered as a Small Business Entity (SBE).
3.	On 1 January this income year the partners discovered that an employee had stolen $3,000 cash in respect of money received from sales to customers.
4.	Johnny and Leon made a capital loss of $15,000 from the disposal of shares acquired in 2006 and sold in 2011.
5.	Johnny often takes work home as he finds it convenient to plan the next day's work in his home study.
6.	Staff salaries include $10,000 paid to Johnny's son Johnny Jr for washing the partners' cars. The Commissioner considers $5,000 to be a reasonable commercial rate for washing the cars.
7.	Stock at beginning of the year was: $20,000.
8.	Stock at end of the year was: Cost $16,000
	(a)	Market selling value $18,000
	(b)	Replacement $17,000
9.	Johnny and Leon did not make an election under s 328-285 of ITAA97.
10.	Johnny and Leon are owed $30,000 by a debtor who is bankrupt. They believe it is very unlikely that they will recover any money from the debtor, and do not take any action to recover the money.
11.	Johnny and Leon spent $10,000 on business lunches with overseas buyers at expensive restaurants.
12.	In the last income year, Johnny and Leon made a net partnership loss of $40,000.
13.	Johnny and Leon wish to minimise their tax liabilities for the income year.

Calculate the net income for the partnership for the income year.

Rules and Laws for s 8-1 of ITAA 1997 in the Case of Big Bank Ltd

The problem and the challenge that has been explained with respect to this case study tries to handle the cost of transporting the machine and obtaining allowable deductions in income tax. There are numerous rules and laws that can be applicable with respect to the case study and each of them are explained as follows:  

Rules: 

• “Section 8-1 of ITAA 1997”
• “British Insulated & Helsby Cables v. Atherton (1926)”

The generated cost due to the transporting of the machinery to a new location includes the capital expenditure in accordance to “Section 8-1 of ITAA 1997”. It has been viewed that “Section 8-1 of ITAA 1997” has brought about the fact that the deductions that are permissible for the intention of income tax is granted when the expenditure is experienced for trade functions for each day. It has further been explained that the incurred expenditure for relocating the machinery to its new site presents a minimal transition, which may not be permitted for any deductions and thereby raises cost of depreciation.

As cited in the “Taxation Ruling of TD 93/123” the expenses that are associated in installing the machine and initiation the process of manufacturing and discloses the profit and thereby leads to a rise in the benefit of the operations of the business (Watts 2015). Hence, according to “Section 8-1 of ITAA 1997” the relocation expenditure for the machinery in the new region is the capital expenses and therefore no allowable deductions can be provided in this scenario. According to “British Insulated &Helsby Cables v. Atherton (1926)”, there has been a rise the profit for the business and due to the transformation of the assets that are in nature depreciable for the organization (Hopkins 2016).  

Conclusion 

The explanation of the “Section 8-1 of ITAA 1997” with respect to the expenses of relocating the machinery to the new site has been explained as the cost of capital that has been not permitted for the deductions in the income tax.

Issue: 

The area that has been discussed in this issue is the impact of the coverage of insurance in the asset revaluation and would be signified as allowable deductions of income tax with respect to “Section 8-1 of ITAA 1997”. The rules and the laws that are applicable to this scenario are given below:

Rule: 

• “Section 8-1 of ITAA 1997”

The scenario has explained that the expenses has connections with the cost of recurring. Therefore, during the time of determining the overall value of permissible business subtractions, it has been imperious for the firm to determine the fact that the expenditure gained during the asset revaluation method, which raises the earnings of the firm and the expenditure that has taken place during the method of securing the asset (Niazi and Krever 2017). In the scenario that the revaluation expenses of the asset is ascertained that is of nature recurring and has been regarded as deductions that are permissible for the intention of income tax that are under the “Section 8-1 of the ITAA 1997”.

Conclusion 

In regards to “Section 8-1 of ITAA 1997”, it has been explained that the asset revaluation has a significant impact on the coverage of the insurance and is taken as a deduction for income tax. The key factor for including the deductions for the income tax has been due to the fact that the expense possesses the nature of recurrence features.

Rules and Laws for Angelo's Income, Expenses, and Foreign Tax Offset

Requirement 1.3 

Issue 

The problem that has been explained in this case study has been managing the challenges related to the legal expenditure that has taken place during the method of closing down the business of the organization. Therefore, the legal expenditure has been found to be deductions that are non-allowable in accordance to “Section 8-1 of ITAA 1997”. The laws and the rules that are associated with this scenario are as follows:

• Sun Newspaper Ltd vF C of T (1938)
• Section 8-1 of the ITAA 1997

The Taxation Ruling of ID 2004/367 describes that there are certain legal expenditure that that can be claimed for the purpose of deductions in relation to the business. In accordance to “Sun Newspaper Ltd v F C of T (1938)” the verdicts have explained that when the legal cost is devoted towards the course of the structural intention more than for the intention that is operational in nature, then the expenditure and the outflows would be considered as capital expenditure (Lang 2014).

Due to this outcome, these expenditures would not be regarded for the intention of income tax deductions. There are distinct legal expenditure that has been acquired during the operations of the organization are generally considered for deductions in the earnings with respect to “Section 8-1 of ITAA 1997”. Furthermore, it is authoritative to ascertain the features of the legal costs during the claims for deductions related to the income tax. By undertaking the activities of the solicitor is presented as the organizational expenses that is associated directly to the creation of the earnings of the firm (Mumford 2014). It is due to this effect, that the expenses would be permissible for the determination of the income tax as it has been gained from the business operations of the firm.

Conclusion 

By looking at the citations given in the explanations that have been given earlier and seeking assistance of “Section 8-1 of ITAA 1997”, it can be depicted that the expenses of the solicitor can be taken into consideration for deductions that are permissible.

Requirement 1.4 

Issue

The statement of the problem has brought forward the problem that the legal expenditure payment given to the solicitor is determined as deductions that are permissible with respect to “Section 8-1 of the ITAA 1997”. The rules associated with this case study will be given as follows:

• Section 8-1 of the ITAA 1997
• Herald and Weekly Times v F C of T (1962)

In the context of “Section 8-1 of ITAA 1997” where it has been explained precisely that the legal expenses that has taken place for the discharging of the organizational business functions that creates a section of the each day activities of the taxpaying individuals that are specifically regarded for deductions (Dicey 2017).

There is even an exemption to the matter, which has been that the expenditure are nationalised or the carrying factor of the private expenditure or gained for the manufacture of the income that is non-exempted and in this respect they are considered for deductions in the income tax. By looking at the decisions that has been described in the case study of “Herald & Weekly Times v F C of T (1932)” the expenses that are in nature legal with respect to “Section 8-1 of the ITAA 1997” and has been experienced from the regular operations of the business then it would be looked upon as deductions for income tax (Aroney et al. 2015).

Rules and Laws for Determining Net Income of Johnny and Leon's Partnership

The current case study has highlighted that the legal cost for engaging the service of the solicitor in accordance to numerous business operations would be looked upon as allowable income tax deductions with respect to “Section 8-1 of ITAA 1997”. The solicitor’s service expresses the expenditure that are associated directly for the emancipation of the functions of the business and therefore it would be looked upon as the deductions for the intention of income tax.

Conclusion 

As described from the case study that has been undertaken before, the legal expenditure for the solicitor’s services in the discharging of the various activities that are associated with the everyday operations and this would be considered as deductions under “Section 8-1 of ITAA 1997”.    

Issue 

The statement of the issue of the case scenario has been reliant on the determination of the prerogative of the promotional and advertisement expenditures that have been paid by Big Bank Ltd with respect to the “Legislation of GSTRAct 1999”. There are certain rules that are applicable with respect to the scenario as well and they have been laid down as follows:

• “GST Act 1999”
• Paragraphs 11-5 and 15-5
• Subsection 15-25
• “Goods and Services Tax ruling of GSTR 2006/3”
• “Ronpibon Tin NL v F C of T”

The statement of the issue that is in relation to Big Bank Ltd looks for the determination of the input tax credit with the incorporation of “Taxation Ruling of GSTR 2006/03”. The “GSTR 2006/3” is apprehensive with the method that requires to be incorporated in the current scenario of Big Bank in order to determine the volume of the input tax credit for the value of the financial supplies that is undertaken by Big Bank along with the value that is inclusive of the “GST Act 1999”.

The legislation of GST distinctly put forth the level of ascertaining the creditable intentions and it is found in Section 11-15 and 129 of the GST Act (McGee, Devos and Benk 2016). The entities that are taxable require to be listed or they may even get the registration in accordance to GST Act 1999 and have even exceeded the limit of the financial acquisition. The “Goods and Service Tax Ruling of GSTR 2006/3” distinctly puts forth that the entities of the business requires to gain the registration in accordance to GST Act 1997 for the GST value that is included in the financial supplies that are undertaken (Joseph 2017). Hence, as an outcome, the organizations that are registered would be liable to claim input credit tax.

According to the scenario that have been put forth with respect to the case study of Big Bank Ltd, it is evident from the transaction that the bank had to undergo an expenditure of $1,650,000 that is associated with the advertisement expense and are inclusive of the GST value within the financial supplies cost. With respect to Big Bank Ltd, it can be said that the bank is eligible for the privilege of the input tax credit or the decreased input tax credit. As explained in the “GSTR Ruling of 2006/3”, a firm that is registered under the GST Act or needed to gain the registration then the firm requires paying out the GST inclusive price of the financial supplies (Chen 2017). The GST legislation explains that the professional organizations are needed to pay the GST associated to the financial supplies manufactured or created imported by the organization.

Calculation of Input Tax credit
Particulars	Amount ($)
Total spending on advertisement and promotional activities
GST input credit 100% eligible for:
Portion of advertisement expenditures ineligible for input credit in respect of GST
100%  GST input credit	100,000.00
Add: 2% contribution in revenue	3,000.00
Amount of input credit allowed to the bank	103,000.00

In compliance to the case of “Ronpibon Tin NL v. F C of T”, the standards of the level and to the degree are implied with the goal of assessing the GST Act. The judgment explained in this case efficiently to put forth the suitable processes of allotment that logically requires to be incorporated by the company. It has been explained under the paragraph 11-5 and the 15-5 of the GST Act 1999, the possession to be eligible for the intention of taking credit and the process of taking credit should be temporarily and permanently for the intention of credit.

With respect to the present scenario of Big Bank Ltd, it has been discovered that the supply of finance provided by the bank has overgrown the financial credit entry limit (Miller and Oats 2016). In order to be eligible for the input credit tax, Big Bank can claim temporarily for the financial credit requested by it. In compliance with Section 11-5 and 15-10 of the “GSTR Ruling of 2006/3” it can be defined that the financial purchases undertaken by the organization would be able to ask for the privilege of the input tax credit in accordance to the financial supplies undertaken by it.

As explained in the present scenario of Big Bank Ltd, the advertisement and the expenditure that incurs for the intention of credit will be qualified for obtaining the input tax credit. With respect to the “Taxation Ruling of GSTR 2006/3”, it can be said that Big Bank meets the criteria of claiming input tax credit in association to the financial supplies that have been undertaken by the bank.

Conclusion

With respect to the explanation received from the analysis undertaken above in regards to Big Bank Ltd, it can be explained that Big Bank Ltd would be eligible for bringing forward the requests of gaining the input tax credit. The financial supplies undertaken with the structure of the “Goods and service tax ruling of GSTR 2006/3” associated with the value that has been added in the financial supply price undertaken by the bank.

Reference List 

Aroney, N., Gerangelos, P., Murray, S. and Stellios, J., 2015. The Constitution of the Commonwealth of Australia: History, Principle and Interpretation. Cambridge University Press.

Buchan, J., 2014. Deconstructing the franchise as a legal entity: practice and research in international franchise law. Journal of Marketing Channels, 21(3), pp.143-158.

Chen, J., 2014. The Yet-to-Be Effective but Effective Tax: Hong Kong's Buyer's Stamp Duty as a Critical Case Study of Legislation by Press Release. E. Asia L. Rev., 10, p.1.

Dicey, A.V., 2017. Lectures on the relation between law and public opinion in England during the nineteenth century. Routledge.

Douglas, H., Bartlett, F., Luker, T. and Hunter, R. eds., 2014. Australian feminist judgments: Righting and rewriting law. Bloomsbury Publishing.

Herdegen, M., 2016. Principles of international economic law. Oxford University Press.

Hopkins, B.R., 2016. The Law of Tax-Exempt Organizations+ Website, 2016 Supplement. John Wiley & Sons.

Joseph, S.A., 2017. Immunity or exemption: what are the consequences for sovereign wealth funds with respect to sovereign immunity vis-à-vis tax exemptions?. International Journal of Public Law and Policy, 6(1), pp.39-53.

Lang, M., 2014. Introduction to the law of double taxation conventions. Linde Verlag GmbH.

Lang, M., Rust, A. and Owens, J. eds., 2014. Tax Treaty Case Law around the Globe 2013. Linde.

McGee, R.W., Devos, K. and Benk, S., 2016. Attitudes towards Tax Evasion in Turkey and Australia: A Comparative Study. Social Sciences, 5(1), p.10.

Miller, A. and Oats, L., 2016. Principles of international taxation. Bloomsbury Publishing.

Mumford, A., 2017. Taxing culture: towards a theory of tax collection law. Routledge.

Niazi, S.U. and Krever, R., 2017. Romance and Divorce between International Law and EU Law: Implications for European Competence on Direct Taxes. Stan. J. Int'l L., 53, p.129.

Schenk, A., Thuronyi, V. and Cui, W., 2015. Value added tax. Cambridge University Press.

 Watts, R.L., 2015. Comparing Federal Political Systems. Understanding Federalism and Federation, p.11.

Zander, M., 2015. The law-making process. Bloomsbury Publishing.