Taxation Law
Assessment Title: Assessment 3- Individual assignment
This assignment must be presented as an individual effort.
The assignment requires individual research using a range of tax resources. It is expected you will survey the relevant literature, including decided cases, and select appropriate additional resources.
You are expected to identify the facts and issues presented by each question, identify and apply the relevant legislation and/or case law, and reach a conclusion.
This assessment assesses your research skills, your ability to synthesise an original piece of work to specific content requirements. It also assesses your written communication skills.
Your reasons for your conclusions and recommendations must be based on your research into the relevant cases and legislation. Please check the marking sheet (included below) for Part A to ensure that you have followed all the guidelines
PART A: Written letter of advice. (10 marks)
PART B: Advise net capital gains (losses) to be included in Madison Turners tax return for the years ending 2019 and 2020. Include ALL available methods for calculating a capital gain for both years. (10 marks)
Assessment Description
PART A: Written letter of advice.
Due to COVID-19, Madison was informed by her two current employers that she would be nominated as an eligible recipient for JobKeeper payments from the government. Madison is confused about the tax ramifications of receiving JobKeeper payments and she is seeking your advice. In your own words, explain the tax treatment of JobKeeper payments to Madison and the potential impact of having two employers nominating her. She also has some sole trader income on the side and is wondering whether this will impact her nomination. (500 word limit)
PART B: Calculate net capital gains (losses) to be included in Madison Turners tax return for the years ending 2019 and 2020.
Madison Turner, an Australian resident, seeks advice on the CGT consequences of the following events. She exchanged contracts for the acquisition of an investment property, at market value, on 30 January 1999, paying a 10% deposit of 60,000. Property settlement was deferred until 10 December 2001, when the balance of $540,000 was paid, title transferred, and her name was recorded as the registered proprietor. At the time of the settlement, the market value of the property was $800,000. She sold the property on 15 June 2019 for $1 million.
She also bought 20,000 shares in BHP Billion in October 1985, paying $18.50 per share. She decided to sell her entire holding, for $40 per share, and signed a share transfer document and handed the transfer and share script to the Stock Exchange on 21 June 2019. The transfer was not registered with BHP Billiton until 10 July 2019.
She also incurred a capital loss of $50,000 from another CGT event in 2019/2020.
You have to include ALL available methods for calculating the net capital gains for the years ending 2019 and 2020.
You have to show all workings. ACC304
Taxation Law
Workshop 4
Statutory Income
COMMONWEALTH OF AUSTRALIA
Copyright Regulations 1969
WARNING
This material has been reproduced and communicated to you by or on behalf of
Kaplan Business School pursuant to Part VB of the Copyright Act 1968 (the Act).
The material in this communication may be subject to copyright under the Act.
Any further reproduction or communication of this material by you may be the
subject of copyright protection under the Act.
The lecture material contains content owned by Kaplan Business School and
other materials copyrighted by Thomson Reuters, Principles of Taxation Law
2017 edition.
Do not remove this notice.
Learning Objective 1
Explain the connection between statutory income,
assessable income and taxable income
Statutory income
Assessable income = ordinary income +
statutory income
Statutory income is assessable income by
virtue of a specific section of law.
Includes amounts that are not ordinary income,
but are included in your assessable income
under a specific section of law (Section 6-10(2))
Statutory Income
Where income may be included in assessable income by
more than one section of law, Section 6-25 states the
amount is included once only.
The statutory provision overrides the general provision.
The two types of income form assessable income and are
connected to the basic tax equation contained in s 4-15
ITAA 1997:
Assessable income allowable deductions = taxable
income
Class activity 1
Is statutory income defined in either ITAA?
Why, or why not?
Class activity 2
Discuss the following comment:
The amount of money you receive will
also always be the amount of statutory
income you need to put in your tax return.
Class activity 3
Discuss the following comment :
The concept of statutory income is irrelevant
as every receipt is a form of ordinary income
and will be included in assessable income.
Learning Objective 2
Calculate the franking credit associated with a franked
dividend and correctly apply the relevant law
Franked dividends
A dividend is defined in Section 6(1) ITAA 36 to include any
profit distribution made by a company to its shareholders.
There are two related provisions:
Example
In April 2018, John receives a franked dividend of $70 from
BHP Ltd. According to the Distribution Statement, this
dividend is franked to 100%.
Assessable income = Dividend $70 Section 44(1)(a) AND
Imputation Credit $30 Section 207-20(1)
Franked dividend
How does it work?
The dividend itself is assessable income $70. The imputation
credit is added to the assessable income even though it is an
imaginary amount. The credit is a tax offset applied against the tax payable on
Johns taxable income.
Formula (Assume tax rate of 30%)
Amount of franked dividend x 30 x % franked
70
Therefore: $70 * 30/70 * 100% or $30
Assessable income = $70 + $30 = $100
Cash = $70 Is this a good deal?
Partial franking
Dividends can be fully or partially franked.
In April 2018, John receives a franked dividend of $70 from BHP Ltd.
According to the Distribution Statement, this dividend is franked to an
extent of 50%.
Formula $70 * 30/70 * 50% = $15
Assessable income = $70 + $15 = $85
Pre-workshop question 1
Roberto is a resident for the full year and receives a cash
dividend of $880 from The Hill Pty Limited, which was 95%
franked.
He also received a cash dividend of $1,000 from Broken
Crown Pty Limited which was 75% franked.
Roberto reinvested the dividend from Broken Crown Pty
Limited through their dividend reinvestment plan.
In relation to these transactions, how much will
Roberto include in his assessable income?
Pre-workshop question 2
A company paid a 45% percent franked
dividend of $7,000 to a resident shareholder.
Required
Calculate the imputation(franking) credit
associated with the dividend and identify
which sections the dividend and
imputation(franking) credit are assessed
under.
Explain the tax benefits of the imputation
(franking) credit to a resident investor.
Learning Objective 3
Calculate the assessable amount associated with
trading stock and apply the relevant law
Trading stock s70-10 ITAA97
Meaning of trading stock
(1) Trading stock includes:
(a) anything produced, manufactured or acquired that is held
for purposes of manufacture, sale or exchange in the
ordinary course of a * business; and
(b) * live stock.
What are some examples of trading stock?
Business income from sale of trading stock is assessable under
s6- 5(1) ordinary income from business activities. Purchase of
trading stock is deductible under s.8-1(1). It is not capital
(s.70-25).
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s995.1.html#trading_stock
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s995.1.html#acquire
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s995.1.html#held
http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s995.1.html#business
Trading stock
Compare the values of trading stock on hand at the start of
the income year and at the end of the income year
(s.70-35(1)).
If closing stock is greater than opening stock, the excess
is assessable income (s.70-35(2)).
If opening stock is greater than closing stock, the excess
is an allowable deduction (s.70-35(3)).
Class activity 4
Yankers Enterprises Pty Ltd sells training course materials to
organisations. The materials are imported from a United States-based
course developer and on-sold for a profit. Yankers provides you with
the following information for the purposes of preparing its income tax
return for the CIY:
Sales $690,000
Less; Cost of goods sold
Opening stock $120,000
Plus: purchases $530,000
Less: closing stock $250,000 $400 000
Gross profit $290,000
What is Yankers Enterprises assessable income for the current
income tax year?
Pre-workshop question 3
Kezza runs a small business. Her opening
balance of stock was $4,000. During the year
there was sales income of $30,000 and
purchases of $5,000. Trading stock valued at
$500 was destroyed due to water damage.
The closing balance of stock was $6,000 and
reflects the reduction due to stock damage.
What is the taxable income from trading
for the CIY?
Class activity 5
Explain which of the following items could be
considered as trading stock:
Shares traded on the ASX
Accounts receivable
Land
Unpicked fruit
Unmined coal
Work in progress for a manufacturer
Goods in transit
Learning Objective 4
Calculate the assessable amount associated with
assessable balancing adjustments and apply the
relevant law
s40-285 Assessable balancing
adjustment
When a depreciating asset is disposed of the proceeds of
the sale, or termination value (TV), is compared to the
written down value, called the adjustable value (AV), on the
day of disposal.
If the TV is greater than the AV the excess is assessable statutory
income under s40-285(1)
If the TV is less than the AV the difference is an allowable deduction
under s40-285(2)
Example
A depreciating asset with an AV or $5,500 was sold for $6,250. There
is an assessable balancing adjustment of $750.
Class activity 6
Basil Pty Ltd sells a computer which has
been used for income-producing purposes.
The termination value of the computer is
$1,500 and its cost was $2,500. At the time
of sale, the computers adjustable value is
$1000.
What is the balancing adjustment amount
in respect of the sale?
Pre-workshop question 4
A non-current asset is a depreciating asset. It
initially had a depreciation cost base of $45,000, it
cost $2,500 to transport and install the item, and it
has an effective life of 5 years for tax purposes and
was purchased on 1/7/15. It was sold on 1/4/17 for
$27500.
Required
State the relevant legislative provisions and
calculate:
the depreciation expenses for each relevant year
income year under both the Prime Cost method
and the Diminishing Value method
any assessable or deductible balancing
adjustment associated with this disposal.
Net capital gains
In 1985 the inequitable distinction between capital and
income receipts was partially addressed by the introduction
of a capital gains tax.
Essentially if a taxpayer makes a net capital gain related to
a CGT asset it will be included in assessable income and
taxed at the taxpayers marginal rates.
Capital gains tax will be the focus of our next workshop
ACC304Taxation Law
COMMONWEALTH OF AUSTRALIACopyright Regulations 1969WARNING
Learning Objective 1
Statutory income
Statutory Income
Class activity 1
Class activity 2
Class activity 3
Learning Objective 2
Franked dividends
Franked dividend
Partial franking
Pre-workshop question 1
Pre-workshop question 2
Learning Objective 3
Trading stock s70-10 ITAA97
Trading stock
Class activity 4
Pre-workshop question 3
Class activity 5
Learning Objective 4
s40-285 Assessable balancing adjustment
Class activity 6
Pre-workshop question 4
Net capital gains ACC 304
Taxation Law
Week 7
General Deductions
COMMONWEALTH OF AUSTRALIA
Copyright Regulations 1969
WARNING
This material has been reproduced and communicated to you by or on
behalf of Kaplan Business School pursuant to Part VB of the
Copyright Act 1968 (the Act).
The material in this communication may be subject to copyright under
the Act. Any further reproduction or communication of this material by
you may be the subject of copyright protection under the Act.
The lecture material contains content owned by Kaplan Business
School and other materials copyrighted by K. Sadiq et al. 2017,
Principles of Taxation Law, Thomson Reuters
Do not remove this notice.
Learning outcome 1
Identify and apply the 2 positive limbs in
Section 8-1
2
Section 8-1
1-2 above represent the 2 positive limbs
3-4 above represent the 4 negative limbs
1st Positive Limb
Section 8-1(1) allows a deduction for a loss or
outgoing to the extent it is incurred in gaining or
producing assessable income.
What is the difference between a loss and an
outgoing?
Meaning of loss or outgoing
Loss
A loss may be subtly different, it has the connotation of something
which has been used up or maybe something not voluntarily spent
by the taxpayer.
The loss may not necessarily be linked to the income production
but is actually incurred in the course of gaining or producing
assessable income. A loss is a reduction of income or capital.
For example, the theft of the days takings was found to be
deductible in Charles Moore & Co (WA) Pty Ltd (1956) as it was a
loss incurred in business activities.
5
Meaning of loss or outgoing
Outgoing
Suggests something paid out – something which has left the hands of the
tax-payer so the outgoing is an expenditure which has (hopefully) the
effect of gaining or producing income
Generally considered to constitute a voluntary payment. Most business
expenses such as advertising, rent, telephone, electricity and wages
would be considered outgoings and, hence, be deductible, under Section
8-1.
For example, the purchase price of goods which are subsequently sold
Class Activity 1
What is a deduction? Give examples that might
apply to a coffee shop?
7
Class Activity 2
What is the meaning of the words loss or
outgoing in Section 8-1 ITAA 97?
8
Class Activity 3
Discuss some outgoings/expenses your likely
to find in Items D1, D2, D5 and D10 of the
income tax return.
Students should provide their own examples
and explain how the deduction works in a real
context.
Individuals – Tax return 2018
9
https://www.ato.gov.au/Individuals/Tax-return/2018/
to the extent that
Any loss or outgoing to the extent that
This phrasing allows the apportionment of an
expense when the purpose associated with the loss
or outgoing is only partially related to the assessable
income.
In this case only that part of the loss or outgoing
related to the assessable income will be deductible.
Example -to the extent that
Mary is a sales consultant with Honda. She uses her
mobile telephone, to make work-related telephone
calls. Her mobile telephone bill for the month of June
2018 was $200. Mary reliably estimates that she
used the phone 75% for business purposes and 25%
for private purposes.
Student discussion
How much can be claimed?
Meaning of incurred
Section 8-1 requires that the loss or outgoing
is incurred. What does this mean?
Lets review TR 97/7 Paragraph 6 and 21.
Meaning of incurred
Tax Ruling 97/7 Summary
Does incurred mean paid? No.
The liability must exist which requires the
payment of an expense.
If you dont know the exact amount, a reliable
estimate is fine.
Discretionary payments are not a deduction
until paid (Para 21 examples).
Pre-workshop question 1
Jack receives his electricity bill on 20 June 2018.
Assume that Jack uses the electricity to power his
business 100%. ( Why is this important ?). The amount
of $1,200 is due for payment on 10 July 2018. Jack
pays his electricity bill on 2 July 2018.
When is the outgoing incurred?
Would your answer be the same if Jack was paying his
car registration for the next 12 months? Why?
Incurred in gaining or producing
assessable income
In discussing what makes expenditure
deductible under subsection 8-1, Lockhart J
said in F C of T v. Cooper 91 ATC 4396; 21
ATR 1616 (at ATC 4399, ATR 1620) that the
phrase “incurred in gaining or producing
assessable income” in the first limb of s. 8-1
has been construed to mean incurred in the
course of gaining or producing assessable
income…
15
Nexus Test
There should always be a nexus between income
and the outgoing incurred. The payment of the
outgoing does not have to be in the same year as
the income was incurred (TR 94/28).
It is sufficient if the expenditure produces future
income or reduces future expenditure or was
incurred in deriving income of a previous
accounting period.
Nexus Test
The commissioner has released a number of
occupation-based taxation rulings dealing with
employees. Rulings TR 95/8 to 95/20 cover a
selection of occupations and allowable
deductions.
17
Expenses incurred too soon
Expenses incurred before commencement of a
business are not deductible under Section 8-1.
(Softwood Pulp & Paper Ltd v FCT 76 ATC 4439).
Hence, preliminary expenses connected with the
establishment or acquisition of a business (e.g.
incorporation of a company, initial business name
registration etc.) are not deductible under Section 8-1
because they are incurred at a point considered too
soon.
Pre-workshop question 2
Discuss whether the following would be deductible
under Section 8-1 of the ITAA (1997):
Internet bill dated 18 June 2018 for $200 where the
taxpayer was able to establish a pattern of usage
showing that it was used 100% for business.
Mobile phone bill dated 8 June 2018 for $130. The
phone was used for calling family members.
ASIC fee invoice dated 12 June 2018 for $100 in
respect of the registration of a new business name.
19
2nd Positive Limb
Section 8-1(2) allows a deduction for a loss or
outgoing to the extent it is necessarily incurred
in carrying on a business for the purposes of
gaining or producing assessable income.
Necessarily incurred
The words “necessarily incurred” does not mean that
the outgoing must be absolutely essential or
necessary.
For practical purposes, it is for the person carrying on
the business to be the judge of what outgoings
are necessarily to be incurred.
It is not for the Commissioner to instruct a taxpayer as
to the nature and extent or manner of conduct of his or
her business activities (Tweddle (1942) 180 CLR 1).
21
http://www.austlii.edu.au.ezp01.library.qut.edu.au/cgi-bin/viewdoc/au/cases/cth/HCA/1942/40.html
Carrying on a Business
The second positive limb is all about business. Whats a
business? The courts have developed several characteristics
for a business activity (Ferguson v FCT) including:
the repetitions of acts or transactions
the commercial nature of the activities
the size and scale of the activities
the existence of a profit motive and;
whether the activity is conducted in a systematic manner
Are you carrying on a business?
22
https://www.ato.gov.au/business/starting-your-own-business/before-you-get-started/are-you-in-business-/
Meaning of purpose
There may be instances where a loss or outgoing
has more than one purpose (i.e. a dual purpose).
The Commissioner may disallow all or part of the
deduction being claimed (see Fletcher & Others v
FCT91 ATC 4950 and Taxation Ruling TR 95/33).
In other words, if the Commissioner believes that
the taxpayer has deliberately over-inflated the
amount of the expenditure to gain an additional
tax deduction, he may disallow a portion of the
expenditure. Ure v FCT(1980) 11 ATR 484.
23
Meaning of purpose
The purpose test
In general the nature of the business and the
appropriateness of the outgoing to the business ends
pursued is the most important factor as per Magna Alloys
case.
The Magna Alloys decision referred to 2 tests:
(1) the outgoing being reasonably seen as desirable or
appropriate to pursue the business ends of the business
(determined objectively) and,
(2) If so, whether the person carrying on the business so saw
it (subjective).
Provided the outgoing comes within that wide ambit it will
necessarily be incurred in carrying on that business
24
Pre-workshop question 3
Tony is a doctor. He has the following items in his
waiting room:
womans day magazines for clients to read
flowers to freshen up the room
cups for the water cooler
Can Tonys business claim these items as a tax
deduction?
25
Learning outcome 2
Identify and apply the 4 negative limbs in
Section 8-1
26
The four negative limbs
1st Negative Limb
It is a loss or outgoing of capital, or of a capital
nature.
Capital losses or outgoings and losses or outgoings of a capital nature, even
though they are incurred in the course of producing assessable income, are
not deductible under s 8-1.
The most useful test in this area is the structure or process perspective
Losses or outgoings associated with the process of gaining or producing
assessable income tend to be income in nature and deductible
Losses or outgoings associated with the structure of the activity tend to be
capital and therefore non-deductible in the first instance but may be able to
be amortized for tax purposes.
The four negative limbs
1st Negative Limb
Example
Is the cost of transporting trading stock deductible?
Yes, as trading stock is clearly connected with the income producing process
Is the cost of transporting a large machine deductible to the factory so that it
can be installed?
No, as the machine is a capital asset therefore the associated costs are
capital in nature and not deductible under s8-1. The capitalized value of the
machine would be amortized for tax purposes
2nd Negative Limb
It is a loss or outgoing of a private or personal
nature.
Fullerton v FC of T 91 ATC 983 A taxpayer moved his family
to a new city due to a change in employment. Decision
(Private).
Lodge v FC of T 72 ATC 4174 Child minding so as to attend
work. Decision (Private).
3rd Negative Limb
It is incurred in relation to gaining or producing
exempt income or assessable non exempt
income.
Under the third negative limb of Section 8-1(2) of the ITAA
(1997), losses and outgoings incurred in producing exempt
income are not deductible
4th Negative Limb
Losses and outgoings are not deductible where
another provision of the Act prevents the
deduction.
Learning outcome 3
Apply the law to determine the deductibility of a
given expense under s8-1 ITAA97.
Refer to Workshop Readings
32
Pre-workshop question 4
Discuss whether the following would be
deductible under Section 8-1 of the ITAA (1997):
A manager of a production business travels to
Hong Kong to buy a machine. The machine is
worth $1million. The travel costs including
accommodation are $15,000.
33
Clothing
On many occasions, taxpayers have sought deductions for the cost of
purchasing clothing. The main issue that arises in these cases is
whether such expenditure is of an income-producing or private nature.
Conventional clothing Mansfield v FC of T96 ATC 4001 (General
rule)
Compulsory uniforms – Examples; police officers, airline pilots.
TR 97/12
Para 30 – deduction allowed
Para 31 – a collection of clothing that is distinctive to an
organization.
34
Clothing
Occupation specific clothing
Examples; nurses uniform, barristers robes. A
deduction is generally allowed.
The items cant be conventional clothing
Protective clothing
Examples; steel cap boots, safety helmets
Morris & others v FCT (2002)
Can now claim sun protection and hats to
protect the taxpayer from ultra-violet radiation
35
Pre-workshop question 5
Discuss whether the following outgoings would
be allowed as a tax deduction
A police officer washes her police uniform.
A school teacher wears a $200 pair of
sunglasses whilst on playground duty.
The cost incurred by an employee accountant
in buying a suit compliant with the employers
dress code worn to impress clients so they
can gain more clients.
36
Interest expenses
Interest expenses are recurrent expense securing the use of
borrowed money during the term of the loan.
It is the purpose the borrowed funds are put to which determines
the deductibility of the interest.
Interest on funds used to purchase a property on which the
taxpayer intends to build an income producing asset may be
deductible from the time of purchase (Steele v FCT, 1999).
It is not necessary to show the interest was incurred in producing
assessable income in a particular year.
It need not even produce assessable income as long as it is
expected to produce assessable income.
In FCT v Brown (99 ATC 4852) the interest on a loan taken out to
purchase a business continued to be deductible even after the
business had been sold.
Refer to TR 2004/4 for extensive discussion on interest
deductibility.
37
Legal Fees
The principal issue that arises under Section 8-1
in relation to legal expenses is whether such
expenses are linked to the purpose of incurring
the expense. Legal expenses of a private or
capital nature are not deductible.
Legal expenses are generally deductible if they
arise out of the day to day activities of the
taxpayer’s business.
Compare the decision in the cases of :
Herald & Weekly Times Ltd v. FCT and
Sun Newspapers v. Ltd FCT.
38
Class Activity 4
Would the following be deductible under section
8-1?
Legal expenses incurred by a hotel proprietor
in opposing an application for a licence to
open another hotel in the area.
39
ACC 304Taxation Law
COMMONWEALTH OF AUSTRALIACopyright Regulations 1969WARNING
Learning outcome 1
Section 8-1
1st Positive Limb
Meaning of loss or outgoing
Meaning of loss or outgoing
Class Activity 1
Class Activity 2
Class Activity 3
to the extent that
Example -to the extent that
Meaning of incurred
Meaning of incurred
Pre-workshop question 1
Incurred in gaining or producing assessable income
Nexus Test
Nexus Test
Expenses incurred too soon
Pre-workshop question 2
2nd Positive Limb
Necessarily incurred
Carrying on a Business
Meaning of purpose
Meaning of purpose
Pre-workshop question 3
Learning outcome 2
The four negative limbs
The four negative limbs
2nd Negative Limb
3rd Negative Limb
4th Negative Limb
Learning outcome 3
Pre-workshop question 4
Clothing
Clothing
Pre-workshop question 5
Interest expenses
Legal Fees
Class Activity 4 ACC 304
Taxation Law
Week 8
Specific Deductions
COMMONWEALTH OF AUSTRALIA
Copyright Regulations 1969
WARNING
This material has been reproduced and communicated to you by or on
behalf of Kaplan Business School pursuant to Part VB of the
Copyright Act 1968 (the Act).
The material in this communication may be subject to copyright under
the Act. Any further reproduction or communication of this material by
you may be the subject of copyright protection under the Act.
The lecture material contains content owned by Kaplan Business
School and other materials copyrighted by K. Sadiq et al. 2017,
Principles of Taxation Law, Thomson Reuters
Do not remove this notice.
Learning objectives
After this workshop, you should be able to determine the
availability and amount of the tax deduction associated
with:
Tax related expenses
Repairs
Borrowing expenses
Bad debts
Travel between workplaces
Carry forward losses for individuals
Depreciable assets
Trading stock balances
2
Specific deductions: s8-5
(1) You can also deduct from your assessable income an
amount that a provision of this Act (outside this Division)
allows you to deduct.
(2) Some provisions of this Act prevent you from deducting
an amount that you could otherwise deduct, or limit the
amount you can deduct.
(3) An amount that you can deduct under a provision of this
Act (outside this Division) is called a specific deduction.
.
Learning objective 1
Apply the legislation to determine the availability
and amount of the tax deduction associated with
tax related expenses.
4
Tax related expenses: s25-5
Section 25-5 provides taxpayers with a deduction for certain costs,
including expenses incurred:
to manage their tax affairs;
to comply with a notice or obligation imposed on the
taxpayer by a Commonwealth law relating to the
taxpayers tax affairs;
for payments of the general interest charge; and
for certain valuations.
Definition of tax affairs and tax limit the deduction to income tax
obligations only (s.995-1).
For other taxes (e.g. GST and FBT), consider deductibility under s.8-1
(General Deductions)
5
Tax related expenses: s25-5
Deductions unders.25-5 are not available in certain
circumstances, for example:
payment of the income tax;
Amounts withheld or payable under the PAYG system;
Interest on funds borrowed to pay income tax or PAYG
amounts;
advice from an adviser who is not a recognised tax
adviser as defined in s995-1 (registered tax agent,
and legal practitioners)
capital expenditure (e.g. purchasing a computer to
manage tax affairs, however, depreciation will be
deductible).
6
Learning objective 2
Apply the legislation to determine the availability
and amount of the tax deduction associated with
repairs.
7
25-10 Repairs
(1) You can deduct expenditure you incur for repairs to
premises (or part of premises) or a depreciating asset that
you held or used solely for the purpose of producing
assessable income.
(2) If you held or used the property only partly for that purpose,
you can deduct so much of the expenditure as is reasonable
in the circumstances.
(3) You cannot deduct capital expenditure under this section.
25-10 Repairs
Replacement of a whole asset
A repair involves the restoration of part of some income-
producing property. It does not involve the replacement of an
asset in its entirety but rather a subsidiary part or component.
Lindsay v FCT (1961) 106 CLR 377
An improvement to an asset is not a repair
A repair involves the restoration of an asset to its original
state.
FC of T v Western Suburbs Cinema Ltd (1952) 86
CLR 102.
25-10 Repairs
Initial repairs
Expenditure incurred to put the asset into good order
before it can be used to produce assessable income is
an initial repair and is not deductible. Essentially the
taxpayer has the benefit of the lower purchase cost.
The Law Shipping Co Ltd v IR Commrs (1924) 12 TC 621;
W Thomas & Co Pty Ltd v FCT (1965) 115 CLR 58.
W Thomas & Co Pty Ltd v FCT: Facts
The taxpayer purchased a building, unaware that repairs were
needed in order to be able to use the building in its business as
a flour and grain merchant.
The taxpayer subsequently carried out extensive work to the
roof, guttering and floors, and painted the walls and roofing
timbers.
At the same time, the taxpayer also altered and enlarged an
office and installed a lunch room and other amenities.
W Thomas & Co Pty Ltd v FCT: Held
Expenditure was of a capital nature.
When a thing is bought for use as a capital
asset in the buyer’s business, but is not in
good order nor suitable for use in the way
intended, the cost of putting it in order suitable
for use was part of the cost of its acquisition .
Lindsay v FCT
Facts:
Ship repairing business .
Lindsay demolished one of its slipways
and replaced it.
Lindsay argued slipway was part of its
business premises or part of the hauling
machinery.
Held:
Not a repair.
Slipway was an entire asset.
Renewal in this case was reconstruction
of the entirety.
Law Shipping Co Ltd v IRC
Facts:
Taxpayer acquired a ship which required a repair.
Undertook one voyage, then repaired it.
Held:
Capital expenditure, not a repair.
The cost of this initial repair formed part of the
acquisition costs, therefore was capital.
Taxpayer would have paid a lower price for the
ship due to the need for repair.
Expenditure was necessary at the time of
purchase to render the ship serviceable.
Class activity 1
Jack purchased business premises on October 5, 2017. Jack
incurred the following expenses:
On October 8, 2017, Jack replaced 20 roof tiles at a cost of $800.
Jack used steel roof tiles to replace the
