Taxation Law
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 old clay roof tiles.
On December 24, 2017, Jacks replaced the petrol engine in his
Mazda 3 with a new Turbo Diesel engine (fuel efficient and more
power).
On January 24, 2018, Jack paid a gardener for a days work at his
business premises $400. The gardener mowed the lawn and
pruned the hedges.
On March 2, 2018, a bad storm damaged the carpets in the main
office. The entire carpet was replaced at a cost of $8,700.
How much of these expenses can be claimed under Section 25-10
ITAA 97 (Repairs) ?
15
Learning objective 3
Apply the legislation to determine the availability
and amount of the tax deduction associated with
borrowing costs.
16
25-25 Borrowing Expenses
Section 25-25 ITAA1997 allows a deduction for expenditure
incurred for borrowing money and the purpose of the money is
to produce assessable income. Borrowing expenses which are
$100 or less, are fully deductible in the year the expense was
incurred: s25-25(6) ITAA1997
These costs refer to the cost of borrowing and include
valuation fees, survey fees, stamp duty, and legal costs.
Borrowing expenses DO NOT include interest expenses.
Interest expenses are considered under s8-1 ITAA1997.
25-25 Borrowing Expenses
Expenses incurred in borrowing money are deductible over the
shortest of these periods:
the period of the loan as specified in the original loan
contract;
the period starting on the first day on which the money was
borrowed and ending on the day the loan is repaid; or
five years starting on the first day on which the money was
borrowed (s25-25(5) ITAA1997).
25-25 Borrowing Expenses: Example
On 2 January 2008, Jett obtained a four-year
loan of $15,000, which she used solely for
income-producing purposes throughout the
period of the loan.
Borrowing expenses incurred in relation to the
loan amount to $400. The total period of the
loan was four years (1,461 days). The
period applicable to the 2008 financial year is
181 days (a leap year).
25-25 Borrowing Expenses: Example
The borrowing expenses ($400) would be
allowed as follows:-
2008: $ 49.56 ($400 x 181/1,461 days)
2009: $ 99.93 ($400 x 365/1461 days)
2010: $ 99.93 ($400 x 365/1461 days)
2011: $ 99.93 ($400 x 365/1461 days)
2013: $ 50.65 ($400 x 185/1461 days)
$400.00
Class activity 2
Jane purchased a rental property on 1 September 2017
for $500,000. Tennants occupied the house at the time of
purchase. Jane provides you with the following
information:
Jane took out a $400,000 loan with the NAB on 1
September 2017 for 25 years to fund the purchase.
Interest paid for the financial year ending 30 June 2018
totalled $14,560.
Loan establishment fees of $5,200 were charged by
the bank on 1 September 2017.
What is the total deduction for the 2018 financial year?
Please quote relevant sections.
21
Learning objective 4
Apply the legislation to determine the availability
and amount of the tax deduction associated with
bad debts.
22
Bad debts (s. 25-35)
A deduction for bad debts under s.2535 is available when the following
criteria is met:
1. there is an existing debt – must have had a legal
or equitable right to claim
2. the debt is bad the taxpayer must have taken all available legal
steps to recover the debt TR 92/18
3. the debt is actually written off. There must be some written record
e.g. board minutes, memo from Financial Controller or accounting
entries a mere provision is insufficient
4. it was included in the taxpayers assessable income for accruals
taxpayers; this requirement would not apply of course to cash
basis taxpayers
23
Pre workshop question 1
Refer to the link below.
Bad debts s 25-35
In your own words, describe a bad debt for
taxation purposes. Provide your own example.
24
http://classic.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s25.35.html
Learning objective 5
Apply the legislation to determine the availability
and amount of the tax deduction associated with
travelling between places of work.
25
Travel between workplaces (s. 25-100)
Common law position:
Travel between unrelated work places are not
deductible unders.8-1 FCTvPayne(2001).
Later a statute (s.25-100) was introduced:
Deduction allowed for travel directly between two
workplaces where the taxpayer is engaged in income
producing activities
Not deductible if a workplace is the taxpayers
residence.
Travel between workplaces
26
https://www.ato.gov.au/individuals/income-and-deductions/deductions-you-can-claim/vehicle-and-travel-expenses/travel-between-home-and-work-and-between-workplaces/
Learning objective 6
Apply the legislation to determine the availability
and amount of the tax deduction associated with
prior year losses.
27
Tax losses of earlier income years:
Div 36
s36-10 How to calculate a tax loss for an
income year
(1) Add up the amounts you can deduct for an income year (except
tax losses for earlier income years ).
(2) Subtract your total assessable income.
(3) If you derived exempt income, also subtract your net exempt
income (worked out under section 36-20 as Exempt Income Losses
or outgoings incurred in producing exempt income Any income tax
paid to foreign governments)
(4) Any amount remaining is your tax loss for the income year,
which is called a loss year.
Tax Losses: General
If you cannot deduct all or part of your tax loss
in an income year, that amount can be carried
forward into the next income year.
What is a loss for taxation purposes according
to Division 36 of the ITAA (1997) ?
30
Class activity 3
2014/15 2015/16 2016/17
Assessable income $70,000 $65,000 $90,000
Net exempt income $ 4,000 $ 2,000 $ 8,000
Deductions * $83,000 $60,000 $96,000
Personal Superannuation
contributions (that fit inside the
concessional cap)
$ 2,000 $ 2,000 $ 2,000
Gifts to registered charities – $ 400 $ 2,000
31
*Note: Deductions represents all deductions except superannuation,
gifts and losses of previous years.
The above data relates to Gandalf Greyteeth, a resident
taxpayer:
For each tax year, determine Gandalfs taxable income and
any losses that may be carried forward.
Learning objective 7
Apply the legislation to determine the availability
and amount of the tax deduction associated with
depreciable assets.
32
Capital allowances Division 40
Deductibility of capital expenditure
Deduction for decline in value of a
depreciating asset held for a taxable
purpose: s 40-25.
Balancing adjustment deduction if a
depreciating assets termination value is
less than its adjustable value: s 40-285(2).
s40-25 Deducting amounts for
depreciating assets
You deduct the decline in value
(1) You can deduct an amount equal to the decline in
value for an income year (as worked out under this
Division) of a depreciating asset that you held for any
time during the year.
(2) You must reduce your deduction by the part of the assets
decline in value that is attributable to your use of the asset,
or your having it installed ready for use, for a purpose
other than a taxable purpose.
s40-30 What a depreciating asset is
(1) A depreciating asset is an asset that has a limited
effective life and can reasonably be expected to
decline in value over the time it is used, except:
(a) land; or
(b) an item of trading stock; or
(c) an intangible asset, unless it is mentioned in
subsection (2).
What is the relevant value?
This is determined from the cost base.
There are two relevant elements (s.40-175).
The first element is worked out when you begin
to hold it and is normally the purchase price
(s.40-180(3)).
It could also be the amount you are taken to
have paid (s.40-185).
What is the relevant value?
The second element of the cost base includes
costs in bringing the asset to its present
condition and location and costs
attributable to any balancing adjustment events
(s. 40-190)
Examples include costs of delivery, installation,
capital improvements, site preparation.
When does depreciation start?
Depreciation starts at the time the asset is first
used or installed and ready for use. (s.40-60(2)
How is the deduction calculated
The taxpayer can choose between the
Diminishing Value or Prime Cost methods.
(s.40-65(1)
Once the choice is made the method cannot be
changed (s.40- 130(2)
The DVM gives greater deductions in the earlier
years, under the PCM the same amount is
claimed each year
Decline in value under PCM
Under s 40-75(1) the deduction is calculated by:
Assets cost x Days held x 100% x Business use %
365 Asset Effective Life
Decline in value under DVM
Under ss 40-70(1) & s40-72(1) the deduction is
calculated by:
Base
Value x Days held x 200% x Business use %
365 Asset Effective Life
Base value = Cost at start time OR opening adjustable value plus second
element costs
*If start time is before 9 May 2006, use 150% rather than 200%
(s. 40-72(1)
Sale of depreciating assets
The sale of a depreciating asset results in a
balancing adjustment:
If the Termination Value > Adjustable value =
Assessable gain (s.40-285(1).
If the Termination Value < Adjustable value = Deductible loss (s.40-285(2). Sale of depreciating assets The termination value is generally be the amount received for the asset on disposal or taken to have received (s.40-300(1) and (s.40-305(1). The adjustable value is the cost less the total decline in value up to date of sale (s.40-85(1). SBE Pools There are special rules for depreciating assets acquired by a small business entity (SBE). The simplified depreciation rules for depreciating assets acquired by small business entity (SBE) taxpayers on or after 7:30 pm on 12 May 2015 are: - an immediate 100% deduction applies in respect of depreciating assets costing less than $20,000 (GST exclusive); and - depreciating assets costing $20,000 plus (GST exclusive) are automatically pooled (gathered together) and are depreciated in a general small business pool at the diminishing value rate of 30% per year (15% Diminishing Value in the first year). 44 Pre workshop question 3 What is a depreciating asset? What do we mean by the term effective life? 45 Class activity 4 A machine used in a manufacturing business has an estimated effective life of 5 years was purchased on 1 January 2016 for $25,000 and sold on 21 March 2018 for $12,500. Prepare the depreciation schedules for both the prime cost AND diminishing value methods. Calculate the assessable or deductible balancing adjustment. 46 Learning objective 8 Apply the legislation to determine the availability and amount of the tax deduction associated with trading stock balances. 47 Trading stock s70-10 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. Trading stock Trading stock does not include: standing or growing crops, timber or fruit these only become trading stock when they are harvested, felled or picked stocks of spare parts held for repairs or maintenance to plant and equipment consumables used in manufacturing trading stock, such as cleaning agents or sandpaper. Trading stock Income from sale of trading stock is assessable under s.6-5(1) - income from a business. Purchase of trading stock is deductible under s.8-1(1). It is not capital (s.70-25). Opening and closing stock accounted for pursuant to s.70-35. 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)). Pre workshop question 4
What is trading stock?
How is trading stock dealt with for tax purposes?
52
Class activity 5
Lincoln is an Australian resident for the full year
aged 30. He conducts a business as a sole
trader as a video game designer and retailer.
During the 2016/17 year he had trading stock
purchases of $275,000.
The value of the opening stock on 1/7/16 was
$72,200, and the closing stock on 30/6/17 was
$92,300.
Calculate Lincolns trading stock deduction.
53
ACC 304Taxation Law
COMMONWEALTH OF AUSTRALIACopyright Regulations 1969WARNING
Learning objectives
Specific deductions: s8-5
Learning objective 1
Tax related expenses: s25-5
Tax related expenses: s25-5
Learning objective 2
25-10 Repairs
25-10 Repairs
25-10 Repairs
W Thomas & Co Pty Ltd v FCT: Facts
W Thomas & Co Pty Ltd v FCT: Held
Lindsay v FCT
Law Shipping Co Ltd v IRC
Class activity 1
Learning objective 3
25-25 Borrowing Expenses
25-25 Borrowing Expenses
25-25 Borrowing Expenses: Example
25-25 Borrowing Expenses: Example
Class activity 2
Learning objective 4
Bad debts (s. 25-35)
Pre workshop question 1
Learning objective 5
Travel between workplaces (s. 25-100)
Learning objective 6
Tax losses of earlier income years: Div 36
Tax Losses: General
Pre workshop question 2
Class activity 3
Learning objective 7
Capital allowances Division 40 Deductibility of capital expenditure
s40-25 Deducting amounts for depreciating assets
s40-30 What a depreciating asset is
What is the relevant value?
What is the relevant value?
When does depreciation start?
How is the deduction calculated
Decline in value under PCM
Decline in value under DVM
Sale of depreciating assets
Sale of depreciating assets
SBE Pools
Pre workshop question 3
Class activity 4
Learning objective 8
Trading stock
Trading stock
Trading stock
Trading stock
Pre workshop question 4
Class activity 5 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?
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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
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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
