The Income Tax Assessment Act of 1997 provides several cases on how expenditure on some items is to be treated for tax accounting purposes. The various expenditures incurred by a business are treated differently, depending on their classifications. The following are few situations, and how they are treated:
- a) During project execution, machines may be moved. Some cost is incurred when moving machinery from one site to another. The cost incurred during such movement of machinery is known as expenditure on capital, or capital expenditure. According to section 8-1 of the Income Tax Assessment Act of 199797, there are no deductions on capital expenditure (Afshari-Jouybari, H., & Farahnaky, 2011). When these costs are involved, the depreciation of the asset increases, increasing the amount of depreciation included for the purpose of accounting.
- b) Revaluation of assets is sometimes needed in order to obtain insurance policies ( John Wiley & Sons, 2012). Sometimes, this process may incur some expenses in terms of paying the valuers and other associated costs. These kind of expenses results into increase in expenditure on fixed assets (Fritz, & Schiefer, 2009). Tax deductibility on these expenses occurs if the expenses result to reduction of the capacity of the entity to make profits. Under section 8-1 of the Income Tax Assessment Act of 1997, if the expenditure positively influences the capacity of earning revenue, then it is deductible for taxation purposes because such benefits are not to be experienced for a long period of time.
- c) Legal expenses incurred by a company opposing a petition for winding up.
Companies are legal artificial persons who have the capacity to enter into legal suits on its own without the involvement of the owners. As a result, it will require the services of legal personnel, which are paid for. During winding up, legal cases are involved, and there two factors that are considered when deciding on the taxation behavior of the expenses involve. These are the structure of the expenditure and effect on the ability of the business to earn income. If there is an interruption on the normal operations of the business, it means that the ability or capacity of the firm to make profit is negatively affected. In this case, the expense is a capital expenditure, hence no deductions made (Afshari-Jouybari, H., & Farahnaky, 2011). Looking into the other side, if the results of the case greatly influence the general process of the business operation, the expenditure involved is considered as revenue when accounting for taxation.
- d) Legal expenses incurred for the services of a solicitor in respect of a number of matters
Lawyer charges, litigation fees and many other legal expenses are incurred during the life of any business entity (Hoch, Roeding, Lindner, & Purkert, G. 2010). These kinds of expenses are known as investment or business expenses. They affect the normal operations of the business and are fully deductible. There are many business expenses, which include but not limited to the following: negotiating employment terms with order workers and wrongful dismissal expenses, defamation charges, evicting a tenant who has defaulted in rent payment, to mention but a few.
The following costs are also deductible:
Costs incurred in amending an existing employment agreement are deductible; however, costs associated with securing an employment agreement with a new employer are not deductible to the employee.
Costs incurred in arbitration; settling disputes arising out of employment agreements are deductible for both employers and employees. Costs of amending existing terms and conditions of employment with the same employer are also deductible, as well as the Costs of renewing or extending a contract of employment that have a fixed term (Gelinas & Dull, 2008).
There are other legal charges incurred by individuals, which do not amount to any effect on the business. Those incurred by individuals are not deductible, and include loan discharge expenses, borrowing expenses and expenses on lease payment valuation, the cost of negotiating employment contracts, defending driving charges, charges of sexual harassment in the workplace, eviction of a tenant after term expiry, etc. They are capital expenses in nature (Fritz, & Schiefer, 2009).
Section 8-1 of the Income Tax Assessment Act 1997 is the key provision which relates to general deductions ( John Wiley & Sons, 2012). This provides that one can deduct from their assessable income any loss or outgoing to the extent that it is incurred in gaining or producing the assessable income or it is necessarily incurred in the course of doing business with aim of gaining assessable income.
The section also provides cases when one cannot deduct a loss. These cases include if it is a loss or a capital nature or when it is a loss or outgoing of a private or domestic nature (Afshari-Jouybari, H., & Farahnaky, 2011). Finally, a loss or outgoing that can be deducted under this section is called a general deduction.
Moreover, the section allows the taxpayer to subtract all losses suffered in the process of acquiring assessable income. Taxpayers are not however permitted to deduct a loss of capital or domestic nature. Capital expenses are quite hard to claim an allowable deduction.
The total Expenditure incurred by the business = $ 1,650,000
Subtract cost incurred on advertisement through television = $550,000 (taxable)
Remaining amount which is not taxable= $ 1,100,000 (not taxable)
Let us assume the total amount of GST paid = $ 1,650,000 * 10/110 = $150,000
GST that was incurred on print media = $1,100,000 * 10/110 = $100,000 (this is exempted for taxation)
Expenditure amount on television media = $ 550000 * 10/110 = $ 50,000
The difference on print media is given by ($150,000- $50,000 =$100,000). This amount can be claimed as input tax credit
One can claim the foreign income tax offset in his/ her income tax return. This is done in order to discourage double taxation. This is done excluding any penalties and interest and disregarding any tax offsets. In order to arrive at Angelo’s s foreign income tax that is offset, the limit is first computed using the following few steps:
The first step will be to calculate the gross tax payable on his taxable income
Tax on $62,000 (note medical expenses are not deductible): $12,937 (includes Medicare levy of 2%)
Second Step: the second step will be computing the tax that would be payable depending on some factors:
- His assessable income is not inclusive of any amount where foreign income tax has been paid and his foreign income tax offset or other non-Australian source amounts, calculated as follows:
|Employment income from United States||12,000|
|Employment income from United Kingdom||8,000|
|Rental income from United Kingdom||2,000|
|Dividend income from United Kingdom||1,200|
|Interest income from United Kingdom||800|
The difference between the foreign income tax that Aangelo has paid and the offset limit cannot be refunded or carried forward to a future income year (Afshari-Jouybari, & Farahnaky, 2011). It should be noted that foreign income tax is deducted from the person’s assessable income, and this provides an explanation as to why it was deducted from income at this step.
- Any expenses that are close to the amounts included in Aangelo’s assessable income on which foreign income tax has been paid, as long as the tax counts towards his foreign income tax offset, or other non-Australian amounts that are part of his assessable income (excluding debt deductions).
|Expense item||Amount ($)|
|Expenses incurred when obtaining employment income from United States||900|
|Expenses incurred when determining the amount of rental income from the United Kingdom||500|
it is important to state that the deductions of $200 and $ 400 relating to the United Kingdom dividends and interest income are not disregarded. This is so due to the fact that Angelo does not have a permanent resident in the foreign country.
The calculation is as shown in the steps below:
|Total Assessable income (not including the amount in 2(a)above||$44,000|
|Less allowable deduction (disregarding Step)||4,600|
|Taxable income under Step 2 assumptions:||39,400|
Tax on $39,400 (inclusive of a 2% Medicare levy) $5,140
Step 3; Get the difference in step 2 and 1 above gives us his foreign income tax offset limit.
$12,937 – $5,140 = $7,797
Since he had paid foreign income tax of $4,400, he is entitled to a full offset of that amount.
The following is a table, showing how the calculations are done.
|Assessable income: total amount of accessible income|
|– sales: s.6-5 ITAA97||400,000|
|– bank interest: ditto||10,000|
|– dividend: s.44 ITAA36||21,000|
|– imputation gross up ($21,000 x 30/70 x 60%): s.207-20 ITAA97||5,400|
|– bad debt recovered: s.20-30 ITAA97||10,000|
|– exempt income: not assessable: s.6-20 ITAA97||–|
|– capital gain: regarded as made by the partners individually: s.106-5 ITAA97||–|
|– sales proceeds stolen by employee: s.25-45 ITAA97||3,000|
|– partners’ salaries: not deductible: Scott||–|
|– FBT: s.8-1 ITAA97||16,000|
|– interest on partner’s capital: not deductible||2,000|
|– interest on partner’s loan: deductible: s.8-1 ITAA97||4,000|
|– travel expenses of Johnny between home and office: personal expenses: not deductible||3,000|
|– legal fees for office lease renewal: s.8-1 ITAA97||2,000|
|– legal expenses for preparation of partnership agreement: capital expenses: ditto||4,400|
|– legal fees for new office lease: ditto||700|
|– debt collection expenses: ditto||500|
|– council rates: ditto||500|
|– staff salaries ($25,000 – 5,000): ss.8-1 & 26-35 ITAA97||20,000|
|– purchase of trading stock: s.8-1 ITAA97||30,000|
|– rent on shop: ditto||20,000|
|– provision for bad debts: not deductible until written off: s.25-35 ITAA97||–|
|– business lunches: not deductible assuming the expenses are not subject to FBT: ss.32-5 & 32-20 ITAA97||–|
|– excess of opening stock over closing stock ($20,000 – 16,000): s.70-35 ITAA97||4,000|
|– net partnership loss last income year: not deductible, as the amount was attributed to partners last income year||–|
|Net income of partnership||345,700|
From the above computation, we obtain an income of $ 345,700 from the partnership.
Afshari-Jouybari, H., & Farahnaky, A. (2011). Evaluation of Photoshop software potential for food colorimetry. Journal of Food Engineering, 106(2), 170-175.
Fritz, M., & Schiefer, G. (2009). Tracking, tracing, and business process interests in food commodities: A multi-level decision complexity. International Journal of Production Economics, 117(2), 317-329.
Gelinas, U. J. & Dull, R. B., (2008). Accounting Information Systems. s.l.:Thomson/South- Western.
Hoch, D. J., Roeding, C., Lindner, S. K., & Purkert, G. (2010). Secrets of software success (pp. 23-40). Boston: Harvard Business School Press
John Wiley & Sons, (2012). Accounting Information Systems: Understanding Business Processes. 4th ed. s.l.:John Wiley & Sons.
Johnson, S. (2013). Fresh Item Management: Lessons in DSS, ERP and SCM from a Grocery Bakery Department. AMCIS 2003 Proceedings, 415.
Microsoft, (2015). Microsoft Dynamics. [Online]
Maiden, N. A., & Ncube, C. (2008). Acquiring COTS software selection requirements. IEEE software, 15(2), 46-56.( Maiden, N. A., & Ncube, C. (2008).
Order, S. (2012). Sage 100 ERP.
Romney, M. B. & Steinbart, P. J., (2014). Accounting Information Systems. s.l.:Pearson.
Soliman, F., & Youssef, M. A. (2008). The role of SAP software in business process re- engineering. International Journal of Operations & Production Management, 18(9/10), 886-895.